China economy

As trade war with United States rages on, China looks inward to keep economy rolling

Field visits by President Xi Jinping and Premier Li Keqiang suggest the country’s leaders are keen to boost the domestic economy

PUBLISHED : Monday, 01 October, 2018, 11:48am
UPDATED : Monday, 01 October, 2018, 10:43pm

With no sign of a let-up in the trade war with the United States, China’s top leaders are looking inward for new growth drivers in a move that could affect the nation’s economic trajectory in the years ahead.

While Beijing is keen to attract foreign investors by trumpeting its efforts at “opening up”, it is also preparing for the possibility that growing international hostility might make it tougher to sell products to and acquire advanced technology from the US and other wealthy nations.

In a white paper issued late last month, China said it planned to revitalise its domestic market by making its rust belt and vast countryside more self-sufficient.

In his first public statement on what China should do to cope with growing hostility in the outside world, Chinese President Xi Jinping said last week that rising unilateralism and protectionism was forcing China to become more self-reliant, and “it’s not a bad thing”.

Xi: Trade war pushes China to rely on itself and ‘that’s not a bad thing’

Xi made the assessment during a visit to a state-owned factory in the rust-belt region of northeast China, which borders Russia and was once a base of the planned economy but is now the sick man of the economy.

During his visit, Xi said the government would continue to back state-owned enterprises (SOE) to make them “bigger and stronger”, despite complaints from Washington and Brussels that they distort market competition.

According to Chinese government statements, academics and analysts, the message that China must “eventually rely on itself” suggests the emergence of a more inward-looking strategy, which in turn is a product of the perception that the US is trying to thwart China’s rise and that the trade war is just an element of that.

Kong Dan, a “princeling” in the ruling Communist Party and former chairman of state-owned conglomerate Citic Group, said last month that the trade dispute between China and the US was “an argument about trade on the surface” but ultimately about “paths”, as in Washington’s market-led liberal democracy and Beijing’s state-led model.

“For them [the US], if they don’t contain us now, our development will set to threaten them,” he said in a speech at an academic conference. “So they are attacking our path – our model of development is seen as a serious threat to them.”

Kong, who has close links to the leadership, said China had to develop a new mechanism to mobilise the country’s resources to cope with the new challenges.

Ding Yifan, a senior researcher at Tsinghua University’s National Strategy Institute, said China had no option but to seek “self-reliance” if the US was unwilling to maintain the status quo on trade and economic interactions.

China’s industrial value chain system, namely its ability to make everything “from a nail to a rocket”, would help it to weather the confrontation, he said.

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Beijing made some preparations for the headwinds from the trade war in July when it told local governments to speed up infrastructure investment. But as the dispute has escalated, so China’s tactical responses have been accompanied by strategic blueprints.

Days after the US imposed tariffs on US$200 billion worth of goods it imports from China, Beijing issued a plan to improve its rural economy in the 2018-22 period. It covered everything from garbage processing to “Engel’s coefficient” – the ratio of spending on food in overall income.

This rural development blueprint came just days after another state plan for “stimulating Chinese consumer spending potential”, aimed specifically at spending on tourism, health care and education. In one example, the National Development and Reform Commission is urging local authorities to cut admission fees at popular attractions to help boost domestic tourism.

China’s ailing rust belt struggles to shake off reliance on state support

While Xi was touring the country’s northeast, Premier Li Keqiang was visiting the eastern Chinese province of Zhejiang, the cradle the country’s private economy, where he pledged equal government support for the private sector.

According to official reports, Li told local governments to cut red tape and corporate burdens on private firms, and instructed banks not to favour state firms in lending.

At a seminar with businesspeople in Taizhou, where the private economy has been thriving since the 1980s, Li vowed to continue economic restructuring and quicken the pace of building a “market and law-based international business environment”.

Julian Evans-Pritchard, a senior economist for Capital Economics in Singapore, said the whole of the developed world was wary of China’s ambitions due to factors such as its “Made in China 2025” strategy for industrial upgrading, its “Belt and Road Initiative” to boost international trade and infrastructure links, and its traditional growth model.

“They [the Chinese authorities] are particularly concerned that the dispute with the US could be broadened towards the rest of the developed world,” he said. “It is noticeable that the US, the European Union, Japan and South Korea in some respects have taken a joint stand on issues like intellectual property.

“The Chinese leadership are going to be more wary of the West as a result of recent experiences.”

As a result, Beijing might have to rely more on its home market and domestic capabilities, he said.

Some observers have said exports are no longer a deciding factor for China’s economic growth.

Exports accounted for just 18 per cent of gross domestic product in the first half of 2018, of which about a fifth went to the United States.

Former central bank governor Zhou Xiaochuan and other economists said the trade war would have only a marginal impact on China’s GDP.

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According to official figures, China’s economy grew by 6.7 per cent in the second quarter, while exports in August grew 9.8 per cent from the same month of 2017. The official purchasing managers’ also pointed to expansion.

However, there are also signs of trouble in China’s US$12 trillion economy. Consumer spending growth has slowed to its lowest level in 15 years and other indicators suggest there are signs of weakness in China’s manufacturing base of Guangdong.

Zhou Hao, a senior economist with Commerzbank, said there was no concrete evidence to show the trade war had had a substantial impact on China’s economy, but it had brought huge uncertainty and dampened domestic sentiment.

Hu Xingdou, a Beijing-based economist, said China’s plan to increase self-reliance did not mean the country would reverse its economic reforms or opening up.

“The trend of economic reforms is irresistible and the opened door must not be shut,” he said. “Otherwise, it would lead to economic disaster and an all round retreat.”