Congratulations, Merics! Today marks the tenth anniversary of Germany’s China think tank. Reason enough for us to compile eleven honoring voices from China researchers and one business representative.
Merics has filled a gap we didn’t realize how big it was. Germany has always had considerable China expertise and excellent research at its universities. However, this was and still is fragmented into narrowly defined disciplines and spread across universities throughout the country.
With a think tank in the capital, Germany finally had a contact address for China research with an applied focus. Merics conducts small-scale research, but Merics always aims to answer pressing, topical, and – as we have all realized by now – vital questions for Germany.
Merics’ success is the result of private sector involvement. Simply put, the Mercator Foundation’s funds come indirectly from the profits of the Metro retail group. This means that Merics is not financed by taxpayers’ money and is also independent of political interests.
Germany’s China community was all the more stunned when Merics, of all organizations, became a victim of Chinese sanctions in March 2021. Admittedly, the institute is often critical of Chinese policy. However, its staff consists of people in Germany who know China best and have dedicated their lives to studying the country.
It’s good that we have Merics. Merics has enlivened the scene of German China watchers by bringing in a new think tank perspective and thus adding an action-oriented dimension to the debate. As such, Merics ‘ work, which is always at the cutting edge of development, is an important addition and enrichment to the intellectual debate on China. Merics’ contribution to the debate is all the more important given the profound changes currently taking place in China itself and the parallel fundamental shift in the perception of China in Germany and the Western world as a whole.
Especially in such phases of upheaval, it is important to take a close look and analyze developments in China with the greatest possible objectivity. A differentiated view that places value on the shades of gray and does not allow itself to be misled into populist black-and-white scenarios is the order of the day. Merics has undoubtedly fulfilled this requirement in recent years. Not everyone may have agreed with every study and every opinion expressed, but that cannot be the claim in a pluralistic society and in an open scientific landscape. What is important is that Merics has repeatedly contributed new ideas and significantly raised the general level of knowledge about China with excellently researched works. Differences in content are to be clarified in free discourse. May the best argument win! It is therefore very welcome that the exchange between the Merics think tank and the academic scene has been intensified in recent years. This can only be enriching for all sides.
Unfortunately, this has not been understood in China. With the entry and cooperation bans against Merics , the Chinese government has to a certain extent blocked an important channel for improving mutual understanding (which does not mean “approving “). The underlying idea behind the sanctions, that Merics employees would interpret and publicize information gained in their exchanges with Chinese partners from an “anti-China” perspective, is fundamentally flawed. Merics, like all actors involved with China in Germany, is interested in the most accurate picture of China possible. Demonization only leads to bad decisions and opens the trapdoor to a downward spiral in bilateral relations. At a time when dark shades of gray dominate the picture, the lifting of Chinese sanctions against Merics would be an important step towards strengthening a rational and differentiated exchange with China.
Over the past ten years, Merics has risen to become an important and now indispensable voice on the German China scene. May it stay that way!
Markus Taube is Professor of East Asian Business / China at the Mercator School of Management and Director of the IN-EAST School of Advanced Studies at the University of Duisburg-Essen. He is also a member of the Merics Board of Trustees.
Over the past 10 years, Merics has done nothing more and nothing less than revolutionize European China research. Merics researchers have started debates, backed them up with facts, refuted myths and shown time and again why a much more intensive analysis is needed to deal with the challenges posed by the policies of the Chinese leadership. Professional, factual and highly topical: if Merics didn’t already exist, it would have to be invented.
Janka Oertel is Director of the Asia Program and Senior Policy Fellow at the European Council on Foreign Relations (ECFR)
Merics has done a fantastic job in its first ten years of existence. Its research work is courageous and well done. Especially at a time when China is becoming increasingly difficult to understand, we need more in-depth knowledge. We need ten more Merics.
