China's looming economic strategy is a wake-up call, but the UK's reaction is surprisingly subdued.
French President Emmanuel Macron's recent trip to China, aiming to persuade Xi Jinping to intervene in the Ukraine war, was destined to fail due to China's unwavering support for Russia. His plea to address China's soaring trade surplus, a consequence of its economic policies, also went unheard.
Xi's focus was on the year-end politburo meeting and the Central Economic Work Conference (CEWC), where the new 15th five-year plan took center stage. This plan, to be unveiled at the National People's Congress in March, is China's roadmap for global dominance in advanced technologies like EVs, batteries, semiconductors, biotech, robotics, and AI.
China's CEWC rhetoric, touting its success, contrasts with its policy measures: easier monetary policy, higher fiscal deficits, real estate stabilization, and increased social spending to counter a 'complex external environment'. This complexity includes overproduction, weak domestic demand, and financial stability risks from the real estate sector.
China's priority for 2026 is boosting domestic demand, a narrative dating back 3-4 years. However, the government still views weak consumption as a supply issue, not a demand problem, leading to a misdiagnosis.
China's commitment to industrial policy is evident, aiming to lead the fourth Industrial Revolution by mid-century and challenge the US-led global order. This strategy, coupled with its goal of boosting consumption, may create conflicts in resource allocation, fiscal transfers, exchange rate management, and regulatory policies.
China's emphasis on manufacturing has led to overproduction, excess capacity, and deflationary risks, with its GDP deflator declining for 10 quarters. Weak domestic demand and a strong supply result in a booming export sector, with China's trade surplus in goods reaching $1tn this year, a third of which is with Europe and the UK.
Since 2022, Chinese exports have surged by 50%, while imports have barely increased. Trump's tariffs failed to address global imbalances but altered trade patterns. Chinese goods to the US have decreased by 25%, but transhipment and trade diversion to Southeast Asia and Europe have boosted overall exports.
Chinese exports now threaten Europe's industrial base and jobs, particularly in sectors like cars, machinery, and high-tech equipment, in addition to traditional concerns like apparel, appliances, and steel. Meanwhile, stagnant imports into China due to weak demand and self-reliance ambitions limit opportunities for European producers.
China's undervalued exchange rate, 20% lower than three years ago, contributes to its export boom. The IMF urges China to adjust its yuan policy, but the government maintains currency stability.
Macron labeled the Chinese trade imbalance with Europe as 'unbearable' and a matter of 'life or death' for European industry. The EU has responded with tariffs on Chinese EV imports and an import surveillance mechanism to combat unfair competition. The UK, however, has been more reserved, collaborating with the EU on steel trade policy and granting the business secretary authority to investigate unfair practices.
Keir Starmer's planned visit to China in January, if approved, may allow engagement with Xi on non-security matters. But Starmer should avoid claiming that China's mercantilism drives global and UK growth, as it doesn't. Instead, he should focus on understanding the implications of China's economic strategy, especially for the UK.
But here's where it gets controversial: Is China's economic strategy a threat or an opportunity for the UK? Should the UK adopt a more assertive stance, or is collaboration with the EU sufficient? These questions spark debate, and the answers may shape the UK's economic future. What do you think?
