China's help for Europe has a political price tag

BEIJING, Sept 15 Thu Sep 15, 2011 12:57pm EDT

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BEIJING, Sept 15 (Reuters) - China's push for the troubled European Union to recognize it as a market economy is more about political status than economic concession, but experts doubt Beijing can leverage purchases of euro zone debt to achieve it.

As Chinese premier Wen Jiabao presented it at a conference on Wednesday, the trade-off was clear enough: Europe can get a bigger slice of China's $3.2 trillion in foreign exchange reserves in return for treating China as a market economy.

But analysts say China has to keep buying euro bonds anyway and the 27-member European Union is unlikely to bow to Beijing's demand, even if it is more about symbolism than substance.

"We cannot say that China will buy European bonds only if it's given market economy status. China will invest if it thinks it is necessary," said Ding Zhijie, a professor at the University of International Business and Economics.

The drive for market economy status is not new. Since it joined the World Trade Organisation in 2001, Beijing has regularly pressed for such recognition, which it will receive automatically in 2016.

Without it, China is more vulnerable to EU trade actions.

Beijing holds down the value of its currency, keeping many prices artificially low. Moreover, producers in Europe and the United States often complain that Chinese exporters sell their goods at below cost to squeeze western rivals out of the market.

In such anti-dumping case, Europe can point to the input prices of other countries and compare them to Chinese export prices to prove the country's goods are underpriced. If China were a recognised market economy, the complaint would need to be based on a comparison of China's own input and export prices.

Granting Wen's wish won't be easy.

It's hard to argue that China really is a market economy. The world's second-biggest economy still sees strong state intervention, with whole sectors dominated by government-owned businesses and state credit allocation.

"Since China dictates the speed with which market-oriented rules and laws are effectively enforced centrally and locally, the timing of the conclusion on its market economy status is largely in China's hands," EU trade spokesman John Clancy told Reuters in an emailed statement.

That speed has been slowing in recent years, with EU and Chinese diplomats suggesting Beijing sees less interest in making concessions to achieve a status that it will gain automatically in just five years.

Since anti-dumping duties cover less than one percent of Chinese exports to Europe, the decision is largely political rather than economic.

But even then, it's not clear that Europe's leaders, who are struggling to devise a common approach to the debt crisis, can agree on granting China market economy status.

"Even if Europe wanted to get it done, the usual interests will operate in the usual way," said Chin Leng Lim, a law professor at the University of Hong Kong, adding that the European leaders seeking China's money may not be the same ones who object most strongly to easing trade rules on China.

NO STRONG PRESSURE

The push for market economy status is one of a regular list of Chinese demands that come up prior to big meetings with the Europeans, alongside lifting an arms embargo the EU had applied since the crushing of the Tiananmen Square pro-democracy movement in 1989.

The next EU-China summit is coming up in October.

Linkage between debt purchases and trade concessions is new, however, and has been picked up by Chinese state media.

"Since last year, China has purchased bonds of several European countries, trying to save nations deep in a debt crisis. By contrast, it is a pity that the EU side shows no sincerity on the issue of recognising China's market economy status," state-run Xinhua said in a commentary on Wednesday.

Not everyone is convinced that China will press hard for the concession, however.

"I don't think there is such a link (between buying European bonds and gaining market economy status)," said Ding of the University of International Business and Economics.

A spokeswoman for the EU executive said "there was no link whatsoever made" in a recent conversation between EU Commission President Jose Manuel Barroso and Wen.

EU leaders such as Germany's Angela Merkel and France's Nicolas Sarkozy may have made promises to Beijing in individual meetings, EU diplomats say, but there is at present no clear European consensus to upgrade China.

China is likely to continue investing in Europe for two key reasons. It has no interest in seeing the debt crisis in the EU -- its largest trading partner -- spread and worsen.

Besides, Beijing also aims to diversify its reserves. Its huge foreign exchange pile continues to swell. Reluctant to park it all in U.S. Treasuries, especially after last month's historic U.S. sovereign credit rating downgrade, Beijing will inevitably continue to look at European assets.

"China is widening the channel for its FX reserve investments - even U.S. debt is not risk free," said Ding of the University of International Business and Economics.

Indeed, Chinese leaders may be realistic about the prospects of winning market economy status soon.

"I don't believe that China itself holds high hopes of solving this issue. This problem is hard to solve, and China grasps that," said Song Xinning a professor of European Integration Studies at Renmin University in Beijing.

"Everyone understands that the economic significance of winning full market economy status would not be that big," added Song. "It's more about the political symbolism. It says, 'You don't trust me'. The arms embargo is the same."

In fact, the domestic audience is one of the main considerations, said Tu Xinquan, of the China Institute of WTO Studies at the University of International Business and Economics in Beijing.

"The Chinese government wants a kind of goodwill gesture from Europe," he added. "Since the status will be given anyway in a few years, it is not a hard choice for Europe. And for the Chinese government, it at least got something in return from Europe to appease those who criticize the Chinese government." (Additional reporting by Chris Buckley and Kevin Yao, and Juliane von Reppert-Bismarck in Brussels; Editing by Paul Taylor)

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