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China Security and Risk Tracker
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MERICS China Security and Risk Tracker 04/2023

Introduction

2024 will be a geopolitically complicated year, with elections in Taiwan, the United States, and to the European parliament. Two other key global players, India and Russia, are also due to hold elections. We will enter the new year in an environment of worsening geopolitical and technological competition, and with wars raging in Ukraine and Gaza. Europe-China relations showed few signs of improvement after the December 7-8 EU-China Summit in Beijing. China’s own economic prospects are rocky and Beijing will need to address domestic social fault lines. 

To help European actors anticipate what 2024 may bring, MERICS has developed a foresight effort to identify key China risks. We sought to pinpoint risks with the biggest impact on European interests and security. We ran two separate, off-the-record foresight workshops in mid-November hosted by MERICS in Berlin. The first workshop consisted solely of MERICS experts, while the second brought together some 15 European officials, business representatives and external experts. The process will be repeated annually. 

MERICS Top China Risks 2024 consists of the most probable and highest impact risks we identified in these sessions. These risks have urgent implications for European policymakers. We will track them throughout the year in upcoming editions of this MERICS China Security and Risk Tracker.

Nor will we lose sight of risks which the two expert groups thought less likely to materialize in 2024 but which would have major implications in Europe. Some are included as ‘what ifs’ in this publication. However, they were not the only other risks identified in discussions. Escalation in the South China Sea is a possibility, with a possible trigger point when the Philippines’ rusting, grounded ship in the Second Thomas Shoal (the Sierra Madre) disintegrates. 

For foreign firms, China’s changing regulatory environment poses greater risks of local staff becoming tangled up in investigations or arbitrary detention. Severe climate events in China in 2024 may drive up global food and energy prices. And Beijing’s continued reluctance to implement structural reforms needed to revitalize economic growth will impact consumption rates and worsen conditions for foreign businesses in China.

European actors should brace for greater risk and uncertainty in their relations with China next year. Efforts to stabilize relations and find new avenues for cooperation with Beijing will continue, but the overall outlook is a challenging one. 
 

merics domestic stability risks

Economic risk: China’s overcapacity problem

China’s exports will flow into Europe in greater quantities next year. The country’s economic trajectory could begin to undermine Europe’s manufacturing base. Beijing directed considerable investment resources into manufacturing and technology upgrades in 2023 to drive growth and counteract China’s stagnant consumption and a sluggish real estate sector. As a result, China now has more manufacturing capacity, especially in high-tech and new energy sectors, including EVs. Structural reforms that could support household consumption and absorb these goods do not feature on President Xi Jinping’s economic agenda. We therefore expect China’s manufacturing overcapacities will continue to grow in 2024 and Beijing’s only option to deal with them will be exports. 

More Chinese exports to Europe will worsen the imbalances in the economic relationship: the EU’s trade deficit with China is currently at almost EUR 400 billion. As happened with the solar panel industry in the early 2010s, European manufacturing will be undercut by heavily subsidized Chinese exports unless it is defended from market distortions. The automobile industry is already feeling this trend as Chinese EVs and EV batteries are rapidly entering the European market. Other industries will feel the heat next year too. In the green tech, white goods, steel and cement industries, China’s overcapacity is compounded by its real estate crisis.

Together with China’s push for self-reliance, this paints a difficult picture for European businesses in 2024. It will worsen considerably if Europe acts slowly while other major markets - like the United States, Japan, and India - take swift action to shield their markets from these distortions, leaving Europe as among the few remaining pressure valves for Chinese overcapacity. 

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