Davos 2020: Phase 1 Of U.S.-China Trade Deal Won’t Solve Problems, China Reform Foundation’s Fan Gang Says

Having an agreement is better than none, right? I don’t believe this will solve the problems with other countries. The trade deficit of the U.S. is hard to be eliminated by selling primary goods to China—the beans, pork and the gas. As the most advanced country, you’re not selling us the most advanced goods but all those economic ones. I don’t think that will be sustainable. That is one thing.

Second, a lot of things are not in this agreement. I would say that this is a good thing, but it has not yet solved all the problems. So, we need to make more effort to improve the situation and the relationship between them.

This is the kind of uncertainty which this agreement did not really remove. Because, if things are determined by domestic politics, it could be very damaging for international relations. Somebody will oppose more sanctions or the tariff and when negotiations for Phase 2 will start— that is all uncertain. So, that’s not a good thing for both countries I would say.

Well, the Chinese economy is a large economy. That means, the outside factor may have an impact but it is mainly due to domestic reasons. So, the trade war has a negative impact but the main reason for this downturn is that the domestic over-capacity issue has not been totally removed and the market clearing is not yet finished.

But things are getting better. It is stabilising and the market clearing is going on and it is going to be finished in the last phase of the transition. So, we would expect that the economy in 2020 would be stabilised, that is one thing. If there is no higher growth, but at least it will stabilise around 6 percent and then, the next thing will determine is how much reform and how much of structural changes will really take place in the economy.

The consumption now is really growing as a part of the GDP and as a contributor to the GDP growth. The reasons are really solid for this kind of a change. Number one, by the end of 2019, China’s per capita GDP reached $10,000. So, this is a milestone and that indicate that the people really have the money now for consumption.

Number two, social securities have been really reformed and started to function for Chinese consumers. Not only the urban people but the rural people have now got some basic securities. So, that will be making a big contribution for the lower saving but higher consumption. Also, these digital things really improve. Before, we didn’t have this—the so-called consumer credit. Now the internet is really growing very fast and the e-commerce is really fascinating.

Earlier, China’s saving rate was high and old people’s saving is so low. Earlier, they didn’t save much money but after retirement, they are not going to spend much money. But after 40 years, people who have retired have the savings. So, the structure of the economy and the population is now really changing but that will also make the consumption continue to grow in the next decade.

Well, at this stage of development, as an economist, I do not want to see the investment going too low. This is because savings rate is around 42 percent. So, to utilise those savings, you need some investment. Also,China needs investment in the social capital in terms of the infrastructure and urbanisation. You still need those investments.

The investment in China now is going into the second phase of urbanisation. In the early phase, you had small cities grow up. But now, the government has finally adopted the policy encouraging the big metropolitan are adevelopment—you may have heard Hong Kong, the Schengen area, Shanghai. That’s a big area for urbanisation as it’s a group of cities. That also needed some investment. That will lay a better foundation for the future growth of consumption.

At the moment, the percentage of the ratio between this consumption and investment is okay. I would like to see that stays for a while—say three-five years, then go down further. We calculated it many years ago that if China has basic equity of the income, the better. The ratio is something like a 25 to 65.

No, not very far away.

The overcapacity mainly is related to investments. If there is too much investment, it creates too much demand for those investment goods, not really exports. Exports continue to be at a high level, but in recent years because of trade friction with some countries they are now growing marginally. However, China’s export to other countries—emerging markets, including India, Russia, Asean, Africa and other markets, it is really growing.

I mean, our export to other countries is still growing. While I’m not saying that exports will play the role like it did 10 years ago or 20 years ago, I will not say it will decline or disappear. China’s export capacity will continue to be strong. If we can open up further to remove some restrictions for foreign capital, then growth of export, including export from the multinationals in China, will continue to be the part of the growth story.

Last year, our export to the U.S., was down by some 14 percent. But overall export continues to grow by two or three-point percentage.

It will play a part but definitely not the main part. Because this is mainly for the investment. Investment means infrastructure in domestic and those kinds of heavy industries. So that’s not really exports. Export mainly means the light industry—you know, the electronics and all those things. So, it plays some roles, but not the key for this.

