China: the ultimate instance

PAWEŁ BIEŃKOWSKI, Asian Programme

Polska wersja artykułu: Chiny- ostateczna instancja

Deepening and widening crisis in Europe is the ultimate proof of China’s economic and political position. Even more importantly, Beijing proves the effectiveness of its global strategy: being the second largest economy and a developing state at the same time; making the rich dependent on China while still belonging to the poor; tying up to the wealthiest and mightiest while making them play its own game. While Europe is clearly going down, China rises to power faster than ever before.

China notes a considerable success of its foreign policy, guided by a powerful credo of Deng Xiaoping: “observe calmly; secure our position; cope with affairs calmly; hide our capacities and bide our time; be good at maintaining a low profile; and never claim leadership”. For decades of “Reform and Opening”, China was doing exactly so. It became a global powerhouse, accumulated over $3 trillion in currency reserves, significantly improved living conditions of its population and made its voice heard in G-20 and other international fora. Now, with a growing threat of profound economic downturn in the Western world, China is grasping its generations-awaited opportunity.

What was behind Deng rationale, was to adopt a policy of scientific development and modernise the country, open it to the outside world, and benefit on global free market economy. But the image of China as a “World Factory” – the most “acknowledged” legacy of Deng’s reform – starts to fade very quickly. One of the reasons of that is China’s constant and rapid move up the value chain. Businessmen and traders around the world already know that China’s coastal regions are no longer world’s repository of cheap, unskilled labour and low-technology industrial goods. These are now manufactured on even bigger scale and lower cost in countries like Vietnam, Laos, Cambodia or Indonesia. China undergoes a thorough process of socio-geographical change under governmental strategy of “Going to the West”. While cheap labour moves to central and western provinces of China, the country can still benefit on competitive exports, balance its geographical and social inequalities, and most importantly, broaden its trade offer to the world. China’s exclusive economic zones are now increasingly competitive in high-end products, modern technologies and innovation. At the same time, leaders in Beijing are clearly aware of dangers of export-oriented economy, especially in times of global economic downturn. The 2008 economic stimulus package was cleverly designed in order to encourage internal spending in China and boost popular consumption. This trend continues.

“Secure our position”

The European Financial Stability Facility (EFSF) head Klaus Regling’s recent trip to China has been a blow to the European public opinion regarding contemporary China. Even in countries least interested in the events in East Asia, such as Poland, who still associate China only with oppressive communist regime, poverty and slave labour, popular TV news services broadcast Europe’s desperate pledge for emergency funding. Europeans’ confidence in their economies and world’s most advanced regional integration architecture must bend under the impact of reality. And reality is that Europe has neglected China, and continued so for too long. For many Europeans, it is still unimaginable how a country of still relatively low standards of living, almost nonexistent social welfare sector, reverse-technology based economy and tremendous social inequalities can be regarded as the ultimate instance, the savior of Eurozone. But it can. For decades of reforms, Chinese leaders managed to utilize beneficial laws of the market and Western-designed global economic structures for the purpose of multiplying its own wealth and safeguarding the ruling position of the Communist Party. Paradoxical as it sounds, this is the real mighty China of today.

For the time being, China has enough capital reserves to buy out the entire sovereign debt of Greece, Italy, Spain and Portugal. And this appears to be “easy money”: Regling’s trip is an effort to make China responsible for EU recovery and obtain sufficient funding for EFSF without a need of social welfare cuts and deeper reforms in Europe. Obviously, China knows that perfectly well. Beijing leaders are nevertheless interested in secure investment. Therefore, their reaction to Mr Papandreou’s stunning proposal of national referendum on the proposed rescue package was cold and distanced: This is up to the Europeans to solve their own problems; you have all resources you need. At the same time, one needs to acknowledge China’s internal opposition against providing Europe with financial assistance. The majority of Chinese netizens (i.e. youth and educated middle class) is clearly against helping “the rich” while the funds could be easily used to alleviate the position of the poor in China. Opposition against purchasing of bonds denominated in ever-falling US dollars is similarly strong: for regular Chinese, a political tool as it is, bonds purchases should only come second to offsetting the negative impacts of growth on the Chinese population. Another issue is China’s internal debt: even though the country operates astronomic currency reserves, some of its own provinces are significantly indebted, while Chinese banks may hold dangerously high amounts of “toxic” assets.

“Hide our capacities and bide our time”

Let me go back to Deng Xiaoping once again. His foreign policy dictum remains valid now as much as it used to be. But Europe clearly needs to see a bigger picture. The current so called “Fourth Generation” of Chinese policymakers, the “Hu-Wen” leadership, has been preoccupied with maximizing the absolute dividend of economic growth and try to distribute it across the nation. But numerous signals indicate that this benign approach will not be a characteristic of the upcoming “Fifth Generation”, led by Xi Jinping and Li Keqiang. During the next Party Congress in late 2012 almost the entire Standing Committee of the Party Politburo will be exchanged. Those who succeed the current leaders might be more prone to move forward with Deng’s guidance and utilize China’s economic and political advantage on an unprecedented scale. The upcoming elites are believed to be more conservative, inclined to revive some of the Maoist ideas and possibly hawkish in foreign policy. And this is probably the most important message for Europe.

This should not be a reason to fear, though. As a recent ECFR report “The scramble for Europe” indicates, contrary to popular beliefs China is not making Europe dependent on its bond purchases, foreign direct investments or public procurement. And even if it was, as in case of the US, the EU is still China’s primary export market, what makes Beijing effectively tied up to Europe’s economic well-being. But nonetheless the price for help must be paid. The crisis in Europe brings a chance for China to overcome the three main issues of friction in EU-China relations: the arms embargo, WTO free market economy status, and European criticism towards China’s human rights record. Once Europe becomes more pressed against the wall, its bargaining position regarding the three issues rapidly diminishes.

All in all, China has a clear interest in helping the Eurozone. While it must protect its exports, Beijing eyes at some of the leading European market assets, such as high technology enterprises and abundant public procurement. Today’s China is not a charity – any lending must be repaid. Therefore, China can eagerly purchase the eurobonds, provided that they will be guaranteed by the remaining power of region’s economy – in this case Germany. How much then do EU-China relations differ from Germany-China ties? On the other hand, Chinese investments in eurobonds will lead to further appreciation of the euro, and result in a further loss of Europe’s global competitiveness. Europe is hence increasingly reliant on China in a short term, to its own comparative disadvantage in the long run. Direct Chinese investments into the EU economy would perhaps have less detrimental effect, but popular and unjustified fear against them spread across Europe makes them harder to make a difference.

Being in its current position, Europe should not be afraid of Chinese assistance. Opening up for Chinese capital, investments and cheaper services for public procurement may eventually serve Europe well. Nevertheless, what Europe must immediately acknowledge is that its bargaining power against China and within the global economy continues to fall, and still not enough is being done to circumvent that. The EU has still enough consumers and high technology patents to attract the Chinese, Indians or Brazilians. But for how long? This is probably one of the very last moments when Europe and China talk to each other as equals.

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Polska wersja artykułu: Chiny- ostateczna instancja