Among us scientists working on China, there are some who see sanctions as a kind of badge of honor. If you are sanctioned for the right reasons, for the quality and integrity of your work, and because you have hit a sensitive spot in China, it should not inhibit you: We should be intellectually honest and do the best work we can do.
Merics should be proud of its courage to continue its work even after the sanctions. We should all support it in doing so. Because when organizations and scholars are silenced by sanctions, the Chinese Communist Party shuts down our ability to form independent judgments.
Glenn Tiffert is a research fellow at the Hoover Institution and co-chair of its project “China’s Global Sharp Power“.
Merics has become a central player and a central platform for China knowledge for politics and the general public – and its success also shows how high the demand for this knowledge is and that more such platforms are needed. For the future, it would be desirable for the Chinese government to lift its sanctions against Merics and for Merics researchers to be able to travel to China.
Marina Rudyak is a sinologist at the University of Heidelberg and a lecturer in Chinese economic policy and international relations.
Congratulations to my colleagues at Merics on their anniversary and their successes over the past ten years! From my university perspective, Merics makes a valuable contribution to the production and dissemination of up-to-date analyses on China. I would like to congratulate the Merics public relations and graphics department. It has set new standards with the Merics designs and illustrations.
In terms of science policy, I find it regrettable that a private foundation is funding another think tank for policy advice. This would probably not (have been) necessary if independent China research at universities had comparable financial and personnel resources from the federal states or the federal government.
Doris Fischer holds the Chair of China Business and Economics at the University of Würzburg and is Vice President for Internationalization and Alumni.
My first contact with the work of Merics was during my studies as a political science researcher on China. At that time, Merics’ bilingual reporting hit like a comet – and gave my work a huge boost. Bilingualism was a very important point, so that there were always links to Chinese texts and sources as well as to American and German reporting on new trends in politics and society. That was something innovative ten years ago.
Merics has achieved impressive things over the past ten years. I think that Merics has helped to shape an entire generation of social science and political science researchers in Germany .
Mercis has become a pivotal point, a kind of academic hub for European, but also American and international research on China. Chapeau and respect for so much visibility and also for strengthening the China-related landscape in Germany.
Josie-Marie Perkuhn is project leader of the “Taiwan as a Pioneer” project in Sinology at the University of Trier and a non-resident fellow at the Institute for Security Policy at Kiel University.
Over the past ten years, Merics has achieved a prominent position in German political consulting through clever strategic leadership, media presence and substantive expertise. For the next ten years, I wish the team even more time and cooperation skills for substantial analyses that go beyond concrete day-to-day politics.
Daniel Leese is Professor of Sinology with a focus on “History and Politics of Modern China” at the Albert-Ludwigs-Universität Freiburg. His most recent work together with Shi Ming: “Chinesisches Denken der Gegenwart”, published by C.H.Beck
There are several hearts beating in my chest. Merics is a success story. Merics research is the most extensive and also the most far-reaching that I know of from a research institute in Europe.
However, the institute suffers from the fact that it is too strongly influenced by European values. The criticism of China is sometimes somewhat exaggerated. This is counterproductive – also for the institute. If China researchers are sanctioned and can no longer travel to China, that is a problem.
I would wish Merics a little more pragmatism. Criticism is important and necessary. Criticism with a moralizing finger now goes down badly in China. It’s a fine balancing act that also requires political intuition. But in the end, I think Merics is too attached to the American point of view . This may go down well in the USA, but in China Merics has burned all bridges. That is very regrettable.
Eberhard Sandschneider was Otto Wolff Director of the Research Institute of the German Council on Foreign Relations (DGAP) until 2016 and is now a partner at Berlin Global Advisors
The fact that a private foundation made such a long-term investment in a China Institute ten years ago was a real highlight. The Mercator Foundation has shown foresight. And I would personally like to see more of that, more courage in new forms of financing China expertise. I think the approach chosen for the financing of Merics is very smart: long and high enough for the institute to develop its own portfolio. At the same time, the funds do not flow indefinitely. Merics is partly self-financing.
