Europe Between the Greek Bull and the Chinese Dragon
Ralitsa Kovacheva, September 16, 2011
Italy appears to be another European country that is peeking with hope in the thick Chinese wallet. The government in Rome hopes Beijing to make "significant" purchases of Italian bonds and investments in strategic companies, The Financial Times reported. It is unclear exactly what part of Italy's nearly 2 billion euros debt is held by China at the time, but the newspaper quoted an Italian representative saying that it was about 4%.
As the edition recalls, Italian Finance Minister Giulio Tremonti has repeatedly expressed his fears for China's "reverse colonisation" of Europe. But now, squeezed by the need to adjust his budget as a matter of urgency, Mr Tremonti is obviously acting pragmatically. Amid fears that the ECB cannot continue to buy Italian debt for long, increasing the likelihood of a Greek default and concerns about its impact on some large European banks, the long Chinese arm offers, if not salvation, at least a sip of air. Obviously, contemporary Europe is ready, in order not to be raped by the Greek bull, to become a hostage of the Chinese dragon.
Last year, the debt crisis has roughly reminded Europeans that prosperity can be sustainable only when it is based on a prosperous economy and the welfare state can be an expensive legend if it only spends but does not produce. Furthermore, the debt crisis removed Europe from its haughty posture of an island of affluence, demonstrating its dependence on the rest of the world. As many expected, Europe has proved to be unprepared for this, for the same reason it is not prepared for the debt crisis - the lack of a common economic policy. However, if before the crisis one could say that it was difficult to have a common policy, expressing the common interests of 27 different nations and even only those of the euro area, now it seems almost impossible, because the crisis has exposed new divisions and new contradictions.
One of the dividing lines between Europe’s "periphery" and "core" goes precisely through the attitude to the Chinese invasion. In its policy brief “The Scramble for Europe", François Godement and Jonas Parello-Plesner with the European Council on Foreign Relations examine the change in relations between the EU and China in recent years and make recommendations for a common European response to replace the current situation of competition between the member states for Chinese investment at any price.
Today China is aggressive - it no longer wants a "strategic partnership" with Europe, because it has a new advantage. "China had always realised that its basic vulnerability in relation to Europe was its need for continued access to Europe’s market. In fact, whereas the US depends on continued Chinese purchases of its public debt, the Europeans have needed almost nothing in return. But current account deficits and public debt emergencies have changed that. As one of China’s top strategists put it bluntly: ‘You need our money’."
In fact, the authors note, now China is applying the same approach to Europe previously applied in Africa, the Middle East and Latin America - "China buys or builds infrastructure projects, snaps up ailing companies or collects assets from quasi-insolvent states, gets a foothold in the distribution sector and uses local media to increase its soft power". There are three ways of Chinese invasion of the Old Continent - the purchase of sovereign debt (or at least creating the impression of it), direct investment, mainly in companies from Europe's periphery and the public procurement.
Logically, China's interest is mostly focused on where fresh money is most needed - the eurozone's periphery and Southeast Europe. "Portugal, Italy, Greece and Spain now represent 30 percent of Chinese investments and trade facilitation in Europe, and Central and Eastern European countries another 10 percent – a disproportionately large amount given the overall size of their economies."
The Bond Diplomacy
This is perhaps the most popular of the three ways for China to "conquer Europe" because Beijing's statements that it buys or intends to buy debt of some troubled European economies are widely covered by the media. In fact, the authors say, there are almost no data on the actual volume of European government bonds purchased by China since the country does not disclose such data, and the EU simply does not have it at a Community level.
In June 2010 China bought Greek government bonds in exchange for a 35-year lease of the port of Piraeus and a deal to finance the purchase of Chinese ships. Then the news broke that China would buy Spanish debt, but some believe that its value was only 400 million euros. Promises for debt purchase have also been given to Portugal, Ireland and Hungary.
Referring to various sources, the authors summarise that perhaps the real volume of European government bonds purchased by China, is significantly less than suggested by the public statements of some Chinese representatives - according to an ECB official it is about 15 to 20 billion euro, which is just “peanuts” compared with 1.112 trillion dollars - the estimated value of US debt, bought by the Chinese. On the other hand, some European leaders have announced that there was Chinese interest in their public debt in order to create a sense of security and investor confidence, analysts note. "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."
