Li Daokui, dean of the Institute for China's Economic Practice and Thinking of Tsinghua University Photo: Courtesy of Wang Xiaoyuan

Editor's Note: 

While US President Donald Trump has repeatedly said that imposing tariffs will benefit the US and cost China dear, US businesses have pointed out that they are actually enduring the pain. Meanwhile, China's economy has proved resilient amid the ongoing trade war between China and the US. How large is the impact of US tariffs on Chinese economy? What is the future of China's economy? Global Times (GT) reporters Xie Wenting and Bai Yunyi interviewed Li Daokui (Li), dean of the Institute for China's Economic Practice and Thinking of Tsinghua University, on these issues. 

GT: What will be the direct impact on the Chinese economy if the latest round of US tariffs imposed on China kick in?

Li: The biggest impact will be mainly psychological and would affect confidence. For instance, some investors may lose confidence and mix the turbulence in the China-US trade talks with some domestic economic problems. This is reflected in the stock market. But specifically, on the real economy, I think the impact will be relatively limited. Because many Chinese exporting enterprises have been mentally prepared and accelerated exports last year. Thus, the decline in China's export volume this year actually reflects the result of accelerating exports last year.

In the short term, China's exports in the second half of 2019 may remain sluggish, and profits of related companies may be affected. However, since 2007, China's dependence on exports has weakened significantly. Currently, exports only account for 15-17 percent of China's GDP, which has declined by more than half since 2007. Exports to the US now only account for about 3 percent of China's GDP. Therefore, the newly imposed tariffs by the US will not have a significant impact on China's economic growth in the short run.

The impact of the last round of tariffs on China's GDP growth this year will not exceed 0.2 percentage points; in the medium- and long-term, it will promote and accelerate adjustment of China's economic structure as well as the fresh laying out of industry. For example, some export-oriented companies will shift to the domestic market or transfer their production links to neighboring countries such as Vietnam.

GT: One of the greatest concerns about the consequences of the China-US trade dispute is that a large part of the production chain will leave China. How do you evaluate this possibility? How big an impact will it have?

Li: Today, China's production capacity shift to the surrounding countries and regions won't be as complete as the transfer of US production capacity to China before. It is because China itself has a very large market that cannot be taken away, whether it is textiles, automobiles, home appliances, etc, they all occupy one-third of the global market. Such a large market cannot be satisfied only by overseas manufacturers. 

A more important reason is that Chinese production companies have formed a complete system for many years. In the Pearl River Delta and the Yangtze River Delta regions, there is a complete production system ranging from a screw to a key component. It is difficult for a single company to leave this system and move to other countries such as Vietnam. It is more likely that the last link of the production process, that is, the processing and assembly process, will be transferred from China to Vietnam, other Southeast Asian countries, and the products will be exported directly from factories there to the US. But most of the value-added links will stay in China. So China's industrial hollowing-out will not occur, but the Chinese industrial chain may become more distant from the US market as the trade war intensifies.

GT: The outcome of the China-US trade dispute is ambiguous. If the two countries really enter into the long-term economic disputes, will there be any change in the priority and direction of China's economic development?



Li: The biggest change is to let China fully realize that industrial development should be carried out in an independent way. In the past, we would have liked to promote domestic industrial upgrade by purchasing technology and mergers and acquisitions, but now it seems that these will not work. Especially for some key technologies, we have to rely on ourselves. Today the US can engage in trade protectionism and tomorrow it will possibly put up barriers on some technical issues. On the third day, the US will possibly impose sanctions on us because of international issues such as Iran. Therefore, the Chinese economy must accelerate its development and innovation.

Another important impact is that as the China-US trade negotiations have failed to achieve results so far, China will be more aware of the importance of the Belt and Road Initiative (BRI), and our production capacity and investment will flow more to the BRI countries, especially the Middle East, Southeast Asia and others which have a broad market.

GT: Do you think innovation is an important driving force for China's economic growth? When will capacity growth driven by innovation offset the negative effect caused by the decline in traditional industry in Chinese economy?



Li: China's industrial chain is undergoing an upgrade. Today, both the Pearl River Delta and the Yangtze River Delta are home to a large number of technology enterprises. On a global scale, our products and equipment are also gradually replacing goods from Japan, South Korea and Europe. The China-US trade disputes may bring about one or two years' "painful period," such as the embargo on some core technologies and products, but in the long run, it will also force China's development of domestic core equipment and technology.

On the other hand, we also need to see that many Chinese companies, especially private enterprises, still have to face the pressure of elimination, transformation and upgrading. Many old industries, including steel and animal husbandry, face an uncertain future and the problem of excess capacity.

It can be said that today we are in a metabolic transition, and this is also the "pain point" of the Chinese economy. But I think we can solve this problem within the next three to five years. At the time, the growth because of the new capacity will be able to fill the gap caused by the reduction in old capacity. It is so because first, our domestic demand will be larger; second, our industrial chain distribution will be more reasonable and our dependence on the US market will be further reduced; third, the independent innovation capability of Chinese enterprises will rise sharply by then if we do well. The next three to five years are the key. We must speed up in three areas - the reform of state-owned enterprise systems, reform of science and technology innovation systems, and the cultivation of domestic markets.

GT: How do you evaluate China's current investment and business environment? In the next few years, can China remain attractive to foreign investors and companies? 



Li: China's investment and business environment has greatly improved and it is reflected in a more open and transparent government. Many procedures have been simplified and facilitated. In addition, another important factor when considering a country's business environment is whether the government can serve the enterprise and help them solve practical problems. For example, can the government help manage the contradictions between business owners and workers? When enterprises encounter difficulties in land acquisition, can the government resolve and balance the demands of all parties? In this regard, the Chinese government can be said to be one of the best in the world.

However, improvement of the business environment does not necessarily mean an increase in the attractiveness of foreign investment. Currently, the impression of foreign companies about the Chinese market is affected by two forces. One is China's relaxation of foreign investment rules. The other is the rise in the strength of the Chinese companies which has made the competition faced by the foreign companies increasingly fierce. For example, as Chinese car maker Geely grows, Volkswagen and Toyota may find that their ride is getting tougher; When Gree is up, Matsushita and Hitachi's air conditioners are not selling as much as before. The rise of Chinese companies has led to shrinking profit margins for foreign-invested companies, which further reduced the interest of these companies in the Chinese market. This is not because of the Chinese investment environment, but is a natural market trend. But many foreign companies are reluctant to admit it.

GT: How do you evaluate the long-term development prospect of the Chinese economy? Is China's growth sustainable and resilient? Why is it so?

Li: In the medium- and long-term, China's growth still has great potential. I personally think that China will maintain a GDP growth rate of 6.5-7.0 percent for a long period of time. First, China does not lack savings capital. Savings can be converted into capital through investment. Second, although the total labor force in China is no longer growing, its quality is improving. Every year, there are about 8 million university graduates in China, many of whom major in engineering and technology from science and engineering universities. These people will play an important role in China's scientific research and technological development. 

Third, China currently has a population of about 1.4 billion, but only 400 million people have entered the middle-income class. There is still plenty of room for improvement in the income and living standards for the rest of 1 billion, which also means huge growth potential. In fact, the income of this part of the population is also growing, and after a few years, this will also be converted into consumption. Therefore, in general, China has many important development factors, but we need to release all such potential through further reforms.