For me, Merics is like RB Leipzig in soccer. At the beginning, there is a lot of money from investors, which you can use to take the best people off the market and rush through every league. That was also the case with Merics at the beginning. The difficulties come when you enter the top flight and have to establish yourself in terms of content. That is much more difficult. In my opinion, the current director Mikko Huotari has done a tremendous job. He has transformed the institute into a policy advisory institute with a clear focus on applied China research.
The great added value: Merics manages to present economic, social and legal changes in China very promptly in well-founded analyses and studies. This was not available in this form and density in Germany. In this way, Merics has increased China expertise, especially in politics. In my opinion, it has not been quite as successful socially.
A comprehensive China strategy also requires a comprehensive implementation of China expertise. However, this cannot just be Merics. Merics is sanctioned by China. Therefore, there are many loyalties. I think that is also important. In my opinion, however, policymakers also have the task of involving other players, particularly from academic research, in the advisory process. We have a large number of social science researchers on China that policymakers could also draw on. In my opinion, this is not being done enough.
Nadine Godehardt is an Asia expert at the German Institute for International and Security Affairs (SWP) with a focus on China and its geostrategic policy.
Merics has become an integral part of the German and European landscape of China expertise. The success of Merics – as evidenced by the fact that the institution has been sanctioned by Beijing – shows that an important gap has been filled.
Adrian Zenz is a German anthropologist, best known for his research on Xinjiang, and Senior Fellow for Chinese Studies at the Victims of Communism Memorial Foundation in Washington, D.C.
The development of Merics was a stroke of luck. The team stayed away from academic presentations, the experts developed an enormous media presence. And clever contributions at conferences and in government headquarters had a direct influence on decision-makers. China then honored this with sanctions. Jia you Merics!
Jörg Wuttke was President of the EU Chamber of Commerce China until last summer.
At first glance, the data indicates China’s dramatic departure from the US bond market: According to official data from the US Treasury Department, China’s holdings of US Treasuries have fallen to their lowest level in 14 years. The most recent data available shows that China’s holdings of US Treasuries totaled 805 billion US dollars (750 billion euros) in August 2023. The last time the level was even lower was in May 2009 at 776 billion US dollars (720 billion euros).
Chinese holdings have thus fallen by 40 percent since their peak around ten years ago. China is widely perceived to be reacting to the increasing geostrategic competition and economic rivalry with the US by withdrawing its foreign exchange reserves from the US dollar. Reports have repeatedly emerged that China is seeking to become less dependent on the US dollar due to geopolitical concerns and is thus turning its back on the US bond market.
However, a closer look at the data reveals that Chinese financial planners have by no means lost their appetite for US dollar investments. Instead, experts attribute the statistical outflows to other factors.
The economist Brad W. Setser, who once worked for the US Treasury Department himself, has delved deep into the matter. After extensive calculations, he concluded that there had not been a decline in Chinese purchasing, but rather a shift.
Setser argues that China has very likely made greater use of so-called offshore custodians in recent years. A well-known example of such an offshore custodian is Euroclear in Belgium. Euroclear is one of the largest trustee companies and offers the settlement of securities transactions and the associated safekeeping of securities. However, these securities do not appear in the statistics of the US Treasury Department. This would enable China to conceal its actual holdings of US Treasuries or other securities.
Furthermore, China is investing its US dollar reserves differently than before. For example, a lot of money has flowed into New Silk Road projects as loans over the past ten years. According to Setser, the loans granted by China here were also primarily in US dollars – which means that US dollars will flow back to China after repayment.
At the same time, China has continued to buy bonds on a massive scale in recent years. However, instead of US Treasuries, Beijing increasingly favored so-called Agency bonds.
