Looking Forward: China’s Economy, Trade and Investment, and the Taiwan Issue
December 31, 2021
About the author:
Liu Yangsheng,
Senior Fellow, Taihe Institute
Co-Founder, Impact Asia Capital Ltd. Advisory Board Member,
CGN Capital Partners Infrastructure Fund III
2021 is a momentous year for China, with landmark regulations marking pivotal changes to key sectors and areas of society. To better grasp the developments of the past year that will inform the coming year’s policies, TIO conducted an interview with Mr. Liu Yangsheng, Senior Fellow of Taihe Institute.
TIO: The outbreak of the COVID-19 pandemic in 2019 has changed the world economy in many ways. It struck China during its transformation from an export-led manufacturing economy to an innovation-driven service economy. One main area that many foreign investors and policy analysts focus on is the direction of China’s future economic development. Based on your experience and observations, what is your projection concerning the outlook on China’s future economy?
Liu: Regarding the future of China's economic development, I think you have to understand it in the context of global economic growth. Global economic growth is fueled by the last two decades of globalization. And what is globalization? That's a nice way of putting efficiency. If you look at human economic behavior, the key is value creation - to make a profit. How do you make a profit? Become more efficient.
Globalization has essentially made the global economy more efficient. You do what you do best, and higher efficiency means higher value creation. Globalization can therefore be translated as higher profitability. In China's case, it is probably the only country in the world today that has all the key components to have efficiency enhancement. You have very hard-working people who have the willingness and enthusiasm to generate value creation. You have an incredible level of education, especially in sciences and engineering.
When the People’s Republic of China was established in 1949, more than 90% of people were illiterate - a literacy rate of under 10%. Today, the illiteracy rate is under 10%. So, you have a skilled, hardworking workforce, and you have what is also probably the world’s most modern, sophisticated, and elaborate supply chain based on logistics infrastructure. There is no question that China's infrastructure is much more advanced than European or American infrastructures.
China is the only country in the world today with such an extensive, sophisticated supply chain system that supports efficiency creation. No matter how others might try to suppress that efficiency, by actions that make things inefficient like the trade war and so on and so forth, it all goes against the human instinct of enhancing efficiency.
Now I think China's further development is mainly about two things.
First, dual-track domestic development. Here, I need to mention this concept of economies of scale. It means that the larger the scale, the more efficient and the lower the cost of the manufacture. China has the biggest market in the world today, bigger than Europe, and certainly bigger than the United States. That efficiency, in terms of the economies of scale, is unrivaled anywhere. That's why when China decides to go into manufacturing, no one else in the world can compete because we have the largest market to enhance economies of scale. So, what China needs to do, and this is what the government is focused on very much, is to upgrade the sophistication of the technology, not only in manufacturing but also in innovation. This means that in the future years, China’s economic development will be focused on: number one, the dual-track enhancement of the domestic market; and number two, continuing to upgrade, not only the efficiency but also the sophistication in export.
On the service side, one must be careful as there has to be a balance. The United States offers a great case in point. America is a service economy. 80% of the American GDP is service. But when a country can't even make screws and nails anymore, it becomes beholden to the suppliers. And that's what happened over these two years since the outbreak of the pandemic. This is also why the U.S. is trying to restore manufacturing, bring manufacturing jobs back, and so on and so forth.
However, that is not going to happen. Take the semiconductor sector as an example. There's a shortage now in America. But you cannot just bring the whole semiconductor industry back to America again because everything else is made in Asia. They don't have the labor force to be able to have a comprehensive supply chain.
In short, the main elements that are key to the Chinese economic development include: First, dual-track; and second, upgrading innovation and technology and continuing the globalization process to have efficiency enhancement to improve the lives of everybody. This is why China talks about win-win. Globalization is a win-win if it is a cooperative and collaborative approach.
Forty years ago, Deng Xiaoping said something that was really interesting. He quoted the words of the party-secretary of a small village, who said, “You want to be rich, then build roads first.” What does that mean? That means the foundation of economic growth is to build solid infrastructure - an infrastructure that is as sophisticated and massive as what China has today. The process took decades. But we did it. Today, we are building not only physical but also digital infrastructure that outpaces any country by leaps and bounds!
