De-risking from China: companies and countries have different goals

These shifts in relationships require both governments and businesses to adjust their strategies. This is where a flurry of D-words comes into play, including deglobalisation, decoupling and de-risking.

De-risking is perhaps the most popular strategy now since US and European officials have come to realise the reality of trade and investment links with China.

Ursula von der Leyen, the president of the European Commission, is a strong advocate of this de-risking concept, having suggested reducing Europe’s economic dependence on China while not fully severing ties. This narrative has been echoed by officials in the US and elsewhere.

French and EU leaders urge China to ‘bring Russia to its senses’ and stop invasion of Ukraine


French and EU leaders urge China to ‘bring Russia to its senses’ and stop invasion of Ukraine

While states and businesses might loosely apply these broad concepts to their strategies, what they want to achieve in practice can be very different. Governments are prioritising national security, which means we could see more export restrictions on hi-tech products that could be put to military use.

There will also be greater scrutiny of Chinese business investment in strategically sensitive sectors. Western governments are also trying to do more by themselves, such as securing the production of rare earth minerals that go into batteries and other electronic components

Businesses want to manage their supply chain risks while maintaining their connections with China. The diversification of supply chains could bring more investment to other emerging markets.

With pandemic-related travel restrictions being lifted across Asia, multinational companies can accelerate their assessment of possible new production locations.

That said, many of these multinational firms are not leaving China for two reasons. First, China continues to be a critical market for them. According to research group Rhodium, direct European investment in China’s automotive sector hit €6.2 billion (US$6.8 billion) in 2022.

This reflects the current scale of the Chinese car market as well as the rising competition from domestic carmakers, especially in electric vehicles.

Of the 10.5 million new electric vehicles that were sold globally in 2022, almost 60 per cent of them were sold in China. Many international firms already derive a significant part of their revenue from this important market.

Second, while it is understandable that companies want to diversify their supply chains to reduce potential disruptions, China’s logistics infrastructure remains competitive and allows these businesses to produce at a large scale and deliver on time.

Gantry cranes at the Kwai Tsing Container Terminals in Hong Kong on March 13. Photo: Bloomberg

Gantry cranes at the Kwai Tsing Container Terminals in Hong Kong on March 13. Photo: Bloomberg

China, including Hong Kong, has seven out of the top 10 biggest container ports in the world in 2021, according to the World Shipping Council. For other emerging economies to pick up some market share from China, investment in infrastructure will need to accelerate to provide the appropriate logistics.

A good leader plans for tough times and contingencies while conducting business as usual. Operations in China are already an important component of many international companies.

This means that company leaders are more likely to manage the risks to their businesses of operating in China instead of disengaging from the Chinese economy and market altogether.

Tai Hui is chief market strategist for the Asia-Pacific at JP Morgan Asset Management

The news is published by EMEA Tribune & SCMP210520-twitter-verified-cs-70cdee.jpg (1500×750)

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