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Monday, 27 June 2011

China loves Europe, but this love comes at a price! What the price will be, the future will learn us.

Prime Minister Wen Jiabao of China is on a trip to Europe this week. He visited Hungary (current holder of the EU Presidency) and the United Kingdom this weekend and he will visit Germany in the coming days. Wen spoke a.o. with British Prime-Minister David Cameron and representatives of the Hungarian government.

Although the details of these conversations are not disclosed totally, we can figure out that China will act as a ‘friend’ to Europe, but that this friendship will not be for free.

To get a picture of what this friendship might cost Europe, I want to remind you of one of my earlier articles: Friend or foe: why Europe and the USA should beware of the Chinese friendship: 

I am not so sure that China is not trying to come to Europe as a Trojan Horse. Of course it is a defensible strategy when you try to secure your sales channels and supply lines with your own workers through your own ports and highways. 

But looking at the wise words of Sun Tsu and Confucius on top of this article it is wise to remember: 

  • It is the best thing to take over your enemy’s country whole and intact
  • Ignorance is the night of the mind, but a night without moon and stars 
So, in my opinion, it is a good thing if we don’t erect trade barriers towards China. NOBODY is waiting for a trade war with the most patient people in the world. But let’s not be naïve over the intentions of the Chinese people in Europe and let’s not be too glad when our Chinese “friend” with the virtually endless supply of money is willing to help us in our darkest hour. It can be the kind of friend that makes enemies unnecessary.
The German newspaper Frankfurter Allgemeine Zeitung ( reported on June 26 on the Chinese intentions with Germany and the other European countries. The article is written in the German language and translated by me. As the article is an absolute must-read, here is an almost complete version of it:
Next week in Berlin, the first government talks take place. Such a common cabinet meeting won’t stop China. The country expects compensation for the support of the Euro.
Because of the weakened European Union, China is looking for closer relations with Germany. Both countries have the strongest economies of their part of the earth, the strongest exports positions in the world and the second and fourth biggest home economies. Last Friday, Prime Minister Wen Jiaboa started a trip to Europe, that brought him to Hungary and the UK and will bring him to Germany on Monday and Tuesday. 

In Berlin, the first Chinese-Germany government consultations will take place. This is a  unique event, as China didn’t have these meetings with other countries. It emphasizes the importance of the Chinese-Germany relations fir Beijing. 
The conversations with China, that feature 24 Ministers of both countries, focus on the political, economic and technological cooperation. Also a number of economic treaties is signed, for instance on an intended investment of €860 mln from BASF in the city Chongqing. Airbus is hoping to sell dozens of new airplanes to China, but this is not yet certain. China is using this Airbus order as leverage, aiming to be excluded from the EU Emissions trades, that will shortly include air traffic.

Also new economic industries are discussed. The Chinese government also wants to decide on the structural reforms of German companies. In the five year-plan up to 2015, the country wants to evolve from mass exports with little added value, to new techniques, quality goods and services. An important role play industries where German providers are very strong: renewable energy production, energy-efficient construction, environmental protection, water and waste management. Also a common platform for electromobility should be developed; people in Chongqing get special trainings on this topic. 

The German companies will get a special Chinese bureau where difficulties among patent violations can be solved. China feels very close to Germany, as both countries suffer from US attacks on their trade surplusses.
The Chinese government sees Angela Merkel as a kind of inofficial chairman of the EU. The German government on their side, are aware not to give in to Chinese flattering, as it doesn’t want to additionally weaken the European Union. Wen Jiabao, however, is intending once more to ask for the release of the EU weapons embargo and for the recognization of China as a market economy. The latter would make it harder for Europe to ask for legal settlement at the WHO in case of anti-dumping cases. In July, 2010, Angela Merkel denied both Chinese desires and since then the Chinese economy hasn’t turned more into an open market, according to investors. The American and European Chambers of Commerce are very dissatisfied that foreign companies have hardly access to public tenders in China and that these companies are growingly harmed by the Chinese bureaucracy. According to the European Commissioner for trade, China has only met one of five conditions for obtaining the free market status. At the other four conditions, steps have been made.
China sees itself in a stronger negotiating position, as the EU is more and more dependent on the Far East. China rose to be the fifth-largest foreign investor during the crisis and buys more and more in Europe; for instance German computer manufacturer Medion. Even more impressive is the fact that China has the Euro on a leash. The country has the largest currency reserves in the world; more than $3 trillion. The larger part of this is invested in the dollar, but increasing parts are invested in the Euro. China signed Greek sovereigns during the debt crisis and invested also heavily in Ireland and the Iberian peninsula. For these investments, the Chinese government expects compensations: quid pro quo. A Chinese spokesman stated before the trip started: “China is willing to additionally help Europe”.
The EU is the most important trade partner for China; even before the US. Especially because of the exchange between Germany and China. This exchange between these countries is one third of the total volume with the EU and is almost as big as the exchange between China and Great Britain, France and Italy combined. German imports from China soared by 35% and exports even soared by 44%. 
The German Industrial and Commerce Chamber DIHK expects China to be Germany’s most important trade partner in 2012. This is already true for imports; for exports China is Germany’s number seven. For China, Germany is their number five trade partner.
China is the most important host for German economic activities, outside the home country. More than 5000 German-financed companies and 200,000 employees are involved there. The direct investments are indeed not more than 1% of all money flows that exceed $106 bln. However, most money earned by German companies is reinvested in China and is therefore not visible in statistics.
The fact with China was, is and will be the coming years, that the country is not a democracy and does not have an open economy with fair chances for all competitors: domestic and foreign. Besides that, I am not so sure that the Chinese intentions for the western world are as friendly as their smile. If the love for their Chinese citizens is already not very big in some cases (‘the dissidents’), you can imagine that the true love for Europe is even smaller. That should not prevent the European countries from doing business with China, but it should prevent them from becoming (too) dependent on China.

