Policy Dialogue

Four Chinese airlines are to legally challenge Europe's new carbon emission taxes, which are due to take effect from 1 January.

The four carriers - Air China, China Eastern Airlines, China Southern Airlines and Hainan Airlines - have the backing of the country's air transport association, which claims the new carbon emission rules will cost Chinese airlines some €95 million.

The association asked all Chinese carriers not to take part in the EU carbon trading scheme, not to submit carbon emission monitoring plans or to negotiate with the EU on a bilateral basis.

From 1 January airlines will be required to buy permits for 15 percent of the emissions generated on flights to, from and within the EU. The figure will rise to 18 percent in 2013-2020.

US airlines have already challenged the scheme in court.

A ruling by the European Court of Justice is expected on Wednesday. A legal opinion by the court issued in October said the carbon emission rules were compatible with EU law. The opinion is non-binding, but it is usually followed by the judges in their final verdict.

Some airlines, such as America's cargo giant UPS, are already thinking about re-routing flights in order to side-step the scheme and cut costs, reports the Wall Street Journal. The move is likely to end up creating more carbon emissions.

Mitch Nichols, president of UPS Airlines, told the newspaper that the company may look at redirecting flights between its hubs in Hong Kong and Cologne, Germany, by going through Mumbai. That will cut the cost of the tax by about a quarter because UPS would only be charged for the distance flown between Cologne and Mumbai. But the distance flown will increase by 1,100 miles, upping the emissions.

US foreign policy chief Hillary Clinton last week sent a letter to several EU commissioners urging them to suspend the enforcement of the carbon scheme and re-negotiate with governments around the world.

"Halt or, at a minimum, delay or suspend application of this directive. Re-engage with the rest of the world. The United States stands ready to engage in such an effort. Absent such willingness on the part of the EU, we will be compelled to take appropriate action," she warned.

In a statement on Tuesday (20 December), the Association of European Airlines expressed fears of an imminent trade war should the plan go ahead. "Even if the ECJ (EU court) decides that the EU (emissions trading scheme) conforms with EU law, this will not resolve non-European countries' vehement hostility," it said.

EU climate change commissioner Connie Hedegaard has refused to back down, however.

"It is not just an idea, it is EU law," she told Financial Times Deutschland, stressing that the commission will not give in to pressure from the US or elsewhere.

A collapse of the eurozone would be a "disaster for everyone" and EU leaders have not "fully realised" the urgency of the situation, a Chinese official said Tuesday (29 November), adding that Europe's problem is not so much money-related as a matter of lack of confidence.

"We don't want to see the collapse of the eurozone, it would be a disaster for everyone. We want to see a very quick recovery of the eurozone. China is a very firm believer in the euro, in European integration," Hua Chunying, a foreign ministry counsellor dealing with EU affairs told this website on the margins of the Understanding China policy summit.

China has invested in bonds of the troubled southern euro-countries already. "But the major problem with the EU is not the money, it's the confidence," she explained.

This lack of confidence is "natural" given the diversity between north and south, poor and rich countries, Hua said, adding: "But I do believe once everybody realises it's a problem of life and death of the euro, then they may take very rapid measures."

A 'core' or northern eurozone splintering off with a stronger currency is not viable, in the Chinese official's view. "They can only go as one area. It's not a matter of choice, it's a strategical asset. Europe for a long period in history used to be the pillar and source of stability and we hope it will continue to be so," she stressed.

Asked if the Chinese government is preparing any contingency plans for a eurozone break-up, Hua said: "No, we don't want to see that. Everybody will suffer if that happens."

Meanwhile, Wang Yiming, a Chinese official from the National Development and Reform Commission, spelled out that instead of asking for money, Europe should provide market access to Chinese companies.

"The European economy needs blood, but the way forward is not by asking China for blood. We need to create new blood together rather than to transfer some," he said at the conference.

Eurozone leaders had been hoping that China and others would help boost the single currency's bailout fund. But a meeting of G20 leaders earlier this month saw no offers forthcoming.

Lord Leon Brittan, a former EU commissioner and currently vice chair of UBS Investment Bank, also warned against the EU asking for Chinese financial assistance, but for different reasons.

"It would be a great mistake to ask for Chinese assistance in this crisis, because if you ask for money, there are always political conditions attached," he said.

Beijing in recent days has signalled that it would be willing to invest in infrastructure and state assets in Europe, but is still waiting for the prices to go down.

China is looking to buy EU factories and railways instead of wobbly government bonds as prices fall amid the eurozone crisis.

Minister of commerce Chen Deming articulated the strategy at a business congress in China on Monday (28 November).

"Next year, we will send a delegation for promoting trade and investment to the European countries ... Some European countries are facing a debt crisis and hope to convert their assets to cash and would like foreign capital to acquire their enterprises. We will be closely watching and pushing forward the process," he said.

Chen's remarks come after the chief of the $410 billion Chinese Investment Corporation, Lou Jiwei, wrote in an op-ed in the Financial Times on Sunday that EU infrastructure needs outside help.

"Traditionally, Chinese involvement in overseas infrastructure projects has been as a contractor only. Now, Chinese investors also see a need to invest in, develop and operate projects," he explained.

Lou praised the UK as "one of the most open economies in the world" and mentioned involvement in a new UK north-south railway project in the context of political hostility to China in some countries.

Chinese port operator Cosco last year bought a 35-year lease for two container terminals in debt-struck Greece. But crisis-hit Iceland last week blocked the sale of a large farm to Chinese businessman Huang Nubo on national security grounds.

Huang said he wanted to build a hotel and a golf course.

Speaking to the Sina Finance news agency, he hit out at what he called European "prejudice ... like the view that state-owned enterprises represent your country, that whatever your background is you're a military business."

