De-risking threatens Beijing
Why China is dependent on the West
By Hannes Vogel
07/14/2023, 7:12 p.m
Get out of China is the motto from Washington to Berlin. But it shows that not only Germany, but also the People’s Republic has a lot to lose from growing alienation. Economically, Beijing is increasingly standing with its back to the wall.
When Foreign Minister Annalena Baerbock presented the German government’s new China strategy on Thursday, the contradictions in the relationship between the West and the Middle Kingdom could be felt in every sentence. Because Beijing is becoming “more repressive internally” and “more offensive externally,” as Baebock puts it, Germany is increasingly turning away. German corporations should look for alternative suppliers and sales markets. “De-risking”, i.e. minimizing the risks and dependencies on China, is the order of the day.
However, according to Baerbock, trade with the second largest economy in the world is so much “the backbone” for the German economy that an end to economic cooperation would be “a broken neck”. There should therefore not be a complete decoupling. Just as far away as possible.
China has also made this squaring of the circle – to become as independent as possible without jeopardizing the relationship as a whole – its official strategy. Beijing claims supremacy in Asia, but intends to continue exporting unabashedly to countries that are critical of this striving for power. The West and China increasingly want to be without each other politically, but economically they cannot.
In extreme cases, not only Germany, but also China is threatened with a broken neck: the increasing economic withdrawal of the USA and Europe is a danger for the political stability of the country. China is at least as dependent on the West as the West is on China. Because in the Middle Kingdom things are anything but smooth.
Zombie economy is kept alive with money
All economic data shows that. In June, China’s exports fell by more than 12 percent compared to the previous year and were thus more severe than at any time since the corona pandemic began three years ago. China’s President Xi Jinping is scaring away international capital with his revisionist foreign policy, thereby choking off one of the most important drivers of China’s rise: foreign direct investment.
According to the Wall Street Journal, they fell to $20 billion in the first quarter. A year ago it was $100 billion. Goldman Sachs expects capital outflows to exceed inflows this year — a tectonic shift in a country that has seen more money flowing in than out for 40 years.
The economy of the People’s Republic is in a dead end. The former locomotive of the world economy is only a shadow of itself: Beijing tore up the self-imposed growth target last year, this year it should be just under five percent at best. Almost ten percent growth, which the country has reliably delivered for more than two decades, is now only a distant memory. The IMF assumes that China’s growth will be below four percent after 2024 in the medium term – due to “declining economic momentum and little progress in structural reforms”.
For more than a decade, party leaders have been putting off a pile of unsolved problems. Above all, the gigantic bubble on the real estate market, inflated with state loans. The Chinese construction sector is a seemingly dead industry. The government is now only keeping him alive with emergency measures such as the forced extension of the term of loans. The flash in the pan hasn’t gone out yet because Beijing keeps shoveling new money into the problems. The central bank only cut interest rates in June. And Premier Li Qiang has repeatedly announced a large stimulus package.
Between gunboats and direct investments
At the same time, the military showdown with Washington is increasingly becoming a burden on China’s economy. On the one hand, the People’s Liberation Army is using gunboats and fighter jets to carry out diversionary maneuvers against the US Navy in the Taiwan Straits and the South China Sea. On the other hand, President Xi is proclaiming 2023 the “Year of Investment in China” and wants to lure US companies to China with a charm offensive. This balancing act is becoming increasingly impracticable.
Together with Japan and the Netherlands, the USA have effectively established an embargo on high-performance chips against the Middle Kingdom. And the Biden government apparently wants to ban investments in high technology such as semiconductor production, artificial intelligence and quantum computers this summer. Slowly but surely, the US administration is cutting off the supply of “raw materials” to China’s most important industries.
During her visit to Beijing a few days ago, US Treasury Secretary Janet Yellen tried to placate these barriers because of “clearly articulated and narrowly defined national security interests”. The state news agency Xinhua replied in a comment that the Chinese side should not be fooled by Western de-risking into believing that “the US has given up its attempts to contain China”.
Not just too much, but also too little China is dangerous
The party cadres are nervous. Because the West’s increasing economic turning away from China can become a stress test for the authoritarian system of the People’s Republic if growth and prosperity should fail to materialize as a result. “Autocrats are most dangerous when their backs are against the wall,” wrote the Financial Times last summer during a visit by US House Speaker Nancy Pelosi to Taiwan. The paper asks the crucial question: “Are we putting too much pressure on Xi – as many argue that Putin was?”
Russia’s invasion of Ukraine shows the danger is real. The Chinese leadership is openly stoking fears of what could happen if the West oversteps the mark in restructuring economic relations. China’s Prime Minister Li Qiang has been on a diplomatic tour for weeks to deliver this message and dissuade Washington and Berlin from their derisking course.
In Berlin, Li encouraged German managers to make their own decisions about their ties with China and not allow themselves to be dictated by politics. “The invisible barriers being erected by some in recent times are expanding, plunging the world into disunity and even confrontation,” China’s second-biggest leader said at the IMF meeting in Tianjin in late June. “We should stand up to the politicization of economic issues and work together to keep global supply chains stable, smooth and secure.”
Of course, words and deeds are not the same. In response to the de facto chip embargo in the USA, Beijing has announced that from August it will restrict the export of rare earths, germanium and gallium – essential raw materials for microchip manufacture. There is no relaxation in sight from Washington either. The US Army may want to move troops currently stationed in Japan and South Korea to counter Beijing’s claims for supremacy in Asia. “We are seriously considering alternative bases,” said US Chief of Staff Mark Milley. In any case, they should move closer to China, not further away.