The direct investment
The exact amount of Chinese direct investment in the EU is covered with the same mystery as well as the purchases of government debt, because also in this case "Europe has neither data nor regulations". Some big deals in recent years are a sign that "the Chinese government has now given the green light to major takeovers in Europe." The problem is that many of the deals take place via offshore companies, the authors note. However, the data shows that in 2010 Chinese direct investment in Europe was 11 billion dollars and it is forecast to reach 1 trillion dollars in 2020.
The problem for Europe is twofold. On the one hand, many Chinese companies are implicitly or explicitly subsidised by the state, which gives them an unfair competitive advantage over the European companies. On the other hand, the European companies don't have equal access to the Chinese market – the capital market remains closed in certain "strategic" sectors, while in others like air transport, banking and alternative energy, the foreign participation is limited to 20% of the capital. "In a nutshell, this means that China’s Geely can buy Sweden’s Volvo but Chinese regulations can block the reverse."
is the third way in which Chinese business enters Europe. Currently China's interest is focused on the European periphery where it is needed to build roads, railways and public buildings but there is not enough funding. Chinese companies have a major advantage – they offer low prices and attractive terms (thanks to their numerous and cheap labour force) which are unattainable for European companies. But since they do not like to attract attention, they often make bids through local companies, the authors say, giving Bulgaria for an example: "When there is EU funding, the Chinese are very interested, but they don’t want to be at the frontline," a European official is quoted to have said.
At the same time, European companies don't have access to the public procurement market in China, “which is the size of the whole economy of South Korea,” the authors write. The authorities restrict foreign companies' participation in strategic sectors and state managed mega projects. What remains for the foreigners are only "pencils and rulers" in the words of the European trade representative in Beijing - something which is denied by Chinese authorities.
Chinese strategy: divide and conquer!
Taking into account their attitude towards China, the European countries are divided into two groups, the analysts note - those in the core are demanding for reciprocity in the trade and economic relations with China and the others, in the periphery, are desperately looking for fresh Chinese money. The arguments of the former, led by Great Britain, France and Germany, are colourfully described by a French official as follows: "It’s a real war, with highly subsidised companies coming to open markets with unusually low prices and undercutting the competition … . It’s not capitalism, it’s not trade, it’s predatory policy."
The position of the latter is clearly defined by an Eastern European official: "Our companies can’t compete in China, so it doesn’t matter to us if China opens up its public procurement market." The authors cite an official in the foreign ministry of a Mediterranean member state, who has rhetorically asked: "What have Germany and Europe done for us lately?[...] How can they have the nerve to ask us to coordinate and unite our European interests on China when there is no common economic interest?”
The result: "China’s meticulous bilateral approach to each member state, the pull of short-term national interests, and perhaps even the need for elected politicians to demonstrate to their voters that they are fighting the gloomy economic context, is leading to a fragmentation of EU-China policy." However, the successful policy should be the opposite - a common effort of Europe to seek reciprocity and equal access to the Chinese economy. This approach, however, has been presented by the trade strategy announced by the European Commission last autumn, and the principle of reciprocity has been embedded in the free trade agreement with South Korea which entered into force on the 1st of July 2011.
The authors propose concrete measures that the EU can take in respect of each of the three ways of Chinese invasion. A coordinated system for government debt purchases; a system for vetting direct investment in certain sectors (defence, critical technologies, media, education) or above certain amounts, with thorough examination of potential investors and clear information on Chinese companies ownership; fair competition in public procurement - for example, the EU “could deny EU subsidies to public projects involving companies from countries that do not grant access to their own public markets” or to introduce “a quantitative index of the foreign share of public markets in both developed and emerging economies”.
"The Chinese presence in Europe thus calls for the same response as for the sovereign and banking crises: a demonstration of political unity and a policy process that matches this unity," the European Council on Foreign Relations' analysis concludes. However, exactly the experience with debt and banking crises has shown how difficult it could be to achieve political unity where there are different, even conflicting interests. Although it is not clear at this stage in what specific solutions the common European response could be expressed, we can clearly say where to start from – the compromise between short-term national interests, dominated by domestic electoral reasons and lasting, and the long-term European interest as an expression of the long-term national interests of all member states.