BEIJING (Reuters) - China might just be about to strike the deal of the decade. For a fraction of the trillion euros needed to clean up Europe's debt mess, Beijing could score huge diplomatic kudos for helping end the crisis while satisfying a domestic agenda of reducing dollar dominance in world trade and further loosening its currency straitjacket.
Any contribution to the rescue of the euro zone is fraught with risks -- and no sum has yet been declared -- but for many analysts the upside for China far outweighs the danger of failure.
Among multiple motivations China has for contributing to a euro zone bailout -- such as supporting recovery in its single biggest export market and protecting the value of the 600 billion euros of sovereign debt in the bloc it already owns -- being hailed as the banker to the world is a strong one.
Beijing already enjoys that status in Asia, largely because no country in the region has any desire to ask the IMF for help again after the bruising experiences of the 1997-98 financial crisis, while they would be more than willing to seek assistance from their principal trading partner.
"If you step that up a notch, China in an IMF-type role, then this is simply a soft-power projection on the global economic stage," says Tim Condon, head of Asian economic research at ING in Singapore.
"It's the world's second-largest economy helping avoid another Lehman-like panic."
A SMALLER PILE OF CASH
China has revelled in the role of saviour before, earning plaudits during the Asian financial crisis for not devaluing the yuan as the currencies of regional competitors crumbled, and again at the height of the 2008 global downturn when it unveiled a 4 trillion yuan domestic stimulus package that many observers say kept the world economy moving.
China's contribution to any rescue this time around would likely be far smaller.
That's because while China officially has a pile of $3.2 trillion of foreign exchange reserves, there isn't nearly so much money on hand.
Excess reserves -- the amount of foreign currency above and beyond that needed to cover short-term trade and sovereign debt purposes -- are calculated closer to $1.5 trillion.
Some of that has already been channelled to China's sovereign wealth fund and much of the rest could easily be spent if Beijing chose to clean up a pile of bad debt accumulated by its local governments, meaning free reserves might be as low as $500 billion.
That doesn't leave a huge amount of money to divert towards the euro zone rescue, which could easily explain official Chinese reticence on the size and scale of any commitment.
Beijing also would be reluctant to make a massive bet having watched for two years as Europe has limped from crisis summit to crisis summit, with each successive meeting hailed beforehand as the breakthrough event, only to disappoint.
And there are domestic risks for China's leaders, who face constituencies pessimistic about Europe and wary of buying its debt, something many Chinese see as a bad investment.
"China won't want to be seen as part of a failed effort, but as part of a success and that's probably why there's been so much to-ing and fro-ing," ING's Condon said.
SOMETHING TO GAIN
Chinese officials were customarily cautious on Friday.
Vice Finance Minister Zhu Guangyao told a Beijing news conference that while Europe clearly saw China as an important investor, China wanted more detail about plans to boost the euro zone rescue fund before deciding whether to commit more capital.
Li Daokui, an academic member of the monetary policy committee of China's central bank summed up the quandry.
"It is in China's long-term and intrinsic interest to help Europe because they are our biggest trading partner, but the chief concern of the Chinese government is how to explain this decision to our own people," Li told the Financial Times.
"The last thing China wants is to throw away the country's wealth and be seen as just a source of dumb money."
A big Chinese investment bolstering the existing 440 billion euro European Financial Stability Facility -- even one far more modest than China's 2008 intervention -- would be a clear signal of closure for the crisis that Europe's leaders are desperate to send.
It also would advance several of China's own goals.
First, an investment fits China's need to diversify its foreign exchange holdings in euro-denominated assets. Investing via the proposed special purpose investment vehicle could be a much more favourable way of increasing Chinese holdings of euros rather than buying debt direct.
"Every major reserve currency has its own problems, so for China it comes down to choosing the right balance," said Song Xinning, a professor of European studies at Renmin University in Beijing.
Second, it might also help China deliver on its ambition to internationalise the yuan to unseat the dollar as the world's main unit of cross-border trade settlement.
"It allows China to hold fewer dollars in reserve while preventing a European meltdown that would also have affected their U.S. market," says MES Advisers President Paul Markowski, a long-time external adviser to China's monetary policy makers on international financial markets.
"The debt is cheap and, since the Chinese had already bought some Greek debt, preserves their position and more on an average cost basis," Markowski added.
With so many details still absent for how China might contribute to the funding of a leveraged EFSF, it's conceivable that part of the funding comes with strings attached to accelerate yuan trade settlement efforts, or outright issuance of yuan bonds to national central banks in the euro zone, analysts say.
Finally, it will inevitably grant China some political leverage over its biggest trade partner.
China often grumbles about its lack of access to Europe's markets and about the EU's long-standing arms sales ban on China. It has also been pushing Europe to recognise it as a market economy, something that would shield it from certain trade actions.
Some Chinese intellectuals argue that now is the time to negotiate hard, securing access to, control over, or even ownership of some of Europe's best brand names, companies and intellectual property.
A tilt in the balance of economic power is a price Europe may find it has to pay, however reluctantly.
"Do we really think that China would come to the rescue of the euro zone without getting something in return?" said French Socialist Party challenger François Hollande, who leads Sarkozy in polls for the 2012 election, on Thursday.
"Do we think that by putting ourselves, even if only partially, in the hands of these nations with which we also have to negotiate on monetary and trade issues, we will be able to get positive results for Europe?"