Global Policy Volume 8 . Supplement 4 .

June 2017
62

The Dark Side of China’s Economic Rise

J€
org Wuttke
European Union Chamber of Commerce in China
Survey Article

Abstract
Since China acceded to the World Trade Organisation (WTO) in 2001, the country’s importance to and impact on the global
economy has expanded rapidly. This has been particularly notable since the global financial crisis in 2008. While this has cre-
ated new opportunities and benefits for Europe, it has also brought with it important new challenges. One such challenge is
the impact of industrial overcapacity in industries like steel that have resulted from the allocation of capital on non-commer-
cial terms. Going forward the China Manufacturing 2025 (CM2025) initiative that was announced in 2015 is another. The latter
represents an attempt by the Chinese authorities to maintain a position as ‘masters’ of China’s economy instead of allowing
the market to drive innovation and industrial upgrading. Since CM2025 also allocates capital on non-commercial terms, includ-
ing through subsidies and government-backed investment funds, there is a risk that it will lead to overcapacity in advanced
industries of importance to China’s economy. This concern is further exacerbated by the fact that as Chinese investment
rapidly expands in Europe, the authorities continue to deny European business reciprocity in the Chinese market.

Policy Implications
• Strengthen the role of the market in allocating resources and driving innovation; reduce and ultimately end the allocation
of capital on non-commercial terms to industries favoured by government authorities.
• Move forward with the implementation of the market-driven reform agenda that was announced at the Third Plenum in
2013 with the Decision.
• Afford European business reciprocity in trade and investment relations, in part through a successfully completed and
ambitious EU-China Comprehensive Agreement on Investment (CAI).
• Play a leadership role in developing new international guidelines on investment which ensure that the legitimate interests
of all countries are given due consideration.

model, highly profitable product R&D, branding and design

Beijing Consensus challenges the neo-liberal
global order
History might record that China’s re-emergence after its
World Trade Organisation (WTO) accession in 2001 marked
the highpoint of globalisation; it was also one of the biggest
economic events so far in the 21st century. While China has
benefited from the global trade system, the ineluctable rise
of this economic superpower has also brought great
changes to the global trade regime. Beijing shows scant
enthusiasm for multilateralism, as it generally sees the estab-
lished order as an instrument of Western hegemony. As
China now challenges Europe and America’s century-old sta-
tus as the world’s most dominant trading and rule-setting
nations, it seems keen to remould the global trade system
into one with Chinese characteristics.
At least up until now, China has managed to square the
circle. While maintaining a Leninist political system, it
unleashed Manchester-style capitalism to drive its economy
by about 10 per cent annual GDP growth for 30 years. As it
looks toward the next stage of economic development, the
country wants to hold on to its large 20 per cent share of
global manufacturing and to try to break out of the middle
of the ‘smile curve’ that Stan Shih has outlined. In this
at the beginning of the process as well as distribution, mar-
keting and sales/after service at the other end represent the
high points of the curve. In contrast, the far less profitable
stage of actual manufacturing and assembly, the segment
where China’s economy is still primarily focused, represents
the low point in between.
A stronger and more effective focus on innovation is
subsequently necessary due to the fact that China’s labour
force has also begun to shrink as its society ages. From
2014 to 2015, the working-age population between the
ages of 16 and 59 fell by 4.9 million, the fourth year in a
row that it dropped. While China still possesses an extre-
mely large labour force, and the trend may help to keep
the unemployment rate down, it places upward pressure
on wages, corroding the country’s advantage in terms of
low-cost labour vis-a -vis some less developed countries
with cheaper labour.
At the same time, advanced economies, such as the Uni-
ted States, Germany and Japan, have all formulated policies
supporting further development of their own manufacturing
industries. Emerging economies like India and Brazil are also
catching up with their own advantages. The Chinese gov-
ernment therefore holds upgrading the country’s industrial

© 2017 University of Durham and John Wiley & Sons, Ltd. Global Policy (2017) 8:Suppl.4 doi: 10.1111/1758-5899.12439
 China’s Economic Rise
base to be important to its ability to both hold on to its cur-
rent manufacturing industry while simultaneously working
to compete further up the value chain in the face of reshor-
ing to advanced economies whose competitive position
benefits from digitisation of the industry. As an official from
the MIIT put it, ‘China is being pressured from both sides’
(China Daily, 2015).