TIO: And this is what the Biden administration is trying to do with the Build Back Better World agenda, right?
Liu: Well, he can try. But as far as I’m concerned, they haven't built any serious infrastructure for decades. They don't have the labor force that can do it. They don't have the civil engineers because instead of civil engineering, the best and the brightest in America went into financial engineering.
TIO: It is intriguing because it is not just Biden who brought up the agenda of building infrastructure. Trump and Obama also said their administrations were going to do that. The plan has been there for decades.
Liu: But it is not going to happen because of the whole political structure. It is not happening because the country is in some form of decline, because the polarization of blaming others is what politics in America is all about right now. Republicans against Democrats, Democrats against Democrats, and you also have the Moderates versus what they call the Progressives.
TIO: The so-called “vetocracy.”
Liu: That’s right! When we talk about globalization, it essentially means global efficiency enhancement. This is good for everybody. But it's bad for America because their global clout or influence or their ability to control others would just keep declining. But it's obviously good for China because China has the efficiency, the logistics, the supply chain, and the latest infrastructure.
It is interesting that after the trade war began, the Chinese government and the Chinese entrepreneurs had actually already started to build digital infrastructure. For example, where else do you have WeChat pay and Alipay the way you have in China? In America, people are still sending checks in the mail! Here in China, we have instantaneous settlements. Credit cards, for example, in the U.S. and Europe, are still charging anywhere between 1.5% to 3%, or even as high as 3.5% in some parts of Europe. The banks will not allow this to go away because this would bring tens of billions of revenues in dollars or euros for them. So, they filibuster. It's too much profitability for them and their vested interests will not allow any change to happen.
In China, we have basically bypassed the whole credit card phase. Transactions have directly gone electronic with digital solutions. This is one illustration of the so-called digital infrastructure. 5G is another example of digital infrastructure. I have read somewhere that there are around hundreds of thousands of 5G base stations built in China already. It's spread throughout the country. Where else do you have that? You don't.
TIO: This is interesting because globalization and the world order characterized by free trade was created and promoted by the U.S. after WWII. Now it is going in an opposite direction. This dynamic is something that struck me.
Liu: The U.S. promoted the order because back then, it dominated the manufacturing world. Now, when it is no longer in that position, it starts to reverse the globalization process. An example is putting tariffs on Chinese goods going to America. But what happens thereafter? Who gets hurt? It is America. It is the American companies and the American consumers. This is part of the reason why you have this inflationary pressure in the U.S. too.
The top elites in Washington all know that if they lift the tariffs, the inflationary pressure will be reduced. Biden could have done it in January when he took office. But even now, he is not doing it. Why? Their political system doesn't allow it. Because if he lifted it, then he will be attacked as being soft on China. Therefore, effective policy-making is essentially paralyzed as you have a situation in which what's good for the country is not doable because of its political system and its political structure.
TIO: Just now we talked about the general direction of China’s future development. If we narrow it down to the specific sectors of investment. What are some of the industries that will attract investments, in terms of China’s long-term economic and ecological goals set domestically and internationally?
Liu: I think there are a couple of sectors which will be catching the wind in the sails.
One is renewable energy sources. There's no question because climate change is for real, unlike what President Trump said that “climate change is a Chinese trick.”
Look at the changes in the weather pattern in the last couple of years. Vancouver got so hot that people died from the heat. Germany, a country that has a pretty solid infrastructure, had flooding that killed hundreds of people. At the North Pole, the ice is melting at an accelerated pace. This summer in Siberia, the temperature, which is normally around 22°C to 25°C, went up to 40°C in some places. That is really serious, because underneath the Siberian ice, and also the ice of the North Pole, there is a very significant amount of methane. Methane’s impact on global climate change is ten times stronger than that of pure carbon dioxide.
