This column was previously published in L’Express on 27th January 2022
2022 is a window of opportunity for Europe to draw up the conditions for a new dialogue with China… It just requires a new mindset.
“Europe must establish a balance of power”, said Thierry Breton to L’Express recently. This is a belated but welcome awakening. Will the European Commissioner for Internal Market be able to put these words into action and take up the opportunity that China will be offering during the pivotal year of 2022?
Today, China finds itself trapped temporarily between two cycles: in 2021, Beijing’s leaders finally admitted that they had come to the end of growth driven by over-valued real estate and indebtedness. The also know that they have to rebuild their economy based on increased productivity, which, however, is hardly compatible with their clearly-stated ambition to give greater control to central government.
Beijing’s turns of the screw have wiped out growth in the fourth quarter.
We may well have become used to the frequency of state intervention under President Xi Jinping — in 2013 against corruption, in 2015 against the stock exchange bubble, in 2018 against the private sector — but numerous Chinese voices are being raised today against the excessive measures imposed in 2021. The various turns of the screw have in fact almost wiped out economic growth in the fourth quarter. A brutal deleveraging of 10 GDP points triggered a real estate crisis; attacks on the internet sector smashed domestic consumption pushed upwards by the digitization of services; the “normalization” of young people’s behavior patterns engendered a fall in the birth rate; ill thought-out energy transition led to a general shortage of electricity in September.
With mounting popular discontent, particularly because of the ineffectiveness of the “zero Covid” policy, 2022 should see a re-balancing of government control and economic growth. But the latter will continue to be driven largely by the export boom, the only sector that is progressing strongly — to the tune of 20% to 30% in 2021. China has learned its lesson from 2008: at that time, it indebted itself massively in order to finance a recovery plan that saved the West after the subprime-crisis. Today; it is the main beneficiary of the extra 25 GDP points of public debt incurred by the USA and Southern Europe, and which is contributing to the record Chinese trade surplus of almost $700 billion in 2021.
Reversing the dependency situation
Paradoxically, this is where the key lies for Europe in establishing a new balance of power with China. Europe found itself heavily dependent on imports from China in 2021, but, in 2022, China is going to need Europe more than ever, so as to ensure not only its short-term growth from exports, but also its longer-term growth from increased productivity. This is a field in which Europe should continue to excel, because of its industrial software, its operational skills in the service sector, and its human capital.
The French presidency of the EU should make use of this passing weakness
Any new balance of power with Europe must, however, include reinventing the way we talk to China. Firstly, we must prioritize contacts with local authorities in the most dynamic provinces, a long way from Beijing — Guangdong, Shanghai, Fujian — and whose finances have been drained by the real estate crisis. Secondly, we must talk to the private sector, looking for new growth drivers in technological upgrading. Finally, we must work on China’s young people, who are attracted by a more modern lifestyle and who regard our luxury brands as iconic.
Beware of decoupling
Over the next six months, the French presidency of the European Union should therefore prioritize exploiting — in “Chinese fashion” — China’s relative and temporary weakness, and deal with a new hand of cards. This window of opportunity could open even wider if Beijing’s insistence on locking itself into a “zero Covid” policy were to bring about a reverse decoupling of Chinese and Western growth.
However, it is to be feared that, for purely electoral reasons, French diplomacy will prefer to continue its systematic and convenient criticism of the Chinese regime. After Tiananmen in 1989, the Asian crisis in 1997, and the subprime-crisis of 2008, it would be a good idea not to make this list of lost opportunities any longer, and to benefit from the weaknesses of of the giant from Asia.