China Party Congress bound to antagonize EU and China in their economic relations

• One of the most eye-catching political events of the year, namely the 19th Communist Party Congress, is scheduled to start tomorrow. Following Chinese political traditions, there is no surprise to expect but rather a reaffirmation of President Xi “core” position in the Chinese leadership. Such concentration of political power has already affected the economic model China had been following prior to Xi and will continue to do so.
• As such, we expect China’s economic model to be increasingly state-driven after the Party Congress in the three directions below:

1.  The ongoing restructuring implies a more important role by SOEs.
2. China’s new leadership is very likely to fortify its control over “strategically important sectors” – a term frequently used to accommodate China’s industrial policy.
3.  The post-Congress era will see more restriction on Chinese firms seeking overseas expansion, partly due to the pressure from capital outflows. 

• The new trajectory that China tries to embark on will be perceived negatively by European authorities. Given this, it seems increasingly unlikely that the EU and China will reach an agreement on a bilateral investment agreement (BIT) after years of negotiation. While China is keener than ever to tap into European technologies as most developed economies remain relatively closed (US, let alone Japan and Korea), access to the European market can never be as important as to justify a change in direction of what China’s leadership has decided for China’s economic future, which is a state-driven economy.
• In the same vein, it seems increasingly likely that the EU will create its own investment protection agency based on Juncker’s announcement at the State of Union. Despite China’s push to lower such standards given its currently lower level of development as well as the need to sell assets in some European countries, the EU will not easily step back to meet these requirement given its increasing pressure from domestic industries.
• All in all, we expect EU-China economic relations to be further hampered by the economic consequences of the Party Congress. Trade may continue to grow but at much lower pace than it could with a better institutional framework between China and Europe. The same is true for investment as we do not expect the ongoing BIT negotiations to bear fruit.

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