China And US Seek Their Own Win-Win In Davos

 

OUR MAN IN Davos sends word that he can barely pick his way through the crowds at the annual gathering of the world’s great and the good at the World Economic Forum without tripping over yet another member of the largest government delegation China has ever sent, not to mention more than 50 leading Chinese chief executives and their entourages.

Their presence is even more noticeable in the absence of a US delegation, US officials being instructed by President Donald Trump not to attend because of the US government shutdown.

The ‘optics’, as they say, of the US president rubbing shoulders with the global elite at a time when many of the 800,000 US federal workers furloughed by the shutdown were queuing at soup kitchens or for unemployment cheques, would not look good to his still-adoring domestic electoral base. However, it is easy to imagine also that Trump would not find the Burning Man of globalisation much to his ‘America First’ tastes, or his reception particularly warm.

Vice-president Wang Qishan, leading the Chinese delegation and vying with outgoing German Chancellor Angela Merkel as the star political turn this year, certainly gave the United States the thinnest of thinly veiled workings over.

While painstakingly mentioning neither Trump nor the United States by name, his speech relayed a self-confident message of the great renewal of the Chinese nation and how China was duly asserting its place in the world, one that was a leadership role.

In essence, that message was:

It is a new world. China’s is back. It is a world player and you, United States, had better realise that not only do you no longer rule the roost alone, but we and the other developing nations are no longer going to be takers of the rules of the global order that you alone write, but givers of those rules. And, by the way, don’t bully us over technology, and don’t interfere in our national sovereignty or economic and industrial policy, i.e., lay off Made in China 2025. We can run our economies as we choose, not how you say.

Wang did not, of course, use any of that language; it is entirely our man’s decoding.

How Wang expressed it was:

Adjustments need to be made both economies and societies domestically and to the rules of the international order of economic governance…[China has] the right to take part in the global technological governance system as equals…It is imperative to respect national sovereignty and refrain from pursuing technological hegemony, interfering in other countries’ domestic affairs, and conducting, shielding or protecting technology-enabled activities that undermine other countries’ national security…We reject the practices of the strong bullying the weak and self-claimed supremacy.

Those are lines that do not take much reading between.

Wang also said:

Many countries are increasingly looking inward when making policies; barriers to international trade and investment are increasing; and unilateralism, protectionism and populism are spreading in the world. All these are posing serious challenges to the international order. Will economic globalisation move forward or reverse course? …What we need to do is make the pie bigger while looking for ways to share it in a more equitable way. The last thing we should do is to stop making the pie and just engage in a futile debate on how to divide it.

Even though US officials were not in Davos to rebut Wang, plenty of Western business leaders are there, and have let senior Chinese officials know in the private dinners that are the real power centres of Davos of their concerns over the way intellectual property protections are abused in China and the legal or illegal acquisition of Western technology IP in support of Made in China 2025.

And one US government heavyweight still managed some pre-emptive retaliation, US Secretary of State Mike Pompeo, who addressed the forum by video link the previous day

Pompeo rehearsed his stump speech from his recent swing through what Washington now calls the Indo-Pacific, where he warned of China’s state-centred economic model, its belligerence towards its neighbours, and its embrace of a totalitarian state at home, before holding out an olive branch of sorts:

There are those who say that conflict, superpower conflict between our two countries is inevitable – we don’t see it that way. We want to find places where we can work together.

The old win-win. The question is, will there eventually be just one winner?

Is Anyone Who Matters Listening To Wen’s Call For Political Reform?

Prime Minister Wen Jiabao (left) has spoken before about the need for political reform and greater democracy in China, but usually to select audiences and not given the coverage in state media accorded to his plenary speech and comments in a Q&A at the World Economic Forum meeting in Dalian. (Video here).

Much of what he has said before on the subject has fallen on deaf ears among his peers in the country’s top leadership. There is an acceptance that, if China is to move to the next stage of its economic development and not get stuck as a middle-income developing nation, it has to transform its economic model from the one Deng Xiaoping laid out and that has provided the three decades of rising prosperity that underpin the Party’s legitimacy to monopoly rule. However, there is an equal recognition that doing so carries hazards that could jeopardize the Party’s very supremacy. Creating new economic institutions means rethinking the connections between China’s bodies politic and economic.

