Commentary on Political Economy

Saturday 1 July 2023


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.

The government of Xi Jinping has been making overtures to US business leaders as its economic recovery stalls. But foreign investors have been unnerved at Beijing stepping up security measures

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.”

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