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corporatenetwork.com China: View from a wide lense Prepared for Austrian Delegation by Rachel Morarjee, Director, Economist Corporate Network October, 2018
corporatenetwork.com
China: View from a wide lense
Prepared for Austrian Delegation
by Rachel Morarjee, Director, Economist Corporate Network
October, 2018
corporatenetwork.com
The West and China: Through a glass darkly
corporatenetwork.com 33
Both fear and admiration of China are typically amplified
The West: a view through distorted lenses
In politics and economics, the West’s view of
China skews to extremes. The Western view of
Chinese technology and innovation won’t be an
exception.
Why? There is not one China, but many Chinas.
One extreme view is that China is a Galapagos:
a self-contained ecosystem that’s globally
irrelevant. The other, is that the Chinese will take
over the world.
The truth is somewhere in between.
corporatenetwork.com
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Is this a battle one side can win?
“AI is the new electricity, but
no one won the electricity
race.”
“No one country will be ahead
of anyone else everywhere,”
says Andrew Ng, an AI expert
who has worked for Google and
Baidu and now runs his own
Silico.n Valley startup,
Landing.ai
corporatenetwork.com
Techno Cold War?
Trade tensions hint at bigger problems.
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Trade tensions are now the biggest threat to global growth
Techno Cold War?
corporatenetwork.com 88
The US is concerned about losing its position at the technology frontier
The dispute is about technology as much as tariffs
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China will dominate in some areas, lag in others. Technological spheres of influence will
emerge. The battle for dominance will be fought in emerging markets, not the West.
China’s tech sector may overtake Silicon Valley
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The art of the deal? Or a bid to contain China
US demands China demands
Reduction in US-China trade
deficit of $200bn by 2020
China reduces import tariffs to
US levels by mid-2020
China implements FDI
negative list by mid-2018
China ceases
industrial/subsidy/tech
transfer policies
No recriminatory actions on
US companies operating in
China
Enhanced IPR protection
Relax US export controls on
high-tech products
Removal of US export ban on
products for ZTE
US govt allowed to procure
Chinese ICT products
Drop WTO cases against
China
Chinese participation in US
infrastructure projects
Equal treatment of Chinese
investment in the US
US finds a workaround
for ZTE
China reduces some
import tariffs e.g. autos,
consumer goods
China increases energy,
semiconductor imports
from US
China liberalises
financial services
Chinese leaders are gearing up for a structural shift in economic
relations with the US. They see this as a new Cold War.
$200bn?
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Economy much less exposed to external trade than before
Direct impact of current tariffs negligible for China
24
51
26
33
9
12
13
15
0
20
40
60
80
100
120
2012 2017
Soybean consumption in China(m tonnes)
Made in China*
Import from others
Import from US
Import from Brazil
0
5
10
15
20
25
30
35
40
45
1997 1999 2001 2003 2005 2007 2009 2011 2013 2015 2017
China’s goods & services trade(% GDP)
Exports
Imports
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Rebuffed by US, could China shift to autarky?
Long-term risk to global trade system
US-China spat could
strengthen “economic
nationalists” within China
Could lead to
quickening of efforts
to achieve self-
sufficiency
In this event, the WTO-led
global trading system
would logjam
US and China
disengagement
As economic ties unravel,
US-China relationship
would become more
vulnerable to security
tensions
68,0
69,0
70,0
71,0
72,0
73,0
74,0
75,0
76,0
0
50
100
150
200
250
300
350
400
2013 2014 2015 2016 2017
China’s import dependency in integrated circuits (ICs)
Imports, left scale (bn units)Domestic production, left scale (bn units)Import dependency, right scale (%)
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Supply chains have already been migrating from China to places like Vietnam and
Malaysia, and this may accelerate as companies position for the risk of a trade war
South and south-east Asian countries could gain from US-China trade war
Global supply chains are on the move
Blue = EIU rates as easier to do business in than China
Red = EIU rates as harder to do business in than China
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Officials and investors see tensions as beginning of a long confrontation
Chinese investors bearish on the trade war
US investors look at profits and feel
sanguine about the trade war.
