President Trump created confusion within his administration and abroad because of a negotiating style you could call "governing by bluffing":（Axios
He threatened to veto a spending bill that conservatives hate, then signed it.
He announced stiff tariffs on imports of steel and aluminum, then the administration started negotiating tons of carve-outs.
He talks of war with North Korea, then agrees to meet with Kim Jong-un.
He muses openly of replacing top aides, including White House Chief of Staff John Kelly, then lets them stay.
We are seeing a necessary change towards more reliance on consumer demand
Consumption is at last becoming the most important driver of demand in the Chinese economy. This is a long-awaited and desirable adjustment. It promises to shift China away from its excessive reliance on inefficient, debt-fuelled investment. But it still has a long way to go. As the shift is being completed, the country will need to manage an overhang of bad debt. But the adjustment has begun.
In 2007, premier Wen Jiabao argued rightly that “the biggest problem with China’s economy is that the growth is unstable, unbalanced, uncoordinated and unsustainable”. In that year, gross national savings were 50 per cent of gross domestic product, up from 37 per cent in 2000. These huge savings financed domestic investment of 41 per cent of GDP and a current account surplus of 9 per cent.
Then came the global financial crisis. The Chinese authorities promptly realised that the current account surplus had become unsustainable. In the short run, the only way to avoid a slump was to expand investment further. In 2011, gross investment reached 48 per cent of GDP and the current account surplus fell to 2 per cent. But national savings remained at 50 per cent of GDP. (See charts.)
This solution brought new problems. The first was a declining return on investment. The simplest way of showing this is via the incremental capital-output ratio (ICOR), which measures the amount of investment needed to generate a given increase in output. This has roughly doubled since 2007. That is not surprising: the investment rate has jumped, while growth has nearly halved. Moreover, the rise in the ICOR may well understate the true decline in returns: as Michael Pettis of Peking University’s Guanghua School of Management argues, useless investment does not contribute to GDP.
The second problem is that the increased investment was driven by a huge rise in debt. According to the Institute of International Finance, gross debt rose from 171 to 295 per cent of GDP between the fourth quarter of 2008 and the third quarter of 2017. This is very high for an emerging country. Moreover, half of the increased debt went to non-financial corporate entities, which did much of the increased investment. A substantial portion of this increased debt may prove to be bad. Starting from the dramatic rise in the credit-dependence of growth, London-based Enodo Economics argues that the needed debt write-offs might ultimately amount to 20 per cent of GDP. This might seem big. But it would be manageable for a creditor country with a largely closed financial system.
Up to 2014, then, nothing had happened to make the Chinese economy seem any less unstable, unbalanced, uncoordinated and unsustainable. On the contrary, China had merely replaced an excessive current account surplus, with still more excessive investment, soaring debt and property bubbles. The past three years have witnessed change at last: investment has fallen by 3 per cent of GDP, while public and private consumption have risen by much the same proportion. As a result, consumption has become a more important source of additional demand than investment. Thus, in 2017, notes a background paper to this year’s China Development Forum, final consumption contributed 59 per cent of GDP growth. As investment growth has declined at long last, the rise in indebtedness has also (apparently) stopped.
Behind this has been a willingness to substitute quality for quantity of growth. Explanations for this willingness include the shrinkage of the labour force and a slowing of the rate of rural-urban migration. The increasingly service-driven economy of today is also more employment-intensive than the heavy-industry driven economy of the past. With the labour force now shrinking and growth more employment intensive, real wages have soared, raising the share of labour in national income. Enodo Economics argues that in 2015 the share of household disposable income and labour compensation were already higher than in Japan and South Korea.
It is only because the household savings rate is still very high in China that private consumption is so low a share of GDP. As ageing takes hold, that is likely to change, possibly quite quickly. If the government were to provide an adequate safety net and better health and education services, as well, the household savings rate might fall sharply. If so, the investment rate could also shrink to a more appropriate level. After all, it is still substantially higher than it was in 2007, let alone 2000.
In brief, while the shifts are slow and the full adjustment to more reasonable levels could take until the middle of the next decade, we are seeing early signs of the necessary change in the structure of the Chinese economy towards one that is less unbalanced and, above all, one that is more reliant on the consumer demand of China’s vast population. That would, in turn, be good for China and for the rest of the world.
Good policy could also accelerate the shift, by increasing the transfer of profits to the people, via ownership, taxation or, better still, a bit of both. It is more or less inevitable that a clean up of excessive debt will also be needed, together with substantial reform of the financial sector. But that would also become far easier if the huge imbalances — above all, the excessive reliance on investment — were at an end.
