China to figure prominently in discussions on solutions to continent's financial problems

Leaders of the world's biggest economies are expected to discuss a host of global issues at next week's G20 meeting in the Mexican coastal town of Los Cabos, prominent among which could be the steps to prevent a further deterioration of the debt crisis in Europe

"After the financial crisis in 2008, the G20 has replaced G7 as the most important global platform to discuss and find solutions to major economic problems," says Feng Zhongping, director of the Institute of European Studies at China Institutes of Contemporary International Relations. "Since the eurozone debt crisis is the biggest problem now, it would certainly figure in the summit deliberations."

Feng says emerging economies are expected to play a major role at this year's G20 summit and figure prominently in the solutions and plans that will be put forward to solve the debt crisis in Europe.

"Stable growth in the emerging economies is essential to ward off a global recession. The European Union must be at the forefront of all rescue efforts and should take the initiative to prevent the crisis from spreading further," he says.

Experts are of the opinion that there are two different viewpoints as far as a European rescue package is concerned. Some experts are advocating help to the eurozone via bond purchases and other financial products along with austerity measures in Europe. But other experts have suggested that the primary focus should be on improving the overall economic growth of the EU, a measure that calls for more investments in Europe from within and outside, Feng says.

"Getting out of the debt crisis and attaining stable economic growth are closely related. But things in Europe have become rather murky after the victory of Francois Hollande in the French presidential elections," he says.

Hollande's economic policies, as he had promised during his election campaign, are likely to trigger more economic pressures in an already crisis-ravaged continent.

To cope with the debt crisis, most of the countries in the eurozone region have enforced severe austerity measures. Hollande, on the other hand, wants a less stringent approach and wants to stimulate economic growth with larger financial budgets.

"If France exits the austerity campaign, the economic structure of the eurozone will become even more complicated," Feng says.

But the real pressing problem for the EU is the general election in Greece on June 17, a day before the G20 summit begins. The election is likely to bring the left-wing Syriza party to power. Syriza has constantly spoken out against the austerity measures demanded by Brussels in return for bailout money.

"All the participating countries at the summit will be watching the developments in Greece closely. If Greece finally decides to quit the eurozone, it will have a negative impact in the decision-making process of European countries such as France and Germany," says Ding Yifan, a researcher at the Development Research Center of the State Council.

"It is a dilemma for both Greece and the eurozone. If Greece chooses to exit the eurozone, though unlikely, the EU should be prepared for the worst-case scenario. But if it decides to stay on, it will continue to drag the eurozone even more deeper into crisis," he says.

With Spain likely to seek financial aid later this month, experts are concerned that debt crisis in the EU has reached a critical point.

Eurozone finance ministers confirmed on June 9 that the single-currency area was ready to offer up to 100 billion euros ($126 billion) as financial aid to rescue Spain's ailing banking sector. Spain was the fourth European country to apply for such aid, after Greece, Ireland and Portugal.

Although financial figures in Europe have voiced optimism on Spain's rescue, there is still pessimism about the long-term recovery since the aid to Greece, Ireland and Portugal has turned out be effective only in the short term.

"The sovereign debt crisis in the eurozone was not formed in a day. Some of these problems have been around for decades. So it is impossible for the EU to overcome the crisis within a short time," says Zhao Junjie, a researcher with the Institute of European Studies at the Chinese Academy of Social Sciences.

President Hu Jintao will attend the summit in Mexico, and China will be expected to take part in the global rescue initiatives.

"If the situation worsens to the degree that it affects the stability of the global economy and finance, the international community should give it all the necessary attention and help," Foreign Ministry spokesman Liu Weimin said at a news conference in Beijing on June 13.

Zhu Guangyao, deputy-finance minister, said China hopes that the European nations will arrive at a consensus and take more decisive action to safeguard long-term stability in the region.

The EU and the European Central Bank had made great efforts in fighting the crisis, Zhu says, noting that countries inside and outside the eurozone had provided a huge amount of funds.

"China has always indicated its willingness to improve cooperation with Europe and the International Monetary Fund, under the framework of the G20," he says.

Zhao of the Chinese Academy of Social Sciences says that China is more than willing to help Europe, as the continent is its largest trading partner.

"The worsening of the debt crisis in Europe may have some impact on economic growth in China. There is also every likelihood of the Chinese efforts not being enough to satiate the requirements of the eurozone," he says.

"Although China has bought the bonds of some European countries during the visits of leaders, it will not resort to large-scale buys of European bonds as they pose a huge risk in the event of a eurozone collapse," Zhao says.

Lou Jiwei, chairman of China Investment Corp, the nation's sovereign wealth fund, says his company has already started to trim its holdings of European bonds and stocks.

Zhao says that more such actions are likely as slower growth in China during the first quarter of this year may prompt the government to first set its own house in order.

During the first quarter, GDP growth in China, the world's second-largest economy, slowed to 8.1 percent, the weakest in nearly three years.

The purchasing managers index, an indicator of the nation's manufacturing activity, retreated to 50.4 percent in May, ending five consecutive months of growth. A PMI reading of 50 percent demarcates expansion from contraction.

"However, it is very likely that these are not excuses that China would use to refuse aid the EU. China's efforts might be more reflected in expansion of trade and investment in Europe," Zhao says.

China's direct investment in Europe reached 7.4 billion euros in 2011, with 54 new projects and 37 merger and acquisition programs.

"However, there are still trust issues for Chinese companies in Europe," Ding says. "It still takes time for European companies and people to understand that Chinese investors are in no way different from those in the US, Canada or Japan."

yanyiqi@chinadaily.com.cn

(China Daily 06/15/2012 page3)