When the first EU-China summit was held in 1998, the tea leaves could not have predicted the dramatic inversion in the geostrategic balance of power that would have occurred by the time the 14th instalment of the meeting, to be held on October 25, rolled around.
European Council President Herman Van Rompuy will meet his Chinese counterpart Hu Jintao in Beijing next week against the topsy-turvy background of a weakened Europe crippled by debt and banking crises, soaring unemployment and stagnating economies. In sharp contrast, China’s star is on the ascent, with it having recently shot past Japan to become the world’s second-largest economy. And crucially, given the insolvency being faced by many members of the EU, Beijing is awash with cash, sitting upon a mountainous reserve of foreign exchange worth $3 trillion-plus.
China remains much poorer than Europe with GDP per capita at less than a third that of Europe’s but it is speedily growing richer, while the EU is skirting another recession and facing a possible decade of listless growth.
The turnaround in the relative fortunes of the two is exemplified by the once unthinkable, but today commonplace speculation that China might be the only country with pockets that are deep enough to ultimately pull Europe out of the financial quagmire it is sinking into. One idea that has been floated involves the creation of an EU-China bond that unlike an EU-only bond would rope cash-rich China into the deal by offering a better interest rate than it’s getting on, say, US Treasury bonds. Others, including journalist Fareed Zakaria, have suggested bribing China to help out by offering Beijing a bigger role in the international financial system such as pledging that a Chinese candidate becomes the next head of the International Monetary Fund.
While such notions remain fanciful, Europe’s fiscal woes are not to China’s benefit adversely affecting the country’s exports (over 20 per cent of China’s exports are to the EU, worth $383 billion in 2010) and investments (up to 25 per cent of China’s foreign-exchange reserves are thought to be in euro-denominated assets).
But, faced with a range of domestic challenges and at a time when leadership changes in Beijing are set to take place, sorting of Europe’s mess is too high risk a strategy for China to undertake.
Nonetheless, Beijing has played the crisis cleverly to its advantage, dangling potential lifelines at Europe’s peripheral nations and creating the impression of crucial support for the euro, without committing to any concrete numbers.
In June 2010, China bought Greek bonds as a quid pro quo for a 35-year lease on Piraeus port. A month later, Beijing announced it would buy Spanish bonds, a move that helped prop up investor confidence so that a subsequent Spanish bond auction was actually oversubscribed. But later it was thought that Beijing had only purchased a paltry 400 million euros worth of Spanish debt.
China has also made noises about buying Irish and Portuguese debt but always without specifying timings and amounts. In fact there is no way of verifying the hard figures behind Chinese bond purchases, since the composition of Beijing’s foreign reserves is a state secret, while Europe publishes no aggregate data on foreign buying of debt and few member states reveal this information either.
Europe’s troubles have also allowed China the opportunity of investing directly in the country, snapping up cheap assets and even getting contracts for public infrastructure projects by offering low prices to governments struggling to rein in spending.
Five years ago, China’s total investment into Europe was at $1.3 billion. By contrast so far this year, there have already been several Chinese acquisitions, including a Hungarian chemical company BorsodChem and Elkem, a major Norwegian silicon unit, that have each exceeded that amount.
China’s increased footprint in Europe has hardly gone unnoticed with think tanks and business lobbies producing a raft of papers in recent weeks urging Brussels to take protective action. A report called “the Scramble for Europe” by the European Council on Foreign Relations, makes parallels between the European colonisation of Africa in the 19th century and China’s current activity in Europe.
“China is buying up Europe,” it claims adding that “crisis-hit Europe’s need for short-term cash is allowing China not just to strike cut-price deals but to play off member states against each other…replicating a strategy it has already used in the developing world.”
In another paper by Business Europe, a lobby group, titled “Rising to the China challenge”, a gloomy scenario is painted of a China that is increasingly competing successfully against hapless European companies both in Europe itself and in third country markets. It’s argued that by direct and indirect state subsidies, forced technology transfers, restrictions on raw materials exports from China and threats of retaliatory measures, Beijing ensures an unfair advantage for Chinese companies.
Both reports call on the EU to put pressure on China to open up its services and public procurement markets to European firms, lift restrictions on exports of rare earth and other raw materials, while developing mechanisms to “speak with one voice” thus denying Beijing the ability to divide and rule Europe. Calls for instituting a system for vetting direct foreign investment in key sectors in Europe are also being made, a suggestion that has found support in the EU Commissioner for trade Karel de Gucht.
But despite such exhortations the cold truth is that when President Rompuy meets Hu Jintao, he will hardly be in a position to “demand” anything of Beijing. Particularly since the EU’s 27 member states have not been able to agree on any carrot that Brussels’ might offer China as an incentive.
What Beijing wants is for the EU to offer it market economy status (MES), a technicality which would make it harder for Brussels to initiate and win antidumping cases against Chinese firms at the World Trade Organization (WTO). Chinese Premier Wen Jiabao recently made remarks at the World Economic Forum that seemed to link Beijing’s continued bond buying in Europe to being granted MES, although Chinese officials later insisted this was not the case.
Under the terms of its accession to the WTO, China will automatically be granted MES in 2016 in any case, making it an “easy” sop for Europe to grant from which they could potentially extract much mileage.
But the bloc’s 27 member states have been unable to agree on this tactic. China has long been somewhat of a cheerleader of the EU. Unlike India, which gives Brussels short shrift, Beijing has systematically wooed the EU for years, motivated by the idea of having a single negotiating partner on issues like MES.
Given Europe’s dazzlingly divisive display on Greece over the last two years however, China is growing increasingly cynical of the EU’s ability to deliver any outcomes.
Summits are always mostly political theatre and one shouldn’t expect the EU-China summit to be any different. Hands will be shaken, pictures taken and agreements to celebrate years of youth and culture signed. But beyond the summit, while the crisis has engendered the need more than ever before, for Europe to develop a real strategy for dealing with China, the EU remains fumbling in the dark for one.
