China Must Choose: Euro or Dollar?

Financial institutions declaring bankruptcy due to high default rates on subprime mortgage loans triggered the financial crisis in the United States, resulting in economic recession, the stock market crash, and rising unemployment.
By Chen Pokong
2008-10-28
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Historically, capitalist economies (or market economies) are known to go through periods of turbulent ups and downs. It is not the first and certainly will not be the last time for the United States or other Western nations to face an economic crisis.

Two major characteristics distinguish the current economic crisis from those in the past.

First, the United States, with its enormous financial system, is a leading power in the financial world; hence the impact on the nation’s economy is also enormous. The U.S. government’s unprecedented bailout plan—with funding of U.S. $700 billion—shook the world.

Second, global economic integration links the world’s financial systems together, and the level of co-dependency between nations is extraordinary.

Consequently, the financial crisis that originated in the United States quickly reverberated around the world, and every nation is taking urgent measures to rescue its economy.

Turning to China

This time, people are also turning their focus on China. How will the crisis affect a nation with the most foreign reserves (U.S. $1.9 trillion) and the largest and fastest-growing new economic system? And what effect will China have on the crisis?

All eyes were focused on the 7th Asia-Europe Meeting (ASEM), in Beijing on Oct. 24-25. In the meeting, the European Union called for replacing the U.S.-led Bretton Woods System.

The international monetary system, centered on the U.S. dollar, was created after World War II, with the liberalization of capital, foreign reserves, and commerce as its founding principles.

The General Agreement of Tariffs and Trade (GATT), the World Bank Group, and the International Monetary Fund (IMF) have served as the three major pillars that upheld the world’s trade and financial systems for the last few decades.

As the new wave of financial crisis hit the United States, the government scrambled to adopt an unprecedented national bailout plan as a rescue measure.

However, this course of action seriously damaged the Bretton Woods System and its reputation, which was built on the principles of market economy. (In fact, as early as the 1970s, many countries had already abandoned the system of fixed exchange rate tied with the U.S. dollar. Since then, the Bretton Woods System merely exists in name.) The EU now seeks the opportunity to push for a system reform, in an attempt to have the Euro replace the dollar as the major global currency.

A bigger role?

European leaders are urging China to play a bigger role in the rescue effort of the global financial crisis.

One may interpret this as the European Union recognizing China’s elevated status as one of the world’s leading nations. But it could also mean that the European Union is imposing direct pressure on China to step up and be a “responsible powerful nation” for the world’s economy.

In other words, EU nations are sending a message to the Chinese government that they are displeased with China sitting on the sideline during the financial unrest.

The global economic crisis presents a golden opportunity for China. By catering to the wishes of the European Union, China has a chance to dominate the United States by weakening its global influence and possibly relieving pressure imposed by the United States for China’s human rights record, thus solidifying the nation’s one-party autocracy.

At the Beijing ASEM, President Hu Jintao seized the opportunity to reiterate, “[Countries] should respect each other’s social systems, ideologies, cultural background, and development models.”

Crisis spreads to China

China’s relatively closed banking system has provided a certain degree of immunity for Chinese financial institutions against the international financial crisis. So for a while, China was able to stand on the sideline as a casual observer.

However, as the crisis began to sweep across the globe, China’s economy started to suffer.
Its GDP growth dropped from the previous two-digit rate to 9 percent in the third quarter. China’s economic growth for the following year is expected to slow to 8 percent at best.

For the last 20 years, the Chinese government believed that fast-paced economic growth was the essential building block of a harmonious and stable society—so a stalled economy undoubtedly has Chinese leaders worried.

Many Chinese factories have, further, closed their doors following a drop in foreign investment and export demand.

Half the toy manufacturers in the Zhu Jiang Delta have folded—a sign that China can no longer sit out this global crisis. At this time, the Chinese government must safeguard its interests, primarily in securing its ruling power.

South, Southeast Asia

Southeast Asian countries and Pakistan face bankruptcy as the world financial crisis deepens.

With China-Pakistan ties still close, the Pakistani president visited Beijing in person to seek financial aid—but China refused to provide direct assistance and promised either to expand Chinese investments in Pakistan or provide a deposit of U.S. $1 billion to 2 billion in Pakistani banks.

The U.S.-based World Bank Group and Asian Development Bank meanwhile both committed to provide financial assistance to Pakistan, and the United Kingdom also promised to double its aid to the region.

What’s behind the requests for Chinese aid: Beijing’s enormous foreign reserves, as well as the Chinese government’s autocratic ability to tap into its national reserves at will.

The Chinese authorities, so far, have released only official foreign reserve figures, but how the reserves are structured is a “national secret.” So even the Chinese people have no way of knowing how much of China’s foreign reserves are movable assets and how much is tied up in the slumping stock market.

Sources outside China believe that U.S. dollar assets make up about two-thirds of China’s foreign reserve, with the majority in U.S. Treasury bonds.

The United States is in no condition to repay its national debt, which means that China’s foreign reserve is now tied up in U.S. government bonds.

On the other hand, if the European Union succeeds in rebuilding the global monetary system and replacing the dollar with the Euro, China—with the world’s largest U.S. assets—would be a primary victim.

Wary China


Beijing is tempted to pursue the EU plan, but it’s also wary.

It tiptoed around the issue by announcing that it will fully participate in the International Financial Summit to be held in Washington, D.C., on Nov. 15. U.S. President George Bush will host the summit, which will comprise world leaders and the heads of global organizations from 20 countries for a discussion on the global financial and economic crisis.

The Chinese economy depends heavily on U.S. financial markets, and China realizes that the perpetrator of the current crisis also holds the key to cleaning it up.

Evidently, the Sino-Europe collaboration that Europe wanted won’t go far.

Public opinion about China’s role in the global economic crisis will remain only in the realm of speculation and exaggeration.

RFA/Mandarin commentator Chen Pokong was born in Sichuan province, China, in 1963.  He was one of the main organizers of the 1986 student movement in Shanghai that demanded human rights, democracy and political reform. After completing a master's degree in industrial management at Shanghai's Tongji University, he began teaching in the economics department at Guangzhou's Zhongshan University in 1987. During the 1989 democracy movement, he was one of the most important organizers and leaders of the protests in the Guangdong area. Chen was jailed in China for four and a half years from 1989 to 1992, and again from 1993 to 1995. He holds a Master’s Degree from Columbia University in public administration and economics. He lives in New York city.

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