Continental caught in Lithuania dispute + Social credit model student

Dear reader,

In international politics, small events can grow into big problems. First, the government of Lithuania underestimated how seriously China takes even small Taiwan provocations. Now, the car industry and the German government are in an uproar. China is refusing to import parts from major supplier Continental if they contain components from Lithuania. The company manufactures electronics for smart vehicles there.

So Beijing is taking revenge on the large EU member Germany for the insult by the small EU member Lithuania. That was to be expected: China does not tolerate any governmental action that might indicate the recognition of Taiwan. Since Lithuania itself has been unimpressed by economic pressure, Beijing has taken the process to another level.

The German government now faces the difficult task of formulating an appropriate response. It cannot simply accept a trade attack on Continental. But it also does not want to rush into a hasty confrontation with China. This will be a first test of skill for the inexperienced heads of the German Ministry of Economy and the Foreign Office.

Despite all the demands for a new, assertive China policy, the goal should now also be to protect the auto industry from the escalation to a regional epic in an already difficult situation. It must use its strength for the transition to new drivetrains – collectively, in all economic areas.

Your
Finn Mayer-Kuckuk

Attack on Continental: the Lithuania dispute has arrived in Germany

What started as a trifle about a Baltic state, is turning into a full-blown trade conflict between Germany and China. The automotive supplier Continental and at least one other German company will soon no longer be allowed to export parts to China that contain primary products from Lithuania. China.Table obtained this information from industry circles. Even if the players are trying to appear calm on the surface, both economy and politics are frantically scrambling behind the scenes to find an adequate reaction. After all, this is the first time that Beijing has dragged the German automotive industry so directly into a trade dispute. The conflict was triggered by the founding of a Taiwan office in Vilnius (China.Table reported).

A crisis meeting is scheduled in Robert Habeck’s Ministry of Economics at the beginning of the week, China.Table has learned from circles in the German capital. Associations and chambers are also currently looking for the right way to criticize China without exposing themselves too much. In the course of the week, a series of letters and announcements can be expected. Officially, neither Continental nor the governments are commenting on the reports at this time. VW told China.Table that they are monitoring the situation very closely.

The German Association of the Automotive Industry (VDA) complained that politics and business were increasingly mixing. “Intergovernmental differences should be resolved through diplomatic channels and not on the backs of business,” said a VDA spokeswoman. The association is committed to international cooperation and rules-based, free trade. “In principle, every trade and investment agreement can prevent isolation and conflict.”

Mounting pressure on Lower Saxony, the SPD – and the traffic light coalition

The attack on a major German automotive supplier is now also forcing the new German government to take a stand against China. So there is also no grace period in foreign affairs for the traffic light coalition.

A supply ban on a major company like Continental is already the proving ground for dealing with a massive conflict. After all, a car largely consists of supplier parts. If one major supplier is hit, the entire automotive industry will feel it. Even if Continental only manufactures a small part of its product range in Lithuania, a shortage of these parts could further disrupt the already strained supply chains.

Targeting Continental, however, is not only an obvious commercial but also a geopolitical pick for China. The company’s headquarters are in Hanover. Stephan Weil of the SPD governs Lower Saxony. He is under pressure anyway because VW boss Herbert Diess has brought up the idea of cutting 30,000 jobs back home. Weil faces state elections next year. Although the state of Lower Saxony holds only twelve percent of VW, the state government has traditionally had some influence over the group. If China is now making a move on Continental, it could also be an attempt to influence the SPD.

Ex-Chancellor Gerhard Schroeder is part of the Lower Saxony SPD, as is former-Vice Chancellor Sigmar Gabriel. Given how the Chinese see party structures, these are the top-brass of their organization who should have considerable influence on Olaf Scholz. If pressure is put on the SPD in Lower Saxony, this could potentially influence the incumbent chancellor. From Berlin’s point of view, however, the opposite effect is at least equally possible: external pressure could fuse the federal government together. With Annalena Baerbock and Robert Habeck, Scholz already has supporters of “dialogue and toughness” at the cabinet table within decisive departments.

The European Union appears helpless

In theory, the EU would now have a key role in resolving the conflict. The German government pledged to better coordinate its policies with Brussels and its partners at the European level. But the EU Commission is proving helpless: A mechanism for responding to coercive economic measures is currently underway, but is far from ready (China.Table reported).

The situation is growing complicated with the pressure that is mounting on EU companies, European Commission Vice-President and Commissioner for Trade Valdis Dombrovskis, said on Friday. The comment was made at an event organized by the European Council on Foreign Relations, a think tank. The topic was the planned anti-coercion instrument – the very instrument that would be useful now but is still not ready. There is an “intensive outreach” to the Chinese authorities, Dombrovskis said.

The Lithuanian dispute has put the Anti-Coercion Instrument (ACI) at top of the agenda. Making progress on this instrument was also an important item on the agenda of the French EU Council Presidency, stressed Franck Riester, France’s Vice-Minister for Foreign Trade. The case of Lithuania shows very clearly that the EU must be defensive, Riester said. “We therefore support the Commission’s proposal.”

In the current situation, the options are very limited, the EU commissioner admitted. The only option is to go to the World Trade Organization – and that “takes a lot of time”. The ACI is intended to speed that up. Dombrovskis left open which measures Brussels would hypothetically take in response to the Lithuania-China case if the ACI were already in force. The application of the trading instrument would have to be specifically reviewed on a case-by-case basis. Currently, the EU is trying to react with all possible means, the EU Vice-President of the Commission said. Also, through diplomatic means. The general development of EU-China relations was certainly worrying, said Dombrovskis. This, and also developments with other third countries such as Russia, underline, according to him, the need for the EU instrument against economic coercion: “We need the proper tools to respond.”

Rules-based global trade is ‘broken’

Baltic states are already used to economic coercion, Lithuania’s Foreign Minister Gabrielius Landsbergis said at the same event. Russia also uses such methods. As far as China is concerned, however, we are facing a completely new phenomenon. What the People’s Republic is unhappy about and the measures it takes as a result are not in reasonable proportion to each other, said Landsbergis.

