Author: Fan Gang, President of CDI

Editor’s Note: Eventually, China and the United States will need to sit down at the negotiating table to solve trade frictions.

Trump would sooner or later impose trade sanctions on China, but no one had expected such a big move. China’s exports to the United States amounts to over 400 billion U.S. dollars, while Trump is now seeking to impose tariffs on up to $60 billion of Chinese imports. Such a big move on trade shows that the United States treats China as its primary rival in trade. The action also illustrates that such superpower like United States can be brutal sometimes, adopting measures without any evidence or reasonable analysis and ignore rulings by the WTO.

American consumers will be the victims of trade war between the US and China. The trade war will also harm China as the consumer product prices could rise. It is necessary for China to consider the price elasticity of demand when deciding how much to export. Generally speaking, the trade war will impact on United States as much as China. There is the fear that if you want to fight this trade war and I do not fight back, you would probably be even less reasonable tomorrow. Thus, China will certainly take countermeasures.

Keep a level head in face of US-China trade war

As a rising middle-income country, China needs to be prepared for the possible suspicion, antagonism and even aversion from others. These reactions must be taken care of proactively but also with a cool head. This is not the first time for China to meet with oppositions from other countries, nor will it be the last. China shall keep a level head in face of the cacophony of voices as it rises.

Those who in the past believed the China’s growth depended on low-end manufacturing have now discovered that China is able to innovate and has even become a leader in certain high-tech industries. The western world now feels threatened as China becomes a stronger competitor. And the trade war is highly interconnected with the rise of rise since Trump has declared that the trade sanctions on China are to protect US interests.

China has worked hard for its own success. Chinese have lower per capita income but are increasingly capable of innovation. Most exporters in China are private companies not subsidized by the government. There are many foreign-funded products and services among Chinese exports as well, for example, products that are manufactured in China by American businesses, which also count as Chinese exports to the US when calculating the US trade deficit with China.

Structural conflicts exist in Sino-US trade

The Sino-US trade frictions is not simply caused by trade deficit but more fundamental structural challenges existing in the two kinds of economies. Initially, the US alleged that the deficit due to China’s low foreign exchange rate. However, trade deficit has persisted after China raised RMB’s exchange rate against the US dollar. Even after US conducted the 301 Investigation against China, trade deficit still stayed on the same level.

China is not only highly competitive in a wide range of industries and also benefits from low cost and high efficiency in many fields.  Even though, the competitivity in high-tech industries still needs to improve. Structural problems exist in Sino-US trade in the sense that China is not allowed to import the desired products as it exports its products to the US.

Stand up to US-China trade war

First, China needs to have reciprocal countermeasures. China will probably raise tariffs in response to the imposed higher tariff, which is something that China is capable of doing. Second, crisis management consciousness is crucial to preventing potential risks from developing into full-fledged crises. China needs to negotiate and defuse tensions where possible to avoid a completely hostile situation. Third, China-US trade only accounts for just 16-17% percent of global trade, and trade with Europe, another 16-17%. China also has the option to develop trade relations with emerging countries, including countries in Latin America, Middle East and Africa.

China’s core concern is still development. China welcomes foreign investment not just for the sake of attracting capital, but also creating jobs and bringing in advanced technologies and management. We observe how foreign-funded businesses operate and learn their experience in management. This is not stealing, as this kind of knowledge or expertise is universally shared. It is a common practice among all countries to model on existing products and come up with similar products on their own, not just in China. China is committed to staying open and will not shut its door for foreign businesses even though its own businesses are denied entry into a foreign country.

Globalization will not stop

Globalization was started by American capital and multinationals in the first place. American workers did not take it seriously at the beginning, but globalization has indeed spurred the development of China. As farmers leave villages to work in cities, China has seen a steady increase in per capita income, fast development of technologies and larger exports. Naturally, discontent in the US rises as local workers lose jobs to their foreign counterparts. In a sense, reversals and relapses in the process of globalization are inevitable. It is therefore important to anticipate challenges and be prepared.

