Chinese statements of intent can be misinterpreted by the West.

Op/Ed by Chris Devonshire-Ellis

China’s President Xi Jinping made a number of interesting statements in his speech at the 2nd Belt & Road Forum in Beijing, which concluded on Saturday. As is usual for Chinese politicians, a lot of what was said was covered with some ambiguity, and largely consisted of ‘statements of intent’ without actually delivering any time frames. However, there is enough there for experienced China-focused analysts to sift through the rhetoric and come up with some reasonable assumptions on what the future direction – and intent – of the Belt & Road Initiative will be. It is important to balance what China says in official statements with what non-Chinese politicians want to hear or think has been said. They can be different things.

An example are the comments made by Germany’s Economics Minister Peter Altmaier in reacting to what he called President Xi’s “pledges” — a term he used that implies a strong commitment, and can be translated as a promise. Altmaier said that Xi had committed to “transparent investment rules, to a level playing field, to sustainability, equal rights and opportunities for the companies concerned.” These are key points for the EU, which has long complained that its companies are barred from China market access (and by proxy, Belt & Road Initiative projects) and that while Chinese companies enjoy equal rights and access to EU opportunities, this is not reciprocated by the Chinese. Altmaier then goes on to say: “This is now to be implemented. Hundreds and thousands of German and European companies are struggling with obstacles, with regulations that do not exist in other European countries, and therefore we are prepared to engage in a strong and close cooperation to order to remove all the obstacles mentioned by President Xi.”

However, Altmaier’s words in response to Xi’s speech do not bear much resemblance to what President Xi actually said when referring to the opening up of Chinese markets. What he did say was rather more conservative, did not contain any references to ‘obstacles’ and in fact was rather brief, and nothing new. Xi merely stated, “We will expand market access for foreign investment in more areas, and we will continue to slash the negative list.” (The negative list is an annual list of industries fully open, partially open or blocked from investment to foreign companies in China — for details of the current list, click here)

In short, Altmaier misquoted Xi and bigged up what had actually been stated. Why? To enable German and EU politicians to continue to pressurize China to open up its markets. That doesn’t sound unreasonable, although perhaps a little underhand in terms of misquoting China’s President to do so. The problem is with this approach is that it is far too blunt for Chinese tastes, they do not wish to be constantly reminded about opening up their markets to foreign contractors. And make no mistake about it, the EU are largely, in the terms of the Belt & Road, not talking about direct consumer market access, but about the ability of EU contractors to participate specifically in Belt & Road infrastructure projects. It is true that Chinese SOEs have been hoovering up the majority of Belt & Road infrastructure projects. However, the EU also needs a reality check: by definition such projects are bilateral — between China and the specific nation concerned. That means they are not fully under China’s remit, there is a secondary sovereign Government involved. By insisting that China opens up the Belt & Road to ‘foreign contractors’, the likes of Altmaier are asking for something that is not within China’s scope to deliver. It is a futile and rather naïve approach.

That said, Xi did state in another aspect of his speeches that China was very much open for foreign business. But it seems to me that this aspect of China’s desire to see foreign brands and products in China has largely been ignored, which is frankly bizarre. In terms of having foreign consumer goods and services enter the Chinese market, Xi was far more positive. He explained, “As a Chinese saying goes: ‘The ceaseless inflow of rivers makes the ocean deep’. However, were such inflow to be cut, the ocean, however big, would eventually dry up”.

And then to ram the point home still further, said: “We will increase the import of goods and services on an even larger scale. China is both a global factory and a global market. China does not seek trade surplus. We want to import more competitive, quality agricultural products, manufactured goods and services.” Therein lies the problem with the EU’s trade and investment position with China and the Belt & Road. It only caters for a small minority of larger businesses and not the larger volume of its SMEs. This is because the larger engineering, manufacturing, and contracting businesses (and I mention just a handful of German examples in Arubis, BASF, Bayer, BMW, Bosch, Continental, Daimler, Heraeus, Heidelburg Cement, Lanxess, Linde, Saltzgitter, Siemens, ThyssenKrupp, and Volkswagen) are all able to afford to pay for government lobbying. This is fine, but such a position also relies on the likes of Altmaier to take the right position to soften China’s approach and gain some traction. However, this strategy is not working when it comes to the Belt & Road contracts for the reasons I explained: It is not sophisticated enough, and in any event is not purely a Chinese favor to dispense. German and EU businesses looking at making inroads into Belt & Road Initiative projects need a new approach.

