Aurelia Butler

Following are highlights of the paper and statements by German leaders. GERMANY’S ASSESSMENT OF CHINA * China is trying to create economic and technological dependencies in order to achieve political goals and interests* China is increasingly assertive in its attempts to change the rules-based international order, with consequences for global security* China is an indispensable partner for global challenges like climate change and pandemics* China has changed, requiring a change in Germany’s way of dealing with China* China’s actions have led to growing international rivalry and competition* Germany will show solidarity with EU member states facing economic or other pressure * Germany to relaunch human rights and rule of law dialogue with China* China puts its interests above the United Nations’ multilateral principles and is trying to alter UN policies and programmes with its own initiativesTAIWAN * Germany wants to expand its close relations with Taiwan while continuing to adhere to the One-China policy* Change of the status quo in the Taiwan Strait can only be achieved through consensus and peaceful means* Germany supports Taiwan’s participation in international organisations* Situation in Taiwan Strait has exposed supply chain vulnerabilities, especially when it comes to chips TRADE AND INVESTMENT * China increasingly pursuing political goals by economic means, including creating dependencies and granting or withdrawing economic advantages* Chinese direct investments pose a particular challenge as China fuses civilian and military policy * German export guarantees will be checked against risks of sensitive technology transfers, including sensitive dual use technology, and whether they strengthen dependencies* Chinese investments must not pose risk to German security for example through sensitive technologies* Germany plans to amend investment audit law taking into account security interests* Germany will further develop list of goods subject to export controls in light of new technology developments such as in cyber security and surveillance* Germany advocates close coordination in the EU and increased cooperation in the area of export controls between the G7 and other partners* Germany acknowledges possible need for new measures to counter security risks of investments in China* Germany will create an umbrella law determining which sectors, companies and facilities constitute critical infrastructures* Germany will publish list of critical components this year* Germany will check the efficacy of current rules on critical components and potentially adjust relevant laws* Germany wants to cooperate with China on WTO reform, but also prepared to respond if there is a continued lack of progress* Germany is pushing China to forfeit its WTO designation as a developing country as it is the second biggest economy in the world* Germany will consistently demand comprehensive structural improvements in the market environment in China CLIMATE CHANGE AND ENVIRONMENT * Germany to conduct intensive dialogue with China on coal phase-out* China must not use international cooperation on climate issues as means of exerting pressure to further its interests in other areas* Germany sees need to push China towards more ambitious targets for reducing greenhouse gas emissions* Germany to conduct stringent reviews on investment guarantees depending on Chinese compliance with sustainability, environmental, labour and social standardsDEFENCE AND SECURITY* Germany is taking countermeasures on a national and European level against trans-national repression, especially on the issue of Chinese overseas police stations* Cybersecurity threats are increasing, including from China, and increasingly these threats are impacting European government networks* German government is advising companies and research institutes on cyber and hybrid security risks due to Chinese espionage* Germany urges China to announce military exercises ahead of time and invite international observers to avoid misunderstandings* Germany will expand security and military cooperation with close partners in the Indo-Pacific, including through navy deployments and multinational exercises* China is strengthening its presence in the Arctic and Antarctica, including its military presence, but Germany wants to keep these as conflict-free areasRUSSIA AND UKRAINE * Closer cooperation between China and Russia on defence would impact Germany’s relations with Beijing * China is not credible in its defence of Ukrainian sovereignty and territorial integrity. Germany is pushing for a more clear positionSTATEMENTSGERMAN CHANCELLOR OLAF SCHOLZ”The goal is not to decouple. But we want to avoid critical dependencies in the future.” GERMAN FOREIGN MINISTER ANNALENA BAERBOCK “We want to diversify but we want to further expand and make use of cooperation with China at the same time. This applies to our economic contacts because we neither want to hamper China’s economic development nor our own.””We will protect the European economy against unfair competition by developing new and above all European tools and then jointly using them – for example the instrument against coercive measures, in which we can if necessary protect European companies against attempts to coerce by third countries, if need be including with customs or trade restrictions.””We cannot be indifferent on the tension surrounding Taiwan. A military escalation would also be a danger to millions of people, worldwide, meaning also for us.” More

In its latest report, the Institute of Grocery Distribution (IGD), whose forecasts on UK food inflation have proved to be broadly accurate, cautioned it did not expect sales on a volume basis to significantly recover until next year.“We predict that food price inflation will slowly and steadily decline over the remainder of 2023, reaching approximately 9% by December,” James Walton, IGD’s chief economist, said.”Although food price inflation appears to have peaked in March, widespread price cuts are unlikely at this time and a depressed volume of sales is expected until March 2024.”Prime Minister Rishi Sunak’s pledge to halve overall inflation in 2023, before a probable 2024 election, is under threat from persistently high food inflation, which has added to strain on household budgets already hit by interest rate rises.In May, the Bank of England forecast overall inflation would drop to just over 5% by the end of this year and below its 2% target by early 2025, but some BoE policymakers have doubts about the models used to make these forecasts and fear inflation will be higher.Food and drink inflation was 18.3% in May according to the most recent official data, and 14.6% in June according to the most recent industry data.All of Britain’s major grocers have recently cut the prices of some staple products, such as milk, butter and bread.However, both market leader Tesco (OTC:TSCDY) and No. 2 Sainsbury’s have cautioned that a permanent rise in labour costs will mitigate the easing of commodity and energy pressures.The IGD’s Walton also highlighted a shortage of labour in the UK food and consumer goods industry.“Labour pressures may be the industry’s Achilles’ heel, driving costs while undermining capacity,” he said.The IGD report also highlighted increased pressure on those with the lowest incomes, with 54% reducing the amount of food and drink consumed at home compared to 36% with higher incomes.EXPLAINER-Why is UK food inflation so stubbornly high? More

