Will Europe Kowtow To China? – Analysis

As the EU banks on China to end its debt crisis, questions are being raised about what Beijing will want in return.

By Parameswaran Ponnudurai

Cash-flush China may end up bankrolling eurozone debt for an attractive price—less criticism from the Europeans on what many see as its appalling human rights situation.

As the head of Europe’s bailout fund sought financial support in Beijing on Friday to help end the 17-country euro currency bloc’s debt crisis, speculation is growing on the concessions being sought by the Chinese before they make any significant investment in the facility.

Aside from seeking iron-clad financial guarantees for new bond purchases in the European Financial Stability Facility (EFSF), Beijing is expected to demand that Europe tone down its criticism on China’s human rights record and its controversial currency policy, according to some commentators.

Beijing could also ask Europe to lift an arms embargo imposed on China after its bloody 1989 crackdown on protesters in Tiananmen Square, and seek full market economy status for Asian biggest economy five years earlier than scheduled.

“If they see that the Chinese participation in the new bonds is absolutely critical for keeping Europe from blowing apart, then one would have to speculate that everything is on the table to be concessioned,” Andrew Busch, global currency and public policy strategist for BMO Capital Markets, told RFA.

Still, for China, a mass purchase of the new European bonds will help bring stability in its largest export market by reducing risk and interest rates, and aiding growth, he said.

By buying the euro-denominated assets, he said, Beijing can also further diversify from the U.S. dollar in its massive foreign exchange holdings.

“From that standpoint alone, I think it makes a lot of sense as there are pretty compelling reasons for them to do it,” Busch said.

Britain’s Financial Times newspaper, citing an anonymous source “familiar” with Chinese thinking, said on Friday that if conditions were right, Beijing could pump more than U.S.$100 billion into the EFSF, created last year to finance bail-out loans for crisis-hit countries including Greece, Portugal and Ireland.

Phone call

On Thursday, Eurozone leaders forged a landmark agreement in Brussels to shore up the EFSF’ financial firepower to more than a trillion dollars, including via a special fund in which countries such as China could invest.

As EFSF chief Klaus Regling headed to Beijing cap in hand, French President Nicolas Sarkozy was on the phone with Chinese leader Hu Jintao, who presides over a nation with the world’s biggest foreign exchange reserves at a whopping U.S.$3.2 trillion.

“If the Chinese, who have 60 percent of global reserves, decide to invest in the euro instead of the dollar, why refuse?,” Sarkozy told French television. “Our independence will in no way be put into question by this.”

But Chinese vice finance minister Zhu Guangyao said Beijing needs to wait for the “technicalities to be clear and also to carry out serious studies before we can decide on investment.”

Some French politicians, including the left-wing opposition, fear China, which has already invested significant sums in European bonds since the debt crisis worsened two years ago, will seek to exploit its new role to influence EU politics.

“Do you think China will support Europe without asking anything in return?,” Michel Sapin, the shadow finance minister in the French opposition Socialist Party, told German media on Thursday.

Many believe Beijing will push EU to ease its scrutiny of human rights in China, which worsened in 2011 and is expected to deteriorate further as Beijing moves ahead with plans to legalize secret detentions.

“[I]f Euro comes with hands wide open, we should not be surprised that they [China] will use it as leverage to muzzle criticism,” said Peter Schweizer, a research fellow at the California-based Stanford University’s Hoover Institution.

“China doesn’t believe in free speech at home,” he said. “Why should they tolerate from foreign leaders if they don’t have to?

“This reality applies not only when Europe accepts their help, of course, but also when the United States does,” Schweizer wrote on his blog.

‘Buy silence’

China is already the biggest foreign creditor of the United States, holding U.S$1.14 trillion of American debt, latest data show.

“China must not be allowed to buy silence from Europe,” said Tim Hancock, Amnesty International’s UK campaigns director.

“If our silence on human rights issues is at stake, then that is too big a price for Europe and for China’s citizens to have to pay,” he was reported saying by Britain’s Daily Mail newspaper.

Hancock said that speculation about a possible lifting of the ban on EU arms sales to China is extremely worrying, especially as Beijing continues its crackdown on dissent and criticism.

France, Germany, and Spain have made the case that the ban should be lifted unconditionally but any shift in EU policy on the arms sales would require agreement by all 27 EU members.

The United States, which also has an arms embargo on China, fears that lifting the embargo will create a technology transfer that will increase the Chinese military’s capabilities.

Beijing believes Europe is already taking a softer stance on the human rights situation in China.

Trips to China by EU foreign relations chief Catherine Ashton and EU council President Herman Van Rompuy have seen them take a more nuanced approach, European Union ambassador Song Zhe said earlier this year.

“Ashton and other political figures from the EU, even ordinary people who have been to China and have seen the situation on the ground, the progress we’ve made, hold a more positive view of what China has achieved,” he said.

The perceived toning down of EU criticism came amid a survey by US think-tank, the German Marshall Fund, showing that Europeans are less afraid of China than Americans.

Forty six percent of Europeans—the biggest segment of those polled—see China as more of an economic opportunity than a threat and 62 percent do not think it poses a military danger. In contrast, 63 percent of Americans see it as an economic threat and 47 percent see it is a military adversary.

Wedge

A key question is whether China will be able to woo the Europeans to its side and drive a wedge in the Euro-Atlantic alliance. The United States and Europe have been criticizing China for alleged human right abuses and currency manipulation..

Some analysts believe that for its own self interest, the United States should help Europe confront its worst crisis since the Second World War even as Washington grapples with its own fiscal crisis and high unemployment.

“The [European] crisis spans the Atlantic, and the two economies are deeply integrated. There will be no American recovery without stabilization in Europe,” said Thomas Kleine-Brockhoff, a senior fellow at the German Marshall Fund.

Citing the French president’s telephone conversation with his Chinese counterpart on Thursday to convince him to invest in Europe’s new bond scheme, Kleine-Brockhoff asked, “Will America want to lose its leverage over Europe to China?”