Old Europe, New China

In the case of Europe, the Xi Jinping and Li Keqiang era shall mean more extensive ties – if the new opportunities are seized in an appropriate way.

Conservative leaders, liberal reforms

In the next few months, Xi and Li will seek to sustain China’s legacy of growth and quest for equity, to emphasise continuity amidst change.

In March, Li will have his mandate. And by mid-2013, Xi is likely to develop his signature policy platform. At the broadest level, the Xi-Li policies are likely to focus on structural reforms economically, inner-party democratisation politically, an intensified struggle against corruption internally, and China's rising global clout internationally.

The times favor tough leaders who can execute in adverse circumstances.

After the insulation of Bo Xilai in Chongqing, Zhang Dejiang took over his position in the megacity. The new lineup also favored Liu Yunshan the director of the Party’s propaganda since 2002. With his political savvy, Yu Zhengsheng, the party leader of Shanghai, is among those who welcome greater scrutiny of public officials. Until recently, Vice-Premier Wang Qishan, the former mayor of Beijing was in charge of the economic track of the US-China Strategic and Economic Dialogue (S&ED). As the disciplinary chief, he will take the struggle against corruption to a new level. The new lineup also includes Tianjin’s “talk less, do more” party chief Zhang Gaoli.

Nearly half of the new Central Committee are newcomers. As big boomers march into the leadership hierarchies, Chinese governance will grow more professional, more diversified and more international. But what does this all mean from the European perspective?

Rise of two-way direct investment flows

For a year now, Brussels and euro economies have been gazing toward Beijing, hoping for a new savior. In the past, foreign direct investment (FDI) went primarily into China. Now Chinese outward FDI has taken off, first in Asia and now worldwide.

In principle, the Eurozone can provide China advanced knowledge, high-tech and innovation capabilities, and strategic assets, while China can provide the Eurozone what it needs the most: jobs, tax revenues and investment.

In fall 2011, Eurozone economies were still dreaming of China’s massive purchases in the bond market. Sure, China is gradually diversifying its dollar-denominated assets, but less than a fourth of China’s forex reserves (an estimated €480-600 bn) were held in euro assets, presumably in highly rated sovereign instruments like German Bunds. Only a fraction was liquid.

Another obstacle was that 50% of the €6.5 trillion stock of the Eurozone government debt issued was showing signs of heightened credit risk.

In Beijing, the Eurozone is seen as China’s most important trading partner, which takes up 20% of China’s total exports, and China’s most vital technology partner. The primary Chinese interest is in FDI in Europe; hard assets rather than financial paper.

As the Eurozone’s economic condition has deteriorated, Chinese FDI in the region has climbed rapidly. Annual FDI flows to Europe tripled from €2.3 billion in 2009 and 2010 to almost €7.4 billion in 2011. Geographically, Chinese FDI is focused primarily on Germany, the UK, and France. Sectorally, there is breadth and momentum across industries.

However, the absolute FDI values remain very small compared to Europe’s total inward FDI and to China’s total outward FDI stock.

European-Chinese relations in multipolar world

As China’s economic integration into the world economy will intensify, its role in the European economy should deepen as well, as reflected by rising FDI flows, and the rapidly-expanding role of the renminbi with London as a major offshore center.

While Chinese-European cooperation has intensified in the past year or two, even more could have happened.

From the perspective of Beijing and other large emerging economies, the European economies remain over-represented in the international multilateral organisations, such as the World Bank, the International Monetary Fund, and the World Trade Organisation.

A genuine support for institutional reforms in these organisations would make Europe’s democracy quest more credible in Beijing – as it would in India, Brazil, and other large emerging economies.

Moreover, a decision to recognise China as a market-oriented economy ahead of the WTO’s schedule of 2016 would provide another push for bilateral trade and investment flows.

The Xi-Li goals support deeper EU cooperation

In the coming decade, China shall seek to double its 2010 GDP and per capita income for both urban and rural residents.

The medium-term objective can be accomplished only through structural reforms and a shift from investment-driven growth to consumption. That, in turn, is predicated on expanding social security and health services, a shift from cost efficiencies toward innovation-driven competitiveness, as well as sustainable development. It will also require increasing local governance and integration of China into the world economy.

All of these shifts provide extraordinary opportunities for European-Chinese trade and investment, social exchange, joint ventures and strategic partnerships, cleantech collaboration, not to speak of cooperation in global governance.

In the Xi-Li era, these opportunities will be increasingly partnerships between two equals. And that requires reforms on both sides.

The writer is Research Director of International Business at India China and America Institute (USA) and Visiting Fellow at Shanghai Institutes for International Studies (China) and the EU Center (Singapore).