China to Play the Eurozone’s White Knight?

Since the early days of the Eurozone debt crisis, insiders have identified China and its $3.2 trillion in foreign reserves as a potential contributor to a Eurozone bailout fund. Today, Premier Wen Jiabao gave markets reason to believe this may yet be the case when Wen suggested that China is considering the options for how it may contribute to keeping the Eurozone together.

The original European Financial Stability Fund (EFSF) is scheduled to be superseded by the European Stability Mechanism (ESM) later this year. The ESM is expected to provide 500 billion euros ($656 billion) to the establishment of a bailout fund. Wen did not confirm whether China would contribute to the ESM directly, but this does seem to be the most logical way China could help support the region.

China Desires a Stable Euro and Eurozone

It is in China’s interest to help stabilize the Eurozone. It is estimated that up to one quarter – or roughly 620 billion euros – of China’s foreign exchange is held in euros. Shielding this investment from further decline is obviously of vital importance to China.

However, China also wants to see prosperity return to the region as quickly as possible to protect its export interests. The wider European Union is China’s largest export market with 282 billion euros worth of goods exported in 2010. Sales for 2011 continued to increase but at a slower pace and there is a growing worry that sales could soon start to decline.

German Chancellor Angela Merkel arrived in China today to kick off a three-day visit aimed largely at reassuring China that European leaders have a handle on the debt crisis.

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