Tailwind for the creation of robust trade instruments is also coming from German businesses. Five years ago, he would have been against such a trade instrument, said Wolfgang Niedermark of the Federation of German Industries (BDI). But the rules-based order in world trade is “broken,” Niedermark said. “The unpleasant truth is: we now have to live with it.”

Since the EU cannot act, it is now up to Berlin to formulate a response. There is a lot at stake. Continental is an important partner for German carmakers. Import restrictions on essential parts could disrupt production, which is currently at risk of new disruptions anyway because of Omicron. Continental has business relationships with half the automotive industry. In the short term, automakers can obtain many of the necessary parts from other sources. The suppliers themselves usually maintain capacities for the same part at different locations. The car companies, in turn, purchase identical parts from several suppliers in many cases. On the other hand, however, there are enough examples of how the assembly lines of the very big names in the industry came to a standstill after a small supply disruption.

Flagship site Kaunas became a bone of contention

Continental is known to the public primarily as a tire manufacturer, but it has become one of the largest automotive suppliers in the world. To the public, it is primarily known for its tires, but it actually has become one of the world’s largest automotive suppliers. With 37 billion euros in revenue, the company is – depending on which account – the world’s third-largest automotive supplier after Bosch and Toyota partner Denso. Tires are still part of the program, but within the industry, Continental is now primarily known for electronics, which are becoming key components for smart cars.

The automotive supplier has been making strategic investments in this field in Lithuania since 2018, and production has been underway since 2019. Just this summer, the company announced plans to expand its Kaunas site once again. So far, the company has invested 90 million euros in the plant. Now, another 95 million is to be added. This will increase the number of employees from 1,000 to 1,500. The company produces electronic parts for cars and driver assistance systems there.

At the beginning of the project, no one at Continental could have guessed that the plant in Kaunas, of all places, would become a global political pawn. Lithuania has only recently approved the creation of a “Taiwan office” in Vilnius. It began operations on November 18. The dispute was sparked by its name. The Taiwanese government also maintains a contact office in Berlin. However, it is officially called the “Taipei Representative Office”, thus keeping up the pretense that only a city is represented here, not a state.

Lithuania is now also somewhat shocked at how harshly and extensively China is responding to the Taiwan office. “This shows a will to go to great lengths to influence the political course of countries,” Landsbergis said. Lithuania believed that it was not overly dependent on China because of its low trade with Asia. But now, it turns out that the Continental jobs in Kaunas are already well within Beijing’s reach. Finn Mayer-Kuckuk/Amelie Richter

German companies are social credit role models

China’s social credit system has so far had a less serious impact on German companies than was initially feared. Philipp Senff, partner at the law firm CMS in Shanghai, takes a mixed stock of the situation. Senff cannot confirm that the credit system decides over the “life or death” of companies. This is what the European Chamber of Commerce in Beijing warned about in a dramatic appeal after the announcement. At the time, a survey by the chamber showed that seven out of ten German companies in China were not yet familiar with the system, its mode of operation, and goals.

However, many have since done their homework, confirms Senff. The most tangible effect of the new system so far are so-called “black” and “red” lists. Blacklists are reserved for companies that have committed violations or crimes. For example, anyone who evades taxes or is convicted of corruption can end up on a blacklist for up to three years.

In contrast, companies that comply with all environmental regulations, for example, are placed on the red reward list. So there are:

Blacklists of companies with various violations

Redlists of companies who prove to be compliant

“A blacklisted company will have a much harder time dealing with the authorities in day-to-day practice,” explains Senff: “There is a risk of disadvantages when it comes to receiving licenses or permits. Affected companies also have to expect significantly more inspections.” They will also no longer be allowed to participate in tenders issued by the Chinese government.

Blacklists as a pillory for companies

Being blacklisted does not necessarily mean that a company may no longer operate on the market or must cease production. However, it is still a “considerable restriction”, whereby the greatest risk is losing customers. This is because the information is visible for anyone to see on the internet. This online pillory has an “educational character”, says Senff.

To avoid getting into trouble themselves or risking their reputation, many Chinese and international companies are already taking the precaution of not doing business with blacklisted companies. According to Senff, German companies should also check whether there are any blacklisted companies among their suppliers. On the other hand, it is possible that their own customers could claim damages.

German corporations seem to have prepared particularly well for the new rules. According to Vincent Brussee, a researcher at the Mercator Institute for China Studies (Merics) in Berlin, not a single German company is on a Chinese blacklist. On the contrary, companies such as BASF, Siemens, and Volkswagen are found as model students on the red lists. “They are often praised for reliably paying taxes for many years,” says Brussee. As a reward, these companies can expect fewer audits by the supervisors.

At the moment, the authorities are mainly targeting the areas of taxation, customs and the environment. However, there are clear indications that other fields will follow. Brussee and his Merics colleague Katja Drinhausen warned in a study published in March (China.Table reported) that the social credit system, in its current form, is by no means complete.

However, the rough start is deceiving. “The social credit system is part of Xi Jinping’s vision of data-driven governance,” the two researchers write. It is, they say, “a highly flexible instrument that can be applied quickly to address new policy priorities.” The Covid pandemic has proven that. On very short notice, some regions introduced new rules that could result in blacklisting for companies that violate Covid regulations. “Foreign actors need to accept the reality of a growing social credit system in China – and come up with strategies to deal with that reality,” Brussee and Drinhausen say.

There is one major problem: “There are no nationwide rules that state what is covered by the social credit system, which allows a liberal application for local authorities,” says Brussee. Since there are no clear criteria, it is at least theoretically possible that these blacklists could even be used as retaliation against foreign companies in the event of a diplomatic crisis.

