By Cedric Welsch
The latest talk by Chinese officials seems to be driving up the Euro versus other key currencies. This movement of currencies seems to be an indicator of the rising importance of the role that China has come to play in the global economy. China’s ambassador to the European Union Song Zhe’s statement that a strengthening Euro will bring stability to the global currency system along with the nation’s commitment to bailout Euro zone economies seems to have had a magical impact on the currency.
The Chinese ambassador’s words were backed by the Chinese vice Premier’s commitment to invest four to five billion Euros in the Portuguese government debt in the first quarter of next year. China does not seem to be doing this out of charity. The EU is one of China’s largest trading partner, and in propping the European economy China is only ensuring that its business interest stay protected. China has a war chest of 2.65 trillion dollars in foreign exchange reserves, part of which it intends to use to bail out the Portuguese economy. China said that it was willing to use its 2.7 trillion dollar overseas investment fund to bailout the debt ridden nations in the Euro zone. China’s statements immediately propped the Euro versus key currencies like the Yen and the US dollar. China’s statement came after a downgrade of Portugal’s sovereign rating by Fitch, by a notch from A+ to A–.
This also seems to be a calculated move on China’s part as it probably plans to reduce its exposure to the US dollar and diversify its investments in other currencies as the position of the US economy stands weakened and the dollar could face an uncertain future. With China having a massive exposure to the US dollar in terms of investments in US government paper, any weakening of the dollar could lead to substantial erosion in China’s national savings. Thus, while China would not like to talk the US dollar down in any major way as its savings would diminish if the dollar were to depreciate suddenly, China seems to be using its economic influence to create alternatives to the US dollar so that it can diversify its portfolio gradually. In fact the downgrade of Portugal’s economy could possibly have triggered a fall in the Euro, and China is averse to the idea due to its investments in the Euro zone sovereign paper. Thus, China seems to be doing a tight rope walk. It appears that China cannot afford any major fall in the Euro or the dollar at this point of time and thus seems to have offered to bolster the Euro zone such that the Euro does not take any sudden dip.
While, the Chinese economy is set to overtake the US economy to become the largest in the world in the next few years, China does not appear to be ready to take on the role of leading the global economy and be in a position to replace the US economy from this role. China may have taken the conscious decision to propose help for the European economy in order to step into the global economic leadership role.
In any case these developments suggest that the global economy continues to be fragile and could use help from the Chinese economy, which seems set to take a centre stage in global economic affairs.
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