Chinese investors are more used to
looking at sentiment and combined with
deleveraging are bearish on the long-
term trade tensions.
People’s Daily ran an editorial by
academic at leading government think
tank calling this a “new cold war”.
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Around 40% of the pain of US manufacturing tariffs will be felt outside of China
Tariffs will also impact China’s supply chain
corporatenetwork.com
Dealing with debt: The real battle on the
home front.
corporatenetwork.com 1717
2020 target means strong policy support for growth until then
Economy forecast to grow 6.6% in 2018
6,96,6
6,2 6,15,5
5,2
2017 2018 2019 2020 2021 2022
Real GDP Forecast
corporatenetwork.com
A steep incline: China’s debt growth rings alarms
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China’s transition to a more sustainable consumer led model of economic development is welcome, but
will be challenging
China: Slowing, changing
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Local government debt in the spotlight; the fight is serious
Investment in infrastructure has plunged
Impact of tighter
monetary has
become more
apparent
Investment in
infrastructure has
plunged as local
government
finances under
scrutiny.
Private investment
still weak
corporatenetwork.com
Winning the fight? Still a long way to go.
Regulators have prioritised
deleveraging and China’s slowing
growth has more to do with debt
than trade.
Want to stabilise debt as a
proportion of GDP.
Supply side reform has boosted
producer prices and given a fillip
to struggling companies. Nominal
GDP has been in double digits.
No return to the days of debt
binging.
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High cost of housing
driving up mortgage debt
Highlights lack of
alternative investments
to property
May saw slowest retail
sales growth in more than
a decade.
Household debt still low
in international context
But rising 5 percentage
points annually
Social security net far
from fully built out
Rising household debt is a risk we need to take seriously
Deleveraging is dampening consumption growth
2,92,4 2,5
3,7 3,33,9
6,37,1
5,15
5,7
5,26,5
7,4
6,1
6,7
0
2
4
6
8
10
12
14
16
2010 2011 2012 2013 2014 2015 2016 2017
Net increase in bank loans(Rmb trn)
Households Companies
Lending to households
overtook that
to companies
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Belts, roads and the cult of Xi
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Global ambitions: Foreign policy strength
From keeping a low profile (韬光养晦) to striving for achievement ( 奋发有为)
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Five years is a long time in politics
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Political correctness is having a chilling effect on innovation
Xi who must be obeyed
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No one knows how big BRI will be, but hundreds of billions at stake
Xi v Marshall: How much is at stake?
Sources: EIU, Economist, MOFCOM, American Enterprise Institute
2014-2017:
• Direct investment in BRI
countries $56bn.
• Announced investments:
$180bn, with $144bn in
2017, up 14.5% on-yr.
Chinese estimates $150
bln over next five years.
Policy bank loans
• CDB: $180bn
• Eximbank: $110bn
Over the lifetime of BRI, Chinese officials overseas investment and loans could
total US$1trln, but that could be spread out over decades – or never materialise.
corporatenetwork.com
BRI questions: Malaysia, Myanmar, Pakistan
Failed projects Ongoing projects
$7.58
VenezuelaHigh-Speed
Railway
$58
China-BelarusIndustrial
Park
$548
China-PakistanEconomic
Corridor
, - - - - - - - - $24.58China-MyanmarCrude Pipeline
$0.28-China-Egypt
- -"--- - - ·
Suez Canal
Economic
Zone
- - - - $5.88China-Laos
Railway
L $108Saudi Arabia
Refinery
' " - - - - = - = - - - - = - - $3.68MyanmarMyitsone
Dam
$208-$248Venezuela
Oil-for-Loan
Program
$18 ---'--:--Palm Oil
Plantation in
DR Congo
$LBrazil
SoybeanProcessing Base
Source: Bloomberg
Lake VictoriaFree Trade Zone
in Uganda
$138Sri Lanka
Colombo
Port City
The CorporateEconomist Network
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$3.18BangladeshBridge and
Railway
In January 2018 Bangladeshi authorities eventually blacklisted a Chinese firm, China Harbour
Engineering Company, for attempting to bribe officials to win the project
