Fortress Europe can’t keep out China

One thousand billion is a very big number. In dollars it is about one-tenth of the eurozone’s annual output. It is also equivalent to 40% of China’s gross domestic product and happens to be the value of the foreign exchange reserves which China says it has now amassed, the world’s biggest stock.

Whether China will carry on pouring its foreign exchange reserves into US government securities - about 70% are invested in US government debt - is another question. Earlier this month Zhou Xiaochuan, the governor of the People’s Bank of China, told Reuters that China is diversifying its reserves. This was not news, but it still sent a shiver through the world’s financial markets.

China’s ability to dump dollars in order to put political pressure on the US is a nightmare scenario for the markets. Europe’s economic policymakers worry, too, for such an event would probably send the single currency soaring, damaging eurozone exports. Since China itself would suffer heavy losses on its holdings if the dollar plunged, it has an interest in avoiding such a cataclysm. But China’s power over the value of the world’s most important currencies is undeniable, another manifestation of its expanding political and economic influence.

Until earlier this year President George W. Bush paid too little attention to the erosion of America’s economic weight in the world as Asia’s emerging economies expanded. Bush’s first two treasury secretaries were political lightweights. The president preferred to put his faith in his military supremacist advisers, a historic blunder. Now, with Hank Paulson, his third treasury secretary, Bush is, belatedly, putting real weight into economic diplomacy, particularly with China. There is, however, another facet of China’s growing financial and economic power, less talked about in Europe.

Joseph Quinlan, a Bank of America economist who made a name for himself charting the depth of the transatlantic economic relationship as diplomatic ties frayed at the beginning of the decade, says the financial fire-power of China’s corporate sector (not just its government) needs to be taken more seriously.

Quinlan is warning about the dangers of investment protectionism, not trade protectionism, against China. We Europeans know all about such behaviour. The now departed Italian central bank Governor Antonio Fazio made a name for himself by blocking foreign bids for Italian banks from other EU member states. French government officials helped to ensure that Italian electricity giant Enel’s ambitions to get into the French market were obstructed.

There is no great official enthusiasm either, understandably perhaps given the way President Vladimir Putin is nationalising Russia’s energy industry and using it as a foreign policy tool, for allowing Russia’s gas giant Gazprom to diversify downstream into western European energy markets, by, for example, buying the UK’s Centrica.

So what about China’s companies? Quinlan reckons that between 1995 and 2005 the US and Europe invested close to $40 billion (€31bn) in China. But Chinese foreign direct investment of (FDI) in the EU was only $1.2bn (€0.94bn) and in America $0.3bn (€0.23bn), he says. This, he believes, is going to change. Chinese firms are scouring the globe, particularly Africa, for natural resources including oil. In order to become multinational giants, its leading companies will, Quinlan believes, also have to buy and build up their EU and US assets. An attempt by China’s top oil firm to take over a smallish US oil company was rebuffed last year. But its Lenovo company did buy IBM’s laptop computer business.

Successfully managing foreign investments and acquisitions will be quite a challenge for China’s business elite, to say the least. But Europe is going to have to face up to the reality that our companies cannot pour billions of dollars into China and then hope to slam the door shut when China’s national champions come knocking, even if we do harbour serious doubts about their political independence.

• Stewart Fleming is a freelance journalist based in Brussels.

One thousand billion is a very big number. In dollars it is about one-tenth of the eurozone’s annual output. It is also equivalent to 40% of China’s gross domestic product and happens to be the value of the foreign exchange reserves which China says it has now amassed, the world’s biggest stock.

• Primary Source