No. 36 | The Chinese Economy Under the Friction of Sino-US Relations
On June 23, 2019, the Academic Center for Chinese Economic Practice and Thinking (ACCEPT) held the 36th Tsinghua University Forum on China and the World Economy with the theme of “The Chinese Economy Under the Friction of Sino-US Relations.”
Attendees of the forum included: Gao Shanwen, Chief Economist of Essence Securities; Guan Tao, former Director of the Balance of Payments Department at the State Administration of Foreign Exchange; Wei Shaojun, Dean of the Institute of Microelectronics at Tsinghua University; Yuan Gangming, research fellow of ACCEPT; Timothy Stratford, former U.S. Trade Representative, and Neil Schwartz, research fellow of the Center for China in the World Economy (CCWE) at Tsinghua University.
As the first order of business, Li Daokui, the Director of ACCEPT, released a macroeconomic forecast report entitled “Ushering in a New Round of Reform and Opening-up, Boosting Confidence and the Vitality of Development, and Combating the Cold Current of De-globalization.” The report indicates that Chinese economy has experienced a rarely seen downward pressure since 2008, mainly caused by the lack of confidence of domestic investors rather than the impact imposed by Sino-US trade frictions through channels of foreign trade and investment. In the first half of 2019, passenger car sales declined by 15%, whereas overall consumption growth declined by 1.5%. Private investment in fixed assets and investment in the manufacturing sector declined, with the latter falling to a historic low of 2.7%. The stock market rose in general, but there were relatively huge fluctuations. Statistics on the real estate sector showed an artificially inflated number, whereas actual investment in this sector also declined. Monetary policies were generally easing within a reasonable range, and the leverage ratio increased slightly. As long as local government debts were managed well, risks were basically controllable. The rhythm of fiscal policies accelerated, and tax reductions were intensified. However, due to institutional constraints, the actual use of funds was suboptimal and failed to achieve expected effects.
However, Li Daokui believes that despite the downward pressure faced by the Chinese economy in the short term, the economy still has great potential in the future. In recent years, China has repeatedly reached new heights in scientific and technological innovation, and further policies should be introduced to unleash vitality. In terms of industrial upgrading, there is huge potential for renewing and renovating traditional industries, including the steel industry, which could bring about a new round of economic growth. In the long run, the biggest growth point of the Chinese economy lies in the expansion of the middle-income population. According to the report, it is entirely probable for China to double the current number of middle-income citizens from 400 million to 800 million within the next 15 years. This is a powerful guarantee for China’s growth and will constitute a major achievement of development for humankind.
Li Daokui recommended that the state should introduce several substantive policies to usher in a new round of reform and opening up, to boost confidence and enhance vitality, and to combat “de-globalization” as well as moves to contain China’s development. In terms of reform, China can greatly increase national fiscal revenue and provide a solid foundation for reducing taxes in favor of enterprises by raising the rate of return on state-owned assets and carrying out mixed-ownership reform. In the international arena, China should further encourage international trade and transnational investment, and in particular, China should further open domestic markets to developed countries friendly to China, such as the European Union, Japan, and the United Kingdom—lowering their admission criteria to the Chinese market so as to counter the pressure imposed by the United States.
Gao Shanwen expressed that the stock market and foreign exchange market have fully absorbed the worst-case scenario of trade tensions. Therefore, even if trade talks fail to deliver expected outcomes, this will impose a limited impact on the market. On the other hand, if trade talks deliver an outcome that exceeds expectations, this will have an upward impact on the market. In terms of the Baoshang Bank event, Gao Shanwen pointed out that although relevant departments viewed risks as controllable, there was still anxiety among practitioners in the banking market. Small and medium-sized financial institutions account for a quarter of China’s aggregate financing to the real economy. If risks exceed expectations, lurking peril will loom large. Gao Shanwen pointed out that China’s domestic demand decelerated in 2019, partly due to the impact of trade frictions but mainly due to the government’s deleveraging policy since last year, which led to the release and continuation of tightening effects. At present, the internal and external environments of the Chinese economy are rather complex, and thus require practical plans for carrying out a new round of high-level reform to cope with current circumstances.
