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An exclusive interview with Li Daokui: China's economic resilience can withstand economic and trade frictions
Jun 5,2019
The content below was translated by Tencent automatically for reference.

SMM News: [global Times reporter Baiyun Yi] Editor's words: the world's two largest economies are caught in economic and trade frictions, what impact will this have on themselves and the world? The whole field of international public opinion has been devoted to this great discussion. Compared with the United States, an established western industrial country, China, which represents an emerging power, has not been on the rise for long. Some Americans believe that if the United States and China enter a long-term game, the Chinese economy could be "crushed." Is this really the case? Where is the endogenous power and resilience of China's economy? Recently, a reporter from the Global Times interviewed two scholars on this topic. One is Li Daokui, a former member of the Monetary Policy Committee of the Central Bank and president of the China Institute of Economic thought and practice at Tsinghua University. The other is Tosden Yerinik, former vice president of the European operations of the World Economic Forum (Davos) and director of the European Center, a Taihe think-tank.

The impact of a new round of US tariffs on China's GDP growth this year will not exceed 0.2 per cent

Global Times: starting June 15, Washington will formally raise tariffs on some Chinese goods entering the United States, from 10% to 25%. What direct impact will this have on the Chinese economy?

Li Daokui: the biggest impact is mainly in the psychological and confidence level, that is, some investors lack confidence, mixing the twists and turns in the Sino-US trade negotiations with some domestic economic problems. But specifically in the real economy, I think the impact is relatively limited. Because many Chinese entity exporters were prepared to speed up exports last year, the decline in China's export data this year actually reflects the result of "snatching" exports ahead of schedule last year.

In the short term, China's exports are likely to remain depressed in the second half of the year. However, since 2007, the dependence of China's economy on exports has declined obviously. at present, exports account for only 15 to 17 percent of China's GDP, which is more than half lower than that in 2007. As for exports to the United States, they now account for only about GDP3%, so the tariffs imposed by the United States will not have a significant impact on China's economic growth in the short term. The impact of the US Singapore tariff on China's GDP growth this year will not exceed 0.2 percentage points.

In the medium to long term, on the contrary, this tariff measure of the US side will continue to accelerate the adjustment of China's economic structure and accelerate the pace of industrial redistribution. For example, some export-oriented enterprises will shift the market to China. Or transfer part of the production link to Vietnam and other neighboring countries.

Global Times: in the economic and trade frictions between China and the United States, the large-scale departure of production lines from China is one of the most worrying consequences. What do you think of this possibility?

Li Daokui: today, the shift of China's production capacity to the periphery will definitely not be as thorough as the transfer of US production capacity to China at that time, because China itself has a very huge and inextricable market. In textiles, automobiles, household appliances and other fields, almost all account for about 1 / 3 of the global market. Such a large market cannot be satisfied only by overseas processing enterprises. More importantly, Chinese production enterprises have formed a complete supporting system in China for many years. In the Pearl River Delta and Yangtze River Delta, from a screw to key parts, there is a complete production system, it is difficult for a single enterprise to move to other countries such as Vietnam.

It is possible that the last link in the production process, the processing and assembly process, is transferred from China to countries such as Vietnam, where it is exported directly to the United States, but most of the value-added links are still in China. Therefore, the hollowing out of China's industry will not occur, but the situation that China's industrial chain is getting farther and farther away from the US market with the intensification of the trade war is likely to happen.

The next three to five years is the key to China's economy

Global Times: if China and the United States really enter long-term economic and trade frictions, will there be any changes in the focus and direction of China's economic development?

Li Daokui: the biggest change is to make China fully realize that industrial upgrading should be carried out in an independent way from now on. In the past, we would have hoped to promote domestic industrial upgrading through the purchase of technology, mergers and acquisitions and other measures, but now it seems that this road has failed, especially some key technologies have to rely on themselves. The United States can engage in trade protectionism today, may set up barriers on some technical issues tomorrow, and may impose sanctions on us the day after tomorrow because of Iran and other international issues. Therefore, China's economy must speed up its self-upgrading. Speed up adjustment and innovation. Another important impact is that China will be more aware of the importance of "Belt and Road Initiative" cooperation. Our production capacity and investment will flow more to "Belt and Road Initiative" related countries, especially in the Middle East, Southeast Asia and other places with broad markets.

Global Times: from China's own point of view, do you think innovation has become an important driving force for China's economic growth? When will the growth of innovative production capacity fill the negative impact of the slower growth rate of traditional industries on the Chinese economy?

Li Daokui: China's industrial chain is in the upgrading stage, the Pearl River Delta and the Yangtze River Delta already have a large number of science and technology enterprises. On a global scale, our products and equipment are gradually replacing products from Japan, South Korea and Europe. A trade war between China and the United States could bring a painful period of one or two years to the process, such as an embargo on some core technologies and products. But in the long run, it will force the development of domestic core equipment and technology.

On the other hand, we need to see that many Chinese enterprises, especially private enterprises, still have to face the pressure of elimination, transformation and upgrading.

It can be said that today we are in a "metabolic" transition period, and this is also the current "pain point" of the Chinese economy. But I think we can solve this problem in the next three to five years, when the growth brought about by new capacity can fill the gap caused by the reduction of old capacity. This is because, first, our domestic demand market was fuller at that time; second, our industrial chain distribution was more reasonable, and our dependence on the US market was further reduced; third, if we did a good job, the independent innovation ability of Chinese enterprises would increase substantially at that time. Therefore, the next three to five years are the key, and we must do three things to "speed up", that is, to speed up the reform of the state-owned enterprise system, to speed up the reform of the scientific and technological innovation system, and to speed up the cultivation of the domestic market.

