China: Turning from US to Europe

Published on July 2, 2018

According to sources in Beijing, with a mere few days to go, US officials have yet to contact their Chinese counterparts at any senior level ahead of the July 6 deadline for the imposition of 25% tariffs on $34 billion of imports from China.

And with talks stalled with the United States, China’s leadership is now turning its attention to Europe, beginning new efforts to offset what is increasingly coming to be seen as a prolonged deterioration in trade and strategic relations with America.

*** Chinese officials note the Trump administration has told American companies to be prepared for some short-term pain and, given the continued lack of fresh communications at any senior level, they fully expect trade tensions to escalate come July 6, with the expectations that the US will follow through on its threatened tariff program. China will then respond accordingly, which, they believe, is likely then to elicit an escalation from President Trump of threats of tariffs on $200 billion, or even up to $400 billion worth of Chinese imports (see SGH 6/26/18, “China: Preparing for a Trade War”). ***

*** In anticipation of a significant round of escalation, China’s Central Financial and Economic Affairs Commission has been tasked with formulating and adopting specific “qualitative and quantitative” countermeasures, including limitations on the operations and investments of some US multinational companies in China. As opposed to the trade balance, given that US investments in China far exceed Chinese investments in the US, Beijing believes it has leverage on this front, and is preparing to target the market share of American companies in China in the financial, communications, and aircraft sectors. ***

*** China’s leadership has in parallel tasked the relevant agencies, including the CSRC (China Securities Regulatory Commission) and NSSF (National Social Security Fund), to prepare measures to counter the expected ensuing pressure on China’s domestic markets. The national team has already intervened heavily in China’s stock market, which just hit a two-year low, and from what we understand, will continue to purchase shares on a large scale. ***

Turning to Europe

With a prolonged trade war looming now with the US, Chinese officials are attaching greater importance to European investment, particularly German, in areas including high tech and services.

Indeed, Beijing’s decision on Thursday to unveil a shortened “negative list” of restricted foreign investments, followed by another round on Saturday, was taken with an imminent outreach to Europe in mind.

Premier Li Keqiang is scheduled to visit Bulgaria to attend the 7th leaders’ meeting of China and 16 Central and Eastern European Countries (CEEC) in Sofia, and will hold a 5th round of intragovernmental consultative meetings with Germany between July 5 and 10.

In the past, Germany’s Chancellor Angela Merkel has expressed concerns with China’s tough business environment, and these new negative lists are meant to demonstrate a more relaxed environment to Berlin, and to German investors in particular.

Specifically, on Thursday Beijing unveiled a shortened negative list for foreign investments nationwide, dropping the number of restricted investment areas from 63 to 48. That was followed on Saturday by a new negative list for foreign investments in China’s pilot free trade zones, lowered from 95 to 45. These are slated to take effect on July 30.

Making the changes public at this time especially is seen by Chinese leaders as important in demonstrating President Xi Jinping’s commitment to an “opening-up strategy,” relaxation of market access to China, and pushing forward a “high level opening up.”

But just to be clear, officials note that any opening will remain targeted to sectors like financial services and finance, while sectors that have natural monopolies and provide important public services will remain under government control.

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