Chinese economy can brave external risks - 2024-12-18
The skyline of Beijing.
If the 2021-23 inflation surge in the United States helped Donald Trump's election triumph, his likely tariff wars will penalize world trade and exacerbate bilateral ties with China, again. But China has its toolbox for counter-moves, as demonstrated by the just concluded Central Economic Work Conference.
In setting priorities for its economic policy for 2025, Chinese policymakers emphasize the need to maintain stable growth, employment and commodity prices through steps including higher deficit-to-GDP ratios, interest rate cuts and the issuance of ultra-long-term special treasury bonds.
Recently, president-elect Trump threatened to put a 100 percent tariff on BRICS countries if they seek to create an alternative currency to the US dollar. The bloc countries are more interested in trading in their local currencies than creating a bloc-wide currency as an alternative to the dollar. But economic coercion is a taste of things to come. And the world is watching closely over his pledge to impose more tariffs during the presidential campaign.
Since September, China has launched extensive fiscal and monetary stimulus packages, which are likely to limit the detrimental impact of heightened trade tensions. By some estimates, Trump's blanket tariff hike could penalize China's real GDP growth by 0.5 to up to 1 percentage point. Yet, the support packages could contribute 0.7 percent or more to GDP growth thereby likely offsetting the impact. And there is more coming.
China has a large toolbox for countermeasures. In the policy space, the central authorities can use fiscal and monetary instruments to foster domestic demand in the event of the likely decline in US-based external demand.
Recently, the CEWC chose to implement a more proactive fiscal policy, seeking to respond more actively to the economic downturn, boost domestic demand and stabilize the housing market. Fiscal easing is augmented by the decision to also adopt a "moderately loose" monetary policy next year.
The Chinese leadership is confident that the country's goal of recording around 5 percent gross domestic product (GDP) growth will be achieved. The tacit message is unambiguous: Trade wars or not, China's economy will move ahead.
The decision to foster "unconventional" countercyclical adjustments heralds more than just a major stimulus. It reflects the biggest policy change since 2008. It means a comprehensive shift in policy, coupling demand-fostering measures with reforms and structural adjustment.
US tariffs will impact not just the Chinese economy but much of the world. What is different this time is that the US is less important to the Chinese trade networks than before. It attracts less than 15 percent of Chinese exports, whereas ASEAN and the EU account for over 16 and less than 15 percent, respectively.
The EU seeks to emulate the US tariffs, but it is more divided and prefers targeted rather than across-the-board tariffs.
Finally, Chinese competitiveness is increasingly premised on innovation, which is more resistant to tariff wars. I am currently touring Guangdong province. In the "Chinese Silicon Valley," research and development as of GDP is over 2.4 percent; higher than in France. In Shenzhen, it is over 6.5 percent; more than in any country worldwide.
Today, China is a world-class science leader and benefits from broader, more diversified innovation.
Chinese leaders have cautioned that in "tariff wars, trade wars, and technology wars, there will be no winners."
In early December, Washington added more than 100 Chinese companies to a restricted trade list and banned the sale to China of some of the fastest semiconductors and the equipment to make them. China responded by banning the exports of three rare minerals — gallium, germanium, and antimony — and other items to the US. US sources project the likely total cost to the US economy of gallium and germanium alone at more than $3.4 billion.
It was the first time China included a broad ban on so-called transshipment in a government regulation on exports. Moreover, China began an antimonopoly investigation into NVIDIA, the US giant dominating the world market for the most advanced chips needed for artificial intelligence.
China is not promoting the misguided geopolitical fragmentation the West has touted in the past seven years. Instead, these reluctant moves signal to the incoming Trump administration that unilateralism has no future in a multipolar world economy. They reflect a desire for a sensible bilateral dialogue.
The author is Dan Steinbock, the founder of Difference Group and has served at the India, China and America Institute (US), Shanghai Institute for International Studies (China) and the EU Center (Singapore).
Source: China Daily
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