China Research

Germany’s Foreign Minister Annalena Baerbock visited China only recently without sending kind diplomatic signals to China’s political leadership. Rather the opposite – by mentioning a number of critical points that really are sensitive to Chinese top politicians, such as human rights and the complicated relations to Taiwan. Scarcely surprising, Foreign Minister Wang Yi answered very clearly that China does need any instructions from the West.

This kind of Chinese reaction on foreign critical comments or “recommendations” certainly cannot be regarded as something new. I remember very well how irritated the Chinese reacted 15-20 years ago when American presidential administrations regularly exhorted Chinese political decision-makers to finish their unfair exchange rate policy and to, consequently, finally strengthen the renminbi.

However, China never listened to these direct American attempts to influence domestic policy decisions. They will not either in the foreseeable future.

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This time, I also want to recommend two articles with interesting views on international developments.

First, I find the paper of Pinepoli Goldberg(Yale University) and Tristan Reed (The World Bank) about the possibility of deglobalization very interesting. They see a slowdown of globalization but – contrary to other economists – no a reversal (https://papers.ssrn.com/sol3/papers.cfm?abstract_id=4413852&dgcid=ejournal_htmlemail_nber%3Aworking%3Apaper%3Aseries_abstractlink and NBER Working Paper No. w31115.

Second, I would like to focus on the illuminating article by Rolf Langhammer (Kiel Institue for the World Economy) on the increasing cross-border service trading and the difficulties in factfinding, mainly demonstrated by the German example (https://www.ifw-kiel.de/fileadmin/Dateiverwaltung/IfW-Publications/-ifw/Kiel_Policy_Brief/2023/KPB_166.pdf)

Hubert Fromlet
Affiliate Professor at the School of Business and Economics, Linnaeus University
Editorial board

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China is currently changing dramatically in different respects – politically, economically, technologically, and socially – but not that much institutionally. Despite all these ongoing structural changes, many (or most?) Western governments and corporations still seem to apply their China strategy as implemented in the 1990s and as started, continued and conducted after China’s entry into WTO in 2001 – expressed by official appreciation of China as a rapidly expanding trading partner country and by mainly paying courtesy visits to China’s political leaders (and simultaneously hoping for coming home with some major commercial deals and promises). Consequently, general political considerations and/or political risk analysis played so far no major role in Western business strategies for China.

Russia and China are not comparable – China’s position of today is very different from Russia’s ten years ago

Critics against believers in future firmly and safely expanding Chinese markets argue often that China’s role in the future world will be much stronger and much more dominating than today – and therefore potentially more dangerous than the Russian risks were supposed to develop in a worst-case scenario in the beginning of the past decade.

However, Europe (Germany) was not able to tackle its growing dependence on Russian oil and gas all the same – and relied wrongly on the benefits of pipeline Nord Stream 2 from Russia to Germany. Things went wrong though the forecast error of Russia’s eventually unchanged politics had only one dimension – i.e. only linked to Putin and his foreign policy (with all serious consequences).

On the other side, predictibility of China’s developments and challenges in the next 15-30 years – an investor’s perspective – must be regarded as extremely limited due to many different risk dimensions. Some of these unforeseeable factors are also about dangerous risks. These dangerous risks – if verified at some point – may even affect the whole world politically and economically because of China’s still enlarging global superpower status (which Russia did not have twelve years ago). Altogether, the different China risks can be classified as follows (other risks may emerge or strengthen at a later stage):

¤ Economic risks: One should try to find out, for example, more about China’s potential GDP growth (on trend), productivity, labor markets, demography, distribution of income, marketization (particularly of financial markets and SOEs), bad loans by banks and non-banks, debt of provinces and municipalities. Many of these indicators must develop positively over time for motivating assumed good GDP growth and return on investments.

¤ Political risks: A lot can – and will – happen in the forthcoming years and decades, within and outside China; inside China there may be links to the almighty position of president Xi Jinping, and outside China to uncertain results of Chinese /Russian co-operation, trade restrictions (possible political reactions at some point from the West), the Taiwan issue with its inextricable outcome and consequences (hopefully without war).

¤ Institutions: Here we have an area for major improvements aligned with politics – such as transparency, bureaucracy, laws and their application, corruption, education, health, financial markets and their control.

¤ Technology: Nobody asks whether China will be able to meet all its technological ambitions as only recently declared at the National People’s Congress (NPC) – or will China technologically even perform better than expected at home and abroad. Finally, the question may be motivated how will China handle and develop AI and digitalization in the future – in an acceptable way also in a Western view or context?

¤ Environment: There is no doubt anywhere that China needs a better environment – and that it will be working on it. But how much and how fast?

Chinese politics will matter more than in the past

The list above on different uncertainties and risks indicates clearly that Western corporate investment strategies for China obviously should contain more political analysis. Interdisciplinary analysis approach is badly needed, including politics, institutions, psychology, and social issues in various angles including the environment

Visible institutional improvements may be supportive to Western business with China. Social expectations and needs are also linked to political decisions (e.g. social insurance, pensions, civil rights for urban migrant workers in metropolitan areas, etc). Meeting (roughly) social expectations would certainly support China’s development. Scenarios on Chinese politics and possible Western (American) reactions should also be an important parameter to Western investors in China.

In my view, the so far“comfortable” strategy of separating commercial business strategies from simultaneous political considerations about China cannot – or should not – be applied anymore. Both approaches will become increasingly interlinked – if we like it or not!

The non-Chinese business sector should also learn how to understand and handle Chinese attempts to underline the importance of working for good commercial relations between China and the West, as China’s new Prime Minister and political No 2 – Li Qiang – pronounced the other day at the China Development Forum.

A positive explanation for this statement by the Prime Minister may be that China has recognized that world trade is not only made in China. Being the number one trading nation in the world (services excluded) urges for better recognition of China by the West – maybe the most positive scenario for China one can find these days. A more negative interpretation could be that China’s political leadership now is concluding that China’s recovery after covid and medium-term outlook may be more reluctant than previously anticipated and that potential GDP growth may go down further. This could jeopardize many social, demographic, educational and environmental projects – projects that could mean a lot to China’s future development.

Hubert Fromlet
Affiliate Professor at the School of Business and Economics, Linnaeus University
Editorial board

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