Chinese investment

Jonathan Holslag is head of research of the Brussels Institute of Contemporary China Studies.

Deutsche Welle: When it comes to the European debt crisis and Klaus Regling's (CEO of the European Financial Stability Facility - the ed.) trip to Beijing to talk about China's help, and the possibility that China will make its own demands, for example, that the EU lift its weapons embargo - what do you make of the situation?

Jonathan Holslag: I think we have to put one thing straight: buying or not buying European reserve assets or buying into the stability funds is not a question of choice for China, it's a question of necessity. It is going to have to siphon a lot of money out of the country. And we know that it is trying to diversify its investments globally and not only to put all its eggs in the dollar basket. It has to participate in some way or another in the stabilization of the euro if it is going to stick to its current monetary policies.

When it comes to conditionality, what for China has been most important is that solid members of the eurozone were backing the whole scheme. China has been pursuing a lot of silent diplomacy over the last weeks with the German government to test how far it would go and also (to see) what the next steps would be if the current scheme is not efficient to reassure the markets for instance vis-à-vis problems in Italy.

First, the Chinese want to make sure that they can get their money back for obvious reasons. I wouldn't really expect them to impose a lot of other conditions to it. I don't think it is going to work for China to demand a more conciliatory approach to in other aspects of the EU-China relations. I don't have any indication whatsoever that the Chinese have tried at EU level to pursue a softer trade policy, to back down from the arms embargo. But of course, the Chinese would appreciate it - it would get them a little bit more credit and respect. Most officials tell me that assertive conditionality would probably slap back into their face.

How worried are the Chinese about getting their money back?

Well I think now that we have some AAA countries, at least Germany, to back the whole scheme, that we have guarantees to a degree that they will probably convince China to move in in a big way. But that said, I think overall, China's concern vis-à-vis the European market is still much more pressing and prominent than its distrust and its concerns toward the American markets.

If Chinese officials express their concern about one thing to me, then it's about the fact that the European market is just not dynamic enough. And if, for instance, we manage to re-stabilize the financial markets it would probably be hugely difficult for the EU to come up with a new stage of growth and gains and productivity and innovation that could prevent such financial trouble from happening again.

Does Beijing have more trust in Germany?

Absolutely. The Chinese are obsessed with Germany when it comes to Europe because they believe it has enough stability and productivity and to many Chinese it's the only serious market that's still left in Europe. So Germany still has a lot of esteem. And I think it's only because of Germany's backing and support for the current financial scheme in the eurozone that the Chinese probably will really come to the rescue. For them, what Berlin does is key in all their strategic calculations toward Europe.

There is also the view in China that the EU should pick itself up on its own. What do you make of that?

What is very important here is that it demonstrates the image problem that we have here from a Chinese viewpoint. The Chinese have lost all their trust in Europe as a political actor, a leading economy, and as a model for building a welfare state and for social development. We have a vast perception problem in China. The Chinese tend to see Europe as a spoiled group of decaying countries that do not really deserve the product of China's hard work. That might seem to be a populous sentiment, but I think that it is quite a widely-held view in China, among officials, as well.

What they complain a lot about is that Europe has lectured them for decades about how to do their economic housework and that now the teacher itself is in need of a lesson and is in deep trouble. I think this image problem we have with China will make negotiations tougher and will also make it more difficult for Chinese leaders to step in with support - they will be under a lot of pressure to be tough in terms of their demands for guarantees and also to be tough in signalling their resolve of negotiations with regard to market economy status. So that is definitely creating an awkward situation.

Will China's help change the relationship between China and EU member states?

I think in the short term, China is definitely making a contribution to financially stabilize the eurozone. But in the long run, I think that the big challenge is that Europe will only be able to strengthen its financial markets if it also manages to revamp production and enhance its competitiveness toward other markets. And I think there, China emerges more as a competitor than as a partner, given the fact that it has strengthened its own comparative advantages and also given the fact that the government in China still provides a lot of support that often distorts competition.

Interview: Sarah Berning
Editor: Rob Mudge