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Chinese economy able to withstand impact from economic, trade frictions

(People's Daily Online)    10:01, June 28, 2019

(Photo/Xinhua)

Last year, the refrigerated containers manufactured by Qingdao CIMC Reefer Container Manufacture Co., Ltd (QCRC) were added to the list subjected to additional tariffs imposed by the US, which worried Nian Junlai, deputy general manager of the company.

However, he was pleasantly surprised to find that over the following year, exports didn't drop. Instead, they hit a record high.

Typically, exports, consumption, and investments together drive a country's economic growth. However, after China's recent trade frictions initiated by the US, exports have been affected.

Tariffs affect the price of exported commodities. Once high tariffs are imposed, the international competitiveness of products will be weakened. In the long term, trade tensions could harm consumption and investment.

Economic and trade frictions could lead to a decline in the profits of some companies, which is then passed on to employees, weakening their purchasing power.

At the same time, the Chinese counter-measures may lead to an increase in the price of imported goods from the US, which could then disrupt consumption potential.

Economic and trade frictions could also lead to a reduction in the production of affected industries, thereby reducing or suspending investment.

The negative impact of trade tensions between China and the US is snowballing. How to cope with the risks and challenges is a test for the quality and performance of the Chinese economy.

"The Chinese economy is not a pond, but an ocean." "Big winds and storms may upset a pond, but never an ocean." Such remarks by Chinese President Xi Jinping have indicated that the Chinese economy will remain strong and stable despite uncertainties from the outside.

China has managed to stabilize foreign trade. In the first five months of this year, the total value of China's foreign trade in goods increased by 4.1 percent year-on-year.

Such achievement is attributed to the fact that the country has solidly advanced efforts to improve efficiency and reduce port fees, deepened reforms of added-value tax to further reduce the tax burden on various industries, exempted import tariffs for certain goods to boost consumption, and provided financial services to foreign trade companies.

China sees rising momentum for investment. Guided by the policy to stabilize investment, China's investment and market environment continued to improve. In the first five months of this year, China's fixed-asset investment increased by 5.6 percent year-on-year.

China remains an attractive destination for foreign investment despite the current trade frictions.

US automaker Tesla has ramped up investment in China by building a factory in Shanghai, and German automaker BMW has also increased investment in China. Moreover, China embraced its first foreign-controlled securities company.

The fact that many American companies choose to invest in China is the inevitable result of investment diversion effects, said Liang Ming, director of the Institute of International Trade at the Ministry of Commerce's Chinese Academy of International Trade and Economic Cooperation.

China's counter-measures would weaken the competitiveness of some American products in the Chinese market. To avoid adverse effects in their own development, some US companies chose to bypass tariff barriers and set up factories in China to win Chinese consumers more effectively.

China sees stronger consumption momentum. The country has rolled out measures to increase consumption power and promote consumption upgrading. As a result, Chinese consumers have become more willing and able to buy.

In the first five months of this year, the total retail sales of consumer goods in China increased by 8.1 percent year-on-year, of which online retail sales increased by 17.8 percent.

Exports, consumption, and investments have driven the Chinese economy to move forward steadily. In the first quarter of this year, China's economy grew by 6.4 percent year-on-year, level with the fourth quarter last year. The economic performance was better than expected, getting the year off to a good start.

China's economic operation has remained within a reasonable range, achieving progress while ensuring stability, said Ning Jizhe, deputy director of the National Development and Reform Commission.

The dynamic economic adjustment will mitigate the impact of trade frictions.

Trade protection will inevitably hold back economic development, not to mention that the Sino-US economic and trade frictions are unusually intense and large-scale. However, the Chinese economy is full of momentum and potential. The impact of trade frictions, as a result, will be limited.

Since the trade frictions began, many experts from various research institutions have predicted the negative impact of trade frictions.

Gao Lingyun, a researcher from the Institute of World Economics and Politics of the Chinese Academy of Social Sciences, estimated that if the US imposes 25 percent tariffs on 200 billion dollars worth of Chinese goods, China's GDP growth rate will drop by 0.3 percentage points. The same tariffs imposed on an additional 300 billion worth of Chinese imports would cause China's GDP growth rate to fall by 0.52 percentage points.

If the US imposes 25 percent tariffs on 200 billion worth of Chinese goods and China does the same with 60 billion worth of US goods, China's GDP growth will fall by 0.622 percentage points. If the US imposes 25 percent tariffs on an additional 300 billion worth of Chinese goods and China strikes back on all imported American products, China's GDP growth rate will drop by 1.008 percentage points, according to the results of a trade policy simulation carried out by the Institute of International Economics of China Agricultural University.

However, it is far from enough to calculate the impact of economic and trade frictions from figures. It should be noted that the economy can adjust its own development, including both the spontaneous regulation of the market and the macro-control of the government. In China, the government is capable of controlling economic development with adequate regulatory policies. Therefore, in the long run, the dynamic economic adjustment will weaken the impact of trade frictions.

For example, the individual income tax reform that began on Oct. 1, 2018 has eased the burden on low- and middle-income groups and stimulated household consumption. A recent report released by the China Center for Economic Research shows that this reform could eventually increase consumption by 717.6 billion yuan, which in turn will boost China's economic growth by 0.87 percentage points when compared with the country's GDP in 2017. The tax reform alone can offset, to a considerable extent, the decline in GDP growth estimated by the experts based on trade frictions.

The individual income tax reform is not the most powerful move that China has made in cutting taxes and administrative fees. While the individual income tax reform helped reduce taxes by several hundred billion yuan, the deepening reform in value-added tax started on April 1 will cut taxes by more than 1 trillion yuan, which will play a more significant role in stabilizing economic growth.

Besides, China's fiscal deficit rate is 2.8 percent, lower than the international 3-percent deficit warning line. The required deposit reserve ratio is at a relatively high level. Proactive fiscal policy and prudent monetary policy make the economy more flexible in the face of external risks and uncertainties.

The Chinese economy has passed the 90 trillion yuan mark, representing a greater economic size, growth momentum, and stability than ever before. In particular, the resilience of the Chinese economy makes it fully capable of withstanding pressure from economic and trade disputes.

This article is edited and translated from 劈波斩浪驶向光明未来(中国经济纵深谈①)on the People's Daily on June 27, 2019

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