Portugal's cavalry staged a magnificent parade to welcome Chinese President and Party General Secretary Hu Jintao, 67. Suddenly, one of the horses reared up and threw its rider to the ground. The state guest from China waited motionless until the end of the ceremony before he went to the fallen cavalryman, embraced him, and asked if he was all right.
There was symbolic value to Hu's caring gesture in early November in Lisbon: China's foremost party organ, the People's Daily, wrote enthusiastically that this was the "Best moment for the world to see a true China in flesh and blood."
Given the acute debt crisis in the euro zone, there is a wealth of opportunities for China to show sympathy in Europe these days. With pledges of financial aid and statements of support for the euro, Beijing is endeavoring to stabilize its largest trading partner -- primarily in pursuit of Chinese interests.
Even before his arrival in Lisbon, many in Portugal were yearning for Hu to come to the rescue. In view of the alarming Portuguese government debt, the Chinese leader promised that he would support the country with "concrete measures." He said China intended to double bilateral trade by 2015.
This wasn't exactly what the cash-strapped Portuguese were hoping to hear. They wanted Hu to also help out by buying government bonds. Nonetheless, before his visit, Chinese Vice Foreign Minister Fu Ying had already hinted that this was a definite possibility.
Offers of Aid for Troubled Euro Members
Indeed, the rising superpower is cleverly capitalizing on the euro crisis to extend its long-term political and economic influence in Europe. Chinese offers of aid are mainly directed at the shakiest members of the euro zone, the heavily indebted so-called PIIGS countries (Portugal, Ireland, Italy, Greece and Spain). The People's Republic would like to win them over as long-term allies in the EU.
In the past, China had shown itself to be a "friend" of Greece, Spain and Italy, and it purchased their government bonds at a time when other investors had fled, Premier Wen Jiabao said during a trip to Europe in October. "We will continue to provide aid and help certain countries overcome their difficulties."
Speaking to the parliament in Athens, Wen made a promise to the Greeks. He said that China would purchase Greece's government bonds as soon as they were available again on the financial markets. These were only words, but the jittery markets saw them as a vote of confidence in the euro: They were spoken by the man who helps decide how China invests the largest currency reserves in the world.
China has amassed some $2.5 trillion (€1.9 trillion), and an estimated 70 percent of this has been invested in dollar-based holdings. But the rulers in Beijing are observing with growing concern how their largest debtor country, the US, continues to drive down the value of the dollar with its lax monetary policy.
Switch in Strategy
This has recently prompted the Chinese to increasingly invest their reserve stockpile in non-dollar currencies. One of the leading proponents of this diversification is Yu Yongding, an influential economist and former advisor to the central bank, the People's Bank of China. Yu is known as "the dollar killer" in Beijing. Although he admits that other currencies "are not necessarily an ideal replacement" for US government bonds, Yu says that this will allow the People's Republic to minimize its losses should the US currency dramatically drop in value.
Last July, China spent €400 million on Spanish 10-year government bonds. During a visit to Beijing in September, Spanish Prime Minister José Luis Rodríguez Zapatero dutifully thanked the Chinese: When China increases its share of Spanish government bonds, he said, it bolsters confidence in the financial markets. He added that he hoped China would purchase even more Spanish government bonds.
The cash-strapped southern Europeans are increasingly looking to Beijing to solve their budget woes. But it is difficult to ascertain which countries are being supported by the Chinese state capitalists through government bond purchases.
The investment managers at the State Administration of Foreign Exchange (SAFE) devise their strategies behind the walls of a nondescript large office building in Beijing. They rarely make public statements. Formally, the SAFE answers to the central bank. Last year, People's Bank of China governor Zhou Xiaochuan, 62, caused an international stir when he proposed replacing the dollar with a super-sovereign reserve currency based on the Special Drawing Right (SDR), the IMF's unit of account. This proposal came from the upper echelons of the Chinese leadership: Zhou, a member of the Central Committee, strictly adheres to the instructions of the Communist Party.
It's a similar story with the state-run Chinese Investment Corporation (CIC), which manages some $200 billion of the currency stockpile, with assets in foreign equity funds, mining operations and corporations.
When it was founded three years ago, the CIC was eyed with great suspicion by Europeans. "EU officials came to me and asked me to commit that my investment will not exceed 10 percent," CIC manager Lou Jiwei said last year with undisguised sarcasm. "I said that's fine, then I'm not going."
Times have changed. These days, the Chinese rarely encounter resistance like they have faced in Hamburg, where they tried in vain to purchase a stake in the city's port. Across large swathes of Europe, they are now welcomed with open arms.
Greece a Bridgehead for Chinese Trade With Eastern Europe
The People's Republic has primarily set its sights on Greece as a bridgehead for its trade with Eastern Europe. Even before the current debt crisis, Chinese state-owned shipping giant Cosco signed a deal to lease port facilities in Piraeus for 35 years. By 2015, China intends to increase the annual transshipment of containers from the current 800,000 to 3.7 million, Premier Wen announced.
In the Irish town of Athlone, Chinese investors are considering building a gigantic conference and exhibition center for their export industry. From Beijing's perspective, one of the advantages of this location is that Ireland is the only English-speaking country in the euro zone. In Portugal, energy giant China Power International is looking to buy a stake in local provider EDP; both companies want to collaborate to produce renewable energy in Europe, Africa and Brazil.
And in Italy, Prime Minister Silvio Berlusconi even had the Colosseum in Rome bathed in red light for Wen -- and ordered the Chinese characters for "Sino-Italian friendship" projected onto the façade. Wen also promised the Italians that he would double the annual value of trade with them by the year 2015.
By pledging to help the debt-stricken PIIGS countries, China is ultimately boosting its own industry. Beijing also expects the Europeans to be more compliant on the political front: At a summit of EU representatives in Brussels in October, Wen rejected demands to devalue the Chinese currency. China maintains an artificially low exchange rate for the yuan, also known as the renminbi. This allows the Chinese to keep their exports cheap -- including to countries in the euro zone.
During a brief visit with German Chancellor Angela Merkel, Wen secured support for a matter that he had unsuccessfully raised for years: Merkel promised that she would support China's desire to be recognized as a market economy by the EU within five years. This would make it difficult for the EU to slap anti-dumping duties on inexpensive goods from China or denounce the country on charges of forced technology transfer.
The more EU countries become financially dependent on China, the greater the risk that they will end up facing the same dilemma that America has in its dealings with China. "How do you deal toughly with your banker?" US Secretary of State Hillary Clinton wrote, according to US diplomatic cables leaked to Wikileaks.
Beijing is still discussing how much money it actually intends to invest in government bonds from PIIGS countries. The bonds are "far too risky," warns economist Yi Xianrong from the Beijing Academy for Social Sciences, the government think tank. "As long as the EU has not resolved its internal contradictions, China would be better off not buying any government bonds there."
It is only when conducting a "political bargain," says Yi, that it would be clever for China to acquire euro bonds, "but only a few." Minimal investment, maximum influence -- that's been Beijing's strategy with Europe.