Monday, October 31, 2011

Europe's wishful thinking gets a China treatment

People's Republic of China President, Hu Jinta...
Hu Jintao: no charity
No doubt Chinese companies, and China's government, are trying to go global. But they will take along a Chinese style of negotiating, that is still coming as a surprise to many of the Europeans. For those familiar with China, what I will describe here is no surprise, but obvious the rest of the world still has to get used to the Chinese style of negotiating. Especially Europe is vulnerable, as it loves to fall in its own trap of wishful thinking. But when it fails, it's only Europe to blame.

Three incidents that took place last week made me write this little story. First, there was an enthusiastic mail from an Irish group on doing business in China, who noted that telecom giant Huawei announced investments for their country. Then there was the end game of the Saab adventure. And of course China came in the picture as the savior of Europe with their supposedly unlimited foreign currency reserves from their trade deficit.

First short the three stories.

Huawei already caught my attention earlier this year when the Dutch government announced after a China mission that Huawei would expand its Europe headquarters in Amsterdam from 150 to 300 people. A nice success for an otherwise struggling government in a struggling Europe. Then, later I saw also announcements that Huawei would expand in Ireland, Belgium and Romania. I might have missed some other Huawei promises. At Google+ we started to make the first jokes about European governments and their wishful thinking. Whoever might be losing, it is in this case not Huawei. Is Huawei cheating? I do not think so. Its different European governments who try to score points on the short term for their constituency back home, while there is actually little ground for it.

Then there was the closing act of Saab. For months the technically bankrupt car manufacturer was waiting for millions from China, from its new partners, in exchange for a part of the shares. But those partners were supposedly waiting for the last governmental hurdles to participate in Saab. Despite unsubstantiated positive sounds about that needed permission from the central government, no money came to the rescue of the Swedish-Dutch company. Only when it was too late for Saab, the Chinese partners agreed to purchase the full 100 percent of Saab. Again, it was not the Chinese partner of Saab who is losing this waiting game. (Nobody asked whether the Chinese companies have permission to spend the remaining 100 million for 100 percent of Saab' shares, do there might be yet another chapter.)

Again, a lot of wishful thinking at the last European summit. First, Europeans expect China to have a lot of cash at hand from its trade deficit, and second, they expect that the country would be eager to spend this on European bonds to guarantee China's export industry keeps on humming in the future.

Now, president Hu Jintao is not setting like Uncle Scrooge on a pile of cash. China has apart from foreign reserves, also a huge domestic debt of about the same size as its foreign exchange, so some prudence would be in place in spending those funds. In the past China has put up a lot of its spare money in US bonds and it might not be too happy about its current value. It does not necessarily mean it is now going to throw its foreign currency into another bottomless hole.

Contrary to many Western countries, China owes its debts to its own citizens, companies and local governments. That means, it won't collapse right away when Western banks do: it has only limited financial exposure to the Western economy. The current government is on its way out, but the upcoming government still has to govern for another eight years and might be a bit more careful.

Then, look at Europe. One memorable night, last week, the European leaders force banks to accept 'voluntarily' a cut of 50 percent on their liabilities to Greece. And during the same meeting they give a bit more pocket money to the European rescue fund EFSF so it can guarantee 20 percent of the value of the bonds of countries that are on the verge of default. Now is that a nice deal when you buy guarantee bonds: you get a guarantee you will get 20 percent of your money back. I still remember the days when bonds were safe investments with a low interest, with a guarantee you would get 100 percent back. No wonder China's financial authorities did not react really enthusiastic.

In all three cases we see damaging cases of wishful thinking. Dealing with Chinese companies and governments is certainly possible, but keeping an eye on reality and getting some decent psychologists in your negotiating team might be a good idea. Europeans are their own worst enemies when dealing with the Chinese.


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