Debates on the new economic structure that China should adopt are increasing. The government has indicated that the internal market must become more critical. Cao Dewang, Chairman of the Fu Yao Glass Group, and Yu Yongding, Member of the Academy of Social Sciences, spoke on August 12 at the Summer Online Summit on “China’s New Economic Structure.” Their discussion focused on the Sino-American problem. They believe that decoupling is challenging to achieve. Indeed, the restoration of the manufacturing industry in the United States faces many obstacles. In the face of the developing financial war, China must make the necessary adjustments while strengthening the domestic market.
A summary of their discussion appeared in the Chinese press:
Cao: The dispute between China and the United States is a political issue. However, the real decoupling of the Chinese and US economy is not easy. The establishment of diplomatic relations between China and the US has been difficult. Still, decoupling is even more difficult – China and the US are very dependent on each other, decoupling is a very irrational and costly choice.
But it is not impossible, for political reasons, especially in the high-tech sector, that the United States will contain China and decouple from China.
In addition to the possible decoupling in science and technology, Yu also pointed out that China faces a series of threats from the US in the financial field. However, judging by the current situation, the US should not demand China’s expulsion from the two international financial trading systems, swift and chips. The Chinese government should allow the exchange rate to float freely, insist on the management of cross-border capital flows, increase efforts to establish a settlement system for the renminbi, and promote the renminbi’s internationalization.
China should have no illusions that the United States will fight to maintain the technology gap with China for as long as possible, which does not prevent China and the United States from cooperating more in general trade.
The problematic restoration of the manufacturing industry in the United States
Yong: The United States is gradually reducing its dependence on China in the area of general trade. Over the years, US entrepreneurs have moved from China to India, Vietnam, Cambodia, Eastern Europe, and other countries.
Trump said that the Chinese were taking American jobs and repeatedly called for American manufacturing companies to return from China to the United States. The “Revitalizing American Manufacturing Power” movement was invented by Barack Obama in 2013 when he was president. The two presidents’ style is different, but they both have the same goal: they both want to restore and reinvigorate the American manufacturing industry.
It is the right thing to do to restore manufacturing in the United States, but it is not that easy: First, after the 1970s, the United States introduced labor laws, labor laws, and many other policies. To restore US production now, do we have to revise so many policy documents that were put in place before? Second, it’s been almost 50 years since the United States de-industrialized, it’s been two generations, there’s a shortage of bosses investing in manufacturing. Very few small business owners in the United States are investing in production. The country is facing a shortage of workers. University graduates prefer Silicon Valley, Wall Street, or Hollywood, and few young people are willing to go into the factories.
It will be tough for the United States to revive the manufacturing industry within a few years. The traces left by the process of deindustrialization must be addressed, such as labor relations, distribution methods, the development of investor teams, the shortage of skilled workers. Remembering that this is a national strategic transformation, involving human, economic, lifestyle, and distribution change and a slogan is certainly not enough.
Economist Huang Qifan, on the difficulty of decoupling the global industrial chain from China, mentions several points: first of all, he believes that the investments needed to rebuild the industrial chain are difficult to obtain and that for China and the United States to decouple, the United States would have to spend a lot of money to reinvest in a lot of infrastructures. It is not easy to set up activities to support industrial reconstruction. In Dongguan, China, an industrial cluster exists, and the parts needed to make a particular product are readily available. But the United States has long-neglected manufacturing, making it difficult to recover without a cluster. The economic structure of the United States hinders the development of production. Finally, the infrastructure for manufacturing development is challenging to sustain. In summary, according to Huang Qifan, the reshaping of the global industrial chain will not be the result of some Western politicians’ hope to decouple from China. Still, the law of the market will prevail, with vertical integration in a more diversified direction.
Cao: Huang Qifan talks mainly about direct investments, American companies in China are reluctant and have difficulty to go back. But the issue of decoupling the industrial chain is not quite the same as that of disinvestment and relocation of American companies.
First of all, political factors must be taken into account when discussing the decoupling between China and the United States. The United States fears that China will catch up with or even overtake them. Declining economic growth in China is the political objective of the US political elite. In international politics, it is always the political objective that takes precedence over the economic goal. To achieve the political aim of restricting China, American politicians are allowed to consider sacrificing particular economic interests. Although it is difficult and costly to decouple industrial chains, decoupling is not impossible, especially in the high-tech sector.
