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China in 2022 – “The Eye of the Tiger”

831644119414_.pic Year of the Tiger

According to the Chinese calendar, 2022 is the “Year of the Tiger” and China is potentially facing an even more turbulent year than the previous one. As China continues to be an attractive and reliable investment destination (AHK Survey), the country faces multiple external headwinds like rising geopolitical tensions and the ongoing pandemic. On the domestic side, China aims to internalize global value chains and finance by leveraging its large domestic market, all signaling that for foreign companies realism replaced strong positivity.

 

Three topics to keep an eye on in the “Year of the Tiger”

 

1) Rising tensions in International Relations

The geopolitical competition among the major players USA – EU – China will pick up in 2022 as the Chinese leadership perceived a growing “Western” coalition intent to hinder China’s rise. With the repackaging of the „BRI (Belt and Road Initiative), China directly competes with the US „B3W (Build Back a Better World) and the EU’s Global Gateway programs in search of new „allies“ around the globe. As the rising geopolitical tensions mirror the CCP’s internal focus approach, engagement with China therefore will remain and even become more difficult for foreign governments and businesses alike, reducing the room for maneuver to manage tensions. A clear example in this context is the conflict over Lithuania's position on Taiwan, in which European companies have been caught between the millstones of politically motivated sanctions that are further exacerbating the already tense situation along global supply chains.

What will the new German government’s stance on China be, and how will this manifest in possible political actions?

Link: Coercion with Chinese characteristics: How Europe should respond to interference in its internal trade

 

2) Travel restrictions - The never-ending Covid story

According to the latest AHK survey, the third top operational business challenge in China is the current travel restrictions, resulting in decreasing numbers of expats as well as an acceleration of localizing regarding personal, technical, and operational know-how in China. A factor that should not be underestimated is the risk of a decrease in mutual understanding on political and business levels caused by the lack of Face-2-Face meetings.

The travel restrictions to and in China will also accompany us in 2022. While the rest of the world is increasingly coming to terms with dealing with the Covid, there is still no prospect of an opening up in China. This is due to several factors:

  • The Chinese health system is yet not designed for mass care for the seriously ill. Even apparently milder courses of the virus could still cause an acute overload of the system.
  • The costs of regional-/local-lockdowns are manageable for China - especially compared to the costs of an uncontrolled spread of the virus.
  • Chinese citizens expect their government to protect them. In the event of a major outbreak or even a loss of control, social stability would be jeopardized.

It remains to be seen to what extent and for how long the Zero-Covid narrative can still be successfully communicated and enforced, especially if the Anti-Covid measures are relaxed to a large extent in the global context. According to the prevailing opinion, a noticeable improvement in the travel procedure can only be expected in 2023.

Meanwhile, every new “outbreak” in China represents a potential risk to the economic forecast if it leads to a crippling of supply chains and port logistics in China.

Link: Despite consumption hit, China to stand fast on tough COVID-19 curbs

 

3) Economy 2022: Decoupling? – not yet!

The trade statistics of 2021 show no sign of decoupling yet. China is more embedded into the global economy than ever before, as both imports and exports have grown by around 30 percent. What has changed is something different: China is buying less in relative terms from the West than in past decades and is instead orienting itself towards Asia. Therefore China's trade is not decoupling from the West, rather it is a matter of diversification towards Asia (RCEP) and Africa.

Nevertheless, China’s leadership seeks a balance between securitization and remaining globally integrated as a response to the new geopolitical realities and tensions. To reduce its reliance on essential external inputs, China aims to internalize global value chains and finance by leveraging its large domestic market.

This concept of Dual Circulation (DCS) is not perse bad news for foreign companies as it presents both, chances and challenges. On the one hand, an increasing domestic consumption would enlarge the consumer market of which domestic, as well as foreign companies, could benefit from, where a market expansion in non-sensitive areas or in sectors in which China aims to onshore value chains means new opportunities. On the other hand, China’s ambition of independence from foreign technologies could cost market shares of foreign companies in the long run.

Moreover, protectionism, securitization efforts, new cybersecurity rules, and preferential treatment of local companies have become the top regulatory business challenge in 2021 and will continue in 2022.

Link: China’s Selective Opening Up: the Case of Foreign Direct Investment

All in all, it looks like a challenging and quiet bumpy road for the relationship with China in 2022.

中国加油!,德国加油!

Dirk Müller
VBU Partner in Shanghai

(Sources: AHK, MERICS, EAC, EIU)
(Picture: D. Müller)

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