Right now, one man effortlessly dominates every economic conversation: Donald J. Trump.
The threat of protectionism and isolationist policies has caused executives and economic planners some sleepless nights. However, Mr. Trump could unwittingly be setting off a new wave of free trade, one focused on Asia and Europe.
This was the view of many participants at the annual “Asia Business Insights” conference, organized by Handelsblatt and HSBC, which took place in Düsseldorf on Tuesday.
They suggested that tariffs and “America First!” policies may push Asian companies and political leaders toward Europe, and above all toward Germany, resulting in intensified economic ties. Numerous business leaders supported the idea of a new economic constellation. Hans van Bylen, chief executive of the Henkel Group, said: “Inter-Asian economic and political ties will be rearranged,” while Stuart Gulliver, group chief executive of HSBC, said: “No question: Asia is opening up, while elsewhere protectionism is growing.”
By unilaterally walking out on the Trans-Pacific Partnership, the free trade agreement usually known as TPP, the United States snubbed its Asian partners, said Frederic Neumann, HSBC’s co-head of Asian economic research. “This is a chance for Europe to move in. Many Asian countries will shift their attention from the United States to Europe,” he added.
This is a chance for Europe to move in. Many Asian countries will shift their attention from the United States to Europe. Frederic Neumann, co-head of Asian economic research, HSBC
The shift was underlined by an impassioned speech in favor of global free trade, recently made at Davos by Xi Jinping, the Chinese president. Ultimately, China needs growth to bring higher living standards to its middle class. As Mr. Gulliver put it: “The American dream of well-being is now a 21st-century Chinese dream.” But for this, China needed more than export markets, it wanted partners in innovation, he said, above all German firms with cutting-edge technology.
Underlying China’s investment in European technologies is a long-term aim of turning the country from the workshop of the world into a high-tech nation, Sebastian Heilmann told the conference. Mr. Heilmann is head of Merics, a leading research institute into China, based in Berlin.
Infrastructure and clean technology are central to this new Chinese vision. With the megaproject “One Belt, One Road,” China wants to remake the old Silk Road, creating unprecedented rail and sea connections between the Asian and European land masses. “It’s a Chinese initiative but a global project,” said Mr. Gulliver, the HSBC chief executive, who is also an advisor to the Chinese banking regulation commission.
A new Chinese vision may be in place, but the country retains major restrictions on foreign investment: European companies are subject to strict conditions, often forced to set up joint enterprises with state-controlled Chinese firms. The German government was right to push Beijing to bring down barriers as a quid pro quo for access to European markets, said Mr. Heilmann. With their turn away from the United States, the Chinese government seemed more ready to accept this, he added.
The year 2016 saw an unprecedented wave of Chinese direct investment in Germany. According to a study by the international law firm Baker McKenzie, $12.1 billion of Chinese money found its way to Germany last year.
“Investments in the real economy are increasingly overtaking purely financial plays,” said the report. With a drive to innovation central to the latest five-year plan, China is targeting high technologies, with other investments deliberately scaled back. High profile takeovers last year included the Chinese acquisition of industrial robot maker Kuka, and the attempt—blocked on security grounds—to take over the semiconductor equipment maker Aixtron.
So far, the biggest deal of all has come in the renewable energy sector. Last February, Beijing Enterprises, the investment arm of the city’s government, spent €1.4 billion to buy EEW, a former E.ON subsidiary specializing in generating energy from burning waste.
Speaking at the “Asia Business Insights” conference, EEW chief executive Bernard Kemper spoke frankly about the aftermath. “In operational terms, little has changed for us in Germany.” At first, he said, there had been cultural clashes: for example, scant feedback from Beijing on key figures reported from Germany. But differences were quickly ironed out, he said, and the new owners have been solidly supportive of EEW’s own strategic acquisitions. He added that EEW saw a real chance of realizing recent radical changes to Chinese environmental policy, which could see the country building 800 new incinerators in coming years.
However, considerable skepticism remains. “Even if there are fantastic business opportunities, the window could shut firmly shut again,” warned Mr. Heilmann, the head of the Merics research institute. The Chinese government has made no secret of its wish to import technological know-how, he said. This could mean a technology drain for Germany. Were European companies just turkeys being fattened up before their slaughter, he asked. Mr. Kemper, the EEW manager, said his company did not regard itself as a turkey: there was profit on both sides of the relationship, he emphasized.
