China-EU Relations

Focus

China shows interest in sponsoring EU bail-outs

26.10.11 @ 16:21

  1. By Andrew Rettman
  2. Andrew email

With the eurozone short of money to prop up bad sovereign debt and with China keen to save its main export market from disaster, EU officials are exploring ways to involve the Asian giant in their anti-crisis fund, the EFSF.

  • EUobserver understands that China already holds €6 bn to €8 bn of wobbly Greek debt (Photo: yuan close up)

No detailed proposals have been passed to Beijing at this stage, but Chinese diplomats understand from informal channels that two options are on the table: direct involvement in the EFSF via a special purpose investment vehicle (SPIV) or increased participation in the International Monetary Fund (IMF), with the IMF channeling the money to Europe.

The outstanding details include: how much money the EU wants; how any SPIV would be divided with other new sponsors, such as Brazil; what would be its decision-making structure; and what portfolio of investments it would hold.

"China supports the EU's effort to fight the crisis and has already delivered some measures, like buying Greek bonds, and will continue to help, but as regards the SPIV issue, up to now there is nothing substantial enough to respond to," a Chinese diplomat told EUobserver on Wednesday (26 October).

The China Daily, the country's state-owned English-language newspaper, reported the same day, citing EU sources, that Beijing has provisionally agreed to participate in eurozone rescue schemes.

For his part, the chief of the Luxembourg-based EFSF, German economist Klaus Regling, will flesh out ideas when he visits Beijing on Friday.

According to a four-page EFSF options paper drafted by EU institutions on 23 October and seen by EUobserver, EU leaders are looking to create either one central SPIV or several SPIVs each covering a given debt-hobbled country, such as Greece or Italy.

"The SPIV ... would aim to create additional liquidity and market capacity to extend loans, for bank recapitalisation via a member state and for buying bonds in the primary and secondary market with the intention of reducing member states' cost of issuance," the paper says.

The SPIV or SPIVs would buy eurozone bonds using money from private sector investors, sovereign wealth funds and the EFSF proper. It would be credit-rated by agencies like Moody's. In the event of a default, the private-sector investors would be first in line to get money back. Sovereign wealth funds such as China would be second and the EFSF would take the biggest hit.

Quid pro quo?

French paper La Tribune in January reported China already holds some €650 billion in eurozone bonds. EUobserver understands that €6 billion to €8 billion of this is Greek debt.

One question is whether Beijing will ask the EU to give it market economy status earlier than previosusly agreed in 2016 or lift its embargo on arms exports in return for help.

Even if the EU wanted to reward its Asian sponsor, the decision on market status could be long in coming due to divisions among member states

An EU official told this website the UK is in favour; Italy, Poland and Spain are against; while France and Germany cannot make up their minds. The foreign ministries of the two countries are willing, but the finance ministries are not.

The EU contact noted China will make any EFSF decision based on much bigger questions of national interest than market economy status. The new status would add up to little more than lower EU import tariffs for some Chinese goods.

"It would be a symbol of goodwill. But you will not convince the Chinese to get involved in the EFSF becaue of this. It's just a different way of calculating anti-dumping cases," he said.