China: Europe's White Knight or Economic Black Swan?
Arguably the biggest economic story over the past three decades has been the economic modernization of the People’s Republic of China. Today, it stands as the world’s second-largest economy, and is the largest foreign creditor of the United States. China’s lack of foreign exchange diversification, coupled with ongoing economic travails in Europe’s sovereign debt crisis, has led some observers to believe that China is currently facing a logical choice: it can diversify its foreign exchange holdings and also be a savior of the global economy by using its considerable financial clout to purchase sovereign debt of the so-called “PIIGS” countries in the Eurozone, including Portugal, Ireland, Italy, Greece, and Spain.
The goal of this brief is to analyze whether China has both the means and desire to use its cache of currency reserves to contribute to a European bailout fund. This report suggests that although it is possible that a large financial commitment to the Eurozone on behalf of China’s State Administration of Foreign Exchange (SAFE) and the People’s Bank of China (PBoC) could help lower peripheral European borrowing costs, China will be reluctant to use its reserves for that purpose. In fact, instead of being an economic savior of Europe, China is more likely to be a potential source of the next shock to global capital markets.
- China's Foreign Exchange Reserves
- Could China 'Save' the Euroozone?
- Why China would Save the Eurozone
- Bigger Problems at Home