Talking their way out of the China-US trade war

A fierce debate is raging about the future of China’s economy. Many believe it is being held behind closed doors at the powerful Politburo.

They would be wrong. Instead, these discussions are taking place in the hallow halls of Peking University.

In the past three weeks, Zhang Weiying, the prominent liberal economist and a professor at the prestigious seat of learning in Beijing, has mapped out his vision of the future.

On Monday, Fan Gang, another influential professor at Peking University and president of the China Development Institute, outlined a similar roadmap.

Their views come at a time when the world’s second-largest economy is being buffeted by internal and external headwinds, including rising trade tensions with the United States.

Zhang has attributed the Cold War-style stand-off between Beijing and Washington to China’s flawed economic model.

“Domestically, misleading yourself means a future of self-destruction,” he said in a speech, which appeared on the National School of Development’s website before it was taken down by the authorities.

“Blindly emphasizing the unique Chinese model means going down the road of strengthening state-owned enterprises, expanding government power, and relying on industrial policy. This will lead to a reversal of the reform process, the abandonment of our predecessors’ great cause of reform, and ultimately economic stagnation,” he continued.

“Externally, misleading the world leads to confrontation. From the Western perspective, the ‘China model’ theory makes China into an alarming outlier, and must lead to conflict between China and the Western world,” Zhang added.

During the past six months, international relations with the West have deteriorated as quickly as the economy.

Threatened

Tariffs worth more than US$250 billion have already been slapped on Chinese exports to the US by President Donald Trump.

He has also threatened to impose duties on the remaining goods and products worth another $258 billion, citing “unfair practices” and “intellectual property violations.”

Moreover, the fallout has rippled across the entire economy with GDP growth falling to levels not seen since the Great Recession of 2009, while consumer spending has slowed and factory activity has dropped.

“China is serious about liberalizing its economy and its pace of doing so has been accelerated by the trade war with the United States,” Fan, who is also an adviser for President Xi Jinping’s government, said.

“That kind of willingness is genuine … China recognizes that it needs more liberalization to become more competitive in the global market.”

But the pace of reforms is in danger of stalling with “vast interest groups” lobbying against further opening up to overseas competition.

This, he pointed out, had to change as China’s economy goes through a transformation from low-cost manufacturing to high-tech production, backed up by a thriving services industry and a more sophisticated consumer sector.

“China should move on,” Fan said. “You have more and more companies operating internationally and enjoying international terms for competition. Why do you still have those protections? More and more companies don’t need it.

“Previously, China’s pressure came from the top. The policymakers put pressure on the localities, on the companies, to push them to change. [Now,] some outside pressure [such as the trade dispute] may serve as a good push.”

Realigning the economy and being embroiled in a brawl with the US has prompted the Politburo, which is the main decision-making body of the ruling Communist Party, to reiterate its pledge to stimulate growth.

So far, the government has unveiled a raft of measures, including tax cuts, infrastructure spending and cheap financing for struggling private sector companies, while pressing ahead with its clampdown on debt.

A stimulus-inspired package for the markets has also been rolled out after nearly $3 trillion was wiped off the Shanghai Composite Index and $1.1 trillion off Shenzhen in the past nine months. This, in turn, has hit the spending power of more than 150 million middle-class investors.

Priority

Boosting confidence has become a priority with the Politburo admitting on Wednesday that “downward pressure on the economy has increased” and that “timely measures” must be taken, without revealing concrete proposals.

Hours later, Chinese factory activity statistics for small- and medium-sized companies were released.

The numbers were disappointing with the Caixin Purchasing Managers’ Index, or PMI, edging up slightly higher to 50.1 from 50.0 in September while remaining in expansion territory.

“China’s economy has not seen obvious improvement,” Zhengsheng Zhong, the director of macroeconomic analysis at CEBM Group, a Caixin subsidiary, said.

“Overall, expansion across the manufacturing sector was still weak. Production and business confidence continued to cool despite stable demand. The pressure on production costs didn’t ease,” he added.

Roughly 24 hours earlier, the official PMI, compiled by National Bureau of Statistics, revealed that manufacturing growth was at its weakest level in more than two years, fueling concerns about the aftershocks of tit-for-tat tariffs and a perceived slowdown in major reforms.

“China’s reform and opening-up and the China-US strategic cooperation are two inter-related things,” Sheng Hong, the executive director of the Unirule Institute, an independent Chinese think tank, said. “That is to say, there is no strategic cooperation without reform and opening-up, nor is there reform and opening up without China-US strategic cooperation.

“Today, China faces the risk of leaving the path of reform and opening up, which would risk the loss of strategic cooperative relations with the US. Such a result would be a complete failure.”

Amid the carnage of the trade battle, the great China debate continues.