The EU-China Business Association (EUCBA) and the European Union Chamber of Commerce in China (EUCC) organized a webinar focused on the report 'Riskful Thinking – Navigating the Politics of Economic Security' on May 24, 2024. This is the latest publication of the EUCCC produced in partnership with China Macro Group (CMG).
Ms. Gwenn Sonck, Executive Director, EU-China Business Association, introduced the webinar and the speakers. Mr. Markus Hermann is Co-Founder and Managing Director of the China Macro Group, a European research-based consultancy focused on the China market, policy and geopolitics. He is a Swiss-Chinese based in Zurich and previously worked at the Boston Consulting Group in Shanghai and he was also in charge of government affairs with Bayer Group in Shanghai. Mr. Carlo D'Andrea is Vice President and Chairman of the Shanghai Chapter of the European Union Chamber of Commerce in China. He is also Founder and Managing Partner of D'Andrea Partners, Legal Counsel and Founder of DP Group, graduated in law, and is a member of the Italian Bar Association. He arrived in China almost 20 years ago, so he has a lot of experience and mainly deals with cross-border mergers and acquisitions.
The relationship between the European Union and China is one of the most significant, complex and dynamic in the global economic landscape. Both entities have become increasingly interdependent with trade and investments flowing in both directions. Shaping the economies of not only Europe and China, but also impacting the global economy at large. Europe needs China and China needs Europe more than ever. In 2023 China was the third-largest partner for EU exports of goods and the largest partner for EU imports of goods. The EU was China's largest regional trading partner until ASEAN surpassed it. China is still one of the fastest-growing economies in the world.
Mr. Carlo D'Andrea, Vice President and Chairman of the Shanghai Chapter of the European Union Chamber of Commerce in China, presented the aims of the report: to cut through the hype by clearly differentiating between the respective risk management approaches of the EU, China and the U.S.; to help move the current debate beyond the 'blame game'; to inform European businesses' future engagement in and with the Chinese market; and to provide high-level recommendations for European and Chinese policymakers, with the intention of minimizing the impact of 'de-risking' on business. The approaches of the EU, China and the U.S. to risk management and strengthening economic security differ substantially. The EU has adopted a targeted, country-agnostic approach, geared towards eliminating critical dependencies and is de-risking through diversification. The U.S.' approach has a more overt China angle, with the aim of hindering China's capabilities in key areas while reducing the U.S.' dependency on China specifically. China's approach is the most comprehensive, in terms of the length, breadth and extent to which it has sought to prioritize economic security. The number and severity of risks companies have to navigate has grown exponentially in recent years. There is no one-size fits all response, but distinct trends are emerging.
Mr. Markus Hermann, Co-Founder and Managing Director of the China Macro Group, explained what China is doing to coordinate development and security. Economic security is a top-level policy principle since the 14th Five Year Plan (FYP). The plan itself was a big systemic shift. Development and security are inextricably linked and heightened risk perception is affecting both. The concept of development evolved from the basic party line under Deng Xiaoping to the scientific outlook on development under former President Hu Jintao to high-quality development under Xi Jinping. The security concept also evolved from single security concepts to a holistic view of national security of the 19th Party Congress and the “coordinate development & security” of the 14th FYP. Development is the guarantee for security and security is a prerequisite of development. Mentions of “risk” and “security” have consistently risen during the past three decades. But there is a lesser increase of mentioning risks and a stronger one mentioning security.
There are 16 concepts under the “holistic view of national security”, seven of them having the biggest impact on foreign business: political; territorial; resource, biological; cyber; technological; and economic security. The year 2020 represents a strategic shift with four key contextual factors: geopolitics (the U.S. containment and suppression as a big threat); the state of China's development (the first centennial goal and development challenges); the 19th Party Congress (the change of the principal contradiction in society, the concept of the new era and high quality development); and governance (centralized and unified leadership and abolition of the constitutional term limit). President Xi's reflections after the initial containment of the pandemic included doubling down (super-sized market; complete industrial system; the trump card of tech and industry as a deterrence to decoupling); security needs (data, energy, food, supply chains, military capabilities) and self-reliance (addressing bottleneck technologies; secure industrial and supply chains; and self-circulation).
Li Junru, former Vice President of the Central Party School, said in October 2020 that the core of the 14th FYP is to realize the biggest strategic shift since the third plenary session of the 11th Central Committee in 1978 and the establishment of a market economy. Dual circulation is the core of the 14th FYP's strategic shift, with risk management as a key pillar. There are six main pillars that are defining dual circulation: cultivate comprehensive domestic demand; coordinate regional and urban-rural development; build a modernized industrial system; pursue common prosperity; coordinate development and security; and pursue high-level opening up. China's pursuit of high quality development is taking place amid six structural transitions: economic transition and industrial upgrading; market-oriented reforms and market governance; economic globalization; domestic demand system; social rebalancing; and economic security.
By October 2023, all Chinese ministries except the Ministry of Veterans Affairs had fully adopted the concept of coordinating development and security. They now all have the policy basis for thinking of how to execute risk management. The risk management tool box contains six key measures: self-reliance; key/core tech breakthrough; securing external supply; trump cards; sectoral governance; and retaliatory capacity. An example of self-reliance is Guangzhou being one of 12 pilot cities to build shorter supply chains. A second example is the policy system to make high-tech SMEs thrive and fill critical supply chain gaps. In the past six months there has been a toning down of the security element.
Mr. Carlo D'Andrea next talked about the different approaches to risk management by European businesses in China. Risk management is becoming increasingly important, as 55% of BCS 2024 respondents said the business environment had become more political over the past year. Members are under pressure to review their China operations and are taking action: 76% reviewed their supply chain strategies in the last two years; 21% are further onshoring into China; 12% are establishing alternative supply chains out of China; and 1% is completely shifting supply chains from China. At the company level the perceived risks vary, influenced by several factors. Risk mitigation strategies include moving functions into China; localization; and moving functions away from China.
Recommendations for individual companies vary significantly regarding perceived risks and opportunities. A thorough assessment is needed. Detailed supply chain reviews and risk assessments and due diligence needed to comply with global legalization. Benchmarking is needed against foreign partners and competitors. Many interviewees were dismissive of potential risks. Don't be naive, investing in intelligence is key. Be a first mover: efficiency in risk management could become a competitive advantage.
Recommendations for the EU and Chinese government include the advice to work together to develop a common framework for risk management and to differentiate what is pragmatism and what is protectionism; to recognize that companies are in the process of making tough decisions about engaging with the Chinese market; and working with business to ensure the challenges faced are better understood. The EU's approach to risk management (de-risking) is the most limited compared to the Chinese (coordinated development and security) and U.S. (strategic pre-emption) approaches.
A Q&A session concluded the webinar. Q.: In which technologies is China already a world leader? Mr. Hermann: The most prominent sectors are green technology; and also look at sectors where China has advantages in producing. Q.: What advice would you give to companies exporting to China? Mr. Hermann: Self-reliance is the most important in China's risk management and it concerns import substitution and localization. As an exporter to China you need to check whether you are in a sector affected by incentives to see if China wanted those imports to be manufactured domestically, in which case you need to rethink your business model or find a local manufacturing partner. Many consumer goods are not affected. Mr. D'Andrea: Companies that help China pass through the technological bottlenecks are always welcome. Come to China, because China needs to win back the trust, confidence and optimism it lost in the past years. Come here to check the situation on the ground. Mr. Hermann: Please watch out for the Third Plenum in July, which will clarify some of the policy directions.
The report can be downloaded at the European Union Chamber of Commerce in China's website here.