However, globalization will not stop. Multinationals from developed countries now continue to promote globalization as they are still establishing their presence across the world today to maximize their gains. Two new forces have also joined to promote globalization nowadays, one being low-income countries which have discovered the benefits of attracting foreign investments for their own development from the experience of China and India, the other being middle-income countries like China.

China, as a middle-income country, needs globalization in the process of bringing in foreign capital and encouraging its businesses to go global. Going global is a must for China in view of its domestic excess of capital. Despite a moderate level of income in China, the high savings rate has resulted in a huge amount of capital, which will lead to overcapacity if invested within the country. Many Chinese businesses have also come to realize the importance of seizing the opportunity to develop abroad as China restructures its economy, thus starting to allocate global resources.

Despite opposing voices, globalization will continue in the long run. It is natural that the US wants to get some of its businesses back to accommodate the interest of domestic workers, as all governments wish to see more investment within their own borders. While there are many reasonable ways to do this - reducing interest rate in particular - fighting a trade war, however, is a bit of reversal of globalization.

Author: Liu Muyun, Invited Researcher of CDI and President of Beike Biotechnology

Editor’s Note: Zero tariffs alone cannot address the root cause of exorbitant prices of imported anticancer drugs and much more should be done to expand market access to quality anticancer drugs.

When he held a news conference at the end of the two sessions, Premier Li Keqiang said that tariffs on drugs will be slashed, while the much-needed anticancer drugs might phase in zero tariffs. However, zero tariffs alone cannot address the root cause of exorbitant prices of imported anticancer drugs.

It can achieve a scale effect for international pharmaceutical companies to concentrate the large market demand of China, negotiate directly with the producers via a national channel and purchase anticancer drugs in bulk. National procurement does not only mean lower prices, but also quality assurance. It is feasible to set up a centralized procurement platform at the national level with a new state administration on medical insurance to be put into place according to the State Council institutional reform plan of 2018.

We should give play to the role of Internet, establish an evaluation database for anticancer drugs, a catalogue of much-needed clinical drugs, a database to optimize catalogue and price negotiations of the centralized procurement.

In addition to scientific and technological innovation, mechanism innovation is also needed. We should reform the management of clinical tests, speed up the review and approval system for innovative drugs, accelerate application and marketization of research results, improve the business environment generic drugs, and combine technological innovation with clinical diagnosis and treatment.

The key role of medical service in the treatment of complicated diseases should also get enough attention. Innovative drugs, surgery and therapy are all clinical diagnosis and treatment tools; however, people who use these tools efficiently and economically also matters. Health practitioners deserve recognition and respect from the society.

Prime Minister Keqiang Li announced during a March 5th address to the People’s Congress of Beijing that China’s growth target for 2018 would be about 6.5%, the same as in 2017, when growth reached 6.9%. The yuan will be “basically stable” at a reasonable level, Li also predicted. More local government debt will be cut, but not at the cost of infrastructure. Moreover, reducing financial risk will be key for the regulatory agency, an emphasis further confirmed by new Central Bank governor Gang Yi, who took office after Xiaochuan Zhou’s 13 years of service.

Only three days after the People’s Congress ended, U.S. President Donald Trump announced the plan to impose tariffs on $60 billion China’s exports to the United States. Such unilateral protectionist measures really pushed the Chinese economy, China-U.S. economic relations and the whole global trade system into great uncertainty, at least for the near future! Exports in January-February were up 24.4% y/y, a significant 15.2 pps rise from Q4 2017. Though export growth is generally rising, the current surge is still exceptional, and likely to be a short-term phenomenon. Imports were up 21.7% y/y, and the adjusted growth rate a still-flat rise of about 14.7% y/y.

