If China indeed becomes the world's dominant economic and financial power, yesterday's visit to Beijing by Klaus Regling, the chief of the European Financial Stability Facility – better known as the euro bailout fund – will probably go down as an important symbolic step along the way.
After the euphoric surge in markets immediately after Wednesday night's deal in Brussels to rescue the single currency, reality is reasserting itself. And part of that reality is that if the deal is to stick, China's involvement is essential. Mr Regling made typically soothing central bankerly noises: the bonds issued either directly by the EFSF or through the International Monetary Fund would be an attractive market investment, and that any agreement with the Chinese would naturally take time. But let us not mince words. Mr Regling was in Beijing as a mendicant.
Shifts in the global balance of power were evident long before the great crash of 2008 sealed the status of the G20 as the most important economic negotiating forum, and consigned the G7 group of leading Western nations to near irrelevance. The G20's members include such countries as Saudi Arabia, Russia, Korea, India and Brazil, all of them among the world's biggest individual holders of foreign exchange reserves. These too are likely to provide support for the enlarged bailout fund. But by far and away the largest reserve holder of all, with $3.2trn, is China.
China has demonstrated its clout before. Those colossal reserves helped to create the conditions that led to the 2008 crisis, as sustained purchases by Beijing of US government securities financed Washington's massive trade and budget deficits – keeping US interest rates much too low and thus enabling the credit and housing bubbles that would lead to disaster. Less visibly, China has been increasing its presence and financial assistance in Africa and other commodity-producing countries, to ensure future supplies of vital raw materials. Now a new show of strength is at hand, this time involving Europe.
Self-interest alone dictates that China should step in. A disorderly Greek default, followed as it might have been by a similar crisis in Italy, the eurozone's third largest economy, would surely have spelt the end of the single currency with calamitous consequences for everyone – including China, the world's biggest exporter. But unless flesh is put on the bones of Wednesday's agreement, the day of reckoning may only have been postponed.
Small wonder that far less criticism of China's dismal human rights record is heard from the US these days, or that the Obama administration is fighting to head off protectionist measures by Congress. Now, in return for aid to Europe, Beijing has every right to demand, for example, that its economic weight be properly reflected at the leading international financial institutions.
The financial travails of the US, by far the world's greatest debtor, and the euro's near-death experience make the cosy convention that a European should lead the IMF and an American the World Bank more inappropriate than ever. The US and Europe moreover have de facto veto powers over important decisions by the IMF. If China is providing the money, it should be granted a similar say in proceedings.
Such a grand bargain might also hasten steps to correct the underlying imbalance between China's huge surpluses and the deficits in the US and (to a somewhat lesser extent) Europe. Support for the euro rescue will be a great service. An even greater one would be for China to boost its domestic demand, by increasing imports and the value of its currency and to improve the living standards of its own people.Reuse content