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China’s economic dilemma and the US

China is set for a lower growth rate for its economy. Looking at the new official target growth range of 6 to 6.5 percent from last year’s actual growth rate of 6.6 percent, it doesn’t look too bad. However, two things need to be pointed out here.

Firstly, it will be the lowest growth target since 1990. This will have an impact on the employment situation in the country, with likely adverse effects on social stability.

Secondly, notwithstanding the target growth rate figure of 6 to 6.5 percent that doesn’t seem too bad, Premier Li Keqiang’s annual work report sent to the recent National People’s Congress highlighted the problems that China will be facing.

The following is worth quoting from Premier Li’s report. “Growth in global economy is slowing, protectionism and unilateralism are mounting, and there are drastic fluctuations in the prices of commodities… Instability and uncertainty are visibly increasing, and externally generated risks are on the rise”, referring apparently to the trade conflict with the United States (US).

Domestically, he highlighted that the growth in consumption was slowing and China’s business environment fell short of market expectations. At the same time, the public was “dissatisfied in many areas”, including education, healthcare, housing and food safety.

The economy, therefore, faced “severe challenges” as it tried to balance the new risks with the “growing pains” of transforming the country’s economy, with, among other things, added pressures on job creation.

The unemployment rate is expected to rise to 5.5 percent, up from 5 per cent last year. The official unemployment rate seems to underestimate the real situation. Whatever might be the case, slowing growth in the manufacturing industries is affecting jobs, with exports suffering because of the trade conflict with the US.

The jobs are also hit by reforms to shut down “overcapacity” in state industries, such as steel and coal.

To deal with the situation, the government would cut taxes to encourage manufacturing and small business, combined with new loans to small businesses by state banks; though “refraining from using a deluge of stimulus policies” and continuing with structural reform.

The stimulus policies are not cost-free, as these have created overcapacity and created a mountain of internal debt estimated at more than 200 percent of China’s GDP.

This is causing distortions in the economy, like unoccupied housing apartments waiting for buyers. But the government will go ahead with large spending on railway construction and roads and waterways.

Trade confrontation with the US is acknowledged as a factor in lower growth expectations.

Slowing growth in China’s manufacturing industries is affecting jobs, with exports suffering because of the trade conflict with the US

China attaches considerable importance to settling the ongoing trade issues with the US. The continuing dialogue between the two countries tends to raise expectations of a mutually agreed solution. Beijing is willing to buy a lot more from the US to ease the situation.

But so far, there is no breakthrough.

The problem is multidimensional, which includes intellectual property theft, the character of the Chinese economy subject to state direction and control thus undermining competition, and its headlong ambition to be the world’s technology giant, raising fears of backdoor spying through telecommunications corporations like Huawei.

The case of the telecommunication giant, Huawei, has added to the complexity of the relationship not only between the US and China but also with other Western countries. Australia has taken the lead to ban Huawei in the rolling of 5G technologies, as this would make its telecommunications susceptible to Chinese spying.

The US too has imposed a ban, which reportedly prevents US agencies, private companies that deal with the US and recipients of US loans or grants from using Huawei’s gear.

It would effectively ban national and international businesses and agencies from using Huawei and allied technology products, at a time when China’s dominance in 5G technologies is widely acknowledged. Huawei has said that it was 12 to 18 months ahead of its competitors on 5G development.

China strongly denies that the government forces its technology companies to spy on other countries. Only the other day, Chinese Premier Li Keqiang told his annual press conference that, “This [spying by Chinese technology companies] is not consistent with Chinese law. This is not how China behaves, we did not do that and will not do that in the future.”

In the meantime, Huawei is suing the US government in a Taxes court to overturn the ban on the use of its gear.

Even though the US is taking a tough stand on trade and technology issues, President Trump reportedly said recently that he might consider intervening in the US Justice Department’s legal action against Huawei’s chief financial officer, Meng Wanzhou, who is going through the Canadian judicial process on an extradition request from the US.

It would seem that China is trying to avoid any rash reaction to all that is plaguing the two countries’ trade ties.

Premier Li reportedly struck a moderate tone on US-China relations at his press conference, saying that their shared interests outweighed their differences; noting that the Chinese and US economies were closely entwined. It was, therefore, not realistic, he said, to decouple these two economies.

It would thus appear that both China and the US are keen to avoid a headlong clash.

Will this lead to a mutually satisfying solution? Only time would tell, as there are too many variables, including geopolitical and strategic issues.

The writer is a senior journalist and academic based in Sydney, Australia

Published in Daily Times, March 22nd 2019.