Topic 3: Success of the Chinese Economy
The success of the Chinese economy after 1978
Gradualism versus shock therapy
Overcome the middle-income trap
Competitiveness – Microeconomic factors
Globalisation and International Production Network (IPN)
Labour cost, human capital, education, skills and health
Vast domestic market and division of labour
Inter-governments competition
Backward advantages in adopting advanced technologies
Government interventions and top-down policy designs
China’s gradualist approach performed better than the big bang approach adopted in Russia and Poland.
1.When conflicts in the system began to cause problems, further reforms were carried out to deal with these problems.
2.By continually solving the emerging problems, the incremental reforms followed a surprisingly logical sequence, which was not planned at the beginning.
A unique type of “public” entrepreneurship was built.
1.In the earlier stages of the reform, input markets were under-developed
2.Local government officials acted as entrepreneurs who identified profitable opportunities and used their connections/powers to take advantage of the opportunities
3.This kind of entrepreneurship gradually gave way to private entrepreneurship as input markets developed over time.
The reforms gained broad support from the population as they:
1.Achieved Pareto improvement in the initial stage
2.Enabled reforms of Kaldor improvement to proceed smoothly
3.Minimised social costs of transition
The Middle Income Trap (MIT):
1.Transition from low income to middle income (Per capita GDP is greater than USD3000 in PPP term): has happened recently in many Asian countries.
2.Faster growth in low income developing countries, but growth slows down in middle income countries
3.MIT - Caught between low wage economies and high income economies.
Competitiveness is defined as the set of institutions, policies and factors that determine the level of productivity of a country. The level of productivity, in turn, sets the sustainable level of prosperity that can be earned by an economy. Thus, more competitive economies tend to be able to produce higher levels of income for their citizens
Global Competitiveness Index: 12 Pillars
12 Pillars Explained
Pillar 1: Institutions – Security, property rights, social capital, checks and balances, transparency and ethics, public-sector performance and corporate governance.
Pillar 2: Infrastructure – The quality and extension of transport infrastructure (road, rail, water and air) and utility infrastructure.
Pillar 3: ICT– The degree of diffusion of specific information and communication technologies (ICTs).
Pillar 4: Macroeconomic environment – The level of inflation and the sustainability of fiscal policy
12 Pillars Explained
Pillar 5: Health - Health-adjusted life expectancy (HALE), the average number of years a newborn can expect to live in good health.
Pillar 6 Skill - The general level of skills of the workforce and the quantity and quality of education.
Pillar 7 Product market – The extent to which a country provides an even playing field for companies to participate in its markets. It is measured in terms of extent of market power, openness to foreign firms and the degree of market distortions.
Pillar 8 Labor market – It encompasses “flexibility”, namely, the extent to which human resources can be re- organized and “talent management”, namely, the extent to which human resources are leveraged.
Pillar 9 Financial system– The depth, namely the availability of credit, equity, debt, insurance and other financial products, and the stability, namely, the mitigation of excessive risk-taking and opportunistic behaviour of the financial system.
Pillar 10 Market size – The size of the domestic and foreign markets to which a country’s firms have access.
Pillar 11: Business dynamics - The private sector’s capacity to generate and adopt new technologies and new ways to organize work, through a culture that embraces change, risk, new business models, and administrative rules that allow firms to enter and exit the market easily.
Pillar 12: Innovation capacity – The quantity and quality of
formal research and development; the extent to which
a country’s environment encourages collaboration, connectivity, creativity, diversity and confrontation across different visions and angles; and the capacity to turn ideas into new goods and services.
