Commentary
Michael Pettis
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Source: Getty
Other
Chinese Euro Intervention
Europe can solve its own domestic liquidity issues and it is unreasonable to expect China to resolve European solvency problems.
Published on Dec 1, 2011
What are the prospects of a major Chinese intervention in the euro?
For at least the past one or two years, China has been slowly shifting the composition of its reserve accumulation, with euros likely growing as a share of new reserves. But this doesn't mean we should expect a major Chinese intervention in the euro, especially if by intervention we mean that China will provide money in a way that relieves pressure on the inability of peripheral European countries to borrow.
There is already a great deal of domestic concern about the safety of China's reserve accumulation, and the idea that China is bailing out risky European borrowers, when China has such huge domestic problems, is not likely to be popular at home.
There is already a great deal of domestic concern about the safety of China's reserve accumulation, and the idea that China is bailing out risky European borrowers, when China has such huge domestic problems, is not likely to be popular at home.
Read more
At best, I would expect that China will participate in international programs in which the credit risk is not limited to the peripheral European borrowers. For example, China may provide more funding to the International Monetary Fund that can then provide financing facilities to European sovereign borrowers.
Will this help Europe? Almost certainly not. Foreign capital inflows come with exported demand and slower domestic growth. Europe can solve its own domestic liquidity problems, and it is unreasonable to expect foreigners to resolve European solvency problems. Turning to foreigners for capital is not a strategy so much as an indication of total confusion.
Will this help Europe? Almost certainly not. Foreign capital inflows come with exported demand and slower domestic growth. Europe can solve its own domestic liquidity problems, and it is unreasonable to expect foreigners to resolve European solvency problems. Turning to foreigners for capital is not a strategy so much as an indication of total confusion.
About the Author
Michael Pettis
Nonresident Senior Fellow, Carnegie China
Michael Pettis is a nonresident senior fellow at the Carnegie Endowment for International Peace. An expert on China’s economy, Pettis is professor of finance at Peking University’s Guanghua School of Management, where he specializes in Chinese financial markets.
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Carnegie does not take institutional positions on public policy issues; the views represented herein are those of the author(s) and do not necessarily reflect the views of Carnegie, its staff, or its trustees.
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