While US Treasuries are issued directly by the US government, Agency bonds are issued by government-sponsored enterprises (GSEs) or government agencies. The best-known issuers include Fannie Mae and Freddie Mac, two large mortgage finance companies, as well as other institutions such as the Federal Home Loan Banks.
US Treasuries are considered one of the safest investments in the world as they enjoy the full faith and credit of the US government. Agency bonds carry a slightly higher risk as the US government does not fully guarantee them. However, the yield is also higher.
In 2022, China significantly increased its holdings of such US Agency bonds, as reported by Reuters: Calculations by central bank economists Carol Bertaut and Ruth Judson show that China’s holdings of US agency bonds soared by over 50 billion US dollars.
In addition to this growth, valuation effects led to a further increase of USD 35 billion. This means that the actual increase was 86 billion US dollars. This, in turn, is significantly more than the decrease in US Treasuries in the same year.
The bottom line, Setser argues, is that not much has changed in the Chinese dollar currency reserves over the past decade. Accordingly, China’s investments in US assets remain stable at between 1.8 and 1.9 trillion US dollars.
Sinolytics is a European research-based consultancy entirely focused on China. It advises European companies on their strategic orientation and specific business activities in the People’s Republic.
The sudden end of zero-Covid was a relief for many China specialists. After three grueling years of lockdown, it was finally possible to work on the ground in China again. But this was not the case for Mikko Huotari, Director of the leading German China think tank Merics. In 2021, his institute became one of four “entities” sanctioned by Beijing with an entry ban that remains in effect to this day: “Unfortunately, it is not foreseeable when our staff will be able to travel to China again.”
Those who assume that such measures would deter Huotari and his team from their work do not know the organization well. The team of almost two dozen experts is in regular contact with Chinese colleagues, whom they meet in Brussels, Berlin or online. In the meantime, big data analytics is also used to sift through source material written in Chinese, allowing patterns to be identified more quickly. Huotari sees an abundance of information available. “Picture me here with many highly motivated colleagues who spend all day studying China. We won’t run out of material for analysis any time soon.”
Huotari himself has been with Merics almost since the beginning. Of the ten years that the institute has been in existence, he has been closely involved for nine and a half. He started as Head of Program for Geoeconomics and International Security before becoming Deputy Director and finally Executive Director in 2020. During this time, not only the perception of China has changed. The changing times have also left their mark on Merics: “We started out as a German institute, but today we can rightfully call ourselves a European one.”
Merics employees can feel the internationalization in many places. There is an office in Brussels. The company’s language has been English for some time now. The ambitions in terms of its reach have grown: “We aim to choose topics with foresight and in line with current demand,” says Huotari. “We aim to recognize early on what will be relevant in six, twelve or eighteen months.”
Merics does not shy away from presenting its in-house forecasts and analyses to the public. In June and July of this year alone, Huotari presented his expertise on various German media – out of conviction: “The China challenge has an overall political urgency that does not allow a research institute of our stature to remain behind the scenes.”
When it comes to issues that affect Europe’s sovereignty, prosperity and security, there is a need for transparent and broad-based debates. After all, debates whose scope is as far-reaching as China is large can only be mastered through comprehensive analyses that provide a bigger picture. Huotari sees it as Merics’ responsibility and task to provide such analyses.
Although much has been achieved in ten years of Merics, Huotari still has one wish: “A little more peace and quiet.” The demand for China research has become so intense that even large institutes find it challenging to keep up with everything. Therefore, Huotari wishes “that the players who ask for our expertise are also prepared to support the long-term development of expertise production instead of taking it for granted.” The objective for the next ten years is clear: Keeping Merics on the market as a thriving organization that will continue to provide the best working conditions for research into the most pressing issues concerning China. Julius Schwarzwaelder
Sparks are flying during welding work at market leader BYD’s EV factory in Changzhou, artfully captured by AFP photographer Alex Plavevski. The former battery specialist BYD is now one of the world’s largest EV manufacturers and soon wants to have a major say in the EU market.
