Xi Jinping’s China and the West Are More Than Ever in a Phase of Decoupling.
An invasion of Taiwan by China would tear at the tight fabric of interdependencies.
From October 16, 2022, and for a few days, the leaders of Western companies established in China will have their eyes turned towards the People's Palace in Beijing, where the 20th Congress of the Chinese Communist Party (CCP) will take place. With this worrying question in mind: will the strategic orientations set at this five-year summit amplify the difficulties accumulated since the hardening that followed the 2017 congress, then the zero-COVID strategy of Xi Jinping imposed without wavering since 2020? Against the backdrop of the Taiwan mortgage.
President Xi Jinping's second term marked the end of the golden age of foreign investment, which had begun with the opening up of Deng Xiaoping. Strict confinement from the first cases of COVID-19, administrative and regulatory brakes, product boycott campaigns, forced technology transfers, and diplomatic-military tensions in the South China Sea: everything encourages companies to be cautious, even though they do not want to leave the Middle Kingdom.
Only companies that can help Beijing to catch up with its technological backwardness seem to be better treated. These are times of national preference rather than market opening, of politics rather than economics.
This unanimous observation is made privately by the bosses so as not to offend the extreme sensitivity of the Chinese leaders and harm their company. The CEO of Stellantis (PSA, Fiat Chrysler) has broken a kind of omerta, probably because he is less exposed after the failure of the Chinese adventure of Peugeot-Citroën. Carlos Tavares did not hesitate to denounce, at the end of July 2022, “a clear politicization of the business climate for four or five years.”
The end of the Chinese Eldorado
And what threats are on the horizon! There will be, he assures, “growing tensions between the Western world and China” and “cross-sanctions that will put companies in very difficult situations.” The decline in German, American, and Japanese car sales in favor of Chinese cars reflects, according to Mr. Tavares, “the priority given to domestic manufacturers by Beijing.” Foreign groups with large production sites in China “will suffer,” he says, before concluding, “I would not like to be in the shoes of Volkswagen or General Motors!”
The threat goes beyond the automotive sector. Never before have so many investments in safer countries for business been considered or made, such as those of the American Apple in Vietnam or the Taiwanese chip giant TSMC in Japan. The reports are pouring in and they all say the same thing. The US Business Council, which groups 270 major American companies, is announcing a drop in investments in 2023. The European Union Chamber of Commerce has just confirmed that China's attractiveness is eroding. Its president, Jörg Wuttke, deplores the fact that “China continues to turn inward” while other countries remain committed to globalization.
The note published in mid-September 2022 by the research group Rhodium also speaks volumes about the end of the Chinese Eldorado. If the flow of European direct investment has resisted, it is thanks to a handful of multinationals, often German. Volkswagen, BMW, Daimler, and BASF, which will invest 10 billion euros in a chemical complex, accounted for 34% of the total in 2021; ten groups have ensured 80% of the flow over the past four years, obliged to “safeguard the value of past investments” and “remain competitive with Chinese competitors.”
National security first
A gap will open up between “a select few” who comply with Beijing's demands and the majority of companies, Rhodium Group analyzes. “We are already seeing a dynamic of internal decoupling within some companies,” where employees, supply chains, and data will be Chinese or localized in the country. This forced choice of an “in China for China” strategy will distort the ties between headquarters and Sinicized subsidiaries, posing formidable reputational, cultural, and financial challenges for Western multinationals.
The decoupling of companies only accompanies a macroeconomic decoupling.
Far from being massive, given that the “world factory” is still irreplaceable, it is progressing against a backdrop of tariff wars launched by Donald Trump and continued by Joe Biden, the eviction or exit of Chinese companies from the New York Stock Exchange, and heightened competition in the most sensitive technology segments, where concern for national security overwhelms all other considerations. Every day offers a new example.
Mr. Biden has just asked the U.S. foreign investment regulator to tighten its control over cross-border transactions in artificial intelligence, quantum computing, and biotechnology, highly sensitive sectors where Beijing has made dazzling inroads.
The rivalry between the world's two leading powers, unique in history, is such that economic decoupling will increase, slowly and partially if tensions remain under control; brutally and radically if they degenerate into armed conflict. Businesses cannot rule out the worst-case scenario of an invasion of Taiwan by the People's Republic. It would tear apart the still tightly woven web of economic and financial interdependence between the two blocs, relegating Russia's banishment to the status of an epiphenomenon.
The United States and Europe are not prepared for this: which country, on either side of the Atlantic, has complete knowledge of the value chains of its equipment and vital products? The Chinese planning state, which aims for self-sufficiency in the name of national security, is perhaps better equipped. At least all reasonable leaders - Xi Jinping seems to be more reasonable than Vladimir Putin - know that an escalation without return would be a lose-lose game.
Some reading
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