The chances of achieving desperately needed rebalancing and even of managing that transformation fairly smoothly are rising. The story told by former premier Wen is far from over. But we can now at least envisage a happy ending.
Beijing must recognise the shift in American perceptions and make some concessions
How should China respond to Donald Trump’s aggressive trade policy? The answer is: strategically. It needs to manage a rising tide of US hostility.
Of the events in Washington last week, the appointment of John Bolton as the US president’s principal adviser on national security may well be more momentous than the announcement of a “section 301” trade action against China. Nevertheless, the plan to impose 25 per cent tariffs on $60bn of (as yet, unspecified) Chinese exports to the US shows the aggression of Mr Trump’s trade agenda. The proposed tariffs are just one of several actions aimed at China’s technology-related policies. These include a case against China at the World Trade Organization and a plan to impose new restrictions on its investments in US technology companies.
The objectives of these US actions are unclear. Is it merely to halt alleged misbehaviour, such as forced transfers — or outright theft — of intellectual property? Or, as the labelling of China as a “strategic competitor” suggests, is it to halt China’s technological progress altogether — an aim that is unachievable and certainly non-negotiable.
Mr Trump also emphasised the need for China to slash its US bilateral trade surplus by $100bn. Indeed, his rhetoric implies that trade should balance with each partner. This aim is, once again, neither achievable nor negotiable.
The optimistic view is that these are opening moves in a negotiation that will end in a deal. A more pessimistic perspective is that this is a stage in an endless process of fraught negotiations between the two superpowers far into the future. A still more pessimistic view is that trade discussions will break down in a cycle of retaliation, perhaps as part of broader hostilities.
Which it turns out to be also depends on China. It must recognise the shift in US perceptions, of which Mr Trump’s election is a symptom. Moreover, on trade, the Democrats are far more protectionist than the Republicans. What are the forces driving this shift? China’s rise has made the US fear the loss of its primacy. China’s communist autocracy is ideologically at odds with US democracy. What economists call “the China shock” has been real and significant, although trade with China has not been the main reason for the adverse changes experienced by US industrial workers. The US has also failed to provide the safety net or active support needed by affected workers and communities.
Furthermore, the deal reached when China joined the WTO in 2001 is no longer acceptable. As Mr Trump states, the US wants strict “reciprocity”. Finally, many business people argue that China is “cheating”, in pursuit of its industrial objectives.
Experience shows that the complaints will never end. A decade or so ago, complaints were about China’s current account surpluses, undervalued exchange rate and huge accumulations of reserves. All these have now been transformed: the current account surplus itself has fallen to just 1.4 per cent of gross domestic product. Now complaints have shifted towards bilateral imbalances, forced transfers of technology, excess capacity and China’s foreign direct investment. China is successful, big and different. Complaints change, but not the complaining.
How might China manage these frictions, exacerbated by the character of Mr Trump, yet rooted in deep anxieties?
First, retaliate with targeted, precise and limited countermeasures. Like all bullies, Mr Trump respects strength. Indeed, he respects China’s Xi Jinping.
Second, defuse legitimate complaints or ones whose redress is in China’s interests. Liberalising the Chinese economy is in China’s own interests, as the astonishing results of 40 years of “reform and opening up” demonstrate. China can and should accelerate its own domestic and external liberalisation. Among the widely shared complaints of foreign businesses, is over pressure to transfer know-how as part of doing business in China. Such “performance requirements” are contrary to WTO rules. China needs to act decisively on this.
Third, make some concessions. China could import liquefied natural gas from the US. This would reduce the bilateral surplus, while merely reallocating gas supplies across the world. But doing the same thing for commodities in which China is the world’s dominant market would be far more problematic, since it would hurt other suppliers. Mr Trump may well want China to discriminate against Australian foodstuffs or European aircraft. That way lies the end of the liberal global trading system.
Fourth, multilateralise these discussions. The issue of surpluses in standard products like steel cannot be dealt with at a purely unilateral or bilateral level. As a rising global power, China could play a central role in trade liberalisation, thereby strengthening the system and increasing the world’s stake in the health of the Chinese economy. Operating at such a global level brings another potential benefit: it is hard for great powers to negotiate bilaterally, since they tend to view concessions to each other as humiliating.
In the global context, however, a concession can be seen as a benefit to everybody. Finally, by operating under the rubric of the WTO, China puts Europeans in a difficult position. Europeans share US anxieties over China’s policies on intellectual property, but they also believe in the rules. If China took the high road, Europeans might feel compelled to support it.
We are in a new era of strategic competition. The question is whether this will be managed or lead to a breakdown in relations. Mr Trump’s trade policy is a highly destabilising part of this story. China should take the longer view of it, for its own sake and that of the world.