As austerity, a painful loss of welfare state entitlements and violent riots roil much of Europe, an alacritous knight walked into Berlin, Madrid and London over the last two weeks. Li Keqiang, a deputy Prime Minister who will succeed current Chinese premier Wen Jiabao, arrived like a knight in shining armour with a huge business delegation and advance opinion-editorial placements in the European media.
His politically well-timed and choreographed visit brought guarantees of Chinese backing for the crisis-plagued Euro and promises of buying more debt from European states being downgraded and rejected by private lenders. Just as a bellwether of the investor community, Pimco, dropped a bombshell announcement that it will stop buying sovereign bonds of deficit-heavy and growth-scarce states like Portugal, Greece and Ireland, the Chinese swept in with a Caesar-like veni, vidi, vici swagger to anchor Europe?s fragile periphery.
With foreign exchange reserves totalling a stupendous $2.8 trillion, China has both the means and intention of investing in the Euro so as to diversify its holdings away from the US dollar. As a quarter of China?s reserves are already in Euro-denominated assets, pledges to buy Spanish, Portuguese, Greek and Irish bonds are clearly driven by fears of a free fall of the Euro and severe losses to Beijing. The logic of interdependence is such that Europe needs the bags full of cash Li Keqiang dangled on his tri-nation tour, while China needs to prevent a run on the Euro.
Through this act of enlightened self-interest, China risks suffering ?haircuts? in the future if the PIGS economies plummet and default. But given the continued core weaknesses of the US and Japanese economies, Beijing has no near-term alternative but to beef up the Euro.
The official Chinese media outlet, Global Times, recently advocated greater purchases of gold ?to increase the safety of foreign exchange reserves?.
Currently, only 1.6% of China?s reserves are held in gold, and Beijing believes that the metal?s sky-rocketing prices make it an ideal ?risk-hedging instrument.? Still, the Euro and its member economies are worth saving from the Chinese point of view because the EU is Beijing?s biggest export destination. Helping European states re-enter the zone of sustainable growth is a Chinese wish born out of anxiety about losing lucrative markets.
One of the thrust areas in trade and investment deals struck by Li?s entourage was energy technology. In Britain, where the unemployment rate is nearly 8%, news coverage of Li?s visit highlighted the number of green and fossil fuel jobs that will be created or preserved through joint development of renewable energy and deepwater oil exploration. For a country starved of optimism and beset by confrontations between students and workers on the one side and the police on the other, China has appeared like a calm saviour of last resort.
As pervasive public spending cuts earn the ire of the British public and hobble the UK economy from rebounding with growth, the statistic of a 30% rise in bilateral trade volume with China is a lone international positive for Prime Minister David Cameron to brag about. Forgetting past rhetoric on China?s human rights abuses and absence of democracy, the British and their fellow European hosts laid out the red carpet for Li.
The only issue on which China did not have its way during Li?s trip was in scrapping the EU?s 20-year-long embargo on military supplies. France, Spain and the EU?s foreign policy chief, Catherine Ashton, lobbied to lift this ban to propitiate China, but Britain toed American desires and refused to concede. High-tech European weapons sales to Beijing can tilt the military balance in East Asia against the US and its allies, making this too sensitive a barter chip even for a Europe that is on its knees.
But how long the moribund EU or its individual members can resist China?s chequebook pull is anyone?s guess. I rode a quintessential Manganese Bronze taxicab in London and learnt that this symbol of British heritage could eventually be taken over by China?s Geely Automobile.
The author is vice-dean of the Jindal School of International Affairs