Once upon a time, European envoys to China came aboard gunboats, extracting the concessions they sought – such as the island of Hong Kong – by force. Today they come cap in hand, hoping to convince the latest Chinese emperors to bail them out of a financial mess of Europe’s own making.
China’s defeats in the 19th century Opium Wars, and the succession of unequal treaties with European powers that followed, marked the beginning of what’s known here as the “Century of Humiliation.”
Now it’s China’s turn to demand the concessions and Europe’s to understand humiliation. Klaus Regling – the head of the European Financial Stability Facility (EFSF), the continental bailout fund whose very existence testifies to the shifting balance of power in the world – was in China Friday as a supplicant, rather than a superpower. He was clearly willing to bend to Beijing’s wishes if it gets the world’s most cash-rich government to back the new euro zone bailout plan.
In both China and Europe, Beijing is being portrayed as carefully considering whether it should come to Europe’s aid in its hour of need, and weighing what return – political as well as economic – it can expect for doing so. In reality, China has a strong self-interest in making sure the euro zone doesn’t collapse, something it knows well could badly damage its own export-reliant economy.
There’s no question which side has the upper hand in negotiations about China’s role in the bailout of Europe.
Mr. Regling told a press conference in Beijing Friday ahead of his meetings with officials from the Ministry of Finance and the People’s Bank of China that there would be no “special deal” to convince China to buy EFSF bonds. But pressed about some of the possible conditions Beijing could attach to its help, he sounded more flexible.
If China – which is reportedly considering buying up to $100-billion (U.S.) worth of EFSF bonds – wanted to funnel its contributions through the International Monetary Fund, a tactic that would grant Beijing greater say at future IMF meetings, that could likely be accommodated, Mr. Regling said. He noted that the IMF is already involved in the efforts to stabilize Ireland, Portugal and Greece.
And while all bonds issued by the EFSF have thus far been euro-denominated, Mr. Regling said “we have the possibility to use other currencies,” leaving open the door to yuan-denominated contributions, which would aid Beijing’s effort to promote the yuan as an international currency.
Mr. Regling said he didn’t expect to leave China with any firm commitments, warning that negotiations could take “weeks.” Part of the reason is Mr. Regling, who is a financier rather than a politician, doesn’t have the power to answer some of Beijing’s other anticipated demands. He said the EFSF’s managers would be asking how China and other potential investors would like to see the bailout fund structured “so that the money will actually come.”
“I could only go to one country first,” Mr. Regling said in response to a question from a Japanese journalist about why he had flown to Beijing, rather than Tokyo, after the euro zone bailout deal was reached Wednesday. “We will visit many different investors from many different countries over the next few weeks, but it was good to come to Beijing first.”
With many Chinese commentators questioning why China – a developing economy that recently has seen stirrings of a local debt crisis of its own, with defaults sparking panic in two cities so far – would bail out the far richer European Union, the Communist Party leadership is under pressure to get something in return. One relatively easy-to-satisfy demand might be Beijing’s long-standing appeal to be granted full market economy status within the World Trade Organization.
While China – because of lingering government involvement and control, as well as a lack of labour standards – remains a long way from meeting U.S. and EU specifications for a market economy, it’s an easy chip to trade away since China is due to receive market economy status in 2016 no matter what.
Other, quieter, requests might involve Beijing asking Europe to lower the pressure on China over the artificially low value of the yuan, or even to quiet criticism of the Communist Party’s human rights record. Among China’s rowdy community of 430 million Internet users, there were also calls for Europe to drop its arms embargo on China, which has been in place since the bloody 1989 crackdown on pro-democracy demonstrations on Tiananmen Square.
“China and Europe are not the type of sworn friend who can extend a non-hesitant helping hand as the other experiences a crisis. Both sides are adding calculations at the moment,” read an editorial published Friday in the Global Times, a newspaper controlled by the Communist Party.
“This help, from a purely economic standpoint, is straightforward. But from a public opinion and political standpoint, it’s not so straightforward. The Chinese delegation needs something to show at home, to show that we’re lending a helping hand but we’re [also]getting a helping hand,” said Li Wei, an economics professor at Beijing’s Cheung Kong Graduate School of Business.
But while China seems intent on making the most of Europe’s moment of need, there’s no sense that Beijing will let the continent flounder if some of its demands are unmet. Historical acrimony aside, the Chinese and European economies are now deeply integrated – China this summer surpassed the United States to become the bloc’s largest trading partner, accounting for 13.4 per cent of all trade – and Beijing understands that Europe’s crisis could spread if it’s not promptly dealt with.
“It’s much easier to help a neighbour put out a fire before it reaches your house,” Prof. Li said. “Who knows? In 10 years or 15 years, China may be the one who needs to ask for help.”
The EFSF bonds Mr. Regling is flogging also provide a convenient place for Beijing to park some of its burgeoning current account surplus (including a €12.2-billion trade surplus with the EU), which currently stands at $3.2-trillion and counting. In order to keep the yuan’s value down, Beijing needs buy foreign securities with that money, and the EFSF bonds will help with the goal of diversifying holdings away from the flagging U.S. dollar.
“For the moment, they’ve got these [foreign currency]reserves and they’ve got to put them somewhere,” said Patrick Chovanec, associate professor at Tsinghua University’s School of Management and Economics in Beijing. But that won’t stop the Chinese side from seeking to benefit from the situation, he said. “From the Chinese point of view, if you’re going to be doing something anyway, why not get credit for it?”
Despite repeated requests from European reporters at the press conference in Beijing, Mr. Regling refused to divulge how much China had already invested in the EFSF (he would only say that Asian countries accounted for 40 per cent of the fund's existing €440-billion). Nor would he say how much more he was seeking from China as the EFSF grows to €1-trillion under the latest bailout plan.