China’s charm offens­ive

At this week’s ‘Sum­mer Davos’ sum­mit, offi­cials tried to dis­pel thoughts of ‘decoup­ling’ and ease ten­sions with the US and other trade part­ners. But geo­pol­it­ical fric­tion was never far away.

By Joe Leahy, Ryan McMor­row, Sun Yu and Thomas Hale

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At a sum­mit in Tianjin this week, the Chinese premier Li Qiang took the oppor­tun­ity to make the for­eign exec­ut­ives in attend­ance feel wel­come.

Li, seen as the most busi­ness friendly mem­ber of Pres­id­ent Xi Jin­ping’s inner circle, wrapped up a talk at the World Eco­nomic Forum’s New Cham­pi­ons meet­ing with a play on words in Chinese — mix­ing the word “laowai”, which means for­eigner, with the term “laox­i­ang”, which means “townspeople.”

“I hope you can become our townspeople,” he told a busi­ness round table.

Li’s charm offens­ive at the meet­ing — nick­named the “Sum­mer Davos”, in ref­er­ence to the far lar­ger WEF event held in Switzer­land each Janu­ary — was inten­ded to make attendees from over­seas aban­don all thoughts of “decoup­ling” and “de-risk­ing”.

But here and else­where it is hard to escape the geo­pol­it­ical ten­sions between his coun­try and the US-led west, which many in China fear are peak­ing at a crit­ical junc­ture for its eco­nomy.

After the coun­try’s zero-Covid restric­tions ended last year, the eco­nomy had a robust recov­ery in the first quarter. But this has slowed in recent months, with the gov­ern­ment report­ing yes­ter­day that man­u­fac­tur­ing activ­ity fell for the third straight month while ser­vices were at their weak­est in six months.

Beijing blames part of the geo­pol­it­ical ten­sions on Wash­ing­ton after it imposed con­trols on high-tech­no­logy exports to China and shot down a sus­pec­ted Chinese spy bal­loon early this year.

There are signs that the US and China are try­ing to improve rela­tions. When Pres­id­ent Xi Jin­ping met US sec­ret­ary of state Ant­ony Blinken in Beijing last week, the two sides said there was “pro­gress” towards sta­bil­ising ties — though it was quickly undone just a day later when US Pres­id­ent Joe Biden called Xi a “dic­tator”.

China has also been mak­ing over­tures to US busi­ness lead­ers as its eco­nomic recov­ery stalls. Jamie Dimon, chief exec­ut­ive of JPMor­gan, was wooed by senior offi­cials in Shang­hai in late May, and Tesla’s Elon Musk was invited to meet gov­ern­ment min­is­ters in Beijing the same week. Microsoft co-founder Bill Gates met with Xi him­self in June.

But for­eign investors have been unnerved at Beijing step­ping up secur­ity meas­ures. This week, the gov­ern­ment passed a new for­eign rela­tions law that strengthens the legal basis for “coun­ter­meas­ures” against west­ern threats to national and eco­nomic secur­ity. This fol­lows crack­downs on for­eign con­sultan­cies and expan­ded espi­on­age and data secur­ity laws.

With the eco­nomic recov­ery weak­en­ing, however, many won­der if Beijing will soon be forced to choose whether to pri­or­it­ise the eco­nomy over secur­ity — or whether China is enter­ing a new phase in which the gov­ern­ment will tol­er­ate rel­at­ively low growth, while clamp­ing down fur­ther to strengthen resi­li­ence to external threats.

Inside China, anxi­ety is run­ning deep. “This is the first time in 40 years that the Chinese pub­lic are not sure if things are going to get bet­ter,” says one Chinese com­ment­ator on the eco­nomy, who did not want to be named.

Among the townspeople

The sharp changes in China over the past three years were on dis­play at the WEF this week.

Some of these were tech­no­lo­gical, from the pre­val­ence of elec­tric vehicles on Tianjin’s streets to the con­ver­sion of China to a near cash-free soci­ety. Any­one without an indi­gen­ous pay­ments app such as WeChat or Alibaba could not wander far from the venue. Many com­plained that even for­eign credit cards did not work.

A deeper change, however, was the paucity of global CEOs at the forum, say some who had been to pre­vi­ous WEFs in China, and the con­strained nature of some of the debate. Set up at short notice after the end of zero-Covid, it was harder for bosses to add the forum to their sched­ule, organ­isers say.

But oth­ers blame geo­pol­it­ics, which is for­cing many US chief exec­ut­ives in par­tic­u­lar to keep a low pro­file.

Among the range of attendees in Tianjin, some wel­comed the chance to see China for them­selves after years of hear­ing about the “China threat” in the US.

“This is my first time in China. I thought I should be a little bit nervous,” says JD LaRock, pres­id­ent of the Net­work for Teach­ing Entre­pren­eur­ship, a New York-based non-profit.

“I find every­body that I’ve met has been friendly, open, inter­ested in talk­ing about how we can work together. It’s a dif­fer­ent per­spect­ive from what the US politi­cians say.”

A Ger­man busi­ness exec­ut­ive, however, expressed his frus­tra­tion with how many par­ti­cipants, par­tic­u­larly Chinese exec­ut­ives and aca­dem­ics, seemed to stick closely to the Chinese gov­ern­ment’s offi­cial nar­rat­ive.

