The impact on China foreign exchange reserve if china aids European union debt crisis - Dissertation Example

As economies of the world have become highly integrated because of globalization and therefore poor economic condition of one country or one region of the world could influence the other economy. In other words, China is looking to help the European nations out of this problem so that their poor economic situation does not influence the growing economy of China. Countries like United Kingdom, Germany, Greece, France and several other European countries have good trading relationships with China and sizeable amount of goods are exported from China to European countries and therefore it helps the economy of China to prosper.

But if these countries will default then China would not be able to export its goods and therefore demand of their products would be reduced and it could hurt the economic condition of China as well. 1.2. Background to the Research Study: China is planning to give aid to European countries and China is looking this aid as an investment to keep its economic growth. The foreign exchange reserves of the country at the end of December, 2011 were $3.18. This foreign exchange reserve reflects the strong economic condition of China.

This foreign exchange reserve would allow China to help and bail out European countries suffering from debt crisis. Although, China has made investment in several parts of Europe and even China has increased its investment almost thrice between 2009 and 2010 however Europe requires a lot more aid and investment to get out of trouble. Not only Chinese investors have made investments, but bonds of different European banks have also been purchased by China to boost the economic condition of European Union.. There are different benefits to China if they help the European region.

The aid would help China to improve its image plus it would help them to have better return on their investment. Also with this aid, China would be able to have a greater say in European and financial talk. According to Chinese government, the investment would be safe because European countries are facing temporary issues however they are rich nations. Not only this would be a safe investment, but it would be helpful for China to enter into certain parts where their products have not been dominating and several other European countries could be entered by China in which they were not been able to export sufficient number of product.

In addition to this, European countries like United Kingdom, Germany and France are important trading partners of China and helping them would give them advantage in the long run. Therefore, the investment would be highly beneficial for the country in the long run. 1.3. Rationale of the Research Study: The researcher has started conducting research to identify and analyse the impact on Chinese foreign exchange reserves if China aids European nations to help them out of debt crisis. European nations are important trading partners of China and helping them out from this crisis could not only be an investment but this would be helpful for China to maintain their economic growth rate (REUTERS, 2011).

If European countries default then the exports of China would be hurt and this could hurt the economic growth rate of China and as a result this would hurt the demand of Chinese products. So, with lower demand the industries in China would suffer and it