China is ranked as 28th in global competitiveness
Exchange rate regimes
1.Fixed exchange rate regime: fixed, but with a provision for the revaluation (usually devaluation) of a currency
2.Floating exchange rate: its exchange rate is allowed to vary against that of other currencies and is determined by the market forces of supply and demand
3.Managed exchange rate: hybrid of the fixed and floating exchange rate regimes, usually with a pre-determined bands
China – Exchange effective exchange rate movements
Structure of Production Networks
A Multinational subsidiaries has headquarters in one country and operates several in different countries
Producing a final good for serving home and foreign markets
Production uses multiple-inputs (e.g. Engines, body, seats, etc. in automotive industry) – which can be produced in-house (in home country or in foreign countries) or outsourced to firms in home country or in foreign countries
That means that the main financial benefit to China takes the form of wages paid for the assembly of the product or for manufacturing of some of the inputs. Many components, such as batteries and touchscreens, receive their final processing in China in factories owned by foreign firms. Although hard facts are scarce, we estimate that only $10 or less in direct labour wages that go into an iPhone or iPad is paid to China workers. So while each unit sold in the U.S. adds from $229 to $275 to the U.S.-China trade deficit (the estimated factory costs of an iPhone or iPad), the portion retained in China's economy is a tiny fraction of that amount… around $10
Economic implications of the supply chain
Index of hourly manufacturing labour compensation costs 2010
Average weekly working hours per employed person in 2017
Challenges faced by China
Rising labour costs
Environment degradation
The growth of non-agricultural employment is slow.
In 2006, the ratio of non-agricultural labor productivity to agricultural labor productivity was 5.6, implying that further transfer of labor from agriculture to non-agricultural sectors would increase wealth production.
The income gap has widened, and poverty reduction remains an important policy issue.
Regional disparity has also widened and remains very high.
Why can't China Innovate?
Failure to protect intellectual property rights.
Education focuses on duplication, rather than innovation
Authoritarian system: top-down approach, has its merits, but might pick up the wrong winners. Worse still, it might suppress the innovations from the private sector
After 2012, China is gradually turning into a totalitarian country – which will enhance the absolute authority of the top leader in almost every field – including R&D. A recent example is a chaotic nation-wide rush to the semiconductors industry.
Topic 4 Rich Man, Poor Man: Income Distribution in China
Some measures of income inequality
What is Range?
It measures the difference between the highest and lowest observations of a particular variable of interest.
Strengths:the simplest measure of dispersion.
Weaknesses: low information content - only uses two observations
What is the Coefficient of Variation?
It is the standard deviation of a series divided by its mean.
A small coefficient of variation indicates that the series is closely bunched around the mean, i.e., a less dispersed distribution.
The Gini coefficient = The area between the equality diagonal and the Lorenz curve / Area of the triangle
What is the Theil index?
The Theil index can be understood as a summary statistic that measures the extent to which the distribution of income across groups differs from the distribution of population across the same groups.
Absolute poverty versus relative poverty
Absolute poverty refers to a set standard which is consistent over time and between countries. First introduced in 1990, the dollar a day poverty line measured absolute poverty by the standards of the world’s poorest countries.
Relative poverty views poverty as socially defined and dependent on social context, hence relative poverty is a measure of income inequality. Usually, relative poverty is measured as the percentage of the population with income less than some fixed proportion of median income. For example, the Gini coefficient
The Evolution of Poverty and Income Inequality in China
Poverty alleviation performance in China
1.About 221.35 millions are living near the absolute poverty line (0-17 yuan, USD4 PPP) per day
- Nearly 600 millions are living below 33 yuan (USD7.85 PPP) per day
Evolution of income inequality in China
Rural-Urban inequality
Patterns of Income Inequality In China
Change in income inequality since 1990
1.Over the past fifty years inequality has peaked three times
2.The rural–urban gap accounts for a large share of overall inequality in the whole period
3.The inland–coastal disparity has grown rapidly since late 1970s when China started its economic reform.
The Kuznet hypothesis: there is an inverted-U relationship between inequality and development
income tends to be more unevenly distributed in urban areas
the income gap between urban and rural residents does not necessarily narrow with economic development
In the early stage of development, urbanization raises the share of the more unequal of the two component distributions, which increases overall inequality.
During later stages of development, the widening of overall income inequality associated urbanization is more than offset by the narrowing of inequality within the urban sector.
Thus over the course of urbanization the income inequality path takes the shape of an inverted-U.
Other contributing factors to inequality are:
Dualism
Inflation
Expansion of higher education
Dualism is the persistent and significant productivity difference between the rural sector and the rest of the economy
During early stages of economic development, the level of capital accumulation may be too low to absorb all the rural labor willing to migrate to urban areas.
