The trade war between the US and China has sparked a lot of debates and initiated further research into the potential dangers China presents to the global trade. While the US trade deficit with China has very little to do with “China’s unfair trade practices”, instead it has more to do with the savings-investment ratio imbalance, Donald Trump nonetheless raised an important issue. The dominance of Chinese companies over global trade, including with many developed economies, cannot be overlooked.
It is not even dominance per se, but the double standards of the Chinese government, which encourages local companies to acquire businesses abroad while, at the same time, keeping its economy closed to western firms trying to establish themselves in China.
Chinese Investment in the EU
Perhaps one of the most intriguing cases is in Germany, a country which relies heavily on exports and therefore is one of the loudest free-trade activists. Berlin currently faces a dilemma. Exports have played a crucial role in the country’s success over the past decades. However, it has now found itself in a situation where many Chinese companies, having large amounts of liquid assets earned through trade, acquire German tech and manufacturing companies. The expertise of these firms, their technology and manufacturing processes, is then used back in China to cement the dominance of Chinese companies further. (Chart 1,2)
Although such trends have significantly boosted investment levels in Germany and around the EU, in the long term such loss of tech patents and tools is likely to make China’s position in global trade even more dominant, reducing competition and harming local economies.
Sectors other than industry and manufacturing are also affected. In the UK large inflows of Chinese capital have disrupted the native real estate market. Property prices are being kept artificially high, with some investors nervous of a bubble bursting. Many of the Chinese buyers are willing to hide money outside of the control and oversight of the communist government and pay the above-market rate.
Chinese Financial Integration
The Chinese government has loosened its restrictions over western companies investing in Chinese ventures. It one of the key trends of 2017, for global banking, Chinese financial markets were opened up more to foreign investors. Most banks have assessed this as a positive move, though some economists are slightly sceptical of Chinese financial system integration into the world economy. Gideon Rachman, FT Chief Foreign Affairs commentator, argues the integration of China with its vast levels of savings, investments and other assets into the global economy might potentially lead to a worldwide crisis, similarly to US integration in the 20s, which had a disastrous outcome.
Is it too early for the Chinese government to open up their financial industry’s borders to the rest of the world? Are the developed countries fully considering the long-term implications of China’s dominance in some of the key sectors, which helped them grow in the first place?
China’s dominance in Asia and the high level of dependence many Asian countries have on China are obvious. With its current growth levels and the important One Belt One Road initiative, it is clear that China will inevitably grow its influence in the West. Going forward, Western countries will have to come up with a balanced approach, which will protect local industries and at the same time will not limit the levels of competition.
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