Trade relations between China and the world after the Communist Party Congress

Economic analysts look at Xi Jinping’s stronger power base. Economic ties between China and the European Union may not be all that positive whilst Beijing’s emphasis is on state control and the debt of state-owned enterprises.

Beijing (AsiaNews/Agencies) – With the Chinese Communist Party congress over, and Xi Jinping's power strengthened, European analysts are assessing their economic impact on Europe. Xi is now considered the ‘new Mao’.

In his keynote address at the opening of the congress, Xi promised a "modern socialist country", one that is "prosperous, strong, democratic and culturally advanced". At the same time, he also stressed that the Party-State must be lead in all areas of society, including the economy.

Whilst promising greater market openness when he spoke about reforms, he stressed the importance of boosting – not curbing – state-owned enterprises (SOEs).

“The world market is given less prominence from this speech than in the past, we saw more mention of the role of the state,” said Hans-Dietmar Schweisgut, the EU ambassador to China.

When Xi came to power in 2012 he promised full market reforms. However, in the past five years, the choices made by the Party-State have always been in favour of SOEs, less favourable to Chinese private companies, and unfavourable to foreign companies.

Boosting the state's presence in the economy is likely to make international trade more difficult, even between China and the EU.

Europe and China are the two largest trading players in the world. China is the largest exporter to Europe after the United States, whilst Europe is China's top trading partner.

The EU is certainly committed to greater openness and trade with China, but at the same time it wants guarantees that China trades fairly, respects intellectual property rights and fulfills its obligations as a member of the World Trade Organisation (WTO).

In 2013, the EU and China started negotiations for an investment agreement. Yet, there is a clear imbalance: China’s exports to Europe are about twice Europe’s to China.

"We have always said that the main way to change that is if China were to open its markets, to offer the same opportunities for investment from Europe as Chinese companies currently have in Europe,” said Ambassador Schweisgut.

This would be a major step forward over EU-China talks held in late 2013, and a direct response to the political commitment made by European and Chinese leaders at the EU-China Summit in June 2015.

The aim of an agreement would be to provide investors on both sides with long-term predictable access to both the EU and Chinese markets by protecting investors and their investments.

The implications of such an agreement would be to provide real added value to European and Chinese companies investing in their respective markets.

Although Xi mentioned reforms, analysts and economists doubt that market liberalisation will be implemented. When Xi talks about reform he means improving China’s state-centred model, making state intervention in the economy more effective.

“Don’t anticipate big reforms,” said Willy Lam, adjunct professor at the Centre for China Studies at the Chinese University of Hong Kong. “Bear in mind that Xi is a conservative believing in party control.”

“A lot of reforms that are happening are clearly favouring large SOEs over smaller SOEs, and much, much more than private enterprises,” said Christopher Balding, an associate professor of business and economics at Peking University’s HSBC Business School in Shenzhen.

This drive for control entails significant risks. Although the championing of state power has led to some changes, it also means credit continues to be funneled into unproductive SOEs to propel growth, with banks signing off loans because the borrowers are seen as having implicit state guarantee.

In today’s China, SOEs receive as much as 30 per cent of total loans, but only account for 16 per cent of employment and less than a third of fixed asset investment. Last year, their return on asset was a paltry 2.9 per cent compared to 10.9 per cent in the private sector.

What’s more, the focus on SOEs mean China can’t get to the root of its debt problem. SOE debt has long been the biggest driver of the country’s surging debt levels, which increased from 160 per cent of gross domestic product in 2008 to some 260 per cent today.

This rate is carefully monitored by the International Monetary Fund (IMF), which has warned that it could lead to financial turmoil, as debt growth becomes untenable.

“It [debt] is going to continue to rise,” Peking University’s Balding said. “They [Chinese officials] are concerned about debt but prioritize SOE-funded growth over debt.”