Chinese Premier Li Qiang used his speech at the World Economic Forum (WEF) in Tianjin to warn against the sowing of “divisions and even confrontation”. It was his first onstage appearance at what has been called the summer Davos.
In response to concerns about China’s economic deterioration and countries “de-risking” from China, he stressed global cooperation, echoing what he recently told business leaders in Germany: “Failure to cooperate is the greatest risk, and failure to develop is the greatest insecurity.”
Europe takes a softer approach to de-risking from China than the United States, which appears to see Beijing as more of an enemy than a competitor. To Beijing, Washington’s actions, from restricting China’s access to hi-tech products to restructuring supply chains, are a facade for its economic and technological containment of China.
Europe’s more nuanced approach reflects the sentiments captured in a recent poll by the European Council on Foreign Relations. Europeans want to remain neutral in a US-China conflict and are reluctant to de-risk from China. They generally do not see China as a power that wants to undermine Europe, and do not buy into US President Joe Biden’s “democracy vs autocracy” characterisation of the relationship. Instead, the prevailing view is that China is Europe’s “necessary partner”.
Differences in bilateral trade partly explain why there is no unified Western position on de-risking. Former US president Donald Trump’s trade war led imports from China to plunge in 2019 and 2020. Although imports from China have recovered to reach a record high last year, their share of US imports have fallen to 16.5 per cent. In contrast, the European Union’s imports from China have increased steadily over the years to make up 20 per cent of the EU total last year.
Europe is more supportive of “free trade” than the US because it is more dependent on China for the intermediate goods needed for its manufactured exports. But Washington sees its trade deficit with China as undermining its status as the dominant economic power.
A cargo ship loaded with containers leaves Zhoushan port in Ningbo, in China’s eastern Zhejiang province, on June 6. Photo: AFP
The implications for de-risking based on foreign investment trends are of greater concern. The combination of geopolitical tensions, the pandemic and financial pressures has led to a sharp cutback in foreign investment in China.
To counter this, Premier Li warned the foreign business community that Beijing was “sternly against politicising economic problems” and wants to jointly protect global industrial chains. If there is risk in a certain industry, he said, it is businesses that are “in the best position to assess such risk”and governments “should not stretch the concept of risk to turn it into an ideological tool”.
Political and economic factors will shape how seriously de-risking is applied. The coming US presidential election suggests Washington will be locked into anti-China sentiment for some time. European views of China will depend in part on the outcome of the Ukraine war and the choices Europe faces if it strengthens economic links with China to offset a diminished Russian market.
For foreign firms, the attractiveness of de-risking depends on China’s growth prospects. A China in the throes of long-term economic stagnation becomes an easy de-risking target. But a dynamic and rapidly growing China would be a market that foreign businesses find hard to replicate elsewhere, given its unique combination of size, labour skills and supportive services.
01:49
Premier Li Qiang plays up China’s economic prospects at World Economic Forum’s ‘Summer Davos’
Premier Li Qiang plays up China’s economic prospects at World Economic Forum’s ‘Summer Davos’
China’s economic malaise is a consequence of deep structural weaknesses rather than cyclical factors. While Beijing’s shedding of its draconian Covid-19 policies late last year generated a burst of enthusiasm about reviving growth based on pent-up consumption, these sentiments were short-lived.
In recent months, there has been a steady flow of reports about declining exports, a slowdown in manufacturing and private investment, a lacklustre property market despite supportive measures, local governments overwhelmed by rising debt, and fresh graduates going jobless. This has led to a heated debate on the need for a major stimulus programme.
China’s State Council is reportedly considering such a package, and this has raised hopes of more support for the distressed property market, incentives to boost consumption and a further easing of monetary policy.
But this approach would not be financially viable or effective for sustainable growth. Previous stimulus efforts have pushed up China’s debt to levels close to alarming, leaving little room for another major fiscal expansion. The likelihood of a property market rebound is minimal, given a shrinking population and the slackening pace of urbanisation. A significant monetary expansion is also unlikely to encourage more investment given weak external and domestic demand.
Dealing with these structural issues needs a more fundamental rethinking of the role of the state in its control over resources and labour markets. In particular, the private sector remains too regulated and under-financed compared to richly resourced state-owned firms.
This makes little sense given the much higher profit rates of private companies compared to state-owned firms. And as discussed at the WEF, speeding up a reform of the hukou household registration system could free up the massive spending power of hundreds of millions of urban residents, while medium-term growth measures, rather than stimulus, would support more sustainable growth.
By embracing such bolder reforms, China could grow robustly for another decade, making de-risking an unrealistic option for the global community.
Yukon Huang is a senior fellow at the Carnegie Endowment for International Peace