However, many Chinese do not share the skepticism of Western observers. A survey conducted by the Institute for China Studies at the FU Berlin in 2018 showed that 80 percent of 2,000 Chinese were in favor of a credit system, while only one percent explicitly rejected it. After all, whether it’s food quality, business partners, hospitals, or road traffic, many Chinese know that their country is still lacking a well-developed legal system and regulatory mechanisms in many areas. Many see the social credit system as a means of monitoring and, if necessary, sanctioning compliance with rules and laws. Joern Petring/Gregor Koppenburg

Very low voter turnout in Hong Kong

Turnout in Hong Kong’s general election on Sunday fell dramatically compared to 2016. By 9:30 PM local time, an hour before polling stations closed, less than 30 percent of citizens had cast their ballots. Of the almost 4.5 million eligible voters, less than a third had decided to vote. In the 2016 parliamentary elections, the figure was still just under 60 percent.

Authorities only allowed candidates to run in the election who had passed a check and were deemed “patriotic” enough (China.Table reported), a vague category introduced at Beijing’s behest. The low chances of receiving such a rating was probably also a reason for the low number of pro-democratic candidates.

Only 20 of the 90 seats in the new parliament will be chosen by vote. The rest will be appointed by a committee composed of cadres loyal to Beijing. The low turnout can be interpreted as a sign of protest against these conditions as well as the harsh National Security Law imposed by Beijing.

Hong Kong’s government had previously tried a lot to increase voter turnout. There were free bus tickets to the polling stations and on Saturday, authorities sent text messages to encourage Hong Kong’s citizens to vote, Reuters reports. nib

Prague also plans to stand up to China

The newly elected Czech government is taking a more proactive approach toward Beijing than its predecessor: Prime Minister Petr Fiala chose China-critic Jan Lipavský as foreign minister for his cabinet. The 36-year-old from the Czech Pirate Party had already called the People’s Republic a “danger to the Czech Republic” before taking office, according to media reports. He stressed that his country’s foreign policy must “properly reflect” this threat. The Czech Republic has abandoned some of its principles in recent negotiations with Russia and China, he added. In late October, he pledged to “pursue a renewed human rights tradition,” and vowed “strong cooperation at the EU and NATO level.”

Lipavský also wants to deepen relations with Taiwan. Taipei is “an important economic partner of the Czech Republic … many times more important than the People’s Republic of China,” the new foreign minister reportedly said in October. Czech leader Miloš Zeman had reservations about Lipavský as foreign minister but approved his appointment on Friday. Zeman is considered more friendly towards Beijing and has always promoted the economic benefits of cooperation with China. The diplomatic relations between the Czech Republic and China had recently become strained (China.Table reported). ari

China builds 1,000 schools in Iraq

China and Iraq have signed an agreement about the construction of 1,000 new schools by two Chinese contractors in the Middle Eastern state. Construction company Power Construction Corporation of China (Powerchina) is to build 679 of the schools, with the rest to be built by Sino Tech, according to the South China Morning Post. The construction project is part of an Iraqi project to build 7,000 schools to repair damage from years of war. According to UNICEF, 3.2 million school-age children lack access to education, SCMP said. China’s involvement in the Middle East has grown steadily in recent years. The People’s Republic is now the largest importer of Iraqi oil. China is currently in talks to construct more infrastructure, according to the SCMP. Among them, contract for power lines, data cables, and railroad lines nib

EU introduces anti-dumping duties on wind turbines

With immediate effect, the EU will impose countervailing duties on imports of steel towers for wind turbines from China. According to the EU Commission, a review had shown that Chinese suppliers were importing the towers at dumping prices. The duties range from 7.4 to 19.2 percent, depending on the manufacturer of the steel towers. They will be imposed for an initial period of five years. The aim is to eliminate the economic damage for European manufacturers of steel towers through dumping prices, the Brussels-based authority announced.

According to the EU investigation, the market share of Chinese fabricators had risen to 34 percent in the summer of 2019, compared to just 25 percent in 2017. Chinese manufacturers had sold their steel towers at a discount, according to the report. The Chinese share of EU imports of steel towers for wind turbines is around 80 percent. nib

Production of wind power grows fastest

In the first eleven months of this year, China generated 14 percent more power from solar energy and 29 percent more power from wind energy compared to the same period last year. However, power production from coal and gas also rose by about 10 percent. The increase in nuclear energy was about 12 percent. Power generation from hydropower decreased by two percent, figures from the National Bureau of Statistics show. However, part of the increase in coal-fired power and renewables can be attributed to statistical effects. In the same period last year, power demand was curtailed due to the Covid pandemic.

At the same time, there are increasing signs that the People’s Republic will miss its target for solar energy expansion this year (China.Table reported). The Chinese Photovoltaic Industry Association has announced that solar power generation capacity will increase by 45 to 55 gigawatts this year. 10 gigawatts less than initially projected. The underlying reasons are rising raw material prices. For the next year, an increase in solar capacity of 75 gigawatts is targeted, as reported by business portal Caixin. nib

Evergrande and the intricacies of Chinese insolvency law

By Jiawei Wang, Partner at Roedl & Partner

For 20 years, a myth has prevailed in the Chinese economy: real estate prices always rise. With the construction boom, China has seen the emergence of numerous ever-growing real estate companies. Evergrande is a prime example of the robust past of China’s real estate sector. Thanks to its success story in the real estate market, the Group is now also active in various other sectors: the Group runs a professional soccer club, is an asset manager, plans to build EVs, and is active in the healthcare sector.

The Chinese real estate market is overheated

But the supposed “perpetuum mobile” of the ever-growing real estate market is just a fantasy. Market analysts have warned several times that the real estate bubble will burst. Lately, it has become apparent that the Chinese real estate market has cooled down. The rise in real estate prices in China has slowed down. In some cities, prices have even dropped. This brings Evergrande back down to earth. There are also the bitter results of the diversification strategy: Its EV is not yet running, and financially, the Guangzhou Evergrande soccer club is more resembling FC Barcelona than FC Bayern Munich. Evergrande’s debt crisis is not government-made. Instead, it originated from within Evergrande – or rather, is a market-driven result.

Several creditors are counting on the Chinese government (at the national or regional level) to intervene and put together a rescue package. In particular, private individuals who bought apartments from Evergrande are hoping that Evergrande will resume construction work and fulfill their part of the contract. To date, however, no rescue package has been announced by the state.

Is there an exit strategy?

