What China wants in exchange for spending big in Europe

Chinese Vice Prime Minister Li Keqiang is touring Europe, offering political support, cash, and investment at a critical juncture for the weakened European Union. However, there appear to be strings attached.

While Mr. Li's visit saw the formalization of 16 business agreements with Spain worth $7.5 billion, mostly in the private industry, he has indicated that China is also looking for better trade ties with its new European business partners.

“We hope that the EU will relax restrictions on high-tech exports to China … and develop trade relations that are balanced and sustainable," Li wrote in an Op-Ed titled “China will be more open to the world” that was published Wednesday in the German daily Sueddeutsche Zeitung.

The message is clear, say analysts. Armed with foreign reserves of $2.7 trillion, China is offering its financial muscle to rescue a struggling Europe in exchange for technology and open borders.

“China has become the world’s fireman from a financial point of view. It operates the same way everywhere, and high tech is to Europe what commodities are to Africa,” says José Ignacio Torreblanca, senior fellow of the European Council on Foreign Relations. “And Europe doesn’t have a choice but to accept this.”

China’s good will is tied to political concessions, although not explicitly.

Speaking to business leaders in Madrid, Li said China would “stand by Spain is happiness and sad times,” that it would continue buying sovereign bonds, (depending on market conditions) and that it wanted deeper economic ties.

From Germany, China wants more openness for its expanding companies and more technological exchanges. From Europe as a whole, to which Li offered a new era in relations, China wants improved economic ties.

“It’s understandable that China has linked its support to progress in closer relation with the EU, lifting of restrictions, and improved potential to exchange high tech. That is still an issue for China and there are some expectations that further progress can be made there as a quid pro quo,” says Vanessa Rossi, senior research fellow on international economics and an expert on Chinese global economic expansion in London-based Chatham House.

Some are wary of the latest overture from China, which many European countries still don't trust. The EU’s top diplomat, Catherine Ashton, has tried to bridge internal difference. Consensus is still distant, however, especially in regards to an embargo on selling arms to China that Spain and France have lobbied to relax. Washington still strongly opposes relaxing an arms embargo and is also concerned about technological transfers.

For China, however, the juncture is ideal. Struggling European countries that have dragged down the euro and rattled markets are desperate for cash in the form of direct foreign investment. Not surprisingly, Greece, Portugal, and Spain have sought closer relations to Beijing in the aftermath of the economic crisis, and Chinese investment in those countries has soared.

“But it doesn’t make much sense for countries like Spain to embark on building closer bilateral relations at the expense of an EU-wide policy,” says Mr. Torreblanca.

Not everyone agrees with this sentiment. “We should be very happy to have Chinese investment and not look suspiciously at it, as it happened two years ago. That type of concern has disappeared,” says Ms. Rossi.

Regardless of the debate, countries like Spain are happy to respond to Chinese overtures, especially when they translate into billions in cash. In addition to four bilateral economic and political agreements, deals and contracts were signed in the financial, energy, infrastructure, tourism, service, and food sectors.

Most of the investment comes from a $7.1 billion deal between Chinese’s energy giant Sinopec and Spain’s Repsol for a 40 percent stake in the latter’s Brazil oil production operations.

Mr. Li also endorsed Spain’s plan to attract 300,000 Chinese tourists a year by 2012 and 1 million by 2020 – up from 100,000 tourists a year. A Spanish company will install air traffic control system in two Chinese region and another will sell two power generators. A Chinese company bought a Spanish boiler industry, several wine and olive oil exporting deals were signed, and there was even room to include a deal to export Spain’s famed cured Ibérico ham.

In Spain, a country with an unemployment rate of 20 percent, China’s bond-buying and deal-signing worth $7.5 billion translate into lower borrowing costs and more jobs for Spaniards.