To achieve a redirection away from the current focus on
the low-value stage of manufacturing, China is now in the
process of implementing an industrial policy blueprint called
China Manufacturing 2025 (CM2025), which is designed to
move its economy up the value chain, from ‘Made in China’
to ‘Invented and Branded by China’.
Current state of China’s manufacturing industry
and international economic relations
This will not be easy. On 14 December, 2016, the official
government-owned newspaper People’s Daily published a
front-page editorial titled ‘New Orientation of the Chinese
Economy’ (Tian et al., 2016). The article recognised that
China faces many challenges: besides the aging problem
the country needs to avoid getting stuck in the middle-
income trap; and China’s economic trajectory will follow an
‘L’ shape, not a ‘U’ or a ‘V’ shape.
At the same time, China’s domestic supply, which faces
conditions of overcapacity in some industries, is poorly
aligned with domestic consumers’ demand for high-quality
products and reliable advanced equipment. As a result,
some domestic demand is seen to ‘spill out abroad’. This
‘problem’ requires that domestic supply be redirected
toward producing higher-end goods with government
playing a role in the process. When combined with the
market share targets for international markets as outlined
in the 2025 vision, the current approach to the economy
appears to amount to mercantilism. This raises serious
questions regarding the Chinese government’s willing-
ness to allow its leading trade partners and foreign inves-
tors to benefit from the next stage of its economic
development.
The Chinese authorities have also started guiding state-
sponsored investment of Chinese companies abroad, with
much of it flowing into high-tech industries covered by the
CM2025 initiative. China’s global outbound foreign direct
investment (OFDI) jumped to almost US$200 billion in 2016,
an increase so great that Chinese policy makers are now
seeking to slow the pace of outbound investment expan-
sion. The European Union (EU) continues to be a favourite
destination for Chinese investors, with more than 35 billion
euro of completed OFDI transactions in 2016, an increase of
77 per cent from 2015. This stands in contrast with a further
drop in investment by European firms in China (Hanemann
and Huotari, 2017).
However, China’s singular success possesses within itself
the seeds that can undo the contemporary model of globali-
sation. Two recent examples follow below.
In 2016, leaders from the US and Europe scrutinised more
incoming Chinese companies products and investments. The
Global Policy (2017) 8:Suppl.4
63
increase in dumping cases being brought against China in
the steel, paper and chemicals sectors indicates a need to
protect jobs and industries against the perceived trade jug-
gernaut that is China. In early 2016, 5,000 EU steel workers
also took to the streets of Brussels to protest the closure of
their plants, in part as a result of overcapacity in China’s
impact on the industry. This marked the first demonstration
ever held in Europe against trade relations with the country
with calls from member states and industry groups also
made for further anti-dumping measures.
In view of rising populism in Europe, the mood towards
trade and investment relations with China are shifting. In a
May 2016 non-legislative resolution the European parliament
resolved that until China has fulfilled the EU’s five criteria
for market economy status (MES), its exports to the EU must
be treated in a ‘non-standard’ way. This resolution was sub-
sequently passed by Members of the European Parliament
(MEPs). A consensus was formed that the EU ‘should assess
whether China’s costs and prices are market-based, so as to
ensure a level playing field for EU industry and defend EU
jobs’ (Krivade, 2016). The European Parliament also stressed
that the EU must find a way to do this in compliance with
its international obligations in the WTO, and in particular
China’s WTO Accession Protocol, which provided for
changes to how China is to be treated in trade cases after
the f15th anniversary of its accession on 11 December,
2016.
But first, the history of Chinese industrial
overcapacity
In recent years, industries like steel and aluminium that have
received extensive government support in the form of subsi-
dies and loans from state-owned banks on non-commercial
terms have pushed down prices and profits globally as sub-
sidised excess supply is exported. This has placed pressure
on employment in these industries in many of the countries
that have received these exports.
While China’s industrial overcapacity is a longstanding
problem, in the 1990s it went largely unnoticed abroad
due to the fact that at that time the country was not
fully integrated into the global economy. As such, its over-
capacity did not translate into a huge trade surplus. While
this was already changing in the 2000s, the 2008 global
financial crisis pushed the issue firmly into the spotlight.
