With pesky gremlins rattling around in the economy, who is Beijing going to call? Well, not Ghostbusters, to mix my movie metaphors, but, maybe, Li Jiange.
The former deputy director of the Economics Restructuring Office at the State Council was a close adviser of then Premier Zhu Rongji during the Asian Financial Crisis in 1998 and was known as an avid reformer.
He helped oversee China’s rise as a manufacturing powerhouse and supported stimulus measures when the region suffered economic turmoil in 1997 and again during the global financial downturn 10 years later.
But Li is convinced that is not the answer this time around as the economy slows under the dead weight of the year-long trade war with the United States.
Even if peace talks finally get underway again before President Donald Trump’s planned mini-summit with President Xi Jinping at the Group of 20 talkfest in Japan, Beijing will still face domestic headwinds.
“The fundamental solution is reform and opening-up,” Li told the Shanghai Advanced Institute of Finance forum in Beijing as reported by the Chinese media. “That is the only way out for us.”
Last month, the fallout from the trade dispute saw Washington more than double tariffs to around 25% on Chinese imports worth US$200 billion. In response, Xi’s administration increased duties on US products worth $60 billion.
As the war of words escalated between the world’s two largest economies, Trump threatened to wheel out extra taxes on goods entering the States worth another $300 billion.
Beijing reacted quickly during the first wave of tariffs and launched ambitious stimulus measures. Another infrastructure spending spree was unveiled replacing fiscal prudence.
In 2019, local government debt is projected to balloon to 2.15 trillion yuan ($311 billion), a whopping rise of 60% compared to last year.
During the crisis years in the 1990s and 2000s, this was Beijing’s weapon of choice. But Li has warned:
“I have participated in several internal discussions [and] it was interesting that the economists who suddenly advocated stimulus were the same ones who used to ask for deleveraging. They even felt reasonable to re-leverage the economy and they had many theories.
“It is like keep asking a very sleepy person not to stop drinking coffee, you might as well just let him sleep.”
Still, the “caffeine” hit is not just causing Chinese policy wonks sleepless nights, it is starting to give economists nightmares across the rest of the globe.
The World Bank reported earlier this month that trade growth had sunk to its “lowest” level since the Great Recession in 2009.
Painting a bleak picture of assorted tones of gray, it said in a study entitled, Global Economic Prospects: Heightened Tensions, Subdued Investment:
“The global economy has slowed to its lowest pace in three years. It is on track to stabilize, but its momentum is fragile and subject to substantial risks.
“International trade and investment have been weaker than expected at the start of the year, and economic activity in major advanced economies, particularly the Euro Area, and some large emerging market and developing economies has been softer than previously anticipated.
“A number of risks could disrupt that delicate momentum: a further escalation of trade disputes between the world’s largest economies, renewed financial turmoil in emerging and developing economies, or a more abrupt deceleration of economic growth among major economies than is currently envisioned.
“Of particular concern is a slowdown in global trade growth to the lowest level since the financial crisis ten years ago and a tumble in business confidence.”
The only way to “restore” confidence will be for Beijing and Washington to thrash out a deal, which will probably hinge on the Trump-Xi meeting in Osaka at the G20.
Both sets of negotiating teams are expected to pave the way for the face-to-face encounter between the two presidents.
“This is a positive development,” Clete Willems, a former trade negotiator with Trump’s team, said. “Leader level engagement at last year’s G20 [in Argentina] was critical to jumpstarting the talks.”
Yet how they close the gap on an array of conflicting issues is still unclear. “Our position will continue to be [that] we want structural changes. We want structural changes on all the items … theft of IP [intellectual property], forced transfers of technology, cyber hacking. Of course trade barriers. We’ve got to have something that’s enforceable,” Larry Kudlow, the White House economic adviser, said.
For Xi, there are other concerns, including the US “blacklisting” of Huawei, which is considered a security risk because of its perceived links to the Communist Party government.
Indeed, that allegation has been categorically denied. But despite public statements, the telecom giant has been barred from acquiring components and technology from American companies without Washington’s approval.
Earlier this week, CEO Ren Zhengfei admitted that up to $30 billion will be wiped off revenue forecasts in the next two years because of the ban.
Xi is aware of the problem. “The key is to show consideration to each other’s legitimate concerns,” he told the Chinese state media after he talked with Trump on the telephone. “We also hope that the United States treats Chinese companies fairly [a reference to Huawei]. I agree that the economic and trade teams of the two countries will maintain communication on how to resolve differences.”
Unless, of course, those pesky gremlins pop up again.