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Friday
Feb242012

China Tightened The Vise On Eurozone Bailout

The European Union has filed a laundry list of complaints against Chinese dumping, from shoes to fasteners. Ceramics, for example. Household ceramics got hit last week. In 2011, it was building ceramics. In 2010, it was ceramic tiles, which led to a punitive tax of 69.7%—punitive for consumers who ended up having to pay higher prices, though it was a nice gift to European producers. Now, it has chosen another target, Chinese steel. But with nearly half of the world’s steel production, the Chinese steel industry is the bully on the block. And it flexed its pumped-up muscles—putting at stake the very manna that European officials have been praying for.

Rumors of the Chinese savior appearing on the horizon goosed financial markets innumerable times. China, out of the goodness of its big heart, would use its $3.2 trillion in foreign exchange reserves to bail out the Eurozone with the stroke of a plastic pen. Turns out, China didn’t have a big heart but a list of unpalatable demands—so unpalatable that even a desperate European panhandling delegation sent to Beijing in November turned them down. For this “slap in the face” and the fiasco that followed, read.... Chinese Money and the Quid Pro Quo.

Ten days ago, another top-level EU begging expedition tried to lure Premier Wen Jiabao into plowing part of China’s foreign-exchange trillions into the European bailout fund, a dreadfully convoluted and opaque creature that they passed off as a rose. But rather than kick the conniving beggars out, Wen declared soothingly that Europe was an important partner, and that China and the EU would work together to solve the debt crisis—and the delegation left once again empty-handed. Read.... Bitter Irony of the EU Begging Expedition.

But yesterday, it was brutal. It was an unnamed official at the Commerce Ministry who slugged the EU and everyone who was still steeped in some sort of hope that China would, out of the goodness of its heart, bail out debt sinner countries in the Eurozone.

The trigger: earlier this week, the European Commission opened an anti-subsidy investigation of Chinese organic-coated steel (galvanized and pre-painted) of the type used in household appliances. In December, the Commission had already launched an anti-dumping investigation of the same products. Two separate investigations and two complaints with the World Trade Organization on the same products.

The instigator: Eurofer, the European Steel Association. In January, it whined to the Commission about Chinese steelmakers that didn’t respect the rules of free trade—they received a range of subsidies, such as tax exemptions, preferential loans, and below-market cost of materials that the government purchased for them.

The European steel industry is in trouble. Demand cratered. Producers from ArcelorMittal to ThyssenKrupp have shut down steel mills to prop up prices—but all it did was invite Chinese steelmakers.

And they’re desperate. After years of explosive growth, they’re facing colossal over-capacity, just as demand is slumping. Premier Wen Jiabao acknowledged the problem during a visit to Hunan, where much of the steel is made, and he exhorted the industry to consolidate. So the trade complaint came at a very inconvenient moment.

"Launching an anti-subsidy investigation at this time sends the wrong signal of trade protectionism that will not only cast a shadow over China-EU steel trade, but also damage China-EU efforts to respond to the crisis," said the unnamed Ministry of Commerce official. "With ... many European countries deeply trapped by the sovereign debt crisis, all countries should have a more open, cooperative and forgiving attitude in facing the crisis."

Open, cooperative, and forgiving towards China—the new rules that China is imposing on the game. Or perhaps just a re-write of very ancient rules. Those with the money get to set the terms when those who need it are desperate. Remains to be seen if someday the Eurozone will be desperate enough for Chinese money to compromise on the support for its coddled industries.   

Meanwhile, life in China goes on in its crazy manner: all heck broke loose when Zhejiang's Provincial Administration announced that 30,000 blood nests, the rarest and most expensive bird's nest, contained high concentrations of sodium nitrite. Well-off Chinese were suddenly worried about an insidious food-safety scandal that has changed ... nothing:  Poisonous Blood Nests—Still a Delicacy in China.

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Reader Comments (6)

Hi Wolf,
Lots of talk lately about the BRIC's contributing to a huge IMF fund for Europe, if only Germany will agree to running the EFSF and ESM in parallel. Ken Rogoff makes some good points about this, that relate to your post. The gist is why should surplus countries, struggling to provide for their own still largely impoverished populations, agree to be the loss absorber for developed nations struggling to maintain their own lavish benefits without some serious quid pro quo? Arrogant European attitudes like the one you depict here, or the one betrayed by the airline emissions levy, are not going to cut it.

