China economy woes owe more to domestic issues than trade war, experts tell Washington hearing

China's domestic economic issues are more problematic for policymakers in Beijing than the trade war, experts warn US congressional hearing

Victor Shih, University of California expert on China, warned that ‘it would take a truly massive economic shock to threaten’ Chinese President Xi Jinping’s power

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Victor Shih (left) and Andrew Polk played down the impact of the trade war during the US-China Economic and Security Review Commission hearings at the US Congress. Photo: C-SPAN

Published: 4:58pm, 5 Sep 2019Updated: 5:35pm, 5 Sep 2019

Experts on US-China relations have advised that the 14 month-long trade war has had “little direct impact on China's economy” and warned that “it would take a truly massive economic shock to threaten” Chinese President Xi Jinping’s power.

Instead, experts told a congressional hearing, China’s underlying structural challenges – such as high debt levels – pose greater problems to Beijing’s long-term economic goals. However, it was also suggested that the trade war could cause damage to the Chinese economy as it continues and escalates.

Policy analysts gave written and spoken testimony to the US-China Economic and Security Review Commission annual review just hours before top trade negotiators confirmed a face-to-face meeting in early-October in a step resolve their increasingly bitter trade conflict.

Among them was Victor Shih, associate professor of global policy and strategy at University of California San Diego, who said that the trade war may succeed in creating divisions among policymakers in Beijing as to how to deal with China’s economic slowdown.

Officials have been torn over whether to pursue more stimulus-led policies to buoy the economy, or to continue with market-based reforms, including removing risky debt. Beijing has embarked on some stimulus, but not the full-blown measures seen during the global financial crisis of 2008.

As economic losses accumulate under the trade war, Shih expects divergent camps in the ruling Chinese Communist Party to emerge and pressure Xi to ramp up economic stimulus. Beijing has already announced a series of monetary easing steps and increased fiscal spending in a step to push for new growth under the tense trading environment.

“It would take a truly massive economic shock to threaten [Xi’s] power,” Shih said, adding that high domestic debt and trade frictions with the US are leading to increased state intervention in the Chinese economy.

As the trade war drags on, negative effects through trade, economic sentiment, investment, and technological channels are likely to weigh on China’s medium-term growth prospects, according to Andrew Polk, co-founder of think tank Trivium China.

The tariff battle has already created distance between the world’s two biggest economies. US Commerce Department trade data for July released on Wednesday showed that US exports to China fell by 18.2 per cent in the first seven months of 2019, while imports from China fell 12.3 per cent. The data came just days after both sides imposed further tit-for-tat tariffs, with further US tariffs on Chinese goods planned to take effect on October 1.