China Research

A discussion forum on emerging markets, mainly China – from a macro, micro, institutional and corporate angle.

Do we see the end of an era of globalization in the international economy?

March 5, 2020

What are the consequences of the changes for the European Union?

Globalization characterized the second part of the 20st century.

Discussion by Professor Gerhard Stahl, Peking University, HSBC Business School

Rapidly growing international trade with goods and services and an increase in the flow of international finances characterized the second part of the 20st century, at least until the big financial and economic crisis of 2008.

Two major developments contributed in the Post-World War II period to the creation of a global economy, integrating more and more countries.

First, the European Integration starting with 6 countries in 1950 and ending up with 28 (before Brexit) with the creation of an internal market, by abolishing barriers for goods and services between EU-countries. Second, the opening-up of China by Deng Xiaoping in 1979 and its step-by-step integration into the international economy. China joined the World Trade Organization in 2001 and became the factory of the world attracting foreign direct investment from multinational companies of developed economies, enabling the creation of sophisticated supply chains based on subcontracting and outsourcing of industrial activities. The rise of China and the shift of the economic center of the world economy from Europe and the US towards Asia, the most populated continent, was for a long time seen as a positive development lifting millions of people out of poverty.

But recently the focus has shifted from the economy to geopolitics. Judgments about the international consequences of China’s successful economic development became more critical. Furthermore, Chinas economic model is changing from an investment-led, export-oriented economy towards more domestic consumption, services and green growth.

Will deglobalization characterize the first part of the 21st century?

The international political mainstream of the eighties and nineties promoted a policy of deregulation, reduction of trade barriers and free flow of capital.

Already the financial and economic crisis of 2008 has shown the vulnerability of the interconnected global economy and created doubts about mainstream policies.  The Trump administration since its start in 2017 is openly questioning the benefits of the globalized economy, based on WTO rules and multilateral institutions and policies.

Looking at some recent events, it seems that we reached a tipping point from globalization to deglobalization:

  • In Europe, Brexit will create new barriers and difficulties for the free flow of goods and services and the mobility of the workforce between the EU27 and the UK.
  • The US government blocked the normal functioning of the WTO by not nominating judges for the dispute settlement mechanism. This follows the logic of an American policy focused on national interests and bilateral negotiations at the detriment of multilateral solutions.
  • The US and China reached a temporary truce in their trade conflict by agreeing on a commitment of China to by $ 200 billion more of American made goods over two years. This agreement is in complete contradiction to the idea of free international trade. It must have as consequences that China has to buy less industrial and agricultural products from countries in Europe, Latin American and East Asia.
  • The biggest danger for the globalized economy is the conflict about technology and innovation. If the “nationality” of a company becomes the criteria to exclude it from markets, as it is the line of the US government in the case of Huawei than protectionism is back.
  • The Chinese government gives priority in its “made in China 2025” strategy to develop Chinese innovations and technologies, to make China less dependent on high tech imports and foreign technologies. Already some services like Google research and “what’s up” are blocked for customers in Mainland China. The technology and innovation race between the US and China might lead to “techno-nationalism” that curtails the international flow of goods, services, and ideas.
  • The American political elite sees China more and more as a strategic rival undermining the dominant position that the US has achieved in the Post-World War II international order. If geopolitics dominates economic reasoning an open international economy will not survive.

The European Union and its member states are interested to work with Chinese partners and to continue the successful economic cooperation of the last decades. The EU became Chinas biggest trading partner. Nevertheless, conflicts increased over the years related to market access, state subsidies and unequal treatment of European companies. The EU-Commission summarized the state of play by regarding China as a partner and strategic rival.

Reacting to trade tensions, increased protectionist measures but also to new production technologies (e.g. robotics, 3 D printing) numerous Companies start to reduce their international exposure by cutting supply chains and repatriating production. But there is also a reverse development. Electronic platforms offered by companies like Amazon, Ali Baba, and e-Bay enable especially small companies to access foreign customers at lower costs.  Looking at empirical data the situation is as follows:  Global flows of goods, services, and finance peaked in 2007, before the financial crisis, reaching more than 50 percent of global GDP. With the financial crisis, this rapid expansion has been stopped. Growth in global goods trade has flattened, financial flows have fallen sharply, and trade in services growth modestly.

