Approximately 280 kilometers east of Beijing, on the Bohai Sea, the annual summer conclave of China’s top leadership at Beidaihe ended this Tuesday, August 14.
In a testament to the strategic significance of this year’s gathering, attendants included, in addition to all 25 politburo leaders, two former presidents, Hu Jintao and Jiang Zemin, as well as three former premiers, Wen Jiabao, Zhu Rongji, and Li Peng. It was the first full gathering of China’s top leadership since President Xi Jinping consolidated power and scrapped term limits in March. Xi himself, from what we understand, stayed at the resort for a full 18 days.
*** Of all the issues discussed at Beidaihe, the most important was US-China relations. And the consensus among all the top leaders, current and past, was that the US-China relationship has entered a key, strategic inflection point, from which there is no turning back. China’s leadership now believe the strategic economic path going forward will be to reduce China’s dependence on trade with the US and diversify its trading partners. ***
*** A deterioration of US-China bilateral relations is now considered the long-term trend, regardless of the results of the latest round of trade talks or of upcoming US November mid-term elections. The Trump Administration is expected to continue a confrontational approach and to challenge China on trade, economics, security, and technology. They believe the only US domestic factor that will change that trajectory will be no less than a US recession. ***
*** The US relationship nevertheless remains the most important bilateral relationship for China, and as such must be handled properly. China will continue to launch “counter strikes” to safeguard its interests, but must also be careful now to take a lower, and less directly confrontational, profile to handling the relationship. ***
*** While a trade war is now seen as inevitable, China, it was agreed, should make every effort to avert turning the current trade tensions into a full-scale confrontation between the two countries. China should make no concessions on its “Made in China 2025” and “One Belt, One Road” initiatives, as the two involve the country’s core national interests and long term strategic interests. But the government should keep a low profile and adjust its diplomatic and public opinion posture on these, as well as on the Guangdong-Hong Kong-Macao Greater Bay Development Program, and on the China-Africa Summit that is scheduled for September in Beijing. ***
*** If US President Donald Trump does go ahead and, as threatened, slap tariffs on the full $450 billion of imports from China, China, it was agreed, would suffer significant economic and trade losses and be confronted with fresh challenges in its national economic transformation program. In that scenario, China’s GDP, it is estimated, could slide by 0.3-0.4% year on year, even as the US economy would be expected to take a hit as well, mainly through higher living, and corporate operating costs. ***
*** To protect the downside, the government is expected to stay on the current path of greater monetary easing, fiscal accommodation, and relaxation of market access. On the monetary policy side, the People’s Bank of China is expected to cut the Reserve Requirement Ratio (RRR) by 50 basis points at least one more time over the next five months, and release about 5.5-6.0 trillion Yuan of new loans into the economy. ***
*** In parallel, the government is expected to accelerate the approval of large investment projects to stabilize and boost infrastructure investment and Fixed Asset Investment (FAI) over the next five months. Local governments are expected to issue 800 billion Yuan worth of special bonds for infrastructure projects from August to October. For context, total issuance over the first seven months of the year stood at around 560 billion Yuan. ***
Going forward, economic policy will be focused on diversifying away from exports where possible, investing in infrastructure and high-tech industries, and boosting domestic demand. In that, China’s State-Owned Enterprises will, as usual, be expected again to play their part.
A Historic Turning Point
The relationship between the US and China was characterized by the leadership at Beidaihe as having entered its most significant historic inflection point since the establishment of diplomatic ties between the two countries in 1979.
With the arrival of the Trump administration, it is clear to Beijing that Washington now regards China as a full strategic rival, one that could become an unprecedented opponent of the US. And so no matter what actions China takes, the damage has already been done, with China’s development, in the eyes of the administration in Washington, already seen as posing a challenge to the global supremacy of the United States.
Although at the forefront, trade is just one issue on that ledger. China’s leadership agrees the strategic economic path forward now it to reduce China’s dependence on trade with the US and diversify its trading partners. But even as China attempts to reduce its reliance on the US, the Trump administration is expected will step up its pressure on China.
In the near term, despite the trade wars, China’s trade surplus is, awkwardly, expected to continue to widen, with the US remaining China’s top trading partner this year.
Goosing Investment and Domestic Demand
The trade fight with the US, it is believed, has already had a negative impact on China’s economy.
Indeed, the main objective of the sixth of eight summer meetings of the Central Financial and Economic Affairs Commission (CFEAC) that was held on August 9, also in Beidaihe, and presided over by Xi, was to formulate policy to boost domestic consumption for the second half of 2018.
In addition to infrastructure spending, the CFEAC endorsed a State Council directive that all levels of government expand investments in China’s high-tech industry, specifically the top 10 sectors of the “Made in China 2025” strategy, at the same time boosting domestic consumption to reduce the share of exports as a percentage of the country’s GDP.
In order to further boost that technology program, the CFEAC, from what we understand, on July 12 approved the disbursement of 80 billion Yuan out of the secretive, emergency “Premier Fund” towards those 10 high-tech industries for the second half of 2018.
This, apparently, will be the first time China’s leadership has provided money from the Premier Fund earmarked explicitly for the “Made in China 2025” plan. China’s NDRC (National Development and Reform Commission) predicts FAI growth rate in high tech manufacturing to reach 15% in H2 of 2018, from 13.1% in H1.
The meeting also endorsed calls by the NDRC to stimulate second half investment through China’s infamous SOEs (State-Owned Enterprises). SOE investment growth is expected to rebound, from 3.0% in the first half of 2018, to between 4.0% and 5.0% in the second half. Private investment is expected, or hoped, will also rise, from 8.4% in the first half of 2018, to between 8.6% and 8.8% in the second half. For context, SOEs accounted for about 37% of total Fixed Asset Investments in 2017, while private investments accounted for about 60%.
If all goes as planned – which could be a big if – domestic consumption is expected to continue to grow in the second half of 2018, boosted by a reduction by the State Council of import tariffs on 1,449 consumer goods, including autos and medicine, announced on July 1. After growing by 9.4% in the first half of 2018, total retails sales of consumer goods are targeted to grow by 9.7-10.0% in the second half