The Final Call

China to bail out broke Europe?

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For European politicians and economic leaders, Christmas appeared to arrive early this year. In the role of Santa Claus is Wen Jiabao, Premier of the People's Republic of China, bearing possibilities of multi-billion-dollar trade agreements and deals.

Europe is China's largest trade partner, so it was not for nothing that Premier Wen returned to the continent in June to visit Hungary, Germany and Britain only months after he visited France, Portugal and Spain.

A policy brief by the think tank European Council on Foreign Relations analyzes the challenges accompanying the Chinese “Scramble for Europe.”

“A kind of ‘scramble for Europe' is now taking place as China purchases European government debt, invests in European companies and exploits Europe's open market for public procurement,” said the council brief.

When Premier Wen met recently with Hungary's Prime Minister Viktor Orbán, 12 economic agreements were signed. According to Mr. Orbán, Chinese and Hungarian companies now have agreements on new investments in the chemical industry amounting to $1 billion.

The bilateral trade volume should more than double between now and 2015, to reach an annual total of $20 billion.

Mr. Wen said China wants Hungary to be its new “logistics platform” in Central Europe, while Mr. Orbán called China a “strategic partner” and welcomed the bonds deal as “historic aid” from China.

The next stop on the Chinese Euro-tour was the UK, where both countries also agreed on new trade deals worth about $2.2 billion. British Prime Minister David Cameron announced the UK wants to double trade with China to reach $100 billion by 2015.

Later that same day Mr. Wen, accompanied by 13 other ministers, arrived in Germany. By the end of the visit, Germany and China concluded trade deals worth more than $15 billion and cooperative agreements on research, agriculture and renewable energies.

Germany's Federal Foreign Minister Guido Westerwelle said trade with China offers an “enormous chance for the German economy.”

A continent for sale?

China is buying up Europe. According to the policy brief, the process involves three steps. The first is the so-called “bond diplomacy,” where China purchases bonds from financially unstable European countries like Spain and Greece.

The next step is direct investment in European countries. According to the council, five years ago, China's total investment in Europe was about $1.3 billion. From October 2010 to March 2011, Chinese firms and banks have committed $64 billion—more than half of the total investment and trade facilitation flows in Europe since early 2008.

The third and last step is Europe's procedure of public procurement, where European taxpayers subsidize Chinese companies entering into contracts in Europe to build roads, railroads and public buildings funded by the European Union.

In an example of “bond diplomacy.” China bought Greek bonds “as a quid pro quo for a 35-year lease on Piraeus harbor,” the report said, as well as a deal to finance the purchase of Chinese ships in June 2010.

Despite enthusiastic responses from European leaders and evidence of the positive opportunities China's involvement in European finances offers countries, it is very difficult to say how much China actually supports Europe in its debt crisis.

After China's announcement that it would buy Spanish bonds one month later, market confidence in Spain completely turned around, although afterwards it was estimated that China eventually bought only around $725 million worth.

China also signaled to other countries—Portugal, Ireland, and again to Spain—that it would buy bonds in 2011. During his recent visit to Germany, UK and Hungary, Mr. Wen underscored that stabilizing the Euro zone was “vitally important” for China.

While Chinese companies can invest almost without limit in Europe, China's capital market is still closed in the sectors the government considers important for its economic development strategy.