“They are keen to cre­ate the impres­sion that everything is back to nor­mal, but it’s not,” he says. “It’s such a dif­fer­ent meet­ing because, five years ago, they had all those top-level people from the indus­tries in China, but also from the US and Europe. Every­body was dis­cuss­ing openly.”

Yet some present were con­tent to speak freely. At a busi­ness roundtable, Volk­swa­gen China head Ralf Brandstätter poin­ted to the pleth­ora of com­pet­i­tion in the Chinese auto mar­ket, with over 100 car­makers, say­ing it was destruct­ive of cap­ital. He also raised the issue of China’s cross-bor­der data secur­ity laws, which car­makers have com­plained are too vague.

Frank Bournois, dean of China-Europe Inter­na­tional Busi­ness School (CEIBS), which has cam­puses in sev­eral large Chinese cit­ies, says the afteref­fects of the pan­demic are still being felt at his insti­tu­tion, with inter­na­tional stu­dents num­ber­ing just below 100 of the 1,200 full-time MBA stu­dents. Nor­mally it would be up to double this.

“Inter­na­tional stu­dents are hes­it­ant because of the pan­demic and reper­cus­sions related to the pan­demic,” says Bournois. “Geo­pol­it­ics [at] the moment doesn’t help us much.”

Reignit­ing the recov­ery

While the US and Beijing are try­ing to cool tem­pers this year, the longterm tra­ject­ory of the great power com­pet­i­tion between the US and China is clear, ana­lysts say, par­tic­u­larly on tech­no­logy.

“The US real­ises this is an import­ant junc­ture in China’s devel­op­ment,” says Eswar Prasad, a senior fel­low at the Brook­ings Insti­tu­tion, a US think-tank. Wash­ing­ton knew that China’s bid to invest more in advanced man­u­fac­tur­ing and other areas of high tech­no­logy meant it needed to also look abroad for for­eign investors. “At the moment China needs for­eign tech­no­logy.”

That helps explain Li’s pres­ence at the Tianjin event, among other ini­ti­at­ives. But the imme­di­ate pri­or­ity for Beijing will be to sta­bil­ise the recov­ery.

The prop­erty sec­tor, a growth engine of the eco­nomy, is locked in a long slump. After steady­ing briefly this year, it began to slip again in recent months, threat­en­ing con­sumer con­fid­ence. China’s exports and man­u­fac­tur­ing sec­tors are also strug­gling.

Some believe there is a risk of a “bal­ance sheet reces­sion”, when the indebted focus on pay­ing down debt, as happened in Japan in the 1990s after its bubble burst.

“I think some of the chal­lenges the Chinese are facing are equal to or per­haps more chal­len­ging than the Japan­ese faced 30-something years ago,” says Richard Koo, chief eco­nom­ist at the Nomura Research Insti­tute.

He says the only way to fix a bal­ance sheet reces­sion is a very large fiscal response. The gov­ern­ment needs to bor­row the money that indi­vidu­als and cor­por­ates are sav­ing and recir­cu­late it in the eco­nomy, Koo says, oth­er­wise GDP will con­tract.

One Chinese eco­nom­ist with a Beijing think-tank says large mon­et­ary stim­u­lus is needed, as well as fiscal. The gov­ern­ment has cut interest rates but only mar­gin­ally. “I’m very wor­ried about near-term growth pro­spects,” he says.

Poli­cy­makers led by Li Qiang, who took office in March, have yet to announce a com­pre­hens­ive stim­u­lus plan. The polit­buro, the party’s top decision-mak­ing body, is due to meet in July and insiders say any stim­u­lus would likely come after that ses­sion.

But few are expect­ing any­thing at the scale of the $570bn fiscal res­cue pack­age China unleashed in 2008. The Chinese eco­nomy is work­ing through import­ant struc­tural changes that will take time, said eco­nom­ist Zhu Min at a WEF panel on the coun­try’s rebound.

The prop­erty sec­tor is suf­fer­ing from long-term over­sup­ply, said the former IMF deputy man­aging dir­ector, while trade is also under­go­ing struc­tural change as the share of exports going to the US and Europe fell.

But the eco­nomy is shift­ing rap­idly towards new indus­tries, Min added, such as elec­tric vehicles and the green eco­nomy. “I observe the whole eco­nomy struc­ture shift­ing,” he told the audi­ence. “You will see volat­il­ity [but] that’s OK.”

The linger­ing ques­tion is how USChina geo­pol­it­ical ten­sions will play into that shift. World Trade Organ­isa­tion dir­ector-gen­eral Ngozi Okonjo-Iweala said at the WEF that there was evid­ence that invest­ment was shift­ing out of China to other parts of Asia. “If the invest­ment pat­terns shift, the trade pat­terns will shift,” she said.

In the near-term, the focus for China will be to try to achieve this year’s growth tar­get of 5 per cent, its low­est in dec­ades. For that, it may need to lower the geo­pol­it­ical tem­per­at­ure, espe­cially with the US.

Beijing may also wish to recon­sider the secur­ity state approach, which intens­i­fied dur­ing Covid, says the Chinese com­ment­ator, and which still weighs on the eco­nomy and on soci­ety. “The whole state-soci­ety rela­tion­ship has changed and people can feel that. And they [the gov­ern­ment] need to dial it back.”