China charms Europe, but Beijing has own agenda

[September 19, 2011]  LISBON, Portugal (AP) -- When a nervous horse unseated its cavalry officer at a red-carpet event during Chinese President Hu Jintao's state visit to Portugal last year, the leader of the world's second-largest economy broke with protocol and walked over to the bruised guardsman.

"I hope you get well soon," Hu told him through an interpreter.

The public display of compassion was in keeping with China's European charm offensive in recent years. It has waved its checkbook at a growing number of financially ailing European countries -- although the actual impact on Europe's debt-stricken countries has been limited so far, and aimed mainly at winning friends and business contracts.

Europe's frail economies are wobbling under the weight of their debts. Their urgent austerity measures are stunting growth and driving unemployment higher, and their citizens are clamoring for improvements. That has changed the complexion of European dealings with booming China.

Crisis-hit European countries are swooning over China's $3.2 trillion cash pile -- the world's biggest foreign exchange reserves -- even though many are angry about what they view as unfair Chinese practices.

"China is increasingly trying to diversify its foreign policy relationships ... trying to find the right ways to use its new-found influence, to gain from it," says Nicholas Consonery, an Asia analyst at Eurasia Group in Washington DC.

Join the dots, Beijing-watchers say, and China's strategy becomes clear: It wants to use its economic leverage to make friends who may be more forgiving in disputes over trade and human rights, and ensure doors are open for its goods and corporate investments in the European Union, its main export market.

Most immediately, many European countries are looking for a lifeline to extricate themselves from the continent's severe sovereign debt crisis, which threatens to collapse the continent's financial system.

In the latest example, Rome officials disclosed this week they held talks with China's sovereign wealth fund about buying debt-stressed Italy's bonds.

Before those talks, Beijing had vowed to buy the bonds of Greece and Portugal, which ended up needing international bailouts, and Spain and Hungary.

Though neither China nor EU countries disclose figures on Chinese bond purchases, analysts believe Beijing's repeated expressions of faith in the EU's finances are aimed principally at building goodwill and have not translated into large disbursements.

"Europeans have a tendency to pray for rain from China, but the rain is not necessarily coming," says Francois Godement, a Paris-based senior policy fellow at the European Council on Foreign Relations.

Experts reckon cautious Chinese leaders are hesitant about putting big money into jittery debt markets. Some leading Chinese economists have discouraged the investment as too risky, and analysts note Beijing has to pay attention to the needs of its own poor.

According to EU officials, China has invested in Europe's euro440 billion ($605 billion) bailout fund. But that fund carries a top AAA rating, meaning it is an extremely safe way for Beijing to help Europe without exposing itself much to the dangers of a default. The sums were never disclosed.

Rachel Shoemaker, an Asia expert at Executive Analysis in London, says the bond purchases -- however modest -- can help win approval for broader Chinese investments down the line, such as in trade and corporate and infrastructure investments.

"We assess that China's rhetoric is likely to exceed its actual support, with China likely to focus on commercial gains and thus to negotiate bilateral deals that essentially result in investment opportunities in return for bond purchases," Shoemaker said in a written reply to AP questions.

She cites Greece as an example. As China promised to acquire that country's bonds, state transport giant China Ocean Shipping Co. snared a $1 billion concession deal in 2009 for the country's largest container-terminal port near Athens. That gives COSCO's growing port management business a foothold in Europe and positions it to prosper as Chinese trade with the Balkans and Central Europe grows. China also pledged to help double the trade volume with Greece to nearly euro6 billion by 2015.

It's a similar story across Europe, with Chinese pledges of bond purchases coming simultaneously with announcements of major investments in the continent's corporations and infrastructures.

Chinese Premier Wen Jiabao and Italian Premier Silvio Berlusconi last year spoke optimistically of doubling bilateral trade to $100 billion within five years. In one of the deals signed in their presence, Internet service provider Tiscali SpA and Zte, a Chinese maker of telecommunications equipment, made a deal for development of ultra-wideband in Italy.

One of the conditions of China's purchase of Spanish bonds in January 2011, analysts say, was the sale to Sinopec of around $7 billion worth of Brazilian oil assets held by Spanish energy company Repsol. That deal gave birth to one of Latin America's largest energy companies.

On his Portugal trip, the Chinese president signed cooperation agreements which sought to double trade between the two countries within five years. Chinese and Portuguese companies signed deals in areas covering energy production, information technology, telecommunications, tourism, banking, port infrastructure, and agriculture.

China's European push came after its expansion into Africa where it has invested billions, mostly in gaining access to raw materials.

"It's clear that China has been successful in pushing emerging market investments and it increasingly wants to diversify into the developed world," said Consonery of Eurasia Group.

Even so, Beijing knows that in the U.S. and Europe "the political hurdles are higher" than in Africa, Consonery said.

Europe, like the U.S., is fighting Beijing over trade barriers. Europe is vexed by aspects such as investment rules and copyright violations in China. The Chinese, meanwhile, are pressing the EU to grant China market economy status that would relax remaining trade obstacles.

Human rights issues are another sore point.

French President Nicolas Sarkozy took a soft line during a visit by Hu last year, when French companies won deals with China worth $22.8 billion.

Sarkozy said then that China has "a different culture," and Paris respected that. Two years previously, Sarkozy had threatened to boycott the opening ceremony of the Beijing Olympics over China's treatment of Tibet.

Beijing doesn't shrink from retaliation. After the Norwegian Nobel Committee gave the Peace Prize to imprisoned Chinese dissident Liu Xiaobo, the country's salmon exporters said their fish were being held up at ports by Chinese food safety inspectors.

Godement, of the European Council on Foreign Relations, says that in some debt-rattled southern EU countries human rights issues in China are being "de-emphasized."

China "hardly needs to push (on the issue) because there is so much economic anxiety ... in those Mediterranean countries about getting something from China," he said.

But opposition to China's advances are coming from other quarters.

In Italy, Chinese businesses have been buying up textile factories and producing the "made in Italy" label under Chinese conditions. That has undercut the prices of the finished goods and wages of Italian workers, causing tension.

When Greece announced its Piraeus privatization plan the Federation of Greek Port Employees went on strike, saying that "the government and the Chinese leadership should realize that we will not allow our ports ... to become Chinatowns."

Across Europe, storekeepers complain about losing business to Chinese rivals selling cheaper goods manufactured in a country which does not observe the same labor and environmental standards as in Europe.

China's foreign investment and export drive shows no sign of letting up.

"It's pretty clear that over the past couple of years Chinese foreign policy and international investment policies are becoming much more far-reaching in terms of their global footprint," said Eurasia Group's Consonery.

It is "one of those inevitable global trends that's going to persist for the next couple of decades really," he said.

[Associated Press; By BARRY HATTON]

Associated Press writers Victor L. Simpson in Rome, Derek Gatopoulos in Athens and Joe McDonald in Beijing contributed to this report.

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