Dirk Nawe, a partner with consultants KPMG, said Chinese direct investment may not continue to increase. Beijing had recently stepped up regulation of capital flows, above all with a view to stopping prestige purchases—like sports teams and luxury hotels—by Chinese companies. “But I’m optimistic that the regulation may only be temporary,” he said. In any case, German regulation was also increasing, he said, citing the Aixtron case, when the German government, under pressure from the United States, blocked the proposed takeover. “Clearly, German monitoring of Chinese direct investment is becoming more stringent,” said Mr. Heilmann. This meant Chinese investors needed to communicate more aggressively, he added: previously, they were often too passive in the face of skepticism.
If barriers to market entry on the Chinese side can be dismantled, the scale of market opportunities may be extraordinary. Mr. Neumann, HSBC’s Asian economics guru, gave the example of Chinese urban transportation. A city like Dongguan, in the southeast of China, he said, has a population of 8 million, but not a single public transit line until last year. Chengdu, with 14 million people, has just two short subway lines. In China as a whole, there are more than 100 cities of more than 1 million people with no substantial public transit infrastructure. For many years, public infrastructure investment will underpin further growth, as well as continued construction of skyscrapers and huge housing projects.
According to the Chinese Academy of Social Sciences, the country’s leading academic research organization, China will see 6.5 percent growth in gross domestic product in 2017. This is a substantial reduction from when the country posted double-digit growth, year after year. But it is a deliberate choice by Beijing, which wants to boost domestic consumption after decades pushing for export growth.
However, new horizons in the wake of Mr. Trump’s arrival in Washington go beyond China.
Many conference participants emphasized that the rest of Asia presented massive opportunities. China may be the biggest motor in the region, but it is far from the only one. This year the Philippines and Vietnam are standing out in particular, with HSBC experts predicting respective growth rates of 6.5 and 6.4 percent. Indonesia is also a top performer: in 2016, the country increased its exports by 15.6 percent over the previous year. All three countries have low debt loads and a young population, unlike countries like Japan, which is weighed down with public and private debt, and plagued by notorious demographic problems.
Debts are not all bad, said Mr. Neumann. The main reason why Asian countries showed stable growth after the global financial crisis was their willingness to take on debt to pump liquidity into their economies. This meant that Asian industrial production has continued to rise, with comparatively few problems from global crises. Mr. Neumann added that a 1990s-style Asian bubble was unlikely: their economies were bigger and more stable these days, and most debt was public rather than private.
Our business is not about building walls, but building trust. Gabor Steingart, Publisher Handelsblatt Group
No one knows for sure how these new Asian political and trade relations will ultimately end up. If Asia can avoid the protectionist virus, said Mr. Neumann, it could emerge as a very powerful economic region.
One big winner could be India, which has the lowest debt-to-growth ratio of any major economy, as well as 600 million people under the age of 35, many of them well educated. What is not clear is if Europe will seize this Indian opportunity: at the Handelsblatt conference, Gurjit Singh, the Indian ambassador to Germany, complained that free trade talks between India and the European Union were bogged down in Brussels bureaucracy.
Nonetheless, considerable risks remain in Asia, partly thanks to Mr. Trump’s policies. The controversial American president wants to drive American growth with tax cuts and massive infrastructure investments. But an overheating U.S. economy could lead to higher interest rates worldwide, a particular burden on Asia. Investment in Asia needs high volumes of credit, he suggested. In short, growth in the region is dependent on low interest rates.
Mr. Trump may not have things all his own way. Europe and Asia, said Handelsblatt editor in chief Gabor Steingart, should stand firm against Mr. Trump’s three Ps: populism, patriotism, and protectionism. “Our business is not about building walls, but building trust,” he insisted. On this point, Carola Gräfin von Schmettow, head of HSBC Germany, agreed: “Germany’s openness has long served it well, and it has every reason to hold on to it.”
Nicole Bastian runs Handelsblatt's foreign desk. Christoph Kapalschinski covers consumer goods, textiles and food for Handelsblatt. Stephan Scheuer is Handelsblatt's China correspondent, based in Beijing. Christian Wermke is an editor for Handelsblatt Live, covering politics, corporate executives and lifestyle. To contact the authors: [email protected], [email protected], [email protected], [email protected]