Spirit of reform needed more than ever

European Chamber President Jörg Wuttke

At first glance, all seems well in the Middle Kingdom, with a significant number of European Chamber members having posted record figures for revenue and profit in 2020. After China’s impressive recovery amid the unprecedented challenges thrown up by the COVID-19 pandemic, many European firms’ China operations found themselves in a position to help stabilise their headquarters and make up for losses incurred in other markets. The Chinese economy looks set to remain strong for decades to come, and the near-term outlook for European companies operating in China is positive overall.

Yet there are troubling signs that China is increasingly turning inwards, as can be seen in its 14th Five-year Plan, and this tendency is casting considerable doubts over the country’s future growth trajectory.

China’s current level of per capita gross domestic product is comparable to that of the economies of Japan, Korea and Taiwan 40 years after they embarked upon their respective reform and market-opening programmes. However, data show that, over the last five years, China’s growth has already fallen slightly behind where it should be, a trend that could continue if Beijing chooses to dispense with bold market reforms in favour of a more insular approach. China’s ambition to cement itself as a global economic superpower is by no means certain.

Of greater concern to European Chamber members is the extent to which they will be able to contribute to China’s future economic growth.

The programme of reforms launched under Deng Xiaoping’s leadership in the late 1970s initially propelled China forward at breath-taking speed. However, over the intervening four decades, reforms have vacillated as Beijing sought to balance growth with its conflicting need to maintain economic control. A key aspect of maintaining control appears to be the continued favouring of state-owned enterprises, despite the fact that they lag the private sector in terms of efficiency and productivity. In the meantime, it seems China is employing methods to increase control over its vibrant private sector in order to achieve its policy goals, while finding ways to exclude foreign companies from the market, and particularly from strategic sectors. Although the potential costs of such an approach may not be felt for several years, they are considerable and should not be overlooked.

Building more resilient supply chains makes sense in order to counter the kind of challenges that saw production disrupted across multiple industries during the COVID-19 pandemic, but less diversification will ultimately result in more expensive, yet suboptimal, solutions. Reducing international engagement will necessitate a steady flow of domestic subsidies and the maintenance of tariffs. The corresponding decrease in market competition will also dent China’s ambition to become a leader in high-technology sectors and compromise its 2060 carbon neutrality target, while resulting in a less dynamic and innovative market overall.

To that end, we have just launched our Position Paper 2021/2022, containing 930 constructive recommendations made by our 35 working groups and sub-working groups, and will be using this ‘advocacy bible’ to engage with the Chinese authorities at all levels over the coming months. We hope that this will allow us to continue moving the needle on behalf of our member companies, while convincing China that it is only through the development of an open, fair and competitive market economy, underpinned by strong insitutions, that it will be able to achieve the high-quality, sustainable economic growth that it seeks.