Before 2008 when domestic consumption was not suffi-
cient to absorb production, Chinese producers could
export their subsidised goods. Exports acted like a ‘safety
valve’ on a pressure cooker. When global demand col-
lapsed in late 2008 as a result of the dramatic retrench-
ment of the economies of the EU and the US, this safety
valve ceased to work effectively and China’s overcapacity
became impossible to ignore. Even more worrying, while
global demand decreased, China’s production capacity
actually continued to expand (European Union Chamber
of Commerce in China, 2016.
The Chinese government’s swift response to the eco-
nomic downturn resulting from the global financial crisis in
© 2017 University of Durham and John Wiley & Sons, Ltd.
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64
November 2008 consisted of a massive fiscal stimulus pack-
age, including an unprecedentedly large lending pro-
gramme since 2009. It targeted infrastructure investment,
while the government-encouraged lending surge mainly
focused on expanding Chinese SOE production capacity.
This led to manufacturing companies’ fixed asset investment
expanding at an average of 18.8 per cent year-on-year from
2009 to 2014 (National Bureau of Statistics of China, 2017).
The Chinese stimulus package poured credit into increas-
ingly questionable projects and expanded both direct and
indirect subsidies for investment and manufacturing. While
it was not the only country in the world to do so, these
policies boosted its economy in the short term while further
distorting markets and complicating China’s economic tran-
sition in the medium term. This outcome is highlighted by
the following chart, which outlines the worsening of overca-
pacity in the crude steel and oil refining industries since
2008, both in terms of utilisation rates and the growing total
scale of the problem (Figure 1).
Figure 1. Crude steel and oil refining since 2008.
Source: World Steel Association and European Chamber calculations.
© 2017 University of Durham and John Wiley & Sons, Ltd.
China’s overcapacity problem is a burden to its
domestic economy
The extremely low utilisation rates of industries charac-
terised by overcapacity means that resources continue to be
wasted. Chinese companies in these industries are forced to
reduce their costs in order to maintain profit margins. Often,
reducing costs is not enough. Companies may feel forced to
cut corners, disregard environmental, health and safety stan-
dards and circumvent labour and social laws. In practical
terms, overcapacity contributes to slower wage growth and
may increase inequalities between provinces, with the low-
income segment being hurt most.
As companies in industries characterised by overcapacity
face low profit margins, they lack sufficient funds for R&D pro-
jects, which leads to less innovation. Since they cannot move
up their value chain, affected companies are forced to further
increase capacity in the hope of increasing their overall com-
petitive situation. This negative spiral is self-perpetuating as
Global Policy (2017) 8:Suppl.4
 China’s Economic Rise
well as a major obstacle on the government’s intended path
to becoming both an innovative and sustainable economy.
Overcapacity causes global trade frictions
Overcapacity in China directly impacts the level of trade ten-
sions among global players. With unemployment still a sen-
sitive political topic in parts of the EU and the US, it is hard
to see that either will be willing to absorb much more of
the cost of the post-financial crisis adjustment.
To date, trade frictions have not been a major issue in
industries where large-scale exports are not economical,
such as cement and flat glass. However, for many of the
other affected industries – steel, aluminium, paper and
chemicals in particular – the export of China’s excess capac-
ity at extremely low prices has created a great deal of fric-
tion and led to a series of anti-dumping investigations.
While China’s exports of steel still account for a small
percentage of its total production, the sheer size of its
industry – more than 1.5 times total production in the US
– means that they still have a significant influence on
world markets. With the World Steel Association’s report-
ing global demand dropped 3 per cent in 2015, an
expected drop of 0.8 per cent in 2016 and only 0.4 per
cent growth forecast for 2017, expanding exports can be
expected to lead to more anti-dumping investigations
(Global Slag Staff, 2016).
Trade tensions and anti-dumping cases are not merely an
issue for China’s relations with the EU and the US either.
Relations with India and ASEAN-member states have also
been complicated by perceived dumping abroad by Chinese
companies in industries that have been distorted by overca-
pacity. There are also reports that multiple Asian countries
that are meant to be part of China’s new plans for regional
integration have serious reservations about importing Chi-
na’s excess capacity.
