COMMENTARY

Summer 2012

by Chun Ding

John Farnell’s is a well-rounded analysis of the EU-China economic relationship, identifying as it does widespread misconceptions of China within Europe. He rightly argues that the EU and China should re-examine some of the assumptions that underlie their relationship. Farnell challenges six “misconceptions” relating to China’s future development and to its trading and investment relations with the EU.

The fact that many Westerners regard China’s rise as a threat is clear evidence that these misconceptions exist. Europe’s hefty trade imbalance with China is changing now that China is pursuing a growth pattern that is shifting from being investment-led to one led by domestic demand. With consumption rising and savings falling, China’s trade surplus will naturally decrease. Rebalancing the EU-China trading relationship is going to require an effort from both sides. If Europe were to lift its ban on exports of high-tech products to China, and lift too the arms export embargo, that would definitely be conducive to a rebalancing of relations.

Secondly, Farnell correctly points out that Chinese direct investment in the EU is far too marginal to be dangerous. China’s FDI in Europe accounted for only 5% of its total stock of outward investment at the end of 2010. But the importance to Europe of these investments is far from insignificant, and it will grow, bringing with it welcome job creation. At the beginning of 2011, a total of 37,700 European jobs had been created by Chinese investment, accounting for 7% of all the jobs created by foreign investment in Europe. It is also well worth noting that Chinese capital has been purchasing bonds issued by the European Financial Stability Fund as well as the sovereign bonds of member states like Spain and Greece. These purchases have greatly relieved liquidity shortages in the European sovereign markets.

Farnell is right again when he says that China and the EU should co-operate to overcome the enormous challenges that face their economies. The targets proposed by the Chinese central government’s “12th Five Year Plan” match quite well with the aims of EU 2020 strategy. The Chinese five-year plan aims at transition away from the intensive growth model characterised by high energy dependence to one that will be more environmentally friendly. Future growth in China will rely much more on productivity enhancement and industrial added value. By much the same token, the EU’s 2020 Strategy seeks "smart, sustainable, inclusive growth" through the greater co-ordination of national and European policies.

China and Europe need to work together to realise their separate goals. Mergers and acquisitions between Chinese and European companies should be evaluated from a business rather than a political perspective. China’s immense market potential will continue to provide opportunities for European companies, and business in China has much to learn from the high-tech skills and expertise of its European counterparts.

John Farnell argues that China’s rapid growth is probably unsustainable because its supply of cheap labour and of available land is drying up. China’s cost advantages admittedly play an important role in its economic growth, but Farnell fails to recognise that urbanisation will help China avoid being caught in the trap of a middle-income country. Its urbanisation rate is at around 50%, much lower than in developed countries, and for the past decade the process of urbanisation has been growing at about 1.3% annually, which will definitely stimulate domestic demand and push the economy to a higher level. In Beijing, the central government now attaches high importance to transition processes like urbanisation and shifts in social structures that will help China to overcome its problem of shrinking demographic advantage in the years ahead.

Chun Ding is director of the Centre for European Studies at Fudan University.
chunding@fudan.edu.cn