This gives rise to the phenomenon of “unlimited supplies of labor” in the sense that the supply of labor to the modern sector exceeds the demand at the prevailing wage which is determined by the earnings in the rural sector (Lewis, 1954)
Since higher income earners tend to be politically more powerful and have better access to finance, they are more likely to receive the new money first and benefit from inflation.
nflation driven by a monetary expansion would redistribute wealth from the poor to the rich, thereby exacerbating inequality
In the long run, education is an important income equalizer because:
1.low income families can more easily acquire human capital through education than accumulate physical or financial capital through savings or inheritance.
2.Human capital accumulation is less prone to concentration than the expansion of human capital involves dispersion of knowledge and skills across the wider population (Ahluwalis, 1976)
In the short run, however, education may be a source of inequality:
1.Different education opportunities between rich and poor
2.Skill-biased technological change increases income difference between educated and uneducated
3.Brain drain (to cities and coastal areas) worsens regional inequality
How to end inequity:
Achieve efficiency and equity simultaneously by maintaining full employment through sustained economic growth and reducing income gaps by making wage rates grow faster than returns to capital.
Policies to improve equality are:
Promote the development of labor-intensive small and medium manufacturing and service enterprises.
The bottlenecks to development of SMEs are access to credit and market entry
Deepen the reform of large SOEs and eliminate price distortions and administrative monopolies to make the market system operate more efficiently.
Introduce competition in monopolistic industries.
Encourage the unification of the labor market.
Establish a development-oriented, instead of a consumption-oriented, public expenditure structure
Invest public resources in education, health, infrastructure
Develop social safety nets to provide support for disadvantaged groups that do not have the ability to work
Business implications of the widen income inequality
Based on Pew’s income band classification, China’s middle class has been among the fastest growing in the world, swelling from 39.1 million people (3.1 percent of the population) in 2000 to roughly 707 million (50.8 percent of the population) in 2018. This amounts to an increase of 667.9 million (or 47.8 percentage points) in 18 years.
1.Developing Asia’s middle class has developed dramatically relative to other world regions in the last couple of decades.
2.Analyzing and understanding the implications of this has very important business implications
Middle Class in China:
E-Commerce in China shown:
China's Health Expenditure:
Topic 1: Chinese Economy before 1978
General information on China:
1, Area total: 9,596,960 sq km
2.Population (July 2020 estimate): 1,394,015,977
- GDP: official exchange rate: $14.140 trillion (2019 est. NO 2); PPP: $27.307 trillion (2019 est. No 1)
4, History of China:
1000 - 1911: ancient China
1911 - 1949: under the control of CNP
1949 - date: under the control of CCP - Administrative divisions: 23 provinces, 5 autonomous regions, and 4 municipalities
6.Special administrative divisions: Taiwan, Hong Kong, and Macau
7.Legal system: Civil law system
Long-term History of the Chinese Economy
China on the World Map:
Macroeconomic administrative organisations
NDRC (Treasury): National Development and Reform Commission (formerly, State Planning Commission)
Ministry of Finance
People’s Bank of China – the Central Bank
Ministry of Commerce
State Taxation Administration
National Bureau of Statistics
Composition of World GDP (%): 1000-1950
World's biggest economies throughout history | The Economist
At the start of the Common Era, India was the world’s largest economy, followed by China. The far-flung Roman Empire came a distant third.
A thousand years later, it looked almost the same. But third place shifted to Byzantium, in modern-day Turkey.
Five hundred years after that, Italy returned, rich from renaissance trade.
Over several centuries, other European powers vied for third: initially France, and then Britain. China and India swapped places.
After the industrial revolution, the top three economies accounted for less than half of global output.
In the 20th century, America dominated. China temporarily fell away. Russia made the top three. As did Japan. Britain dropped down.
Now the modern world resembles the distant past: China and India are back, along with a single Western economy. And America’s pre-eminence is over.
In 2014, China overtakes US as the world's largest economy in PPP term
The Big Mac Index 2020
PPP or Exchange rates – which is better?
There is no clear answer
Market exchange rates are the logical choice when financial flows are involved.
