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Ailing Europe looking for 'Chinese medicine'

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The Chinese have never seen so many European leaders beating their path to Beijing.

This year, France opened up the European search for stronger economic growth by a three-day visit to China in late January of its Prime Minister Manuel Valls. He was accompanied by heads of top French companies.

The Chinese Prime Minister reciprocated with a three-day visit to France last July, concluding more than 20 billion euro deals covering aircraft orders, energy and holiday villages.

Mr. Valls took that opportunity to promise that Chinese businesses would get in France "the best welcome in all of Europe."

These invitations will be high on the agenda of the French President Francois Hollande's visit to Beijing today and tomorrow (November 2 and 3), even though the French media are emphasizing the environmental issues tabled for discussion at the United Nations Conference on Climate Change in Paris on November 30-December 11, 2015.

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Not to be outdone, Germany dispatched to China in mid-July its Vice-Chancellor and Economics Minister Sigmar Gabriel with a large group of business leaders.

That paved the way last week for a visit from his boss – the eighth since Chancellor Merkel took power in 2005 – culminating in 13 economic and industrial agreements and a $17 billion order for 130 Airbus planes. The Sino-German bilateral trade came in at $177.8 billion last year and accounted for nearly one-third of the China-EU trade transactions.

A "Eurasian honeymoon?"

If you want to bet on this, please note that these wide-ranging cooperation agreements are bringing the two countries – a "dream team" of the Chinese prime minister -- closer in the areas of finance, urbanization projects, agriculture, electric vehicles and environmental protection.

The German chancellor emphasized that her country was particularly interested to work with China in industry and finance, to participate in China's huge Belt and Road Initiative and in AIIB (Asian Infrastructure Investment Bank) infrastructure projects.

The Dutch King Wilhelm-Alexander also visited China last week, with a delegation of 250 business leaders representing 150 companies. He witnessed, with the Chinese president, the signing of 15 agreements in areas of trade, finance, aviation and technology.

The Chinese were apparently particularly interested in Dutch advances in agriculture, shipbuilding and in the operation of their innovative small- and medium-sized companies.

And then there was a high-profile state visit of the Chinese President Xi Jinping to Great Britain two weeks ago.

Business deals were signed for $62 billion, confirming a strong growth of bilateral investment flows. Rolls-Royce will also supply engines for China's 20 long-range A330 airplanes.

Perhaps the most important result of Mr. Xi's visit is that the UK – the first European country to sign up for China's AIIB -- was firmly established as a preeminent offshore financial center for transactions in the Chinese currency.

To flag out that new relationship, the People's Bank of China (PBOC) will issue in London a 5 billion RMB sovereign bond – the first such issue outside China's own bond markets.

All that is a strong rebuttal to UK critics that their government was behaving like a "panting poodle." China responded by saying that it wanted to build a "golden era" between its Belt and Road Initiative and Britain's "Northern Powerhouse" project.

What's in it for China?

Mr. Xi's visit to the UK signaled that China was eager to develop an active two-way trading relationship with the EU rather than just serve as a preferred destination for European exports.

In the case of Britain, one of China's main interests was a creation of a powerful offshore financial center to pave the way for its currency as an international reserve asset and a leading vehicle for global flows of trade and finance.

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But Germany looms large in China's efforts to modernize its economy. Indeed, Beijing sees Germany as the main source of support for its technological progress.

That is of crucial importance to China as it tries to move up the value-added chain to compete in more sophisticated products and services. And Beijing knows that Germans keep modernizing and upgrading their traditional manufacturing industries with high-end information technologies.

That is why the Chinese Prime Minister Li Keqiang rhapsodizes about the Sino-German "dream team," because technological innovation and entrepreneurship are the key drivers of his structural reforms, and the only way of avoiding China's dreaded stagnation in the "middle-income trap."

As a powerhouse of science and technology, Germany is uniquely positioned to capitalize on China's well understood imperative of boosting productivity to offset its rising production costs, and to offer the world competitive products and services that will feed its strong and balanced growth.

The rest of Europe is apparently seen as a destination of Chinese exports and direct investments benefiting from significant inputs of German technology.

To understand that, please recall that Europe is the end-point and the key market for China's gigantic Belt and Road Initiative, where trade and infrastructure projects cover 60 countries and regions and a territory of 4.4 billion consumers. Beijing correctly sees that project as a foundation for an increasingly integrated Eurasian trading area.

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China is actively working along these lines. It has agreed to combine the Belt and Road Initiative with the Russia-led Eurasian Economic Community.

The resumption of China's trilateral summits with Japan and South Korea – the first since 2012 and currently under way in Seoul – are also likely to lead to increasing trade ties and joint investments in vast infrastructure deals linking Asia, North Africa and Europe.

Investment thoughts

Thousands of European companies operating in China are ready vehicles to promote the sales of European products and services in a country whose rapidly growing middle-class of some 400 million consumers is making private consumption and services the mainstay of the Chinese economy.

German companies will hugely benefit from their Chinese and Eurasian business. London will remain an undisputed financial center for China's offshore trade and finance.

The rest of Europe will also profit from the Eurasian trade, but it should get ready to compete lest it be overwhelmed by Chinese, Japanese and Korean exports.

Michael Ivanovitch is president of MSI Global, a New York-based economic research company. He also served as a senior economist at the OECD in Paris, international economist at the Federal Reserve Bank of New York and taught economics at Columbia.