The Cyprus solution has forced Chinese investors to keep an even more watchful eye on the euro crisis, particularly in light of the loss suffered by external debt holders. Speaking on the bailout, China’s ambassador to the EU expressed his hope ‘that such kind of practice will not be employed in future scenarios’. In late 2012, China’s second-largest insurance company, Ping An, filed a claim against Belgium in an international arbitration court claiming losses from its investment in Fortis, a bank, when it was dismantled and nationalised by Belgium in 2008. A victory for Ping An, even if many years in the making, could spell out a broader indictment of the way Europe handles its external debt holders.

China’s money didn’t appear to be at stake during the Cypriot bailout, though China has in the course of the euro crisis also been courted, seemingly unsuccessfully, by Cyprus for contributions: in June last year, just before Cyprus took over the rotating presidency of the EU, one of the largest Cypriot banks joined Cyprus’ Minister of Commerce, Industry and Tourism in a visit to China.

Yet beyond Cyprus China still has a significant stake in Europe’s public debt. China did not become Europe’s ‘red knight’ by massively purchasing sovereign debt as some Europeans hoped back in the hey-days of crisis in 2011, but it did continue to express confidence in the single currency. At the G20 summit in June 2012, China announced that it would contribute $US43 million through the IMF, which could be triggered for European debt needs (China’s preferred option). Chinese companies and state institutions (such as China Investment Corporation, who uses recycled currency reserves) have also continued to find opportunities to buy up in European companies such as Thames Water, the largest water utility in the UK, and Heathrow airport. Chinese investments in Europe in 2012 had another high score year reaching $US10 billion.

Informed guesstimates normally put China’s euro denominated holdings at around 25 per cent of Chinese currency reserves. That would put the value of the holdings at well above $US800 billion, with foreign exchange reserves hovering around $US3.4 trillion. This is a considerable sum, particularly because the alternative to the euro is US treasury bonds that also seem less secure with continued quantitative easing. Yu Yongding has aptly dubbed this situation to be China’s ‘asset crisis’: China is simultaneously caught in a dollar and a (somewhat smaller) euro trap.

Yet in reality, an equally big Chinese concern might lie outside the euro crisis. The Chinese ambassador to the EU merely mentioned that he was ‘watching [the banking crisis] closely’ — but he was ‘very worried’ about trade frictions ‘and barriers to hold back Chinese products from European markets’.

The EU Commission is currently ramping up its trade defensive measures, and taking punitive measures against Chinese goods. The largest case ever against Chinese solar panel producers is still looming. Another case against Chinese telegiants, Huawei and ZTE, is in the works. Although the euro crisis has already dented Chinese exports to Europe, China still needs to maintain exports to the EU to cushion its growth as much as possible.

China is itself in the midst of a difficult transformation process where internal consumption isn’t yet ready to replace public investments and exports as the drivers of growth. From the perspective of the EU, China needs to demonstrate that free trade is a ‘two-way street’. China cannot receive full access to the EU’s internal market while sections of its own economy remain closed.

Jonas Parello-Plesner is Senior Policy Fellow at the European Council on Foreign Relations. He has worked as senior advisor with the Danish government on Asian affairs.