China economy

China must be clear about government role in economy, says European lobby group in Beijing

  • The EU Chamber of Commerce claims that Chinese government intervention is causing market distortions in key sectors around the world
  • Criticism comes as China is reportedly set to downgrade its controversial ‘Made in China 2025’ initiative
PUBLISHED : Friday, 14 December, 2018, 9:23am
UPDATED : Friday, 14 December, 2018, 12:02pm

China has been urged to define the role of the government in its economy, with experts warning that its continued interference is spooking global markets.

“When we look at the next round of reforms, the key issue is the correct definition and the role of the government in the economy,” said Mats Harborn, president of the European Union Chamber of Commerce in China, who spoke on the sidelines of his group’s annual conference in Beijing.

“It’s the core of all the conflicts. Should the government be directly supporting the industries or should the government be creating the frameworks?” he said, in reference to the ongoing trade war between the US and China, as well as historical spats between China and the EU.

At the crux of China-US trade war is Washington’s accusation that China’s government investment in selected industries amounts to unfair competition – a complaint made by many foreign businesses over the years.

How does Beijing plan to lead the world with‛Made In China 2025’?

For example, the “Made in China 2025” initiative, which aims to replace imports with local products and build global champions to compete with Western giants in cutting-edge technologies, has attracted the ire of the US government, which claims it will destroy any chance of a level playing field for private companies.

Some analysts claim that “Made in China 2025” is the real target of US President Donald Trump’s trade war, since it blocks foreign companies from competing in China’s technology market.

China is reportedly set to downgrade the policy as a way of appeasing US negotiators, which say it would disproportionately favour state-owned enterprises.

Scott Kennedy, a China expert at the Centre for Strategic and International Studies, a Washington think tank, argued that this sort of favouritism is rife in China’s economy and causes global markets to suffer.

In an interview with the Post, Kennedy highlighted the global solar industry as one that has been clearly and negatively affected by China’s state objectives in clean energy.

China, the world’s biggest solar market, has been the leader in new solar installations over the past few years, often subsidised by the government through guaranteed electricity prices. As such, there are growing concerns about overcapacity.

China’s installed solar capacity reached 140 gigawatts at the end of March 2018, almost twice the 2016 level. But the expansion is expected to slow because of the latest changes in China’s regulations, according to Moody’s.

In June, Beijing moved to rein in the expansion of the industry, by suspending the allocation of more quotas for new farms and cutting subsidies.

The glut in global inventories sent solar panel prices plummeting and the continued state support means they are set to plunge further. Some foreign solar panel producers have already gone out of business, showing the impact China’s plans have on companies elsewhere.

German solar panel maker Solarworld filed for bankruptcy in March, blaming cheap exports from China. This followed an earlier bankruptcy filing by the company in 2017.

In January, the US slapped up to 30 per cent on cheap Chinese solar panel imports in a bid to protect its own firms from Chinese imports.

Moreover, China’s dominance of the solar sector means the most prevalent types of panels are not the most efficient, Kennedy said.

“Because of China’s size, it can really scale up this technology,” said Kennedy, suggesting that China flooding the market with cheap, mass-produced panels stifles quality competition.

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The EU chamber has set up a number of working groups to engage with Beijing with a view to addressing its concerns, but Harborn said there has not been significant progress since it published a report outlining its major issues with China’s economy in September.

State-driven investments, along with market access concerns and forced technology transfer, are among the areas that China must address as the country promises further reforms to its trading partners, according to the report.

The chamber also said that President Xi Jinping’s various economic reforms have not delivered meaningful change in opening up the Chinese economy.

China is a hard negotiator. They’ll keep a poker face. We do not know what the bottom line is.
Scott Kennedy, Centre for Strategic and International Studies

Many of the EU’s demands are shared by the US government, which has given China a 90-day deadline to make structural economic reform, after which tariffs on US$200 billion of Chinese exports to the US will rise from 10 per cent to 25 per cent.

China has been reluctant to discuss the government in its economy with international partners, even though Beijing recognises that it would be beneficial to the economy to be more market driven.

In recent weeks, responding to complaints from US and Europe over the role of state-owned enterprises, Beijing has touted the idea of “competitive neutrality” among private and public firms. This would improve transparency in policy, ensure equitable treatment on issues such as subsidies, taxes, trade measures such as tariffs. The aim is to level the playing field for private sector firms.

However, Kennedy said without pressure from its largest trading partners, China will not initiate the talks.

“China is a hard negotiator,” he said. “They’ll keep a poker face. We do not know what the bottom line is.”