Industrial output was up 7.2% y/y in January-February, up 1.1 pps from Q4, to a new post-2015 high. Fixed asset investment was up 7.9% y/y, up 1.5 pps from Q4, and up 2.1 pps from its nadir in Q3. Retail sales of consumer goods were up 9.7% y/y in nominal terms, down 0.2 pps from Q4, and up 7.9% y/y after considering the price factor, and down 0.5 pps from Q4. In February, the ex-factory price index of industrial products was up 3.7% y/y, a constantly falling growth rate, down 2.2 pps from Q4. PPI has demonstrated a similar trend. We expect producer price growth to fall further, given tightening monetary policy. CPI continued its slower rise, up 2.2% y/y in January-February, and up 0.4 pps from Q4. We expect CPI to rise by around 2.5% this year. M1 was up 11.7% y/y, and the adjusted rate is around 10% y/y, still falling from August 2016. M2 was up 8.7% y/y, less than almost every month in 2017.

Chinese politics has received much media attention this month. The first issue was the constitutional change of presidential term limits, with the elimination the two-term limit making it possible for President Jinping Xi to remain in his post after his second term. The second issue was the creation of new top positions and agencies, such as the National Supervision Commission, at the same political rank as the Justice Department, to battle corruption. We see policy continuity from this change of political arrangement, with deepening reform. We view centralization as favorable for breaking regional and uncoordinated barriers, such as pollution. And the continuing anti-corruption campaign will benefit the economy. At least for the short and medium term, we view China’s political arrangement as favorable to its growth.

On March 12, CDI held China-Africa Special Economic Zones Seminar in Coate d’Ivoire with representatives from Ministry of Industry and Mines of Coate d’Ivoire, African Export-Import Bank, Agency of Management and Development of Industrial Infrastructure (AGEDI) and Funds of Development of Industrial Infrastructure (FODI), Made in Africa Initiative, and Chinese enterprises in Coate d’Ivoire attending. CDI experts gave presentations about development experience of Chinese special economic zones and made suggestions for industrialization of Africa and strategies of industrial zones in Coate d’Ivoire.

CDI held an innovation roundtable with Mr. Del Christensen, Chief of Business Development of Bay Area Council, to discuss cooperation between the Guangdong-Hong Kong-Macao Greater Bay Area and San Francisco Bay Area on March 14. The two organizations exchanged views on technology innovation, emerging industries, talents in the two Bay Areas and explored opportunities to do joint research and co-host events.

On March 23, CDI and the Italian Institute for International Politics jointly held the roundtable discussion in Milan, Italy, to explore the new cooperation mode between Asia and Europe. Participants from different countries reached a consensus that the “Belt and Road” Initiative shall be served as coordination bond of the Eurasia multilateral cooperation mechanism. China and the EU can also join hands to seek more cooperation opportunities in third-party markets through deepening political mutual trust. Moreover, the cooperation between China-EU should deliver more benefits to people from countries along the “Belt and Road” and strive to give new impetus into Eurasia cooperation and economic globalization.

Click here to download the full report as PDF.

Z/Yen Partners and CDI published the twenty-third Global Financial Centres Index (GFCI 23) on the Launch Conference which was held in Qingdao on March 26.

The GFCI rates 96 financial centres in current issue. There is an overall increase in confidence for the leading centres with the top 25 centres all rising in the ratings.

London, New York, Hong Kong, Singapore and Tokyo remain the five leading global financial centres. The gap between London and New York in ratings closed to one point on a scale of 1,000. London’s rating rose less than the other four top centres. There is now less than 50 points between the top five centres.

The number of financial centres across the Chinese mainland in the main index has increased from 7 to 8 with the addition of Tianjin from the associate centres list. Among them, Shanghai remains at the 6th place. Ranking 11th, Beijing fell slightly by one place, but the gap between Beijing and Boston, which ranks 10th, in ratings was only one point on a scale of 1,000. Shenzhen, Guangzhou, Qingdao and Chengdu rose 2, 4, 14, and 4 places respectively. The newcomer Tianjin ranks at the 63th place. Dalian continuously dropped to 96th.

Mark Yeandle, Director of Z/Yen Partners and the author of the GFCI, said "All the top centres have risen in the ratings. London remains on top despite Brexit concerns but rose less than any other centre in the top fifteen."

Zhang Jiansen, Research Director of Finance and Modern Industry Department of CDI, said "Competitiveness of the Chinese financial centres will be further unleashed with the gradual reform and opening-up of China’s financial market.