Room for Optimism

By Yu Shujun

With Chinese and U.S. offi cials holding trade talks in Beijing earlier in January and Chinese Vice Premier Liu He scheduled to continue the discussions in Washington， D.C. at January end， panelists at an event in New York were optimistic that a trade agreement would be reached between the worlds two largest economies.

At the Forecast of Chinas Economy for 2019 conference hosted by the New Yorkbased National Committee on U.S.-China Relations and the China Center for Economic Research at Peking University （PKU） on January 10， they also agreed that despite the clouds in the global economy， the growth of the Chinese economy may still be a bright light.

Yao Yang， Dean of PKUs National School of Development， said there is a high possibility for China and the United States to reach an agreement. “After the Beijing talk， Ive become more optimistic because the two countries can sit down and talk about detailed issues，” Yao said， adding that the trade dispute “has psychological effects， especially on the stock market， which has a real impact on the real economy.”

Nicolas Lardy， a senior fellow at the Peterson Institute for International Economics， a private think tank， said eventually there would be a deal. “I think both sides have a very strong interest in coming to an agreement，” he said.

Catherine Mann， Global Chief Economist at Citigroup， said the collateral damage of the U.S.-China trade war was not only to global supply chains. “We have to recognize the collateral damage to the global economy，” she said.

Lu Feng， Director of PKUs China Macroeconomic Research Center， said the U.S. economy is facing downward pressure and its trade defi cits with China have actually increased rather than declined during the trade tensions， which indicated President Donald Trumps tariff measures were not working to address the bilateral trade imbalance to a signifi cant extent.

Being the worlds two largest economies， both countries have realized that if they do not prevent an escalation of the trade war， its not good for the global economy. Chinas consistent position has been that it wants to negotiate to address the concerns of both， Lu said. “We have reasonable optimism about the deal，” he remarked， adding there will also be negotiations at the multilateral level.

“Looking ahead this year， I think the keyword or catchword in the international economic diplomacy or relationship would be talk rather than confrontation，” Lu said.

Lardy pointed out that China has already taken several measures to address trade concerns but they have not been very well noticed in the United States.

On January 1， China cut tariffs on over 700 imported items. It has also lifted owner- ship caps for foreign companies in fi nancial services and automobile industries， reduced the list of investment areas off-limits to foreigners， and taken some signifi cant steps to improve protection of intellectual property rights， Lardy said.

“These things have not got the attention I believe they should have. They should ultimately be part of the overall settlement between the two sides，” he said. “We will see increasingly the evidence that tariffs are actually disadvantaging the U.S. economy， reducing employment and slowing growth. This has somewhat been obscured by the effect of the very large tax cuts in 2018， but the effects begin to wane. If economic rationality prevails， there should be an agreement and sooner is better.”

Faith in Chinese economy

Justin Yifu Lin， former Senior Vice President of the World Bank and honorary Dean of the National School of Development at PKU， said hes confident of Chinas growth prospects， predicting that the Chinese economy will maintain a growth rate of around 6.5 percent in 2019 and continue to contribute about 30 percent to the global economic expansion. The Chinese market and growth will be an opportunity for both the Chinese and the global business communities， Lin said.

A major reason for his confi dence is that“Chinas economic policies are responsive and contingent” and the ongoing supplyside structural reform in China.

The five key tasks of supply-side structural reform are cutting overcapacity， destocking， deleveraging， lowering corporate costs and improving weak areas of the economy.

So far， the focus has been on the first three tasks， Lin said. For example， excess capacity in the steel， coal and aluminum sectors has been slashed significantly. The housing inventory has been reduced， especially in small cities and towns. Also， the high leverage ratio of state-owned enterprises has been lowered.

“The Chinese Government should be commended for the willingness to take those kinds of contractionary structural reforms，” Lin said， pointing out that while most countries have discussed structural reform， only China has implemented it.

Chinas supply-side structural reform started in 2016 to improve the quality of the economy and avert possible systemic risks. As the major tasks of cutting overcapacity， destocking and deleveraging have been achieved， the focus will be shifted to reducing corporate costs and improving weak areas of the economy， both of which will bring growth， Lin said.

Besides， the Chinese Government has cut taxes and administrative fees for the private sector and reduced red tape， which will boost investment and create a favorable environment for the business community， Lin added. In the World Bank report Doing Business 2019： Training for Reform， released on October 18， 2018， China moved up from 78th to 46th in the ease of doing business ranking.

China will also support investment in industrial upgrading， infrastructure， environmental protection and urbanization， which will further stimulate economic growth， according to Lin.

Xu Gao， Chief Economist at China Everbright Securities， echoed Lin， saying the priority of reform will shift to reducing corporate costs and eliminating bottlenecks to growth in 2019. “This shift will help stabilize the Chinese economy. I think a 6.4-percent GDP growth is achievable，”he said.

Facing external pressure

While undertaking supply-side structural reform， China is also facing external pressure to hasten reform， especially from the United States.

Huang Yiping， Deputy Dean of the National School of Development at PKU， said any incentives， domestic or international， positive or negative， to encourage reform are welcome. They would be very useful， particularly in areas such as intellectual property rights protection and opening the services market， he added.

However， if the pressure carries the threat of isolating China， the outcome may be unpredictable， Huang warned. In case of the United States not giving China access to high technology， “we will be left with developing our technology without any other choice，” Huang said. “The pressure should be to encourage China to integrate， not to decouple from the rest of the world.”

Huang said he felt uneasy when people said China is not a developing country， and therefore， not entitled to concessions. A country shouldnt be measured by the size of its economy， but by its development level， he said， noting that in terms of percapita GDP， China still ranks as a developing country.

Yao reminded the audience that Chinas per-capita GDP is only one fifth of the United States and it is still a transition economy. “We should give China more room for gradual reform， and include policies for state-owned enterprises and subsidies for innovation，” he said.

According to Xu， everybody in China wants more reforms. “Stagnations in some reform measures are just short-term setbacks， which shouldnt be misinterpreted，”he emphasized.