Wen’s calls for greater democracy take that thought a stage further–and into far scarier terra incognita for the Party. It would decouple what the late legal scholar, Cai Dingjian, called the combination of money and power that is at the heart of the Party’s rule.

The existing leadership has been adept at walking a fine line between gradual economic reform — sufficient to generate the growth needed to ensure political stability — and negating change that threatens the status quo of the political system or vested interests in business, the military and government. The underlying goal has been to ensure the survival of the Party’s supremacy.

China’s next top leaders may be even more dedicated to that cause. The incoming so-called fifth generation, will, for the first time, be men born after the Party seized power in 1949. With their ascendancy from next year, modern China will cross a political and demographic Rubicon.

Their generation is the great, great grandchild of Mao’s first generation of leaders.  Their youth was shaped by the tumult of the Cultural Revolution and the near implosion of the Party in the late 1960s. Many of their families were purged. Their survivalist reaction was to be “redder than red” as a means to advance through the Party’s ranks. Distrustful of anything that might cause instability, it is innately conservative.

Yet at the same time, its members’ political lives have been formed when China has only seemed increasingly powerful, wealthy and expansive. They have ridden high on China’s economic growth. They are more worldly than their predecessors, mostly educated at top Chinese universities, more likely than their predecessors to have social science rather than engineering degrees, and be more likely to send their own children to top U.S. and European universities.

That is also the crucible of the world view of the generation of younger officials coming along behind, an identifiably post-Deng generation to whom Long Marches, Great Leaps Forward and Cultural Revolutions are history not experience. They are on track to take power as the sixth generation of leaders in 2022. This unusual mix of conservatism and economic pragmatism at the top with more self-confidence and Party orientation immediately beneath is likely to net out as caution, stability and an appetite for only incremental change,

All are as pragmatically committed as their predecessors to the Party’s monopoly on power, if divided over whether the basis for that should be ideological or economic. The core of the new leadership are “princelings”–descendants of Mao’s revolutionary leaders, a dynasty of some 400 elite families who hold extensive sway over the Party, army and the economy, especially the state-owned sector which accounts for half the economy and where those three power centers intertwine. One of their own, Xi Jiping, is emerging as Hu Jintao’s successor as paramount leader, successively taking over the top Party, state and military jobs between 2012 and 2014.

Their dilemma is that if the Party’s legitimacy to monopolistic rule depends on continuing to deliver the economic growth that keeps its citizens getting richer and the country stronger and if China’s rapid economic growth cannot continue beyond a certain point without institutional reform, then managing the role of government in the economy and overcoming state-owned vested interests–in other words reforming itself–becomes the new leadership’s most important concern.

Though unlikely, and increasingly difficult to do in a globalized world, China could turn inward and neo-isolationist, relying on its growing internal market and a demographic bias to becoming a deficit country over the next decade, to drive the next stage in its economic development. There is every indication for now that China will continue on its present course. Indeed, there is a plan for that. The new leadership will inherit the country’s current five-year plan at its midway point.

That plan is long on goals but short on a timetable for implementation. That lets a new leadership kick the can down the road for a few more years. A key question is, have the old elites secured control of the new economy: or is their power only temporarily persisting in it, to wane as market institutions eclipse the administrative power of the cadres; or are the old elites just being replaced those made newly wealthy by business? In the answer lies an indication of how much scope there is for political reform.

So far at least, the Party has found a way of absorbing the rise of private power that elsewhere in industrializing economies has led to the rise of new centers of political power. Wen seems to sees those as inevitable in China, and thus to be embraced early; his immediate successors, we suspect, will see them to be smothered.

Unintended Consequences Of Yuan Revaluation

Our man with his ear to the ground moving and shaking the global elite at the World Economic Forum’s annual meeting in Davos sends word that amidst a general half-glass full/glass half empty sentiment towards China’s commitment to revaluing its currency, there is some concern that a revalued yuan against the dollar would be a mixed bag for U.S. firms. U.S. exporters would find their products becoming relatively cheaper in the Chinese market. In the other direction, American firms with Chinese operations would find their exports from China becoming relatively more expensive. Foreign-affiliates account for 54% of all China’s exports, according a finance ministry report last year. Against that, foreign affiliates would also be repatriating higher profits in dollar terms from their domestic Chinese sales, and their margins would be helped by getting cheaper raw materials when those are imported.