The judgment of foreign enterprises on the Chinese market is influenced by two forces.

Global Times: how do you evaluate the current investment and business environment in China? Can China continue to be attractive to foreign investors and foreign companies in the next few years?

Li Daokui: the investment and business environment in China is much better than before, mainly in the fact that the government is more open and transparent, and many procedures and things are simpler and more convenient. In addition, an important factor in considering the business environment is whether a government can serve enterprises and help them solve practical problems. For example, can the government help coordinate the conflict between business owners and workers? When enterprises encounter problems such as land expropriation, can the government effectively balance the aspirations of all parties? In this regard, the Chinese Government can be said to be one of the best in the world.

However, an improvement in the business environment does not necessarily mean an increase in attractiveness to foreign investment. At present, the judgment of foreign enterprises on the Chinese market is influenced by two forces at the same time: first, China's relaxation of foreign investment policy, which attracts more foreign investment into China; On the other hand, the strength of Chinese enterprises is rising, which leads to the increasingly fierce competition faced by foreign enterprises. With the development of Geely, a Chinese carmaker, for example, life for Volkswagen and Toyota is not as easy as it used to be; when Gree gets up, Panasonic and Hitachi air conditioners are not selling so well. The rise of Chinese enterprises has led to a reduction in the profit margins of foreign enterprises, resulting in a decline in interest in the Chinese market, which is not the fault of the Chinese investment environment, but a natural market trend, but many foreign companies are reluctant to admit this.

Global Times: what do you think of the long-term development trend of China's economy? Is China's growth sustainable and resilient enough?

Li Daokui: in the medium to long term, China still has great potential for growth. I think China will maintain GDP growth of 6.5 to 7 per cent for quite a long time. First, there is no shortage of capital savings in China, which can be converted into capital through investment. Second, the quality of China's labor force is constantly improving. There are about 8 million university graduates in China every year, many of whom are science and engineering graduates studying engineering and technology. They will play an important role in China's scientific research and technological development. Third, China currently has a population of about 1.4 billion, but only 400 million people enter the middle-income class, and there is still a lot of room for improvement in the income and living standards of 1 billion people, which also means great potential for growth. In fact, the income of this part of the population continues to grow, and in a few years, they will also be converted into consumption. So, on the whole, China has a lot of important development elements, but we need to release all these development momentum through further reforms.

Yerinek, former vice president of European operations at Davos: China's development has made the West richer

Global Times: what impact do you think this will have on the Chinese economy if China and the United States fail to reach a trade agreement in the short term?

Yerinek: first of all, I would like to say that the Chinese economy is already undergoing changes, which has nothing to do with trade tensions. From emphasizing the rate of growth to paying more attention to the quality of development, this in itself means some structural adjustments, which are beneficial and necessary for China. While this process is bound to have some costs, I think China needs this "upgrade". Given the huge volume of trade between China and the United States, the Chinese economy will certainly be hit. Some US companies may shift their supply chains to markets other than China, which will have an impact on China's GDP in the medium term. But we also need to see opportunities in this situation: in order to reduce the risks of the future, China has begun to look for different markets, such as Africa, which is a good partner. The region and China are highly matched in demographics, with a high proportion of young people and a relatively low per capita income, while China is facing the challenge of ageing and has great capacity to provide infrastructure to Africa. At this level, "Belt and Road Initiative" cooperation will provide quite positive help to the Chinese economy, not only improving the quality of trade, but also allowing China to have a more integrated supply chain.

Global Times: how do you predict the medium-and long-term development prospects of China's economy?

Yerinek: on the whole, I think China is on the right track. There are three stages of economic development, followed by factor-driven economy, efficiency-driven economy and innovation-driven economy, which rely on cheap labor, infrastructure investment and natural resource development. Now the western developed countries are mainly innovative economies, while China is jumping into an innovation-driven efficiency-driven economy.

As efficiency-driven returns are diminishing, we see a strong demand for innovation in China and a series of industrial policies to encourage innovation. I think these policies are very reasonable. Some in the West have criticized this as a protectionist policy, but we must see that China has a population of about 1.4 billion and that some technologies cannot rely solely on market regulation. In fact, the West has learned a similar lesson in the wake of the financial crisis-the need to regulate and limit financial markets. But when Westerners who think restrictions should be imposed on financial markets talk about China, they suddenly say that China must open up 100 per cent immediately, which is clearly self-contradictory.

Global Times: how do you evaluate the current investment and business environment in China?

Yerinek: despite the tension in Sino-US economic and trade relations, China's trade is still growing. In fact, China is opening up to more companies, and it may be more open to European companies than to American companies.

China is still a huge market for foreign direct investment. On the one hand, the European Chamber of Commerce has been collecting business concerns about the Chinese market and discussing with the Chinese side the establishment of a more level playing field business environment and the protection of intellectual property rights. On the other hand, we all know that the West has become richer as a result of China's development. The same is true in China, where this win-win situation should continue.

Global Times: what do you think is the most urgent problem to be solved in China-EU economic and trade relations?

Yerinek: I think the most pressing problem between China and Europe is actually Sino-US economic and trade frictions, which will affect investment decisions in Europe. In addition, Europe should be more clear about what kind of relationship it wants to maintain with China, and maintain dialogue and communication with China. Not only do we rely on individual countries to maintain bilateral channels with China, but also through institutions that represent the EU as a whole. There must be practical action after communication. Now, both Europe and China have a responsibility to strengthen mutual trust.

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