Despite the relentless bad news concerning the Eurozone crisis, China remains confident that its economy is well prepared enough to withstand the worst effects.

How the Eurozone Crisis Shapes China’s Global Economic Strategy

Despite the relentless bad news concerning the Eurozone crisis, China remains confident that its economy is well prepared enough to withstand the worst effects.

The current Euro crisis is strongly correlated with China’s economic stability and growth, with Europe being an important business partner and one of the main exporting areas for Chinese goods. Recently the Euro mess has caught on to trade, sending manufacturing activity to a halt. China has always wished to counterbalance the weak US Dollar (long pegged to the Chinese yuan) with a basket of currencies that it considers to be good alternatives. When the switch was finally made in 2005, one of the most important currencies in the basket was the euro. Since then, the welfare of the euro has had a direct impact on the Chinese economy.

When the global financial crisis first broke in 2008, the then French President Nicolas Sarkozy asked China to step in and come to the rescue. Sarkozy was politely rebuffed by China who stated that it was a purely European problem best solved by the governments of the Eurozone. This was because the Chinese had just bailed out the United States by buying huge batches of Treasury bills, pushing China ahead of other countries like Japan and Russia as the biggest creditor of the United States. The other reason was that the problems of the Eurozone were structurally more complex as they were composed of different governments and their diverse policies. With China out of the frame, Germany has become the biggest bailer of the region rescuing countries like Greece, Spain, Portugal, Italy and Ireland. While China had once hoped that a strong Euro could be a counterbalance to the dollar, it has become more and more evident that this can never be the case.

Still it is in China’s interests to stabilize the currencies, both for trade purposes and in preparation for the inevitable reality of the free flow of the Chinese yuan into the market. The yuan had already appreciated due to the huge amount of international trade with surpluses in addition to US pressure to allow it to flow freely into the currency market (The yuan today is still a hard currency with exchange rates tightly controlled by the Chinese Central Bank). So eventually China ended up buying large amounts of Euros and other currencies to stabilize the price, accumulating the biggest forex pile in the world at US$3.24tr. Switzerland recently did the same to weaken the swiss franc, such that the country is now being called the “new China”.

It is interesting that in view of the dire economic situation in both the United States and Europe that China became more aggressive in its pursuit of new markets through both diversification and acquisition of natural resources. While the prices of steel and other industrial metals tumbled recently due to the fall in the rate of growth in building and construction, prices of corn and soya beans achieved record highs, fanning fears of a price hike similar to that of 2007/2008. China has long anticipated this scenario and subsequently invested heavily in places like Brazil for its agriculture capabilities. China has also aggressively invested in countries with huge potential in natural resources like Canada, Australia and a host of African countries. It is within this context that one should view the events currently unfolding in the South China Sea, as under those disputed islands also lie untapped resources. It would be nice to believe in China’s narrative that their claims to the South China Sea is because of their right to exercise sovereignty claims and to reclaim national pride for the once oppressed Chinese people, but in reality their aggressive stance is due to their continuing acquisition of the world resources, a policy that China has not deviated from over the past 10 years.

The future of the Eurozone remains unclear as the austerity measures become more and more unpopular such that the German people will eventually tire of bailing everybody out. A long-term solution to the question of the euro’s future will have to be devised. China, along with the United States, will hope that day comes earlier rather than later. But even if the unimaginable happens, and the world faces the total or partial dismembering of the euro, the actions described in this analysis demonstrate China will be prepared for the fallout and its consequences.

The views expressed in this article are the author's own and do not necessarily reflect Fair Observer's editorial policy.