Climate change is happening very quickly. What we see on the Chinese government side is that every sector now, including steel and cement, has to go green. The Chinese government is very serious about this. All the new regulatory frameworks that have been put out in recent years focus very much on renewable energy sources and the reduction of carbon.
The second sector is new material. The idea is basically to enhance efficiency. All of this means people can be supplied with the goods and services that they need to survive in a more efficient way. New materials will contribute significantly to this.
So, I think these two sectors: renewable energy sources and new materials that go into cheaper and more efficient manufacturing and productivity, will be attracting huge investments in the years to come.
(Source: chinausfocus.com)
TIO: I’d like to follow up on the dual-track system that you mentioned earlier. Can you elaborate on that? Specifically, there has been some assertion that the dual-circulation plan China put forward in recent years is an inward-looking strategy. How would you respond to this?
Liu: China has to protect itself as well. We know what happened with the American ridiculous attacks on Huawei on the chip side and on all Chinese high-tech, right? First of all, this thing about China stealing technology. The U.S. didn’t even have 5G by the time the 5G technology came out in China. How would we steal something that we have invented over here?
Moreover, to protect ourselves, in terms of the number of key technologies and certified conductors, we have to guarantee that we have import substitution. You must be able to have the capacity to produce by yourself in case another Donald Trump comes, which is not impossible.
So, the dual-track or dual-circulation plan is essentially to build some safety net into your own economy. Aside from the fact that to move more to the service sector and so on and so forth, you also have to be very careful, so that people don't hold you by your neck.
Then, in terms of exports, China will continue to be the major trading partner for over 100 countries because of China’s supply chain. We are able to make things cheaper, better, faster than anywhere else. I remember last year, in the middle of the pandemic, my friends from Zhejiang province told me that they were getting huge orders for bicycles from Spain and Italy because all public transport stopped. Then a friend from Italy explained to me that the only place in the world where they can place an order of tens of thousands of bicycles is China because of its supply chain.
Dongguan experienced a similar story this summer. The weather in Vancouver is normally quite nice. People don’t build air-conditioning into their homes. In fact, in the Northwestern parts of Canada, houses were built to retain heat. So, when this extreme heatwave came in June, people were dying from it. Suddenly, in Dongguan, there were huge orders for electric fans coming from Canada.
A temporary misting station on Abbott Street during a heatwave in Vancouver, Canada, on June 28, 2021
(Source: axios.com)
TIO: This resonates. I remember during the presidential election in 2016, when my American friends were still staring at the screen waiting for the results of the vote-count to come out, Chinese netizens joked around and said that just look at the order number of the perks for the two candidates in Yiwu, the answer is already there!
Liu: This is why I started by talking about efficiency enhancement. When you have scale, supply chain, logistics, and infrastructure, no one can beat you, especially as labor costs in the U.S. and European countries are still very high.
When Europe closed the border during the early phase of the pandemic, serious problems arose even in the agricultural sector. Because in France, most of the agriculture sector has workers from North Africa. Closing the border means no more labor. In Germany, a lot of the manufacturing facilities and agricultural labor come from Eastern European countries, including Turkey, Poland, Hungary, and Albania. Shut the border down, end of the story. This applies to the U.S. as well. No Mexicans or Central Americans, things would get very complicated.
In this sense, China is sitting in a good position because we have got a very complete supply chain. But I should note that this supply chain is the supply chain of Asia with China at its core.
If we take a look at our cell phones, there are 200 pieces or components, and not all of them are made in China. Some, along the supply chain, are manufactured in Malaysia, Indonesia, South Korea, and Japan. So, it is actually the shifting of the global economy from the West to the East. And it is the rise of Asia with China at its core. Why China is the core? Because of the size of its market and the elaborate infrastructure that has been built.
TIO: Many people are talking about the creation of the RCEP (Regional Comprehensive Economic Partnership) and China’s initiative of joining the CPTPP (Comprehensive and Progressive Agreement for Trans-Pacific Partnership). They understand this as an act of China to counter the U.S. in their power game. What is your view on this?
