The EU will turn up the heat on China regarding climate change and the exchange rate of the yuan during their second bilateral summit of the year, on 30 November in Nanjing. Only days before the opening of the critical conference on climate change in Copenhagen, Swedish Prime Minister Fredrik Reinfeldt, in charge of the EU Presidency, and José Manuel Barroso, the president of the European Commission, will urge Prime Minister Wen Jiabao to do his utmost to reach an ambitious global deal. The day before, an EU financial troika, led by Luxembourg Prime Minister Jean-Claude Juncker, the head of the Eurogroup, will call on China to revalue its currency, the yuan, that many policy makers in Europe and the US see as undervalued. However, experts believe that the Asian giant is unlikely to cave in at a time when it is basking the success of its aggressive response to the financial crisis.

LAST-DITCH EFFORT

In Nanjing, the EU will launch a last-ditch effort to convince the Chinese leadership to take its share of the burden in the international negotiations on a post-Kyoto agreement. After several months of standstill, the chances of a breakthrough in Copenhaguen have increased over the past few days, with more than 60 world leaders expected to attend the long-awaited conference. US President Barack Obama will fly to the Danish capital, but the Chinese president has yet to announce whether he also plans to attend. Beijing also announced, on 26 November, that it would aim to reduce its “carbon intensity” by 40-45% by the year 2020, compared with 2005 levels. Ten days after Obama’s visit to Beijing, Reinfeldt and Barroso will take advantage of this new momentum to ask the biggest CO ₂emitter in the world to make a binding commitment.

Over the past few months, Beijing has shown some flexibility in the face of increased international pressure: in September, President Jintao promised to make “notable” emission cuts in the future, but without giving a figure. In Nanjing, the EU will urge China to go a step further. “There has been a lively internal debate in China and the signs are quite promising. We would like something more specific on their target on reduction of emission,” said a Commission source.

In return, the EU will promise increased economic cooperation in the environmental field, including technology transfer, to help the Chinese economy to turn ‘green’. This issue will be at the heart of the business summit that will be held on the same day where European and Chinese firms will explore opportunities in the field of ‘green’ growth. “The EU has a vital interest in ensuring that China moves toward a low carbon economy,” argues Nick Mabey from the Centre for European Reform. Beijing is interested in attracting - rapidly and at low cost - the European know-how in the ‘green’ sector. However, many large European industries are wary of the consequence of a post-Kyoto agreement that would not include China. Just ahead of the summit, BusinessEurope wrote to Barroso to insist on the need of having all the emerging economies committing to emission cuts by 2020 in order “to ensure the maintenance of a level playing field worldwide”. This is “crucial for the future competitiveness of European companies,” added the business association.

TRADE

BusinessEurope also wants the Commission to urge China to play a more active role in view of concluding the WTO Doha round. The Nanjing summit will take place at the same time as a WTO ministerial meeting in Geneva that aims at giving a new impetus to the stalled world trade talks. The EU and China are expected to make a joint call against global protectionist tendencies in Nanjing. This is a key issue for Beijing that will keep the pressure on Europe regarding ongoing anti-dumping measures that impose duties on some Chinese products, such as footwear.

“The EU has a vital interest in ensuring that China moves toward a low carbon economy”

Beijing unlikely to bow

Jean Claude Juncker, accompanied by ECB President Jean Claude Trichet and Commissioner for Monetary Affairs Joaquin Almunia, will once again raise Europe’s concerns regarding the weakness of the Chinese currency. They will stress that the exchange rate of the yuan, which is tightly controlled by the government, does not reflect the actual strength of the Chinese economy, which is recovering fast from the global downturn. This view has been repeatedly expressed by the US and more recently by the IMF’s Director-General, Dominique Strauss-Kahn.

European firms believe that that the weak yuan is giving a tremendous competitive advantage to Chinese exporters. “We are very concerned that the weakness of the US dollar combined with China’s fixed exchange rate policy risks shifting the burden of future exchange rate adjustment on to the EU’s shoulder,” said BusinessEurope in a letter to Barroso and Trichet.

China has recently shown some signs of flexibility, under pressure from the US, the EU and more recently its Asian neighbours. However, experts do not foresee any significant revaluation of the yuan in the short run since the Chinese leadership has no intention to hamper the country’s recovery. “If there is an appreciation of the yuan, it will be only limited and merely symbolic,” according to the Samsung Economic Research Institute. The fact that China refuses to discuss the exchange rate within the framework of the summit, but rather in a separate meeting the day before, is another indication of its reluctance to respond to the EU’s concerns.