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China economy

Home-grown tech and domestic spend are key to China’s battle plan for trade war, leadership indicates

Commentators detect ‘big change’ in approach, with moves to address the economic vulnerability targeted by US sanction against Chinese telecoms firm

PUBLISHED : Wednesday, 25 April, 2018, 12:09pm
UPDATED : Wednesday, 25 April, 2018, 10:42pm

China’s top leadership has prioritised boosting domestic demand and developing home-grown technologies after its trade friction with Washington escalated and Chinese telecoms company ZTE was banned from using American components.

The US government banned China’s largest publicly traded telecommunications equipment maker from buying parts from American companies for seven years, after it allegedly made false statements during an investigation into sales of its equipment to Iran.

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The Politburo, China’s prime decision-making body, warned on Monday that the country must be mindful of potential dangers as the global political and economic situation became more complex. 

The 25-member body, led by President Xi Jinping, ordered further efforts to “combine structural adjustment with persistent boosts to domestic demand to ensure the stability of the macroeconomy” and to “strengthen the research and development of core technologies”. 

The Politburo is trying to let the Chinese economy stand firm during the power play between China and the US
Deng Haiqing, JZ Securities

It is the first time the Politburo has included such language in its official documents since 2015, and analysts said it might herald moderate domestic policy relaxation this year amid trade frictions with the US.

Iris Pang, chief Greater China economist of ING Bank in Hong Kong, said the measures were intended to counter mounting pressure from the administration of US President Donald Trump. 

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“Not a single word was mentioned about the United States in the statement, but it is all about the US,” she said. 

Deng Haiqing, an economist with JZ Securities, a domestic brokerage, wrote in a note that the new wording pointed to a “big change” in, rather than a “fine-tuning” of, Chinese economic policy, as growth risks heightened.

“The Politburo is trying to let the Chinese economy stand firm during the power play between China and the United States,” Deng wrote.

The trade stand-off between the world’s two largest economies was heightened in late March when Washington threatened a 25 per cent tariff on US$50 billion of Chinese merchandise over the claimed theft of American intellectual property. Beijing announced reciprocal tariffs immediately. 

The US’ trade deficit, which amounted to US$370 billion last year according to US statistics, is a short-term concern, but the “Made in China 2025” strategy, in which Beijing outlines its ambition of honing China’s technical competitiveness, is believed to be a focus for the long run.

Last week, the US Commerce Department announced its denial of export privileges for ZTE, the world’s fourth-largest telecoms equipment maker.

“It has greatly exposed an economic vulnerability of China,” Pang said. “Fortunately, it hasn’t brought too much pain since the national economy lies in the up-cycle, and it is not too late for the authorities to advance their technology research and development.” 

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The Politburo, convened quarterly to discuss economic issues, said the country had made a good start towards achieving this year’s growth target of “around 6.5 per cent” and that momentum remained good.

The national economy grew 6.8 per cent year on year in the first quarter, having stayed in the range of 6.7 per cent to 6.9 per cent for 12 straight months, according to the National Bureau of Statistics.

Liu Xuezhi, a senior analyst at the Bank of Communications, said China was at an important stage of economic transformation.

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“It has felt certain external pressures, which requires more action domestically, such as structural adjustment and consumption, to offset that,” Liu said.

Chinese exports grew 7.9 per cent year on year, contributing to the first acceleration of economic growth since 2011. In particular, US-bound goods jumped 11.5 per cent and raised the bilateral trade imbalance to a record high.

It has greatly exposed an economic vulnerability of China
Liu Xuezhi, Bank of Communications

Although the top leadership is reluctant to reveal detailed plans covering high-end equipment manufacturing, core technologies, new energy and new materials, Liu said greater emphasis on driving up domestic consumption would be evident.

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Consumption contributed 77.8 per cent of first-quarter growth, up significantly from 55.8 per cent for the whole of last year, according to the NBS.

Liu said the country was striving to produce enough to meet its growing domestic demand, with many consumers having previously bought from overseas.

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“The government could take some measures to boost consumption, such as reducing logistics costs and potentially consumption tax,” he said.