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Thursday, September 14, 2017

Romano Prodi on the Future of German-Chinese Relations

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Romano Prodi is Former Prime Minister of Italy, and Former President of the European Commission. This is an edited version of the opening keynote speech he gave at CEIBS 3rd Europe Forum 2017 in Munich on September 13.

“I am very honoured to be here. I have some very personal observations to share. First of all, in the next weeks we have two great moments in German and Chinese politics, the German election and the 19th National Congress of the Communist Party of China. Maybe there will be some debates, and in an election you never know what will happen, but in my opinion we should bet on the continuity of policy in the future. There may be some changes in personnel but there will not be a change in direction.

So let us think about the future of German-Chinese relations. First of all, these are two different countries. The Chinese population is 18 times larger than the German population, so there are 18 Chinese for every one German. Total income in China has increased so much, it is now the second country close to the US, but there is still an enormous gap in personal income. China’s leaders still love to call themselves a developing country. I never trusted that but anyway I accept this definition. The rate of growth is the perfect rate of growth that you would expect when things go well in a different level of development; 2.7 in Germany and from six to seven in China.

Germany is by far number one in Europe, the process was clear after reunification and unification of the German economy. I think the results in Germany have been fantastic and there is a very wide spectrum of middle to high technology in various sectors, including chemical, pharmaceuticals, and agriculture. It’s really by far the strongest manufacturing country in Europe. China is number one now in manufacturing in the world.

Let’s try to understand if there is some similarity in this process. Taking into account the differences in their systems, I see there is the same attention in their technical aspects and education systems regarding how you educate to the needs of production, and the value of technical schools is higher for both than in all their neighbouring countries.

There is also a similarity in macro-economic aspects that I think surprises everybody. The surplus in current account balance for China for the last twelve months is US$ 157 billion and for Germany it is US$ 270 billion, so the Chinese surplus is 1.5 % of China’s GDP, the German surplus is 8% of the German GDP. Trade is important for both countries but in Germany you have a concentration in foreign trade with this surplus, and in the Euro area the surplus is 3%, in Italy its 2%, and in France its -1.2%.

The real difference when comparing the two countries is debt – if you add together public and private debt in China it is increasing.  In Germany you have a very low level of debt and it is not increasing. So this is one of the problems for the future in China. It is a consequence of the complex transition from investment to consumption that China is undergoing, at a rate that is much quicker than I thought in the last year. China is also a great link to the growth of innovation, and their goal is to be the first country in the world before the middle of the century. I do think it is possible. This is part of the great change from imitation to innovation, and this is happening now.

This is not a result of individual efforts, but is the result of a complex strategy involving the central government, local administration, universities, and financial institutions. China is working as a system, also helped by the political stability and the 86 million members of the Communist Party. But even more, its foundation of meritocracy has been a great strength to create a connective system. The international reputation of Shenzhen is that it is the second innovation cluster in the world. Even in digital technology and artificial intelligence, China is now an innovator and no longer an imitator. Of course this is a complex movement and the consequence is if you make a choice to do something new you must dismiss something. China is dismissing a large number of its low value-added industries which are moving to low-cost labour countries.

This has made for a great change. But the Chinese competition is no longer from different sectors like garments or shoes, there is now intra-sectorial competition, with very different reaction in the foreign markets. It’s no longer that you compete in low level sectors with no threat to big European or American companies. Now you enter into the same market, so we are in a new phase of Chinese development. Not only is there a scale up of technology, there is already a high number, at least 20 or 25, that in order to become world leaders must become global, absolutely global. So this has been the origin of the flow of Chinese investments abroad, and it is totally different than the first phase of European and American investment in China. 

The Chinese have started to buy top companies in Europe, for example in my country they have bought Pirelli, the top tire manufacturer. This has changed a few strategies. If you want to be a global Chinese company you must be active in the United States and Europe, and in past years we saw movement from the US to Europe because the US became more and more protective. In Europe you have more variety of countries, from lower income like Romania to higher income like Germany. Each countries also has different skills. There is a clear strategic priority of Chinese companies to enter Europe instead of the US both for political and economic reasons.

The Kuka case as you know is a company in the forefront of automation. It was bought with some tension though not so much difficulty. However the discussion that came afterwards completely changed the political environment in Europe.  The new purchases now are under discussion. We are now in front of the European authorities with a discussion of policies vis a vis China. This worries me because in my opinion we must be open and have an increasing interchange because we are complementary. But there is a truth on the European side. When you are looking at investment policy you must have reciprocity in the rules, and this is now what is on the table. And I think that it is important to have the same rules on investment and trade policy on both sides. The Chinese restriction in terms of ownership of banks and high tech, energy services, communications is very well known.

Of course we also have tensions among European countries. But if you want to have a common future, which I think we need, we need to have commission or group to prepare the convergence of the rules between China and Europe. Clearly Germany is the most interested country and is the leader in Europe. The need to have reciprocity has not just been proposed by Germany but also by the four biggest members of the European Union. So I think we should act together to study the problem to have a clear idea of the core reciprocity between us.”