China in the post-Covid order: implications for the EU and Italian business interests

The Covid-19 crisis is rocking the world economy, and in the wake, no less, of an already partially underway “de-globalization” process. The diversification – and possible fragmentation – of the global supply chain presents a major challenge to the Chinese economy, but it is not at all certain that it will have such drastically negative effects on global growth, since there are a great many companies (including some Italian ones) interested today in breaking into the Chinese market, and Chinese companies interested in diversifying trade partnerships. Moreover, according to current predictions, China will continue to account for approximately one-third of global growth.

Corporate debt is extremely high, and that could place the banking system under heavy stress as the growth rate slumps (predicted today to drop to under 2%, therefore below the country’s demographic growth rate). Nevertheless, this level of indebtedness is less of a concern than for other countries, given that the majority of it is held by China. However, the government is going to have to make domestic market stability a priority, even as efforts to boost Italy’s presence in Asia go forward – both trends that were already visible prior to the pandemic. Meanwhile, detachment from the dollar, although still incomplete, will also serve to lay the groundwork for an Asian monetary pillar under Chinese leadership.

Indeed, some experts foresee the Chinese economy increasing its accessibility, while remaining selective and conditioned, in any case, by security concerns – not least in response to the recent U.S. attitude. They also underscore the reactivity of what has become a highly complex economic system capable of weathering the impact of lower growth.

Decoupling from the OECD countries is already under way at international level, and that goes for both the United States as well as Europe. Export control measures have increased over the past two years, as have the limitations on technological and even scientific cooperation. According to some participants, the main spark behind this evolution is not the political approach of Donald Trump but China’s divergence from market reform strategies that, in reality, were suspended after several failed attempts. The real question is whether the decoupling process will spread to other sectors, with reshoring and diversification measures strongly encouraged by governments (e.g. in Japan) or strategies of cooperation between companies in order to compete with Chinese ones (e.g. in Europe). The U.S. has adopted a truly strategic competitive approach, while Europe has yet to develop a strong and univocal attitude.

As for the future of the “Belt & Road Initiative”, the undertaking is a long-range one that will therefore continue well beyond the current slowdown in global trade. There will be adjustments along the way, but the need remains for massive investments in major infrastructure in many key countries, not least in order to create jobs – something that undoubtedly goes for the Mediterranean region. This is going to make Chinese capital attractive, at least for some governments, despite the greater caution adopted by almost all counterparts in the very recent past.

From the European perspective, it is essential to handle relations with Beijing as a bloc, leveraging against the European Union’s potential instead negotiating separate and specific national accords. Only under these conditions can European interests be protected from being crushed in the geopolitical clash between China and the US. Sino-European relations have long avoided the temptation to stop at convenient trade criteria, nevertheless a compact European front must be maintained in order to address multilateral issues – environmental or health-related, for example – at a global level.

Among the consequences of the pandemic, many sector operators stress not only the necessary – yet currently uncertain – adaptation of global market supply sources, but also a complete change in consumer habits that include the increased use of e-commerce, more informed and careful attention to the provenance of goods and services and certainly much greater awareness and selectivity in tourism. In some manufacturing sectors, value chains are partially flexible, but it is difficult to imagine a total break in relations with the Chinese, at least as long as some kind of frontal geopolitical clash does not take place.

In systemic terms, in any case, the causes of the trade and finance-related problems that emerged in part during the 2008 downturn need to be reviewed, and not only as regards their effects. Drafting better rules is probably the biggest imperative in that regard, even after the most critical phase of the 2020 pandemic has past.