China lends a hand as Spain climbs from economic doldrums

Chinese Vice Premier Li Keqiang arrived in Spain today for a visit that could add an economic boost as the country sees unemployment fall and appears on target to reduce its deficit.

Spanish officials Tuesday claimed the worst of the country's economic crisis could be over as China’s vice premier arrived for an official visit that has raised expectations of big business deals and more support for Spain’s treasury.

Spain has recently become the focus of investor concern over whether Europe's fourth largest economy could be headed for a bailout, which would frustrate the global economic recovery.

But a flurry of recent data suggests that Spain’s severe austerity policies are working, albeit with much pain remaining ahead.

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Prime Minister José Luis Rodríguez Zapatero said Tuesday that Spain would not only meet its 2010 target of reducing its deficit to 9.3 percent of its gross domestic product (GDP) from 11.2 percent in 2009, but that the figure would be in fact “a little better” than expected. He also restated the country would meet the 2011 target cutting the deficit to 6 percent of the GDP.

Unemployment in December, which usually increases due to seasonal labor trends, also fell slightly. In the presentation of 2010 labor statistics, Social Security Minister Octavio Granado claimed Tuesday that 2010 “was the last year of the crisis” in terms of employment, despite the overall rate increasing slightly to just fewer than 20 percent. Some 175,000 jobs were shed last year, which is nonetheless a fraction of the million lost in 2008 and the nearly 800,000 in 2009.

The three-day visit of China’s Vice Premier Li Keqiang, who will meet Mr. Zapatero and King Juan Carlos Wednesday, has further buoyed government optimism. Mr. Li and a business delegation of more than 100 people travels next to Germany and the UK.

Li, who is considered next in line to replace Premier Wen Jiabao, Monday wrote in an Op-Ed column in El País, Spain’s main daily, that China has “confidence in the European financial market, and, in particular, the Spanish financial market, which has meant the purchase of its public debt, something which we will continue to do in the future.”

“China supports the measures taken by Spain in the firm belief that it will obtain a complete economic recovery,” Li said. “The Chinese side is willing to explore with its Spanish counterpart any positive and effective cooperation possibilities.”

China already owns about 10 percent of Spanish debt. Spain could need to borrow around 200 billion euros ($268 billion) in 2011, according to Moody’s. Depending on the Chinese appetite for bonds, bullish pressure on the cost of borrowing could be subdued.

But the real rescue would not be in debt, say analysts.

“It’s not a Chinese bailout. They are not mopping up the debt problem, but giving international psychological support,” says Vanessa Rossi, senior research fellow on international economics and an expert on Chinese global economic expansion in London-based Chatham House.

The most immediate economic impact for Spain could come from the cash anticipated from Chinese investment and business deals rather than China purchasing Spanish bonds.

“China is keen to look for foreign investment projects, hard investments,” says Ms. Rossi. “This has to be something to take further, with the warming of relations and potential for larger scale project. Perhaps some property markets investments. Any type of approach would be useful.”

Li signaled in the editorial that China is targeting finance, telecommunication, information technology, energy, tourism, and transport sectors, while the Spanish foreign ministry said an “important number” of agreements would be signed. Li will meet Spain’s Finance Minister Elena Salgado Tuesday.

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