China should not save Europe

December 03rd, 2011 |

There are five reasons why participation in any bailout plan for the Eurozone area is not in China’s best interest.

First, the fiscal payback is not good. So far, no fruit has been borne by China’s financial adventures in overseas markets. Investments in the Blackstone Group, Morgan Stanley and Rio Tinto Group have all failed. Since state-owned financial institutions mix business and politics, decision-making is often arduous. These failures have proven, thus far, that China’s state financial system is not capable of selecting and operating overseas investments.

Secondly, Europe will not repay China’s assistance politically. Although multinational corporations like BMW, Mercedes-Benz and Carrefour make huge profits in China, the European media and politicians blame China for their unemployment woes. The European Union’s refusal to recognize China’s market economy is solid proof of prevalent attitudes towards China in the region. The EU’s discontent with China is growing with the worsening of Eurozone debt crisis. Assistance in a bailout may result in further worries about China’s true intentions, harboring even stronger opposition from critics.

Thirdly, China’s assistance would greatly weaken German influence in Europe, and imbed China in the quagmire of European politics. China needs at least ten more years before it will be poised take on issues related to handling of European affairs.

Fourthly, such a large-scale involvement in the European crisis is unfair to the Chinese people. Chinese workers work just as hard as Europeans, but can only earn one tenth of their incomes. In China, there are still large income disparities between the rich and the poor. Such a bailout presents moral issues as to what populations Chinese public funds should help first.

Fifthly, Europe has enough sources to resolve the crisis in its own right. The total debt of Greece is 350 billion euros. But the Eurozone’s GDP surpassed 8 trillion euros last year with no trade deficit. The debt crisis is about the internal distribution of wealth within the EU area. If Europe still has the ability to help itself, a bailout from China seems even less justified.

China can help Europe and the rest of the world by continuing to provide economic opportunities that lead to more jobs and positive returns for foreign enterprises. To continue this trend, China should launch its international board as soon as possible. This can build new financial channels for global corporations to increase their investments and employ more workers.

In addition, China should further stimulate its own domestic consumption with tax cuts. The transferring of business taxes in the service sector to a nationally-administered value-added tax is an important step forward. China should further cut value-added taxes, individual income taxes and logistics costs.

Specifically, value-added taxes could be reduced to 12 percent from 17 percent, and top tier tax rates for individual income tax could be reduced from 45 percent to 25 percent. Moreover, logistics costs per unit of GDP in China are twice that in other countries. China can boost consumption by cutting the highway tolls and harbor usage fees.

Of course, the tax cuts will reduce government revenues. But the government is already spending too much, and not spending efficiently enough. The redistribution of resources from tax cuts will be beneficial to the country and encourage fiscal reform.

In the long run, China must focus on improving technology and support further innovation in its industrial sector. The key to increasing per-capita income from USD $5,000 to USD $15,000 over the next ten years is to update China’s industrial sector. China should learn from Germany and Japan in this regard.

The future of China lies in improving productivity, not demand. The focus should not be on boosting weak global demand, but rather to bring global corporations into China’s economy through capital market and technology investment.

By Andy Xie

This post was first published in Chinese and translated by Li Shen.

Category: Europe, Finance