Growing Chinese investments in Europe – including the purchases of peripheral Eurozone bonds – contribute to sustaining the value of the euro and help to reassure the markets, particularly in these turbulent times. Such Chinese activism is welcomed by countries such as Greece, Portugal, Spain and Italy – countries beset by worsening public finances. This trend of Chinese economic activism presents both Beijing and the indebted European capitals with the opportunity of further discussion about their bilateral relations, including the role that China can play in solving Europe’s debt crisis, and the concessions that Europe would be ready to make.
The declarations of Chinese leaders in support of the Eurozone are no novelty. Beijing has in fact espoused the idea of a European common currency for many years. This is due to the importance of the EU market for Chinese export products (the EU is currently China’s main trading partner) and as part of China’s desire to create an international currency system where the dollar would be less dominant. A key question looms large between Wall Street, the City of London and European capitals: how many euro-denominated assets has China bought so far?
China began diversifying away from the dollar in earnest in 2011 by buying far more European government debt than US dollar assets. According to economists at Standard Chartered Bank, China’s foreign exchange reserves expanded by around US$200 billion in the first four months of 2011, with three-quarters of the new inflow invested abroad in non-US dollar assets. Today, the holdings in euro on China’s total foreign reserves are evaluated to be between 26-28%, while holdings in dollar are between 63-67%.
China’s euro-denominated assets seem to be more likely invested in the safer core Eurozone countries of Germany and France than in Greek, Portuguese, Spanish and Italian bonds. Yet data on this point over the last few months have been contradictory. The Financial Times reported in an article on 13 September 2011, that China holds 4% of Italy’s treasuries. In an interview during his visit to China in mid-July, Franco Frattini, Italy’s foreign minister, declared instead that 13% of Italian public debt is now in Chinese hands. If the latter figure is true, this would make China one of the most important foreign holders of Italy’s public debt. It would also raise the question as to whether China is actually investing more in some of the peripheral Eurozone countries since the yields there are higher. Apart from Greece, the other peripheral Eurozone countries of Spain, Portugal and Italy do not face a serious risk of a sovereign default.
Investing in euro-denominated assets allows China to diversify risk away from the dollar. The Chinese government and monetary authorities have, in fact, expressed growing disaffection for the loose monetary policy of the US Federal Reserve while intervening at various times to reassure markets and the Europeans that they will continue to buy more Eurozone bonds. Chinese investors represented a strong proportion of the buyers of the five billion euro tranche of Portuguese bail-out bonds being auctioned by the Eurozone’s €440 billion rescue fund on 14 September 2011. On the same day, Wen Jiabao, the Chinese premier, declared that China would continue to help Europe.
Alongside the purchase of Eurozone bonds, Chinese investments in European companies have also been growing at an unprecedented rate. Europe is proving more fertile ground for Chinese investments than the US: China’s total investments in Europe are, in fact, 53% greater than the $1.39 billion that went to the US in 2010, according to the Chinese Ministry of Commerce. The debt crisis has forced some EU governments such as Greece, Portugal, Hungary and Italy to consider possible sales to China of strategic stakes in public-controlled companies.
The political implications of these investments in Europe are becoming evident. Wen Jiabao has demanded that the EU recognise China as a market economy status in exchange for Beijing’s friendship. Granting market economy status would make it more difficult for the EU to file anti-dumping cases against China in the WTO. It is a political decision with significant economic implications for both sides.
The recent events indicate that the time has come for the EU and China to start a thorough round of negotiations over their economic and political relations for the next 10-20 years, including proposals for China’s contribution to solve Europe’s debt crisis and other important dossiers in exchange for Europe’s consideration of some form of political recognition to China and its role in helping stabilise the Eurozone.
The seriousness of Europe’s debt crisis and the blow that it can deal to the world economy call for European and Chinese leaders to show courage and vision in order to step up their cooperation and reduce acrimony and misunderstanding. For EU Member States, it is essential to make extra efforts to find the necessary cohesion to adopt a coherent and unitary approach vis-à-vis Beijing, including a clear position on politically sensitive issues such as China’s investments in public companies, market economy status and the arms embargo issue. On the Chinese side, the leadership should seriously ponder substantive concessions on issues pertaining to the domestic economy and political system. If Chinese and European leaders were able to strike a grand bargain on their bilateral relations at this historical juncture, they would not only contribute to solving Europe’s debt crisis but also advance the case for further international cooperation in the face of growing signs of economic nationalism.
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