For the first time, since the Nixon “Ping Pong Diplomacy” (乒乓外交),initiated in 1970 and led to an unprecedented opening of relationship between Beijing and Washington while creating a wage in the common front USSR PRC vs USA, we are experiencing a rekindle of old alliances between Beijing and Moscow.
Starting with China surpassing Germany as a global economic power and now Beijing attempting to challenge the US ranking as the major economic power, we are now observing a dramatic shift of geopolitical strategies which will indeed have long-term political, economic, and military consequences in the West as well as in the East.
China’s Belt and Road Initiative (BRI), the creation of artificial, militarized islands in the South Sea of China, the Covid-19 pandemic, and the visit to Taiwan by the Speaker of the U.S. House of Representatives, Nancy Pelosi, have plunged the Sino-U.S. relationship to the lowest level since 1948. In this scenario, have Western companies already cashed out of China, and what will the consequences be in the years to come?
Have we seen the end of a “Chinese Gold Rush” by thousands of companies investing in China as the world factory and as a springboard to the 1.4 billion people market?
Despite the recent verbal and military escalation by Beijing, in response to the visit by the US Speaker of the House to Taiwan, the Sino-U.S. bilateral relationship has been deteriorating for over a decade.
The geopolitical tensions and the mounting challenges foreign investments had to deal with when setting up operations in mainland China have put great strains on the relationship between the West led by the US and Beijing.
This underlying tension combined with a more assertive Chinese leadership, which sees China as a regional superpower, is leading companies and financial investors to review their long-term strategy toward China.
The recent logistic crise has indeed added an additional element of incertitude that corporations have to consider when planning their supply chain. After forty years of unparalleled evolution and changes, which began under Deng Xiaoping, whose brave and visionary move propelled China on an upward trajectory.
China’s ambitions and assertiveness in the 21st century is attracting increased scrutiny and raises the specter of not only heightened geoeconomics competition but also geopolitical confrontation.
Its commitment to economic reform and restructuring, which began with Deng Xiaoping’s “Open Door Policy” has not only seen China catch up with Western economies, but also claim the status of the world’s largest economy (in nominal terms) after the U.S. (Table 1) On a purchasing power parity (PPP) basis, meanwhile, China has already achieved the status of the world’s largest economy back in 2014.
This statistic captures a partial but significant picture of what China achieved in four decades. In reality, things are more complex and challenging. Students and academics who studied China and its ancient history could not but fall in love with this country and its developmental dynamic, but they also realize that the last forty years are the result of a different kind of evolution. The social pact between the Chinese government and its citizen is unique and has allowed China to develop without significant internal challenges and social conflicts.
Massive government spending, which began in the South, where Deng Xiaoping was living before moving to Beijing, was duplicated across the mainland establishment of functional industrial parks with one window stop to attract and ease the incorporation of Joint Ventures and WOFE (Wholly Owned Foreign Enterprises) in industrial parks like SIP in Suzhou.
With a stable social system, massive tax incentives, and the localization of manufacturing in a market of 1.2 billion prospective consumers, characterized by labor-intensive operations, China was able to attract billions of dollars and other foreign hard currency needed to further invest in strategic infrastructures. When Deng Xiaoping came to power, he prioritized securing social stability and avoiding the turmoil of the Great Leap Forward and the Cultural Revolution.
Even so, China’s growth and development path also encountered setbacks, disappointments, and dashed hopes. In 2002, 70% of all joint ventures (JVs) between Chinese and foreign entities were encountering significant challenges. In retrospect, this was not all caused by local partners but rather the consequence of a significant misalignment of expectations by foreign investors who did not fully understand how to operate in China.
By the second decade of the 21st century, China has emerged as a more assertive player on the international stage – both from a geopolitical and geoeconomics perspective. Building on Xi Jinping’s “China Dream” (zhongguo meng), China has not only called for a ‘new era of great power relations’, but has also outlined clear and unmistakable geoeconomics objectives – notably with the creation of the New Development Bank (NDB), the Asian Infrastructure Investment Bank (AIIB), the championing of the “Made in China 2025 (MIC 2025)” vision and the launch of the Belt and Road Initiative (BRI).
All of this came on the heels of the 2008-09 Global Financial Crisis, and it seemed as though China was well on track to claim the commanding heights of the global economy. The onset of the COVID-19 pandemic, however, appeared to cast new doubts and concerns over the prospects of a global economy increasingly dependent on China.
Indeed, the pandemic laid bare the vulnerabilities of a global supply chain anchored largely around China. In response, multinationals have embarked on an urgent reassessment of the global supply chain infrastructure, and by association, their broader China strategy.
Following the massive logistic crise, generated by the Covid-19 pandemic, we are now seeing a very concerning shift of strategy by Western businesses with companies selling off their assets, and in the process, leaving China and Hong Kong for closer-to-home sourcing hubs or repatriation of strategic production operations.
However, leaving China could mean possible loss of access to a market of 1.4 billion consumers. This new movement is to be carefully analyzed and evaluated to avoid inadvertently creating new business as well as geopolitical tensions.
What Western governments––in particular, Brussels, London, and Washington––should not do, is confront Chinese expansion by focusing on punitive tariffs, as we saw recently with the Russian Federation after its invasion of Ukraine.
Rather, new and long-term strategies are to be developed and deployed to reduce dependence on countries that would not hesitate to weaponize the supply chain or energy resources.
The West needs to learn what China did with its industrial parks and with the classification of strategic commodities, resources, and infrastructures and when feasible reciprocate. The EU Next Generation Fund is the perfect tool for this strategy. So, China’s “Gold Rush” may have indeed reached its peak but is far from being a falling star.
Big and small multinational companies and governments need to focus on their future plans so as to avoid the logistics and supply chain nightmare that resulted from the COVID-19 pandemic.
In conclusion, yes, the Western Gold Rush may have reached its pinnacle but the answer is not to rush to the next Eldorado but rather to rethink and develop a new, more equitable, and sustainable social-economic model using the knowledge gathered in the past to plan a better future.