international analysis and commentary

Beijing and the euro crisis: China’s Vice Premier comes to town

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Li Keqiang, First Vice Premier of China, is widely tipped to become one of the top figures in his country’s government when the fifth generation of leaders replaces the current one at the 18th Party Congress in 2012. Last week Li toured the EU, delivering a bag of economic goodies to Germany, the UK and Spain. Thus, European leaders got a taste of where relations with China stand today and a glimpse of how they might look once the new generation assumes power. Today, Beijing is showing its confidence in the European economy. Soon, Chinese leaders will be more demanding and will aim at a balanced relationship with the EU.

Most of the world has left behind the global financial crisis that began in 2007. However, the EU is still beset by economic woes. Greece, Hungary, Ireland, Latvia and Romania have already been bailed out. Portugal may come next. Spain and even Belgium and Italy have been singled out as other EU members that might also be in need of external economic help. France and the UK are expected to achieve little more than anemic economic growth over the next two years. Only Germany seems to be coming out of the crisis stronger than before. However, Berlin has been reluctant to back other EU members badly affected by the crisis. Germans have EU and euro fatigue. They no longer want to pay for economic mismanagement and profligacy elsewhere in Europe.

China, in contrast, has been a strong supporter of the EU members’ economies and the euro since the beginning of the crisis. Li’s visit left more than $11.3 billion in investments in the German economy, over $7.5 billion in Spain, and almost $4 billion in the UK. Moreover, Beijing acquired $7.5 billion in Spanish debt and $5 billion of Portuguese bonds at a time when markets are showing their uneasiness with the two Iberian economies. Last year, China displayed similar confidence in the Greek economy after the Southern European country had to be bailed out. Premier Wen Jiabao went as far as publicly stating that China would keep buying Greek bonds. Beijing showed its public support for Greece even when other EU members were muttering that Athens might end up defaulting on its sovereign debt.

Of course, Beijing’s actions are not altruistic. The EU is China’s largest trading partner, and Beijing is fully aware that a prolonged economic crisis in Europe would inevitably end up hurting Chinese exports. Furthermore, China is the largest single holder of sovereign debt from European countries, so any default would mean a loss of millions or even billions of euros for the Chinese government. As Deputy Governor of the People’s Bank of China Yi Gang put it last week, investing in eurozone government debt not only provides financial stability to the EU, but also yields investment results to his country.

Supporting the European economy and the eurozone is also part of global geostrategic calculations. To begin with, it deflects criticism of China’s alleged currency manipulation. European leaders, in the past keen on denouncing what they perceived as an unfair advantage to the Chinese economy, have all but stopped rebuking Beijing for tinkering with the value of the renminbi. Similarly important for Beijing, buying European debt helps China to balance its foreign investment portfolio. More specifically, it reduces dependence on the state of the American economy and the value of US Treasury bonds, which yield little return. This way, Chinese leaders send a clear message to their American counterparts to the effect that they are willing to look for other, more profitable investments.

But Li’s tour of three of the five biggest EU members in terms of economic size and population is also an indicator of the current state of Sino-European diplomatic relations, as well as where they might be headed. Li was granted meetings with the British prime minister, the German chancellor and the Spanish president, as well as with several ministers and business leaders from the three countries. Human rights and democracy, two of the EU’s favorite topics of conversation with Chinese leaders in the past, were barely mentioned. Instead, economic cooperation and mutual investment were the main issues discussed. Security threats such as nuclear proliferation and climate change were also on the agenda, which must have pleased European leaders wary of the perceived decline of the EU on the world stage.

In fact, the message that Li’s delegation transmitted throughout its nine-day visit was clear. The trip showcased China as a responsible partner, willing not only to help the European economy but to discuss other important issues as well. In addition, the Chinese delegation spent a significant amount of time courting political and economic leaders. For example, in London Li attended a banquet at the Royal Courts of Justice in which he engaged in an impromptu Q&A session with other guests. In the past some European leaders have fretted about the EU being treated as an appendix to the US. Li’s trip, part of a number of visits by senior Chinese officials to different parts of the EU over the past two years, should go a long way in overturning this perception.

However, Beijing will ask Brussels to reciprocate its overtures. More specifically, Chinese leaders would like their European counterparts to move the EU’s policy towards China away from American wishes. The EU still maintains an arms embargo on China, dating back to the Tiananmen incident of 1989. The main reason why this was not lifted in 2005, when EU members last seriously discussed phasing it out, was American pressure. In addition, European leaders have often joined the US in denouncing Chinese economic policies, especially with regards to the renminbi. And Brussels has also sided with Washington when denouncing the People’s Liberation Army’s military build-up. In short, sometimes the EU still seems to perceive China as a possible economic and military threat rather than its second largest trading partner and a country without which global issues such as proliferation or climate change cannot be effectively tackled. In any case, expect China to quietly ask the EU to treat it as a responsible partner. And of course, economic help is one way of doing so.