Asia-Pacific, Economy & Trade, Europe, Financial Crisis, Headlines

China Offers Lifeline to Hard-Hit Europe

UNITED NATIONS, Jul 8 2011 (IPS) - As the debt crisis drains the purses of European countries, EU members are trying to alleviate the economic downturn, in part with the aid of Chinese investments.

For European politicians and economic leaders, Christmas appeared to arrive early this year. In the role of Santa Claus is Wen Jiabao, Premier of the People’s Republic of China, bearing possibilities of multi-billion-dollar trade agreements and deals.

Europe is China’s largest trade partner, so it was not for nothing that Wen returned to the continent last month to visit Hungary, Germany and Britain only months after he visited France, Portugal and Spain.

A policy brief by the think tank European Council on Foreign Relations (ECFR) analyses the challenges accompanying the Chinese “Scramble for Europe”. IPS was given access to the brief, to be released Monday.

“A kind of ‘scramble for Europe’ is now taking place as China purchases European government debt, invests in European companies and exploits Europe’s open market for public procurement,” said the ECFR brief.

When Premier Wen met Hungary’s Prime Minister Viktor Orbán a few days ago, 12 economic agreements were signed. According to Orbán, Chinese and Hungarian companies now have agreements on new investments in the chemical industry amounting to one billion dollars.

The bilateral trade volume should more than double between now and 2015, to reach an annual total of 20 billion dollars.

Wen said China wants Hungary to be its new “logistics platform” in Central Europe, while Orbán called China a “strategic partner” and welcomed the bonds deal as “historic aid” from China.

The next stop on the Chinese Euro-tour was the U.K, where both countries also agreed on new trade deals worth about 2.2 billion dollars. British Prime Minister David Cameron announced the U.K. wants to double trade with China to reach 100 billion dollars by 2015.

Later that same day Wen, accompanied by 13 other ministers, arrived in Germany. By the end of the visit, Germany and China concluded trade deals worth more than 15 billion dollars and cooperative agreements on research, agriculture and renewable energies.

Germany’s Federal Foreign Minister Guido Westerwelle said trade with China offers an “enormous chance for the German economy”.

A Continent for Sale?

China is buying up Europe. According to the ECFR policy brief, the process involves three steps. The first is the so-called “bond diplomacy”, where China purchases bonds from financially unstable European countries like Spain and Greece.

The next step is direct investment in European countries. According to the ECFR, five years ago, China’s total investment in Europe was about 1.3 billion dollars. From October 2010 to March 2011, Chinese firms and banks have committed 64 billion dollars – more than half of the total investment and trade facilitation flows in Europe since early 2008.

The third and last step is Europe’s procedure of public procurement, where European taxpayers subsidise Chinese companies entering into contracts in Europe to build roads, railroads and public buildings funded by the European Union.

In an example of “bond diplomacy”, China bought Greek bonds “as a quid pro quo for a 35-year lease on Piraeus harbour”, the report said, as well as a deal to finance the purchase of Chinese ships in June 2010.

Despite enthusiastic responses from European leaders and evidence of the positive opportunities China’s involvement in European finances offers countries, it is very difficult to say how much China actually supports Europe in its debt crisis.

After China’s announcement that it would buy Spanish bonds one month later, market confidence in Spain completely turned around, although afterwards it was estimated that China eventually bought only around 725 million dollars worth.

China also signalled to other countries – Portugal, Ireland, and again to Spain – that it would buy bonds in 2011. During his recent visit to Germany, UK and Hungary, Wen underscored that stabilising the Euro zone was “vitally important” for China.

“The Chinese Renminbi is pegged to the dollar, so they have to keep continuing buying a large amount of dollars to stabilise capital inflows,” Jonas Parello-Plesner, one of the authors of the ECFR report, told IPS.

Additional Risks

According to the German Financial Times, China has, until now, only paid around 431 million dollars to the European Financial Stability Facility (EFSF), created by member states of the European Union to safeguard financial stability in Europe.

But Europe does not have a system to publish aggregate or coordinated data on foreign purchasers of public debt, the way the U.S. does, for example.

According to the brief, “if the extent of Chinese purchases of European government bonds in 2010 has been overestimated… there is simply no way of knowing whether China holds 25 percent of its reserves in euros, as is often repeated in the media.”

It also warns, “The consequence of not having a common or even coordinated public borrowing policy is that member states compete against one another in securing foreign creditors.”

While Chinese companies can invest almost without limit in Europe, China’s capital market is still closed in the sectors the government considers important for its economic development strategy.

“In a nutshell, this means that China’s Geely can buy Sweden’s Volvo, but Chinese regulations block the reverse,” said the policy brief. European companies are still excluded from public procurement in China.

The report pointed out that Europe would be weakened from the inside if single member states seek immediate bargains with China and support China’s policies for short-term financial aid.

“On a range of issues from global financial reform and international governance to environmental norms and human rights, it will pay the price,” it warned.

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