Crisis allows China to ‘divide and rule’ Europe: Report

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China is "taking over Europe" by stealth bond purchases and strategic investments, exploiting internal divisions arising from the financial crisis, according to a forthcoming influential think-tank report seen by EURACTIV.

The policy brief, called 'The Scramble for Europe', will be published by the European Council on Foreign Relations in July and claims that a lack of European cohesion has invited China to deal bilaterally with individual member states to exploit their divisions.

It states that China deliberately purchases the bonds of individual member states rather than Eurobonds, because "it knows that dealing bilaterally with European nations leads to a better pay-off than bolstering multinational initiatives".

This will pay political dividends in the future, according to report. It claims: "Even after 2014 – when majority decisions at the European Council will require 15 member states with 65% of the population – it will be useful for the Chinese to have a kind of 'China lobby' consisting of smaller member states. China could always depend some of them – particularly Malta, Cyprus and Greece – to block any unanimous decision against its interests."

It says that China's use of third-party intermediaries on the financial markets is compounded by Europe's own incompetence at accounting for foreign purchases of European public debt, claiming: "Europe's only way to verify it [foreign bond ownership] remains a great guessing game."

The authors recommend that Europe should have a unified statistical system for foreign buyers of public debt or co-ordinated member states' systems using similar accounting standards, like the Japanese and the US.

Offshore centres used by Chinese to launch investments

The report says that precise figures for direct investment into Europe are also opaque because four-fifths of China's external capital flows take place through offshore centres such as Hong Kong and the Cayman and Virgin Islands.

The think-tank claims that more than half of the total investment in Europe from China since early 2008 – $64 billion (€44 billion) – has taken place since October 2010. This figure will inevitably grow as Chinese overall direct investment is set to triple to $1 trillion by 2020.

The report finds that 2011 Chinese investments such as Sinopec's purchase of Spanish company Repsol's $7.1 billion Brazilian holdings "show that the Chinese government has now given the green light to major takeovers in Europe".

"There is no question that China's state led economy will have no qualms about keeping European states divided if they are already fragmented by their political and economic interests," the report says, recommending that Europe manages its trade investment to ensure that reciprocal rights for investment are obtained from the Chinese.

Chinese diplomats seek 'shopping lists of infrastructure projects'

The third way in which China is increasing its presence is through the open European market for public procurement, the authors claim, saying: "Talks with European diplomats reveal that China's high-level trade delegations are asking for a shopping list of infrastructure projects that their companies can bid on."

The report recommends that the current European public procurement terms "sometimes amount to price dumping" and recommends: "Mixing Chinese soft loans with European public subsidies should be conditioned by proof that the Chinese terms proceed from fair competition."

Jeremy Fleming

One eastern European diplomat in Beijing quoted anonymously in the report notes: "We don't need the Chinese when we have EU funds, but when we don't have the money we need the Chinese. Our companies can't compete on the Chinese market of public procurement, so it doesn't matter to us if China opens up this market."

"What have Germany and Europe done for us lately? How can they have the gall to ask us to co-ordinate and unite our European interests on China, when there is no common economic interest?” asks another senior diplomat – from a Mediterranean country – who talked to the compilers.

"The latest Chinese five-year plan, adopted in March this year, has placed emphasis on investment in green and growth and technology," according to Jonas Perello-Plesner, one of the authors of the report with the European Council on Foreign Relations.

He added: "Europe is an obvious target for investment in these sectors and it highlights the problem because there is no level playing field. In the field of IP rights, and in technology transfer generally, these are areas where we have no access to Chinese markets but they enjoy virtually unimpeded access to ours."

An EU official told EURACTIV that no official response to the report would be offered until the executive had seen a final copy of it on publication. But he added: "In relation to issues of transparency on the bond markets, that is one area where current regulatory changes under way to deal with the sovereign debt crisis generally might be able offer solutions."

Beijing offered to buy Greek debt and pledged to support a stable euro and not reduce its holdings of European government bonds ahead of an EU-China summit in October 2010.

The summit was marred by a dispute over China's depreciated currency and low labour costs, which European said keep Chinese exports artificially cheap.

European companies have found it difficult to break into the Chinese market despite stronger political ties between Beijing and Brussels. Language and cultural differences are often cited as major barriers to successful trade, but so too are legal and practical issues.

SMEs find it particularly challenging to trade with China given the financial and human resources required and the lack of local knowledge. Some have complained that commercially sensitive information supplied to authorities in Beijing has fallen into the hands of local competitors.

A number of initiatives are under way to improve business links between Chinese and EU firms, such as the EU-China Managers Exchange Training Programme (METP) and the Understanding China project offering cultural training for Europeans.

  • July: European Council on Foreign Relations to publish 'The Scramble for Europe' report.

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