BY DEAN CHENG
JULY 4, 2015
With the failure to pay $1.73 billion to the International Monetary Fund (IMF), Greece now enters the history books as being the first developed country to default on an IMF loan, with the single largest missed payment in that institution’s history. On Sunday, Greece will hold a referendum, to see whether the people will support further cuts in pensions and increases in the sales tax in order to try and bring the nation’s finances into order.In the run-up to this default, many observers had watched with concern and curiosity as Greek Prime Minister Alexis Tsipras and Russian President Vladimir Putin met for discussions during the St. Petersburg International Investment Forum. Greek statements hinted that a failure to grant Greece more time and funds might result in a turn by Athens toward Moscow. Reports suggest, however, that Tsipiras returned from St. Petersburg empty-handed. Indeed, it is an open question whether Russia, itself suffering from economic sanctions, has the resources to keep Greece afloat.
One nation that does have the capital to rescue Greece is China. With some $4 trillion in hard currency reserves, and $21 trillion in savings, China undoubtedly has the resources to bail out Greece. Moreover, the Chinese appear intent on expanding their financial role. China loaned some $22 billion to Latin America in 2014, more than the World Bank and Inter-American Development Bank combined.
The People’s Republic of China (PRC) may be even more incentivized to extend such largesse to a European state, as Europe is China’s largest trading partner, and the Chinese economy has begun to slow down. Coupled with the major volatility in the Chinese stock market in recent weeks, it is likely that Chinese decision-makers would prefer a stable eurozone, especially as Chinese economic ties with Europe have expanded massively over the past decade. From only $2 billion in 2010, it now has nearly $14 billion in annual investment in Europe. Overall economic interaction between Europe and China is believed to amount to some 46 billion euros. Instability in the eurozone due to the departure of Greece would likely have adverse repercussions in China.
Nor do just economic factors suggest that Beijing may at least consider extending financial support to Greece. In 2013, Chinese President Xi Jinping announced the creation of both an overland Silk Road Economic Belt and a 21st Century Maritime Silk Road, which will connect China by land and sea to Europe. This so-called “One Belt, One Road” initiative will be funded by a dedicated $40 billion Silk Road fund as well as potentially by the Asia Infrastructure Investment Bank (AIIB), which has been formally ratified by Asian and European members.
China has expressed some interest in having Greece serve as the western terminus of the “One Road, One Belt” effort of fostering trade among China, the Central Asian states, and Europe. Last year, Chinese and Greek leaders initialed contracts totaling some $5 billion, centered on the port of Piraeus. As with all reports of Chinese foreign investment, these figures represent more ideals and aspirations, rather than actual expenditures. However, they do reflect a longer-term Chinese interest in establishing a presence in the eastern Mediterranean. Moreover, Piraeus was a key staging area for the Chinese evacuation of more than 20,000 of its citizens from Libya — the first time the Chinese had ever conducted such a large-scale overseas operation.
Chinese bankers have also extended loans to states whose economic history makes them poor credit risks. The $22 billion in 2014 loans to South America, for example, includes $7 billion to Argentina and nearly $6 billion to Venezuela. It has also provided financial backing to Russian entities during the ongoing Ukraine crisis. Several Chinese banks, including the Export-Import Bank of China, have extended nearly $14 billion in credit facilities and loans to their Russian counterpart.
For Beijing, the financial risks for underwriting a bailout of Greece are substantial. The Greek government and population have demonstrated limited willingness to make the deep, fundamental changes necessary to put Greece on a sustainable economic path. This would certainly impose a substantial political, as well as economic, cost. But the potential political gains, especially if Chinese assistance were to allow Greece to remain in the eurozone, may be substantial.
A eurozone that China helps sustain might mean a Europe that would be more willing to end the Tiananmen sanctions and other export controls on high technology to the PRC. Chinese help in maintaining the stability of the eurozone would also likely limit European willingness to align itself against China in the event of a Pacific crisis (e.g., a Taiwan Straits situation in the wake of the 2016 elections on the island). It would also demonstrate to the world that the PRC has the capacity to act on a large financial scale that was once the sole purview of the United States.
This is not a prediction that Beijing will bail out Athens. Chinese officials have expressed unhappiness with the Greek government’s threats to halt the privatization of Piraeus (the basis for Chinese investments there). And, as AEI’s Derek Scissors has observed, “Simply because China has substantial hard currency reserves does not mean that it is prepared to commit that money, notwithstanding that seemingly half the planet claims that a huge amount of Chinese capital is about to come their way.” Bailing out Greece, even more than loans to Argentina and Venezuela, would be a political, rather than a financial, decision.
What the situation highlights is that as Xi Jinping pursues his policy of “national revival,” he will have more tools, including substantial financial ones, at his disposal. Whether the West, and especially the United States, likes it or not, China has the ability to financially influence and even determine developments globally. They will increasingly have to take the mandarins of Beijing into account, as much as the gnomes of Zurich.