We assess that the Chinese government will not be willing or able to offer an extensive rescue package for Evergrande. The scope of the crisis is not yet clear. The domino effect of the state using taxpayers’ money to bail out a company whose mismanagement contributed greatly to its downfall should also be considered. In the difficult Covid period, China’s central bank certainly has more pressing challenges to tackle than becoming the country’s largest real estate investor.

It is possible, however, that in individual cases, state-owned enterprises or state-managed investment funds could participate in a restructuring of the company concerned in the Evergrande Group or assume certain debts. In such cases, however, SOEs and SOE-led investment funds are regular market players like any other potential investors in a Chapter 11 case. We believe that such participation by state-owned enterprises or state-managed investment funds is most likely to occur when the interests of a larger group of private individuals would be adversely affected.

Chinese bankruptcy law

Economically, the Evergrande Group is at rock bottom. Legally, however, the picture is highly interesting: Evergrande has not yet filed for bankruptcy. This means that, by law, Evergrande is still alive.

In China, bankruptcy procedures are mainly regulated by the Enterprise Bankruptcy Law, which came into force on June 1st, 2007. As in Germany, bankruptcy procedures in China are filed with the competent court (People’s Court). In practice, the investor may encounter problems. Bankruptcy procedures in China differ greatly from procedures in Germany. The main difference between the two bankruptcy systems is that the concept of delaying bankruptcy does not yet exist in mainland China in a form comparable to that in Germany. The Chinese Enterprise Bankruptcy Law does not set a fixed deadline for when a company must file for bankruptcy. From a German perspective, bankruptcy petitions are often filed too late in China. This is the legal ground on which Evergrande currently still rests.

Moreover, it should not be overlooked that, in its current form, Evergrande’s influence extends beyond China’s borders. The Evergrande Group is listed on the Hong Kong Stock Exchange and registered in the Cayman Islands. In this case, the company must comply with the laws of the Cayman Islands, as well as the listing rules of the Hong Kong Stock Exchange. In this regard, it cannot be ruled out that a mandatory measure, such as delisting, may occur earlier than the bankruptcy filing in China.

What else can be expected?

What does Evergrande’s liquidity crisis mean for foreign creditors? Unlike Chinese creditors, foreign creditors are mostly institutional investors. Chinese bankruptcy law certainly does not exclude foreign creditors. To this end, the principle of equality applies: neither disadvantage nor advantage. Preference over Chinese creditors or consumers would be an illusion. On the other hand, nerve-racking creditor meetings are likely. It remains interesting to see, if and how Evergrande – and also the state – will overcome the crisis. “Too big to fail” does not exist in the Middle Kingdom.

Jiawei Wang LL.M. is Legal Counsel and Partner at Roedl & Partner in Stuttgart. He studied law in Shanghai and Heidelberg and is admitted to the bar of the People’s Republic of China as Lu Shi (lawyer under Chinese law). Wang represents, among others, German industrial companies in contract negotiations and legal disputes with Chinese business partners.

Sharenting

The sun shining bright outside? There’s a pleasant breeze going? Then it’s the perfect weather to hang out the washing to dry in the sun, or the kids! Don’t worry. Of course, even in China, the offspring are not actually hung out to dry. But in the colloquial language, they are. 晒娃 shài wá – a combination of 晒 shài (“to bask, to dry in the sun”) and 娃 wá (colloquially a “small child, toddler”) is the common term for sharing baby and child photos on social media. In the West, this is known as “sharenting,” a combination of the words “share” and “parenting.”

In the Middle Kingdom, the place to hand stuff out to dry is not called Facebook, but “Friends Circle” (晒朋友圈 shài péngyouquān – “to share/share in the WeChat Friends Circle/the WeChat Moments”). And there, of course, not only babies can be “sunbathed”, but also

Food (晒美食 shài měishí),
Gifts (晒礼物 shài lǐwù),
Vacation (晒旅游 shài lǚyóu),
Muscle (晒肌肉 shài jīròu),
Love (晒爱情 shài àiqíng),
Friendship (晒友谊 shài yǒuyì),
Private happiness (晒幸福 shài xìngfú) or
Selfies (晒自己 shài zìjǐ).

If the “sunbathing” of others by their constant posting is getting out of hand and “brushes” your screen while scrolling (刷屏 shuāpíng “to plaster the screen”, in Chinese literally “to brush the screen”), you can put an end to it in WeChat’s privacy settings. Here, a simple swipe gets rid of constant posts. Simply activate the corresponding option, namely 不看他/她的朋友圈 bù kàn tā de péngyouquān (“do not view his/her WeChat moments”) and the posts of the respective contact will no longer be shown.

But let’s be honest: Many of us social media sunbathers often have a poor grip on sharing impulses ourselves. WeChat has also integrated a practical sunshade for this, namely the setting 不让他/她看 bù ràng tā kàn péngyouquān (“do not show him/her the WeChat moments”). You can spare your (for example, professional) contacts your flood of (private) posts. This averts the risk of sunburns.

Verena Menzel runs the language school New Chinese in Beijing.

CHINA.TABLE EDITORIAL OFFICE

Amelie
Richter

Marcel
Grzanna

Fabian
Peltsch

Julia
Fiedler

Angela
Köckritz

Jörn
Petring

Dear reader,

In international politics, small events can grow into big problems. First, the government of Lithuania underestimated how seriously China takes even small Taiwan provocations. Now, the car industry and the German government are in an uproar. China is refusing to import parts from major supplier Continental if they contain components from Lithuania. The company manufactures electronics for smart vehicles there.

So Beijing is taking revenge on the large EU member Germany for the insult by the small EU member Lithuania. That was to be expected: China does not tolerate any governmental action that might indicate the recognition of Taiwan. Since Lithuania itself has been unimpressed by economic pressure, Beijing has taken the process to another level.

The German government now faces the difficult task of formulating an appropriate response. It cannot simply accept a trade attack on Continental. But it also does not want to rush into a hasty confrontation with China. This will be a first test of skill for the inexperienced heads of the German Ministry of Economy and the Foreign Office.

