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    Greater China
     Jul 1, 2011


Self-interest in China's helping hand
By Jian Junbo

LONDON - Just nine months after visiting Greece, Italy and Turkey, Chinese Premier Wen Jiabao set his feet on European soil again. The just-ended five day tour of Hungary, the United Kingdom and Germany afforded Wen the same opportunity as last time to promise that China will do its best to help the region ride out financial crisis. Without question, it highlights the importance China attaches to closer ties with European countries.
Some analysts jump to the conclusion that China wants to take the advantage of the financial crisis in Europe to increase its political influence. However, past experience shows that it is hardly possible for China to boost its political influence on Europe. A closer match to reality would be that by "helping" Europe, China is helping itself with regard to strategic considerations to

 
diversify its foreign reserves and global interests.

Wen began the first leg of his tour on June 24 in Budapest, the first visit to Hungary by a Chinese premier in 24 years. He signed a number of cooperative deals with Hungarian Prime Minister Viktor Orban, and announced that China was ready to purchase Hungarian government bonds and extend 1 billion euros (US$1.4 billion) in credit. The purchase of Hungarian treasury bonds was hailed by Orban as "historic help" for Hungary.

Three days later, Wen arrived in London to meet his British counterpart David Cameron. At a joint press conference, Cameron cited late Chinese leader Deng Xiaoping's most famous quote - "It doesn't matter if the cat is black or white as long as it catches the mice" - to express his attitude on Britain's introduction of Chinese-made high-speed trains.

Wen Jiabao had earlier said that China was interested in tendering to build a high-speed rail link between London and Birmingham, the so-called HS2. During Wen's visit, the governments signed business deals worth about 1.4 billion pounds (US$2.2 billion). Among them, liquor-maker Shuijing Fang will sell a stake to British Diageo, and China will import British poultry and pork to help strike a balance in bilateral trade.

During Wen's visit to Berlin afterwards, China and Germany signed trade deals worth $15 billion. Wen and German Chancellor Angela Merkel also targeted an increase of bilateral trade to 200 billion euros over the next five years.

China and Germany are the two biggest exporters in the world and Germany is China's biggest trade partner in the European Union (EU). Wen said the focus of his meeting with Merkel was to "boost the growth potential of bilateral trade ... and to once again double our bilateral trade volume in five years". "The wide range of topics up for discussion and the substantial achievements are all pioneering work in the history of Sino-German relations and Sino-EU relations," Wen said during a press conference with Merkel.

Wen reiterated that China had full confidence in European economic stability and viewed ongoing euro zone difficulties as "temporary'', adding that China was prepared to assist Europe by buying a limited volume of sovereign bonds.

Some sound reasoning lies behind the decision for Wen to pick these three countries for his tour.

Hungary held the presidency of the European Council in the first half of this year and China has made considerable investment in the country. More importantly, Hungary's location in central-eastern Europe plants it in a region that China wants to cultivate for trade and investment opportunities, especially at a time when many old EU members have become increasingly protectionist toward Chinese products and investment.

With sound rule of law, the United Kingdom represents a country with some of the best conditions for Chinese investors. It is also a very important trade partner with China. Germany, as a more important economic and technological partner for China, is not only the economic engine of the euro zone, but also a key EU member in dealing with the Greek debt crisis.

From what was achieved during Wen's visit, it is clear he went to Europe again to seek more economic and technological cooperation opportunities with these European partners.

In a sense, Wen's offer to help ease financial difficulties in some European countries may be of help to enhance political trust. But it is too far-fetched to assert, as some analysts do, that Wen's visit, which followed Deputy Vice Premier Li Keqiang's visit to Europe just five months ago, is part of China's efforts to expand its political influence in Europe by taking advantage of its ongoing financial crisis. Such assertion simply sounds like an alarmist call.

If China were to take advantage, Wen might have pressed the EU to lift its embargo on arms sales to China or to grant China market economy status. But his visit concentrated on economic cooperation, practically touching no sensitive political issues.

Given past experience, China can hardly expand its political influence in developed countries by improving economic cooperation with them. In fact, China faces increasingly severe political criticisms from the United States, the EU and Japan - its largest trading partners.

Economic cooperation is a two-way game. A European country has the power of will and capability to turn down any business deal China offers if it considers that Beijing imposes any political conditions on it. It is also illogical to say that political influence would expand with closer economic ties. The EU has more investment in China than China has in the EU. Can we say the EU has stronger political influence on China than the other way around?

One may better say that China has some "selfish'' ambitions to expand its economic interests in Europe and to help ease the financial crisis there.

China had $3,045 billion in foreign exchange reserves as of the end of March, about two-thirds thought to be in dollar-denominated assets. [1] And the Chinese currency is still virtually pegged to the greenback. As such, China is vulnerable to changes in US monetary and fiscal policies.

In recent years, there have been growing calls in China for the government to diversify its disposal of the country's ever-growing foreign reserves, not to put "all eggs in a single basket''. Indeed, the facts, as reported by the Financial Times on June 21, show "China began diversifying away from the US dollar in earnest in the first four months of this year, most likely by buying far more European government debt than US dollar assets'.' [2] And there are estimates that about a quarter of China's foreign exchange reserves are currently invested in euro-denominated assets.

Wen's promise to buy more European countries' bonds helps boost confidence in the euro, which is clearly to China's benefit as an investor in the currency. Also, it was evident on the visit that China wants to diversify its export market to reduce its reliance on United States markets, especially at a time when trade protectionism is growing in the US.

China has little to gain from attaching political torque to its investments in Europe, and helping safeguard the euro from collapse is clearly in its own interests.

Notes

1. Chinese official warns on dollar assets, Financial Times, Jun 7, 2011.
2. Trades reveal China shift from dollar, Financial Times, June 20, 2011.

Dr Jian Junbo, an assistant professor of the Institute of International Studies at Fudan University, Shanghai, China, is currently an academic visitor at London School of Economics and Political Science, United Kingdom.

(Copyright 2011 Asia Times Online (Holdings) Ltd. All rights reserved. Please contact us about sales, syndication and republishing.)


Pointless Europe, redux (Jun 25, '11)

Wen's European jaunt was just business (Oct 15, '10)


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