On 14th January 2021, the European Chamber, in partnership with MERICS, released a major report, Decoupling: Severed Ties and Patchwork Globalisation, which measures the costs of decoupling for businesses operating in China. In this podcast, MERICS Chief Economist, Max J. Zenglein, and Policy and Communications Coordinator at the European Chamber, Tom Groot Haar, introduce the chapter on macro decoupling.

The main findings of macro decoupling are below:

Political

• The politicisation of business and geopolitical tensions are making the Chinese business environment increasingly difficult for foreign companies to navigate, and act as catalysts for decoupling in other areas.

• The current impacts on European companies in China include increasing risks due to a souring of public opinion in home markets towards China, a drop in business sentiment and uncertainty for operations due to the securitisation of business flows.

• The European business community in China is worried about the increased risk associated with ‘political reciprocity’ dynamics, and the potential for more unpredictable tit-for-tat exchanges of economic restrictions resulting from political/diplomatic tensions.

Financial

• In an effort to further reform its own financial system, China is actively working to integrate into the global financial system by establishing new investment channels into its capital markets and new opportunities for foreign financial institutions and investors.

• As long as China lacks a fully convertible capital account and an internationalised renminbi (RMB), its reliance on the USD remains its ‘Achilles heel’. Efforts to internationalise both its currency and financial markets are likely to accelerate, but liberalisation is needed to do so.

• Any broad restrictions on access to the USD would amount to a ‘nuclear option’ that would bring considerable economic damage to the US and the rest of the world. Only a massive escalation of political tensions seems likely to trigger it, as happened with Russia and Iran.

Please click here to download the report.