The high-tech sector
Secondly, to study industrial decoupling between China and the United States, we need a specific analysis of each industry. For some sectors for the United States, it does not matter whether they are decoupled or not. But there are some sectors, especially in high-tech industries, where decoupling is not an insurmountable obstacle. For example, China is the biggest buyer of chips, and US high-tech companies, like Qualcomm, are going to suffer if they don’t sell chips to China. But for political considerations, to attack China, Qualcomm’s losses are not enough to induce the US government to lift the ban on Qualcomm’s chip sales to China. At the request of the US administration, Qualcomm and TSMC no longer sell products to Huawei. In the semiconductor field, the United States is in a position to drive China out of the global industrial chain that it controls. For example, China also manufactures large aircraft that are very much involved in the global industrial chain. China is a massive aviation market with a potential unmatched in the world. Although the United States appreciates the Chinese aviation market, the US government could have prevented US suppliers from working with China for political reasons. For US politicians, expelling China from the large aircraft manufacturing supply chain is a price they can afford.
The cost of decoupling China from the United States is indeed very high, and it would indeed be detrimental to both sides. For political reasons, the United States wants to beat China; in many areas of high technology, the United States has to contain China, with the decoupling of China, which is not impossible to do. In this respect, we still have to rely on our strength to achieve independent innovation and form a robust industrial system, which takes a long time and requires capital investment in research and development. Still, I fear that we have no better way.
Yong: Since 2018, the economic conflict between the United States and China has evolved more intensely in five areas: tariff wars, investment wars to drive US capital out of China while keeping a closer eye on Chinese companies investing in the United States, technological conflicts such as the 5G war, currency wars, and financial wars.
Sanctions and extortion
In terms of financial warfare, there are several areas of concern: first of all, the United States could impose some form of financial sanctions on China. Economic sanctions can be used in many ways, for example, against a bank or particular sectors—secondly, financial extortion. Many Chinese financial institutions, such as the Bank of China and the Agricultural Bank of China, have already been subjected to economic blackmail, under the guise of a fraction or issue of some kind. US financial extortion is not only aimed at China, but many European banks have also been extorted on a large scale. Since the financial crisis of 2008, the big banks around the world have been fined $243 billion by the United States, which is a way for the United States to get rich! Thirdly, it promotes massive capital flight. Capital flight can take many forms, it is often associated with corruption, and large amounts of capital have moved to the United States. In 2014 and 2015, China experienced severe capital flight. Of course, outflows and outflows were mainly China’s domestic problems. Fourth, China holds a large amount of US dollars, and the US was able to pass on the US debt crisis by devaluing the dollar and causing losses in Chinese assets abroad. Fifth, the seizure of Chinese assets abroad when the conflict between the United States and China escalated. Martin Wolf, the Financial Times deputy editor, warned in late 2013 that the United States could seize a significant portion of China’s assets in the event of a conflict between China and the United States. Such a possibility cannot be ruled out, and many of the current US practices. It is difficult to predict what the Trump administration will not do.
Overall, China faces a range of threats from the United States on the financial front, although so far, there have not been many so-called US sanctions. For example, China’s Kunlun Bank had an oil deal with Iran, and the United States has sanctioned the Kunlun Bank. The US sanctions have mainly excluded it from the dollar settlement system, and it cannot use the dollar or do business with a dollar-linked settlement system. Once a company cannot use the US dollar and the US dollar settlement system, its foreign trade is difficult. This sanction has been applied in the past and will be asked again in the future. We have to be very careful about that.
Swift and Chips
The majority of international financial transactions go through two systems, Swif, and Chips. Thus, the United States must use these systems to serve its geopolitical interests. We hope that we will be able to build a messaging system and a settlement system that can be freed from US control in the future, but there is a long way to go to achieve this goal. Some Chinese academics have also talked about solving this problem by promoting the renminbi’s internationalization, but it is a very long process. As things stand, I think the United States is not going to expel China from both systems. However, China must act and prepare for the unexpected.
More than two decades ago, when China’s foreign exchange reserves and foreign assets were small, we considered these possibilities but took no action. As things stand now, many things can no longer be corrected simply by thinking about them, and we can only accommodate ourselves and slowly find ways to get out of them. The proactive measures we can take are limited. To a large extent, we can only pin our hopes on the idea of “killing a thousand enemies and losing eight hundred (or more),” which may make Trump do less foolishness.