Basically, our argument is in the last stage. Hopefully in 2020, we’ll see it to be over. From the beginning of the last century to the end of the last century. So, that’s a little bit too long. That means is it like a so-called ‘soft landing’. The good part is, we didn’t have negative growth. But soft-landing means, it took too long.

In the beginning of 2018, before the trade war started, China’s investment, including the private sector investment, really was growing. But then stopped due to this trade friction. So, I would expect that if the market clearing is finished and if we have the phase one agreement really playing its roles, in 2020 the investment will rebound a little bit.

In the future, we still need a lot of the investments. Particularly, this urbanisation process and the industries. So, the new industry, new technology, and that all the Chinese companies are really making investment plans for that. So, from that point of view, I would say investment growth is too important and that will create a big demand for the world market.

Hopefully not. Hopefully not like last time and this time, the growth will be moderate. Last time, all the bubbles were created by fast growth. I mean, if growth is too fast, then you create the imagination that all the bubbles will take place.

But if it’s moderate, people will be rational to calculate, and the market will not have that kind of favour. From that point of view, the demand will continue. So, that will have a positive impact on the commodity market, but not really the bubble impact. So, hopefully this this time, it could be more stabilised.

Well, the reason Chinese government adopt a lot of opening-up policies, that’s part of the reform. We need a market access for all people, not only the foreign companies but also the private sector, the domestic private sector. So that’s a very important reform. It is a set of institutions and the policies for the development, particularly for the development of the private sector and complied by the foreign companies. Now, China has more openings so that’s a very important part of market access—an open market.

Second, it is also the relationship between the government and the companies, including the issue of state-owned companies’ issue. So that has created quite a lot of distortion in the market, particularly in the domestic market. So that’s important for the future. Also, we need further reforms for the social security system—which we now call the stakeholder development—to avoid the income disparity and the social crisis. So that’s also a very important part of the reforms.

Yes and no. I believe now, most people, including the leadership, understand that we need a private sector. Particularly, we need the private sector to play the role of leading the technology revolution. The investment, the projects by the private sector is really fascinating. But for the whole economy, the state sector still plays the bigger role. They have so much money and capital, but of course they need some reforms. They need to give up some roles for the private sector, they need it and we need it.

We accumulated so much capital and invested a lot of them in the state companies. So, we need the state companies to play a role, including the resources, transportation and infrastructure. All these public goods, we still need. We’re in a stage of urbanisation. So, we need that kind of public goods to be provided. So, I would say both. Hopefully, more roles for the private sector, but still have the same sectors in the economy going very strong.

A lot of the things are not very clear for us as well. We do not know because it is hidden. But I will say when you add up all those stories, as a percentage of the economy, is still not big.

In some sense, the Chinese financial system plays safeguard too much. In effect, for example, banks have scarcely given any credit loans.Everything is a mortgage; everything has been securitised one way or another.So, they don’t take that much risk. You can say there are certain problems but overall, it’s not really a big deal as part of the economy and as part of the financial assets.

I will say with new things like P2P there is a new issue and new problems, but still, by the size of the total problem, overall assets are still handled. Handled in the sense, they are still not really going to create the crisis. So, now we’re in the transition to also clean up these kinds of things. That will take some time, but it’s not really putting too much pressure on the financial sector. Consumer credit is not growing very fast. So, I say the problem is there, but not the problem that can create a crisis like 2008.

At the moment, the Chinese economy has a problem of liquidity. Meaning that the banking sector has the money, but they cannot find a better project. So, because there’s demand, the market is still low. That’s why we need to rely on the fiscal policy. You need the government to spend some money, create the demand and then, you make the whole economy start to roll up. I think this is a situation of the moment and I believe for this year or the next year policy will dominate.

The government has the limit for the fiscal policy. It also has the potential to play the better fiscal policy, particularly in a relationship between the local and the central government. China’s economy is complicated by that very much. So, if they can play that one, if they can really utilise those leverages for the local government, then I believe they can play out.

That’s right.

If China continues to grow, then it will make a contribution to lead the global growth. China right now contributes 30 percent of the total growth of the global economy. So that’s one thing we need to expect.

Second, I think that China really can play some role in keeping or pushing forward globalization—multilateralism. China needs it. That’s really in China’s own interest. So, that may not be a leading role but is an important role in that direction.