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China’s latest manufacturing plan is “highly problematic” for European businesses, the EU has warned.

The European Union Chamber of Commerce (EUCC) says that China Manufacturing 2025 (CM2025) is pressuring European businesses to hand over advanced technology in exchange for short-term market access, and likely to lead to additional overcapacity of Chinese goods spilling into European markets in the future.

The EUCC says that despite rhetoric that advocates market forces, the Chinese governments’ tools to drive CM2025 show that it is determined to maintain its prominent role in steering development.

China has handpicked industries it believes will drive growth and is committing hundreds of billions of euros in financial backing in the form of subsidies, funds and other channels of support including market access restrictions.

“This is highlighted by the large number of domestic and international market share targets that have been set, along with references to ‘indigenous innovation’ included in the multiple planning documents related to CM2025,” says the EUCC in its recent analysis China Manufacturing 2025: Putting Industrial Policy Ahead of Market Forces.

“The appearance of ‘indigenous innovation’—along with mentions of the need to realise ‘self-sufficiency’—is particularly concerning – it suggests that Chinese policies will further skew the competitive landscape in favour of domestic companies.”

The EUCC warns that while short-term opportunities created by CM2025 have allowed numerous European companies to establish partnerships with Chinese firms, the long-term reality will be an import substitution plan.

Market access for European business can therefore be expected to shrink, especially in areas where Chinese companies can close the technology gap, the report says.

Gregor Irwin, chief economist at advisory group Global Counsel, tells GTR that technology is likely to become the single biggest point of tension in the EU-China relationship: “Chinese investors are buying up European companies on the cheap because they are able to use their technology in the Chinese market, which is still largely closed off to European companies in many sectors.

“European policymakers, in Berlin, Brussels and elsewhere, are now waking up to the risk and are exploring how they can block investments in European companies which they judge are the result of unfair competition.”

 

Further overcapacity spills

The EUCC also points out that the amount of support offered by the government for CM2025 should act as an early warning to China’s trade partners as to where additional industrial overcapacity is likely to emerge in coming years.

“As with industries like steel and solar panels in the past, such overcapacity would run the risk of creating new, and exacerbating existing tensions with China’s international trade partners,” says the report.

CM2025, which was announced in 2015, sets ambitious goals for developing ten industries including next generation IT, robotics, aviation equipment, maritime engineering equipment, energy-saving vehicles and biopharmaceuticals.

More recently, speeches by Chinese President Xi Jinping at the World Economic Forum and the Chinese State Council in January this year, made commitments to ensure that foreign companies investing in advanced manufacturing will receive equal treatment under strategic policies and measures related to CM2025.

“European companies will welcome commitments from President Xi, but will want to see clear evidence of actions by the Chinese authorities. So far progress has been modest,” says Irwin.

“The Chinese will respond to the report in the same way they always respond to reports like this, which is to ignore. The more interesting question, is how European policymakers respond and whether they will insist on more scrutiny and tighter controls over investment in the EU. If they do, that might get the attention of Chinese policymakers.”