When Chinese President Xi Jinping next visited Europe, the world economy is now a much different area than it was five years ago.
Since 2019, a pandemic wreaked havoc, Joe Biden was sworn in as US president, Russia invaded Ukraine ( which Beijing tacitly backed ), German Chancellor Angela Merkel stepped aside, the US Federal Reserve carried out its most aggressive tightening cycle since the mid- 1990s and the European Union ( EU) is threatening new tariffs on Asia’s biggest economy’s exports.
With all of this, Xi has performed one of his most difficult balancing acts in his ten years in power. His swing through France, Serbia and Hungary comes as concerns about Beijing fueling Russia’s war machine collide with Xi’s need to tap Europe’s electric vehicle ( EV ) market, convince the West that Chinese “overcapacity” concerns are overdone and that China’s property crisis wo n’t be the cause of the next global financial crisis.
All of this while avoiding falling into a wider trade dispute with a crucial economic union due to China’s post-Covid recovery’s producing boom.
But there has been a significant change over the past five decades. When Xi last visited, China’s gross domestic product ( GDP ) was roughly the same size as the EU in US dollar terms. Today, it’s about 15 % bigger.
” The cyclical setting of Europe and China items to the business balance turning in China’s prefer”, says Cedric Gemehl, scientist at Gavekal Dragonomics.
At the same time, nevertheless, EU place demand is showing signs of recovery, which could be a benefit for China- made merchandise purchases.
The eu economy ultimately experienced some significant development in the first quarter of 2024, according to ING Bank economist Bert Colijn, following a long period of stagnation since the power crisis first started in the second quarter of 2022. A more robust power source and a significantly lower cost of ownership, which in turn lower inflation, make up the economy. Pay growth, in turn, has accelerated to make up for lost buying energy, which is now benefiting consumers”.
The EU has the upper hand, according to some economists, as China is under more US force, including restrictions on investments in island companies.
One great disclaimer: the EU’s 27 people are all over the place on China relationships. Some people complain about Beijing supporting Russia’s military business, people about China’s subsidies for EVs and clean energy industries, and still others about human rights concerns. All of the above are irritable to some.
It’s no accident that Xi’s timetable begins in France. Xi met with French President Emmanuel Macron, who may appear to be a fellow traveller, three days after German Chancellor Olaf Scholz made a trip to China.
Macron’s need for Europe not to become a “vassal position” of the US makes him Xi’s best guess for cajoling the legislation course in Brussels. A significant overlap in the Venn diagram for Beijing and Paris is the argument that Macron made frequently and first for” proper freedom” from Biden’s Washington.
But challenges abound. One is Macron’s desire to protect France’s economy from a wave of low island products and exports of EVs and other natural products, which Brussels claims are funded by “unfair” authorities subsidies.
Another: Xi’s attempts to downplay China’s support for Vladimir Putin’s exploits in Ukraine ( Macron has floated the possibility of a French deployment there ).
” Xi will use his day with Macron to downplay China’s continued support for Putin’s war machine”, said Matt Geraci, an associate producer at the Atlantic Council’s Global China Hub.
Macron also is n’t thrilled by Xi’s choice of stops after France. According to reports from Western media outlets, Macron hoped to maintain the focus on Franco-Chinese ties rather than Serbia and Hungary, which are Russia-friendly.
Eastern European powers, including Macron and Scholz, are concerned that Xi’s time spent in pro-Kremlin lines, which he claims, violates broader EU legislation signals. The problem, of course, is the extent to which those prevents squander any kindness Xi may acquire in Paris.
Of course, Xi can be quite talented at pitting Western countries against one another in front of the wider EU union. Take, for example, the Germanic party’s April trip to China, notes Rolf Langhammer, top scientist at the Kiel Institute. ” Scholz largely followed the quarrels of European business”, Langhammer says.
” For instance, that low-cost Chinese upstream items offer both cost advantages for domestic business and encourage European consumers and processors to get environmentally friendly goods,” for instance. European businesses worry about reprisal if China is subject to import tariffs from the EU, he added.
