Chairman of the Sany Group Liang Wengen (left) and Karl Schlecht (second left), founder of German concrete pump manufacturer Putzmeister, at a press conference at Sany headquarters in Changsha, central China's Hunan Province, on January 31. Sany is expected to close the acquisition deal with Putzmeister in the first quarter this year [Beijing Reveiw/Long Hongtao]
Due to the magnitude of the euro-zone economic crisis, the main focus of China-EU relations in recent months has narrowed down to whether China will rescue the euro zone by buying euro debt with its sizeable foreign reserves. This is yet another indicator of how China-EU relations lack long-term strategic focus and are often subjected to the ebb and flow of current events.
The bailout plan from the euro-zone summit at the end of 2011 increased the European Financial Stability Fund (EFSF) to over 1 trillion euros ($1.3 trillion) and launched Special Purpose Investment Vehicles (SPVs), which issue bonds that are guaranteed by the EFSF. The funds raised by SPVs are then used to buy bonds in distressed European countries to maintain their prices. European leaders have expressed on several occasions their hope that China would purchase these SPV bonds.
While China has pledged confidence in the euro-zone recovery, it has refrained from making firm commitments to purchasing more euro bonds, and it is not hard to see why. In the last few months, Standard & Poor's and Fitch have downgraded the credit ratings of several euro-zone countries, including France, Italy and Spain. More startling is the inability of euro-zone leaders to unite behind a common approach to tackle the crisis. Japan, one of the largest holders of euro bonds, which bought more than 20 percent of bonds sold by the euro zone in January last year, purchased another 1.1 billion euros ($1.5 billion) of 10-year EFSF bonds issued in June, and purchased 10 percent of the bonds sold by EFSF at the end of 2011. Japan has promised to buy more bonds only on the condition that the EU takes more concrete measures to address the crisis.
While China appears to be apprehensive of the risky euro bonds, it is stepping up on investments in Europe. According to the Chinese Ministry of Commerce, China's investment in the EU increased by 94.1 percent year on year to $4.28 billion, compared with a growth of 1.8 percent in China's total outbound direct investment in 2011.
China's state-owned shipping company COSCO now holds a 35-year lease for the Port of Piraeus, the largest port in Greece. A China Investment Corp. subsidiary acquired 8.7 percent of UK company Thames Water, and Chinese company Sany Group announced that it will buy 90 percent of Putzmeister, Germany's largest concrete pump manufacturer. These are among the latest high-profile investment deals by Chinese firms that have received much media attention.
Despite Premier Wen Jiabao's assurance that China does not intend to "buy out Europe" and the fact that China has yet to link the purchase of euro bonds to outstanding issues like market economy status and the arms embargo, there continues to be speculation by many analysts that China is likely to do so. There remain reservations on Chinese investment in a debt-ridden Europe.
Two paradigm shifts are necessary in order for China and the EU to work toward a fruitful economic relationship. First, the EU needs to embrace the long-term trend of China's transformation from an investment destination to both a source of investment and an investment destination. Second, the EU needs to overcome the stigma attached to Chinese investment. The laws of economics dictate that investors seek profit and it would be far-fetched to expect Chinese investment, or investment from any country for that matter, to be altruistic. Opportunistic purchase of distressed assets by corporations and funds were also observed in the Asian financial crisis in 1997-98 and the aftermath of the subprime crisis in the United States.