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Commentaries

Xi’s Thoughts on “Socialism with Chinese Characteristics in a New Era” and What it Means for Economic Relations with the EU

posted by eucentresg

Xi's speech and EU-China relations_500x334

The views expressed in this commentary are those of the author and do not necessarily reflect the views of the European Union or the EU Centre in Singapore.

A printable version of the commentary is available HERE.

 

In a 200-minute speech full of jargons and clichés, Chinese president Xi Jinping in his address to the 19th Party Congress not only lauded what had been achieved by the party since the 18th Party Congress in 2012, but also announced the advent of a new era for China to become a truly influential country in the world, one that all Chinese can be proud of. However, this great socialist modernization of China will only be achieved in a two-stage plan. From 2020 to 2035 China will be transformed into a modern, innovative socialist country, with strong economic and scientific power delivering on improved livelihood for the people and closing of the urban-rural income disparity. And from 2035 to 2050, China will establish itself as a Great Power, a prosperous and influential country in the world, fulfilling the long-awaited “Chinese Dream” of national rejuvenation.

This two-stage plan and other centenary goals that he set for 2021 (hundred anniversary of the Chinese Communist Party) to “wipe out poverty” reflect his key emphasis on domestic issues. His enunciation of the principal contradiction facing Chinese society – that of unbalanced and inadequate development and the people’s ever growing needs and expectations for a better life – reflect his concern to deliver a more inclusive quality growth as the legitimacy and survival of the Chinese Communist Party (CCP) would depend on its ability to address this contradiction.

For those who were looking for signs of further liberalisation of the Chinese economy using market tools and allowing the market to play a more decisive role in allocating resources, they would be disappointed. Xi’s speech and his earlier actions to consolidate his power and have his thoughts enshrined in the Party’s Constitution point to the return of more state control, or perhaps more rightly, party control in the economy and other facets of society. While promising to keep the Chinese economy open and to “level the playing field for foreign investors”, he also announced plans to make state-owned enterprises (SOEs) bigger, stronger, and more efficient, adding that the government will promote the strengthening and expansion of state capital, prevent loss of state assets, developed a mixed-ownership economy and cultivate globally competitive world class firms. Rather than liberalise and marketise SOEs, Xi appears more intent on reasserting Party’s control over SOEs. And instead of reducing their role in the economy, they look set to play a major role in Xi’s Belt and Road initiative (BRI). In short, we can expect more state control over the economy but with some niche sectors remaining fairly open to foreign investors.

Under Xi, China looks set to embark on “globalisation with Chinese characteristics”. There would be more state control and greater use of industrial policies to advance its goals of boosting innovation and manufacturing. What would this entail for China’s relationship with its biggest trading partner, the European Union (EU)? In an era of “America First”, and an increasing call for a Europe that “protects”, and now, China under Xi’s thought of “Socialism with Chinese Characteristics”, it looks set that relations between China and its external economic partners would become far more complex and contested. China-EU economic relations are likely to become more contentious by what Xi has decided to do following the 19th Party Congress.

Trade and investments between the EU and China has grown dramatically over the past two decades. Aggregate trade between the EU and China surpassed €514 billion in 2016, up from €260 billion in 2006. The trade has been increasingly in favour of China with the EU enduing an increasing deficit of over €130 billion. The EU is China’s biggest trading partner while China is the EU’s second largest trading partner after the US. With regards to investments, EU firms invested over €141 billion in China between 2000 and 2016. Chinese investment stock in the same period totaled over €110 billion. However, as a reflection of the increasing difficulties encountered by EU firms, EU’s annual investments into China have started to decrease. While Chinese investments into Europe rose by 77% in 2016, EU investments into China fell by a quarter over the same period.

The European Chamber of Commerce in China (EUCCC) had recently published a position paper urging the Chinese leadership to honour its public commitments to free trade and globalization by leveling the playing field and allowing European companies reciprocal access to China’s market for trade and investments. The paper noted that 54% of European companies perceive that they are being treated less favorably in comparison with their Chinese counterparts. Many EU business leaders also perceive Chinese companies as sources of unfair competition not only in the Chinese market but also in the EU markets.

This is only one of the several differences that have started to emerge between the EU and China with regards to their economic relations. The increasing differences have culminated in the EU’s failure to recognize China as a market economy and the Chinese challenging this in the WTO. The EU has also pursued a number of anti-dumping cases against China, from steel products to solar panels.

The difference over market access is currently the most challenging issue in the ongoing EU-China negotiations for an investment agreement. While EU business leaders complain of “unequal treatment” in Chinese market, Chinese investors in the EU are also facing growing scrutiny from European regulators on grounds of national security and unfair competition. In the face of mounting political and public concerns about a surge in Chinese investments and acquisitions of European companies in high-tech sectors, there has also been call for the EU to consider an EU-wide investment screening mechanism similar to the Committee on Foreign Investments in the US (CFIUS). Jean Claude Juncker in his State of the Union address to the European Parliament in September this year unveiled plans to tighten the screening of overseas investments.

Differences over the role of the state in their respective economies, and the implications these have with regards to the economics-security nexus, might lead to more strategic competition between the EU and China in the geo-economics sphere. While the deep economic engagement between the EU and China over the last few decades means their economic fates have become strongly interlinked, the increasing divergence in political outlook has led to the EU’s fear that such competitive interdependence might be “weaponised” for political gains by the Chinese. The “renationalization” of China’s Europe policy with its focus on bilateral ties, the 16+1 framework for China’s cooperation with Central, Eastern and Southeastern European countries, have raised concerns over China’s rising influence and its potential impact on European unity and policies. An example was action taken by Greece to block EU statement on human rights in China at the United Nations.

There remains great potential for increased EU-China economic ties. Many areas of economic interactions remain under-developed such as trade in services, cooperation on industrial and technological innovation and financial market integration. China’s ambitious Belt and Road initiative focusing on the Eurasian continent would also benefit from broader participation by partners such as the EU. However, these are also areas that will become increasingly politicized as China tightens its control over the economy. One could foresee increasing European frustrations over its economic relations with China, but at the same time, it is also not inconceivable that the two will work together to mitigate any potential disruptions to the multilateral trading order that might still be unleashed by an unpredictable Trump.

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