Despite all the demands for a new, assertive China policy, the goal should now also be to protect the auto industry from the escalation to a regional epic in an already difficult situation. It must use its strength for the transition to new drivetrains – collectively, in all economic areas.

Your
Finn Mayer-Kuckuk

Attack on Continental: the Lithuania dispute has arrived in Germany

What started as a trifle about a Baltic state, is turning into a full-blown trade conflict between Germany and China. The automotive supplier Continental and at least one other German company will soon no longer be allowed to export parts to China that contain primary products from Lithuania. China.Table obtained this information from industry circles. Even if the players are trying to appear calm on the surface, both economy and politics are frantically scrambling behind the scenes to find an adequate reaction. After all, this is the first time that Beijing has dragged the German automotive industry so directly into a trade dispute. The conflict was triggered by the founding of a Taiwan office in Vilnius (China.Table reported).

A crisis meeting is scheduled in Robert Habeck’s Ministry of Economics at the beginning of the week, China.Table has learned from circles in the German capital. Associations and chambers are also currently looking for the right way to criticize China without exposing themselves too much. In the course of the week, a series of letters and announcements can be expected. Officially, neither Continental nor the governments are commenting on the reports at this time. VW told China.Table that they are monitoring the situation very closely.

The German Association of the Automotive Industry (VDA) complained that politics and business were increasingly mixing. “Intergovernmental differences should be resolved through diplomatic channels and not on the backs of business,” said a VDA spokeswoman. The association is committed to international cooperation and rules-based, free trade. “In principle, every trade and investment agreement can prevent isolation and conflict.”

Mounting pressure on Lower Saxony, the SPD – and the traffic light coalition

The attack on a major German automotive supplier is now also forcing the new German government to take a stand against China. So there is also no grace period in foreign affairs for the traffic light coalition.

A supply ban on a major company like Continental is already the proving ground for dealing with a massive conflict. After all, a car largely consists of supplier parts. If one major supplier is hit, the entire automotive industry will feel it. Even if Continental only manufactures a small part of its product range in Lithuania, a shortage of these parts could further disrupt the already strained supply chains.

Targeting Continental, however, is not only an obvious commercial but also a geopolitical pick for China. The company’s headquarters are in Hanover. Stephan Weil of the SPD governs Lower Saxony. He is under pressure anyway because VW boss Herbert Diess has brought up the idea of cutting 30,000 jobs back home. Weil faces state elections next year. Although the state of Lower Saxony holds only twelve percent of VW, the state government has traditionally had some influence over the group. If China is now making a move on Continental, it could also be an attempt to influence the SPD.

Ex-Chancellor Gerhard Schroeder is part of the Lower Saxony SPD, as is former-Vice Chancellor Sigmar Gabriel. Given how the Chinese see party structures, these are the top-brass of their organization who should have considerable influence on Olaf Scholz. If pressure is put on the SPD in Lower Saxony, this could potentially influence the incumbent chancellor. From Berlin’s point of view, however, the opposite effect is at least equally possible: external pressure could fuse the federal government together. With Annalena Baerbock and Robert Habeck, Scholz already has supporters of “dialogue and toughness” at the cabinet table within decisive departments.

The European Union appears helpless

In theory, the EU would now have a key role in resolving the conflict. The German government pledged to better coordinate its policies with Brussels and its partners at the European level. But the EU Commission is proving helpless: A mechanism for responding to coercive economic measures is currently underway, but is far from ready (China.Table reported).

The situation is growing complicated with the pressure that is mounting on EU companies, European Commission Vice-President and Commissioner for Trade Valdis Dombrovskis, said on Friday. The comment was made at an event organized by the European Council on Foreign Relations, a think tank. The topic was the planned anti-coercion instrument – the very instrument that would be useful now but is still not ready. There is an “intensive outreach” to the Chinese authorities, Dombrovskis said.

The Lithuanian dispute has put the Anti-Coercion Instrument (ACI) at top of the agenda. Making progress on this instrument was also an important item on the agenda of the French EU Council Presidency, stressed Franck Riester, France’s Vice-Minister for Foreign Trade. The case of Lithuania shows very clearly that the EU must be defensive, Riester said. “We therefore support the Commission’s proposal.”

In the current situation, the options are very limited, the EU commissioner admitted. The only option is to go to the World Trade Organization – and that “takes a lot of time”. The ACI is intended to speed that up. Dombrovskis left open which measures Brussels would hypothetically take in response to the Lithuania-China case if the ACI were already in force. The application of the trading instrument would have to be specifically reviewed on a case-by-case basis. Currently, the EU is trying to react with all possible means, the EU Vice-President of the Commission said. Also, through diplomatic means. The general development of EU-China relations was certainly worrying, said Dombrovskis. This, and also developments with other third countries such as Russia, underline, according to him, the need for the EU instrument against economic coercion: “We need the proper tools to respond.”

Rules-based global trade is ‘broken’

Baltic states are already used to economic coercion, Lithuania’s Foreign Minister Gabrielius Landsbergis said at the same event. Russia also uses such methods. As far as China is concerned, however, we are facing a completely new phenomenon. What the People’s Republic is unhappy about and the measures it takes as a result are not in reasonable proportion to each other, said Landsbergis.

Tailwind for the creation of robust trade instruments is also coming from German businesses. Five years ago, he would have been against such a trade instrument, said Wolfgang Niedermark of the Federation of German Industries (BDI). But the rules-based order in world trade is “broken,” Niedermark said. “The unpleasant truth is: we now have to live with it.”

Since the EU cannot act, it is now up to Berlin to formulate a response. There is a lot at stake. Continental is an important partner for German carmakers. Import restrictions on essential parts could disrupt production, which is currently at risk of new disruptions anyway because of Omicron. Continental has business relationships with half the automotive industry. In the short term, automakers can obtain many of the necessary parts from other sources. The suppliers themselves usually maintain capacities for the same part at different locations. The car companies, in turn, purchase identical parts from several suppliers in many cases. On the other hand, however, there are enough examples of how the assembly lines of the very big names in the industry came to a standstill after a small supply disruption.

