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China’s self-interested rescue of Europe’s indebted countries

Tuesday, 15 February, 2011 - 11:02

China keeps on buying bonds from the eurozone's troubled economies, a move that some find worrisome, though the sums are not as vast as they appear. In fact, it's more an indicator of China's strategy to turn Europe into an ally in its negotiations with the United States.  

Following a string of recent visits to Greece, Portugal and Spain by Chinese leaders, China is offering to partly bail out the three European countries. The sums promised are low compared to China's immense reserves: “The amounts are not very high for China, but they are for the countries who are looking to refinance their debt,” says Mary-Françoise Renard, in charge of the Research Institute on the Chinese Economy at the university of Auvergne, in France. But the sums will be added to the €630 billion worth of eurozone public debt that China already owns.

In the case of Portugal, the sale of €4 to 5 billion worth of Treasury bonds will not doubt help the country refinance a €15 billion-debt which is due in April. But the Chinese operation covers no more than a fraction of Portugal's total debt, which amounts to 80% of GDP, nearly €130 billion, and has not prevented Moody's, the rating agency, from threatening to downgrade Portugal's rating.

"The imbecile looks at the finger"

All of a sudden, political and economic leaders, along with the press, seem to discover for the first time that China is taking advantage of the crisis to invest in Europe – as if it weren't the case of other big powers, and as if it weren't the case before. For instance, the port of Piraeus signed a concession agreement transferring the operation of container terminals to a Chinese group, Cosco Pacific, in 2009, yet it is only this year that the news caused a sensation.

The media have gone from surprise to worry in their headlines, “China rescues Europe,” “China buys out Europe,” or “The Chinese become the world's bankers,” at the risk of taking the role of the fool in the famous Chinese proverb: “When a finger points to the moon, the imbecile looks at the finger.”

Propaganda, not big bucks

Indeed, China knows how to portray itself as a saviour. “Buying euro debt is not really new,” says Jean-Philippe Béjà, director of research and specialist of China at the French national research centre CNRS. “But the Chinese know how to sell their actions, they have a dedicated propaganda department that does just that.” And buying European debt is also a way to buy credibility, respectability and guarantees for the future. “The image of a developing country bailing out a developed country is probably enough for China to offer its assistance,” says Alistair Thornton, a China specialist at IHS Global Insight quoted by French weekly Le Point.

A worthwhile return on investment

Obviously, China is acting in self-interest. Firstly, Europe is China's main commercial partner, with trade worth €361 billion in 2010, so support for the eurozone also means support for Chinese exports. China is also hoping for a good return on investment by betting on the debt of troubled countries, therefore riskier and with higher interest rates. Any losses would be a drop in the ocean of China's $2,648 billion worth of foreign reserves – the world's largest reserve and a powerful weapon. In short, it does not cost much for China to burnish its image by offering to buy part of the European debt.

It's also an opportunity for China to spread its assets. In October 2010, Beijing owned $906.8 billion of United States bonds, equivalent to 21% of the total public debt owned by non-residents. According to Jean-Philippe Béja, the French researcher: 

China is worried about its dollar investments, because it holds no sway over the valuation of the currency. Instead, China buys euros, it's a safe investment and a common strategy in all countries.

It is all the more sensible as United States Treasury bonds yield little, and the two major powers are at loggerheads over the Chinese currency's undervaluation. 

But Europe's financial dependency must be not underestimated, even if it seems lower than that of the United States. The Financial Times revealed in May 2010 that the public body in charge of managing the Chinese currency owned $630 billion worth of bonds from the eurozone, or 13% of the eurozone's total sovereign debt (at the time).

Investing through companies

Another element must be highlighted: China is so to speak buying Europe, not just via debt, but also via its companies. The European commissioner for Industry, Antonio Tajani, pointed out last December that

Chinese companies that can afford to are buying more and more European companies in possession of key technologies in important sectors. 

Antonio Tajani suggested “setting up an authority in charge of observing foreign investment in Europe.” But again, the European Commission's expression of concern should be put into perspective. The concession agreement signed by the port of Piraeus with a Chinese group (in 2009) or the signature of a dozen contracts between Greece and China worth several billion euros last October shouldn't be seen as more important than they are.

Chinese direct investments in Europe have grown fivefold in the first three terms of 2010, but they amount to less than €2.5 billion, out of a total of some €40 billion invested abroad. In Europe, the main destinations for Chinese investments are Germany and Great Britain, with France a distant third. In other terms, the volume of investments is not particularly high.

Still, Chinese groups, usually linked to government, take advantage of Europe's weaker links to increase their hold over transport infrastructure and strengthen the distribution chain of Chinese products. Cosco, the giant shipping group that is now operating terminals in the port of Piraeus, is thus extending its activities in the port of Naples, and the Chinese multinational HNA Group is bidding to build a terminal for air freight next to Rome.

The Middle Kingdom attacks…the USA

China is not launching a massive attack against Europe. On the contrary, says Mary-Françoise Renard of the Research Institute on the Chinese Economy: 

China needs the European economy to thrive, to ensure an export outlet for its products, and also needs Europe to be strong in order not to face the Americans alone.

China is playing its cards to make Europe an ally in its face-off against the United States. “China is trying to divide the West,” figures Jean-Philippe Béja. And the strategy of financially supporting European countries struggling with high debt is a winning one, because the Chinese strategy is at least as political as it is economic, and Europe is less of an adversary than a key asset in the game played between China and the United States. 

China is expecting for political support from newly indebted countries Greece, Portugal and Spain, for example on the questions of its status as a market economy and of the arms embargo imposed on it since 1989. The Chinese government recently raised those issue, though without linking them to its financial support. The Chinese deputy prime minister's visit to Spain, before his visit to Great Britain and Germany, should give an indication of how much influence China has already gained in Europe.

By supporting these countries, China is also trying to take apart the European common front against the undervaluation of the yuan. “It is a matter of driving a wedge into European policy, even if the effects won't be seen until the long term,” according to Jean-Philippe Béjà. Mary-Françoise Renard's analysis is different; she figures that China is counting on Europe, which it perceives as more accommodating than the United States, to support it on monetary issues – that's why China is offering European countries partnerships:

With China, Europeans are caught up in the logic of free trade, which they have always supported themselves, and from which they have benefited until now. Except that the Chinese excel at that game, so it is better to set up projects in common with them as partners, rather than have them as competitors.

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