China: a third Plenum void of reforms but full of insights
This column was previously published in l’Opinion on July 25th, 2024
Although there is no concrete indication that problem areas are being addressed, the key message is that, from now on, politics and geopolitics will rule the economy.
The people getting the most pleasure out of reading the report on the third Plenum that has just been held in Beijing will be the fans of neo-Marxist-Leninist jargon. However, those who believed that, because the meeting had been delayed for almost nine months, there would be clarification on the urgent reforms needed to fight off the now proven slow-down in the economy, are unlikely to be satisfied with just the mention of “new factors of production” and “high-quality development”.
There is no concrete indication that the problem areas are being addressed: firstly, the low level of domestic consumption, as shown by the cosmetics market which L’Oréal expects merely to be stable for the second consecutive year; secondly, the real estate crisis, with prices plummeting further in June; thirdly, the crisis in the financing of local authorities and regional banks — a crisis sustained by insufficient fiscal transfers from Beijing; and, lastly, excess capacity in so-called “strategic” industries, still been denied by central leaders despite glaring proof of this with regard to electric vehicles, solar panels or mature semi-conductors.
From now on, politics and geopolitics will rule the Chinese economy. For Brussels, this is confirmation of an increased systemic rivalry with China.
Speeding up. This third Plenum therefore confirms that current policy, deemed by the government to be effective, will continue. The priority granted to production in strategic industries at the expense of domestic demand is paying off: the trade surplus has just reached a monthly record of $100 billion, and the industry modernization is supported by the 21% increase in semi-conductor exports since the beginning of the year. Furthermore, increased state control of the economy is being achieved by ramping up public investment — up by 7% this year — whereas private investment remains at the same level. In Beijing’s view, ever since Covid, speeding up the transition to a “war economy” has been a success and is a recipe not to be changed.
This is the real message that has come out of the Plenum: from now on, politics and geopolitics will rule the economy. For Brussels, this is confirmation of an increased systemic rivalry with China, as mentioned by Ursula von der Leyen already in 2019. Europe is now sandwiched between, on the one side, future US productivity increases because of generative artificial intelligence and, on the other side, lethal deflation because of China’s state subsidies, boosting the modernization of 20th century mature technologies. The first victims are the main European players in the electric battery sector who, one after another, have recently announced they are abandoning plans for new local factories
Therefore, the new European Parliament must urgently adhere to the “radical change” advocated by Mario Draghi, whose voice was oddly suppressed during the recent election campaign. The first leverage tool would be the total reworking of governance by Brussels, and replacing the right of a nation to impose a veto by the principle of an overall majority. The second would be the introduction of a tax at their entry into Europe on those products from our trading partners whose pricing is responsible for distorting the market. This should go hand in hand with a “Chinese-style” long-term strategy for industry. It is this change of paradigm that will enable us to build a new relationship of interdependency between Europe and China, and with the United States.
