It is in the interest of cash-rich China to help resolve the eurozone debt crisis, but Chinese premier Wen Jiabao, who is visiting Britain and Continental Europe, will want a share of the West’s buying power in return.
As Wen Jiabao, the Chinese premier, stepped off his plane in Birmingham on Saturday, it was difficult to avoid the feeling that the UK, and Europe, have never looked weaker in Chinese eyes.
In private, senior Chinese diplomats are now openly scornful of Britain’s economic prospects and have even asked why Mr Wen should grace such a weak trading partner with three days of his time.
Indeed, it is telling that the first stop on Mr Wen’s tour is Longbridge, the old MG Rover car factory that passed into Chinese hands in 2005. Once a byword for poor productivity, wildcat strikes and trade union power in its British Leyland and Austin Rover days, the plant is now host to China’s biggest industrial presence in the UK. Owned by Shanghai Automobile Industry Corporation, the factory designs and assembles MG cars in the UK made from car parts manufactured in China.
However, the Longbridge site remains the only major example of Sino-British co-operation, something that the Prime Minister, David Cameron, whose advisers have helped co-ordinate the visit, is determined to change.
On Mr Cameron’s visit to China last year, a target was announced for increasing bilateral UK-China trade to $100bn by 2015, from its 2010 total of $63bn and Number 10 sources said yesterday that they believe that “progress has been made” on hitting that figure.
Whether much more can be achieved depends partly on the success of the visit, which includes a formal summit in London tomorrow with a 35-strong Chinese delegation including China’s foreign minister Yang Jiechi, vice-minister for foreign affairs, Fu Ying, and minister of commerce, Chen Deming.
In formal business and personal conversations between Mr Wen and the British trade minister and former HSBC chairman Lord Green, who is accompanying the premier around Longbridge today, the UK message will be about further strengthening state and business ties with a view to achieving growth and sending that bilateral figure higher.
Meanwhile, Culture, Media and Sport Cabinet minister, Jeremy Hunt, who is accompanying Mr Wen to William Shakespeare’s birthplace of Stratford-upon-Avon, will be seeking to set up a formal structure of future summits to develop better “people” relationships between the countries with a particular focus on education, science and culture.
In London, where Mr Wen may go, apparently, for a jog in Hyde Park, the main topics for discussion will be the weighty topics of climate change (China is now one of the world’s leaders in green technology), the global economy, international security and development.
While Number 10 was refusing to comment yesterday on what else could be on the agenda, the Middle East and the economic crisis in Greece are also expected to come up for discussion.
Yesterday, at the start of his European visit in Hungary, Mr Wen gave a strong pledge of China’s support for the embattled euro, saying that China will buy Hungarian government bonds and “consistently” support the euro as Europe attempts to fight its way out of a sovereign debt crisis. “China is a long term investor in Europe’s sovereign debt market,” he said at a press conference with the Hungarian Prime Minister, Viktor Orban. “In recent years we have increased by quite a big margin our holdings of government bonds. We will consistently continue to support Europe and the euro.”
Whilst in the UK, the Chinese are determined to be aggressive with their British counterparts in private discussions during three days, demanding access to every area of UK technological expertise. China feels it now has the whip hand, after years of eyeing the West with suspicion. The West’s need for Chinese goods and investment (China has a significant current account surplus) are increasingly outweighing concerns about the way China does business or the low value of its currency. The UK knows it has to compete for business with other EU members as well as North and South America, the rest of Asia, Australia and Africa.
Now only 3pc of export licences fall foul of the European Union’s “dual-use” regulations, which forbid goods to be sent to China that could conceivably be also used for military purposes.
Instead, it is British companies themselves who have held back their technology, worried that it will simply be pirated once it has arrived in China, and concerned that the playing field for foreign companies in China is still not level.
For Chinese leaders, who are used to instructing their state-owned companies in how to conduct business, the apparently laissez-faire attitude of the British Government towards its companies, is a black mark.
Similarly, the Chinese ambassador to the UK, Liu Xiaoming, has called for China to be handed the contracts to build the UK’s new high-speed rail link. “There’s a lot of talk about getting more Chinese investment but we need more action,” he said ahead of the visit.
“Chinese businesses will compare why they should invest in the UK and not in France or Germany. We need to identify flagship projects and high-speed rail might be one of them”.
Again, there seems to be a culture gap. “They are very keen to do the rail link, and they do not really understand our tender process,” said one source close to the negotiations.
China also has its own issues to contend with. Economic analysts at Credit Suisse last week revised down their forecast of China’s GDP growth for 2012 from 8.9pc to 8.5pc, still well above European levels. They said they believed that persistent inflation, slowing growth and continued fiscal tightening are likely to play out not only in the second half of this year but also well into 2012.
They also expect the financial stress in China’s small and medium size enterprise sector to spread to other parts of the economy. If the situation does not improve soon, they expect weakened demand and rising debt.
The export outlook has dimmed recently and the analysts say they would not be surprised to see zero growth in exports in the second half of this year. Meanwhile, the report expects inflation to peak soon, but say it is likely to stay at elevated levels as services inflation takes off.
So what can we expect to be achieved from the Wen visit, the fourth by a senior Chinese leader to Europe in the past six months? There will be plenty of hand-shaking and even a new slogan: “Partners for Growth”. Officials from both sides will earnestly discuss the “mutual complementarities” of the Chinese and British economies. Some deals will be signed. The Chinese have said they will leave the UK with a bounty of $4 billion worth of deals. The UK, meanwhile, says the actual value is “several hundred million pounds”.
There has been no word on whether a key deal by Diageo, the drinks company, to buy a Chinese spirits maker, will finally go through. Despite ticking all the boxes, and intense pressure from George Osborne, the Chancellor, the deal has been stalled for years by Chinese obsfuscation which some say is tantamount to protectionism.
The portents for summits in between EU and China in recent years have been anything but auspicious, however, as Raffaello Pantucci points out in a paper for ISN Insights. He recalls that a 2008, summit was “spooked” by tensions during the Beijing Olympics and attitudes to Tibet. When the French and sitting EU President, Nicolas Sarkozy, made time to meet the Dalai Lama in December 2008, the Chinese responded by pulling the plug on that year’s summit.
2010 also proved tricky when Mr Wen – who believed that China would be granted the long-awaited Market Economy Status, conferring EU recognition that China is a market economy and providing some anti-dumping protections – was instead handed a list of demands during his Brussels visit. The meeting collapsed and a planned press conference was cancelled.
This time, the constant theme of how to resolve Europe’s debt crisis will run behind the diplomacy. China, which has invested heavily in Greek infrastructure, is likely to cast itself as a magnanimous saviour.
Making sure that “certain European nations” overcome their difficulties is “extremely important for us”, said Fu Ying, the vice foreign minister, last week.
But while the Chinese media will sell any intervention as a grand favour to impoverished Europe, it is worth remembering that Europe remains China’s biggest export market. And with the latest surveys indicating that Chinese factories have slowed to almost flat growth, China needs Europe to keep on buying its goods or face difficulties in what remains one of the key pillars of its economy. China may be the world’s fastest-growing major economy, but it still needs moribund old Europe.
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