Plans for dealing with overcapacity lack the
capacity to do so
Some have suggested that the establishment of the Asian
Infrastructure Investment Bank (AIIB) as well as the Belt and
Road Initiative (BRI)1 will be help solve China’s overcapacity
problem. This line of thinking envisages China exporting its
excess production to countries within its regions, and per-
haps further afield as well. In January 2014, one person pub-
licly advocating such an approach was He Yafei, who at that
time was Vice Minister of the Overseas Chinese Affairs Office
of the State Council. He (2014) published an article in the
South China Morning Post in which he argued that a plan to
export excess capacity should be formulated and combined
with a ‘going out’ strategy to help internationalise Chinese
enterprises. He acknowledged the potential harmful effects
of overcapacity stating that, ‘If left unchecked, it could lead
to bad loans piling up for banks, harming the ecosystem’,
and going on to say that it would negatively impact China’s
transition to a new growth model and people’s livelihoods,
and could even ‘destabilise society’. The article stressed that
Global Policy (2017) 8:Suppl.4
65
exporting overcapacity to build infrastructure in Asia and
Africa would create a ‘win-win’ outcome. It argued that it
would solve China’s overcapacity problem while simultane-
ously assisting developing countries to expand and improve
their infrastructure, creating expanded trade opportunities
through increased connectivity, which would support
greater economic growth.
This sentiment was echoed again in July 2015, when
Huang Libin, an official from the Ministry of Industry and
Information Technology, stated, ‘For us there is overcapacity,
but for the countries along the [BRI] route, or for other BRIC
nations, they don’t have enough and if we shift it out, it will
be a win-win situation’ (Stanway, 2015).
Ultimately, the political vision of ‘Going Global’ cannot
solve overcapacity problems; it instead requires far-reaching
reform efforts.
Apart from the geopolitical challenges involved in
attempting to undertake an initiative as sweeping as BRI in
a region that poses a wide range of risks, there are sev-
eral key reasons why optimism in this approach may be
misplaced:
• products like cement and plate glass cannot be exported
economically in large volumes;
• the scale of funding to be made available by the AIIB
and the size of the majority of the markets along OBOR
are too small to have a significant impact on China’s
macroeconomic situation; and
• many countries will not be willing to accept large
amounts of Chinese debt and labour, and those that may
be willing pose high risks for loan defaults.
David Dollar, Senior Fellow at the Brookings Institute and
former World Bank Country Director for China, explained
why the scale of AIIB lending is insufficient to resolve Chi-
na’s overcapacity issue. If the bank is successful, in five years
it will lend US$20 billion per year. However, putting aside
cement, construction, heavy machinery and other industries,
in steel alone China would require US$60 billion per year to
absorb its current overcapacity. Furthermore, as the bank
now has more than sixty members, China will not be the
only supplier of its projects (Dollar, 2015).
As BRI is being implemented on a bilateral basis, there is
potentially more room for projects funded outside of the
AIIB to absorb overcapacity. However, the markets of the
Central Asian countries are far too small to absorb a mean-
ingful percentage of China’s excess production. Crucially,
there are limits to the degree to which countries with rela-
tively strong governance, like India, Indonesia and Vietnam,
would be willing to accept Chinese debt, production and
labour. While countries with weaker governance, such as
Pakistan and Cambodia, may be more accepting, they pose
a correspondingly high risk of loan defaults. Chinese policy
makers therefore need to evaluate whether taking this gam-
ble on these possible defaults is in the country’s long-term
interests. China can only fundamentally address overcapacity
through reforms to individual policies and industries, as well
as through a broader restructuring of China’s economic
model. These measures can directly target overcapacity and
© 2017 University of Durham and John Wiley & Sons, Ltd.
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spur the development of other sectors of the economy, thus
reducing the tendency to rely on repetitive investment.
Similar industrial policies for a new stage of
economic development
Unfortunately, it does not appear that the government’s
playbook for steering economic development has changed.
