The economies of Europe and China are highly complementary, creating huge possibilities for cooperation and growth, so long as investors think like businesspeople and not politicians, said investor and author David Baverez.
At a Chamber webinar on 27 January, Baverez, whose books include “Beijing Express: How To Understand New China,” shared his insights on the changing relationship between the two economies, and the impact on Hong Kong.
Assessing the current situation, he said that he expects interest rates in Europe will stay low and growth will be constrained. China’s economy is continuing to grow, but at levels of around 5%, rather than the 10% of a few years ago, and is also dealing with a correction in its real estate sector.
So Europe has low economic growth but high productivity, whereas China has higher growth but its productivity levels are relatively low.
“It should be obvious that if we put the two regions together they are very complementary,” Baverez said, adding, “but all this is very theoretical. In reality, we shouldn’t be naive.”
He explained that, in the past few years, the relationship between China and Europe has weakened. This is due to a number of reasons, including political pressure from the United States. Baverez referred to the 1997 book “The Grand Chessboard” by Zbigniew Brzezinski, which said that “the nightmare of the U.S. in the 21st century would be Europe teaming up with Asia.”
So the U.S. is keen to prevent the Europe-China relationship from growing (even though the U.S. is a major investor in China). For example, the E.U.-China Comprehensive Agreement on Investment, which was agreed in December 2020 after seven years of negotiation, has now been suspended following pressure from the United States under both the Trump and Biden administrations.
“We need to ensure that the E.U. and China talk to each other without U.S. interference,” Baverez said.
Another hurdle is the knowledge gap. Whereas the Chinese diaspora is around 70 million, there are relatively few foreigners in the Mainland. “So we European guys have to work a lot harder to understand what is happening in China.”
There is also an investment gap. Half of China’s growth comes from exports, and China’s share of global manufacturing continued to grow in 2021. This could create opportunities for European companies, if they are willing to take them.
“We are businesspeople, and we should think like businesspeople and not politicians,” he said. “Businesspeople should look at the value chain and identify the strengths and weaknesses, and see where there are gaps or bottlenecks where we can help.”
To develop further, China needs more technology in certain sectors, particularly in manufacturing. One problem is that there is a perception that the best technology comes from the U.S. However, as Baverez noted, the U.S. is no longer a manufacturing powerhouse, so China would actually benefit more from the know-how of European companies like Bosch.
“Europe is ahead of the U.S. in industrial software,” he said, adding that Europe has much to offer in other areas including services, processes and asset management.
“China’s mistake is not to appreciate that there is a lot of wealth and knowledge in Europe. Conversely, it is Europe’s mistake not to sell this knowledge to China, and encourage cooperation between the two regions.”
European investors should remember that China is not only a huge country but also very decentralized, with strong regional governments. If you want to invest in the Internet of Things, for example you need to go to the Greater Bay Area, not Beijing.
So where is the role for Hong Kong in the shifting relationship between China and Europe? Baverez said that Hong Kong is also at a turning point. Previously, the city was a gateway to bring foreign capital into the Mainland for industrial development. But China is now generating its own capital in this area.
But another role for Hong Kong could be to help Mainland households access income streams from financial markets – particularly since the growth in real estate seems to be over. This would enable Chinese people to share the success of homegrown companies like Tencent, while the economy would also benefit from having access to the large savings piles of Chinese households.
Hong Kong should also focus on its role as a regional centre, and in particular should cooperate with Shenzhen as the two main cities in the Greater Bay Area.
So while the role of Hong Kong is changing, there is no shortage of opportunities for foreign entrepreneurs and businesses based here, if they are willing to adapt.
“For expats, the next 20 years will be different to the past 20 years,” Baverez said. “But if you are willing to change your job description, Hong Kong will be as exciting as ever.”