BTW, do you think the Bundestag is going to agree to a combined 750 BN for the EFSF/ESM in the first place? My thought is that they will NOT, despite pressure from Timmy and the rest of the Eurozone. At the very least, they will wait until LTRO 2.1 and the Greek bond swap are actually concluded. In fact, I would not be surprised to see Monday's Bundestag vote on the latest bailout tranche attach some type of conditionality to a desired outcome for the bond swap.
February 25, 2012 | Unregistered Commenterblankfiend
When Europe created the euro and price it high to keep inflation low they forgot that a high euro exports jobs and jobs pay income tax and keeps the balance sheet in clean condition, however if Europe made a peg to the dollar from the beginning and lower the taxes on energy products and kept real presure on the commoditie traders it would have been a powerhouse today, and exports and Europe as a vacation destination would have easy taking care of their governments overspending.
so and how are they fixing their problems, their are not. but making a peg to the dollar and canadian dollar would make a beginning .
and a haircut for all bond holders in Europe to make up for the loss in euro value. and remember do not worry bondholders will be back.
February 25, 2012 | Unregistered Commenterlucas
Hi Blank,

Germany will compromise on a lot of the financial issues. It has already compromised on the ECB (actually it lost control of the ECB). So, in the end, I think they will be ok with EFSF and ESM in parallel, and €750 billion is not out of the question.

But they will probably not compromise on attaching conditions to bailout packages. And these conditions will be tough to meet. In that respect, I believe they're trying to get Greece to exit the Eurozone on its own will, and they're using out-of-reach conditions as a means. I've been trying to decipher the writing on the wall on this, and that's what I see.

The bond swap, if successful, will ironically make a Greek default more likely because post-swap, a default will be a lot less messy, and its impact on other countries will be smaller.

The CSU has been insisting on tying both the bond swap and continued IMF participation to the deal, but I'm not sure if they'll succeed.
February 26, 2012 | Unregistered CommenterWolf
The author's tone and use of loaded words like "whine" suggest he is one of the global-free-market-nirvana crowd - the invisible hand will save us all. He needs to take a bigger picture view and realize that China is using dumping and subsidizing to destroy western companies/industries. They do this as part of a bullet-free war being waged on the west. The athor's infatuation with cheaper prices - IN THE SHORT TERM - shows that he is not taking his ADD/HD (attention deficit disorder with hyperactivity disorder) medicine, as he is not realizing just how crappy life will be once all western countries are 100% totally beholden to China for everything manufactured. China has shown time and time again that they WILL use that advantage to manipulate political agenda's. IT'S NOT ALL JUST ABOUT MARKET EFFICIENCY STUPID!!! There's more to the big picture that that!

And the cheapest way - per the budget - is not always the best way for a society to manage its affairs. Not every right-thing-to-do generates a profit on a quarterly returns ledger.

Read a history book, learn something, and pull your head outa your butt. You frickin Keynesians are going to destroy the world.
February 27, 2012 | Unregistered CommenterSteven in Dallas
Steven- Read my other posts to know where I'm coming from, especially those about China and the US trade deficit. You got emotionally hung up on the verb "whine" and failed to understand the rest. Too bad. And every country subsidizes its favorite industries. GE and Boeing don't pay taxes, for example. Read my posts on that. All the Stimulus money? Subsidies. So get a little perspective before you mouth off. You just made yourself look very very silly.
February 28, 2012 | Registered CommenterWolf Richter
I do not believe China ever asking the western world to manufacture in China, , the western worlds thinking was let cheap labor work for us and our pensions, and pulled China in to its global project, however the Chinese government does need to take care of its 1.35 billion people, something western corporations would not do., and now it has become a blame game of who steals more or stimulates /subsidise, protect more ext ext.
But if Steven would spend a little vacation in China he could see what it really means to have 1.35 billion people on the same land size as the U.S.A.
February 29, 2012 | Unregistered Commenterlucas

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