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Will the NPC ride to the UK's rescue?

Will the NPC ride to the UK's rescue?

Updated: 2012-03-13 08:08

By Mark Hughes (China Daily)

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All economists' eyes and many of those with a mortgage, a pension, savings, stocks and even a job are on Greece, wondering whether it will default on its sovereign debt.

But what has this got to do with China and the ongoing National People's Congress?

Well, if Greece does default, and in my view the chances are very high, it would leave it being run by a European Commission placeman and former Goldman Sachs banker (with all the baggage that entails), who was forced on the Greeks after their democratically elected prime minister was thrown out under European Union pressure.

Will the NPC ride to the UK's rescue?

It will put further pressure on the euro, which is in a long-term downward trend against the dollar. It will also put more pressure on Spain, Portugal, Italy and Ireland's economies. This could lead to the failure of the euro. That in turn would shake all of the world's economies. Europe would start importing far less, putting Chinese companies out of business and thereby increasing unemployment here.

Whatever emerges in this long drawn out saga will have a profound effect on world financial markets.

Already, Premier Wen Jiabao noted in his central government report to the National People's Congress that the expected growth rate for China is now 7.5 percent. Earlier this year the prediction was for 8 percent. Chinese markets have taken a tumble on news from Europe.

We live in a world of dark economic uncertainties.

Late last year, the UK's Bank of England governor, Sir Mervyn King, issued what many observers described as an apocalyptic warning. He said: "An erosion of confidence, lower asset prices and tighter credit conditions are further damaging the prospects for economic activity and will affect the ability of companies, households and governments to repay their debts. That, in turn, will weaken banks' balance sheets further. This spiral is characteristic of a systemic crisis."

Many commentators have suggested there is a pact between the two most powerful leaders in the 17-nation eurozone, German Chancellor Angela Merkel and French President Nicolas Sarkozy, a sort of Merkozy some observers joke, that will see changes to the EU treaties that will make it less democratic and abolish member countries' vetoes in the interests of greater fiscal unity and central control.

UK Prime Minister David Cameron, while no doubt counting his blessings that Britain never signed up to the euro and maintained sterling as its currency, is reported to fear Britain being sidelined by the Merkozy pact.

Cameron and his team of ministers, not so long ago described on Chinese television as the "young men quietly getting on with cutting the UK's budget deficit", are keen to reduce UK government spending. The EU has a "bloated welfare system that meant people in Europe did not work enough", the head of the Chinese sovereign wealth fund was quoted as saying on Al Jazeera television English language news channel.

In an apparently well briefed report in the Financial Times, it was stated: "Ms Merkel and Mr Sarkozy have promised to submit joint proposals for EU treaty changes on that score although they have yet to agree on some critical questions, such as whether sanctions should be automatic for rule-breakers."

The problem for China is that the EU has form in being protectionist, and the world is entering an increasingly protectionist phase as harsh economic conditions bite. China is now the EU's second trading partner behind the US and the EU's biggest source of imports by far.

The EU is also China's biggest trading partner. In 2010, the EU exported 113.1 billion euros ($148.5 billion) of goods to China, a 38-percent increase on 2009 and imported 281.9 billion euros of goods from China, a 31-percent increase on 2009.

If what emerges from the Greek crisis results in a more protectionist EU, that trade will suffer. The EU might start trying to dump cheap goods on China while imposing higher tariffs on Chinese imports.

China's best friend in the EU is the UK, as witnessed recently by its decision to launch a series of infrastructure projects in Europe starting in Britain. It has already decided to finance a dual carriageway between the southwest city of Exeter and the seaside resort of Torquay, according to a BBC report. It is also interested in building and managing a new London airport in the river Thames.

Chinese investors' nerves were clearly rattled by last year's national strike by British public sector workers protesting about cuts to their "gold-plated" pensions. These demonstrations, which were peaceful, came just a few months after rioting broke out in several cities.

The UK has not experienced the level of civil disorder witnessed in places such as Greece and this form of violent protest is not often manifested in the British DNA where the "stiff upper lip" is the usual reaction to difficult times. In the event, the strike passed quietly and Cameron described it as a "damp squib".

Chinese investors should cast aside any anxieties at this critical time and employ their impressive leverage to ensure the UK does not get marginalized by more protectionist forces. After all, the Chinese are the ones with the biggest financial clout and the least debt, and it is in their interests that a new Europe does not become more protectionist.

The National Party Congress should use the opportunity to make sure this happens.

The author is the executive business editor with China Daily.