For decades, the Middle Kingdom was the locomotive of the world economy and the mainspring of the German economy. But China could soon become the world’s biggest trouble spot. And take revenge that Germany is not prepared for it.
The US general was not very subtle. “I hope I’m wrong. But my gut tells me we’re going to fight in 2025,” Air Mobility Command chief Mike Minihan wrote in early February in an internal memo to all of his commanders about “the next fight” of the U.S. Army – against China. And he asked his subordinates for target practice: “Aim for the head.”
In fact, it comes as no surprise when a warlord commits his warriors to an impending war he believes is likely. But Minihan’s pithy words came as a shock to the world. The Pentagon immediately distanced itself from the statements made by their four-star general. They are just a brutal wake-up call that the danger of a conflict between the superpowers USA and China is real. And thus the most visible sign of the tectonic shifts in the relationship between the West and the Middle Kingdom.
For decades, China was the key economic partner for the West. An anchor of stability for the German economy (for companies that were already there) and a place of longing (for companies that still wanted to go there): the largest sales market in the world, a cheap workbench for their products, an almost inexhaustible reservoir of sales and profit. Now a devastating crisis cocktail of military aggression and economic crash potential is brewing in the People’s Republic, which threatens to upset the previous world order. And just like before the Russian attack on Ukraine, the German economy, which is closely intertwined with China, has made itself comfortable in cherished dependencies that prevent it from wanting to acknowledge the impending danger. Let alone seriously preparing for it.
The possible invasion of Taiwan, which US General Minihan has in mind, is only the most obvious danger. Should China really try to militarily bring the renegade island back into the giant empire, this would have direct, devastating consequences not only for the USA, but also for Germany. The following sanctions would be a shock for the supply chains of the German economy.
A war over Taiwan is far from a certainty, and Minihan’s prognosis is certainly extreme. But it is unmistakable that China embarked on a much more confrontational course ten years ago when President Xi Jinping took power. Under his leadership, China has created dozens of artificial islands in the South China Sea, stationed soldiers, fighter jets and missiles on them, and armed the People’s Liberation Army with trillions of yuan. With his policy of the “Chinese Dream”, a patriotic “China First”, Xi is striving for the renewal of national greatness and the rise of the People’s Republic to become a world power. As the first “Supreme Leader” since Mao, he has virtually unlimited power and had the presidential term limit lifted in 2018. Xi looks set to become China’s leader for life.
Not only Donald Trump, but also US President Joe Biden is already trying with all his might to curb China’s desire for expansion wherever possible. In many areas, the United States is not just waging a trade war against China, it is also opposed to the country continuing to receive sensitive US technology – especially those that can be used militarily. Discreetly, Washington, together with Japan and the Netherlands, effectively imposed a high-tech chip embargo on the People’s Republic in January.
Not only militarily, but also economically, a big thunderstorm could soon be brewing from China. In the short term, the next wave of inflation could roll out of the Middle Kingdom: After years of lockdown, China’s consumers are wild about consuming. The sudden awakening from the Covid slumber could unravel the central banks’ global fight against historic price increases – just as they are beginning to bear fruit.
In the long term, things look even bleaker. China’s population is shrinking for the first time since 1960, and the Covid catastrophe has already dampened growth significantly, from eight to ten percent to three percent last year. For the first time in 40 years, China’s economy grew more slowly than the world economy and even less than Europe.
The International Monetary Fund (IMF) is assuming that things will rise by 5.2 percent again this year. After 2024, however, China’s growth will be below 4 percent in the medium term – due to “declining economic momentum and little progress in structural reforms”. According to the IMF, the biggest risk remains the overheated real estate sector: Bad loans could lead to “a large-scale collapse of construction companies” and “instability in the financial sector”. The rest of the world would feel the crash through weak demand and more supply chain disruptions.
The lull on construction sites from Beijing to Shanghai could soon become a deadly threat from Frankfurt to New York. Because with the political backing of the party, the banks in China have inflated a gigantic credit bubble in the construction sector. For more than two decades, real estate was the backbone of China’s economic miracle, accounting for almost a third of economic output during boom times, driven by the huge wave of farmers migrating to the cities as migrant workers to try their luck there.
Now the bubble is bursting. And with Evergrande, the largest and most indebted real estate company in the world, China has created its own Lehman Brothers. In 2020, this company alone contained 300 billion dollars in assets, around two percent of China’s economic output. Evergrande founder Hui Ka Yan became the richest man in China by building ghost towns with cheap money like many others: According to the “Financial Times” (FT), apartments for over 90 million people are now empty all over China – more than live in all of Germany.
If Evergrande goes under, China’s construction sector is threatened with a crash – and the Chinese economy with catastrophe. When the government finally pulled the ripcord in 2021 and imposed hard credit limits on construction companies for the first time, it turned out that, according to FT, more than half of the 30 largest real estate groups had gambled so badly that they could not meet the government’s red lines. She hasn’t learned anything from it – and the money taps for developers and homebuyers have already been turned on slightly again.
Plenty of reasons actually to flee from China. But many large German corporations don’t just stay. They also turn a blind eye to danger. First and foremost Volkswagen: The car manufacturer has chained its fate to China for better or worse for more than a decade. VW has 120 factories worldwide, 25 of which are in China – more than in any other country in the world, including Germany (24). The Middle Kingdom is by far the largest single market for the Wolfsburg-based company. VW sells almost every second car there and also makes more than a third of its profits in the country. The group can hardly tear itself away from this money-printing machine, not even now, when the existential risks are becoming ever more obvious – and the criticism is getting louder.
Ex-VW boss Herbert Diess studiously ignored all of this: In Germany, “how much our prosperity is co-financed by China is extremely underestimated,” said Diess in the summer, probably also referring to the prosperity of VW. VW should also remain in the controversial plant in the Uyghur province of Xinjiang, said Diess, “because withdrawing is of no use to anyone”. Diess’ successor Oliver Blume studied in China and knows the advantages of the country as well as the problems from his own experience. After all, there is now a “China Board” in VW management. However, it is hardly to be expected that Blume will turn away from China. “If we stop investing in the region now, we won’t play a role in this important market in three years,” said the new VW China board member Ralf Brandstätter last year to the “Handelsblatt”.
A strong China business is officially no longer seen as a competitive advantage, but as a risk of a crash. Sanctions experts are calling for emergency plans for the China meltdown. And if Economics Minister Robert Habeck has his way, German companies will soon have to report how strong their ties with China are. Even obligatory stress tests are under discussion: the loss of China business and supplies from China should be simulated. Cluster risks have formed in the automotive industry, electromobility and renewable energies, and they would hardly be able to survive without the Chinese market. Development loans for China should no longer exist, and Chinese companies should be excluded from orders for critical infrastructure.
The plans are still just a draft in the drawer. But the federal government also apparently suspects that it will not have to stay with strategic sandbox games in the medium term. The clearest clue is the sudden appearance this week of a Chinese spy balloon near a US strategic nuclear missile base in Montana. US Secretary of State Antony Blinken actually wanted to visit the People’s Republic from Sunday and try to mend the tense relationship with China at a high-profile meeting with Xi Jinping. A few hours before his departure, Blinken canceled his visit to Beijing and postponed it – indefinitely.
