The Flanders-China Chamber of Commerce (FCCC) organized a webinar focused on “China and the world: the resurrection of geopolitics. What does that mean for businesses?” on 3 March 2023.
Ms Gwenn Sonck, Executive Director of the Flanders-China Chamber of Commerce, welcomed the participants and the three speakers, experts with a rich experience, Mr Alexis De Méyère, Director, PwC Belgium and an active member of the FCCC; Dr Peter Eitel, Senior Manager, PwC Germany; and Mr Jens Paulus, Partner, PwC Germany. The world is changing. This is a fact in a global scene where we've seen more and more geopolitical tensions. Business leaders must continue taking decisions. 2022 has been a turbulent year and 2023 will certainly be very different from last year.
The biggest change for those doing business with China is the fact that since 8 January this year China lifted all the travel restrictions. Many investments had been put on hold as people could not visit their locations and meet their business partners, but now high-level business leaders are back on the road to China to hold opening ceremonies of their new factories in China. The reopening of China's economy will certainly increase trade and investment between both sides. According to the latest data, EU investments in China grew for the first time in four years by a staggering 92% year-on-year in 2022. It shows that European companies remain committed to the Chinese market and they continue to invest. Most of our member companies are in China for the long term. The Chinese government identified stabilizing growth as one of China's top priorities this year. Looking at the longer term, Morgan Stanley predicted that the reopening would allow China to achieve economic growth of 5% in 2023 compared with 3% in 2022.
Mr Alexis De Méyère leads the China business group for PwC in Belgium. For top executives in China and top managers of European companies in China, the complexities and uncertainties of today's geopolitical landscape are quite critical. It is also somewhat challenging to consider geopolitics and business, but there are some concrete approaches worth looking at. How can businesses address geopolitics in their strategies. We observe three megatrends in China: the economic rebound following the reopening of the Chinese economy; the presence of geopolitical tensions; and the deep transformation of the Chinese consumer market.
Tensions are not new, thinking about the Trump administration and the Covid diplomacy with the race for the vaccines and the need to adjust the supply chains, the Russian war with Ukraine and energy. Geopolitical tensions are here to stay. On the third trend, we observe that Covid accelerated some transformations of the market. We see new consumers groups and radical shifts from collectivism to individualism. We observe an increase in the unemployment rate in China, resulting in a significant increase of the population saving more money. Younger Chinese consumers are willing to save more money for themselves, offering a great opportunity for the financial services industry. Many young people resign and start their entrepreneurial journey. Most crises are a catalyst for change. Corporate values will become more critical in the future. The purpose-led transformation is an opportunity for Chinese companies to realize their brands. Chinese brands are value-centered. The first and the third trend will generate more trade between China and Europe, but the presence of geopolitical tensions is a significant challenge.
Mr Jens Paulus, Partner, PwC Germany, said geopolitics has always been there and the question is how do we deal with it and what does it mean for us. It started last year on February 24. The Russian war in Ukraine didn't come out of the blue. It had been there for at least a decade. There is a tectonic shift in the geopolitical axis of power. It is the end of the world as we know it. China's economic development over the past 30 years shifted the political and economic center of gravity towards the Indo-Pacific. In the future there will again be two blocs facing each other: on the one hand the western world with the U.S. at its center and on the other hand China and its allies and partners. During the Cold War, the two axes did not meet on an equal footing in terms of the economy. They were on par in military capability but economically they were not equal and that is why the Soviet Union lost the Cold War.
But China and the U.S. are at the same level. From a European point of view, the re-bipolarization of the international system is not necessarily good news. If the U.S. and the West are being challenged by China and a bloc of like-minded states in the Global South, they tend to move in one direction or another depending on the policy area and the interests at stake. From a European perspective this is not good news. Bipolarity between China and the U.S. means in the foreseeable future a renegotiation of the rules without the EU. The shift in the balance of power has many consequences for those doing business. As the environment is becoming more dangerous, the risks are going to increase and the world is becoming more chaotic. Besides the war in Ukraine, many other things are going on: the revolution in Iran; the food crisis; civil wars in the Horn of Africa; the ongoing pandemic in some regions; the climate crisis; an uncertain future in the U.S.; and on top of that a European Union that is hardly united anymore. It is now united because it is threatened by Russia, but leaving this aside, in common policy, it is far from being united. Those crises make the world more and more confusing. We live in an era of poly-crises.
