China’s premier dials up the heat on the West’s ‘de-risking’ push

The push by the United States, the European Union and other US allies to “de-risk” their relationship with China is generating increasing and increasingly visible concern within China, as it should, given that it represents a direct threat to its growth model and ambitions.

At a World Economic Forum event in Tianjin, the first of the so-called “Summer Davos” gatherings since pre-pandemic 2019, China’s premier Li Qiang warned on Tuesday that the de-risking of supply chains could lead to confrontation.

Premier Li Qiang said “de-risking” from China was misguided.Credit: AP

“The invisible barriers put up by some people in recent years are becoming widespread and pushing the world into fragmentation and even confrontation,” he said.

“We should oppose the politicisation of economic issues and work together to keep global industrial and supply chains stable, smooth and secure.”

Governments shouldn’t overreach or stretch the concept of risk and turn it into an ideological tool, with “some in the West” hyping up the need to reduce dependencies. These were false propositions, with businesses in the best position to assess risk, Li said.

The ramping up of US restrictions on companies supplying strategic technologies to China, particularly those relating to semiconductors – along with a massive push to “re-shore” and “friend-shore” critical manufacturing activity with lucrative incentives – has clearly unsettled China.

‘The invisible barriers put up by some people in recent years are becoming widespread and pushing the world into fragmentation and even confrontation.’

Chinese Premier Li Qiang

With the US also close to restricting investment by US companies in China, and the Europeans this month unveiling a new economic security strategy that echoes that of the US, it’s not surprising China feels it is being encircled, and its economic and geopolitical ambitions threatened, by the West.

The Biden administration has repaired relationships with its traditional allies that were damaged during the chaotic Trump years, and has been able to generate strong levels of co-operation, in direction if not detail, in their approach to China.

It’s been aided by the lessons learnt about over-reliance on China during the pandemic, when broken global supply chains exposed the dangers of over-dependence on a single major supplier.

Russia’s invasion of Ukraine reinforced that message for the Europeans, in particular, while China’s support for Russia (in stark contrast to the open-ended support for Ukraine the US has demonstrated) and its more aggressive and assertive stance on Taiwan has highlighted the sensitivity of exports of technologies with both commercial and military applications.

China’s remarkable economic transformation began in 1978, when it decided to reform and open up its economy and engage with the global economy. It joined the World Trade Organisation in 2001, which ignited a boom in its private sector and led to China’s dominance of low-cost manufacturing.

Despite significant efforts in recent times to rebalance its economic model towards consumption, China is still heavily trade-dependent. It is also still reliant on advanced Western technologies and products and access to Western intellectual property in some of the most strategic sectors of its economy.

That’s why it is so concerned about the momentum of the “de-risking” push by the US, Europe, Japan and other Western economies. The push targets the most sensitive elements of its economic model and its aspirations to dominate advanced manufacturing and the key 21st century technologies. It also jeopardises China’s aspiration to displace the US as the most influential geopolitical force.

Li, during a visit to Europe last week, revealed a key tactic China is deploying to try to blunt the impact of the actions being taken by the US and its allies. It wants to drive a wedge between international businesses and their governments, hence his comments in Tianjin about businesses making their own decisions about risk.

Companies, of course, would take a far narrower and far more commercial view of risks than their governments, which have geopolitical and national security considerations – both economic and military – to consider.

As it happens, China, while urging international businesses to invest in China – it has been proclaiming that China has now re-opened for business after the pandemic and its “zero COVID” lockdowns – has actually made it harder for them.

Its raids on foreign consultancies, its orders to its agencies not to supply foreigners with information on its companies and economy that it deems sensitive, and its redrafting and expansion of its foreign espionage laws have had a chilling effect on foreign investment.

That doesn’t mean US and European companies don’t want to maintain and/or expand their businesses in China, but there is greater wariness about investing in areas that their governments might deem sensitive, and many of the companies are either making new investment in their home markets or in friendly economies to diversify their own risks.

The push to de-risk economies has come at the wrong time for China, which is still trying to generate some economic momentum after the pandemic-depressed activity last year saw anaemic, by China’s standards, growth of only 3 per cent.

This year it is targeting modest growth of about 5 per cent which, with the global economy slowing under the weight of widespread and substantial interest rate hikes, would be a respectable outcome. Beijing might, however, have to intervene if it wants to achieve that goal.

With recent data showing retail sales growth faltering, urban youth unemployment at disconcertingly high levels, factory activity spluttering and foreign direct investment falling away, China is expected to resort to central government-directed stimulus to try and put a floor under the economy.

Li said at the forum that the Chinese economy was on course to hit the 5 per cent GDP growth target, flagging the government would roll out more practical and effective measures to expand domestic demand and stimulate dynamism.

The People’s Bank of China has recently cut policy rates and is expected to do more, while there is speculation that Beijing might produce some sort of infrastructure spending package and, perhaps, some action to support its still-beleaguered property sector.

De-risking is not supposed to be “decoupling”, although the distinction between the two is yet to be articulated. China’s economic future and that of its major trading partners in the West may be determined by where that line is drawn.

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