Blain’s Morning Porridge, May 8^th 2024: China’s Economic Offensive in Europe – Dance To China’s Tune

“Let China sleep, for when she wakes, she will shake the world….”

Emperor Xi’s brief trip to Europe has apparently achieved little – but he’s made clear China is open to dealing with Europe – on its terms. He can wait: the global economy is increasingly transactional and the US / Yoorp relationship is under stress. If China needs to flex some muscles and break things to get the message across – they will.

Divide, Distract and Wait.

One big issue for European investors is China – is the world’s second wealthiest and second most populist nation investible? China’s markets could provide the kind of economic boost Europe needs, but at what cost? Questioning our relationship with China comes at a time when many in Europe distrust what the US is apparently becoming – isolationist, disinterested and unreliable. Many expect these issues will become more pronounced if Trump is elected. Will trade wars become hot wars?

Emperor Napoleon made the perspicuous comment: “Let China sleep, for when she wakes, she will shake the world….”

President Macron of France was trying to make some sense of that pithy observation and the questions above earlier this week. Yet, during his first visit to Europe in 5-years Chinese Emperor Xi Jinping seems to have given Macron a difficult time, leaving him (and Europe) uncertain. All of which is probably the effect Xi sought to achieve.

Macron was hoping the formality of the full French Elysee dinner, with gifts of expensive (and tariff threatened) brandy, followed by a day “getting to know-each other” at Granny’s place in the Pyrenees, would be a bonding session. Macron wanted a chance to persuade Xi to be less “no-limits” in support of Russia, and consider the potential economic advantages of a closer relationship with 450mm relative wealthy European Union Citizens, rather than 150mm broke Russians living in Putin’s kleptocracy.

The inclusion of EU Commission President Ursula von der Leyen in the three-way discussions on Ukraine and China/Europe trade seems to have gone nowhere – except peeving the Germans who were not invited. Europe’s $400 bln trade deficit is unsustainable while China favours domestic protectionism, and lacks transparency. Europe says China is dumping cheap goods, China says it does not – it just makes things cheaper! Yet, Xi thru the sop of maintaining strong relationships with France while “opposing decoupling, cutting off supply chains, and erecting walls and barriers.”

One impression is Xi stalled on every issue – content for the Europeans to complain and for China to simply deny. Another perspective is China’s leader has clearly said it is open to business, but it will be business their way – much as we have accepted business the US way for decades.

That’s worth thinking about:

• The economic relationship with the US, under which Europe was able to rebuild and thrive, succeeded on the back of the shared concepts of market capitalism, democracy and freedom. It was based on the strong, shared cultural links between the USA and the European diaspora 100 years ago to the New World.
• No such strong relationships exist between Europe and China. There is the baggage of Opium Wars, British Troops storming Beijing (twice), and other European states being equally beastly during the centuries of Chinese weakness.

The world has changed. Today, the global economy is transactional. We don’t know what an economic relationship with China could do to Europe – it may create mutual advantage, we fear we may be enslaved.

We do know that we experienced decades of prosperity in alliance with the US. But that era may be over. The ties of kith and kin mean little in today’s financialised, greed-driven economy.

Yet, all things come to an end… Angus Hanton’s book “Vassal State: How America Runs Britain”, is long on rant, but is difficult to refute in terms of how the US dominates the UK economy – everything for taking a slice of every internet payment (7% of Morning Porridge subscriptions go to PayPal!), to private equity seizing the crown jewels of the economy, US firms dodging taxes, or how the UK was once the richest nation on earth but now would rank as the poorest US state. That’s what Economica Americana brought to Europe (largely through the UK!)

China’s leader is no longer the former peasant, Chairman Xi, who spent his childhood mucking out the pigs in cultural revolution exile and was happy to have a pint and chips with David Cameron. He has become more distant and less communicative – more Imperial in every respect. When he does speak – he does so with carefully chosen meaning – making the point in Paris the West is making a serious mistake when it seeks to use the Ukraine crisis to “blame and smear” China, and incite a new cold war.

The 2-day France/China summit, with Europe in its proper supporting roles (or so think the French) does not appeared to have achieved much. “Thanks for the brandy” and vague hints about supporting an Olympic Truce. Today Xi is off to Serbia to be very, very angry about the accidental bombing of the Chinese embassy 25 years ago, and then to Hungary – where Orban will be looking for insider tips on maintaining life presidencies.

China is undeniably flexing muscles while exercising power and its projection. Xi sees no reason to engage with Europe – now. Why not wait till after the US election and see to what degree Trump may damage the existing Western alliances. Meanwhile, keep everyone on their toes to ensure when the moment of crisis comes, China will hold the upper hand in negotiations.

However, Xi may also be trying to draw lines and send warnings…

Yesterday the UK press announced China is the “bad-actor” behind the hacking of personal details of 270,000 UK servicemen – which the Chinese immediately denied and dismissed as a smear. Meanwhile, the entire UK Border Force automated passport gates failed across the entire network, leaving enormous, long and very disgruntled queues at airports.

A not very subtle message might have been sent. Even as UK servicemen were being told their personal data had been compromised, Tik-Tok, the social media app and recently the subject of new US laws to ban or force a sale, was filing a defence of its, and its’ customers, First Amendment Rights – alleging the ban tramples the right to free speech. Will young Americans be as vociferous in the defence of a Chinese corporate as they are for Gaza? Probably not.

Meanwhile, the US government revoked licences of US Chip makers to sell certain equipment to China tech giant Hauwei – apparently after Hauwei launched a cheap and cheerful AI-enabled “Matebook Pro” laptop found to contain an Intel chip. Part of the quid-pro-quo recently achieved in Congress to give military support to Ukraine and Israel was to block Tik-Tok and continue to clamp down against China. Republicans are serving clear notice the only way a new Trump administration will deal with China is harshly – China has become a defacto enemy of the USA because it enabled political compromise.

A number of my contacts, some of whom are in senior positions advising governments and military say we are already in World War 3, with China pulling the purse springs that control Russia, Iran and North Korea, attracting the world’s ne’er-do-well failed and corrupt states in its wake. I am told it will invade Taiwan, kicking off war. Off course, that’s what you’d expect someone to say who relies on the Western Military-Industrial complex to their bills – he wrote a tad cynically.

The reality is Europe, and the UK (since we chose not to be part of it..), stand in a difficult position. Do we stay in alliance with an increasingly distrusted US that appears to treat us as a US fiefdom, or do we risk economic ties with China? That doesn’t need to mean appeasement – but functional markets.

135 years ago Rudyard Kipling, wrote: “The West is West, and the East is East, and never the twain shall meet..” But, I suspect Kipling foresaw the future when he wrote it – how the UK has become a cosmopolitan, multicultural society.. Later in same stanza he writes:

“There is neither East nor West, Border, nor Breed, nor Birth,
When two strong men stand face to face, though they come from the ends of the earth!”

The two strong men were enemies. The trick is to get them working together. The reality for Europe is the world is a transactional place – and to succeed we need to do deals.

Out of time, and off to the day job…

Bill Blain

Author of The Morning Porridge

Wind Shift Capital

www.windshift.capital