Congratulations, Merics! Today marks the tenth anniversary of Germany’s China think tank. Reason enough for us to compile eleven honoring voices from China researchers and one business representative.
Merics has filled a gap we didn’t realize how big it was. Germany has always had considerable China expertise and excellent research at its universities. However, this was and still is fragmented into narrowly defined disciplines and spread across universities throughout the country.
With a think tank in the capital, Germany finally had a contact address for China research with an applied focus. Merics conducts small-scale research, but Merics always aims to answer pressing, topical, and – as we have all realized by now – vital questions for Germany.
Merics’ success is the result of private sector involvement. Simply put, the Mercator Foundation’s funds come indirectly from the profits of the Metro retail group. This means that Merics is not financed by taxpayers’ money and is also independent of political interests.
Germany’s China community was all the more stunned when Merics, of all organizations, became a victim of Chinese sanctions in March 2021. Admittedly, the institute is often critical of Chinese policy. However, its staff consists of people in Germany who know China best and have dedicated their lives to studying the country.
It’s good that we have Merics. Merics has enlivened the scene of German China watchers by bringing in a new think tank perspective and thus adding an action-oriented dimension to the debate. As such, Merics ‘ work, which is always at the cutting edge of development, is an important addition and enrichment to the intellectual debate on China. Merics’ contribution to the debate is all the more important given the profound changes currently taking place in China itself and the parallel fundamental shift in the perception of China in Germany and the Western world as a whole.
Especially in such phases of upheaval, it is important to take a close look and analyze developments in China with the greatest possible objectivity. A differentiated view that places value on the shades of gray and does not allow itself to be misled into populist black-and-white scenarios is the order of the day. Merics has undoubtedly fulfilled this requirement in recent years. Not everyone may have agreed with every study and every opinion expressed, but that cannot be the claim in a pluralistic society and in an open scientific landscape. What is important is that Merics has repeatedly contributed new ideas and significantly raised the general level of knowledge about China with excellently researched works. Differences in content are to be clarified in free discourse. May the best argument win! It is therefore very welcome that the exchange between the Merics think tank and the academic scene has been intensified in recent years. This can only be enriching for all sides.
Unfortunately, this has not been understood in China. With the entry and cooperation bans against Merics , the Chinese government has to a certain extent blocked an important channel for improving mutual understanding (which does not mean “approving “). The underlying idea behind the sanctions, that Merics employees would interpret and publicize information gained in their exchanges with Chinese partners from an “anti-China” perspective, is fundamentally flawed. Merics, like all actors involved with China in Germany, is interested in the most accurate picture of China possible. Demonization only leads to bad decisions and opens the trapdoor to a downward spiral in bilateral relations. At a time when dark shades of gray dominate the picture, the lifting of Chinese sanctions against Merics would be an important step towards strengthening a rational and differentiated exchange with China.
Over the past ten years, Merics has risen to become an important and now indispensable voice on the German China scene. May it stay that way!
Markus Taube is Professor of East Asian Business / China at the Mercator School of Management and Director of the IN-EAST School of Advanced Studies at the University of Duisburg-Essen. He is also a member of the Merics Board of Trustees.
Over the past 10 years, Merics has done nothing more and nothing less than revolutionize European China research. Merics researchers have started debates, backed them up with facts, refuted myths and shown time and again why a much more intensive analysis is needed to deal with the challenges posed by the policies of the Chinese leadership. Professional, factual and highly topical: if Merics didn’t already exist, it would have to be invented.
Janka Oertel is Director of the Asia Program and Senior Policy Fellow at the European Council on Foreign Relations (ECFR)
Merics has done a fantastic job in its first ten years of existence. Its research work is courageous and well done. Especially at a time when China is becoming increasingly difficult to understand, we need more in-depth knowledge. We need ten more Merics.