After decades of top-down attempts by Chinese state plan-
ners to promote technological development and a move up
industrial value chains which produced disappointing results
in spite of the generous funding that they were supported
with, in May 2015 the Chinese government launched a new
plan. Titled China Manufacturing 2025 (CM2025), it takes its
lead in part from the German Industry 4.0 model and
focuses on both upgrading the country’s industrial base and
promoting innovation in the following 10 industries, which
are being targeted as drivers of economic growth, domestic
self-sufficiency and export prowess:
1. next generation IT;
2. high-end numerical control machinery and robotics;
3. aerospace and aviation equipment;
4. maritime engineering equipment and high-tech mar-
itime vessel manufacturing;
5. advanced rail equipment;
6. energy-saving vehicles and new energy vehicles (NEVs);
7. electrical equipment;
8. agricultural machinery and equipment;
9. new materials; and
10. biomedicine and high-performance medical devices.
However, it does not appear that they are moving toward
the establishment of the market-driven economy and open
system for innovation that successfully doing so requires.
Instead, they continue to reserve a central role for the gov-
ernment in planning the future, directing capital and favour-
ing some companies and industries over others. This is also
highlighted by the large number of domestic and interna-
tional market share targets and talk of ‘indigenous innova-
tion’ that multiple planning documents related to CM2025
include.
Semi-official planning documents (Expert Commission for
the Construction of a Manufacturing Superpower, 2015) that
have been publicly endorsed by senior political leaders
include market share targets like the following:
• 40 per cent of basic components and basic materials to
be domestically manufactured by 2020, rising to 70 by
2025 (State Council of China, 2015);
• 30 per cent reduction in operating costs, production
cycles and product defect rates by 2020, rising to 50 per
cent by 2025;
• ‘indigenous’ NEVs should account for 70 per cent of the
domestic market by 2020 with China having two of the
top-10 companies in terms of global sales by 2025;
• ‘indigenous’ industrial robotics and core components to
reach 50 and 70 per cent domestic market share by 2020
and 2025 respectively; and
© 2017 University of Durham and John Wiley & Sons, Ltd.
• domestic production of routers and switches for the
telecommunications industry to reach 20 per cent inter-
national market share by 2020 and 25 per cent by 2025.
While the meaning of ‘indigenous’ in this context is not
clearly defined, in the context of past initiatives it has only
included domestic companies in which foreign interests did
not hold equity.
China’s continually growing investments in R&D and
attempt to change the mind-set of domestic industry
toward quality and efficiency are admirable. However, the
broader set of policy tools that CM2025 utilises – subsidies,
protectionism, new pressures on foreign business to transfer
core technology and the acquisition of companies with
advanced technology in Europe and elsewhere, often with
support from state-backed investment funds, as well as the
establishment of ever-larger SOEs that are being positioned
as national champions while their management is often
simultaneously politicised – are highly problematic.
While this represents an extension of decades of industrial
policy, what is different is that China now has far more
resources with which to pursue this strategy. For example,
while the German government only committed 200 million
euro to supporting R&D associated with Industry 4.0,2 the
Chinese central and local governments have announced
funding that amounts to hundreds of billions of euros. In
short, with their selected policy approach the Chinese
authorities intend to remain masters of the economy; they
are not moving to instead enable the market to play the
decisive role in directing resources toward their most pro-
ductive use.
The government-driven approach ultimately will not
enable the Chinese authorities to establish a more innova-
tive and efficient economy; and some measures are creating
serious problems. In the field of industrial robots, subsidies
are contributing to overcapacity at the low and mid-tiers of
China’s market. Due to the amount of fraud connected to
subsidies for new energy vehicles (NEVs) that was subse-
quently found to be taking place, the authorities have also
had to conduct a series of investigations that led to major
fines (An et al., 2016). Even representatives of the National
Development and Reform Commission have stated that the
subsidies provided to this industry are not sustainable.
An early warning on new areas where
overcapacity will emerge?
Due to the amount of state support that has been offered
by the central and local governments, CM2025 may be put-
ting China’s international trade partners on alert regarding
areas where additional overcapacity can be expected to
emerge by 2025.
As has been seen in the past with steel and aluminium,
this runs the risk of creating tensions with China’s interna-
tional trade partners at a time when support for economic
globalisation and free trade faces rising opposition in some
quarters. The government-driven approach to pursuing
international acquisitions that align with industrial policy
Global Policy (2017) 8:Suppl.4
 China’s Economic Rise
priorities may unfortunately also lead to political tensions
that could complicate the ability of private Chinese
companies to complete normal merger and acquisition
transactions.
