China’s plan for independence

EurochinaBridge: China’s plan for independence

Less than a month remains until the next meeting of the Central Committee of the Communist Party of China, which will take place in early October. The global crisis caused by covid-19 and the outbreaks of the virus dominate all the media attention, leaving in the background the conclave in which the direction taken by the second most important economy in the world will be resolved. Everything indicates that there is going to be a turnaround in the country that could harm Europe and, especially, Germany in the medium term. China is preparing a strategy to reduce the dependence of its economy on abroad, through a plan that will lead the country to move closer to self-sufficiency to protect itself against the new 'era of disorder'. This change can pose a serious threat to the big trading partners of the 'Asian giant'.

If confirmed, it will be a change of course after years of integration. The liberalization reforms carried out in China from 1978 onwards created an economy totally dependent on foreign demand (exports) for low value-added goods. Little by little, the Chinese productive fabric was climbing towards the manufacture of goods with greater added value (chips, telephones, medical devices ...) that generated a greater profit and reduced dependence on the outside of some of these goods with key to the military development or artificial intelligence.

Beyond this trend, which has continued as labor costs rose and the economy became more specialized, the Chinese authorities presented a new strategy after the 2008 global crisis that included expanding domestic demand to achieve more growth. solid and sustainable over time. This has led China to consume millions of foreign goods and services, supporting the growth of other countries. Official data reveal that domestic consumption in China accounted for 57.8% of GDP (40% household consumption and 17% public consumption) last year, compared to 35.3% in 2008. The composition of GDP China now looks much more like that of a developed country, where private consumption has a great weight.

This increase in domestic demand has caused a drastic decline in the current account surplus, which has gone from around 9-10% of GDP in 2008 to 1% today. China has become a major importer of quality intermediate goods, benefiting Germany, Japan, South Korea or the US. This is what seems to be in danger with the new strategy that the country intends to adopt as of October, known as 'dual circulation' (dual circulation). China wants to start producing a greater part of all the high value-added goods and services that it now imports, an inward turn (similar to what Trump intends or intended in the US) that reduces the country's external dependence, especially now that relations with the United States and its allies are increasingly tense.

Peter Dixon and Jörg Krämer, economists at Commerzbank, have called it "China's path to autarky." It is true that Beijing can take that path, but it is impossible to believe that it will achieve the goal in a world that is still globalized and in which China still needs to import, for example, vast amounts of oil. However, countries like Germany or South Korea should be concerned. China cannot extract oil from where there is none, but it can start producing the goods and services that it buys from these countries today.

Experts from the German bank explain that the Asian country has taken this path in order to reduce the vulnerability of its economy with respect to the trade conflict with the US: "China is striving to achieve greater independence from the global economy, focusing on the domestic market However, this strategy poses significant risks for China and western industrialized economies. " The conflict with the US is one of the defining characteristics of the new era the economy is entering, dubbed the 'age of disorder' by Deutsche Bank economist Jim Red.

If disagreements over technology continue to worsen during this decade, the effects will reverberate around the world, says Jim Red. This expert believes that competition between China and the US "will result in a 'technology wall' that will reduce interoperability or interaction between platforms. Rival Internet, satellite communication networks, telecommunications infrastructures, CPU architecture, payment systems... Companies and countries will have to choose a side or implement two different communication standards and networks to guarantee interoperability ", explains this expert . If China wants to compete for network dominance, it must have the capacity to manufacture high-quality technological goods.

An obstacle for countries that export these goods to China

"What matters for China's foreign partners is that the arrival of the 'dual circulation' strategy appears to be a step to reduce dependence on imports, particularly on high-end manufacturing supplies and equipment," highlights Alicia García Herrero, Natixis economist and one of the leading experts in Chinese economics.

"While this is a reaction to the US move to decouple global supply chains, Beijing's initiative will surely raise new concerns for Japan, South Korea, Germany and other countries that have benefited from the export of intermediate goods. to Chinese companies ", says the expert in a note published by the French bank.

Like the strategy launched in 2008, it was intended to stimulate domestic demand (which increased imports and reduced the foreign deficit), this new plan aims to do the same but with the objective that "domestic production can meet that demand, rather than imports. In this sense, the 'dual circulation' strategy is a spin-off of the government's earlier Made in China 2025 program to enhance China's technological capabilities, making it possible to replace high-end products thanks to advances in key sectors, "says Herrero.

With the previous strategy, Made in China 2025, the country put the right pillars to escape the middle income trap and try to become an economy oriented towards the production of technology and high added value goods. Now, the country's leaders want to take the final step to produce this type of goods, the demand for which was satisfied, to a large extent, with imports from the countries that produce these goods.

For example, last week it was reported that with an export share of 9%, China had become (after the euro zone) Germany's most important export market in the second quarter of 2020, overtaking the US for the first time. Germany mainly exports vehicles, car parts, aircraft, machinery and industrial equipment to China. China's plan is to reduce imports of these types of products as well as electronic integrated circuits, phone parts and other electronic devices. Little by little and after years of a lot of investment, China is being able to produce these goods to meet its own demand.

In other words, the old 'rebalancing' was about reducing China's dependence on exports. Rather, the push for this so-called 'dual circulation' plan is about reducing dependence on imports and increasing self-sufficiency. ", says Herrero.

This economist believes that the strategy will serve to protect the Chinese economy from volatility that could come from abroad and, at the same time, benefit from sales in foreign markets. China does not want to stop selling its products abroad, it simply wants to reduce what its economy buys abroad. This in terms of GDP can be positive if Chinese companies manage to produce what is now important with a good quality / price ratio. The result is that China will produce much more, both to meet its domestic demand and to export. The result can be a much larger GDP. "The rebalancing strategy (China consuming and importing more) was great news for the rest of the world, as it boosted exports from most countries to China. This time, the countries that benefited are likely to be disappointed, in particularly those that export end products with high added value that China can now produce by itself ", Alicia Garcia Herrero sentenced.



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