The second China shock

Europe must prepare for what's ahead

- George Magnus

Emmanuel Macron came back from China in early December empty-handed.

The French president's appeal to his Chinese counterpart, Xi Jinping, to help stop the war in Ukraine was never going to gain traction given Beijing's support for Russia. Urging Xi to address China's surging trade surplus, the result of the country's economic and industrial policies, predictably also fell on closed ears.

In any event, Xi's main concerns were the imminent final politburo meeting of the year and the annual Central Economic Work Conference (CEWC) that followed. Centre stage was the passage of the new 15th five-year plan, due to be presented at the National People's Congress in March, and what would be needed in 2026 to get it off to a good start.

We all need to pay attention as we brace for the second China shock. The first, which followed China's accession to the World Trade Organization in 2001, was about China's integration into the global trading system, with huge consequences for global labour and resource markets and the harm experienced by many communities around the world as firms and jobs were lost.

The second is China's attempt to lead advanced technologies, such as electric vehicles, batteries, semiconductors, biotechnology, robotics and AI, via state-directed industrial policy on an unprecedented scale.

Beijing always enthuses about its performance at the CEWC, and this year it was similarly optimistic, asserting that it is on "the correct path". Yet this cheerful rhetoric contrasts with the prescriptive policy measures the government is proposing to implement.

These include even easier monetary policy, higher fiscal deficits, real estate stabilisation measures and increased social spending to deal with what it acknowledges is a more "complex external environment".