China Pledges to Help EU on Debt and Investment (6/30)     Print Email

Chinese Prime Minister Wen Jiabao was welcomed with open arms on a trip to three EU states on a four-day trip beginning on June 25 that involved visits to Hungary, Britain and – on a larger scale – Germany. The theme of his European swing was a “new chapter” in China’s relations with Europe, apparently signaling a change in the longstanding Chinese attitude of dismissing the EU as a significant international player.

In Europe at a peak moment in the Greek crisis, Prime Minister Wen emphasized China’s intention of trying to help bring stability to the troubled money markets in Europe, promising that his government will continue buying bonds to ease the debt squeeze in Greece, Ireland and Portugal. After similar earlier promises, China has been intervening to help the eurozone. While the scale of China’s buy-in remains low, Wen seemed to promise a growing Chinese role.

The symbolic importance of his promises underscores the new interest in Beijing to expand its role and influence in the EU. To many observers, the Chinese prime minister’s trip could signal further movement in a trend shifting Beijing away from its earlier almost exclusive focus on the U.S. for its relations with the West. Instead, China may now be preparing to accord a larger place for Europe in its economic diplomacy. Mr Wen said: “Europe's debt crisis is expanding. Trust is more important than currency and gold. Now, during the debt crisis, we again bring trust to Europe.”

This very high-level Chinese trip lavished particular attention on Germany, which is Beijing’s main trading partner in Europe. Germany is a global export leader in advanced manufacturing product just as China leads the world in low-cost exports. In Berlin, the Wen delegation, which included 10 Chinese cabinet minister and dozens of business executives, signed contracts worth at least $20 billion, according to Spiegel newspaper. The deals with Germany dwarfed the volume of separate Chinese business with Hungary and Britain.

Beijing and Berlin have a new incentive for diplomatic coordination since the Obama administration has started singling out China and Germany as two countries that have contributed to “global economic imbalances” because of similar policies that promote exports heavily without any balancing appetite for domestic consumption of imported goods in China and Germany.

The change in tone was particularly noticeable in Berlin after a four-year period of coolness after Chancellor Angela Merkel received the Dalai Lama, Tibet’s leader, at a diplomatic function, a gesture that angered China. Merkel has been under pressure from Germany’s business lobby to make amends and she did so by meeting Wen – the first between the two. Critics say that she was far from stern enough about human rights in China, but there seems to be new impetus in the bilateral relationship, notably on the development of renewable energy. While Germany has renounced nuclear energy, China is pressing ahead, unfazed by the Japanese accident, and both countries are leaders in clean energies of the future.

After the visit, the Geman media on both sides of the political spectrum warned against encroachment of Chinese soft power. The right-leaning Frankfurter Allgemeine Zeitung noted that “the debt-ridden Europeans are naturally happy that there is still someone out there who is willing to invest money on the Continent, but they should also be aware that China is not acting entirely selflessly.” The leftist Die Tageszeitung was more outspoken, claiming that “The red-carpet treatment sends out the wrong signal. The Beijing politicians will understand it as a license to throw as many people as they want into prison, knowing that the Germans will respect them anyway.”

EU policy toward China is glaring in its absence. “On every global issue, the role of China is critical, but the EU has no long-term strategy toward China. It has 27 different policies,” notes Eberhard Sandschneider of the Council on Foreign Relations, the U.S. think tank.

Indeed, European leaders have welcomed Chinese attention, albeit with little apparent thought to the potential need for a cohesion in their dialogue with Beijing. While their constituents view Chinese expansion with mounting suspicion, policymakers remain enthusiastic over this new economic interaction. And even though critics allege that failing to engage the Chinese in the political arena represents a weakness in European foreign policy, the benefits have been substantial. Ever since Congress controversially intervened to block the takeover bid of the Chinese-controlled oil conglomerate CNOOC for the American UNOCAL in 2005, Chinese firms have remained wary of investing in the American market and have turned to Europe instead. And their recent trend in foreign currency reserves has reflected this reality: China has increased its share of euro-dominated assets to 26 percent, and are looking to further expand in an effort to diversify away from the dollar, according to the Economist.

This trend has also driven Beijing to consolidate its stake in the economic fortunes of the eurozone. Anxious to protect a burgeoning euro-dominated nest egg, Jiabao has indicated that he will continue to support European countries struggling with debt. Despite being heralded as a “white knight” in the sovereign debt crisis, Chinese largesse has limits. However exposed to a default they may be, it nevertheless appears that, despite eminent MIT scholar Simon Johnson's expectation that this crisis offers a grandiose opportunity to Beijing.