The trade war has pushed China towards further globalisation, domestic technology development and policy reforms
- China’s trade war with the US could hold back technological development and sow distrust between the world’s two biggest economies. But Beijing has used the rivalry as an opportunity to open up to other countries and stimulate domestic innovation
The world has been watching developments in the Sino-US relationship with trepidation. Fears of increasing disengagement between the two economic superpowers have given rise to uncertainties about the global economy and financial markets.
Trade is not the only area of contention. Cross-border investment has come under increasing scrutiny in the US, with many investments from China deemed national security threats. This has led to an 88 per cent plunge in Chinese investment in the US since 2016.
These restrictions will have a short-term economic impact, but more concerning are the long-term consequences of reduced movement of people between the two countries, fuelling further misunderstanding.
In his 2019 New Year’s address, Chinese President Xi Jinping warned that China and the world are experiencing once-in-a-century changes. So far, these changes have come mainly in the forms of challenges and headwinds.
In investment, the so-called negative list of industries subject to restrictive FDI conditions – has been slashed from 180 to 40. Amid that push, liberalisation in the financial industry has been notable, with a continued opening up of onshore markets leading renminbi assets onto global indices, and the scrapping of foreign ownership caps for joint ventures in banking, broking and insurance.
China’s reforms don’t contradict the communist revolution – they consolidate it
Finally, Beijing has accelerated domestic reforms to put its house in order. Two sets of policy changes are noteworthy: faster urbanisation and corporate-sector reforms aimed at unleashing new growth potential; and shifting tactics in countercyclical policies – moving away from monetary and housing stimulus to fiscal easing – to manage the systemic risks associated with debt and asset bubbles.
None of these reforms are new, but the urgency of their implementation has been driven by the changing external environment. A broadly successful delivery of the changes will, in our view, help to arrest the trend decline in productivity growth and provide a cushion for China’s structural economic slowdown. Nevertheless, the onus will ultimately be on Beijing to deliver reforms in a bolder and more resolute manner while navigating the treacherous external environment with caution.
Aidan Yao is senior economist, China, at AXA Investment Managers