China puts itself on an (industrial) war footing

This column has previously been published in L'Opinion on January 29th 2024.

?Increased investment in manufacturing is a new stage reached in China's move to the “War economy”. 2024 is therefore going to bring the moment of truth in terms of Europe's relationship with Beijing.

A complete dud! In his speech, which opened the Davos forum, Prime Minister Li Qiang tried to reassure the attendance by guaranteeing equal treatment for foreign businesses. Notably, he announced that GDP had grown by 5.2% in 2023 – albeit higher than the 5% objective fixed by Beijing at the beginning of the year, but also one of the lowest for three decades if you exclude the Covid years. His speech was greeted by a further collapse on the Chinese Stock Exchange, which was already at its lowest level! This was because private investment, buried deep in a great mass of carefully manicured statistics, has been at a complete standstill for the second year running. On the other hand, increased state investment in industry means that manufacturing capacity – already estimated at four times more than domestic demand – keeps also increasing!

Since the 20th Party Congress, Beijing has continued to build an economic system that is in head-on opposition to the West. Based neither on domestic demand nor on digital services, it is founded exclusively on the massive promotion of exports, largely loss-making. After the solar panel industry in the 2010s, it is now the turn of electric cars to hit Europe, and then it will be mature “lagging-edge” semi-conductors which will have their production capacity doubled in the near future.

?“Zero Private.” 2024 is going to bring the moment of truth for Europe in terms of its relationship with China. Two years after the American Chips Act, will Brussels finally put its words into action and recognize that the 20th Party Congress saw the coming to power of the “neo-Marxist-Leninists” and a stronger systemic rivalry? Will Europe agree to temporarily set aside its free trade ideology and adapt to the new “War economy”? With its US competitors getting huge tax breaks from the Industrial Reduction Act, will the European Union put the costs of capital and CO2 back into Chinese exports?

“Will Europe agree to temporarily set aside its free trade ideology and adapt to the new ‘War economy’”

Unless Brussels wakes up, 2024 will be the first year in which the world market is clearly being shared out in a new way: the United States will have to strengthen its global leadership in high tech and leave the way clear for China to gain a global market share in the medium and low tech sectors – mainly to the detriment of Europe and Japan. These are sectors that may not give control of any industry, but, because of scale effects, make it possible to generate profits and job creation in the long term.

The most realistic probability is therefore that the savings forced upon the Chinese people will have to face a new crisis that comes immediately on top of the real estate bubble of the 2010s. After having been worn down by that crisis, they are going to have to absorb the future depreciation of industry's excess capacity in the 2020s. This explains why private entrepreneurs in China are now imitating their children, who, for some years, have become devotees of tang ping ("lying flat"). This strategy means they are putting things on hold and waiting for a U-turn in the unworkable “Zero Private” policy. It will take more than a charm campaign in Davos to rebuild confidence in the second largest economy in the world.