Francois Hollande's Chinese revolution

It turns out finance isn't Francois Hollande's only enemy – the French president also has it in for China. And as Europe's crisis enters its terminal phase, Angela Merkel may be inclined to back his assault.

When French president Franois Hollande met German Chancellor Angela Merkel for the first time on Tuesday, chances are that political turmoil in Athens was not the only subject on the agenda. The newly elected French leader is probably likely to have tested whether his German counterpart would be prepared to back an assault on Beijing.

Because it turns out that finance isn’t Hollande’s only enemy. He also has it in for China. In his recent book, "The Poisoned Victory”, journalist Eric Dupin recounts comments made by Hollande during a lunch back in March.

"I think it is now time to name the adversary", he said. "I did it for finance. It has to be done with the Chinese. The problem, it is Chinese. They cheat on everything. On the currency, on research. The difficulty is that many large companies have Chinese contracts. That’s what is stopping us taking a stronger stance with respect to that country’s products. But it’s necessary to open the conflict, with the support of a number of other European countries.” Unfortunately, he noted, there were some complications. "The Germans, after all, have a lot of interests in China, other countries have less.”

As the French newspaper Le Monde noted, the Chinese ambassador to Paris will have undoubtedly drawn these comments to Beijing’s attention. However, since then Hollande has gone some way to smoothing diplomatic tensions between France and China by choosing a China specialist, Paul-Jean Ortiz, as his diplomatic adviser.

Still, Beijing will be nervously watching carefully to see whether the new partnership between Hollande and Merkel (or Homer, as the Europeans have dubbed it) will see Germany backing the French initiative to take a much tougher line on Chinese imports.

Beijing is deeply aware that the strong links between Germany and China have produced huge benefits for both economies. The structural reforms that Germany embraced under its former Chancellor, Gerhard Schrder, boosted the country’s competitiveness but also made it increasingly dependent on exports. German companies, such as Audi and Siemens, turned towards China, and its fast-growing middle class, as an ideal market for their products.

In exchange, German companies transferred valuable technology to Chinese firms. So much so, that German companies now often themselves competing in third markets with Chinese firms that can proudly boast that they have German high-tech.

Still, there’s little doubt that Merkel, who knows that the European debt crisis has now entered a vicious and terminal phase, will want to forge a strong working relationship with Hollande as quickly as possible.

What’s more, German economic data may make her more inclined to back Hollande’s assault on Beijing. The figures showed that in the first three months of this year, German GDP grew by a greater than expected 0.5 per cent compared with the final quarter of 2011, and was 1.7 per cent higher than in the same period last year. This impressive performance was largely due to exports.

In a perceptive article, GaveKal analyst Francois Chauchat points out that the latest figures show German imports from China were stagnant, while German imports from the lowest-cost countries of Eastern Europe – Romania and Bulgaria – rose by 30 per cent year-on-year.

This change partly reflects the fact that the Chinese currency has risen against the euro in real terms. But, he adds, "it is also likely that these trade figures bring to light a re-acceleration and broadening of Eastern Europe integration into the German production process, possibly to the detriment of Asia.

"Indeed, German manufacturers have in recent years expanded their production of semi-finished products from safe and close Poland and the Czech Republic to Romania, Bulgaria, and Croatia – which helps to explain the boom of both exports and imports with these countries.”

Beijing will be deeply worried that Berlin’s new economic focus on eastern Europe could make it much more willing to listen to Hollande’s criticism of China.