Liu: That's totally the wrong perspective of looking at it. Its effect might appear like China is countering America’s ridiculous attacks. But this is all about further efficiency enhancement. It is the natural consequence of the further rise of Asia with China at its core.
If you look at the EU. The EU was trying to move in the direction of creating a common market. The whole concept of an EU common market was to compete against the big market of the United States. But for 27 countries during the pandemic, shipments that were supposed to go to Germany, and not supposed to go to Switzerland, the flights ended up in Germany, and it was all blocked on the German border. They said: “Sorry, health care products, personal protective gear, we are keeping these in Germany.” Therefore, it's going to be very difficult, I think, given the polarization of societies in the West to have a cohesive supply chain.
(Source: wfaa.com)
Another comment that I would love to make on investment is that in the last several years, there has been a massive move toward green finance and ESG (Environmental, Social, and Governance) finance. Many sovereign wealth funds, even pension funds, and social security funds, and private investment funds are allocating a significant portion of around 10% to 20% of their holding to green investments.
I don’t see this being treated very seriously in America because Wall Street bankers will green wash anything if they can get a better return. They are not really passionate about it and do not take it as the Europeans do. Europeans take the thesis of green very seriously. Wall Street bankers don’t.
So, the amount of activities in green finance is going to increase and increase exponentially. As people can see, the impact of climate change and the amount of capital that's required to make the transformation of human activity into something that is more sustainable and greener, I think this will be a huge sector in China. So, when we say renewable, that's green! Using new materials to enhance efficiency, in a way, is also green.
But the other part - common prosperity - the S part of ESG, which is social responsibility, should not be overlooked as well. So, these new pieces are actually a more forward-looking view in terms of what the earth needs or what the world needs, because as climate change continues to accelerate, even agriculture is going to be impacted very seriously.
To sum up, I think ESG and green finance will certainly be something that people have to look seriously into in terms of the future trends of investment. All Chinese companies, sooner or later, like many European companies now, are required to file ESG reports to enunciate what they have done to enhance ESG and to meet the targets of sustainable development.
(Source: inxsoftware.com)
TIO: Very interesting. Thank you, Mr. Liu, for your comments. I think we have covered enough on the questions about trade and investment and now I’d love to turn our attention to the question of Taiwan - another area that has sparked discussions all over the world in recent years.
We all know that the Taiwan issue is complicated. First, I would love to hear about your view on the oft-cited statement that the Taiwan issue is a product of the U.S.- China power game. Personally speaking, while I think the statement may be true on the American side, for China, Taiwan is not a card that the U.S. can play at its will but one of China’s core national interests. So, I hope to hear about your perspective on this statement that Taiwan has little agency of its own rather than as a bargaining chip in the power game between the two big powers.
Liu: In different phases of history, in different historical periods, Taiwan is treated differently by the United States. When the United States, in 1949, saw the formation of the People’s Republic, they still believed that there was a way for Kuomintang to come back, but failure to win the Korean War started to change some views on Taiwan in Washington.
Taiwan is the beachhead for the United States to contain China. The stronger China got, the more powerful China became, economically, politically, militarily, and on a global basis, the US strategic aim is to retard that. The logic is simple: whatever we can do to slow down China's growth, they will do, and Taiwan is one part of that. That is their strategic objective. There is essentially no strategic value to Taiwan, except as a small tool in causing trouble or hassle for China.
TIO: I noticed during the virtual summit between President Xi and President Biden that Biden said, “We stick to the strategic ambiguity stance on the Taiwan issue.” But then the next day, Washington sold 200 F-16 Vs to Taiwan. It is rather perplexing to me as the Biden administration appears to be zig-zagging a lot in its policy practices.
Liu: There are some who would argue that “sell as much as possible to make as much money as possible.” But there are several aspects to this US weapon sales. If we understand this from a commercial perspective, the more they sell, the cheaper it becomes for them to produce. Again, efficiency and economies of scale.
