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We at the China Programme at the European Council on Foreign Relations would like to take the opportunity of the coming

Lunar New Year Festival, a time of reflection for many in China and Asia, to send you this short bulletin on key trends for 2012 and a bit more about our work. We would be most interested in your comments, so please do not hesitate to get in touch at thomas.koenig@ecfr.eu Franois Godement, Senior Policy Fellow Jonas Parello-Plesner, Senior Policy Fellow Thomas Knig, Programme Coordinator www.ecfr.eu KEY TRENDS FOR 2012 China at a crossroads yet again: The leadership race at the 2012 Party Congress may not just go on behind closed doors. Social unrest from growth inequalities are translating into tension over political governance, even at the doorstep of liberal-minded Guangdong partychief Wang Yang. Social unrest will not be wished away by a party that wants a tranquil succession. A rift is developing between transition-minded leaders and keepers of the status quo. The implications for Europe: Europes China policy should not be based on the fatalistic acceptance of a new authoritarian superpower. China has emerged as the big winner of the financial crisis, but systemic imbalances (in areas like the housing market and local debt and financing) are bubbling away beneath the polished surface Asia hedges China: There is unease in Asia over a series of incidents with almost all of Chinas maritime neighbours: Beijing has denounced the upgrading of military ties between Australia and the US; South Korea is angry at Beijings evident continuing support for Pyongyang; Japan is deeply concerned about the foot-in-the-door approach that Chinas navy has towards territorial issues. Add that to Beijings challenge to Indian sovereignty and the result is a regional call for the US to balance China. The implications for Europe: Europe must reach out to Chinas regional partners (without necessarily taking sides on territorial issues), instead of weakening its hand by focusing solely on Beijing. Chinas relations with the region go through brief periods of tension followed by eventual accommodation. Europe must look beyond the tense periods towards a more balanced and integrated Asia. Mrs Merkel has made strides in this direction, but her diplomacy is more German than European.

Asia (and China) hedge the Wests flagging economies: Japan still the worlds third largest economy and the rest of Asia still rely upon Chinese growth. Japan has signed an epochal agreement to use the Chinese currency for bilateral exchanges, storage and free conversion. This is as significant as the Transpacific Partnership pushed by the US and which is regarded as an initiative of economic containment towards China. The implications for Europe: A move towards full monetary and financial sovereignty is a prerequisite for the Eurozone to remain attractive. The failure of the European Financial Stability Facility (EFSF) to attract China is a testimony to this. Strikingly the UK has had some success in this, reinforcing London as an exchange centre by trading the Chinese Yuan and at the same time empowering infrastructure deals. This is the policy the Eurozone should embrace, with or without the UK. A potential meltdown of Europes foreign and strategic relations with China and Asia: Postponing EU-China summits offered China the chance to trim its relations with European institutions (where more hard headed reciprocal arrangements are embedded). Instead, large member states have stepped up their bilateral engagement with China (free of such reciprocal European demands). The first full cabinet meeting moved the German-Chinese entente commerciale beyond the export of German cars and machine tools. The British foreign secretary, William Hague, addressed the Chinese people without a word about the EU (although the world has become more multilateral [] it has also become more bilateral). At the same time, China shops for bargains inside distressed European economies. The Chinese expansion that we highlighted in our Scramble for Europe is likely to intensify when European privatisation programmes, austerity budgets and bank restructuring plans are enacted. Brand names such as Volvo and Rover are now Chinese, and Chinese firms have invested in French and Portuguese power firms. These purchases are much more tangible than the buying of European member state debt and EFSF bonds that Europeans wished for. The implications for Europe: It is time for a core group of countries to visibly demonstrate their unity towards China on the issues defining the relationship. UK participation remains essential to avoid further European divisions, as is a capacity to dissuade errant member states such as Hungary to seek China at the expense of Europe. 2011 was bleak for human rights; 2012 is also likely to be so: In response to the Arab Spring there was a tightening of repression in China out of proportion to the limited calls in China for something similar there. The Chinese foreign ministry spokesperson warned the law is not a shield to hide behind, giving an ominous signal for those hoping for further improvements in the rule of law. The upcoming leadership changes in 2012 reinforce the importance of stability at all costs for the government. The implications for Europe: The EU and its member states should keep values on the agenda. China needs environmental activists if it is to achieve a green economy. It needs intellectual freedom if it wants to achieve genuine innovation. The new frontier for freedom of expression is also the Chinese internet. Here the EU should move beyond scripted dialogue and the gatekeepers in Beijing and interact more directly with the Chinese people. Herman Van Rompuy already has more followers on the Chinese version of Twitter than on the English version.

Here is a list of our main publications from 2011 in case you missed them:

The Scramble for Europe Rescuing the Euro: What is Chinas Price? Chinas Janus-faced approach to the Arab revolutions Moving beyond symbolism in the EU-China relationship on human rights [PDF] China Analysis: One or two Chinese models? | Click here for more China Analysis

News about the team: Thomas Knig has joined the team as Programme Coordinator. You can learn more about him on his official profile. For ECFR China Programme updates and a collection of observations on China-related news, feel free to follow him on Twitter @thomasokoenig

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