It is on the investment rather than trade account that a yuan revaluation may have the greatest unintended consequences. It would become more expensive for U.S. companies to invest in setting up Chinese operations, giving an advantage to those already there. It would also likely boost China’s outward foreign direct investment (FDI), as it lowers the cost to Chinese firms of buying overseas assets. This Bystander recalls that that is what happened in Japan after Washington arm-twisted Tokyo into allowing a 50% revaluation of the yen against the dollar in 1985-87. Japan’s overseas FDI went from barely $6 billion in 1984 to nearly $50 billion by 1990.

In China’s case, the drive overseas is led by the search for natural resources. Manufacturing accounts for less than 10% of Chinese firms’ FDI. Some labor-intensive manufacturers are looking abroad for cheaper labor in the face of rising wages at home; more than 700 Chinese companies had invested in operations in Vietnam as of last July, according to Vietnamese officials. That is a drop in the bucket of the country’s manufacturing cohort, and they are mostly small or low-value-added manufacturers from Guangdong and the provinces bordering Vietnam. Yet a rising yuan could sweep along more in their wake. If Japan’s experience were to be replicated (and Beijing has resisted such a rapid forced appreciation having seen the effect on Japan’s domestic economy), the bigger flood of Chinese firms looking beyond natural resources to invest in access to foreign markets, brands and technology would be likely to prove much more troublesome for Western competitors, and to expand trade friction into investment friction.

China’s Economic Competitiveness Still Lags Its Growth In Muscle

China has moved up two places to 27th in the latest annual rankings of national competitiveness published by the World Economic Forum. Hong Kong and Taiwan, which are ranked separately, are at 11th and 13th, unchanged and down one, respectively. Hong Kong remains the most competitive economy in the Asia-Pacific region thanks to its financial markets and improved infrastructure.

The report says that “China shares with mid-range European countries the relative handicap of rigid institutions and very low innovation. But the country is quickly catching up on infrastructure and market efficiency and will increasingly benefit from its expanding market size.” It also notes that  “market size, flexible labor markets, and strong innovation are at the core of the U.S. competitive advantage.” The U.S. ranks fourth overall, down two places from last year’s survey. Switzerland remains no 1 overall.

China is the only one of the four Brics to have improved its ranking this year, and so extends its lead over them. The lift of two places comes almost entirely from improvements to China’s financial markets. The report also says that “China has made small strides in the quality of higher education and training, but there remains considerable room for improvement in what constitutes an important area going forward. In addition, although the labor market is indeed quite efficient, a lack of flexibility constitutes a major challenge.”

Slowing China Growth Remains A Global Risk, WEF Says Again

The yearly Global Risk Report issued by the World Economic Forum ahead of its annual meeting in Davos (again) lists “China’s growth falling to less than 6%” as one of the key risks facing the world economy. The report doesn’t give a probability of that happening, beyond indicating it is unchanged from a year earlier, though it does lay out how it could occur:

[China’s growth] derives from high credit growth, which entails an increased risk of misallocation of capital and renewed bubbles in financial asset prices and real estate. These can always carry the risk of a sharp and potentially recessionary correction.

Not an unconventional concern.

The report lists the drivers and developments to watch as follows, with a plus sign denoting drivers of increasing risk; minus signs drivers that reduce risk:

+ Excess ex-ante savings over-investments in China
+/- Chinese government’s ability to stabilize domestic demand in the wake of loss in export momentum
+/- Ability of Chinese government to maintain stable renminbi in the wake of high foreign reserve accumulation
+/- Ability of Chinese government to maintain political stability in the wake of sizable loss in growth momentum.

China’s growth falling to less than 6% has turned up in each of the five past Global Risk reports, a fact that the WEF acknowledges in its latest one:

The implication of a decline in China’s growth has been a constant since the first edition of the report. Thus far, this risk has not materialized but it is clearly one that would have considerable implications for China and also for the global economy.

Nor an unconventional analysis.

One other table that caught our eye in the report was a listing of stimulus packages for the energy sector. China has committed $46.8 billion for 2009-11, second only to the U.S.’s $66 billion, but way more than third placed Japan’s $8 billion. America’s money is going to clean energy generation; China’s to energy efficiency.