Flagship site Kaunas became a bone of contention

Continental is known to the public primarily as a tire manufacturer, but it has become one of the largest automotive suppliers in the world. To the public, it is primarily known for its tires, but it actually has become one of the world’s largest automotive suppliers. With 37 billion euros in revenue, the company is – depending on which account – the world’s third-largest automotive supplier after Bosch and Toyota partner Denso. Tires are still part of the program, but within the industry, Continental is now primarily known for electronics, which are becoming key components for smart cars.

The automotive supplier has been making strategic investments in this field in Lithuania since 2018, and production has been underway since 2019. Just this summer, the company announced plans to expand its Kaunas site once again. So far, the company has invested 90 million euros in the plant. Now, another 95 million is to be added. This will increase the number of employees from 1,000 to 1,500. The company produces electronic parts for cars and driver assistance systems there.

At the beginning of the project, no one at Continental could have guessed that the plant in Kaunas, of all places, would become a global political pawn. Lithuania has only recently approved the creation of a “Taiwan office” in Vilnius. It began operations on November 18. The dispute was sparked by its name. The Taiwanese government also maintains a contact office in Berlin. However, it is officially called the “Taipei Representative Office”, thus keeping up the pretense that only a city is represented here, not a state.

Lithuania is now also somewhat shocked at how harshly and extensively China is responding to the Taiwan office. “This shows a will to go to great lengths to influence the political course of countries,” Landsbergis said. Lithuania believed that it was not overly dependent on China because of its low trade with Asia. But now, it turns out that the Continental jobs in Kaunas are already well within Beijing’s reach. Finn Mayer-Kuckuk/Amelie Richter

German companies are social credit role models

China’s social credit system has so far had a less serious impact on German companies than was initially feared. Philipp Senff, partner at the law firm CMS in Shanghai, takes a mixed stock of the situation. Senff cannot confirm that the credit system decides over the “life or death” of companies. This is what the European Chamber of Commerce in Beijing warned about in a dramatic appeal after the announcement. At the time, a survey by the chamber showed that seven out of ten German companies in China were not yet familiar with the system, its mode of operation, and goals.

However, many have since done their homework, confirms Senff. The most tangible effect of the new system so far are so-called “black” and “red” lists. Blacklists are reserved for companies that have committed violations or crimes. For example, anyone who evades taxes or is convicted of corruption can end up on a blacklist for up to three years.

In contrast, companies that comply with all environmental regulations, for example, are placed on the red reward list. So there are:

Blacklists of companies with various violations

Redlists of companies who prove to be compliant

“A blacklisted company will have a much harder time dealing with the authorities in day-to-day practice,” explains Senff: “There is a risk of disadvantages when it comes to receiving licenses or permits. Affected companies also have to expect significantly more inspections.” They will also no longer be allowed to participate in tenders issued by the Chinese government.

Blacklists as a pillory for companies

Being blacklisted does not necessarily mean that a company may no longer operate on the market or must cease production. However, it is still a “considerable restriction”, whereby the greatest risk is losing customers. This is because the information is visible for anyone to see on the internet. This online pillory has an “educational character”, says Senff.

To avoid getting into trouble themselves or risking their reputation, many Chinese and international companies are already taking the precaution of not doing business with blacklisted companies. According to Senff, German companies should also check whether there are any blacklisted companies among their suppliers. On the other hand, it is possible that their own customers could claim damages.

German corporations seem to have prepared particularly well for the new rules. According to Vincent Brussee, a researcher at the Mercator Institute for China Studies (Merics) in Berlin, not a single German company is on a Chinese blacklist. On the contrary, companies such as BASF, Siemens, and Volkswagen are found as model students on the red lists. “They are often praised for reliably paying taxes for many years,” says Brussee. As a reward, these companies can expect fewer audits by the supervisors.

At the moment, the authorities are mainly targeting the areas of taxation, customs and the environment. However, there are clear indications that other fields will follow. Brussee and his Merics colleague Katja Drinhausen warned in a study published in March (China.Table reported) that the social credit system, in its current form, is by no means complete.

However, the rough start is deceiving. “The social credit system is part of Xi Jinping’s vision of data-driven governance,” the two researchers write. It is, they say, “a highly flexible instrument that can be applied quickly to address new policy priorities.” The Covid pandemic has proven that. On very short notice, some regions introduced new rules that could result in blacklisting for companies that violate Covid regulations. “Foreign actors need to accept the reality of a growing social credit system in China – and come up with strategies to deal with that reality,” Brussee and Drinhausen say.

There is one major problem: “There are no nationwide rules that state what is covered by the social credit system, which allows a liberal application for local authorities,” says Brussee. Since there are no clear criteria, it is at least theoretically possible that these blacklists could even be used as retaliation against foreign companies in the event of a diplomatic crisis.

However, many Chinese do not share the skepticism of Western observers. A survey conducted by the Institute for China Studies at the FU Berlin in 2018 showed that 80 percent of 2,000 Chinese were in favor of a credit system, while only one percent explicitly rejected it. After all, whether it’s food quality, business partners, hospitals, or road traffic, many Chinese know that their country is still lacking a well-developed legal system and regulatory mechanisms in many areas. Many see the social credit system as a means of monitoring and, if necessary, sanctioning compliance with rules and laws. Joern Petring/Gregor Koppenburg

Very low voter turnout in Hong Kong

Turnout in Hong Kong’s general election on Sunday fell dramatically compared to 2016. By 9:30 PM local time, an hour before polling stations closed, less than 30 percent of citizens had cast their ballots. Of the almost 4.5 million eligible voters, less than a third had decided to vote. In the 2016 parliamentary elections, the figure was still just under 60 percent.

Authorities only allowed candidates to run in the election who had passed a check and were deemed “patriotic” enough (China.Table reported), a vague category introduced at Beijing’s behest. The low chances of receiving such a rating was probably also a reason for the low number of pro-democratic candidates.

Only 20 of the 90 seats in the new parliament will be chosen by vote. The rest will be appointed by a committee composed of cadres loyal to Beijing. The low turnout can be interpreted as a sign of protest against these conditions as well as the harsh National Security Law imposed by Beijing.

