Friends, not foes

Winston Churchill once likened American diplomacy to “a bull who carries his own china shop around with him” and the description had never sounded more fitting than during Donald Trump’s disruptive tour of Europe last week.

The American president kicked off proceedings by attacking fellow NATO members during a breakfast meeting and lambasting Germany as a “captive” of Russia. Then he flew to Britain, where he gave an explosive interview to a national newspaper, bashing Theresa May’s approach on Brexit. After keeping the Queen waiting by showing up late for afternoon tea, he labelled the European Union as a “foe” just ahead of going to Helsinki for an extraordinary meeting with Vladimir Putin.

His much friendlier press conference with the Russian president then irked many back at home in the United States, especially when he took Putin’s word over that of his own intelligence services in a performance some described as “treasonous”.

Over in China the country’s political and business leaders have had a busy week too – but in an altogether more positive sense. In the wake of Trump’s America First-ism, Beijing has been trying to supplant Washington’s longstanding role as the champion of global multilateralism. And the signing of a slew of multibillion deals over the past few weeks also looks likely to bring some of the leading companies from Europe, in particular, closer to China.

What deals have been done?

The first gathering was the eighth meeting of ministers at the China-Arab States Cooperation Forum last week in the Chinese capital. Calling the Arab states “natural partners” in his Belt and Road Initiative, Chinese President Xi Jinping pledged more than $23 billion in loans and aid to Middle Eastern countries.

The Chinese media was quick to contrast its government’s conduct with the behaviour from Washington. Both China and the Arab

countries were “victims of US hegemony,” the Global Times wrote in an editorial. China was Washington’s biggest target on trade protectionism, while Trump’s decision to move the US embassy in Israel to Jerusalem was “an insult to the Arab world”, the newspaper claimed.

Xi followed that diplomatic coup by hosting the 20th EU-China summit in Beijing, which he also personally attended. Previous summits in 2016 and 2017 failed to produce joint statements, with the two sides disagreeing over China’s steel overcapacity and human rights issues. This time the mood seemed more cordial, although Reuters reported that Chinese diplomats were keen this time for the European Union to issue a strongly-worded joint statement against Trump’s trade policies.

They didn’t get their way: the post-meeting communique turned out to be more neutral, reinforcing the EU and China’s commitment to multilateralism and the ‘rule-based’ international order.

(Aside from not getting their preferred wording, China’s leader were likely disappointed by the EU selecing Japan as its key Asian trade ally. Following their Beijing visit EU representative went to Tokyo and signed one of the world’s biggest free trade agreements with Japan.)

The ground had been laid for better relations with the EU the week before, when Premier Li Keqiang made a three-day visit to Germany that included meetings with German Chancellor Angela Merkel. Praising China’s efforts to open up more of its domestic market to foreign competition, the Germans signed a raft of commercial deals, with industrial giants such as BASF, BMW and Siemens making investments of more than $23 billion in projects in China.

“US President Donald Trump’s rapidly escalating trade war is pushing Berlin and Beijing into an uneasy economic alliance,” noted Politico, a Washington-based political news website.

What is BASF investing in?

BASF started exporting to China as early as 1885, so it is no newcomer to the Middle Kingdom. Its newest investment has been billed as the centrepiece of the latest round of China-Germany deals, however, after BASF said it had signed an agreement with the Guangdong government to invest up to $10 billion in a petrochemical plant in the southern Chinese province.

When completed, most likely in 2030, the integrated production base (‘Verbund’ in German) should become the largest single foreign investment in China’s petrochemical industry.

Probably more importantly, it will also be the first to be entirely foreign-owned (BASF has a 50-50 joint venture with Sinopec on another ‘Verbund’ in Nanjing).

The planned plant will be capable of producing more than a million tonnes of ethylene a year and 21CN Business Herald described the deal as groundbreaking, given that even the largest of the state-owned chemical firms can find it difficult to get the necessary approvals (mainly on environmental concerns) for production sites on a similar scale.

David Fickling, a columnist covering commodities for Bloomberg, noted that BASF has often played a prominent role in Germany’s relations with its trading partners. For instance, in 1990 following the fall of the Berlin Wall, it swiftly established a joint venture with Russia’s Gazprom. The $10 billion plant in China has a similar “fall-of-the-wall feel” about it, says Fickling, signalling a greater commitment from the Chinese to reducing their restrictions on foreign investment.

“For all that we’ve scoffed at China’s recent revisions of its foreign investment ‘negative list’, BASF’s move shows the changes are real,” he wrote. “Right now, the US appears to be looking for battles on the world stage. It should watch its step: China is busy seeking out allies.”

BMW is getting a good deal too?