So, it's very important for them to have lots of foreign sales of weapons so it reduces the cost of weapons to themselves, including nuclear submarines, jet fighters, and all kinds of hardware. But to the argument itself, that they are trying to squeeze as much money out of Taiwan as possible, I think this is not a significant factor. The real important factor is how to slow down China's growth by causing trouble that annoys China and distracts China from advancing its development on the many fronts I mentioned earlier. The Hong Kong and Xinjiang issues are two cases in point. Anything and everything they can do, whether through lies, cheating, through whatever means to retard China's continued growth is all they have focused on. That's a strategic objective, whether or not they make a little money on the side by selling some arms, because they can sell more arms, but it's not going to make any difference between the mainland and Taiwan. There's just no comparison between the two. Twenty-three million people in Taiwan, and half a million Taiwanese live in Shanghai!
TIO: Do you think Washington will continue to follow this zigzag pattern regarding the Taiwan issue in future years?
Liu: I think they will. They will continue to sell just to annoy China. A couple of $100 million is not very significant for the U.S.
TIO: How will the mainland respond then? Based on articles and statements made by officials of the Ministry of Defense, while we hope to deal with the Taiwan issue in peaceful ways, the policy is also not set in terms.
Liu: Both sides have used strategic ambiguity. But the way the U.S. is playing this game is moving from strategic ambiguity to strategic clarity. US government officials visiting Taiwan on US Air Force planes. American Congress people go to Taiwan one after another, declaring the Republic of Taiwan, or saying that Taiwan should participate in the UN in a meaningful way. All of this is bringing more clarity to the ambiguity.
Now why would they do it? I think it's because their position is weakening. That's why they're moving in that direction. In terms of the ways of dealing with the Taiwan issue, China hasn't shown its hand at all. There’s this thing about financial backing Jinzhu 金主that is very interesting. It is a very short list so far, but the list can get much longer as 80% of the companies in Taiwan on the Taiwan stock exchange are involved in business with the Chinese mainland. There are lots of things that can be done economically or trade-wise. In other words, Taiwan is totally dependent on the mainland in terms of trade.
So, there are many ways of dealing with Taiwan. But we don't want to go to that end because it's actually bad for people in Taiwan. If you started doing sanctions or trade embargoes and so on, the economy would collapse, which will really hurt the people.
TIO: But do you think it's possible that the U.S. reach out to those Taiwan corporates and say that “look, why don’t you come to us, we can provide you what the Chinese mainland can offer you as well”?
Liu: Foxconn is a great example. Wisconsin allocated all kinds of tax benefits and support for Foxconn to come and put together the assembly plant in Wisconsin. What happened? Complete disaster. First, they couldn't find the workers. The workers they had didn’t want to do hard work. Second, they have to pay a lot more for the labor. The question is, again, how do you move this back?
Then, in terms of the semiconductor industry, Arizona put in a $17 billion plant by the Taiwan Semiconductor Manufacturing Company. But how would they do it if they could not even find blue-collar workers? Unless they promise to give out a couple of hundred thousand green cards, which politically is impossible to be done in the U.S. given the political climate, how would you find the engineers and technicians? The politics in America will not like that. Five years ago, Terry Gou promised Donald Trump, “I will create 12,000 high-paying blue-collar jobs in the state of Wisconsin.” Five years later, he is still creating. And semiconductor production is much more sophisticated than manufacturing jobs.
So, there are many factors here in the Taiwan issue. The U.S. is pushing, and it's trying to get its buddies to push with it. Again, this is a “whatever we can do to cause trouble for you, we will do it” kind of scenario. They will continue the push. But in the meantime, China will take steps to counter-push to the point where you don't want to waste time. Let’s just solve it.
TIO: Interesting. This helps explain what it says in the plenary communiqué that “we firmly oppose foreign interference. We have maintained the initiative and the ability to steer in cross-Strait relations.”
Liu: That's basically it. The initiative must stay in our hands. We are keeping the initiative because as they move to strategic clarity, we actually have more tools in our hands with strategic ambiguity.
This article is from the December issue of TI Observer (TIO), which is a monthly publication devoted to bringing China and the rest of the world closer together by facilitating mutual understanding and promoting exchanges of views. If you are interested in knowing more about the December issue, please click here:
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