The euro for China: too important to fail and too difficult to rescue

Abstract

The aim of this paper is to analyze China's strategy in relation to the euro. The first section summarizes China's active support to the single currency since its creation up to the first phase of the current Eurozone debt crisis. It shows how China has used a two-pronged approach. It has developed a public campaign in favor of the euro, especially when the market sentiment has been bearish on the single currency, and it has continued to be an active player in the European sovereign debt markets. The second part explains why China has been so supportive. Beijing wants to move away from dollar hegemony and thus it favors a tripolar monetary system based on the US dollar, the euro and the Chinese renminbi (RMB). With this aim, and despite the crisis, China has continued to diversify its foreign reserves into the euro making it by now ‘too important to fail’, not only because China holds roughly $1 trillion in euro-denominated assets, but also because for China the Eurozone is a crucial market and an important strategic counterweight to US dominance in world affairs. Finally, the third part focuses on how by the end of 2011 China switches to a more cautious approach due to the difficulty involved in rescuing the Eurozone. Domestic pressures, public outcry in Europe against being saved by China, the unwillingness of the European leaders to enter into strategic bargaining and Germany's strategy to use sovereign bond spreads as a market mechanism to create ‘more Europe’ have convinced policy-makers in Beijing to keep a lower profile while making sure the value of the euro remains stable.

Keywords:

• China
• euro
• Eurozone crisis
• foreign reserves
• geopolitics
• Germany

Acknowledgements

I would like to thank Yu Yongding, Gao Haihong and Zhang Ming for their help in conducting this research in Mainland China and Hong Kong. I am also grateful to Oxford Brookes University and ESSCA School of Management for financing my fieldwork trips. Finally, my gratitude goes to all the interviewees who agreed to participate in this study and to the two anonymous reviewers for their challenging and thought-provoking comments.

Notes

1. In total, 55 interviews were conducted: n = 48 in Beijing (n = 24 in spring 2009, n = 15 in spring 2012, and n = 9 in summer 2013), and also n = 5 in Hong Kong, and n = 1 in Oxford in spring 2012. Unfortunately, due to the sensitivity of the topic, most of the officials interviewed asked for anonymity and hence their references are codified. Nonetheless, in order to show the reach and depth of this study, the positions of the quoted officials will be disclosed in the bibliography. Furthermore, the reader can find in the appendix all the institutions that contributed at least with one interviewee to this study.

2. Coincidently, this is the same concept used by the president of the European Central Bank, Mario Draghi (see Draghi 2012) to reassure international investors that a return to national currencies is impossible.

Additional information

Notes on contributors

Miguel Otero-Iglesias

Miguel Otero-Iglesias is Research Fellow at the EU-Asia Institute at ESSCA School of Management, France, and Senior Analyst for the European Economy and the Emerging Markets at the Elcano Royal Institute, Spain.