Outbound foreign direct investment surges, but
reciprocity is not provided to European business
As the scale of China’s outbound investment has been
expanding rapidly, this would be highly significant. Today,
China not only receives foreign investment, it has also itself
become a major global investor. These investments are not
just in commodities in Africa and Latin America, they are
increasingly focused on advanced industries in the US and
the EU.
China’s global outward FDI has been on an impressive
growth trajectory for the past decade, with an annual aver-
age growth rate of 30 per cent from 2005 to 2015. In 2016,
Chinese outbound investment grew faster than this histori-
cal rate, in part driven by the desire of corporations to
diversify in the face of a slowing domestic economy, finan-
cial stress and devaluation pressure on the Chinese currency
with estimates that Chinese outward FDI came close to US
$200 billion in 2016, a 40 per cent increase from 2015 levels
(Hanemann and Huotari, 2017). This cements China’s role as
one of the top direct investor nations globally.
In light of the challenges faced by China’s economy, it is
unsurprising that Chinese companies have looked to diver-
sify their asset base into Europe’s open economy. As China
now accounts for 14 per cent of global GDP, it can be
expected to continue to become an increasingly important
source of international investment. Europe greatly welcomes
foreign investment from China and around the globe. It
actively works to attract this investment for the jobs, eco-
nomic growth and international business connections that it
creates. The attractiveness of the largest economic region in
the world – the EU – is enhanced by the fact that foreign
investors enjoy the same legal protections that are enjoyed
by their domestic counterparts. Nor has the EU established
a review body to evaluate transactions that could result in
foreign individuals or entities gaining control of EU-based
companies. In short, and as outlined in European Union
Chamber of Commerce in China’s 2013 report Chinese Out-
bound Investment in the European Union it is an open and
attractive destination for investment.
However, the European Union Chamber of Commerce in
China holds concerns that the priority sectors outlined in
China’s CM2025 amount to a ‘shopping list’ of companies
and technologies that China has not been able to develop
domestically. As 70 per cent of the Chinese investment that
flowed into Europe in 2015 came from SOEs, it is likely no
coincidence that many of these investments have been in
industries like advanced machinery, robotics, semiconduc-
tors and clean technology – all priorities for China under
CM2025.
It is therefore an increasingly serious concern that recipro-
cal market access has yet to be extended to European busi-
ness in China. In contrast to Chinese companies who face
Global Policy (2017) 8:Suppl.4
67
few, if any, limitations in investing in European industries
like construction, financial services, healthcare, insurance,
logistics, media and telecommunications, European compa-
nies in China continue to either be fully barred from partici-
pation or limited to holding a minority position. The new
Market Access Negative List on domestic and international
investment that was released in March 2016, indicates that
minimal progress has been made in opening up the market
to more competition. While it is too soon to draw a defini-
tive conclusion, nor do the draft revisions that were
announced for the Foreign Investment Catalogue in Decem-
ber 2017 include many significant changes. As a result,
while the complementarities of pairing Europe’s technology,
knowhow and capital with China’s supply chain, market and
capital are attractive, in many industries European compa-
nies’ only options for accessing the Chinese market are to
license their technology, take on a Chinese investor or be
fully acquired.
Reciprocity for European business in China is
important
This gap in market access is as significant as it is unsustain-
able. In the past, China’s status as a developing economy
rendered reciprocity much less of an issue. This has now
changed. As a US$10 trillion economy – the world’s second
largest, China is now far more important than it was 10 or
even five years ago. This is reflected in the fact that from
2010 to 2015, China’s total outbound foreign direct invest-
ment (OFDI) tripled. As Premier Li has stated that during the
period 2016 to 2020 China may deploy US$1 trillion of capi-
tal abroad, this figure may shortly double again (Xinhua
News Agency, 2015).
As China’s largest trading partner, the EU represents
about 15 per cent of the country’s trade. Since it is also a
leading destination for its outbound investment, China
needs the EU as much as the EU needs China. The question
of whether China will be willing to offer reciprocity therefore
has serious ramifications, both for European business today
and for how in the longer term Chinese investments will be
perceived internationally. If it is ultimately unwilling to offer
reciprocal access to its own market, China cannot assume
that it will indefinitely continue to enjoy open and unhin-
dered access to the EU market. The liberal approach to
mergers and acquisitions will only work if all parties move
toward equal access and the removal of barriers, otherwise
it is politically untenable.
