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Economy
China’s economy is resilient enough to withstand Sino-U.S. trade war
2018/11/05 04:22:17
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Since March, this year, with the escalation in trade friction between China and the U.S., there are concerns about and lack of confidence in China’s economy, which have resulted in downward pressure on the stock market. On September 19th, China’s National Bureau of Statistics announced the operating indicators for the first three quarters of the country’s economy, which showed that GDP was RMB 65.0899 trillion, a year-on-year increase of 6.7%. It is not difficult to see that trade friction has not changed China's economic fundamentals, its economic stability remains unchanged.

Faced with the pressure brought by changes in the external environment, China needs to be firm towards high quality development in terms of economy. It can capitalize on transformation and confidence in development to effectively hedge the impact of external uncertainty. More importantly the government’s policies of structural adjustment, transformation and upgradation of economic system are paying off and the characteristics of high-quality economic development are more telling.

The “stability” of China's economy is reflective from its economic growth. First, although affected by trade friction with the U.S., China's economy grew by 6.7% in the first three quarters. It has been operating smoothly in the medium-to-high speed range between 6.7% and 6.9% for 15 consecutive quarters.

Second, the employment situation in the country is stable; in the first three quarters 10 million new jobs were created in urban areas. The employment target of more than 11 million people in the whole year is being steadily achieved. In September, according to national urban survey, urban unemployment rate was 4.9%, which remained at a low level.

The third important indicator is stable price level; in the first three quarters, consumer prices rose by 2.1% YoY, showing overall stability.

The fourth is that foreign exchange reserve stabilized at more than USD 3 trillion, and RMB exchange rate remained steady. These four internationally accepted economic observation indicators reflect overall stability of China's economy.

The “promising” nature of Chinese economy is obvious by its optimized structure. The basic role of consumption in economic growth has been consolidated; in the first three quarters, the contribution ratio of ultimate consumption expenditure to economic growth was 78.0%, which was 46.2 percentage points higher than the total capital formation. The proportion of service consumption continued to increase; in the third quarter, among the national consumer spending, service consumption accounted for 52.6%, an increase of 0.2 percentage points over the same period of the previous year. The investment structure continued to be optimized; in the first three quarters, high-tech manufacturing investment increased by 14.9% YoY, and the growth rate was 9.5 percentage points faster than the total investment. New industries have grown rapidly; in the first three quarters, the added value of high-tech manufacturing and equipment manufacturing increased by 11.8% and 8.6% respectively, which was faster than the above-scale industries by 5.4 and 2.2 percentage points respectively. The added value of industrial strategic emerging industries increased by 8.8% YoY, 2.4 percentage points faster than the above-scale industries.

Secondly, the economic benefits are increasing; in the first three quarters, the profit of industrial enterprises, above designated size, increased by 16.2% YoY, and the profit rate of main business income was 6.43%, an YoY increase of 0.35 percentage points. The improvement of benefits is conducive to the stable expectation of enterprises.

Thirdly, level of people’s lives has improved; in the first three quarters, the per capita disposable income, of an average person, was RMB 21,035, a nominal increase of 8.8% YoY. The actual growth rate remained 6.6% after deduction of the price factor. The growth rate was the same as that of the first half of the year, which was basically in line with economic growth. The ecological environment continued to improve, the quality of development advanced steadily, various social security systems were gradually enhanced and people's level of satisfaction persistently hiked.

According to rough calculations, China's dependence on exports was close to 70% in 2007. After 2008 economic crisis, China actively adjusted its strategy from export-oriented to domestic demand-driven economy. Ten years later, China's export dependence has been dropped from 70% to around 10%. By the end of 2017, China’s total GDP was RMB 82 trillion, and its export contribution was about RMB 8 trillion with exports to the U.S. accounting for about one-third. Even if the Sino-U.S. trade friction finally reduces China's exports to the U.S. to zero, the actual impact on China's economic growth rate will be 0.2-0.5 percentage points, and Chinese economy can withstand a 0.5% slowdown.

Chinese economy is resilient; with Chinese economic transformation and upgradation, the role of domestic demand in economic growth has enhanced. In the first three quarters, domestic demand, composed of consumption and investment, has contributed more than 100% to economic growth. Making good use of such drivers, as resident consumption and effective investment in economic growth, China can narrow the impact of external trade friction to a manageable range.

From the perspective of the impact on employment, additional tariffs on some export commodities may shrink orders of enterprises, which in turn will affect employment. At present, China is in a good condition of increasing employment. Concrete implementation of policy measures that are conducive to innovation and entrepreneurship will effectively overcome the impact of economic and trade friction on employment.

From the perspective of the impact on prices, China boasts the largest and most complete industrial system in the world with adequate supply of industrial and agricultural products and services. As long as the supply and demand are basically balanced, the price fluctuations of individual commodities caused by trade friction are unlikely to bring about overall price hikes.

In terms of impact on the balance of payments, China's current trade in goods is in surplus, and the service trade deficit is stable with net inflow of cross-border capital. China is capable to maintain a basic balance of international payments and a stable RMB exchange rate.

Analysts are confident about China's economy, because its economy as a whole, has resilience, flexibility and a huge potential for domestic demand, which will provide it stability. The competitiveness of market players is constantly improving. The country is fully capable of continuously meeting people's needs for a better life by expanding domestic demand. China can promote international economic and trade cooperation by deepening reform and opening-up and expedite high quality development to hedge the impact of Sino-U.S. trade friction.

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Shi Jianxun
Director of the Institute of Finance and Economics at Shanghai Tongji University
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