On this European dependency on China the following article at Bloomberg, of which I quote the pertinent snips:
Premier Wen Jiabao said China will keep investing in Europe’s sovereign bond market, providing a vote of confidence in the region roiled by the debt crisis.
“China has actually increased the purchase of government bonds of some European countries, and we haven’t cut back on our euro holdings,” Wen told the British Broadcasting Corp. yesterday in an interview. These acts “show our confidence in the economies of Europe and the euro-zone.”

Wen, whose country’s $3 trillion of currency reserves are the world’s largest, is today due to meet with U.K. Prime Minister David Cameron in London as European policy makers enter another week of talks on how Greece can avoid default. Greek lawmakers vote this week on an austerity package needed to secure more international aid, while governments elsewhere on the continent are negotiating with banks over how they can assist the country.

China’s leader is visiting Europe as investors signal renewed concern in the ability of euro-region nations to beat the debt crisis that has occupied the minds of officials for more than a year. European stocks fell for an eighth week last week, the longest stretch of losses since 1998, and the euro weakened to a record against the Swiss franc amid speculation Greece won’t be able to pay its bills.
“China is ready to work with Europe to share opportunities, cope with challenges and achieve common development, and to make unremitting efforts for stable development of the world economy and an in-depth development of China-Europe ties,” China’s state-run Xinhua news agency cited Wen as saying June 25.

This is not the first time Wen has expressed support for Europe’s cash-strapped nations. He said in April that China would invest in Spain’s bonds and savings bank industry and that it would continue buying public debt.
Wen’s visit will help “convince the market that China will provide a contagion back-stop” and so lend support to the euro, Douglas Borthwick, head of foreign-exchange trading at Stamford, Connecticut-based Faros Trading, said in a June 20 report.

China is playing a “white knight” role in assisting Europe and buying itself goodwill that will enable it to purchase more sensitive European assets such as technology companies, according to Faros Trading. The Asian country’s purchases of euro-denominated debt also helps diversify its reserves away from dollars, it said.

Today’s talks in London will be focused on trade as the U.K. government seeks to boost commerce with China to $100 billion by 2015, Cameron’s office said in a statement. Downing Street also said the two countries are set to make it easier for British businesses to branch out beyond Beijing and Shanghai and that China will again open its market to U.K. poultry exports.
The Financial times also reports on the visit of Wen Jiabao to Europe.  

Wen Jiabao, China’s prime minister, arrives in Europe for a visit to Britain and Germany, at a time when the European Union is in crisis and China is booming. Neither the British nor German governments need any reminding of China’s importance to their economic prospects. Its demand for sophisticated machine tools has been a big part of Germany’s recent economic success. In Britain, Mr Wen, will go to Birmingham to visit the city’s famous Longbridge car plant, now owned by Shanghai Automotive, and will inspect a new MG sports car.
It is natural and important that the emphasis during Mr Wen’s visit should be on the benefits of co-operation between Europe and China. The future of both international politics and economics will turn on whether a rising China can sustain a co-operative relationship with the western world.
For that to happen, however, both the Chinese and the Europeans must engage with the difficult issues. The MG plant may be an example of a mutually beneficial project. But, as China looks for investment opportunities overseas, other projects may be less welcome – particularly if they involve state-owned companies which get cheap state funding or whose ownership is untransparent. Huawei, a telecoms company with global ambitions, has caused concern over its alleged links – which it denies – to the Chinese military. 
Both sides have valid points to make. The Chinese rightly warn against protectionism wrapped in a national-security flag. But the Europeans should remind Mr Wen that Chinese companies may be viewed with a degree of suspicion given the volume of cybercrime emanating from China. The treatment of western investors in China over intellectual property also needs to improve.

It is understandable that the cash-strapped European countries are happy with ‘white knight’ China. This knight in shining armour comes with its pockets filled to the brim with dollars and Euro’s, that it is happy to spend on all European countries in distress.

However, this white knight comes with a price, according to Bloomberg: buying itself goodwill that will enable it to purchase more sensitive European assets such as technology companies. The European countries should consider very well if this is a price they are willing to pay, as it is defense and industrial technology that often distinguishes European and American companies from their Chinese counterparts. Losing the exclusive usage of their leading technology might mean that European and American companies lose the edge to China.

The Financial Times is right when they state that ‘Chinese companies may be viewed with a degree of suspicion’.

So let us look at the Chinese Dragon very carefully, before it blows us away. Because even a dragon with a smile, is still a dragon. And Europe has – in spite of all current financial difficulties – still a lot to lose.

1 comment:

  1. I enjoyed following the whole entry, I always thought one of the main things to count when you write a blog is learning how to complement the ideas with images, that's exploiting at the maximum the possibilities of a ciber-space! Good work on this entry!