Hong Kong’s government had previously tried a lot to increase voter turnout. There were free bus tickets to the polling stations and on Saturday, authorities sent text messages to encourage Hong Kong’s citizens to vote, Reuters reports. nib

Prague also plans to stand up to China

The newly elected Czech government is taking a more proactive approach toward Beijing than its predecessor: Prime Minister Petr Fiala chose China-critic Jan Lipavský as foreign minister for his cabinet. The 36-year-old from the Czech Pirate Party had already called the People’s Republic a “danger to the Czech Republic” before taking office, according to media reports. He stressed that his country’s foreign policy must “properly reflect” this threat. The Czech Republic has abandoned some of its principles in recent negotiations with Russia and China, he added. In late October, he pledged to “pursue a renewed human rights tradition,” and vowed “strong cooperation at the EU and NATO level.”

Lipavský also wants to deepen relations with Taiwan. Taipei is “an important economic partner of the Czech Republic … many times more important than the People’s Republic of China,” the new foreign minister reportedly said in October. Czech leader Miloš Zeman had reservations about Lipavský as foreign minister but approved his appointment on Friday. Zeman is considered more friendly towards Beijing and has always promoted the economic benefits of cooperation with China. The diplomatic relations between the Czech Republic and China had recently become strained (China.Table reported). ari

China builds 1,000 schools in Iraq

China and Iraq have signed an agreement about the construction of 1,000 new schools by two Chinese contractors in the Middle Eastern state. Construction company Power Construction Corporation of China (Powerchina) is to build 679 of the schools, with the rest to be built by Sino Tech, according to the South China Morning Post. The construction project is part of an Iraqi project to build 7,000 schools to repair damage from years of war. According to UNICEF, 3.2 million school-age children lack access to education, SCMP said. China’s involvement in the Middle East has grown steadily in recent years. The People’s Republic is now the largest importer of Iraqi oil. China is currently in talks to construct more infrastructure, according to the SCMP. Among them, contract for power lines, data cables, and railroad lines nib

EU introduces anti-dumping duties on wind turbines

With immediate effect, the EU will impose countervailing duties on imports of steel towers for wind turbines from China. According to the EU Commission, a review had shown that Chinese suppliers were importing the towers at dumping prices. The duties range from 7.4 to 19.2 percent, depending on the manufacturer of the steel towers. They will be imposed for an initial period of five years. The aim is to eliminate the economic damage for European manufacturers of steel towers through dumping prices, the Brussels-based authority announced.

According to the EU investigation, the market share of Chinese fabricators had risen to 34 percent in the summer of 2019, compared to just 25 percent in 2017. Chinese manufacturers had sold their steel towers at a discount, according to the report. The Chinese share of EU imports of steel towers for wind turbines is around 80 percent. nib

Production of wind power grows fastest

In the first eleven months of this year, China generated 14 percent more power from solar energy and 29 percent more power from wind energy compared to the same period last year. However, power production from coal and gas also rose by about 10 percent. The increase in nuclear energy was about 12 percent. Power generation from hydropower decreased by two percent, figures from the National Bureau of Statistics show. However, part of the increase in coal-fired power and renewables can be attributed to statistical effects. In the same period last year, power demand was curtailed due to the Covid pandemic.

At the same time, there are increasing signs that the People’s Republic will miss its target for solar energy expansion this year (China.Table reported). The Chinese Photovoltaic Industry Association has announced that solar power generation capacity will increase by 45 to 55 gigawatts this year. 10 gigawatts less than initially projected. The underlying reasons are rising raw material prices. For the next year, an increase in solar capacity of 75 gigawatts is targeted, as reported by business portal Caixin. nib

Evergrande and the intricacies of Chinese insolvency law

By Jiawei Wang, Partner at Roedl & Partner

For 20 years, a myth has prevailed in the Chinese economy: real estate prices always rise. With the construction boom, China has seen the emergence of numerous ever-growing real estate companies. Evergrande is a prime example of the robust past of China’s real estate sector. Thanks to its success story in the real estate market, the Group is now also active in various other sectors: the Group runs a professional soccer club, is an asset manager, plans to build EVs, and is active in the healthcare sector.

The Chinese real estate market is overheated

But the supposed “perpetuum mobile” of the ever-growing real estate market is just a fantasy. Market analysts have warned several times that the real estate bubble will burst. Lately, it has become apparent that the Chinese real estate market has cooled down. The rise in real estate prices in China has slowed down. In some cities, prices have even dropped. This brings Evergrande back down to earth. There are also the bitter results of the diversification strategy: Its EV is not yet running, and financially, the Guangzhou Evergrande soccer club is more resembling FC Barcelona than FC Bayern Munich. Evergrande’s debt crisis is not government-made. Instead, it originated from within Evergrande – or rather, is a market-driven result.

Several creditors are counting on the Chinese government (at the national or regional level) to intervene and put together a rescue package. In particular, private individuals who bought apartments from Evergrande are hoping that Evergrande will resume construction work and fulfill their part of the contract. To date, however, no rescue package has been announced by the state.

Is there an exit strategy?

We assess that the Chinese government will not be willing or able to offer an extensive rescue package for Evergrande. The scope of the crisis is not yet clear. The domino effect of the state using taxpayers’ money to bail out a company whose mismanagement contributed greatly to its downfall should also be considered. In the difficult Covid period, China’s central bank certainly has more pressing challenges to tackle than becoming the country’s largest real estate investor.

It is possible, however, that in individual cases, state-owned enterprises or state-managed investment funds could participate in a restructuring of the company concerned in the Evergrande Group or assume certain debts. In such cases, however, SOEs and SOE-led investment funds are regular market players like any other potential investors in a Chapter 11 case. We believe that such participation by state-owned enterprises or state-managed investment funds is most likely to occur when the interests of a larger group of private individuals would be adversely affected.

Chinese bankruptcy law

Economically, the Evergrande Group is at rock bottom. Legally, however, the picture is highly interesting: Evergrande has not yet filed for bankruptcy. This means that, by law, Evergrande is still alive.