Among us scientists working on China, there are some who see sanctions as a kind of badge of honor. If you are sanctioned for the right reasons, for the quality and integrity of your work, and because you have hit a sensitive spot in China, it should not inhibit you: We should be intellectually honest and do the best work we can do.
Merics should be proud of its courage to continue its work even after the sanctions. We should all support it in doing so. Because when organizations and scholars are silenced by sanctions, the Chinese Communist Party shuts down our ability to form independent judgments.
Glenn Tiffert is a research fellow at the Hoover Institution and co-chair of its project “China’s Global Sharp Power“.
Merics has become a central player and a central platform for China knowledge for politics and the general public – and its success also shows how high the demand for this knowledge is and that more such platforms are needed. For the future, it would be desirable for the Chinese government to lift its sanctions against Merics and for Merics researchers to be able to travel to China.
Marina Rudyak is a sinologist at the University of Heidelberg and a lecturer in Chinese economic policy and international relations.
Congratulations to my colleagues at Merics on their anniversary and their successes over the past ten years! From my university perspective, Merics makes a valuable contribution to the production and dissemination of up-to-date analyses on China. I would like to congratulate the Merics public relations and graphics department. It has set new standards with the Merics designs and illustrations.
In terms of science policy, I find it regrettable that a private foundation is funding another think tank for policy advice. This would probably not (have been) necessary if independent China research at universities had comparable financial and personnel resources from the federal states or the federal government.
Doris Fischer holds the Chair of China Business and Economics at the University of Würzburg and is Vice President for Internationalization and Alumni.
My first contact with the work of Merics was during my studies as a political science researcher on China. At that time, Merics’ bilingual reporting hit like a comet – and gave my work a huge boost. Bilingualism was a very important point, so that there were always links to Chinese texts and sources as well as to American and German reporting on new trends in politics and society. That was something innovative ten years ago.
Merics has achieved impressive things over the past ten years. I think that Merics has helped to shape an entire generation of social science and political science researchers in Germany .
Mercis has become a pivotal point, a kind of academic hub for European, but also American and international research on China. Chapeau and respect for so much visibility and also for strengthening the China-related landscape in Germany.
Josie-Marie Perkuhn is project leader of the “Taiwan as a Pioneer” project in Sinology at the University of Trier and a non-resident fellow at the Institute for Security Policy at Kiel University.
Over the past ten years, Merics has achieved a prominent position in German political consulting through clever strategic leadership, media presence and substantive expertise. For the next ten years, I wish the team even more time and cooperation skills for substantial analyses that go beyond concrete day-to-day politics.
Daniel Leese is Professor of Sinology with a focus on “History and Politics of Modern China” at the Albert-Ludwigs-Universität Freiburg. His most recent work together with Shi Ming: “Chinesisches Denken der Gegenwart”, published by C.H.Beck
There are several hearts beating in my chest. Merics is a success story. Merics research is the most extensive and also the most far-reaching that I know of from a research institute in Europe.
However, the institute suffers from the fact that it is too strongly influenced by European values. The criticism of China is sometimes somewhat exaggerated. This is counterproductive – also for the institute. If China researchers are sanctioned and can no longer travel to China, that is a problem.
I would wish Merics a little more pragmatism. Criticism is important and necessary. Criticism with a moralizing finger now goes down badly in China. It’s a fine balancing act that also requires political intuition. But in the end, I think Merics is too attached to the American point of view . This may go down well in the USA, but in China Merics has burned all bridges. That is very regrettable.
Eberhard Sandschneider was Otto Wolff Director of the Research Institute of the German Council on Foreign Relations (DGAP) until 2016 and is now a partner at Berlin Global Advisors
The fact that a private foundation made such a long-term investment in a China Institute ten years ago was a real highlight. The Mercator Foundation has shown foresight. And I would personally like to see more of that, more courage in new forms of financing China expertise. I think the approach chosen for the financing of Merics is very smart: long and high enough for the institute to develop its own portfolio. At the same time, the funds do not flow indefinitely. Merics is partly self-financing.
