Can China Rescue Europe?

CLAREMONT, CALIFORNIA – The debt crisis in Europe is no longer a European affair. Coupled with fears of a double-dip recession in the United States, the European debt crisis is dragging the global economy into another cycle of financial panic and economic recession.

Sitting on the sidelines, emerging-market economies in general, and the so-called BRIC countries (Brazil, Russia, India, and China) in particular, may feel fortunate to be spared this financial maelstrom. But they should think again. With closely integrated global financial markets and trading networks, financial crises and economic contractions in the developed economies, which still account for nearly 60% of the world’s GDP, will inevitably undermine emerging-market countries’ prosperity.

Some have thus called upon major emerging countries to step up and use their huge foreign-exchange reserves to purchase the debt of crisis-ravaged countries, such as Greece, Italy, and Spain. In particular, China, with its $3.2 trillion in foreign-exchange reserves, is seen as a potential white knight coming to the rescue of debt-ridden European nations.

Playing upon such hopes, China has been both coy and demanding. Without committing itself to any substantive assistance, the Chinese government has publicly demanded that the European Union grant China the coveted status of “market economy” if it expects China to loosen its purse strings. That status matters, because achieving it will make it more difficult for Chinese firms to be found guilty of dumping goods on overseas markets.