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EU benefits from links with China
By John Ross |
00:00 UTC+8 February 1, 2012
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Print Edition
Print Edition
THE European Union recession is creating short-term problems for China's exports. But this should not conceal the major overall strengthening of China's links with Europe as investment and greater political cooperation adds to existing trade ties.
To see how far this has come, go back to early 2008 on the eve of the international financial crisis. Then as now, Europe was China's largest export market. European firms invested in China. But China's investment in Europe was only beginning and many political relations between Europe and China were fraught - French President Nicolas Sarkozy threatening not to attend the opening ceremony of the Beijing Olympic Games.
Fast forward four years to a sharp change. When Chinese President Hu Jintao visited France in November 2010, Sarkozy did him the honor of meeting him personally at the airport. Trade between key European countries and China has sharply increased - Germany now exports more to China than the US. China's companies have started major investments in Europe. Taking only two months, China's Three Gorges Corporation bought a 21 percent stake of EDP-Energias de Portugal SA for US$3.5 billion, and China Investment Corp, China's sovereign wealth fund, bought a nine percent stake in the holding company of the UK's Thames Water in another multi-billion dollar deal.
In finance, the UK in January signed an agreement with the Chinese government for London to act as an offshore center for yuan transactions. In 2011 London's share in overseas yuan payments rose rapidly and will soon overtake Singapore to occupy the second place behind Hong Kong. London is already the world's largest center, outside Chinese mainland and Hong Kong, for yuan foreign exchange dealing. The city is also the world's largest forex dealing center, with 37 percent of the sector's US$4 trillion daily turnover, so both London and China gain from this relation.
These types of deal, because they are mutually beneficial, are well founded and therefore going to last. Greater realism is also entering discussion on China's participation in solving the Eurozone debt crisis. At the beginning of last year there were fanciful speculations that China could be persuaded to buy a lot of Greek or Portuguese bonds which were likely to default. Why on earth should it? Chinese government's formula is a "win-win" deal, not a "you win-we lose" one. However, at this year's Davos World Economic Forum, discussion focused instead on China participating in multilateral, therefore financially guaranteed, IMF-based solutions.
Mutually beneficial
While China's government is certainly too diplomatic to point out the realities behind all this, others can. Several European governments, led by France, previously adopting an arrogant attitude to China learnt modern economic realities. China's government loses from bad relations with EU and therefore tries to avoid them. But it is China not Europe, which has the world's most rapidly growing import market, the globe's largest foreign exchange reserves, and the greatest finance available for investment. As with Asia, Latin America and Africa, European leaders found that China's government no longer has to ask for equality. It is strong enough to impose it if others are not polite enough to understand this is the only basis for mutually beneficial relations.
In the coming period mutually beneficial relations on both Europe and China are likely to be strengthened by the contrast to the situation in the US. Large US companies are overwhelmingly in favor of good relations with China, but US politics is at present gripped by a populist spasm in the run-up to the presidential election. Republican candidates outdo each other in "China bashing." President Obama takes a less aggressive economic position but is nevertheless trying to cover his flank against populist attacks - claiming in his recent State of the Union Address to have brought trade cases against China "at nearly twice the rate as the last administration."
The US has a record of blocking inward investment from China. Most famous was China National Offshore Oil Corporation being prevented from purchasing Californian oil company Unical. Equally serious is that China's Huawei, the world's No.2 telecommunications equipment maker, has effectively been blocked from bidding for US contracts.
Again Chinese authorities on some of these issues will undoubtedly maintain a diplomatic silence and say they make no difference. But in the real world they do. Chinese firms, just as much as Western ones, have to evaluate "political risk" and these are now greater in business with the US. That was an unspoken factor in China choosing London, not New York, as the center for offshore yuan business.
The Economist magazine has noted: "In welcoming China, Europe is swimming with the tide of history; America is struggling against it." If US politicians are not prepared to resist populism, they can't complain if others take advantage of openings they create.
The present economic situation is creating openings for ties between China and Europe's companies. The current dynamic of the US presidential election may well increase them.
