Chinese Show Europeans a New Face

By Antoaneta Becker Reprint | | Print |

Antoaneta Becker

LONDON, Jul 21 2010 (IPS) - German Chancellor Angel Merkel’s weekend visit to China has put a positive spin on the increasingly complex economic relations between China and the European Union, but the flurry of deals signed has not disguised the fact that Beijing faces challenges over its EU policies both at home and abroad.

Beijing’s stated commitment to continue investing in euro-denominated assets is being challenged by a vocal lobby of domestic critics who clamour China’s piles of foreign exchange reserves should be put to better use. And the government’s ambitions to nurture national champion companies coupled with restrictions placed on foreign businesses in China are now receiving daily attacks from Western politicians and executives.

Displeasure over China’s post-crisis policies towards foreign businesses was voiced long before Merkel arrived in Beijing. First it was U.S. President Obama who took up the issue by calling for a level-playing field for U.S. business operating in China. Last week British Foreign Secretary William Hague pressed the matter when meeting with his Chinese counterpart, Yang Jiechi.

Hague said businesses in the European Union were increasingly worried over the way Chinese officials were enforcing regulations and the way indigenous innovation rules were impeding market entry for foreign companies.

“Just as we favour China having improved access to EU markets, well, there’s a reciprocal side of that, which is improved access to China for British and other European companies,” he told reporters in Beijing.

Hague’s intervention came in the wake of a survey of EU businesses released Jun. 29, which showed that optimism about China had dropped dramatically because of concerns about regulatory interference and unpredictability.

Earlier this month General Electric Chief Executive Jeffrey Immelt made the news when he was quoted as saying Beijing was growing increasingly protectionist, and complained GE was experiencing its toughest business conditions in China in the past 25 years.

During Angela Merkel’s visit to China the baton of criticism was taken up by German businesses who complained of foreign companies being forced to transfer business and technological knowhow in order to gain market access.

“CEOs of transnational companies seldom criticise the Chinese government,” said an editorial in China’s Economic Observer newspaper.

Noting duly how unusual this is from people who have been all along enthusiastic about China’s market promises, it went on defending Beijing mandarins by offering an explanation.

“During the past, the high-end market in China was controlled by foreign investors while local enterprises were famous for their low prices. But now, as shown by the increasingly intense conflicts, Chinese enterprises are gaining more shares of the high-end market which used to be only occupied by foreign companies”, it said.

“The thing is that these Chinese companies would not have done it without Beijing’s support,” says a western business executive based in China. “The game for us has changed completely — they (the Chinese) need less foreign money and their new polices are designed to extract the foreign knowhow they deem useful by offering as little as possible in return. We are being virtually squeezed out of the market.”

Beijing has earned the displeasure of domestic critics too.

During Merkel’s visit Chinese Premier Wen Jiabao reaffirmed that Europe will remain one of the vital markets for investment of China’s foreign exchange reserves. “As a responsible long-term investor, we stick to the principle of a diversified portfolio” for the investment of foreign exchange, Wen Jiabao said.

China’s foreign exchange reserves, the world’s largest, totaled 2.45 trillion dollars at the end of June, and the country now has the biggest overseas holdings of U.S. treasuries. Diversifying the currency portfolio has become a priority for Chinese regulators as they attempt to reduce the country’s dependence on dollar-denominated assets.

Analysts estimate about 37 percent of China’s forex reserves are in dollars and about 20 percent are in euros. Sitting on such large holdings of both currencies mean Beijing needs to watch zealously over the value of the dollar and the euro to make sure no currency slump can erode the worth of its portfolio.

Even in the middle of the euro-zone sovereign debt crisis in May, the State Administration of Foreign Exchange (SAFE), which manages China’s forex reserves, quelled rumours that Europe’s debt troubles could lead Beijing to scale back its investment in euro-denominated assets.

The Financial Times reported on Jul. 12 that China bought several hundred million euros of Spanish bonds this month. While no official confirmation of the deal has been issued by the Chinese side, the strategy has been criticised by some commentators and economists.

“China’s strategy lacks foresight,” says economist Han Shibing. “We had the sub-prime mortgage crisis breaking out and the U.S. dollar slumping after China had increased its holdings of U.S. treasuries dramatically. Then we reverted to piling up the euros only to see the eurozone erupt in a sovereign debt crisis.”

The difficulties of managing such large forex reserves have been publicly acknowledged by Chinese regulators. In recent years China has been transformed from a country with a dearth of forex reserves into the world’s biggest net exporter of capital, and the world’s second largest creditor nation. In a statement last week SAFE noted that China’s trade fortunes were reversed dramatically in a number of years, a transformation that historically takes several decades.

“The deficiencies of the U.S. dollar and the euro as currencies have now been revealed to all of us,” said commentator Zhang Lainan in the Economic Observer. “Instead of tinkering with those currencies China should establish a National Strategy Fund that will seek to invest our forex wisely in gold and other currencies while taking care of the country’s most pressing development needs.”