The US is used to admonishing China on its exchange rate – it should go up. Europe is used to lecturing China on its human rights record – it should improve. This summer of current account deficits and public debt emergencies has changed that. As one of China’s top strategists put it bluntly: “You need our money.”
Now China is demanding that the US behaves responsibly on its debt. Its credit agency, Dagong, even went out first – ahead of the big American rating agencies – and stripped the US of its cherished triple-A rating. As Europe attempts to navigate a course through markets, politicians and public opinion to a solution to the debt crisis, China is requesting that the tattered European Union seeks long-term solutions and making declarations that a European recovery is ‘vitally important’.
The world’s three largest economies, the EU, US and China, are now linked economically and financially in ways that go beyond cheap trade and exports. And it is China, with the help of the world’s largest currency reserves, that is creating the new connections.
A recent brief by the European Council on Foreign Relations that I co-authored examined how the euro crisis is providing China with new opportunities in Europe.
Over the past year, China’s most powerful quartet – President Hu and Prime Minister Wen assisted by their likely successors Li and Xi – has toured the economically troubled capitals of the continent, taking in Lisbon, Rome, Athens, Madrid and Budapest. These men are bargain-hungry shoppers, and Europe’s crisis is fast becoming China’s opportunity.
China has consistently sent signals to debt-stricken European countries like Spain, Greece and Hungary that it is willing to buy-up their debt, yet Beijing keeps the true extent of its purchases a state secret. Europe has a peculiar arrangement with a common currency but national debt and bond issues. And Europe has no system – in contrast to the US – of keeping a tab on foreign holders of its debt. China skillfully exploits that muddled European reality, getting the most out of bilateral deals with cash-hungry member states. In June 2010, China bought Greek bonds as a quid pro quo for a 35-year lease on Piraeus harbour and a deal to finance the purchase of Chinese ships.
Yet China has not so far become the White Knight, stepping in with massive purchases of European debt. When the markets have really crunched the euro, it has been Europe’s own piece-meal mechanisms – primarily through the European Central Bank – that have saved the day, at least temporarily.
Still, Europe’s perception of China is changing. Cash-strapped Eastern Europe exemplifies this. Not long ago, the former Soviet states were sceptical of China – a Communist system that reminded them of a not too distant past of their own. Now, Hungarian Prime Minister Viktor Orbán praises China’s social progress and talked of an ‘alliance’ during Wen Jiabao’s visit in June while criticism of Beijing on human rights grounds from Eastern Europe is muted at best. In return, China promises to purchase debt and invest.
Five years ago, China’s total direct investment in Europe was $1.3 billion. So far in 2011, there have already been three acquisitions, one of which was a Hungarian chemical company, that exceeded that amount in a single deal. China is also taking a stake in the European car industry, with Chinese companies now running Volvo, MG and providing Saab with a life-saving injection of cash.
China’s overall foreign investment is projected to grow from $311 billion at the end of 2010 to $1 trillion in 2020. What we have seen so far is therefore just the beginning for both Europe and the US. China is looking for access to high- and green technology to fuel its next phase of economic development. Such assets can be found in Europe and in the US – and now often at lower prices than before the economic crisis.
China should not be blamed for taking this opportunity. The Chinese dilemma, as pointed out in Shakespearean terms by vice-minister Fu Ying, is “to buy or not to buy.” There will, she correctly added, “always be someone pointing fingers at us”. China is also sought after as an investor by Westerners.
Still, it will not be smooth sailing. Chinese investments in Europe and the US carry their own set of issues ranging from political backlash and protectionism to more legitimate concerns about security, corporate governance (what influence does the Communist Party have in Chinese companies?) and labour issues (conflicts are sprouting already as a result of Chinese investments in Africa and Latin America).
The US has a vetting system for foreign investment. It has been applied to Chinese investments in several high-profile cases. Europe is currently more open to investment – a case in point is Huawei, a Chinese private company the founder of which has a military background and which is mushrooming over the whole Continent but has its take-over deals blocked in the US – but there is now a debate among Europeans about whether they should establish a similar vetting system.
Yet there is another side of the coin with China. Beijing is increasingly protective of its own nascent strategic sectors, and bars foreign companies from involvement in big infrastructure projects and the purchase of state-owned companies. Europe should make the case to China that free trade should be a two-way street. Cooperation with the US on this could get results. Look how both the EU and the US pushed back on China’s new rules last year on so-called ‘indigenous innovation,’ which could have shut out foreign companies from a large part of the Chinese market.
In the coming decade the three economic centres of the world have to find better ways to interact on financial and economic matters.
The US seems to have found such a modus vivendi with China on debt, and China has bought up swathes of greenbacks. Europe has yet to get there. One suggestion for improving Europe’s hand could be Eurobonds. Such mutual bonds would make China and other investors take a stake in the overall European economy rather than in individual indebted countries. Another possibility is the establishment of a US-inspired system whereby foreign holders of European debt are listed monthly, removing unnecessary opacity from the system.
On investments it is likely to be a longer and bumpier road for all three parties. China has a legitimate desire to acquire new assets, and the US and Europe have legitimate concerns about letting China in while China’s own market remains closed in important areas like public infrastructure.
Jonas Parello-Plesner is a Senior Policy Fellow at the European Council on Foreign Relations. He served as Denmark’s Senior Advisor on China and North East Asia from 2005-2009 and has engaged in numerous diplomatic exchanges with China including the negotiations for a Strategic Partnership between Denmark and China in 2008.