16 September 2011

China Entering Europe: As Friend Or As “Economic Hit Man”?

China seems friendly to Europe – even surprisingly so.

China Daily writes about the New China-Europe era, Chinese Premier Wen Jiabao's successful European tour, that “China and the Central and Eastern European countries can not only be good friends who stand by each other through thick and thin, but also good partners that draw on each other's strengths and pursue win-win cooperation.” (China Daily, 1 July 2011)

Chinese leaders have repeatedly voiced support for the debt-mired euro area and also bought a substantial amount of European debt (about a quarter of China’s record foreign currency reserves of $3.2 trillion are estimated to be in euro assets); they have helped to reassure markets that investor “panic” about Europe’s debt crisis was unnecessary; they have told that China was ready to work with others to boost market confidence.

China’s premier writes in FT on 23 June 2011: “China will continue to work with other countries with common responsibilities. We should make concerted efforts to strengthen the co-ordination of macroeconomic policies, fight protectionism, improve the international monetary system and tackle climate change and other challenges. We should welcome the fast development of emerging economies, respect different models of development, increase help to least developed countries to enhance their capacity for self-development, and promote strong, sustainable and balanced growth of the global economy.”

If this is the true state of affairs, then what is worrying Europeans?

Jürgen Stark, the Executive Board Member of European Central Bank (ECB) who a few days ago informed about his resignation (causing quite a market panic by being the second top German official this year that has opted to say “no” to ECB), has cautioned that: “It's not a matter of China rescuing the euro. That is a completely misplaced interpretation of what might be discussed. If China decided to buy Greek government debt, that would be a decision for the Chinese leadership. [...] I don't see China as the rescuer of the euro. I don't think the euro needs to be rescued.” (Reuters, 27 June 2011)

Our analysis of the situation in Europe suggests that indeed, eurozone as a whole does not look that bad as one might think (see “Hey Europe, What Is Going On (Part 5)”); these are the internal differences between countries within eurozone, and the political issues that make the situation worse and may lead to whatever. So, is Jürgen Stark right when warning of Chinese leadership?

Peter Apps, the Political Risk Correspondent at Reuters, has for example reported that: “But several of China's projects, some strategists say, may in the long run prove to be more than just business. Vast port projects in Piraeus, Greece and Naples, Italy -- the latter also the site of a major NATO base – worry some in European defense and foreign ministries.” (Reuters, 11 September 2011)

What should make one even more cautious is that China has started to ask repaying debts in another form than money:
“BEIJING: The European Union owes it to China to recognise the country's help with Europe's debt crisis by rewarding Beijing with market economy status, the official Xinhua news agency said in a commentary on Wednesday.”  (The Edge via Reuters, 14 September 2011) The source is accusing EU in playing tricks of postponement and practicing protectionism in the name of fair trade.
While Chinese media may (in certain extent) be right in saying that Europe does not recognise their achievements properly (this needs to be checked out), it is clearly alarming if debt relationships start to be mixed up with political issues. It sound like blackmailing, isn’t it?
In one or another way, China definitely has large interests in Europe:
* Europe is one of the main China’s investment destinations, by helping it among others to diversify away from the US dollar-denominated assets;
* Europe is one of the China’s main trading partners and export-import relationship is clearly favourable for China; in 2010 eurozone countries imported from China EUR 114.5bn more than they exported to (data source: Eurostat);
* China wants easier access to European markets.
The best outcome for China would be if struggles in Europe last as long as possible, but not longer – so that it could buy lots of assets in favourable terms without suffering major credit losses, and look as giving “a helping hand” by that.

Planned this way or not, but the following appears to be the logic of what is going on in EU-China relationships:
* We (China) first help you (Europe) by giving credit to the “peripheral” eurozone countries (and they will take or even ask for it because their fellows do not provide enough help).
* We then give credit to the more core eurozone countries like Italy.
* We do it, because as a whole, you are rich enough to repay everything, and you have something that we want.
* If you have received enough “help” in the form of credit, we can start asking something for that help (there are no free lunches, remember?); since you do not have money for repaying the debts we can ask for example that you become more open to investments by our companies (including strategic areas like infrastructure) or that you recognise us as free market economy (even if we are not).
* But we start worrying if there is a real risk that eurozone may break down and/or if weaker countries (to which we have given credit) are left alone with their debts. And if we get too concerned and you get too dependent from our money then we already dictate what you should do.
* This is just a part of our wider agenda of getting number one instead of US.

In which stage is the EU-China relationship right now? Well, China is in the stage of granting credit to Italy, but starting to ask something for its help to Europe and (still quite softly at the beginning) telling what Europe should do. Without something more decisive by European leaders, the next scenes are probably money printing and the introduction of Eurobonds. The later turns the clock in EU-China relationship backwards (but in itself does not solve anything in longer term) as belief into the eurozone increases somewhat (eurozone will at least not break down). One of the major risks for Europe is that desperate EU countries accept too much “help” by China, and get far too indebted. If there are Eurobonds, then there is no other option that Europe as a whole will be held accountable.

I have nothing against Chinese people. It's just money and politics.

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