PPP is a logical choice when to compare “true” living standards
PPP or Exchange rates could make significant difference
A recent study (2019) indicated that: “Relative to the official numbers, we estimate that GDP growth from 2010 to 2016 was about 1.8 percentage lower…”
The Chinese economy under the Chinese National Party: 1911-1949
Nanjing Decade (or The Golden decade) – 1927-1937
After the fall of the Qing Dynasty in 1912, China underwent a period of instability and disrupted economic activity.
During the Nanjing decade (1927–1937), China advanced in a number of industrial sectors, in particular those related to the military, in an effort to catch up with the West and prepare for war with Japan.
The Second Sino-Japanese War (1937–1945) and the following Chinese civil war (1945-1949) caused the retreat of the Republic of China and formation of the People's Republic of China.
The Nanjing Decade is the period from 1927 to 1937 that saw Chiang Kai-shek's Nationalist rule over a semi-unified China, allowing for the blossoming of new trends in science, literature, art, and culture that were brought to an abrupt halt with the invasion of Japan in 1937.
GDP growth averaged 3.9 per cent a year from 1929 to 1941 and per capita GDP about 1.8 per cent (Maddison)
Annual rates of growth by sector
Economic policies under the Chinese Communist Party (1949-1978)
Century of Humiliation:The period between the 1840s (First Opium War) and the 1940s is known as China’s Century of Humiliation. During this time, the country suffered huge internal fragmentation, embarrassing loss of territory and invasion from powers that had, for thousands of years, been inferior to China. Invasions were followed by uprising and revolutions, forcing Imperial China to its knees.
Chairman Mao’s famous slogan – 1 October 1949
“the Chinese people have stood up”
Development strategy
When the Chinese Communist Party took over the government of China in 1949, it set out to fundamentally change the way the economy was organized
State takeover of ownership of most of industry and commerce in 1954-6
Replacement of household agriculture with agricultural producer cooperatives, a process largely accomplished in the Winter of 1955–6
Install a system of central planning where the government decided what would be produced, who would produce it, and from whom enterprises would receive the inputs required for this production.
From the early 1950s, the government pursued a heavy-industry-oriented development strategy
Spontaneous development of capital-intensive industry in the economy was impossible.
A set of distorted policies was then introduced to promote the development of heavy industries, which created major problems in the economy.
Distorted prices :Artificially low interest rates, overvalued exchange rates, low nominal wage rates, and low prices for living necessities and raw materials
Enable enterprises to make profits to repay loans and to reinvest in the heavy industry
Nationalization and micromanagement
private enterprises were nationalized
new key enterprises were owned by the state
the government micromanaged state-owned enterprises (SOEs)
Collective agriculture
Collectivization was used as a convenient vehicle for implementing the state’s low-priced procurement program of grain and other agricultural products
The remuneration system in the collectives was basically egalitarian.
An agricultural development strategy was designed to ensure that agriculture would not compete for resources needed for industrial expansion.
GDP per capita
Topic 5: The Panda and the Eagle: Sino-America political and economic relations
US-China Cooperation in History
The Qing Dynasty and the United States of America
Boxer Rebellion was an anti-imperialist, anti-foreign, and anti-Christian uprising in China between 1899 and 1901, towards the end of the Qing dynasty.
After the suppression of the revolt by a foreign alliance including the United States, the ruling Qing dynasty was required to pay indemnities to alliance members.
US Secretary of State John Hay suggested that the US$30 million Boxer indemnity allotted to the United States was excessive. After much negotiation with Qing ambassador Liang Cheng, US President Theodore Roosevelt obtained approval from the United States Congress in 1909 to reduce the indemnity payment by US$10.8 million, on the condition that the funds would be used as scholarships for Chinese students to study in the United States.
Using this fund, the Tsinghua College was established in Beijing, on 29 April 1911 to serve as a preparatory school for students the government planned to send to the United States – which was late developed to become one of the leading research universities in China – Tsinghua University
The ROC and USA – 1911-1937
After the Xinhai Revolution in 1911, the United States government recognized the Government of the Chinese Republic (ROC) as the sole and legitimate government of China despite a number of governments ruling various parts of China.
China was reunified by a single government, led by the Kuomintang (KMT) in 1928.
The 2nd Sino-Japanese War outbroke in 1937
The United States strongly supported China starting in 1937 and warned Japan to get out. American financial and military aid began to flow. Claire Lee Chennault commanded the 1st American Volunteer Group (nicknamed Flying Tigers), with American pilots flying American warplanes painted with the Chinese flag to attack the Japanese.