In China, bankruptcy procedures are mainly regulated by the Enterprise Bankruptcy Law, which came into force on June 1st, 2007. As in Germany, bankruptcy procedures in China are filed with the competent court (People’s Court). In practice, the investor may encounter problems. Bankruptcy procedures in China differ greatly from procedures in Germany. The main difference between the two bankruptcy systems is that the concept of delaying bankruptcy does not yet exist in mainland China in a form comparable to that in Germany. The Chinese Enterprise Bankruptcy Law does not set a fixed deadline for when a company must file for bankruptcy. From a German perspective, bankruptcy petitions are often filed too late in China. This is the legal ground on which Evergrande currently still rests.

Moreover, it should not be overlooked that, in its current form, Evergrande’s influence extends beyond China’s borders. The Evergrande Group is listed on the Hong Kong Stock Exchange and registered in the Cayman Islands. In this case, the company must comply with the laws of the Cayman Islands, as well as the listing rules of the Hong Kong Stock Exchange. In this regard, it cannot be ruled out that a mandatory measure, such as delisting, may occur earlier than the bankruptcy filing in China.

What else can be expected?

What does Evergrande’s liquidity crisis mean for foreign creditors? Unlike Chinese creditors, foreign creditors are mostly institutional investors. Chinese bankruptcy law certainly does not exclude foreign creditors. To this end, the principle of equality applies: neither disadvantage nor advantage. Preference over Chinese creditors or consumers would be an illusion. On the other hand, nerve-racking creditor meetings are likely. It remains interesting to see, if and how Evergrande – and also the state – will overcome the crisis. “Too big to fail” does not exist in the Middle Kingdom.

Jiawei Wang LL.M. is Legal Counsel and Partner at Roedl & Partner in Stuttgart. He studied law in Shanghai and Heidelberg and is admitted to the bar of the People’s Republic of China as Lu Shi (lawyer under Chinese law). Wang represents, among others, German industrial companies in contract negotiations and legal disputes with Chinese business partners.

Sharenting

The sun shining bright outside? There’s a pleasant breeze going? Then it’s the perfect weather to hang out the washing to dry in the sun, or the kids! Don’t worry. Of course, even in China, the offspring are not actually hung out to dry. But in the colloquial language, they are. 晒娃 shài wá – a combination of 晒 shài (“to bask, to dry in the sun”) and 娃 wá (colloquially a “small child, toddler”) is the common term for sharing baby and child photos on social media. In the West, this is known as “sharenting,” a combination of the words “share” and “parenting.”

In the Middle Kingdom, the place to hand stuff out to dry is not called Facebook, but “Friends Circle” (晒朋友圈 shài péngyouquān – “to share/share in the WeChat Friends Circle/the WeChat Moments”). And there, of course, not only babies can be “sunbathed”, but also

Food (晒美食 shài měishí),
Gifts (晒礼物 shài lǐwù),
Vacation (晒旅游 shài lǚyóu),
Muscle (晒肌肉 shài jīròu),
Love (晒爱情 shài àiqíng),
Friendship (晒友谊 shài yǒuyì),
Private happiness (晒幸福 shài xìngfú) or
Selfies (晒自己 shài zìjǐ).

If the “sunbathing” of others by their constant posting is getting out of hand and “brushes” your screen while scrolling (刷屏 shuāpíng “to plaster the screen”, in Chinese literally “to brush the screen”), you can put an end to it in WeChat’s privacy settings. Here, a simple swipe gets rid of constant posts. Simply activate the corresponding option, namely 不看他/她的朋友圈 bù kàn tā de péngyouquān (“do not view his/her WeChat moments”) and the posts of the respective contact will no longer be shown.

But let’s be honest: Many of us social media sunbathers often have a poor grip on sharing impulses ourselves. WeChat has also integrated a practical sunshade for this, namely the setting 不让他/她看 bù ràng tā kàn péngyouquān (“do not show him/her the WeChat moments”). You can spare your (for example, professional) contacts your flood of (private) posts. This averts the risk of sunburns.

Verena Menzel runs the language school New Chinese in Beijing.

CHINA.TABLE EDITORIAL OFFICE

Amelie
Richter

Marcel
Grzanna

Fabian
Peltsch

Julia
Fiedler

Angela
Köckritz

Jörn
Petring

Feature

Attack on Continental: the Lithuania dispute has arrived in Germany

Mounting pressure on Lower Saxony, the SPD – and the traffic light coalition

The European Union appears helpless

Rules-based global trade is ‘broken’

Flagship site Kaunas became a bone of contention

German companies are social credit role models

Blacklists as a pillory for companies

Social credit system not yet completed

News

Very low voter turnout in Hong Kong

Prague also plans to stand up to China

China builds 1,000 schools in Iraq

EU introduces anti-dumping duties on wind turbines

Production of wind power grows fastest

Opinion

Evergrande and the intricacies of Chinese insolvency law

The Chinese real estate market is overheated

Is there an exit strategy?

Chinese bankruptcy law

What else can be expected?

Executive Moves

So To Speak

Sharenting

China.Table Editors

CHINA.TABLE EDITORIAL OFFICE

Feature

Attack on Continental: the Lithuania dispute has arrived in Germany

Mounting pressure on Lower Saxony, the SPD – and the traffic light coalition

The European Union appears helpless

Rules-based global trade is ‘broken’

Flagship site Kaunas became a bone of contention

German companies are social credit role models

Blacklists as a pillory for companies

Social credit system not yet completed

News

Very low voter turnout in Hong Kong

Prague also plans to stand up to China

China builds 1,000 schools in Iraq

EU introduces anti-dumping duties on wind turbines

Production of wind power grows fastest

Opinion

Evergrande and the intricacies of Chinese insolvency law

The Chinese real estate market is overheated

Is there an exit strategy?

Chinese bankruptcy law

What else can be expected?

Executive Moves

So To Speak

Sharenting

China.Table Editors

CHINA.TABLE EDITORIAL OFFICE

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