"You can come and buy a house, and you can emigrate here and bring your riches with you, or you can buy my luxury goods, but if you want to touch my natural resources, then I'm sorry, I won't let you."

The EU in recent weeks had tried to interest China in buying weak Euroepan bonds instead through a special purpose investment vehicle.

For their part, Chinese analysts predict the spending spree will not begin until prices hit rock bottom.

"The euro zone crisis has not entirely played out and asset prices are very volatile. They haven't found their floor ... Europe is not a resources player, but its manufacturers are what would most interest us, with their market, their technology, and their strong experience," Wang Jun, an economist at the Beijing-based CCIEE think-tank told Reuters.

Chinese ratings agency Dagong on Tuesday (22 November) downgraded Greece's sovereign rating to the second-lowest 'default' level, a move suggesting that Beijing has no intention of 'playing Santa Claus' to the ailing eurozone, experts say.

"As Greece has completely lost its solvency, it has to prepare for a massive debt restructuring," Dagong said when announcing the downgrade from triple C to C.

Dagong also warned that it may downgrade Greece to the lowest default level if austerity further dragged the country downwards.

"Social unrest has intensified. The government's ability to control economic and social developments has been dramatically impaired," making the implementation of the EU-IMF aid package difficult, it added.

The ratings agency projects a recession of 7.2 percent in 2012 and 6.8 percent the following year, with very little chances of restoring growth in the medium term.

Neither does the Chinese ratings agency believe that the new €230-billion-strong aid package may "drag the Greek government debt back to a sustainable track."

While the standing of the Chinese agency has not the same impact on markets as the 'big three' Anglo-Saxon ratings agencies - Moody's, Standard & Poor's and Fitch - Dagong is indicative of what the Chinese government's intentions are when it comes to acquiring debt from Greece and other troubled eurozone countries, experts say.

"This downgrade is a confirmation of what we saw in recent weeks: There is no real appetite to invest in Greek bonds - and European bonds in general," said Carsten Brzeski, a senior economist with ING Bank.

Contrary to what EU officials had alleged earlier this year - that the 'big three' are deliberately attacking the sovereign rating of eurozone countries to their own advantage - Brzeski said that the Dagong move illustrates that "Chinese have the same information as all other investors."

It also spells out clearly that Beijing "is not going to buy Greek debt and play Santa Claus with the eurozone," he stressed.

What it means for EU leaders meeting again in Brussels next month is that the October deal on 'leveraging' the eurozone bail-out fund to €1 trillion was "wishful thinking", because it was based on the assumption that countries such as China will be interested in buying up debt.

One scenario would be to fast-track the adoption of the permanent bail-out fund - the European Stability Mechanism - currently planned for mid-2013. This would be more likely than overcoming German resistance to allowing the European Central Bank to lend enough money for troubled euro-countries to weather the crisis, Brzeski suggested.

EU member states have slapped rigid new controls on all imports of Chinese rice products in the wake of ever-increasing detection of products 'contaminated' with unauthorised genetically modified rice.

Following a near unanimous decision by experts sitting on the bloc’s food safety committee, Europe will now require 100 percent of all consignments of rice originating in China to be certified as meeting EU standards.

Until now, whenever China submitted analytical reports to the EU showing that a shipment was GM free, the bloc has performed only random spot checks on consignments to verify these reports.

But in 2010, the EU's Rapid Alert System for Food and Feed - the border control warning system - issued 47 alerts over the presence of GM rice in Chinese imports.

As a result, on Tuesday, Europe’s Standing Committee on the Food Chain and Animal Health - a group of national officials from the EU member states - has decided that all consignments of rice products originating in China will be verified.

Currently, no GM rice products are authorised in the EU, and some of the alerts involve GM rice products that are not authorised in China itself.

The problem dates back some time, with the commission adopting an emergency measure in 2008 to impose controls on Chinese rice products entering the union.

All representatives of member states on the food safety committee apart from one approved the tougher measures on Tuesday. No unanimity is required to pass the measure. The new controls will be reviewed in six months.

However, the urgency of the EU manoeuvre contrasts with the scale of the China-Europe rice trade. The Middle Kingdom only exports some €50-55 million worth of rice products to the EU every year, equivalent to around 50,000 tonnes, according to the commission.

No to Chinese rice, divided on US soybean

Separately, the same committee today found itself divided over approval of the import of two GM soybean products from Monsanto and Bayer.

The European Food Safety Authority had given favourable scientific assessments to both products, saying they were as safe as their non-GM counterparts for humans and animals.

One of the soybeans had previously been authorised for import by the same Standing Committee, but now, upon reassessment after the original authorisation ran out, the bean has not been seen in so favourable a light.

Some 95 percent of soybean imports, which are mainly used for animal feed, are genetically modified.

The EU is in effect a GM-free zone in terms of cultivation, with only two items, a corn plant and a potato approved for growing in the bloc, and even there, only a handful of states themselves permit this.

While there are 165 million hectares around the world growing GM products, there are just 100,000 hectares in the EU.

But a total of 43 GM products that are not grown in the EU can however be imported.

As the Standing Committee was unable to reach the required majority either in favour or against the soybeans’ approval, the decision now passes for the first time ever to a GMO Appeal Committee.

The GMO Appeal Committee has yet to be constituted, and so the precise composition has yet to be decided, although member-state representatives from some level - whether diplomat, national official or expert - will be involved.

If the GMO Appeal Committee also cannot muster a majority either in favour or against - a situation that is quite likely, it is the European Commission that makes the final decision, based on the assessment of the scientists in EFSA.

As EFSA has already said that these two soybeans are safe, the commission would in this case likely give the green light to them.

The Appeal Committee is to debate the status of the soybeans within six weeks, and so a decision will probably be taken by the end of the year.