06.03.2016 Author: Vladimir Terehov

EU Chamber of Commerce on problems in the Chinese economy

2342342333It looks like the alarming assessment by the world famous speculator George Soros of the already near future of Chinese economy (and, consequently, of global economy on the whole) cannot be fully attributed to the phantoms of the malevolent imagination, as they first tried to present it in the PRC.

Something reminiscent of what George Soros said at the end of January this year in his sensational interview with Bloomberg TV Channel, one month later was discussed in Beijing during the presentation of the report “Overcapacity in China: An Impediment to the Party’s Reform.” It was prepared by a team of experts from the European Union Chamber of Commerce in China, a non-governmental organization established in 2000 by 51 European companies in order to promote interests of EU business in one of the world’s largest economies.

The Chamber has contributed to the process of rapid development of the economic relations between the EU and China. At present, the volume of bilateral trade in goods and services is nearly 600 billion US Dollars (i.e. it is approximately equal to the volume of US-China trade) with a noticeable (around $ 150 billion USD) deficit of the EU.

Let us recall that it is conventional to mean under the “Party’s reform” a long process of comprehensive reformation of China, started in 1978 by Deng Xiaoping, mainly in order to overcome the negative effects of the policy of the “Great Leap Forward”, enforced on the cusp of the 1950-1960s under the leadership of Mao Zedong.

Western experts do not see any concerted strategy being implemented during the 40 years since then, and they suspect at certain points the CPC leadership was guided rather by the circumstances in response to the emerging issues.

In addition, they believe the fundamental (and still relevant) problem of the reforms of Deng Xiaoping is an attempt to combine the socialist State structure in the PRC (in particular, the hegemony of the CPC virtually in all aspects of the country’s life) and the introduction of market mechanisms into the economy and initiating of the “open door” policy providing for wide inducement of foreign capital.

According to them this problem determined the inflexibility of the Chinese economy regarding the changes in the situation at the international markets, the role of which has immeasurably increased with the development of the reforms of Deng Xiaoping.

Negative consequences of the attempts to “combine the incompatible” were intended to demonstrate the results of the analysis of the EU Chamber of Commerce experts, mainly the state of the Chinese metallurgical industry, as well as its place at the international market. The conclusions of the Report were reflected not only in the title, but also in the artistic design of the cover of the document made in twilight colours.

During the presentation the head of the Chamber Jörg Wuttke sort of tipped his hat to the Chinese leadership, noting the “positive impact of attempts to overcome the consequences of overcapacity” of the Chinese industry. At the same time, he noted that there are still “a large number of problems to be solved.”

In particular, it is pointed out in the paper that although China exports only a small part of the produced steel, Chinese export volume is half as much as the total amount of steel produced in the United States.
In order to support its own steel companies the US and some other countries (e.g, India) use the tool of customs “anti-dumping” barriers. And that does not contribute to the development of international trade.

The authors note that similar overcapacity in the PRC is noticeable in the production of aluminium and cement, shipbuilding, and in some other industries as well.

In China, of course, they are well aware of the problem of preserved production overcapacity even without any “tips”. Although the public statements of responsible officials (for example, from the Ministry of Trade) state that in the present context of general slowdown of the global economy, this problem is typical for other countries as well, still, 2016 was declared in China a landmark year for its solution.

In particular, it is expected that there would be closure of a large number of so-called “zombie firms” (sometimes defined as “white elephants”) and that will allow the metallurgical industry to reduce steel production by 100-150 million tonnes.

Taking into account the closure of “zombie firms” in other industries it would lead to the fact that the number of reduced jobs would be counted in millions. It was the social consequences of this decision that for a long time restrained the Chinese leadership from the turn to radical measures in economic restructuring.

The question, whether these measures will partake of the “landing” of the Chinese economy and, especially, of “tough landing”, as suggested by George Soros, is more linguistic or semantic.

As for the global consequences of problems in the Chinese economy, they were already noticed, in particular, in Japan, when they summed up their own economic results of the last quarters of 2015. Despite the existence of such a favourable (for Japan) factor as the energy price drop, a reduction (and not growth) of GDP was recorded, as compared to the same period of the last year. Emerging in the third quarter of 2015, the decline continued also in the fourth. The main contribution to the overall deterioration of economic indicators in Japan in the fourth quarter was brought by a reduction in the volume of consumption by the population of the country, and in exports of the manufactured products (respectively, by 0.8% and 0.9%). It is in the second component that the commentators saw the negative impact of problems in the Chinese economy.

Finally, we cannot neglect the potential impact of the reviewed Report of the EU Chamber of Commerce on the political aspects of China-EU relations and, more broadly, the development of the game in the “China-EU-US” triangle, which is one of the world’s most important global playing fields. Since it seems undeniable that there is a close relationship between economic and political aspects of international relations, although it is extremely difficult to set the priority among these aspects (if putting such a question is correct at all).

There are no grounds for suspicions of bias of the authors of the research on the problems of the Chinese economy, completed by the EU Chamber of Commerce. Moreover, the findings may well be regarded as a well-minded recommendations from the part of the concerned partner.

And yet, they cannot stop “working” against the policy of those European establishment circles that seek strengthening comprehensive relations with China, thus raising the obvious suspicion in the United States.

In particular, in this article author’s opinion, the general pessimistic “tone” of the Report will not contribute (at least) to the solution of such important issue in the interrelations in “US-China-EU” system as granting by the Europeans the Market Economy Status to the Chinese economy this year. In this respect, the request made in the beginning of February this year by the leading EU countries to verify the absence of dumping in the price of imported Chinese steel, was noteworthy.

However, quite the opposite consequences cannot be excluded either: the research of the EU Chamber of Commerce on the problems in the Chinese economy, being taken into account by the China’s leadership in practical terms, would just contribute to both solving these problems and granting the MES to the Chinese economy.

As they say, the future will tell. And it is not a far future.

Vladimir Terekhov, expert on the issues of the Asia-Pacific region, exclusively for the online magazine “New Eastern Outlook”.


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