As the June 2016 European Commission (2016) paper Ele-
ments for a new EU Strategy on China puts it: ‘The EU wel-
comes productive Chinese investment in Europe provided it
is in line with EU law and regulations. In return, the EU
expects improved market access for foreign companies in
China and a level playing field for business and investments.
China should reduce the number of protected sectors and
minimize national security reviews’.
German Chancellor Angela Merkel echoed this sentiment
during her trip to China in June 2016, in her comments on
Chinese companies’ high level of interest in acquiring
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German businesses. If we are open, she said, ‘it must be
possible to find good solutions here too. We do, of course,
expect reciprocity from the Chinese side’ (Scheuer, 2016;
The Federal Chancellor, 2016).
In the reform programme propagated by the Chinese
Communist Party in November 2013 – the Decision – the
Chinese Government pledged to remove a wide range of
market access barriers. Unfortunately, since evaluating Chi-
na’s reform progress in the Position Paper 2015/2016, the
European Union Chamber of Commerce in China has
noted only limited improvement. This inertia to fulfil pub-
lic commitments granting reciprocal access for investment
is increasingly detrimental to the Chinese authorities’ abil-
ity to achieve their own goals. A prolonged dip in FDI
into China, which may have already begun with European
investment in China declining during the last four years in
a row, would indicate a loss of interest among foreign
investors. This could lead to a further decline in confi-
dence over the country’s ability to maintain long-term
economic growth and would in no way support the Chi-
nese government’s ongoing efforts to foster new drivers
of economic growth.
Addressing tensions in the global trading system
China’s expanding impact on the global trade system might
cause an increase in protectionism and contribute to a
retreat from globalisation. In these times of fragile global
demand, an integrated global economy needs a cooperative
political architecture. Unfortunately, in recent years the glo-
bal trade climate has changed a lot, as indicated by the fail-
ure to conclude the WTO Doha round, the sanctions
brought against Russia, Brexit and the election of President
Trump. The increasingly protectionist measures seen interna-
tionally since the financial crash of 2008 all point to globali-
sation in reverse. China alone is not to be blamed for this:
narrow, nationalist tendencies in many countries are elbow-
ing aside global commitments.
The Western world was trying to re-establish the moral
high ground on free trade by negotiating the Trans-Pacific
Partnership (TPP) and the Transatlantic Trade and Invest-
ment Pact (TTIP). Yet, as the 2016 US Presidential campaign
testifies, the US is currently retreating from global engage-
ment. Despite the conclusion of the TPP by the outgoing
Obama Administration, its ratification is being stopped by a
triumphant Donald Trump. The less-than-impressive commit-
ment of the US to the TTIP negotiations with the EU are
also failing to facilitate a timely conclusion, particularly as
the European Commission is struggling to establish a con-
sensus among EU member states.
Domestic politics reinforce these trends. If Western lead-
ers can be said to have grown wary of globalisation, many
in their electorates have turned positively hostile. Globalisa-
tion was sold for too long in the West as an exercise in
enlightened self-interest: everyone would be a winner in a
world that pulled down national frontiers. The 2016 Brexit
referendum shows that globalisation seems to hold little
appeal to the squeezed middle classes, as they perceive the
© 2017 University of Durham and John Wiley & Sons, Ltd.
top one per cent as scooping up the lion’s share of gains
from economic integration.
The architects of the present era of globalisation no
longer seem to be willing to lead or to commit to their cre-
ation. Neither the Europeans nor the US seem to see a vital
national interest in upholding an order that redistributes
jobs to other countries. China, despite being the largest
exporter in the world, is unwilling to step up as guardian of
the existing multilateralism, preferring instead to impose its
own agenda. But, without open trade advocates, globalisa-
tion cannot but fall into disrepair.
Globalisation requires powerful and likeminded advocates
in order to ensure that global governance arrangements are
sufficient for the fair application of rules that have been
agreed to. Without a political architecture that locates
national interests in mutual endeavours, the economic frame-
work is unfortunately destined to fracture and fragment.
Opportunities for China to more effectively
integrate into the global economic system
This is not to say that globalisation is doomed or that China
cannot play an important role in upholding the international
economic order from which it has gained so many benefits.
