China and Europe’s debt: help, at a price

“We have repeated our willingness to extend a helping hand and increase our investment,” said Chinese Premier Wen Jiabao when talking recently about the EU’s sovereign debt crisis. But Beijing’s largesse may have some strings attached. China wants the EU to make political concessions in return for its capital.

Chief among Beijing’s demands is the EU granting China full “market economy” status. This should happen automatically in 2016, according to the agreement China reached in 2001 when admitted into the WTO. However, Chinese leaders want recognition of market economy status as soon as possible. This has been a point of friction between Beijing and Brussels since China joined the WTO. Recognition would facilitate investment by Chinese companies overseas and would help them resolve trade disputes.

But the economic benefits that Chinese companies would obtain from China being recognized as a market economy are secondary to political considerations. Since China’s entrance into the WTO, recognition has become a bargaining tool for the EU to obtain concessions from China on trade disputes. It makes it easier for Brussels to enforce restrictions on Chinese exports, such as quotas on exports applied from time to time. The US has also used recognition to obtain concessions from China. However, Washington has already agreed to grant full market economy status to the Asian giant. Even though actual recognition is still to occur, the EU is now at odds with the US. Thus, Chinese officials are targeting Europe.

Shortly after Wen implied that China would only help battered European companies in exchange for a political gesture from Brussels, Chai Xiaolin, Director of the WTO department at China’s Ministry of Commerce, explained that the two were not necessarily linked. Yet this is poised to become one of the key issues in the China-EU summit to be held in Tianjin in October. EU officials argue that China does not meet several criteria necessary for full market status. Yet Washington’s pledge to consider China as such makes this a moot point. Beijing is likely to underline this out during the Tianjin summit.

Demands for political concessions in return for investment are likely to increase, given recent precedents. In June 2010, Chinese companies signed several contracts worth tens of billions of euros in Greece. Firms from the Asian giant have also invested heavily in Ireland and Portugal over the past two years. And the Chinese government has been buying bonds from these three countries plus others suffering from the debt crisis, most notably Italy and Spain. China has shown more confidence in debt-ridden European economies than most European companies and politicians have. Yet, China still gets bashed regularly by many in Europe for its supposedly unfair economic interventionism. Meanwhile, its help to Europe’s slumping economies has been barely noticed, let alone recognized.

Of course, China’s investment is not altruistic. Chinese companies will certainly benefit when the economy of the EU recovers. And current interest rates on the debt of many EU members are very appealing to long-term investors, such as the Chinese government. However, recognition as a market economy would be a major victory for the Hu Jintao administration, which is poised to leave office in the autumn of 2012.

In this context, it would not be surprising if China also brought the arms trade embargo issue back to the table in the near future. Brussels has maintained an embargo on arms exports to China since the Tiananmen Square incident, which took place more than twenty years ago. Over the past decade, several European leaders have hinted that they would like the embargo to be lifted. Most notably, in December 2010 High Representative for Foreign Affairs Catherine Ashton formally proposed ending the embargo. Yet, there is no agreement among EU members on this issue, and the US has been pushing for the embargo to remain in place.

Beijing has repeatedly called for the EU to end the embargo, calling it one of the major impediments in their bilateral relationship. It will probably raise this issue again in the Tianjin summit. And China can point out that its economic help is most welcome yet it is not trusted as a military partner. This is despite the fact that the Chinese navy is now cooperating with the EU and several countries to protect the waters of the Gulf of Aden. Similarly to the market status issue, the arms embargo has now become a diplomatic tool. If Beijing decides to play the same game, it will try to use its economic leverage to press the EU on this issue.

Ultimately, China will probably help Europe recover from its economic problems because it stands to lose if the crisis in Europe carries on for much longer. Nevertheless, Wen’s words point out that Beijing is increasingly willing to employ its economic power to obtain political victories. The EU, the US and others have been doing this for a long time. Now they have to welcome a new player to the table.