The United States cut off Japan's main oil supplies in 1941 to force it to compromise regarding China. Japan attacked American, British and Dutch possessions in the western Pacific – for example, the 1941 Japan attack on Pearl Harbor. The United States declared war on Japan in December 1941
Japan surrendered on 15 August 1945
Angus Maddison 1926 - 2010
World scholar on quantitative macroeconomic history, including the measurement and analysis of economic growth and development. He was professor at the University of Groningen from 1978 to 1997.
The Chinese Economy under the CNP
After the fall of the Qing Dynasty in 1912, China underwent a period of instability and disrupted economic activity.
During the Nanjing decade (1927–1937), China advanced in a number of industrial sectors, in particular those related to the military, in an effort to catch up with the West and prepare for war with Japan.
The Second Sino-Japanese War (1937–1945) and the following Chinese civil war (1945-1949) caused the retreat of the Republic of China and formation of the People's Republic of China.
Major economic and political events during 1949-1978
1953–1957: First 5-Year Plan :The program’s aim was to boost China’s industrialization. Steel production grew four-fold in four years, from 1.3 million tonnes to 5.2 million tonnes. Agricultural output also rose, but it couldn’t keep pace with industrial production.
1958–1962: Great Leap Forward: The campaign emphasized China’s agrarian-to-industrial transformation, via a communal farming system. However, the plan failed—causing an economic breakdown and the deaths of tens of millions in the Great Chinese Famine.
1959–1962: Lushan Conference and 7,000 Cadres meeting :Top leaders in the Chinese Communist Party (CCP) met to create detailed policy frameworks for the PRC’s future – which was interrupted by power struggling within CCP
1966–1976: Great Proletarian Cultural Revolution:Mao Zedong attempted to regain power and support after the failures of the Great Leap Forward. However, this was another plan that backfired, causing millions more deaths by violence and again crippling the Chinese economy.
The centrally planned economy
When the Chinese Communist Party took over the government of China in 1949, it set out to fundamentally change the way the economy was organized
State takeover of ownership of most of industry and commerce in 1954-6
Replacement of household agriculture with agricultural producer cooperatives, a process largely accomplished in the Winter of 1955–6
Install a system of central planning where the government decided what would be produced, who would produce it, and from whom enterprises would receive the inputs required for this production.
Economic logic of the reforms
When conflicts in the system began to cause problems, further reforms were carried out to deal with these problems.
By continually solving the emerging problems, the incremental reforms followed a surprisingly logical sequence, which was not planned at the beginning.
Successful reforms are irreversible as :Once autonomy are given to individuals and firms, and benefits flow from it, these cannot be easily taken away.
were often initiated at local levels
Reforms were started with decentralisation and profit sharing which led to Improved incentives and increased resources, which called for reforms in resource allocation (e.g pricing reform) etc.
The Chinese reforms worked better:
China’s gradualist approach performed better than the big bang approach adopted in Russia and Polan
A unique type of “public” entrepreneurship
In the earlier stages of the reform, input markets were under-developed
Local government officials acted as entrepreneurs who identified profitable opportunities and used their connections/powers to take advantage of the opportunities.
This kind of entrepreneurship gradually gave way to private entrepreneurship as input markets developed over time.
The reforms gained broad support from the population as they
Achieved Pareto improvement in the initial stage
Enabled reforms of Kaldor improvement to proceed smoothly
Minimised social costs of transition
Measures of exchange rate
Bilateral exchange rate: the value of one country’s currency relative to another country’s currency
Nominal exchange rate: the value of a currency relative to another currency
Effective exchange rate: is an index that describes the relative strength of a currency relative to a basket of other currencies.
Nominal effective exchange rate (NEER): is a measure of the value of a currency against a weighted average of several foreign currencies. An increase in NEER indicates an appreciation of the local currency against the weighted basket of currencies of its trading partners.
Trade-weighted exchange rate: a special case of NEER. It is compiled as a weighted average of exchange rates of home versus foreign currencies, with the weight for each foreign country equal to its share in trade.
