US President Donald Trump’s ‘America first’ announcements and policies are alienating his Western allies. This coincides with the United Kingdom beginning its departure from the EU, now set for 29 March 2019 at 23:00. In these circumstances, China has been quietly reaching out to Western nations. Both Beijing and Brussels hope to move ahead with economic globalization, and during the annual EU-China Summit held in Brussels on June 1–2, 2017, the two sides forged a new green alliance to combat global warming, a clear nose thumbing at Trump. With the EU and the United States increasingly divided, this moment may mark the beginning of a new China-EU axis in global politics.
One of the areas in which China and the EU have developed strong ties is in the monetary field. Beijing has traditionally supported the euro, which is the only serious alternative to the dollar, and has diversified its foreign exchange reserves—the world’s largest—so that it now holds over one-third in euros and just slightly more than half in dollars, a decrease of around 30 percent since 1999, when the European common currency came into circulation. What this means is that in the last several years, Beijing has swapped dollars for euros, a trend that is likely to continue in future.
China’s diversification strategy signals that the dollar is no longer the world’s only reserve currency, and this is important to Beijing, which is trying to internationalize its currency as it weans itself off of its dependency on the United States’ economic cycle and monetary policy. Europe has, in turn, supported many of China’s monetary ambitions. The Europeans unanimously backed the decision by the International Monetary Fund (IMF) in December 2015 to include the renminbi in the basket of currencies making up the Special Drawing Right (SDR), an international reserve currency that includes the U.S. dollar, the euro, the British pound, and the Japanese yen. The decision was clearly political. The EU wanted to send a friendly message to China, the world’s second-largest economy, as well as to recognize what Beijing had done to support the euro during the euro crisis of 2009–11, when the European common currency became the target of speculative attacks mainly stemming from Wall Street–based banks and hedge funds. At the time, Chinese leaders intervened on various occasions to reassure the financial markets by buying eurozone bonds.
Today, the old continent is home to the largest number of renminbi bank clearings or offshore hubs where the Chinese currency can be traded. The fact that offshore renminbi hubs have also emerged in Budapest, Frankfurt, Luxembourg City, Madrid, Milan, Paris, and Prague indicates Europe’s willingness to promote the use of the Chinese currency. In the same vein, most of Europe’s central banks have accepted—or are considering accepting—China’s currency as a viable reserve. Although London is currently the most important offshore market for renminbi trading, once the United Kingdom leaves EU, significant shares of renminbi trading in London will most likely move to the continent, in places such as Paris, Frankfurt, and Luxembourg, thus strengthening the China-EU monetary axis even more.
When it comes to trade, relations between China and the EU are more rocky, although Trump’s derision of global trade certainly provides an opening. Between 2002 and 2016, total EU-China trade has risen dramatically, from 125 billion euros to roughly 515 billion euros. Today, China and the EU trade more than 1.5 billion euros in goods each day, and total bilateral trade in 2016 was 514.6 billion euros according to the European Commission—nearly equivalent to what China exchanges with the United States. In fact, the EU is now China’s most important trading partner, although China ranks number two for the EU, after the United States.
In addition to buoyant commercial relations, Beijing is trying to charm Europe through investments. Europe is now the top destination for Chinese foreign investments, surpassing the United States. According to the China Global Investment Tracker, a joint project of the American Enterprise Institute and the Heritage Foundation, China invested nearly $164 billion in Europe between 2005 and 2016. During that same period, it invested $103 billion in the United States.
These dynamics indicate that Europe-China relations are entering a new phase. Make no mistake, however. A China-EU alliance would be more a marriage of convenience than a solid partnership—one that is facilitated by Brexit and that revolves around a shared antagonism for Trump. We must wait and see whether the new dynamics within both the United Kingdom and the United States transform this axis into a more permanent one as new possibilities for China-EU relations open up, unthinkable only a few years ago.
An earlier and expanded version of this article was published in Foreign Affairs.