How should the European Union react to the changes of the international economy and the geopolitical challenges?

The EU defends in its political statements the multilateral rule-based international system and supports international institutions (like the WTO) responsible for promoting an open international economy.

Nevertheless, there are good reasons to demand an equal playing field in international competition. It cannot be accepted that companies, whether state-owned or private, receive government support in a way that undermines fair competition.  This issue is especially complicated regarding China’s socialist market economy.  The ongoing negotiations about a comprehensive investment agreement between China and the EU (that should be concluded this year) will show in which areas a common understanding and common rules can be agreed upon.

Numerous modern innovations and technologies have a dual-use element for military purposes and private needs. Dual-use elements can be seen e.g. in aircraft construction, drones, space activities, nuclear energy, electronic chips, artificial intelligence, and the digital economy. This dual-use element makes it so difficult to separate economic reasoning from political consideration. Both China and the US support research and some national companies in line with military objectives. This might lead to non-market based disadvantages for European companies in international competition.

How can European policy react to these challenges?

The EU is at a crossroads:

  • It can develop new protectionist measures to protect European companies and to close its markets against unfair competition.
  • The second option is to develop policy instruments similar to its main competitors to strengthen European competitiveness. This approach would allow the EU to stay one of the most open economies in the world.

If the EU wants to defend an open international economy it is incompatible to distinguish companies based on their “nationality”.

An interesting example is the Huawei discussion: the European Commission has not proposed in its toolbox on 5G cybersecurity – in contrary to US demands – the exclusion of Huawei in the built-up of the new telecommunication infrastructure. But it has recommended measures to mitigate the main cybersecurity risks and it demands a diverse and sustainable 5G supply chain, not depending on one dominant company. To achieve the objective of a diverse supply chain it might be necessary to give specific support in tendering procedures or via research financing to companies like Ericson or Nokia.

To be able to stay an open economy in a period of increased protectionism and deglobalization the EU must develop appropriate policies. Especially trade policy, competition policy, industrial policy and research policy must be further developed with the objective to assure an equal playing field for EU companies in the international competition. Furthermore, the new multi-annual financial framework (MFF) has to foresee an increased financial envelope for related research and industrial policy measures. It is important that in the ongoing MFF negotiation the financing of the European defence fund is agreed. This would allow supporting military research and coordinating better national plans. Even if the proposed amount of 13 billion Euros for the fund for the 2021-2027 period is limited, it shows that the EU is aware of the dual-use problem and industrial policy consequences of military expenditure.

Professor Gerhard Stahl

 

 

 

 

 

 

 

Professor Gerhard Stahl
Peking University, HSBC Business School

 

 

China’s communication on the corona virus – reality and opportunities

February 27, 2020

More recently, the corona virus has also started to frighten stock markets. The virus has reached more and more countries – and finally Europe more visibly as well, particularly Italy. The outbreak is spreading. One may say unfortunately and unexpected – but for virologists certainly no surprise.

Statistical sources

China remains by far the most negatively affected country with its epicenter in Wuhan (see https://www.ft.com/content/a26fbf7e-48f8-11ea-aeb3-955839e06441, also the following more anonymous source with similar numbers https://www.worldometers.info/coronavirus/#countries). Here I could find for China on February 26 totally 78 073 cases with infection, 30 049 totally recovered people and, unfortunately, 2715 total deaths.

It must be regarded as impossible to judge more precisely the quality and correctness of these statistics. Despite further search, however, I could not find better or more reliable info on the Chinese infection and recovery cases.

The corona virus in Chinese media – a new opportunity for more transparency?

There is a widely spread belief outside China that the numbers for the initial outbreak of the epidemic, the unregistered cases of the disease and the true lethality rate strongly underestimate real developments. This mistrust is certainly caused by inconsistent and limited reporting in the beginning of the crisis – but also by the long-time transparency bottlenecks which I addressed many times in the past.

Having studied more lately quite a number of articles on the corona topic in Chinese media takes me to the conclusion that the virus problem indeed dominates the headlines. However, these reports are mainly presented with encouraging attributes, supported by selected positive comments on all the managed efforts from official and prominent voices from abroad.