Real exchange rate: describes how many of a good or service in one country can be traded for one of that good or service in another country
The real effective exchange rate (REER): is the weighted average of a country's currency relative to an index or basket of other major currencies, adjusted for the effects of price and inflation.
Corruption Perception Index (CPI) ranking
The PRC and USA in 1973-1979
The Korean War was a war between North Korea (with the support of China and the Soviet Union) and South Korea (with the support of the United Nations, principally from the United States). The war began on 25 June 1950. The war unofficially ended on 27 July 1953 in an armistice.
After the Korean War broke out, the Truman administration resumed economic and military aid to the ROC and neutralized Taiwan Strait by United States Seventh Fleet to stop a Communist invasion of Taiwan.
The Vietnam War was officially fought between North Vietnam and South Vietnam from 1 November 1955 to the fall of Saigon on 30 April 1975. North Vietnam was supported by the Soviet Union, China,[and other communist allies; South Vietnam was supported by the United States, South Korea, Australia, and other anti-communist allies.
In July 1971, Henry Kissinger arranged a top-secret mission to Beijing to negotiate with Chinese Premier Zhou Enlai.
From 21 to 28 February 1972, President Nixon traveled to Beijing, Hangzhou, and Shanghai. At the conclusion of his trip, the US and the PRC issued the Shanghai Communiqué, a statement of their respective foreign policy views.
US acknowledged the PRC position that all Chinese on both sides of the Taiwan Strait maintain that there is only one China and that Taiwan is part of China
The US and the PRC established the United States Liaison Office (USLO) In Beijing and a counterpart PRC office in Washington
In the Joint Communiqué on the Establishment of Diplomatic Relations, dated 1 January 1979, the United States transferred diplomatic recognition from Taipei to Beijing
Vice Premier Deng Xiaoping's January 1979 visit to Washington initiated a series of important, high-level exchanges which continued until the spring of 1989
US, PRC, and Taiwan
US and Taiwan - 1979 onwards
After WW2 and until the US formally recognized China in 1979, Washington provided Taiwan with financial grants. A separate Sino-American Mutual Defense Treaty was signed between the two governments of US and Taiwan in 1954 and lasted until 1979.
In April 1979, the US Congress signed into law the Taiwan Relations Act, permitting unofficial relations with Taiwan to flourish, on the one hand, yet the right of the US to provide Taiwan with arms of a defensive character, on the other.
On 17 August 1982. the US-PRC Joint Communiqué stated US’s intention to gradually reduce the level of arms sales to Taiwan, and the PRC described as a fundamental policy their effort to strive for a peaceful resolution to the Taiwan question
Taiwan’s democracy movement since 1987
:After 1949, Kuomintang (Chinese Nationalist Party) of the ROC developed Taiwan into a dictatorship. The period of martial law that existed in Taiwan from 1949 until 1987 resulted in the unlawful convictions and occasional executions of thousands of Taiwanese and Chinese democracy activists and other dissidents. This period has become colloquially known as the "White Terror".
In 1987, the Kuomintang released its hold on power and ended martial law in Taiwan. Democratic activism within Taiwan gave birth to a range of independence-oriented political parties.
Taiwan’s Economic Miracle – in real GDP per person
Trump and Taiwan
When Donald Trump won the 2016 presidential election, contention over the Taiwan issue intensified; President Trump became the first sitting US president since Jimmy Carter in 1979 to have any formal political or diplomatic contacts with Taiwan when he decided to receive a phone call from President Tsai Ing-Wen.
Trump has expanded the duties of the US' de facto embassy in Taipei-American Institute in Taiwan - by adding more security personnel, and has overseen increasing non-diplomatic visits of Tsai Ing-Wen and Congressmen to each other's countries/regions.
In addition, American warships have reportedly crossed the Taiwan strait and increased military drills with Taiwan, which mainland China views as a direct threat to its sovereignty.
Advanced arms sale to Taiwan
On 18 August 2020, Trump administration confirmed that Taiwan will receive 66 new American-made F-16 fighter jets in the biggest arms sale to the self-governing island in years.
The new F-16s, known as the F-16V or Viper, will be made at Lockheed Martin factories in Greenville, South Carolina, and Fort Worth, Texas. They will be the latest, upgraded models of the single-engine aircraft which first flew with the US Air Force in the late 1970s. They will join about 140 others already in the Taiwanese fleet.
