Chinese consumers aid European economy

Chinese consumers can help European economies with recovery.

The diplomatic maneuvers played out during Chinese President Hu Jintao's state visit to France in November underlines the extent to which China is expected to drive the European recovery in 2011.

French President Nicolas Sarkozy ignored protocol to travel to Orly airport to greet his counterpart and presided over a 10-billion euro deal that will send 102 Airbus planes to China.

This is a far cry from the spring of 2008, when Sarkozy considered boycotting the opening ceremony of the 2008 Beijing Olympics, leading to a strain in China-France relations. Since then, the global financial crisis and shaky convalescence of the EU have injected a serious dose of realism into European countries' dealings with China. For the moment, it is all about business.

The biggest contribution China can make to the European recovery next year is through a significant rise in import demand from both its consumers and producers. The signs are that the Chinese consumer is up to the task.

China is the second-largest consumer of luxury goods in the world and is set to surpass Japan within the next five years. A stroll past the shop windows of the Champs-Elysees in Paris reveals lines of Chinese shoppers often frustrated by strict limits on the number of Louis Vuitton handbags they can buy.

Continued near double-digit growth in China equates to an increase in demand for high-end European imports. Automobile brands like Mercedes and BMW, designer labels, perfume, cosmetics and Western medicine all feature at the top of the nation's collective shopping list, an indicator of the inequality that divides Chinese society.

Only the high-income group in China can afford such luxuries but, as Europe is finding out, you only need a small percentage of Chinese consumers to be rich to create a vast market.

EU countries like Germany are ahead of the game when it comes to meeting China's needs. It has successfully diversified its economy and is able to provide China with high-tech exports that address China's environmental concerns.

Volkswagen AG recently announced plans to sell 10,000 electric cars in China from 2014 to 2018. Siemens is set to supply a Chinese city with electric-vehicle charging infrastructure. Germany and France continue to play key roles in the formation of a high-speed rail network that will bring Chinese cities closer together.

In contrast, many European countries have not focused enough on the Chinese market in recent years. European companies need to learn what China needs, urgently and efficiently.

Countries like the United Kingdom are far behind Germany in manufacturing high-tech products for export. But the UK is attempting to tap the potential of the Chinese market for clean-energy technology. If the Chinese government decides to embrace carbon capture and storage technology - a joint project between the EU and China called the Near Zero Emissions Coal Project identified Northeast China as an ideal location to trial the technology - then this will provide a huge long-term boost to the UK and other European economies.

Chinese demand for overseas higher education will continue to swell in 2011 and Europe has many advantages on this score. British universities will be welcoming Chinese students with open arms as they bid to offset the spending cuts on teaching imposed by the new coalition government.

China is already the biggest provider of overseas students to the UK, providing its universities with 5 billion pounds (5.9 billion euros) in income. As the Chinese become more prosperous - and as the yuan gently appreciates - overseas education will become more affordable and an increasingly attractive alternative to the fierce competition for places in China's leading institutions.

The greatest non-material boost China - and indeed the rest of Asia - can give Europe is simple: Confidence. Doubt and concerns over sovereign debt have swept through Europe in a series of aftershocks that followed the onset of the financial crisis. Confidence has been lacking among governments, investors and consumers.

But if part of the world - at this point of time Asia - displays prosperity and dynamism, then the rest of the global economy can regain its momentum.

The strong growth in the likes of China and India has provided a much needed fillip to the PIIGS - Portugal, Italy, Ireland, Greece and Spain - and this will be crucial in 2011. China has already agreed to resume its purchases of Greek government bonds as soon as Greece has proved its stability.

Of course, the perennial rumblings over the valuation of the yuan will persist over the following year. The European Central Bank recently argued that the China's exchange rate policy was a threat to the European recovery.

However, the EU finds itself in a weak negotiating position and China has already made its intention to boost imports from Europe clear. Besides, trade surpluses and deficits vary wildly from state to state within the EU. China is currently running a substantial trade deficit with Germany.

The yuan has appreciated 3.5 percent over the last 10 months and the effective appreciation, if inflation is taken into account, is 5 percent. China will continue to allow its currency to rise in value but gradually, and on its own terms. EU member states will find it very hard to dispute this policy if China's imports from Europe, as expected, increase in 2011.

But China-EU relations in 2011 will not solely be limited to economic ties. Globalization is not just about economics, but creating common understanding and mutually beneficial agreements. Rather, the closer they are, the more leverage Europe has to institute change.

The similarities between present-day European and Chinese views on international politics are often underestimated. European countries for the most part share Chinese characteristics of harmony and pragmatism, while this proximity of ideas is not so evident in China-US relations.

The year 2011 will be remembered as a year of heightened pragmatism in China-EU relations. And this will play a central role in setting Europe firmly back on the path to economic recovery.

The author is head of the School of Contemporary Chinese Studies at the University of Nottingham and director of the Globalisation and Economic Policy Centre's China program.