Given that we don't know where the pandemic might re-appear from one day to the next, it is all but impossible to make firm predictions about what the future may bring. So rather than try to establish certainties about Chinese economic power in a post pandemic world, it is more realistic to be somewhat cautious and point to a range of potential scenarios instead. Here, we might think of the pandemic as providing a lens to look at China through. But rather than a lens on a microscope, one on a magnifying glass instead. It is not something that allows us to see things that we could not see or identify in the past, but instead a lens that makes what we were already looking at appear much bigger and closer (and more urgent) than before.
For example, the drive to make domestic consumption ever more important as a source of Chinese growth had been ongoing before the pandemic. As Prime Minister Li Keqiang noted in his Government Work Report in 2020, the combined impact of the domestic close down and a dramatic slump in global economic growth created – or exacerbated – a whole range of economic challenges:
“Domestically, consumption, investment, and exports have declined. Pressure on employment has risen significantly. Enterprises, especially micro, small, and medium businesses, face growing difficulties. There are increasing risks in the financial sector and other areas. The budgetary imbalances of primary-level governments have intensified.”
One scenario for dealing with these challenges is a rebalancing away from overseas projects and an emphasis on investing at home to return to growth. As one of a series of People’s Daily’s front-page commentaries on the pandemic put it, “shifting part of the foreign trade production capacity to the domestic market” and increasing domestic investment to “drive the expansion of the consumer market” were the most effective way of trying to recover from the economic dimension of the pandemic crisis.
Even before the pandemic began to spread, a number of investment projects along the Belt and Road Initiative (BRI) had already faced problems generating enough money to pay for themselves. This had generated considerable debate on both the political utility of debt relationships for China, and whether it was an intentional strategy to actually promote financially unsustainable projects in the first place. Here, the point is simply to suggest – rather uncontrovertibly – that global economic turmoil will make things worse. This can actually create opportunities for China. For example, according to one Chinese think tank analyst, those countries that are ‘friendly with us’ might get preferential treatment when it comes to debt relief. But rescheduling debt payments is likely to cast further doubt on the wisdom of investing in projects that are based more on the political logic of promoting the BRI than on sound economic fundamentals.
If these first two outcomes suggest a turn away from global investment, there are potentially countervailing factors at play to. As was the case in and after the global financial crisis, the coronavirus crisis could see major overseas companies and resources available at knock-down prices. Indeed, in response to the possibility of Chinese purchases of suddenly rather cheap European firms, in April 2020, the EU Commissioner for Competition, Margrethe Vestager, urged European governments to do exactly what her office normally tried to prevent: to protect domestic companies and prevent takeovers from foreign government backed entities, including via partial nationalisation of them if necessary. So pre-existing concern about the wisdom of allow key economic assets controlled by Chinese owned companies was exacerbated by fears of what some of the economic consequences of the pandemic might bring to major Western economies. There might be opportunities in developing economies too that lose markets in (and finance from) the West.
And yet another scenario is that the force of decoupling arguments might be enhanced. Production patterns would have shifted in any case. Some production has already moved out of China to other even cheaper sites in even later developers, and more will follow. Moreover, China’s position in the supply chain for the provision of so many global goods and commodities had already created concern about economic power asymmetries and dependencies. For example, in 2019, the US Economic and Security Review Commission (ESRC) argued that there were ‘economic and security risks’ from dependence on China with 13.4 per cent of all drug and biologic imports into the US coming from China, and 39.3 per cent of medical device imports. The pandemic made such a dependence on China for medical supplies more urgent in more places. In a number of countries, it also shone a light on the bigger picture of the wisdom of past relationships with China, and the even bigger question of whether China can and should be trusted.
We have to remember that it is companies, not national governments, that invest and produce in China. They are of course influenced by government policy at home and in the countries they invest in, and a more hostile environment towards China might well result in a search for alternatives. It will be a big ask, for governments to provide either the penalties or the incentives (or both) that will persuade producers to abandon China and move production back home or to more politically trusted economies. Or to find sources of supplies that either currently come from China, or pass through China. Or, as will increasingly be the case, are produced by Chinese actors in other countries. It will also be very expensive too, at a time when governments across the world will have large amounts of debt to deal with as a result of dealing with the economic consequences of their own pandemic responses. But political pressure and government preferences will likely play some role in adding to existing economic logics that might make the prospect of producing elsewhere increasingly attractive.
These are not necessarily mutually contradictory scenarios at all. Indeed, it is highly likely that we will see all of the above playing out in different sectors and different countries. For example, there could be less overall COVID, but what is invested might take advantages of the opportunities that the pandemic offers. While some existing investments along the BRI will face debt problems, new projects will be signed as opportunities come available. A concerted effort to continue production in strategic sectors throughout the pandemic combined with the problems facing other countries could put China in a strong position to push ahead with MIC 2025 objectives “to move China up the manufacturing value chain, expand its global market competitiveness, and reduce its reliance on foreign firms and their intellectual property”.
Trust is always important in economic relations. It becomes even more important in international economic interactions in times of crisis. And if there is one clear conclusion to be drawn at this still very early stage of thinking through the consequences of the pandemic, it is that there does not seem to be an abundance of trust in China in many western polities at the moment.
This comment draws from research undertaken for “China Risen? Studying Chinese Global Power” to be published by Bristol University Press in January 2021. It is funded by a Leverhulme Major Research Fellowship, “China Risen? What is global power (and in what ways does China have it)?”
The opinions expressed are those of the author. They do not reflect the opinions or views of ISPI.