This crisis also presents a real opportunity.
Regarding overcapacity
Some examples of desirable reforms that would allow China
to play a more constructive role in the global economy, in
part by improving its long-term domestic growth trajectory,
are:
• Cut capital expenditure (‘capex’) in industries charac-
terised by overcapacity.
• Reform the fiscal system to give local regions more fund-
ing possibilities, for example, by moving to a consump-
tion-based, value-added tax sharing system in order to
reduce their incentive to subsidise local companies with
the goal of maintaining their tax base and employment
levels.
• Strictly enforce the limitations provided in the 2014 Bud-
get Law to tackle the propensity of local governments to
subsidise local companies.
• Continue to improve IP protection in order to safeguard
innovations and provide Chinese companies incentives to
increase R&D spending, thereby enabling them to move
up the value chain and away from the vicious cycle of
manufacturing low-tech products for which profits are
limited and oversupply already exists.
• Implement environment, health and safety standards and
labour laws more rigorously and continue to adjust input
prices by increasing resource and environmental charges,
forcing the least efficient and most polluting companies
in industries characterised by overcapacity to exit the
market, thereby reducing supply.
• Reduce energy price subsidies to industry and continue
resource price reform by focusing on areas like coal
Global Policy (2017) 8:Suppl.4
 China’s Economic Rise
resource tax, and pricing for electricity, water and natural
gas.
• Publish more reliable and transparent industry data in a
timely manner to enable companies to make more
informed decisions about their production volumes.
• Expand and increase SOE dividend payments to reduce
the ability of SOEs to invest in unneeded expansions.
Regarding free trade
One of the largest contributions the Chinese authorities can
make is to afford more market access to foreign companies
and investors. In the face of popular opposition, it is impor-
tant that the proponents of free trade are able to highlight
significant benefits that voters gain from China’s role in the
globalised economy, both as workers and consumers. A
robust market opening, in part through a successfully com-
pleted and ambitious Comprehensive Agreement on Invest-
ment (CAI), is one of the most important steps that the
Chinese authorities can take to do so.
The EU business community in China also hopes that Chi-
nese government agencies will find the courage to dust off
the visionary market-reform agenda that was announced at
the Third Plenum in 2013 and to follow through on imple-
menting its content. Market forces are vital to creating an
innovative Chinese ecosystem, not heavy-handed attempts
by political masters to steer the future direction of the
economy.
Regarding openness to foreign investment
The Chinese government also has an opportunity to play a
leadership role in developing new international guidelines
on investment which ensure that the legitimate interests of
all countries are given due consideration. Doing so would fit
well with the non-binding G20 Guiding Principles for Global
Investment Policy making that were proposed in Shanghai
in July 2016 during a G20 Trade Minister’s Meeting. The
OECD Guidelines for Multinational Corporations can also
contribute to a constructive starting point from which to
draft new rules. Such guidelines would help to ensure that
regular commercial transactions are not unnecessarily politi-
cised by helping to clarify types of investments that are and
are not welcome.
These changes would ensure that China served as an
important force in support of the open markets for trade
and investment from which it has gained so many benefits.
They would also closely align with President Xi’s statement
at the World Economic Forum in January 2017 that ‘China’s
development will continue to offer opportunities to business
communities in other countries. China will keep its door
wide open and not close it. An open door allows both other
countries to access the Chinese market and China itself to
integrate with the world’ (Xi, 2017). While European business
has heard similar statements in the past, it hopes that this
time the Chinese authorities will ultimately walk the talk. For
both China and the rest of the international community, the
international economic relations that have developed
Global Policy (2017) 8:Suppl.4
69
because of globalisation are far too important for 2017 to
be marked by words without actions.
Notes
1. BRI was previously referred to as One Belt One Road.
2. While this figure does not include German tax credits for R&D, this
approach is distinct from the subsidies that the Chinese authorities
are providing in support of manufacturing and sales in multiple
industries covered by CM2025.
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Author Information
€rg Wuttke is President of the European Union Chamber of Com-
Jo
merce in China and Vice President and Chief Representative of BASF
China, based in Beijing. He joined BASF in 1997. From 2007 to 2010,
and again from 2014 to 2017 he has served as the President of the
European Union Chamber of Commerce in China.
Global Policy (2017) 8:Suppl.4