Thus, hope dominates, also when it comes to the economy. President Xi Jinping has recently been stating that China can and will meet this year’s social and economic goals. This conclusion underlines what has been written in one of my previous blog that this year’s GDP growth should come in as close as possible to the growth goal of “around 6 %”.

But: The content of “as close as possible to 6 percent” may or will be changed in reality to a somewhat lower “as close as possible”, at the same time using the foreseeable and unforeseeable negative consequences of the corona virus as an excuse.

Right or wrong, China has recently also received some international praise for its fight against the corona virus. In my view, China has now a unique opportunity to improve transparency and international recognition by communicating as openly as possible about the corona virus and the economic/statistical consequences.

Why not commencing now – with the corona virus as the concrete starting point – a new kind of opening-up policy aiming at better transparency after Deng Xiaoping’s important opening-up approach for more cross-border trade in 1978/1979?

At the end of the day, transparency always means a virtue.

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

 

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China’s political leadership and the coronavirus – how to handle growth objectives and statistics?

February 10, 2020

Hur kommer Kinas ledare att tackla coranavirusets negativa tillväxteffekter?

Summary / Sammanfattning på svenska

Det skrivs för närvarande väldigt mycket om de negativa effekterna på Kinas ekonomi p g a coronaviruset. Detta trots att det saknas underlag till mer precisa beräkningar. Effekter från minus 0.5 upp till minus 1.5 procent av BNP nämns såväl för det första kvartalet med åtföljande normalisering som för helåret 2020 – trots den helt omöjliga förutsebarheten. Dock förbises en annan intressant fråga: Hur kommer Kinas politiska ledare att tackla den kommande BNP-statistiken med tanke på det så sent som i januari i år uppsatta BNP-tillväxtmålet för 2020 på “omkring 6 procent”?

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Every day we can read about revised GDP forecasts on China as a consequence of the coronavirus. Economists “introduce” themselves as medical doctors, virologists and experts on both Chinese politics and statistics – many of these economists, however, dealing with China only occasionally. For this reason, readers of these new China forecasts should be very careful and also consider possible psychological overreactions or minimization. I hereby stress the word “possible”. An unknown factor is also Africa with many Chinese working there. Hopefully, negative news from there will not reach us.

Analysts neglect the political strategy conflicts

The coronavirus does not fit at all in the communist party’s economic planning process. First, there is – or should be according to previous plans – the “evaluation” of the 60 relatively detailed reform plans from the Third Plenum in 2013 which should give “significant” results by 2020.

Second, in 2021 the Communist Party of China will celebrate its 100 th anniversary. A major weakening of GDP-growth the year before would certainly not be appreciated by the leaders of the strong Standing Committee and all the other highly ranked party officers.

Third, the next five-year plan will start already in 2021. This means that the underlying growth trend will be even more difficult to find if the coronavirus really should cause structural or sustained psychological damage. And it is certainly not easy to recognize and determine appropriate assumptions and preconditions five years ahead in this critical and not normal year of 2020.

Fourth, considerably slower GDP growth in 2020 could indeed jeopardize the official objective to double GDP in the decade to 2020. It will be a narrow race in any case.

The alternatives

Altogether: Looking at 2020, it appears obvious that President &:Chairman Xi Jinping and the other political top leaders around him actually cannot “afford” a clear weakening of GDP growth. Such a negative development can either be counteracted  by further fiscal or monetary stimuli and/or by “window dressing” of GDP statistics (as critics interpreted surprising upward-revisions of GDP last fall).

It is hard to imagine that China’s political top leaders (in the Standing Committee) will remain passive without influencing GDP in a more positive direction. In my view, trying to remain relatively close to the official growth target will have political priority. But I do not want to give a GDP-growth number for 2020 at this very moment.

Conclusion

Clearly missing the annual growth target and/or the goal of doubling GDP would be negative or even embarrassing for China’s political leaders – unless the coronavirus really would make the situation much more critical. Consequently, keeping GDP growth for 2020 as close as possible to the “around 6-procent target” seems to be the guiding strategy.

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

 

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