Scholar: Chinese Companies Will Switch to Europe Instead of US Amid Trade War

A possible recession in Europe poses more of a threat to China than the emerging trade war with the United States, according to Mohamed El-Erian, chief economic advisor at Allianz Group, one of the largest financial services companies in the world.

According to El-Erian, who spoke to The South China Morning Post, the EU is China's largest trading partner. In the event of an economic slowdown, the demand for Chinese exports will fall sharply, undermining growth prospects. 

Statistics for 2017 show that trade turnover between China and the EU amounted to $650 billion; trade turnover between China and the United States for the same period totalled $635 billion. Thus, despite the fact that all attention is now focused on the outcome of trade negotiations between US and China, Europe remains its largest trading partner. Therefore, the state of the EU economy may have an even greater impact on China than its trade relations with the United States.

Mohamed El-Erian estimates that the probability of a recession in the EU in 2019 or early 2020 is around 50-60%. Factors including Brexit in the UK, the Yellow Vests protests in France and the upcoming elections in Spain undermine stability in the region. In the end, even according to the most optimistic IMF forecasts, this will result in a slowdown of the growth rate of the EU economy this year to 1.3%. The Allianz Group chief economist told the South China Morning Post that he expects growth in the EU to total around 1% or lower. El-Erian told the SCMP that a growth rate of 1% can be compared with the minimum speed of an aircraft: beneath this rate, the EU faces what the economists refer to as ‘stall speed'; i.e. growth can turn into a fall at any time, the expert believes.

Chinese authorities are taking measures to stimulate their nation's economy, which is slowing down, also due to the fact that the old growth model is becoming obsolete. El-Erian also compared the Chinese economy to an airplane, explaining that when you change the engine in mid-flight, in order not to fall, you need to have a strong tailwind, and by no means a headwind. At the moment, an external shock for China is the trade dispute with the United States. Therefore, the country is being forced to rely on 'old engines' of growth, and this, first of all, is exports. This means that a fall in exports to Europe, which will definitely happen if the EU slips into recession, will slow down China and negate all its efforts to stimulate its own economy, El-Erian said.

Xu Jiyuan, the director of the Economic Development Division of the Institute of World Economics and Politics at the Chinese Academy of Social Sciences, said that the trade war had contributed to the deterioration of the economic situation in Europe. However, the uncertainty in relations with the United States has compelled China to look for a way out in other markets throughout the world. For China, Europe is seen as a first choice for filling in America's niche. This, ultimately, will also support the development of the EU, the expert told Sputnik.

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"China and the EU have great opportunities for cooperation in various fields, especially in the context of a trade war between China and the United States. This concerns the import of hi-tech products. Although there is an agreement between China and the United States, there is not much expectation, there is great uncertainty. Therefore, in the future, China will more and more switch to Europe when it comes to hi-tech cooperation. We are talking about international cooperation in the field of high-technology and the import of products and aircraft. Cooperation in this area with the EU will expand. In addition, the middle class is continuing to grow in China following the improvement of the quality of life; a diversification of consumer preferences and the import of goods from the EU will increase. In addition to the import of technological goods and consumer goods from the EU, the investment activity of Chinese companies will also increase. After all, in relation to their investments in the US, there are restrictions for market access; for example, Huawei is not allowed in. Naturally, companies will switch to Europe. There will be many opportunities."

The downturn in the eurozone can be attributed to cyclical factors. However, the uncertainty created by the trade conflict between China and the United States has led to the disruption of established supply chains, which, in turn, increases pressure on the European economy, Xu Jiyuan explained.

"I want to add that recession in Europe is also connected to the trade war between China and the United States. If you look at the first quarter, China's active balance-of-payments surplus has grown. This growth comes at the expense of Europe. Why are Chinese exports growing fast while imports are declining? Because there is concern about the uncertainty of a trade war. Many goods that China imports are intermediate, they are exported after certain processing. If Chinese exports decline, imports of such intermediate goods will decrease. And this will affect other trade partners of China. In the first quarter, for example, exports from the EU to China fell significantly. Of course, the EU and China are also interdependent."

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For China, it is now very important to continue structural reforms, such as resuming its deleveraging programme to reduce debt and risky lending, El-Erian told the SCMP. A number of experts, including El-Erian, believe that reliance on short-term monetary stimulus should be reduced. In this case, the Chinese economy is at risk of a 'hard landing'; however, in the long run, a full recovery is still better than half measures.

The views expressed in this article are those of the speaker and do not necessarily reflect those of Sputnik.