The internal market as a pillar
Recently, the central government has put forward the strategic idea of “accelerating the formation of a new development model with domestic circulation as a pillar and the dual national and international cycles being mutually beneficial” (see article). This strategic thinking is also the guideline for dealing with financial decoupling and US sanctions. This direction has implications for China’s future development strategy, economic structure, and balance of payments adjustment. In the long term, this adjustment will significantly strengthen China’s financial security and minimize the Chinese economy’s damage caused by the U.S.-led financial war
Specific policy adjustments are needed:
First, the renminbi exchange rate should be allowed to float freely. Suppose the renminbi exchange rate can float freely. In that case, there is no need for the central bank to intervene in the foreign exchange market, buy dollars to increase foreign exchange reserves, or use foreign exchange reserves to stabilize the renminbi exchange rate.
Second, the management of cross-border capital flows must be maintained, and the firewall of capital controls cannot be removed. However, the gradual liberalization of specific items under the investment program can be continued. As many systemic problems have not been resolved, the complete removal of the firewall of capital controls may, in certain circumstances, lead to large-scale capital outflows and flight. During the Asian financial crisis of 1997-98, international capital attacked the Thai baht and the Hong Kong dollar. Without firewalls, it would be difficult for China to resist such attacks.
Third, intensify efforts to establish a yuan settlement system. Further research and attempts have been made on the issue of digital currency, and in fact, the central bank has already done a lot of work in these areas.
Fourth, to promote the internationalization of the renminbi. As long as conditions permit, we will use the RMB as much as possible to denominate, settle, and invest in RMB.
Fifth, Chinese companies should fill the gaps in compliance management. Our compliance and anti-money laundering capacity cannot keep up with the significant regulatory needs of Europe and the United States and other countries. Chinese companies still have a lot of work to do in terms of compliance culture, building systems, and talent development. Chinese companies and financial institutions abroad need to be more vigilant and strengthen their efforts to prevent the US government from using its long-term jurisdiction for extortion and blackmail.
Sixth, strengthen international cooperation to promote reform of the international monetary system and enhance the role of the SDR as an international reserve currency. Continue to explore the possibility of regional financial cooperation.
Seventh, regularly promote asset diversification abroad and reduce US dollar holdings.
Will for hegemony?
Yu Yongding: There is a real problem with the so-called Thucydides trap between China and the United States. China had grown rapidly over the last 40 years, especially after 2001, and especially after the financial crisis of 2008, when the West stagnated, and the Chinese economy went even further. As a result, the gap between China and the United States is gradually narrowing, creating fear in the United States. It is natural for the United States, as a conservative power, to have such a mentality. Although China has no grudge against the United States and does not want to compete with the United States for world hegemony, many Americans do not see it that way. Whether they are Democrats or Republicans, the US government is responsible for the United States’ national fortunes. As a contemporary hegemonic state, it believes that China has threatened its hegemonic position. It will put pressure on China even if it believes that China has no intention of threatening it. Indeed, the United States cannot be sure of that. It is, therefore, obliged to put pressure on China. That has always been the reality of international politics, and China has no reason to complain about it, let alone have any illusions about it. In short, the United States will certainly put pressure on China, especially in the high-tech sector. The United States will do its utmost to maintain the technology gap with China for 20, 30 years, or even longer. However, the United States and China can still cooperate on general trade and investment issues. Of course, China will have to make a very significant adjustment. The trade surplus with the United States is almost $200 billion a year, which is unsustainable: on the one hand, the United States will never allow China to maintain such a large trade surplus; on the other hand, China’s trade surplus with the United States means that it is lending more money to the United States, which is not good for a poor country like China. So, to reverse this situation, we must, on the one hand, firmly oppose US trade protectionism, and, on the other hand, we must also adjust our trade policy towards the United States. To improve the balance of trade between China and the United States, we must increase our imports from the United States. But what we want to buy from the United States they don’t sell to us, and what the United States can sell to us, China may not need. What can we do? We will have to reduce our exports to the United States, but the total volume of trade between China and the United States may decrease. A decrease in total trade is certainly not good for economic growth, especially since a reduction in exports will dampen overall demand. Faced with this situation, we can only replace the weight of the external market by expanding the domestic market. I think that may be why the government has proposed the “domestic round” approach.
An interview that highlights the challenges in the face of the American attacks. China must have a larger domestic market and arm itself financially to withstand the cannon fire of its adversary/enemy/former spouse (your choice). In 80 days, the game may change. Trump said that Americans should learn Chinese if Biden becomes president!
17 August 2020