Guan Tao pointed out that the combined effects of weak external demand and insufficient domestic demand led to a slowdown in imports. The current trade surplus was not caused by the increase in export competitiveness, but rather reflects the downward pressure faced by the economy in general. China now advocates pursuing high-quality growth instead of sheer growth speed and strives to maintain employment and financial stability. In terms of foreign investment, the U.S. government has tightened restrictions on Chinese investment in the United States in recent years, and policy uncertainty has led to a rapid decline in such investment. In the long run, the share of China’s investment in mature markets will be reduced, and there will be a steady increase in investment in emerging markets, especially those along the “Belt and Road.” When it comes to the view that “trade surplus has a supporting effect on the stability of the RMB exchange rate,” Guan Tao remarked that if the expansion of surplus was derived from insufficient domestic demand and economic slowdown, it would actually suppress market expectations. In fact, such surplus would drag the RMB exchange rate down. The relative strength of the forces at play is dependent on the market.
Wei Shaojun said that although China could achieve self-sufficient production of 25% of its mobile phone chips, it still relies heavily on imports in areas such as computers, servers, high-end communication chips, and processor chips. In 2018, the value of all the semiconductor products imported to China amounted to $312 billion, accounting for two-thirds of the world’s total, but about half of these were re-exported in whole machine production. At present, there are few products related to the semiconductor industry involved in Sino-US tariffs, but if the situation further escalates, the semiconductor industry will inevitably face consequences. Wei Shaojun believes that the current situation has exceeded the expectations of the U.S. Semiconductor Industry Association (SIA), which has turned to lobbying Donald Trump and the U.S. Department of Commerce to oppose further tax increases and thus avoid losses on both sides. The Internet and mobile communications industries have provided a strong impetus for global economic growth in the past, and the globalized supply chain constitutes the basic condition for economic prosperity. If the supply is interrupted due to the escalation of frictions between China and the United States, both sides will be faced with the issue of supply chain reorganization—a lose-lose situation. In particular, Wei Shaojun pointed out that there are many semiconductor industry players in China that could meet the relevant production needs if required, but it would take time to make use of their engineering advantages to grow bigger and stronger.
Timothy Stratford holds that although the U.S. government believes Chinese enterprises have “harmed” the interests of U.S. enterprises under different game rules, it is not entitled to request that China should adjust its mechanism and forsake its own industrial policies. From his perspective, there are two major difficulties in the current trade talks: 1) Though both sides have reached a consensus on 90% of the issues, the remaining 10% are spots where breakthroughs are hard to achieve; and 2) Frictions in other areas lead to confusion and uncertainty in trade talks. It is illogical for Mr. Trump to attempt to address other issues (such as national security) from the entry point of trade talks. In his remarks, Mr. Stratford suggested that both the Chinese and the U.S. governments explain their economic policies and communication styles to one another in a detailed and clear manner, and treat varying demands in different areas separately.
From the perspective of Yuan Gangming, the Chinese economy is faced with downward pressure caused by excessive tightening of monetary policy, and China must address the relationship between the money supply and the leverage ratio through reform. In the first three months of 2019, monetary policy was rather relaxed, and the economic situation improved significantly as a result. However, monetary policy tightened after April, causing all economic indicators to decline accordingly. In Yuan Gangming’s view, the lack of funds and policy support for financing in the manufacturing industry and private enterprises, weakening trends in investment, and the slowdown in development are more prominent issues in the current economic situation. The overheated real estate market has contributed to the rise of the steel and coal industries, and although this has helped address the financial difficulties of the country, it has also caused weakness in the manufacturing industry, among others, and has ultimately aggravated the downward pressure faced by the economy. Yuan Gangming pointed out that some local governments and stakeholders believe that China must support state-owned steel and coal enterprises to boost national economic growth, but they have neglected the contribution made by private enterprises since reform and opening-up. As China seeks to sail against the current and advance reform and opening up, it is crucial to consider critical questions such as the relationship between traditional industries and emerging ones as well as the relationship between the government-led, state-owned economy and the private economy, bursting with potential.
As for the question of whether Donald Trump can succeed in his re-election campaign, Neil Schwartz believes that there are two key factors, namely, the U.S. economic situation and the Democratic Party’s competitors. If the U.S. economy weakens in the future and Joe Biden is elected as a Democratic candidate, Trump’s chances of re-election will decline. According to relevant surveys, Biden leads by 13% in one-to-one polls. Compared with Trump’s unpredictable behavior, he has a rather rational and neutral economic style and would adopt a more traditional and formal way of communicating with China. Neil Schwartz believes that the U.S. elite and Wall Street are friendly to China, and the western part of the U.S. led by California would also like to maintain cooperation. On the contrary, people engaged in the manufacturing industry in the south-central U.S. believe themselves to have suffered from losses and threats to employment due to U.S. trade with China.