Rishi Sunak on Thursday accepted in full the recommendations of independent pay review bodies to give key public sector workers wage rises of about 6.5 per cent, telling trade unions to call off strikes now.The prime minister agreed the awards for 2023-24 after talks with chancellor Jeremy Hunt, when he was reassured they could be funded without increased government borrowing that might have fuelled inflation.“Today’s offer is final,” Sunak told a press conference in Downing Street. “There will be no more talks on pay. No amount of strikes will change this decision.”Sunak received an immediate boost when four education unions backed the government’s proposed 6.5 per cent pay increase for teachers, saying they would recommend the deal to members and call off strikes.Under the review bodies’ recommendations accepted by ministers, police officers will receive a 7 per cent pay increase in 2023-24, teachers 6.5 per cent, senior NHS staff 6 per cent, junior doctors 6 per cent plus a one-off payment, and armed forces 5 per cent plus a one-off payment.More than 1mn NHS staff, including nurses and ambulance crews, have already been offered a 5 per cent wage increase by the government for 2023-24, along with a one-off payment for last year. The prime minister was fully aware of the political risks of fuelling public sector workers’ anger over pay — potentially aggravating a wave of strikes — if he had rejected the review bodies’ recommendations.In a joint statement with Sunak, the NEU, NASUWT, NAHT and ASCL teaching unions said they would recommend the government’s pay offer to members. “This deal will allow teachers and school leaders to call off strike action and resume normal relations with government,” they said.He said the pay offers could be funded without hitting frontline services and urged all public sector workers — including striking junior doctors — to call off their strikes now.In a direct challenge to the British Medical Association to call off strikes by junior doctors in England, Sunak said: “How can it be right to continue disruptive industrial action, not least because these strikes lead to tens of thousands of appointments being cancelled — every single day.”The prime minister has been grappling with the biggest series of public sector strikes in the UK in decades — with NHS workers, teachers and civil servants all demanding higher pay amid the cost of living crisis.Junior doctors who are members of the BMA began an unprecedented five day strike on Thursday. Teaching unions have been holding strike ballots that might result in widespread closures of schools in the autumn.Sunak said that Whitehall departments will have to find efficiency savings and reprioritise spending to help cover the pay increases.This reflects how the wage rises are above the 3.5 per cent originally proposed by the government.But Sunak also announced a plan to raise an extra £1bn by increasing visa fees and a NHS surcharge for legal migrants coming to Britain.Public sector pay could now start to keep up with rising prices. Consensus Economics, which averages leading forecasters, expects consumer price inflation to average 7.3 per cent in 2023 and 3.2 per cent in 2024.Sunak wants to halve inflation to about 5 per cent by the end of this year. It currently stands at 8.7 per cent. More

LONDON (Reuters) -Britain’s public debt could surge to more than 300% of annual economic output by the 2070s, up from about 100% now, and the government is not taking measures to make big changes in the short term, the government’s budget forecasters said.The Office for Budget Responsibility said challenges from an ageing society, climate change and geopolitical tensions were already posing big fiscal risks.But Britain’s plans for stabilising and reducing debt as a share of gross domestic product were modest by historical and international standards, the OBR said in an annual report on the long-term outlook for public finances published on Thursday.Finance minister Jeremy Hunt has set a target of getting underlying debt to fall in five years’ time, something he was only narrowly on course to hit at the time of his budget statement in March.Since then, borrowing costs in financial markets have risen sharply, making Hunt’s target all the harder to hit.The OBR said British government borrowing costs have risen more than in any other Group of Seven (G7) economy and they had been more volatile than at any time in the past 40 years.”While other governments also face rising interest rates on debts close to or in excess of 100% of GDP, several factors make the UK’s public debt position more vulnerable to some shocks than in the past or in other advanced economies,” it said.Britain had the shortest average maturity on its debt on record, the highest proportion of inflation-linked debt of any major advanced economy and more of its debt was held by private foreign investors than most other G7 countries, the OBR said.On the long-term challenges, the OBR said a “baby boom” wave of people going into retirement would push the cost of Britain’s state pensions by 23 billion pounds ($30 billion) a year by the 2027/28 fiscal year compared with the start of the decade.A rising take-up of electric vehicles was expected to cost 13 billion pounds a year in lost fuel duty revenues by 2030 and public investment needed to support decarbonisation of the economy could hit 17 billion pounds a year by then.The OBR also said the government’s hopes of increasing defence spending to 2.5% of GDP from 2% now had a potential cost of 13 billion pounds a year.($1 = 0.7651 pounds) More

