Beijing’s leadership transition and the EU

Posted by Antonia Colibasanu on 13/11/12
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While the major headlines of the last week were about the U.S. elections, China had its share of election coverage, too, in light of its leadership transition that began with the Party Congress on Nov. 8. Because Europeans — indeed, most of the world — sees China as a giant whose behavior is well calculated, with expected returns in centuries and not years, it seemed obvious to everyone that the transition meant no change.

In truth, it is not a change of leadership that affects how things go with foreign or domestic policy. However, there are other forces that speak about change, even when it comes to China. Sweeping the news, my attention was caught by a Reuters report saying that China’s sovereign wealth fund will focus more on Asia and less on Western markets, citing the inability to persuade investors that a recovery plan is firmly in place as a key reason for the China Investment Corporation to underwrite European bonds and equities.

Moreover, CIC chairman and chief executive Lou Jiwei said, “We would not buy peripheral country bonds because they do not fit our risk/return profile.” “Most importantly, the risk and returns of these bonds are determined by politics and it is very hard for us to make a judgment (on them),” he added. That reminded me of George Friedman’s argument on the new reality of financial markets.

In the same report, Lou Jiwei also mentions the preference toward the United Kingdom, where, on Nov. 1, the CIC made its latest strategic investment: buying into Heathrow airport. Recent research by PWC shows that throughout 2012 China increased the pace of investment in Europe. It appears that for the first time in a decade, Chinese investment in the EU surpassed European investment in China, with 32 investments from China’s mainland and just 26 deals made by European companies in China in the first quarter of 2012. According to the PWC report, Germany has been the preferred destination for Chinese investment over the past 15 months — France was China’s preference in 2011.

We’ve also seen China developing an increased interest in regions like Central Europe and in Portugal, Spain, and Greece since the debt crisis hit the old continent. For example, Bank of China launched operations in Warsaw on June 6. Its aim is to support Chinese investments in Poland in infrastructure, energy and new technology as well as to facilitate Chinese business in Central and Eastern Europe. While most moves in Europe made by China are focusing on taking advantage of the debt crisis to build on the Chinese economic presence and taking some strategic assets at cheap prices, Poland is especially strategic because it is the economic leader of the region and tightly linked into the supply chains of Western companies.

Through investment, China looks to avoid greater exposure to the debt crisis that risks significant losses and to indirectly assist the debt-strained state thereby adding its presence. China has a direct interest in a European recovery, considering that the EU has been China’s largest trade partner. Within the EU, it is Germany that has profited the most from the Chinese consumption market. The others have seen their trade deficit increasing during the last decade.

With the crisis, the pressure has increased on EU governments to protect domestic industries and to help find export markets — the relationship between the EU and China intensified accordingly. The accusations of China dumping goods in Europe likewise intensified, leading to more trade disputes between the European Union and China.

The EU crisis has negatively impacted Chinese exports over the past few years, which has brought to the fore structural problems in the Chinese economy. As Stratfor’s senior East Asia analyst Rodger Baker says, “I think it doesn’t matter whether Hu stayed or whether Xi Jinping came in, the Chinese are facing some serious problems in their economic model. They’re really reaching the end of this economic cycle that they’ve been in and it’s not easy for them to shift to an interior-focused, domestic consumption model.” Economic policies have been held hostage by fears of social unrest and by resistance from regional and local interests. The Chinese government believes maintaining the flow of money and technology from the export sector to fund the development in newly urbanized and rural areas is a must.

As Stratfor’s analysis about the challenges of the new Chinese leaders says: “The Fifth Generation leaders inherit a country whose problems, while qualitatively similar to those faced by their predecessors, are — like the economy itself — of a vastly different scale. In 2002, corruption, graft, inefficiency and inequality were pervasive. But they were manageable so long as the fundamentals of China’s economy — and its role as unobtrusive supplier of low-cost goods to the world — remained intact. […] In 2002, with the world’s attention settled on the Middle East, China’s naval modernization and moves in the South and East China seas drew minimal attention at best. By contrast, Xi Jinping, Li Keqiang and the incoming Politburo Standing Committee face not only a slowing economy but also the end of an economic cycle built on low-cost, export-oriented coastal manufacturing. At home, they will be challenged by new levels of social unrest both in the Han core and in China’s peripheral buffer regions, while abroad they must navigate rising tensions over territorial disputes and resource acquisition.” (see a good video on China’s political system and challenges ahead with my colleague Jennifer Richmond)

Leaving aside development in the South China Sea and the East China Sea — they also threaten regional and global stability — and looking specifically to the relationship between China and the European Union, it seems to me that the tensions will increase. The long term question is less related to trade fights between the two and more related to China’s future, its reforms and the way these will impact the EU economies.

China-EU Trade facts (source: Eurostat):

  • In 2001 China accounted for only 3.5% of global imports. By 2011 it accounted for around 12%. This shows how important China has become as an export market also for Europe.
  • On the other China has profited largely from the European consumer base. For the whole EU the trade deficit with China over the past decade increased from around 50 billion euro to 156 billion euro in 2011. The countries with the highest trade deficit are the Netherlands, UK, Italy, Spain and France. Only Germany and Finland had positive trade balances with China in 2011.
  • Germany’s performance is remarkable. Until 2007 the trade deficit increased to nearly 19 billion. Since then however the trade deficit has decreased drastically and in 2011 Germany recorded a slight trade surplus of 350 million euro with China.
  • Germany is still the largest importer (64.3 billion euro) of Chinese goods in Europe. France only imports around half. But Germany has also seen the strongest increase in exports from around 10 billion euro in 2000 to 64.6 billion euro in 2011. Second but far off is France (2000 = 3.4 billion euro, 2011=13.5 billion euro)

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  1. [...] Party Congress appoint a new leader. Global Perspectives at Blogactiv.eu looks at the how this leadership transition might affect the EU. Meanwhile, Rhein on Energy and Climate at Blogactiv.eu makes the case for an [...]

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Every day, events occur that influence the state of the world. This blog comments on what's important, breaking down international news and raising questions to analyze their potential effects on global markets and politics. more.



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