For me, Merics is like RB Leipzig in soccer. At the beginning, there is a lot of money from investors, which you can use to take the best people off the market and rush through every league. That was also the case with Merics at the beginning. The difficulties come when you enter the top flight and have to establish yourself in terms of content. That is much more difficult. In my opinion, the current director Mikko Huotari has done a tremendous job. He has transformed the institute into a policy advisory institute with a clear focus on applied China research.
The great added value: Merics manages to present economic, social and legal changes in China very promptly in well-founded analyses and studies. This was not available in this form and density in Germany. In this way, Merics has increased China expertise, especially in politics. In my opinion, it has not been quite as successful socially.
A comprehensive China strategy also requires a comprehensive implementation of China expertise. However, this cannot just be Merics. Merics is sanctioned by China. Therefore, there are many loyalties. I think that is also important. In my opinion, however, policymakers also have the task of involving other players, particularly from academic research, in the advisory process. We have a large number of social science researchers on China that policymakers could also draw on. In my opinion, this is not being done enough.
Nadine Godehardt is an Asia expert at the German Institute for International and Security Affairs (SWP) with a focus on China and its geostrategic policy.
Merics has become an integral part of the German and European landscape of China expertise. The success of Merics – as evidenced by the fact that the institution has been sanctioned by Beijing – shows that an important gap has been filled.
Adrian Zenz is a German anthropologist, best known for his research on Xinjiang, and Senior Fellow for Chinese Studies at the Victims of Communism Memorial Foundation in Washington, D.C.
The development of Merics was a stroke of luck. The team stayed away from academic presentations, the experts developed an enormous media presence. And clever contributions at conferences and in government headquarters had a direct influence on decision-makers. China then honored this with sanctions. Jia you Merics!
Jörg Wuttke was President of the EU Chamber of Commerce China until last summer.
At first glance, the data indicates China’s dramatic departure from the US bond market: According to official data from the US Treasury Department, China’s holdings of US Treasuries have fallen to their lowest level in 14 years. The most recent data available shows that China’s holdings of US Treasuries totaled 805 billion US dollars (750 billion euros) in August 2023. The last time the level was even lower was in May 2009 at 776 billion US dollars (720 billion euros).
Chinese holdings have thus fallen by 40 percent since their peak around ten years ago. China is widely perceived to be reacting to the increasing geostrategic competition and economic rivalry with the US by withdrawing its foreign exchange reserves from the US dollar. Reports have repeatedly emerged that China is seeking to become less dependent on the US dollar due to geopolitical concerns and is thus turning its back on the US bond market.
However, a closer look at the data reveals that Chinese financial planners have by no means lost their appetite for US dollar investments. Instead, experts attribute the statistical outflows to other factors.
The economist Brad W. Setser, who once worked for the US Treasury Department himself, has delved deep into the matter. After extensive calculations, he concluded that there had not been a decline in Chinese purchasing, but rather a shift.
Setser argues that China has very likely made greater use of so-called offshore custodians in recent years. A well-known example of such an offshore custodian is Euroclear in Belgium. Euroclear is one of the largest trustee companies and offers the settlement of securities transactions and the associated safekeeping of securities. However, these securities do not appear in the statistics of the US Treasury Department. This would enable China to conceal its actual holdings of US Treasuries or other securities.
Furthermore, China is investing its US dollar reserves differently than before. For example, a lot of money has flowed into New Silk Road projects as loans over the past ten years. According to Setser, the loans granted by China here were also primarily in US dollars – which means that US dollars will flow back to China after repayment.
At the same time, China has continued to buy bonds on a massive scale in recent years. However, instead of US Treasuries, Beijing increasingly favored so-called Agency bonds.