There is also an acceleration of the trend of de-globalization, sparked by Covid-19, Brexit, and Trump. It is a trend towards a more disconnected world, nation states, local solutions and border controls, rather than global institutions, trade treaties and freedom of movement. We can expect a reduction in economic interactions among the competing blocs, while internally there might be a growth in interactions. Trade relations, market access, and tourism increasingly correlate with political allegiance. This will have an influence on business strategies and the way to plan investments. We are witnessing a revitalization of politics. Economic activity is increasingly the subject of political observation and even regulation.
Dr Peter Eitel, Senior Manager, PwC Germany, said we need to analyze what is happening around us and how to translate this into business practice. The situation is becoming more politicized and requires us to look at all the actors that play a key role. China has presented an impressive growth story. It has taken 800 million out of poverty. There is a massive growth between the '90s and 2020. In the financial crisis, it was the Chinese economy that was instrumental in pulling the world economy out of it. China has also presented a tremendous technological development, competing with the U.S. for technological supremacy. That is one of the key drivers why the geopolitical axis of power is shifting from the Euro-Atlantic to the Indo-Pacific.
China today is at a crossroads. Since Xi Jinping took power, China has left its cautious course on international affairs. The philosophy before Xi Jinping took power was to not take center place before actually being able to play a major role. Xi took a short-cut. With the Belt and Road Initiative he deviated from the course of his predecessors. His policy is characterized by re-ideologization. Xi's predecessors were much more pragmatic, while Xi is more ideological, which is of tremendous consequence to the business world.
Another element that is key to China's position in the world is that it has invested heavily as part of the BRI in a global trading network, investing heavily in the different chokepoints. Domestically, China has shown a remarkable stability over the past 30 to 50 years, but to continue would need a strong growth, which in the current situation is very much contested. China also has a demographic problem, growing old before getting rich. You could argue that the age of China is already over, because even if it continues to grow, it will have lots of difficulties sustaining the system because social welfare will create such high costs that things will get very difficult.
China's uncertain future can be illustrated in four possible scenarios:
1. Optimistic: more challenges, more cooperation. The difficulties that China is having are alleviated. Tensions on the global stage disappear to a certain extent. China will remain the first or second important economy, but will not take a dominant role. There will be more freedom for the private sector to flourish.
2. Neutral: robust growth, hybrid economy. The current strategy of dual circulation works. China's domestic market ensures massive economic growth despite demographic challenges. The BRI is successful as well. The relation with the U.S. remains frictious.
3. Pessimistic: strong police state, weak economy. All negative indicators come to fruition. Technology replaces labor, leading to even higher unemployment. The aging population leads to a dramatic rise in social welfare expenditure. The U.S. expands the list of dual goods and the EU follows the U.S. China would become inward-looking.
4. Low probability, high impact: Taiwan attack, Europe down. No end to the war between Russia and Ukraine; the U.S. is preoccupied with domestic politics; the European economy enters a downward spiral, and the U.S. enters into a hot war with China over Taiwan's independence.
Those four scenarios show how complex, chaotic, sensitive, dynamic, volatile, full of surprises, the geopolitic environment that we are facing is.
What can companies do about this? Where do geopolitical risks affect corporate responsibilities? There are six impact dimensions: regulatory (Chief Compliance Officer); corporate security (Chief Security Officer); reputation (CEO); cyber security (Chief Information Security Officer); value chains (COO); and investments & finance (CFO).
The PwC Geopolitical Fingerprint (GPF) is the starting point that leads the way towards a bespoke risk management approach. How exposed are you in those six risk areas and how well prepared are you? Geopolitical risk cannot be dealt with by one person. It needs to be considered by all actors together. There is no blueprint for being best prepared, because companies and their risk exposure are unique. In a nutshell, PwC breaks down geopolitical risks into impact dimensions and translates that into your individual risks or fingerprint. We will try to reduce uncertainty and help you regain control and resilience. One of the strategies for dealing with geopolitical turmoil is diversification. Friend-shoring and near-shoring are increasingly relevant mechanisms to cope with politicized globalization.
A Q&A session concluded the webinar. What could be the advice for an EU company that wants to deploy economic activities in China, but does not want to burn bridges with the U.S.? Mr Paulus: There is no silver-bullet answer to this question. This is the dilemma you find yourself in. We need to closely observe the developments. If China would deliver weapons to Russia, not only the U.S. but also Germany – whether we like or not – would sanction China. In the foreseeable future, people, economies and businesses need to decide. Mr De Méyère: We see a high pace of new regulations and new barriers. The race to be compliant is a No 1 item, so you can say “I respect the laws where I do business.” By lobbying you can sometimes change the playing field, but this is more complex.
How to evaluate the need to import products versus producing locally? A site has a long life, whereas political tensions can change in a week. If you have a strong business case to locate a manufacturing plant in China, address it. The geopolitical angle should not be the first for site location.
