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China plays hardball with EU

China could now be taking to Europe the hard game it’s played for some time with eurozone periphery states.

In a recent speech to the World Economic Forum in Dalian, Prime Minister Wen Jiabao asked Europeans along with the United States to “put their houses in order,” almost as a condition for China “extending a helping hand.” While there is no doubt that China holds 60 per cent of its foreign currency reserves in dollars, statistics are unavailable in China or Europe to confirm that the euro accounts for up to 30 per cent of its reserves, in fact leaving little room for other currencies such as the Japanese yen.

Wen came perilously close to asserting a political condition for that help, by noting that Europe granting market economy status to China would be “the way a friend treats another friend.” In reality, the European Union would give up rights to bring anti-dumping charges against subsidised Chinese exports.

The quid pro quo was direct enough, unprecedented in China’s relations with either Europe or the United States. For some time, Europeans, caught in the debt crisis, had found bland expressions of support for the euro by Chinese leaders reassuring. And the governments struggling most have eagerly sought direct purchases of their national debt by China or even the psychological uplift of generic promises. In quick succession, Greece, Portugal, Spain, Hungary – the last unabashedly currying political favour from Beijing – have pleaded for China to rescue national budgets. The first publicly announced purchase of Spanish bonds in July 2010 did engineer a turnaround in market sentiment. For that reason perhaps, several governments – Spain, Hungary and now even Italy – have directly or indirectly overstated purchase commitments, bringing denials from Beijing, which steadfastly declines to cite figures in any case.

Beijing’s “support” and “friendship” have actually taken the form of asset buying in sectors evidently designed to benefit future trade and the interests of Chinese enterprises. Container ports and terminals, airports and logistical or industrial assembly bases are targeted, besides firms with interesting technological or marketing content.

Wen’s public gambit could, therefore, be a bluff. China has excelled in public diplomacy of vague assurances designed to leverage its partners, accompanied by hard deals and asset purchases rather than gifts.

Only 48 hours after Wen’s statement at the World Economic Forum, five major central banks stepped in to assuage the European banking system’s liquidity fears, immediately prompting a step back by China.

The episode should serve as a warning to Europeans. Political unity is essential, lest other players begin to take advantage of the obvious divisions. The one and only realistic argument that European sovereignty hawks have always held was that the European Union as such was not a viable or even legitimate political actor.

In today’s global currency wars, China is a unitary political actor and so is the United States, despite the transaction costs of its political democracy. Europe seems bent on making the political demonstration that it cannot get its act together.

If China is now moving its pawn across the chessboard, Europe has only itself to blame. The show of European disunity, the apparent ignorance of market play by the leaders of Europe’s core economy, is staggering. China’s national interest alone dictates that the proceeds from its trade surpluses and hot money inflows must at least be partially invested into the euro. But Europe’s weakness invites into the game irrational market sentiment and potential heavy-handed pressure by a better organised player.

François Godement is senior policy fellow at the European Council on Foreign Relations and the founder of Asia Centre in Paris
© 2011 Yale Center for the Study of Globalisation