While US Treasuries are issued directly by the US government, Agency bonds are issued by government-sponsored enterprises (GSEs) or government agencies. The best-known issuers include Fannie Mae and Freddie Mac, two large mortgage finance companies, as well as other institutions such as the Federal Home Loan Banks.
US Treasuries are considered one of the safest investments in the world as they enjoy the full faith and credit of the US government. Agency bonds carry a slightly higher risk as the US government does not fully guarantee them. However, the yield is also higher.
In 2022, China significantly increased its holdings of such US Agency bonds, as reported by Reuters: Calculations by central bank economists Carol Bertaut and Ruth Judson show that China’s holdings of US agency bonds soared by over 50 billion US dollars.
In addition to this growth, valuation effects led to a further increase of USD 35 billion. This means that the actual increase was 86 billion US dollars. This, in turn, is significantly more than the decrease in US Treasuries in the same year.
The bottom line, Setser argues, is that not much has changed in the Chinese dollar currency reserves over the past decade. Accordingly, China’s investments in US assets remain stable at between 1.8 and 1.9 trillion US dollars.
Sinolytics is a European research-based consultancy entirely focused on China. It advises European companies on their strategic orientation and specific business activities in the People’s Republic.
The sudden end of zero-Covid was a relief for many China specialists. After three grueling years of lockdown, it was finally possible to work on the ground in China again. But this was not the case for Mikko Huotari, Director of the leading German China think tank Merics. In 2021, his institute became one of four “entities” sanctioned by Beijing with an entry ban that remains in effect to this day: “Unfortunately, it is not foreseeable when our staff will be able to travel to China again.”
Those who assume that such measures would deter Huotari and his team from their work do not know the organization well. The team of almost two dozen experts is in regular contact with Chinese colleagues, whom they meet in Brussels, Berlin or online. In the meantime, big data analytics is also used to sift through source material written in Chinese, allowing patterns to be identified more quickly. Huotari sees an abundance of information available. “Picture me here with many highly motivated colleagues who spend all day studying China. We won’t run out of material for analysis any time soon.”
Huotari himself has been with Merics almost since the beginning. Of the ten years that the institute has been in existence, he has been closely involved for nine and a half. He started as Head of Program for Geoeconomics and International Security before becoming Deputy Director and finally Executive Director in 2020. During this time, not only the perception of China has changed. The changing times have also left their mark on Merics: “We started out as a German institute, but today we can rightfully call ourselves a European one.”
Merics employees can feel the internationalization in many places. There is an office in Brussels. The company’s language has been English for some time now. The ambitions in terms of its reach have grown: “We aim to choose topics with foresight and in line with current demand,” says Huotari. “We aim to recognize early on what will be relevant in six, twelve or eighteen months.”
Merics does not shy away from presenting its in-house forecasts and analyses to the public. In June and July of this year alone, Huotari presented his expertise on various German media – out of conviction: “The China challenge has an overall political urgency that does not allow a research institute of our stature to remain behind the scenes.”
When it comes to issues that affect Europe’s sovereignty, prosperity and security, there is a need for transparent and broad-based debates. After all, debates whose scope is as far-reaching as China is large can only be mastered through comprehensive analyses that provide a bigger picture. Huotari sees it as Merics’ responsibility and task to provide such analyses.
Although much has been achieved in ten years of Merics, Huotari still has one wish: “A little more peace and quiet.” The demand for China research has become so intense that even large institutes find it challenging to keep up with everything. Therefore, Huotari wishes “that the players who ask for our expertise are also prepared to support the long-term development of expertise production instead of taking it for granted.” The objective for the next ten years is clear: Keeping Merics on the market as a thriving organization that will continue to provide the best working conditions for research into the most pressing issues concerning China. Julius Schwarzwaelder
Sparks are flying during welding work at market leader BYD’s EV factory in Changzhou, artfully captured by AFP photographer Alex Plavevski. The former battery specialist BYD is now one of the world’s largest EV manufacturers and soon wants to have a major say in the EU market.