These arguments, according to Langhammer, are natural from a macro perspective. However, they disregard the well-founded issues raised by the EU Commission regarding the anticipated surge of Chinese imports into the EU’s single market, which is currently the only available market in the world.
Of Xi’s vacation this year, Mathieu Duchatel, senior colleague at the Institut Montaigne, observes that “diplomacy only is unlikely to produce substantial outcomes in EU- China relations, as this explore may once again underscore. Those looking for a more realistic way to address trade, technology, and investment relations between the EU and China should turn their attention to the EU’s evolving economic security agenda.
According to Duchatel,” a lot still needs to be done.” Without economic intelligence, the difficulty of developing a European economic security agenda is demonstrated by the difficulty of establishing a supply chain resilience challenge. Successive crises have exposed weaknesses in Europe’s supply chains. Private companies and individual member states have primarily taken steps to reduce these risks, though.
The European Union’s efforts to address supply chain flaws have not yet produced significant results, according to Duchatel, despite its own economic intelligence capability. The European Commission must combine and analyze strategic information on a scale greater than that of individual member states and private entities in order to effectively address this challenge. The Commission would gain from all EU countries and European businesses by becoming a key player in supply chain resilience decisions.
In the interim, EU President , Ursula von der Leyen is , raising the temperature with a slew of trade restrictions against Xi’s Communist Party. In part, the effort aims to fulfill her commitment to improve Brussels ‘ impact on the world. Part is aimed at assessing the broader costs of China’s subsidies for EVs and its support for wind parks, solar manufacturers, railway firms and medical devices.
” We recognize what we see as the Chinese playbook” , , Margrethe Vestager, the EU’s competition chief, tells Bloomberg. Knowing that you have been played teaches you to be much more watchful and take better actions.
Vestager says that” we are fully utilizing our trade tools and our tools that come with the foreign subsidies regulation to restore fair competition.”
The so-called “external subsidies regulations” are intended to protect against state funding that causes unfair competition for public tenders and deals to the detriment of European businesses.
Last month, Vestager’s team unveiled a subsidy investigation into China’s involvement in wind parks in Bulgaria, France, Greece, Romania and Spain.
The extreme uncertainty surrounding geopolitical tensions, according to economist Maartje Wijffelaars of Rabobank International, has made the year 2024 even more precarious.
” The main question is”, says Wijffelaars, “where will it end? Solar panels, wind turbines and medical devices have also’ recently’ caught Europe’s attention”. China is essential for its desperately needed energy transition, but also because it needs both as an export market and as a resource.
Yet Xi’s real challenge, let’s not forget, is China’s economy back home. At a time when youth unemployment is at its highest level, the cratering property sector is still putting downward pressure on deflation. Municipalities, meanwhile, face crushing debt loads, including US$ 9 trillion of so- called local government financing vehicles ( LGFVs ). That’s double the size of Germany’s economy.
The trade concerns will “undoubtedly” be a key discussion point, particularly since China is grappling with a slowing economy, says Leonie Allard, a visiting fellow at the Atlantic Council’s Europe Center.
The weak yen also makes Xi’s 2024 difficult to read. The currency’s 10 % drop this year is affording Tokyo a trade advantage that China is n’t enjoying. Xi’s economy could, of course, embolden the People’s Bank of China to push the exchange rate lower.
It would be a risky gambit, triggering a broader currency war. A decade of efforts to increase the yuan’s use in trade and finance may be slowed down by doing so.
Property developers who have a lot of offshore debt might face higher default risks as a result of a weaker yuan. In the run-up to November 5, China might become a bigger issue in the US election.
The key is addressing the real estate crisis, strengthening capital markets, boosting private sector size in comparison to state-owned companies, and creating bigger social safety nets to encourage more money and saving it.
Premier Li Qiang is back in Beijing as Xi rounds the European markets, leading efforts to improve China’s economic standing. and overcoming difficulties, albeit temporarily, that Xi might find appealing because of his isolation.
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