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Event Report: 28 March: The Future of the Chinese Economy

2 April 2019

On 28 March 2019, the EU-Asia Centre hosted a panel discussion on the future of the Chinese economy. The discussion was attended by around 50 experts from the Brussels realm and was moderated by John Farnell, Senior Advisor to the EU-Asia Centre. The following experts sat on the panel:

- Mr. CHI Lo, Senior Economist for Greater China at BNP Paribas Investment Partners

- Mr. Lawrence J. Lau, Professor of Economics at the Chinese University of Hong Kong

- Ms. Elena Flores, Director for International Financial and Economic Relations, DG ECFIN, European Commission

- Mr. XIA Xiang, Commercial Minister, Permanent Mission of China to the EU

Against the backdrop of increased global economic uncertainty, a raging trade conflict between the US and China, and growing domestic headaches for Beijing, economists and policymakers are growing wary of the direction of the world’s largest economy. To discuss these concerns, the moderator outlined three main issues for debate: the state and direction of China’s economy; recent policy developments in China; and the EU’s response to these recent developments. 

1.     The state and direction of China’s economy

Although growth levels in China are being sustained with the Chinese economy growing 6.6% in 2018, this growth remains predominantly dependent on domestic government stimulus as well as on state-subsidized exports. Private debt is skyrocketing, and for the Chinese economy to be able to grow sustainably, a larger share of the growth ought be fuelled by domestic consumption – not by government-backed investments. 

Mr. Lau expressed his cautious optimism about the future of China’s economy. Once the trade war will have been brought to an end, a load of investments that were previously put on hold will be made regardless and the economy will return to business as usual. In addressing widespread concerns about the extreme volatility of the stock markets in Shanghai and Shenzhen, he explained that China’s stock exchange values have never been an accurate predictor of the general status of China’s economy. Another reason to be optimistic was the wide availability of tools Beijing can employ to ensure that the Chinese economy will grow at least 6.0% in 2019, including fiscal stimulus measures. As opposed to many western states, the debt to GDP ratio of China’s banking system remains relatively low at 60% (of which two-thirds accounted for by the central bank and one-third by lower-level banks).  

Other panellists, including Mr. Chi, argued that it is ostensibly not Beijing’s intention to lead the national economy towards short-term recovery. Beijing has self-imposed constraints on its easing policy, marking a new macroeconomic policy under Xi, notably different than the policy pursued for the past forty years. The Xi government is seeking moderateeconomic growth only. Nonetheless, fundamental macroeconomic issues remain: the private sector continues to be severely credit-constrained. This tempers the sector’s growth expectations, which in turn lowers the lending preparedness of Chinese banks to the private sector. This, in turn, lowers investment incentives. This vicious circle greatly undermines the development of China’s private sector.

2.     Recent policy developments in China

Disagreement both within China and amongst its economic partners prevails about China’s opening-up and reform policies. An increasing number of economists contest China’s self-proclaimed ‘policy reversal’, as Beijing continues to restrict trade and investment access to key sectors. The Belt and Road Initiative can above all be seen as a one-way street, opening up possibilities for Chinese investment for all, leaving little space for investment in the local labour market. Strong pressure from the USA and likeminded allies for structural, genuine changes in China’s economic and industrial policy has not yielded satisfying results – except for the announced liberalization of conditions for inward foreign direct investment.

Mr. Xia, representing the Chinese mission to the EU, explained that growing global uncertainties contributed to the State Council foreseeing a 6,0-6,5% growth rate for this year – the lowest growth forecast in decades. Nonetheless, he remains highly optimistic as the potential for larger and more sustainable domestic consumption remains. Mr. Xia provided an overview of recent efforts of the Chinese government to push through macroeconomic reforms, partially aimed at addressing some of the issues of its major trading partners. These reforms are incurred by the realization that private sector development, including creditability, is crucial for sustainable economic growth. In responding to comments made by the moderator, Mr. Xia argued that economic reform is not halting: for example, over the past 5 years, the number of goods subject to import tariffs was reduced by factor 5. The number of German majority-owned companies registered in China had also increased by 17% in 2018. 

Ms. Flores, representing the European Commission, stated that the EU has welcomed some of the reforms mentioned by Mr. Xia (significant tax reforms, freer prices in the energy sector, the construction of national pension and welfare systems) – yet nonetheless, significant trade and investment barriers remain, representing a lack or reciprocity on the Chinese side. She reminded the audience that China has unequivocally stated the objective of turning its state-owned enterprises into ‘global champions’. From the European side, this unquestionably translates as a statement of intent to continue subsidizing its SOEs. Moreover, the need to deleverage private debt (according to latest statistics representing over 270% of China’s GDP) is greater than ever. As for the newly adopted law on foreign investments, pushed through last-minute during last month’s gathering of the National People’s Congress, she shared that the EU is not yet in a position to clearly assess this law. 

The economists on the panel agreed on the urgent need to deleverage China’s private sector – in particular China’s shadow banks. Even though the aforementioned number of 270% may be an overestimation due to double counting, increasing equity and capital must be applied as tools to deleverage the private sector. Mr. Lau mentioned that Beijing had recently lifted joint venture requirements in most sectors, in what he interpreted as a sincere show of goodwill towards its trading partners.

3.     Brussels’ response to recent economic developments in China

The EU and its Member States – though their respective foreign policy vis-à-vis China remain far from unified – are increasingly concerned about the long-term strategic impact of Chinese investment in sectors deemed critical (high-tech, automobiles, infrastructure, cyber). Negotiations on a bilateral investment agreement have not progressed

Ms. Flores explained how media discourse tends to frame the relationship between the EU and China as one with a zero-sum nature – whereas in fact, the full breadth of the Sino-European partnership must be employed to jointly strengthen the multilateral trading order from which both parties have greatly benefitted. It is imperative that China fulfils its obligations under requisite WTO law on transparency as regards its industrial policy, including the subsidization of state-owned enterprises. Simultaneously, the EU and China must jointly double down on their efforts in the Global Forum on Steel Overcapacity and the Working Party on Export Credits in order to come to an understanding on investment and transparency standards. Her counterpart Mr. Xia confirmed that China is open to multilateral engagement and continues to endeavour strengthening the multilateral trading order in all possible ways. 

Audience remarks touched upon the alleged hypocrisy of the EU in presenting China as a credible supporter of the Paris Agreement and partner in the combatting of climate change, whilst China is funding a number of energy projects whose environmental sustainability is highly questionable – also on the EU’s direct border. Ms. Flores explained that the EU is fighting for a common and universally acknowledged set of investment standards that guarantee not only environmental, but also social and financial sustainability.