Exclusive: Politics stymie China's EU aid offer: sources

Fri Nov 11, 2011 10:53am EST
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By Benjamin Kang Lim and Nick Edwards

BEIJING (Reuters) - Diplomatic deadlock is curbing China's will to provide cash to help end the euro zone crisis after Europe spurned the simplest of Beijing's three key demands, two independent sources have told Reuters.

China had offered help in return for European support to grant it either more influence at the International Monetary Fund, market economy status in the World Trade Organization, or the lifting of a European arms embargo, said the sources, both of whom have direct knowledge of the matter, including one who has ties to the leadership in Beijing.

The IMF route would have been the simplest diplomatically, especially after European Union leaders last month laid out a plan to leverage up the resources of its crisis-fighting fund through an IMF-backed investment vehicle.

But the sources in Beijing say that this option was abruptly closed to China when it became clear to EU politicians that any investment from China would be contingent on gaining a greater say in IMF decision-making and a more rapid path to inclusion of China's yuan in the IMF's special drawing rights (SDR) currency unit.

Increasing China's say at the IMF would mean reducing EU representation and possibly diluting the influence of the United States, which enjoys veto-power status given its voting rights at the Fund.

"We are willing to help, but we are not a charity," the source with leadership ties told Reuters, requesting anonymity due to political sensitivities.

"The United States and the IMF also attach conditions (when they help financially troubled countries). It is not unreasonable for China to do the same. They can always reject (our demands)," the source said.

Including the yuan in the SDR is important to China because the IMF unit is a basket of the currencies in which most global trade is settled -- U.S. dollars, euros, Japanese yen and sterling.   Continued...