Yuan Pro Quo

Beijing will almost certainly say it wants to see the euro zone survive at their joint summit on February 14. If so, it should pony up — not by lending directly, but via the International Monetary Fund’s $1 trillion rescue package. That way China not only has a better chance of getting paid back, but may also win a bigger role at the world’s currency watchdog.

Europe is China’s top trading partner and Beijing already parks part of its $3.2 trillion of foreign exchange reserves in the continent’s bonds. But buying bonds from distressed euro members like Greece looks too risky. Direct loans, or asset purchases, may anger nationalists on both sides. For Beijing, it would be hard to justify a poor country like China bailing out a relatively rich one like Greece.

Contributing to the IMF’s proposed bailout fund makes more sense. Based on its relative weight at the IMF, China might put up $60 billion. Europe would provide $500 billion, and there would be strings, notably that the IMF be paid back before other creditors. Best of all, just the idea might calm down markets so much that the money itself never needs to be lent.

China still has to sell its public on bailing out Europe through a predominantly rich-country club. An agreement by IMF members in late 2010 to increase voting rights from developing economies left China, representing roughly nine per cent of global GDP, with only about six per cent of the vote.

How the IMF is run may seem unimportant to China, with its closed capital account and vast reserves. But China is bit-by-bit internationalising its currency and opening to currency flows. Moreover, most of China’s trade is still denominated in dollars, which leaves it exposed to US monetary policy. China considers the IMF the best counterbalance to such tides. Helping fund Europe’s bailout, and getting a bigger say at the watchdog in the process, is a no-brainer.