John Ross is currently a visiting professor at Antai College of Economics and Management, Shanghai Jiao Tong University. He was consultant to Fortune Global 500 companies and from 2000 to 2008 London's director for economic and business policy.
To see how far this has come, go back to early 2008 on the eve of the international financial crisis. Then as now, Europe was China's largest export market. European firms invested in China. But China's investment in Europe was only beginning and many political relations between Europe and China were fraught - French President Nicolas Sarkozy threatening not to attend the opening ceremony of the Beijing Olympic Games.
Fast forward four years to a sharp change. When Chinese President Hu Jintao visited France in November 2010, Sarkozy did him the honor of meeting him personally at the airport. Trade between key European countries and China has sharply increased - Germany now exports more to China than the US. China's companies have started major investments in Europe. Taking only two months, China's Three Gorges Corporation bought a 21 percent stake of EDP-Energias de Portugal SA for US$3.5 billion, and China Investment Corp, China's sovereign wealth fund, bought a nine percent stake in the holding company of the UK's Thames Water in another multi-billion dollar deal.
In finance, the UK in January signed an agreement with the Chinese government for London to act as an offshore center for yuan transactions. In 2011 London's share in overseas yuan payments rose rapidly and will soon overtake Singapore to occupy the second place behind Hong Kong. London is already the world's largest center, outside Chinese mainland and Hong Kong, for yuan foreign exchange dealing. The city is also the world's largest forex dealing center, with 37 percent of the sector's US$4 trillion daily turnover, so both London and China gain from this relation.
These types of deal, because they are mutually beneficial, are well founded and therefore going to last. Greater realism is also entering discussion on China's participation in solving the Eurozone debt crisis. At the beginning of last year there were fanciful speculations that China could be persuaded to buy a lot of Greek or Portuguese bonds which were likely to default. Why on earth should it? Chinese government's formula is a "win-win" deal, not a "you win-we lose" one. However, at this year's Davos World Economic Forum, discussion focused instead on China participating in multilateral, therefore financially guaranteed, IMF-based solutions.
Mutually beneficial
While China's government is certainly too diplomatic to point out the realities behind all this, others can. Several European governments, led by France, previously adopting an arrogant attitude to China learnt modern economic realities. China's government loses from bad relations with EU and therefore tries to avoid them. But it is China not Europe, which has the world's most rapidly growing import market, the globe's largest foreign exchange reserves, and the greatest finance available for investment. As with Asia, Latin America and Africa, European leaders found that China's government no longer has to ask for equality. It is strong enough to impose it if others are not polite enough to understand this is the only basis for mutually beneficial relations.
In the coming period mutually beneficial relations on both Europe and China are likely to be strengthened by the contrast to the situation in the US. Large US companies are overwhelmingly in favor of good relations with China, but US politics is at present gripped by a populist spasm in the run-up to the presidential election. Republican candidates outdo each other in "China bashing." President Obama takes a less aggressive economic position but is nevertheless trying to cover his flank against populist attacks - claiming in his recent State of the Union Address to have brought trade cases against China "at nearly twice the rate as the last administration."
The US has a record of blocking inward investment from China. Most famous was China National Offshore Oil Corporation being prevented from purchasing Californian oil company Unical. Equally serious is that China's Huawei, the world's No.2 telecommunications equipment maker, has effectively been blocked from bidding for US contracts.
Again Chinese authorities on some of these issues will undoubtedly maintain a diplomatic silence and say they make no difference. But in the real world they do. Chinese firms, just as much as Western ones, have to evaluate "political risk" and these are now greater in business with the US. That was an unspoken factor in China choosing London, not New York, as the center for offshore yuan business.
The Economist magazine has noted: "In welcoming China, Europe is swimming with the tide of history; America is struggling against it." If US politicians are not prepared to resist populism, they can't complain if others take advantage of openings they create.
The present economic situation is creating openings for ties between China and Europe's companies. The current dynamic of the US presidential election may well increase them.
John Ross is currently a visiting professor at Antai College of Economics and Management, Shanghai Jiao Tong University. He was consultant to Fortune Global 500 companies and from 2000 to 2008 London's director for economic and business policy.
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