The German government has adopted its first ever China strategy with a focus on “de-risking” its relationship with its largest trading partner, which it says is increasingly emerging as a “systemic rival” to the west.“Germany has changed and so we have to change our China policy too,” said foreign minister Annalena Baerbock. Beijing had become “more repressive internally and more aggressive externally”, she added, and while it remained a partner, its role as “systemic rival” was beginning to “dominate”. The milestone strategy, which was long delayed by disagreements between Olaf Scholz’s chancellery and Baerbock’s foreign ministry, rejects the notion of “decoupling” from China but stresses the need for Germany to “de-risk” — that is, diversify its supply chains and export markets away from the country and so reduce its vulnerability to external shocks. The EU labelled China a systemic rival in 2019.In particular, the 64-page document aims to make German companies more aware of the risks they face in doing business with China and make clear that Berlin will not bail them out if they get into trouble.“Companies that are dependent on the Chinese market to a large degree will in future have to bear more of the financial risk themselves,” Baerbock said.She said the responsibility for “risky corporate decisions” must become clearer. “The approach of trusting the invisible hand of the market in good times and demanding the strong arm of the state in times of crisis doesn’t work in the long run,” she said. “Even one of the strongest economies in the world can’t stem that.”

Chancellor Olaf Scholz, left, with Chinese president Xi Jinping in Beijing last November. The relationship between the two countries has long been seen as a pillar of Germany’s economic success © Kay Nietfeld/Reuters

Noah Barkin, a Europe-China expert at the US-based research firm Rhodium Group, said the strategy sent an important signal.“There was a lot of confusion about where Germany stood,” he said. “Now Berlin has made clear that China is no longer just seen as a lucrative one-way economic bet but that it poses threats to the west on multiple levels.”Since Russia’s full-scale invasion of Ukraine, which revealed how reliant Germany had become on Russian gas supplies, Berlin has sought to reduce its dependence on other problematic countries, particularly China.China is Germany’s largest trading partner, with the volume of bilateral trade reaching a record €300bn last year. The relationship was long seen as a pillar of Germany’s economic success and a model of globalisation in practice. Former chancellor Angela Merkel’s frequent trips to Beijing, often accompanied by a huge entourage of German industrial bosses, symbolised the strength of the relationship, one not particularly encumbered by concerns about Chinese human rights abuses in places such as Xinjiang and Hong Kong.But Germany’s misgivings have gradually grown since the ascent of President Xi Jinping, China’s most powerful leader since Mao Zedong, who this year started an unprecedented third term. The country’s increasing authoritarianism, its crackdown on civil rights and ethnic minorities, its sabre-rattling over Taiwan and aggressive posture in the South China Sea have forced Berlin to undertake a fundamental rethink of the relationship, one that accelerated when the China-sceptic Greens entered government in late 2021. The strategy notes that China is pursuing its own interests “far more assertively and is attempting in various ways to reshape the existing rules‑ based international order”. “This is having an impact on European and global security,” it adds.Germany is particularly alarmed at the prospect of a Chinese invasion of Taiwan, a move that would throw global supply chains into disarray and potentially shut off the Chinese market to German companies.Baerbock noted that a military escalation over Taiwan would represent a “danger for millions of people all over the world and for us, too”, noting that half of all the globe’s container traffic moved through the Taiwan Strait.Tensions over Taiwan have come at a time of growing doubts about German companies’ future prospects in the Chinese market, as Beijing pursues plans for global technological dominance.Even companies such as Volkswagen that have been present in China since the late 1980s have reason to be worried. China is still VW’s largest market, accounting for 50 per cent of its total sales in 2021. But it has fallen down the sales rankings when it comes to electric vehicles, a market that is dominated by local producers such as BYD, Chery and Nio.German companies in China are also increasingly concerned about the operating environment, pointing to moves such as a new counter-espionage law that they say hugely increases the risks of doing business there.

The strategy also insists that China remains a partner for Europe and Germany, particularly on climate change. Baerbock said Germany wanted to “expand our co-operation with China — because we need it”. She noted that while China produced a third of global CO₂ emissions, it was now generating more solar energy than the rest of the world put together.That the German government was able to agree on a common strategy is in itself a huge achievement. Scholz’s three-party coalition between Social Democrats, Greens and Liberals is divided on how it should deal with Beijing, with Baerbock’s Greens insisting on a tougher course and Scholz’s SPD advocating a more cautious approach.Differences over China have occasionally caused open cabinet rifts. Scholz supported Chinese state-owned shipping conglomerate Cosco’s investment in a container terminal in Hamburg port, triggering a damaging row with the Greens who opposed the deal on grounds of national security. More