USA and China – from Engagement to Conflict
A timeline of China-US engagements:
After the 1989 Tiananmen Square conflicts, US government suspended military exports and arms sales to China, imposed sanctions including cancellations of high-level visits by US senior officials to the mainland
However, the Bush administration (1989-1992) believed maintaining ties with China remained important to US national interests
The Reagan administration (1980-1988) reinforced US commitment to strengthen diplomatic relation with China by the passage of the Third Joint Communiqué in August 1982
From Engagements to Confrontations
During Obama administration (2008-2015), the relationship between two countries witnessed mostly positive development in Obama's first term, but gradually became characterized by more complex layers of dynamics and accompanied global-level threats
During this period, Xi Jingping became the general secretary of CPC in 2012 and President of PRC in 2013
Two issues emerged: territorial disputes in the South China Sea and the high level of tension caused by a huge trade deficit in their trade relationship.
China’s ambitious plans
Made in China 2025: a state-led industrial policy that seeks to make China dominant in global high-tech manufacturing. The program aims to use government subsidies, mobilize state-owned enterprises, and pursue intellectual property acquisition to catch up with—and then surpass—Western technological prowess in advanced industries.
Belt and Road Initiative (BRI)
Huawei’s aggressive 5G world-wide deployment
Wolf warrior attitude in diplomatic relations
Beijing consensus (state-led, government intervention) versus Washington consensus (laissez faire, free-market)
Decoupling of US - China after COVID-19
COVID-19 has significantly exacerbated the confrontation between China and the Rest of the World (led by the USA)
Two countries blamed each other on origin of the COVID-19. The Chinese government has refused the investigation teams from WHO to visit the bio labs in Wuhan – of which Washington used as an evidence of Beijing’s hiding.
The Chinese government used the supply of PPE as a bargaining chip to force some West countries (Italy, Sweden, Poland, and etc.) to praise the Chinese government and its political system
Chinese government use the early development of vaccines (although with a short-cut) to demonstrate its superiority in biological research and the leadership of Xi Jinping.
8 July 2020, Director of the FBI, Christopher Wray, in a speech to the Hudson Institute, claimed China is using espionage, cyber theft, blackmail and other means as part of a strategy to replace the US as the world's dominant power, Wray also warned that China is trying to penetrate American firms working on lifesaving research into the coronavirus.
On 16 July 2020, Attorney General William Barr made a speech at the Gerald R. Ford Presidential Museum in Michigan, accusing China’s ”unlawful tactics” to unseat the United States as the world's preeminent superpower, in pursuit of global supremacy.
On 23 July 2020, Secretary of State Mike Pompeo gave a at the Richard Nixon Presidential Library and Museum in Yorba Linda, California - titled “Communist China and the Free World’s Future,” he declared the failure of 50 years of engagement with China and called for free societies to stand up to Beijing.
A simple illustration of trade deficit
Autarky – no international trade :
International trade – trade balance
International trade – with US running current account deficit
International trade – with US running current account deficit
International trade – with US running current account deficit
International trade – with US running current account deficit
Figures and Facts
US trade deficits with China
Tariff barriers – lack of reciprocity
Trade battles with other economies
China-US tariff war
Imports hit by the tariffs
China-US tariff war
Imports hit by the tariffs
Impacts of the US-China trade war on the stock markets
PMI and GDP growth in China
The currency agreement contains pledges by China to refrain from competitive currency devaluations and to not target its exchange rate for a trade advantage
U.S. officials said the deal includes improved access to China’s financial services market for U.S. companies, including in banking, insurance, securities and credit rating services.
China agreed to increase purchases of American products and services by at least $200 billion over the next two years.
The United States will cut by half the tariff rate it imposed on Sept 1. on a $120 billion list of Chinese goods, to 7.5%.
The deal includes stronger Chinese legal protections for patents, trademarks, copyrights, including improved criminal and civil procedures to combat online infringement, pirated and counterfeit goods.
China also agreed to refrain from directly supporting outbound investment aimed at acquiring foreign technology to meet its industrial plans -- transactions already restricted by stronger U.S. security reviews.