Trade war may undermine China’s whole basis for future development

Tensions over structure of the Chinese economy are not confined to the US, with Europe and Japan also concerned about technology transfer

PUBLISHED : Monday, 15 October, 2018, 8:18pm
UPDATED : Monday, 15 October, 2018, 10:52pm

The US-China trade war’s worst effects will be felt over the long-term and could slow China’s ability to continue the strong pace of development it has enjoyed in recent decades, according to the International Monetary Fund’s former representative in Hong Kong.

Shaun Roche, currently chief Asia-Pacific economist at Standard & Poor’s Global Ratings, said analysts tended to overestimate the short-term impacts of the conflict while underestimating its long-term effects.

Speaking on the sidelines of the International Monetary Fund’s annual meetings in Bali on Friday, Roche said the short-term economic “headwind” for the Chinese economy created by the tariffs could be “easily offset” by a loosening of monetary policy and depreciation of the yuan exchange rate, which the Chinese government had been pursuing.

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It would be more difficult for the Chinese government to offset “the restrictions put on Chinese firms regarding their investment in the States, and other matters that slow the technology transfer from the US, Europe and Japan into China”, he said.

Roche warned the slowing of technology transfer may undermine the whole basis of how China had grown in past decades – adapting and innovating based on foreign technologies – which could significantly erode its growth potential in the future.

“Chinese technology share prices already reflect weakening [investor] confidence” in the ability of Chinese firms to continue to grow as they have before, he argued, predicting there was likely to be more negative fallout in the longer run.

Roche pointed out that trade tensions were not confined to the US and China, with concerns about structural features of the Chinese economy coming also from Europe and Japan, including the way foreign firms see their propriety technologies unfairly transferred, the lack of a level playing field for foreign firms doing business there, and the dominance by Chinese state-owned enterprises in many business sectors.

“This is a shared concern,” he said, noting last month’s joint statement by trade officials from the US, Japan, and the European Union that focused on the need to address China’s non-market-oriented policies and practices.

Still, Roche believes there are plenty of things the Chinese government can do to resolve the trade conflict and avoid the long-term negative consequences.

“China has to show a [greater] willingness to protect intellectual property, and needs to show more commitment that foreign firms can operate on a level playing field [in China] without seeing tech being unfairly transferred,” he said.

More specifically, China needs to better explain its “Made in China 2025” strategy to its trading partners, “regarding how it is to achieve market share targets while showing it is consistent with a level playing field,” as this remains a core concern at the heart of the trade conflict, Roche said.

“Made in China 2025” is China’s 10-year plan to become self-sufficient and dominant all the way up the value chain in 10 cutting-edge hi-tech industries such as artificial intelligence, electric cars, aerospace, and bio-medicine.

The plan has sparked significant concern from the US, with White House trade adviser Peter Navarro saying it seeks to lock US firms out of these future markets.

“China has targeted America’s industries of the future … if China successfully captures these emerging industries, America will have no economic future,” Navarro said.

In response to these concerns, the US “went off by itself at the early stage”, Roche said.

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But Europe and Japan are working to pull the US back into trying to resolve these shared concerns through the existing World Trade Organisation framework rather than relying simply on unilateral pressure, he added.

Trade tension will probably last for “a while”, Roche predicted.

Given China’s attachment to its five-year economic plans, there is little chance Beijing will change its path for the next few years, given its latest five-year plan will end only in 2020, he said.

“But we are seeing China moving a little bit more toward the US position. And the US is moving a little bit closer to Europe and Japan now. So probably we are going to see them converge” at some point in the future, he predicted.

The short-term effects of the trade war have included a tumble of 9 per cent in the value of China’s currency against the US dollar in the past six months, approaching the psychologically important level of 7 against the greenback.

On October 7, China’s central bank announced it would cut the amount of money banks are required to hold in reserve at the central bank, pumping about US$110 billion into the domestic interbank system.

On Sunday, Yi Gang, governor of China’s central bank, said the government still had “plenty of options” when it came to stabilising economic growth and dealing with external uncertainties, including further monetary easing.