Opening up 2.0
China’s leaders want foreign businesses to invest in the country’s embattled economy. Have they had a change of heart or are they just desperate?
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Many of China’s manual labourers may have returned to their hometowns empty handed this Spring Festival. So argues an article in The Economist, which states that large companies hiring migrant workers – many of them in the construction industry – are falling behind in payments due to a slowdown in the real estate market.
Protests over unpaid wages in the period before the Spring Festival have doubled compared with last year, according to data from China Labour Bulletin, a watchdog organisation in Hong Kong (see chart). Several local governments have voiced concerns. The “severity and complexity of the situation cannot be ignored”, said the Communist Party boss of Huaibei, a city in the eastern province of Anhui, last month.
Developers like Evergrande were on the verge of collapse in 2022, when the Chinese government finally decided to put the lid on the overheated housing market. But now the ripple effect of those policies are being felt across the economy, which was responsible for almost one third of China’s economic growth. Despite record cuts to mortgage loan rates and moves to pressure banks to offer cheaper mortgages, buyer sentiment is still weak in the market.
Red flags are going up all over China’s economy. Youth unemployment is up over 21%, with a glut of grads having to settle for dull local government roles or, worse, labouring in the fields. Last year in Henan, record unseasonal rainfall caused a fall in production and huge losses for farmers. Foreign direct investment has reached its lowest levels since the 1990s, dropping 82% in just one year.
The government has blamed everything from the global economic slowdown to covid (of all things), and says that China is still in the process of bouncing back. They have announced that they will take strong actions to counteract these issues: cracking down on financial fraud, stricter control over IPO access, better monitoring of mutual funds and improving financial regulations. Perhaps if we say the word ‘financial’ enough times, the problem will go away by itself. In general, though, the government is hoping that boosting the domestic market will reinvigorate consumer confidence, and thus reinvigorate the economy.
But focusing solely on internal consumption picking up and domestic companies being able to create new jobs for graduates won’t cut it. It’s too slow for one, and besides, China’s focus is shifting from becoming a manufacturing hub to an industrial hub. The government needs an economic strategy to go along with its Made in China vision. And that strategy is reaching out to new friends and old foes to see if anyone’s interested in playing.
The plan
Against this backdrop of economic uncertainty, China has decided to embark on a diplomatic charm offensive aimed at strengthening ties with foreign partners and promoting international cooperation. The first of these moves that caught my eye was the lifting of a 24-year-old ban on imports of beef from Spain. As random as this seems on the surface, it indicates a sort of first step in China's willingness to expand trade relations and diversify its sources of imports, something it had been trying to avoid in recent years.
On his recent visit to the Munich Security Conference (MSC), Chinese Foreign Minister Wang Yi met with several European leaders to convince them to work together more actively. Speaking with German leaders, and making trips to Spain and France, he urged leaders to see the benefits of “mutual trust and win-win cooperation” and tried to convince them “that there is no fundamental conflict of interest” between them and China. Part of his goal is to show them that relations can be stabilised, as can the Chinese economy. While no longer in double-digit growth figures, China is still an important strategic partner and a stabilising force in an increasingly turbulent geopolitical situation.
One strategy to lure in foreign investors is by ramping up development in the Chinese aviation sector. China unveiled its new C919 jet at the Singapore Airshow, a homegrown passenger plane that’s designed to compete with the likes of Boeing and Airbus. The goal is to make China the #1 destination for the aerospace industry, which has taken a huge chunk of government investment, which they’re hoping will pay off big time. "I personally believe it would be possible for China to reach 5 percent to 5.5 percent (growth) this year," says Justin Yifu Lin, vice-chairman of the Committee on Economic Affairs of the National Committee of the Chinese People's Political Consultative Conference.
As long as China maintains dynamic economic growth and further opens its market, most companies and nations will have no reason to restrict their access to the Chinese market…the nation has reached a stage at which it is able to mobilize enough domestic capacity, resources and talent, when necessary, to achieve breakthroughs in certain areas.
Speaking on the aging issue in China, Lin said it is unnecessary to feel pessimistic. The number of working people is not as important as how effectively they provide their labor input, which largely depends on their education.
I believe him to be sincere in these statements.
Apart from sending out politicians on press tours, China is also encouraging domestic businesses to make links with companies abroad. Chinese EV companies like BYD have made great strides in European markets (much to the chagrin of some onlookers in the EU), and ecommerce giants like Temu have practically taken over global social media channels, putting China ahead in the global race for cheap products and fast shipping times.
