The China think tank Merics is an institution in Berlin. Last week, Foreign Minister Annalena Baerbock (Greens) presented the federal government’s first China strategy. In 2021, EU Commission President Ursula von der Leyen held her keynote address on China in these rooms.
In 2021, the Chinese government sanctioned Merics and other European institutions in retaliation for EU sanctions. Since then, Merics employees have not been allowed to travel to the People’s Republic.
Mr. Huotari, the federal government is warning companies with large China business to position themselves more broadly. But many companies are in China because the market continues to grow – what are the prospects for the coming years?
China is at a turning point in its economic development. The economic recovery after the end of the corona restrictions is much worse this year than many expected. We will continue to see positive numbers on paper due to the base effect, ie year-on-year comparison, but it is clear that China is facing what Japan has already experienced: a lost decade.
Where does this weakness in the Chinese economy come from?
In addition to the current acute crises, the Chinese leadership has postponed many necessary structural reforms for too long. China is one of the most unproductive economies in the world. It is struggling with massive financial problems, especially at the local level. The innovation-driven growth that the government had been aiming for is coming under pressure, among other things because of foreign technology restrictions. China’s economic and political foundations are shaky.
Surveys show that most of the companies that are already in China still want to invest further. Are they wrong?
Not necessarily. Poor overall growth does not mean that individual sectors cannot do better. And global business prospects are not a beauty contest at this stage.
Other countries’ economies are still growing much more slowly than China’s.
Even an uncertain four percent growth can make the Chinese market more attractive than Europe in a recession. But anyone who believes that China can be the growth driver in the company, as it was a few years ago, and which balances out other developments, is wrong. Against the background of the industrial revival in the US, the decade 2030 to 2040 could even be more attractive in the US than in China. Not to mention other Asian growth markets.
Can China even overtake the USA as the world’s largest economy in 2030, as forecast?
It’s still possible, but it depends on the decisions China makes in the coming months. And, of course, where the trip is going in the USA.
The Merics expert believes China is facing a lost decade.
(Photo: Marics/Marco Urban)
Where could China catch up compared to the US in the next few years?
In many areas, China is already setting the standard, for example in infrastructure. The big catch-up continues to be in the high-tech sector: from aircraft manufacturing to agricultural machinery, to robotics, medical technology and IT. A central area in which not only China but also Europe wants to catch up with the USA is the application of artificial intelligence. Another is military technology – not only in civilian aircraft, but also in combat aircraft, China is clearly behind. When it comes to the design and production of semiconductors, Chinese companies sometimes lag behind their American competitors by ten years or more. Despite all the difficulties, I expect that China will catch up, if only because of the massive resources that are being invested in these areas.
Last week, the federal government presented the first China strategy in the history of the Federal Republic. A big hit with a view to more diversification in China or a minimal consensus?
Somewhere in the middle: an important milestone that marks clear changes in German China policy. In substance, little is entirely surprising. Much has been discussed for months. It is good that the interest in cooperation seems to be balanced overall with the description of risks and challenges. In essence, there seems to be relatively great unity in the federal government.
>> Read here: Berlin’s new China plan – These are the most important points for the economy
Chancellor Olaf Scholz sees the companies primarily as responsible for implementing derisking. Do you agree?
No. We are in a new phase of globalization. The test is to see whether we can simply continue as before with a naively liberal economic model. It is wrong that derisking in relation to China works without new incentives, support and also intervention by the state – the state sets the framework conditions.
What exactly is needed in view of more independence from China?
It is absolutely crucial that politicians support the diversification of companies more closely – and that is what they are increasingly doing. It must enable trade agreements and conclude raw material and energy partnerships. The second big topic is technology. The state cannot completely stay out of the question of whether and how companies and research institutions enter into technology and innovation partnerships with China.
The Chinese leadership repeatedly exploits dependencies to achieve political goals.
That is the third point: economic security. When dealing with China, we have to look more closely at our vulnerabilities, i.e. at dependencies that can affect our innovation and industrial ecosystems. In this context, it is not plausible to say that we only do this from the point of view of what companies want and can do on their own.
The companies that are heavily invested in China say that they have long been derisking because they produce in the People’s Republic for the Chinese market.
This shows that the definition of risk on the corporate side can be very different from the political definition. Securing supply chains is a top priority for companies in this new phase of globalization. Localization is a rational answer. But this strategy is downright detrimental when you focus on geopolitical risks. Politicians cannot expect companies on the whole to voluntarily withdraw from the Chinese market. That would be naive.
More on the subject:
Where does the German economy first have to make itself more independent of China?
We are currently most vulnerable with critical raw materials, which are central to technological development in general and green technologies in particular. This dependency directly affects the future of Europe as an industrial location.
What time horizon is realistic?
Extracting and refining these critical raw materials in such a way that we are not dependent on China will certainly take five to ten years.
That’s a long time – against this background, it might be a good idea not to be too harsh on China?
We should certainly not proactively throw ourselves into a heated technology dispute with China. But just because we have certain dependencies doesn’t mean that the Chinese government can be played down. Rather, we must focus on expanding the dependencies that China also has on us and using them as leverage. Beijing must be aware that they too would lose dramatically if they restricted the export of critical raw materials for political reasons.
The federal government presented its new China strategy last week.
(Photo: IMAGO/Metodi Popov)
Where is China technologically dependent on Germany?
First of all in the technical field, in measuring and control instruments, high-tech machines, especially machine tools, in some medical devices, but also in specialty chemical products. There are also strong dependencies for aircraft and spacecraft and special medicines. If Germany wants these levers to remain in place and be expanded in relation to China, the state must promote these areas accordingly.
In Moscow, head of state and party leader Xi Jinping whispered to Russian President Vladimir Putin that he is currently seeing upheavals that have not happened in 100 years and that the two heads of state are driving these changes forward. what does he mean with that?
The statement shows in which historical mission Xi Jinping sees himself. He sees a turning point in the international world order. It’s not about East and West, but about autocratic systems asserting themselves more strongly internationally against democratic systems and the hegemony of the USA being broken in the medium term. This is the change that Xi Jinping sees and wants to promote.
What does this mean for German companies?
Being naive about China is the biggest mistake you can make. A completely different risk calculation must be applied to companies. This has happened to many companies, but not all of them.
In March, the Chinese President traveled to Moscow for a state visit.
(Photo: IMAGO/ITAR-TASS)
What does it mean exactly?
When assessing the risk of doing business in China, it is no longer just a question of whether one correctly assesses the growth prospects in one’s sector or how good one’s relations with the local party secretary are. It’s about much more now. China not only wants to compete with our system, but wants to assert itself. Companies dealing with interrelationships and dependencies should be aware of this. We are still in a gray area phase, but there is a risk that companies with too close ties to China will one day be perceived politically and socially as being on the wrong side of history.
Mr. Huotari, thank you for the interview.
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