In terms of the Chinese market, however, Xi was much more bullish, indeed openly stating, “China wants to import more competitive, quality agricultural products, manufactured goods and services.” If anything, that is the take-away from the Belt & Road Forum: China is open for business and wants competition in its markets. Some markets that require government monitoring, such as pharmaceuticals, do have limits and restrictions on how far the foreign investment can be permitted, and this is not entirely unreasonable either. However, pharma, and other currently restricted industries are on the way to be further liberalized. Xi touched on this, and I reiterate: “We will expand market access for foreign investment in more areas, and we will continue to slash the negative list.” The important thing to bear in mind is that the Chinese government is intensively studying their national industries and wish to build up their own global champions before allowing foreign competition. This is not unreasonable when such industry sectors would not be able to compete with imported goods, and this remains the case in certain sectors. It is unreasonable when vested interests start to seek protection from foreign competitors to maintain local market dominance. WTO rules forbid this, and while the Chinese state are aware of abuse, internal political considerations can and does mean some industries remain extremely difficult for foreign businesses to enter. That then is not a trade issue, it is a Chinese internal political issue, and very hard to resolve. Pressure from the likes of Altmaier is not going to be enough, it never has been, and isn’t ever going to be.

Instead, the EU should be listening to Xi’s words and comparing them with China’s negative list to see what EU exporters can actively enter the Chinese market — and be more engaged with what the Chinese president himself has stated the country needs. Many of these businesses will be SME’s. However, the EU hasn’t really developed an accurate SME tracker: on the EU Stats website concerning EU SMEs it is conceded that the stats only include companies employing less than 250 people. There is a huge analytical gap in the EU in understanding the spread of companies within it. The largest MNCs are given preferential treatment, yet China is effectively stating it needs not the big guns, but the smaller manufacturers and service providers to sell to them. That group of EU businesses, the European regional, but not yet multinational, are precisely the target group China wants and needs products and services from.

The messages, therefore, from the Belt & Road Forum as regards China and Belt & Road market access are as follows:

  • There is little point in global MNCs lobbying for their national governments to put diplomatic pressure on China to ask for involvement in BRI infrastructure projects. China cannot deliver on this as these are by definition bilateral deals. A new, more direct approach within China and beyond is required.
  • China has stated it will continue to open up the negative list of industries currently restricted to foreign investment, but will do so under its own time frame.
  • China also stated it needs foreign goods and services and wants to purchase these from overseas. Many of these needs will be met by SMEs around the world. Such companies need to understand what China wants, and how to supply it.

There are implications to this. Firstly, the EU approach to China and market access has been dominated so much by its MNCs that the EU’s own capabilities in providing services to its own massive SME sector have been diminished by all the MNC noise. This needs to change.

Secondly, the good news is that China is open for business, and by definition much of the required demand will be from global SMEs. However, with more limited resources, they need to understand whether or not firstly if there are indeed opportunities in China for their particular product, and secondly, how then to sell these. The first requires a bit of local market research (I already mentioned the negative list, which details the approved, restricted and blocked industry sectors) and if positive, further local research either by visiting the country and talking to pertinent consultants can establish how viable that is. Then the structural aspect comes in, either to sell to China from your home country, and the internet and payment platforms required to do that, or to establish an in-country presence. The latter can be surprisingly inexpensive; China is full of expatriate entrepreneurs who are succeeding. This has just recently been boosted by China slashing the import tariffs on imported goods earlier this year

Either way, there are positives to take from China’s position on the Belt & Road. The China market is open, with huge market significance for SMEs in general (and especially from those whose government have signed off on the Belt & Road Initiative). Global MNCs wishing to partake in BRI contracts, however, need to rethink their strategies. Asking your government to lobby for you isn’t a winning strategy, and this is a longer term positive in that it has become obvious this now needs a rethink. Both messages are there. It is time to adapt, and then progress. China and its Belt & Road Initiative are, and can be, open for business given the right approach.

Leave a Reply

Your email address will not be published. Required fields are marked *