BMW was being described as “the envy of foreign carmakers” this week, the South China Morning Post has suggested, after speculation that the German firm has been given the green light to raise its stake in its Chinese joint venture to 75%.

That will also be a first of sorts, as foreign carmakers have been required to operate via joint ventures with Chinese partners. Previously, their shareholding limit was capped at 50%, although the State Council said in April that the ceiling would be gradually lowered, with a view to being abolished completely by 2022.

News that BMW was in pole position to benefit from the rule changes was reported first by German media and it has since been confirmed by the Chinese newspapers as well.

There is yet to be an official announcement and BMW will first need to convince its partner, Brilliance China, to sell down its shareholding. The joint venture is the jewel of the Brilliance China Group, a state-owned firm based in Liaoning. An additional 25% stake won’t come cheap either as the partnership has been providing the bulk of earnings for its parent firm.

Should a deal be completed, the restructuring could provide a template for similar transactions, including the tricky issues of technology transfer and board composition, and will set a benchmark for other foreign carmakers who want bigger stakes in their China businesses.

Buffetted by concerns that it might have to make some sort of shareholding sacrifice for the good of China-Germany relations, Brilliance China’s Hong Kong-listed shares have fallen 15% over the past week.

In contrast, a higher stake in the carmaking joint venture for BMW could offset some of the impacts of the unfolding China-US trade dispute, the Hong Kong Economic Times reckons. The German brand’s US-based factory exported more than 100,000 vehicles to China last year, the newspaper says, but sales of these cars, mainly SUVs, would be hampered by retaliatory tariff hikes of up to 40% on American-made vehicles mooted by Beijing in response to the Trump administration’s round of tariffs.

And the other German deals?

A host of technology collaborations were also signed. Siemens agreed with Alibaba to use the e-commerce giant’s cloud infrastructure in rolling out its digital operating system MindSphere, for instance, and Thyssenkrupp and China Railway Rolling Stock Corp inked another deal on technology cooperation.

BMW was also busy on other fronts, and negotiations with Great Wall Motors that have dragged on for more than a year for a 50-50 joint venture to build a Rmb5.1 billion electric vehicle (EV) plant in Jiangsu seem to have been resolved. This marks the first time that BMW will make Mini cars in China and it is also a new departure for Great Wall, a private sector firm which prides itself on being a ‘national brand’, in forging a partnership with a foreign carmaker. The new company, called Spotlight Automotive, will also launch its own EV brand.

In another headline-grabber, BMW has agreed to source $4.7 billion worth of sales from Chinese battery maker CATL. About 40% of the lithium cells for this contract will be produced in Germany, where CATL sealed a deal to build its first production site in Erfurt. The Munich-based carmaker will also make a Rmb2.85 billion strategic investment in CATL.

Tesla is coming as well…

The other key signal this month is that Beijing wants to maintain ties with corporate America, detaching big firms from Trump when it comes to dealing with the Chinese on trade. Chicago Mayor Rahm Emanuel, for one, was in the Chinese capital to salvage business deals threatened by the trade row, including a $1.3 billion deal for a Chinese firm to assemble railcars in Chicago.

He was even afforded a meeting with Chinese Vice President Wang Qishan, who is widely believed to have been put in charge of improving Beijing’s testy relationship with Washington. Wang has kept a low profile during the early days of the trade spat stoked by Trump’s administration. However, there are signs that China’s ‘firefighter’ – the nickname Wang has for his troubleshooting skills – is taking a more prominent role in response to the worsening mood.

Last week he also rolled out the red carpet for Elon Musk, with the Tesla boss recounting that he and Wang had discussed “history, philosophy and luck”. Musk’s car firm has already seen its fortunes improve in China after it was given final approvals this month to build a 100%-owned Tesla Gigafactory in Shanghai. Tesla plans to produce its first China-made cars about two years after construction begins, ramping up to as many as 500,000 vehicles a year within three years of launch.

The Tesla facility will be the first wholly foreign-owned car plant in China and it is likely to surpass Disney’s $5.5 billion theme park as the biggest overseas investment in Shanghai.

Of course, Tesla has to tread its own fine line politically and it said in a statement that its Shanghai plant won’t impact on its plans for its US manufacturing bases. But Beijing will still notch up the news of the car factory as an example of converting one of its erstwhile American foes into a friend.

In March this year, Musk fired off a series of Twitter rebukes complaining about an unequal playing field for his firm in China. Only four months later, he was all smiles on his visit, knowing that China is set to become Tesla’s most important market.

The Chinese media knew it too and picked up on other visual cues of Musk’s readiness to go local: according to ThePaper.cn, he was spotted eating fried pancakes and chicken from the popular Shanghai restaurant chain Zhending (naturally, the tycoon arrived at the eatery in a Tesla Model X).

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