When China naps, the world will sag – 中国一打盹,世界就会下垂

In la Tribune 29/09/2021

Beijing is translating this initiative into its own rhetoric.  The “harmonious society” of the 2010s that sought urban-rural inclusion is to be readjusted, rebalanced with more social justice with “common prosperity” (共同富裕); preference to domestic demand, economic security and self-sufficiency is “dual circulation” (双循环).

In La Tribune 29/09/2021

The famous adage, when China wakes up the world will tremble, also works in reverse.

In many ways, China numbs, drowsy, encocone its industry by pursuing three objectives: first, to increase the decarbonization of its economy by reducing electricity consumption by 3% in 2021, then by 14% by 2025 to reach carbon neutrality by 2060.

Secondly, since electricity production is still dominated by thermal coal, Beijing is reducing its overall consumption and its Australian imports in favor of local production.

then, as with every autumn, Chinese industry is reducing its pollution to make the air breathable in winter, especially in 2022 as the next Winter Olympics are to be held in Beijing from 4 to 20 February 2022 under blue skies.

The whole thing militates for a sharp reduction in demand from large electricity consumers, and rationing now affects more than 10 Chinese provinces.

Readjustment through rhetoric

Beijing is translating this initiative into its own rhetoric.  The “harmonious society” of the 2010s that sought urban-rural inclusion is to be readjusted, rebalanced with more social justice with “common prosperity” (共同富裕); preference to domestic demand, economic security and self-sufficiency is “dual circulation” (双循环).

The whole works with economic tools such as shortening economic policies: the “inter-cyclical adjustments” (跨周期调节);  autonomous decision making vis-à-vis the rest of the world and especially the Western central banks: “autonomous macroeconomic policy” (宏观政策自主性);  an anticipation of “secondary risks”(次生风险), i.e., the collateral damage of reforms (Evergrande is not a Chinese Lehman);  and finally, the encouragement of a more frugal life for the youth with the “lying flat” (平躺). The consistency of the whole is illustrated by more innovation and more environmental protection.

To succeed, the Chinese economy has a lethal weapon, real estate.  It is therefore widely used for decarbonization. In one example, the logic follows.

The “common prosperity” allows the weakening of one of the causes of inequality between city and rural dwellers, real estate ownership: “a house is made to live in, not to speculate”.

Steel production down 15%.

The “dual circulation” is the slowing down of construction by limiting the debt ratios in construction, together with the management of “secondary risks” (Evergrande) to reach the environment chapter by decreasing metallurgy, especially the collapse of almost 15% of steel production, and its devastating impact (-45% in two months) on the prices of iron ore, especially of Australian origin.

This means that Chinese steel exports are shrinking, as has been the case since 2015; that the steel industry will be more self-sufficient, with more scrap and less iron ore or nickel; that the Chinese steel peak has been reached and that manufacturing can only decline, or at best stabilize at a low point, to the benefit of another consumer, India and new steel sovereignties in Europe. In the end, the demand for coal-fired electricity is falling.

This naturally affects other major direct consumers: the transformation of bauxite into aluminium, copper, zinc, cement, textiles and petrochemicals. …. China is therefore no longer the world’s factory or the global center of commodities consumption.

But the “secondary risks” of the Chinese metallurgical slowdown are the inflation of the prices of these natural resources.

Increasing the “common pie” through innovation

As a result, without contradicting the objective of decarbonization, the “dual circulation” has opened up the reserves of strategic metals four times since the beginning of July to destock copper, aluminum and zinc in order to supply certain industries handicapped by electrical restrictions, notably the microelectronics industry and the battery industry for electric vehicles.

In this way, the “dual circulation” aims to increase the “common pies” through innovation by securing national demand, economic security and self-sufficiency in areas as diverse as soft power, infowar, culture, nuclear, renewable energy, microchips, agriculture, education, health, 5G infrastructure ecosystem, … etc.

But, what if it goes wrong in such privileged sectors, if they can’t produce sufficient volumes?

For example, if the battery manufacturers do not succeed because they are caught between electrical restrictions, rising raw material prices and the price of batteries that have to decrease to reach parity with thermal vehicles. Then competitive consumption will take place. When the two notions of critical and strategic materials merge, the event leads to a competition between different consumers. The producer favors the user closest to his own strategic objectives: his domestic automobile industry to the detriment of exports. The analogy with the situation of the Covid-19 masks last year is just as striking as those of the microchip and steel industries today.

One word, sovereignty

For us in Europe, the result of the move can be summed up in one word: sovereignty.

China is retracting some of its antennae, not all of them of course, and we have to relearn what sovereignty is, with its hazards and its benefits, otherwise Chinese sleepiness means subsidence for us.

China being less expensive, we ourselves will manufacture more expensively with inflation; China no longer being the world’s factory, we must relearn industry; China no longer working for us, we must work for ourselves; past relocations having caused betrayals, unemployment, despair, cynicism, we must pick up the pieces so that the factory, the steel mill, the mine, the company, once again become socially cohesive. The consequences are all the more numerous as we have to roll back 40 years of deindustrialization.

China’s decarbonization is planned in the 14th Five-Year Plan, and the reform is being carried out with force and authority, because the Chinese government has more difficulty than in the past in managing with nuance, since corrupting exemptions granted to this or that have been commonplace. The state’s outright cuts in real estate, education, internet and bitcoin are examples. Biden’s United States has understood this and has started to play the same game with the same method, as in the case of the Australian submarines.

Where does Europe stand?

Europe has not reached this point. It is the leader in the consumption of electric vehicles, but accounting for the total of the next European battery manufacturing capacities, the Airbus of batteries plus the Asian industry established in Europe, is revealing of its nuances. Germany will have 32% of battery manufacturing capacity on its soil, Hungary 13%, Poland 9%, Sweden 8%, France 8% and Norway 7%. The countries that have played the battery card best are the first three…each of which has electricity dominated by coal, while Scandinavia and France are decarbonized. How is it that the latter three have not sold their green electricity better?

For Europe, Chinese decarbonization is undoubtedly a historic opportunity for its sovereignty and strategic solidarities. But in light of the facts, the question that arises in order to succeed in this return to industrial sovereignty is: what kind of leader do European countries, and France in particular, need?