Deep­en­ing re­form only path for China

Global Times - - Business - The ar­ti­cle was com­piled based on a re­search re­port by Ding An­hua, chief econ­o­mist at China Mer­chants Se­cu­ri­ties Co. bi­zopin­ion@glob­al­times.com.cn

With the Sino-US trade war es­ca­lat­ing, a de­tailed anal­y­sis of the US tar­iff lists could en­able ra­tio­nal judg­ments about China’s po­si­tion in the trade row.

Gen­er­ally speak­ing, the two tar­iff lists – which cover $50 bil­lion and $200 bil­lion worth of Chi­nese goods – mainly tar­get prod­ucts with small ex­port vol­umes to the US or those for which sub­sti­tutes are eas­ily avail­able else­where.

Chi­nese goods with large ex­port vol­umes ap­pear to be less af­fected. For in­stance, in the tar­iff list for $200 bil­lion in Chi­nese goods, 27 per­cent of the prod­ucts un­der the “elec­tri­cal mo­tor, elec­tri­cal equip­ment, au­dio-vis­ual equip­ment and parts” (HS85) cat­e­gory are sub­ject to the new tar­iffs. Up to 79 per­cent of the prod­ucts un­der the “ve­hi­cles and parts” (HS87) cat­e­gory are on the tar­iff list.

In 2017, Chi­nese ex­ports of HS85 prod­ucts to the US to­taled $150 bil­lion, ac­count­ing for 28.5 per­cent of China’s to­tal ex­ports to the US. Chi­nese HS85 prod­ucts held a 42 per­cent mar­ket share in the US, but the mar­ket share of ve­hi­cles from China was only 5 per­cent.

To a cer­tain ex­tent, the tar­iff lists in­di­cate that China’s po­si­tion in the global sup­ply chain for cer­tain prod­ucts is un­likely to be taken up by other coun­tries in the short term. For ex­am­ple, ex­ports of HS85 prod­ucts from the Chi­nese main­land and Hong Kong ac­count for 44.6 per­cent of the global trade of such goods.

In the medium and long term, a trans­fer of man­u­fac­tur­ing out of China may be the big­gest chal­lenge for the na­tion. If the Sino-US trade war con­tin­ues, many man­u­fac­tur­ers will have to con­sider mov­ing pro­duc­tion out of China to avoid US tar­iffs.

From site se­lec­tion to in­vest­ment, con­struc­tion and pro­duc­tion, it can take years to start man­u­fac­tur­ing in a new place. More­over, un­like some low-end pro­cess­ing in­dus­tries, most elec­tri­cal and me­chan­i­cal prod­ucts in­volve com­plex man­u­fac­tur­ing pro­cesses. These sec­tors re­quire cap­i­tal in­vest­ment, sup­port­ing in­dus­tries and a large num­ber of pro­fes­sional work­ers.

Take Ap­ple as an ex­am­ple. With a rel­a­tively low-cost yet skilled la­bor force, China has most of the sup­port­ing in­dus­tries needed for Ap­ple’s pro­duc­tion line. Get­ting a plant built may take only a year or so, but a com­pre­hen­sive base of sup­port­ing in­dus­tries and la­bor train­ing will take three to five years or even longer.

This trans­fer will have a huge im­pact on China, which must be pre­pared, but the dif­fi­cult and time-con­sum­ing process of such a shift will buy some time for China to re­spond and seize the strate­gic ini­tia­tive. China should not waste this op­por­tu­nity.

As to cop­ing with the trade war, in the short term, China must do its best to min­i­mize the neg­a­tive im­pact of trade fric­tion by means of hedg­ing poli­cies. There can be no win­ner in the trade war. Both China and the US will face pres­sure from eco­nomic slow­downs and higher prices. There­fore, ob­jec­tive and ra­tio­nal judg­ment is needed to avoid un­war­ranted op­ti­mism or pes­simism.

The de­mand for in­fras­truc­ture in­vest­ment is still huge in China, and it can off­set the de­cline in ex­ports and al­le­vi­ate the pres­sure from an eco­nomic slow­down. So far this year, due to fac­tors such as the ef­fort to clean up lo­cal gov­ern­ments’ im­plicit debts, in­fras­truc­ture in­vest­ment has fallen sharply.

But with the au­thor­i­ties striv­ing to bridge in­fras­truc­ture gaps, the in­vest­ment po­ten­tial for in­fras­truc­ture con­struc­tion will be re­leased. Mean­while, in­fla­tion in China is ex­pected to rise only mod­estly, which will help main­tain the over­all sta­bil­ity of mone­tary pol­icy while rais­ing nom­i­nal in­comes and low­er­ing the macro-lever­age ra­tio.

More­over, the China-US trade war has been mostly priced into the stock, bond and for­eign ex­change mar­kets.

In the medium and long term, China must deepen mar­ket-ori­ented re­forms, ac­cel­er­ate in­dus­trial up­grad­ing and strengthen the ad­van­tages of its in­dus­trial chain.

Ini­tially, China should keep calm and turn the trade pres­sure into a pos­i­tive force to ac­cel­er­ate the up­grad­ing of its in­dus­trial struc­ture. Also, it should ex­pand open­ing-up to the world so it can ac­tively in­te­grate into the global value chain, us­ing the ad­van­tages of its in­dus­trial chain.

But the fi­nal, cru­cial mo­ment of the trade war be­tween China and the US hasn’t ar­rived yet. There may be no sub­stan­tial change in the bi­lat­eral trade scale and re­spec­tive bal­ances this year or the next, which will likely lead to mis­cal­cu­la­tions and com­pla­cency.

So far, the US tar­iff at­tack hasn’t touched China’s man­u­fac­tur­ing ad­van­tages, so as to give US im­porters some time to re­or­ga­nize their sup­ply chains. That’s ab­so­lutely in line with US in­ter­ests.

If China doesn’t cope with the sit­u­a­tion prop­erly, it may lose its po­si­tion in the global sup­ply chain, which will have se­vere con­se­quences. The ur­gent pri­or­ity for China now is to man­age its own af­fairs well.

Deep­en­ing mar­ket-ori­ented re­form, im­prov­ing the busi­ness cli­mate, sta­bi­liz­ing ex­pec­ta­tions of mar­ket par­tic­i­pants and stim­u­lat­ing the vi­tal­ity of pri­vate cap­i­tal and for­eign in­vest­ment is the only path for China’s rise.

Deep­en­ing mar­ket-ori­ented re­form, im­prov­ing the busi­ness cli­mate, sta­bi­liz­ing ex­pec­ta­tions of mar­ket par­tic­i­pants and stim­u­lat­ing the vi­tal­ity of pri­vate cap­i­tal and for­eign in­vest­ment is the only path for China’s rise.

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