Time to talk harmoniously

China and Europe can work together to ensure the G20 makes a decisive contribution to global growth and stability

Although the EU-China summit has been postponed, the leaders will still meet this week at the G20 summit in Cannes, France. How will the two sides react when they meet in Cannes? And can we still hold any expectations for the delayed EU-China summit and hope that Europe and China will work meaningfully together on global economic issues?

Despite the many problems that exist between the two sides, they are locked in a close embrace. The European Union is China's largest export market and China is being courted by the EU to prop up the euro.

When Herman Van Rompuy, the European Council president, meets President Hu Jintao he is unlikely to join the United States in accusing China of currency manipulation. Instead, Van Rompuy will probably be more inclined to try and tap into China's vast foreign reserves and seek to persuade Chinese leaders to buy more euro bonds. Already China has nearly one-third of its total foreign currency reserves in euros, and the ongoing financial deterioration in Europe has opened doors for China to expand its investment in Southern and Central Europe.

China has informally suggested purchasing more European sovereign bonds, yet so far has refrained from giving a firm and concrete commitment. Therefore, Van Rompuy will be keen to transform China's "words" into actions, and at the same time convince China of the safety of its investment.

However, China's growing presence in Europe is not always welcomed with open arms. It has been regarded by some EU members as responsible for assets stripping and the buying of resources. But it is worth noting that despite the recent surge of inward investment from China into the EU, which reached 900 million euros ($1.26 billion) in 2010, it still amounts to only 1.7 percent of the total foreign direct investment in the 27-member bloc.

Another daunting task for Van Rompuy will be persuading the Chinese leaders to further open China's domestic market to products that are "made in Europe". The latest figures from Eurostat show that the EU has a 168.6 billion euro trade deficit with China, despite growing exports to China that amount to just over 113 billion euros. The economic rebound of some European countries can be partly credited on exports to China. Germany for instance has been leading the race to explore the Chinese market. By the end of 2010, China had overtaken the US as the leading export destination for German products. German chemical firms and car manufacturers, such as BASF and BMW, are experiencing significant financial gains through their Chinese operations.

While Germany's success cannot be simply duplicated by the other 26 EU members due to their different industrial bases, Van Rompuy will likely express frustration about the lack of effective access to the Chinese market expressed by small and medium-sized enterprises in Europe and those companies from less economically advantaged parts of the EU. European leaders should prioritize their negotiation tactics and focus on the pragmatic issues such as business licensing and legal transparency.

While President Hu Jintao will undoubtedly reiterate Beijing's support for the eurozone, he will also wish to ensure that the EU is not over-reliant on China's foreign reserves. While China's contributions so far are widely acknowledged in Europe, President Hu clearly knows that China alone cannot be Europe's savior, and is certainly not perceived as one by the majority of Europeans. After all, China has plenty of domestic economic challenges of its own to solve, including the unhealthy loans of Chinese banks and bad debts held by local governments. Chinese leaders will thus evaluate the European rescue plan carefully before making any firm offers. To make sure of their return on investment, China will aim at expanding infrastructure and transportation projects on the European continent as part of their financial commitment.

Already China has been successful in securing a number of large-scale projects in Southern and Eastern Europe, for instance, China's Chinese shipping giant Cosco has financed 3.6 billion euro project in the port of Piraeus in Greece. But the Chinese leadership will express its concerns about the growing protectionism in Europe.

Last but not least, the success of the Cannes meeting and the forthcoming EU-China Summit will depend on whether the EU will be able to follow through on the impressive commitments made in Brussels recently. After calling President Hu Jintao to prepare for the G20 Summit, President Sarkozy announced that China and Europe will work together to ensure the G20 'makes a decisive contribution to global growth and stability'. An indecisive voice from the European side will definitely not be helpful at the summit and will be perceived as a weak response in the eyes of Chinese leaders.

The fragility of the eurozone economy and seemingly unaffected Chinese growth has brought the Europe and China closer, but we are observing an inevitable shift in the center of gravity. Though difficult challenges remain, there is still scope for reaching a meaningful deal at the G20 meeting and the postponed EU-China Summit. To achieve this, the EU and China must demonstrate mutual trust, leadership, vision and pragmatism in the meetings. After all, while the EU and China may share different interests and motivation in solving the eurozone debt crisis, it is clear neither of them wishes to see a further deterioration of the market, and they need each other to rejuvenate the global economy and restore confidence in the financial markets.

The author is a professor at ESSCA School of Management, Angers, France.

(China Daily 11/01/2011 page8)