Can China survive trade war by seducing US firms and fixing economy’s weak links?

Beijing will remain focused on its existing domestic strategies, while promising to open up more markets to foreign investors, analysts say

PUBLISHED : Thursday, 19 July, 2018, 10:32am
UPDATED : Friday, 20 July, 2018, 6:49am

Chinese President Xi Jinping is trying to play cool and smart to win a trade war against the US by fixing domestic economic weak links, and offering a friendly face to other trading partners and American firms.

Xi and his colleagues have shelved a tit-for-tat confrontational approach and opted to deal with the protracted battle by pressing on with what Beijing believes is right for the long-term health of its economy, carefully managing the trade dispute’s impact on growth without sidelining Beijing’s strategic pursuits such as debt reduction, analysts said.

The plan is based on Xi’s trust in China’s growth model, having often asked the country’s officials to keep “strategic confidence” and “strategic focus” during the trade hostilities with US, and the threats from US President Donald Trump could press Beijing to enhance its economic resilience, they said.

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Mei Xinyu, an affiliated researcher with the Ministry of Commerce, said China could use the trade dispute as a “pressure test” to spot weak links in its economy and remedy them.

“For instance, China can carry out large-scale tax cuts … not catch fish by drying up the whole pond,” he told a symposium in Beijing this week.

One area Xi spotted from the friction with the US in the past couple of months is that China lacks home-grown “core technologies” to help it to control its own fate.

Washington’s earlier decision to ban key component sales to ZTE had nearly killed the Chinese telecom equipment maker, exposing the Achilles’ heel of the world’s second-largest economy.

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The ZTE case, although the ban is lifted for now, prompted Xi to stress the importance of indigenous tech power and he urged the country’s officials to find ways to keep core technologies in China’s “own hands” at a key economic policymaking conference last week.

“If you were President Xi, you would probably think, ‘What if the US does that to me again?’ and ‘Are they going to threaten to cut the supplies of my major firms?’” said Chen Long, a Beijing-based analyst at Gavekal Research.

“The natural reaction [of Xi] will be, ‘I need to work even harder to make Chinese firms faster, and to get stronger at a faster pace,’” he said last week.

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At the same time, China is speeding up its efforts to fix the riskiest parts of its economy, a top priority stated by Xi for the country’s economic bureaucrats.

Although the People’s Bank of China has been less aggressive in its monetary policy stance compared with a few months ago, it has remained ruthless in starving the country’s shadow banking activities.

In June, the broad measure of shadow banking – all credit other than bank loans – shrank 660 billion yuan (US$99 billion), according to central bank figures.

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A total of 63 peer-to-peer lenders, the non-bank lenders that raise funds from investors online and lend to investment projects, have reported liquidity difficulties or suspended withdrawals in June, compared with about 10 lenders in May, according to Wangdaizhijia, a Chinese agency tracing these platforms. The closure of such institutions continued into July.

China is reining in local government borrowing to curb debt, a big source of risk for its financial and economic stability.

The National Development and Reform Commission has raised the financial and population thresholds required of municipalities for their governments to build subway rail networks, targeting a significant share of local government spending, while the country’s audit office is introducing a nationwide campaign to check “hidden debts” of local governments.

The finance ministry, meanwhile, has been busy scaling back subsidies in areas from solar panels to affordable housing programmes.

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Liu Yuhui, a researcher with the Chinese Academy of Social Sciences and chief economist with TF Securities, a mainland brokerage, said at a forum in Beijing on Wednesday that the trade war had disrupted Beijing’s original plan of a smooth de-risking campaign but China would rather take the pain to cut debt instead of inflating the problem through fiscal expansion or monetary easing.

“There’s no other choice – China has to tighten its belt for the next three to five years,” Liu said.

The domestic efforts were accompanied by China’s renewed push to woo foreign investors, from Wall Street banks to German carmakers, as a rally for support to counter Trump’s trade “unilateralism”.

Instead of punishing US firms as many had feared, Beijing favours a strategy of being nice to them and seducing them with promises of wider market opening and profit prospects. Tesla, the US new-energy vehicle manufacturer, has agreed to set up a factory in Shanghai in a vote of confidence for China.

“The Chinese leaders have acknowledged it does no good to go back to isolation to confront [the US],” said Larry Hu, chief China economist of Macquarie Capital in Hong Kong. “They still have their eyes on opening up.”

China must turn to Plan B as trade war escalates, and spur the domestic economy

However, the US-China trade dispute would not alter Xi’s view that the state had a right, even a responsibility, to guide economic activities and that state firms must serve the Communist Party’s goals, said Ding Shuang, chief Greater China economist at Standard Chartered Bank.

Reform and opening up was a policy to support the party’s rule, and China’s measures in the trade war were intended “to realise Xi’s goals, not to move China towards a Western model”, he said.