Expert background: ZHOU Zheng (周正) – CMG Senior Analyst
Zheng is Senior Analyst with CMG and a finance and investment specialist with experience working with in China’s technology and FinTech sectors. Prior to joining CMG, he conducted market and company research to evaluate investment opportunities in banking, ICT, enterprise services and Fintech. Zheng holds a Master's Degree in International Political Economy from Nanyang Technological University Singapore, as well as a Master's Degree in European and Chinese Business Management from the University of Zurich.
CMG: Zheng, EU Commission President Ursula von der Leyen coined the term ‘de-risking’ also to delineate from the more comprehensive idea of ‘decoupling’ as proposed by some voices in the US, measures towards addressing risks of economic interdependencies have become more prevalent in many capitals. What is China doing in this regard?
The EU’s effort to delineate ‘de-risking’ to from ‘decoupling’ has not dispelled Beijing’s worries that ‘de-risking’ could be used as a veiled attempt to hold China back. However, as policymakers around the world increasingly view economic interdependence as a risk, many governments have developed their own toolkit to manage risk and enhance security of their economies, and in this regard China is no exception.
To date, there is no unified formal policy framework in China as in the EU. China had been using industrial policy tools in more targeted fashion since at least 2005, but largely out of a development rationale. Since 2014, however, policymakers have been trying more explicitly to balance the country’s development and security needs under the top-level policy concept of ‘coordinate development and security’ that was later enshrined into the CCP constitution at the 20th Party Congress.
For the report we just jointly released with the EUCCC, we looked into China’s actual policies over the past two decades in more depth to better understand how this top-level guidance on risk management and economic security is being implemented, and identified six distinct types of policy measures.
Can you walk us through these six types?
First, to prevent negative impacts from supply chain shocks amid a more complex external environment, China has been trying to 'onshore' critical industrial resources, components and goods to strengthen its supply-chain self-reliance.
Second, to address the country’s so-called 'technological bottlenecks', seen as those technologies limiting China’s further upgrading, substantial financial, material and knowledge resources have been invested to achieve 'breakthroughs' in key or core indigenous high-tech.
Third, to secure safe and stable access to critical resources and commodities such as energy and food for which China will unavoidably remain import dependent, it has been very active in trying to secure this supply from third-countries via import diversification and trade diplomacy especially via the BRI.
Fourth, China has been trying to solidify its leading position in specific advanced as well as strategic emerging technologies as so-called 'trump cards' that shall confer China-based manufacturing indispensability in global supply chains. Mostly, in Chinese policy logic, to act as a 'strong deterrence' against the risk of being cut off from Western critical inputs.
Fifth, China has been tightening the sectoral governance to prevent the abuse or weaponization of sensitive technologies, so far most notably in the areas of cyber- and biotechnology.
And sixth, China has also been putting in place its retaliatory legal toolbox enabling it to respond e.g. to foreign sanctions, foreign interference or long-arm jurisdiction.
What do these measures mean for European business?
From our interactions with European business in China, concerns and confusion have emerged, among them that China’s risk-management policymaking indicates that China could close the door to FIEs after 40 years of actively participating in economic globalization.
On a high-level, we argue that risk management is an important new factor in China’s political economy and affects European business interests either directly or by reshaping the business context. Local content requirements in public procurement, which are part of China’s self-reliance efforts, are an example where the effect is direct. A policy initiative that selected 12 pilot cities to experiment with supply-chain self-reliance measures – ranging from concentrating supply chains geographically within shorter distance to building supply-chain alliances – is an example how risk management can reshape the business context, and thus indirectly affect European business interest.
Further effects are for instance increasing compliance cost for FIEs to transfer data cross-border, or the growing competition from Chinese high-tech SMEs that are policy-supported and tasked to fill critical supply chain gaps and drive import substitution.
How discriminatory is China's risk management overall towards foreign business?
The last major industrial policy that is explicitly “nationalistic” by pursuing market share of domestic firms versus foreign business is the Made-in-China 2025 Roadmap in 2018. Since then, industrial policy in our view has shifted to a market supply logic. This means that as long as manufacturing of goods and equipment takes place in the Chinese market, formal policy would not discriminate against foreign business, as for instance evidenced by the fact that FDI into ‘bottleneck’ and ‘strategic emerging’ technologies or localization of supply chain or R&D functions in high-tech sectors are explicitly incentivized. However, various foreign business chambers – including the EUCCC – have been collecting evidence that discrimination nonetheless is made through 'window guidance', which means informal discrimination in policy implementation, or deviating local implementation.
What should European firms do?
The core remains to invest and innovate in core capabilities and products, and be nimble, locally effective and ambitious in go-to-market. Specifically for risk management, we advise to look for up-to-date policy and market intelligence, but more importantly, embed this discussion into the broader strategic review of the China business and consider both opportunities and challenges.
How do you embed risk management in China’s broader political economy?
CMG has introduced its own framework in the last edition of this newsletter, which distinguishes six structural transitions. In a nutshell, four decades of ‘reform and opening up’ have been giving market forces an increasingly important role in allocating resources. This gradual institutional liberalization was crucial in allowing China to achieve its spectacular growth rates. Today, however, a series of problems in China’s political economy illustrate that unchecked market forces can do both harm and good. Chinese policymakers today are faced with a number of structural challenges: a heavy debt burden, tech bottlenecks, vulnerabilities to global economic shocks, environmental issues etc., all threatening the sustainability of China’s continued development.
In China’s political economy, development is intended to help people have a better life and the nation to achieve rejuvenation and modernization – both central to the Party’s legitimacy. When policymakers see this development threatened by uncontrolled market forces or structural vulnerabilities such as overreliance on foreign inputs, they intervene. President Xi has made clear that China should not mono-dimensionally pursue growth, but so-called 'high-quality development' which also factors in sustainability, stability and security.
So economic security is part of this?
The recently intensified focus on economic security is a reflection of a global protectionist trend that already started after the Global Financial Crisis and Beijing’s ensuing heightened risk perception that really gained in urgency since the Trump presidency. Today, this is best understood as an increasingly complex set of trade-offs for policymakers throughout the Chinese bureaucracy where officials try to balance at times conflicting development and security objectives.
Absent any miracle, this uncertainty and ad-hoc environment is the new reality that companies need to deal with. Going forward, therefore, this also means that the policy context will need to be even more closely monitored to be able to better anticipate changes in the strategic business context.