China’s leaders announce their plans after they are well on their way to fruition. Sunday’s signing of the Regional Comprehensive Economic Partnership (RCEP) capped a year in which China’s export trade reached new records while the rest of the world contracted amid the pandemic.
As the dominant player in world export markets, China has to open its markets reciprocally to its partners’ goods and services.
A marked increase in intra-Asian trade was evident as early as March of this year, as I wrote on May 11 (“Who’s De-Coupling from Whom?”). Asian trade is now as tightly integrated as trade within the European Union.
In addition, lower-cost imports will help increase domestic consumption, a key goal of China’s new Five-Year Plan. Lower tariffs on foreign goods under the RCEP, including the planned elimination of tariffs on 86% of imports from Japan, are the equivalent of a sales tax cut for Chinese consumers.
Diplomatically, the RCEP is a triumph for China and a rebuff for Washington’s efforts to isolate it. But the new trade agreement waited on a change in Beijing’s stance.
As Sinologist Francesco Sisci observed on November 16, “In the past years, China had been dragging its feet on the RCEP, for fear that a sudden opening of its markets could damage its economy. Eventually, it apparently found a sensible compromise with its neighbors.”
Previously China sought to protect its manufacturers from Japanese competitors, whose products had a reputation for higher quality than locally made equivalents.
Opening its market to foreign competition is a sign of China’s confidence that its industries can compete on equal terms with the best the world has to offer.
China’s commitment to lower tariffs is intended in part to spur competition and reflects the same thinking that prompted Chinese regulators to prevent the country’s top Internet companies from suppressing competition.
Most of all, China’s commitment to RCEP reflects the facts on the ground. Its trading footprint is too big to be contained by a system of protection designed to cultivate infant industries that have mostly already grown by leaps and bounds.
China’s export volume reached a new record at 145% of its 2020 level while the rest of the world struggled to recover from a global recession, according to the Netherlands Central Planning Bureau.
Despite the slump in overall world economic activity, China’s deep supply chains and flexible production capacity filled a surge in orders for consumer electronics, medical equipment, and other goods whose demand jumped during the Covid-19 pandemic.
With the pandemic under control, China’s economy is growing while the world’s other large economies will shrink in 2020. Remarkably, China has regained the growth levels prevailing in 2019 while Europe, Japan and the US remain in recession.
The quality of China’s growth has also improved. Unlike the last major world economic shock in 2008-2009, when China used expansive monetary policy and aggressive public spending to prevent a recession, private sector investment this year grew faster than public sector investment.
Central bank policy contributed very little to China’s recovery. The broadly-defined money supply is growing at a 10% annual rate, below the 2010-2019 average.
In 2019, by contrast, China’s broadly-defined money supply briefly grew at a 30% year-on-year clip. America’s broadly defined money supply is growing at a 24% year-on-year rate.
The People’s Bank of China’s short-term interest rate, meanwhile, has returned to pre-recession levels while the US Federal Reserve has kept its short-term rate at zero.
In summary, China’s response to the global Covid-19 recession bears no resemblance to the fiscal and monetary firehouse approach that Beijing adopted during the global financial crisis of 2008-09. Government spending and monetary policy have been restrained compared to the West.
China’s economy is a different entity today. In 2008, private enterprises had 51.2 million employees vs. 64.5 million at state-owned enterprises in urban China.
By 2018 the balance had shifted to 139.5 million employees at private enterprises versus. only 57.4 million at state-owned enterprises. The Chinese economy that recovered so quickly in 2020 is dominated by private business rather than state firms.
The shift in the balance of employment to the private sector makes China’s economy more sensitive than previously to supply-side measures, including tax cuts, deregulation and investment incentives.