“China and the Eurozone Crisis” forecasts that China will likely focus on commercial gains and thus negotiate bilateral deals that essentially result in investment opportunities in return for bond purchases. In the ten-year outlook, Asia is almost certainly to be the main focus of Chinese trade and FDI, which limits China’s willingness to support struggling Eurozone countries long-term.
Within the EU, China will likely focus investment efforts on Eastern European countries, where it perceives greater opportunities and access to natural resources. Exclusive Analysis forecasts that China is likely to support Eurozone member states economically insofar that this support earns reciprocal EU support for Chinese commercial ambitions in Europe.
The analysis continues, “China is looking to gain some political benefits in return for supporting the EU, particularly as the US’s willingness to do so has been limited. China is namely seeking reduced political opposition to Chinese acquisitions in Europe, as well as less Western criticism of Chinese trade and currency policies. However, China is more concerned with commercial than political gains resulting from its support of European economies.
Most deals are signed on official visits and sweetened by government incentives and relatively low asset prices. Purchases of Greek bonds, for instance, were made in return for a 35-year lease of the Piraeus Harbour and strategic infrastructure projects to increase China’s access to southeastern European markets.
One of the conditions of China’s purchase of Spanish bonds in January 2011 was finalising the sale of some $7 billion worth of Brazilian oil assets held by Repsol to Sinopec. In April 2011, China Investment Corporation, the country’s state-run sovereign wealth fund, denied Spanish government claims that it had agreed to less commercially beneficial equity investments in Spain.
China is still running a trade surplus, and as such slowdowns in Europe and the US are likely to slow Chinese economic growth and job creation. Statistics from the Chinese Ministry of Commerce show that the EU remains China’s biggest export market, accounting for some one-sixth of China’s total trade.
China is likely to prefer to negotiate any further debt purchases or potential lending on a bilateral basis, avoiding the EU’s collective bargaining power. An indicator of its limited appetite for establishing a lending mechanism to Eurozone nations that are denied access to credit markets is seen in China’s support for EU issuance for the European Financial Stability Fund.
China’s leaders are concerned that the issuance of Eurobonds would reduce their political clout vis-à-vis individual member states, and would prefer that the expansion of the Stability Fund and government spending cuts stabilised the Euro. However, if Eurobonds had to be issued to stabilise the Eurozone, China would welcome this development and almost certainly purchase Eurobonds to further diversify its own foreign currency reserves.
China’s trade and investment figures with the EU continue to rise year-on-year, and significant trade deals often follow official bilateral visits. While we expect this pattern to continue, we assess that China is likely to increasingly diversify its strategy within the EU, more systematically targeting eastern European countries for trade and investment deals, while negotiating occasional one-off bilateral agreements with Western European countries.
While China clearly has an interest in a stable Eurozone, it is unlikely to buy troubled Eurozone nations’ debt without clear commercial gain. There is little evidence China is actively switching into these assets. Indeed, Chinese purchases of US Treasury-bills have increased since 2008. Some of our sources in the financial sector report that the rate of purchase is rising, and is likely to continue to do so in the three-month outlook.
Further, China’s dependence on the EU as an export market has declined over the past several years. After the US, Chinese Customs reported the largest destination of Chinese exports in 2010 to be Hong Kong, Japan and South Korea. China’s foreign direct investment has been steadily increasing since the early 2000s, with two-thirds of this investment presently going into Asia. Thus, while the EU remains an important export market, China is more concerned about development of trade and investment in the Asian region and its domestic consumer market in the ten-plus year outlook.”
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Exclusive Analysis is a specialist intelligence company that forecasts commercially relevant political and violent risks worldwide. For additional information or to arrange an interview, please contact Head of Corporate Communications Amanda Russo at +44 (0) 207 648 5416; bb: +44 (0)75 5723 1908; arusso@exclusive-analysis.com
