It has started with the announcement by the Trump administration of the instauration of customs duties on 200 billion dollars of Chinese exports. The rate is modest (10%) but it could rise next year until 25%. On September 18th, the Summer Davos Forum opened in Tianjin. 2000 gests coming from more than 100 countries will attend the meetings. Beijing will develop its analysis regarding the Fourth industrial revolution and how shape innovative societies to adapt themselves to the progress of robotics and Artificial Intelligence. The Forum comes just after the Vladivostok Meetings where Russian and Chinese economies exposed their willingness to cooperate. Fruitful partnerships have been concluded as the one about natural gas supplies to China from Siberia. On the same day, all around the country, was commemorated the invasion of the country by Japan in 1931. The future can be built without forgetting the past.
The previous week, President Xi Jinping addressed a message to Kasakhstan President to celebrate the Fifth anniversary of the launch, announced after a meeting between the two leaders, of the Silk Road Economic Belt which was renamed the “Belt and Road Initiative”. This message was sent just after the Ministerial Conference of the Forum on China-Africa Cooperation. 53 African countries were participating, all members of the African Union. So China is active on the world economic scene. Its action in favor of international cooperation and multilateralism contrasts with the strategy of the American administration which is taking refuge in isolationism and keeps up bad relations with almost the whole planet.
This intense diplomatic activity naturally gives rise in Western countries to a lot of critics. BRI would send the countries which accept the Chinese investments to an excessive indebtedness and would weaken their economies. Coming from countries which, for decades, have put in place policies to support development whose results have not been convincing, these critics are ill-founded, especially regarding Africa. The other argument put forward is even more specious. China would artificially boost its growth through programs financed by debt to keep hidden the slowing of its economy. The truth is quite different. The Chinese President considers that his country couldn’t have a strong growth if the rest of the world, and especially its neighboring countries, have stagnant economies. In supporting their development, Beijing will get new clients for its products. In the meantime, the building of the infrastructures which are necessary to their take-off profit to the Chinese companies which have gained the technical know-how in participating to the modernization of their own country during the last thirty years.
Is that policy enough to cope with the risks the Chinese economy is confronted with? Some are even thinking, in Western countries, that China could be at the origin of the next major financial crisis. The first threat China has to face is the trade war with the United States which is growing in size. But that threat is overestimated. Most of Chinese exports to the U.S. depend of American companies supply chains. But these ones are not going overnight to change their suppliers because, very frequently, there don’t exist. So they will reduce their margins, what is not going to be very painful for companies like Apple, and transfer the rise of customs duties to their clients. The retaliatory measures Beijing has just announced are symbolic: they concern only imports from the U.S. for an amount of 60 billion dollars. To start an escalation is useless because it is clear that the perspective of the coming elections at the beginning of November is not without link to the recent announcements. Beijing will wait until then before launching real retaliatory measures. In the immediate, the consequences on the Chinese economy will be modest and definitely not able to send the country into a crisis.
The other threat is the excessive and growing indebtedness of State Owned Enterprises and local authorities. Beijing has taken the point into account and strict measures have just been taken to put limits to go into debt. SOE debt ratios will have to be reduced by two points before the end of 2020. It was, in July, 59.4%, i.e. 5% more than in the private sector. Rules as strict have just been enacted regarding local authorities, with the prohibition to use shadow banking. The third trial which is brought against the Chinese leaders is about the manipulation of their currency. Through devaluation, they would offset the increase of customs duties. That would hurt all emerging countries currencies and generates a risk of a financial crisis.
These critics are as unjustified as the previous ones. The Yuan did lose since the beginning of the year between 5 and 8% of its value against the dollar. But that fluctuation results from the American monetary policy, with increased interest rates and from the lack of trust generated by several emerging economies, especially Argentina and Turkey, which incites to transfer assets toward the American currency. China has set as an objective almost ten years ago to make its currency a reserve one. This Long March will certainly not be interrupted. The real counterattack to the American policy, as it has been stated by the former governor of China central bank, Zhou Xiaochuan, is rather to reorient Chinese exports toward other countries and to reduce imports from the U.S.
During that time, Chinese growth doesn’t slow. It has reached, on an annual basis, during the first half of the year, 6.8% and the objective assigned for 2018 around 6.5% will be reached. Unemployment rate is closed to 5% and inflation a little above 2%. During the first eight months of this year, foreign trade increased by 16% and trade surplus has been close to 200 billion dollars. Bur risks about a slowing of the economy are not underestimated. Liquidity increases by the central bank for an amount of 38 billion dollar have been offered and the growth of the money supply stays above 8%. This accommodative policy has been completed by tax cuts to support consumption with a 1% reduction of the VAT rate and an increase of the personal income tax threshold to 5000 Yuan from 3500 Yuan.
The government has identified three tough battles until 2020: to maintain financial stability, to reduce poverty and to tackle pollution. The announced measures fit well with the first and the second ones. The evolution of power production also shows the current progresses for the third one. The transfer toward less polluting energy sources is accelerating. In August, nuclear and solar grew by 16.9% and 12.9% year-on-year, which permitted to compensate the stagnation of the production of wind turbines caused by unfavorable weather conditions. And the substitution of coal by natural gas is accelerating as the supply of the country allows it.
China, this week, asserts more and more influence on the world economy. Its leaders show they are aware of the external and internal risks they are confronted with. In a world more and more volatile with unpredictable leaders, it is rather reassuring.