It seems too that other nations are not totally averse to working closer with China. For their part, Spain has “agreed to enhance cooperation in various fields such as telecommunications, healthcare, electric vehicles and green energy.” However, this does not mean that China will be welcomed in Europe with open arms and open wallets just yet.
The catch
Despite the popularity of China’s EVs among European consumers, European governments are not so thrilled about this development, citing concerns over national security and the importance of ‘de-risking’. The Dutch government is similarly worried about working with Chinese chip firms, claiming that China may seek military advantages through the use of Dutch technology. The US has also warned China against dumping unused goods on the global market to ease oversupply back home: “China has acknowledged the risks from overcapacity, which has been a feature of its industrial development for decades, but has not outlined a clear plan to tackle the issue.”
China may want to cosy up to advanced foreign nations for ‘mutual benefit’, but needless to say the West at least is still very cautious of an until-recently very prickly China. According to China itself, however, these concerns are unfounded:
The EU has launched several investigations against China. Among these, the European Commission is probing a subsidiary of the Chinese rail company CRRC to ascertain if it received subsidies that unfairly allowed it to undercut European competitors. Additionally, an anti-subsidy investigation into Chinese EVs commenced in October 2023.
The investigations into China's auto exports by the US and the EU are not conducted from a perspective of global interest but originate from hegemonic and unilateral thinking.
Even where China has been successful in drumming up foreign support, the deals often come with strings attached. A joint venture between Saudi Arabia and Chinese tech companies Sensetime and Alibaba will require Chinese companies to share technical expertise, train local staff, and buy out Saudi investors’ shares if the company fails to go public or find a buyer.
Several Chinese investors said when raising new venture funds, their Saudi counterparts would only invest if 30 per cent of the new fund was spent on projects in the kingdom. According to three Chinese fund managers, these measures contrast with the attitude a decade ago.
“Before, Chinese venture capitalists with no name or track record would walk away with a blank cheque,” said one Chinese VC investor who has explored raising a Middle East fund. “It’s much harder now.”
In India, Chinese phone companies have been ‘convinced’ to outsource their manufacturing processes to Indian companies, a move Global Times characterises as an "arranged marriage”, which is not racist at all. But this curt remark may stem from the apparent bitterness (at least of the author of the article) towards India for their general attitude towards Chinese companies:
From banning Chinese apps to tax probes, as well as interfering in the appointment of senior executives of Chinese companies, India's intensified scrutiny of Chinese companies has been hysterical.
The Indian side does not need to act so bluntly in forcing Chinese companies to open up their supply chains.
But apart from complaining about the issue, there’s not a lot China can do about the situation. As the author of the article points out themselves:
Chinese phone companies have gained strong popularity among Indian consumers for their value-for-money products. According to data from Canalys, Vivo had a market share of 18 percent in India in 2023, just one percent behind Samsung at the top. Xiaomi had a market share of 17 percent, followed by Realme at 12 percent and Oppo at 11 percent.
China has worked hard to embed their products and manufacturing processes into the global economy. Though they’ve had the upper hand for the past decade or so, they can’t pull out now the tables are turning. Doing so would be nothing short of disastrous for the already beleaguered economy.
It might seem that China’s attempts to woo foreign leaders and businesspeople is an abrupt about face from their usual bullish behaviour, but the truth is China has been at this for over a year now. According to my own newsletter from last year:
The government seems to be pinning its hopes somewhat on foreign investment, with top officials spreading the good word that China’s economy is back online and ready to grow to whoever will listen. At the World Economic Forum in Davos, people reported that vice-premier Liu He was trying to get everyone pumped up about a recovering Chinese economy. The State Council also sent a request to regional authorities asking them to support foreign investors in setting up research and development (R&D) centres in China, including funding for universities, scientific research institutes, and vocational schools.
I don’t think that reaching out cap in hand to unnatural allies was China’s first choice for economic recovery, but at this point they don’t really have a choice. They can no longer rely on internal consumption as they had hoped – not even in peak seasons like CNY, where travel was up over 19% but spending was only up 7% on 2019 figures. All this is to say that we can expect to see a lot more Chinese politicians wining-and-dining with top leaders from all over the world in the coming months, and possibly even years. This will be China’s leader's strategy for the foreseeable future, and it's as safe a bet as it comes. It’s just that their hearts aren’t really in it.