On September 24th, the Information Office of the State Council of China issued a white paper entitled “Facts on Sino-US Trade Frictions and China’s Position”, explaining China’s policy position on the Sino-US economic and trade frictions. It also aimed at promoting a reasonable solution to the China-US economic and trade issues. In order to accurately understand the major points of the white paper, “China Talk” interviewed Chen Wenling, Chief Economist of China Center for International Economic Exchanges (CCIEE).
China.com.cn: Ms. Chen, you have just said that Trump feels very good about himself, indeed, the United States has experienced an economic growth this year, how do you think about the current situation in the United States, do you think this is sustainable?
Chen Wenling: I believe that we should look at the US economy from two aspects. On the one hand, the US economy has experienced a remarkable recovery. The relaxed market access has created a better market environment for micro-enterprises and made them more active. A relaxed market access and tax reduction have led to the backflow of capital, industry and wealth to the US. Therefore, Trump is very happy and feels that more and more money is flowing into the United States. His refusal to appreciate the dollar has resulted in a sharp depreciation, dollar shortage or massive decline in the stock market in more than ten countries. For the United States, his economic policy has activated the economy.
On the other hand, Obama has already said several times that Trump should not take the credit for the economic recovery. The economy was picking up and the unemployment rate was falling when he was still the president. Actually, the US economy started to recover during the Obama administration and became better during the Trump administration but Trump loves to take all the credit for the economy. The second is the dollar hegemony. The US dollar is a quasi-world currency. After the Bretton Woods system was established, the dollar replaced the British pound and pegged to gold, while some other currencies were pegged to the dollar. For a very long time, the dollar was used as a world currency. After the collapse of the Bretton Woods system in 1971, many countries still used the US dollar as the settlement and reserve currency. Therefore, the international status of the US dollar has not declined and 85% of the world’s countries use the dollar as the “anchor currency”, according to our analysis. In the early days of China’s reform and opening up, the dollar accounted for about 70% of the settlement currency. Later, it fell to 62% due to a rising Euro and currently, it was reduced to 50%. Nonetheless, the dollar remains to be the No.1 settlement currency. Furthermore, the dollar accounts for about 60% of the world’s reserve currencies and many countries, including China, use the US bonds as a value-added investment. Therefore, the hegemony of the dollar will not disappear in the short term.
Commodities, especially oil, are based on the US-led energy settlement system. However, there are currently more than ten countries using other currencies for settlement purpose because they are either subjected to US sanctions or do not accept the sanctions imposed by the US, such as Russia, Venezuela and Iran. China is now also promoting the internationalization of the renminbi. As can be seen, the US dollar is being challenged but such kind of challenge is not fatal because the international status of the dollar is irreplaceable. The dollar hegemony will still have a big impact on the world economy for quite a long time. This is also an important reason behind the strong US economy.
The third is the US military hegemony. The military strength of the United States is still the strongest in the world. The military expenditure in 2018 is $716 billion, four times higher than that of China, and equal to the total expenditure of the following eleven countries. The US arms sale amounted to 34% of the world’s military supplies, making it the biggest in the world. The military hegemony, coupled with its newly established network and space army have great psychological deterrence for many countries. Moreover, the US has the largest number of nuclear warheads in the world. In terms of the stock index, it has been rising in the past two years and according to some research institutions, the US stock market has experienced the highest rise in the past years. At the World Economic Forum, Trump said proudly that he has made more achievements than any other previous presidents of the United States in just two years. The trade war is not necessarily the biggest challenge for China because we can fight back in the end, however, his economic strategy and policy has given the United States great advantages in resources allocation, industrial reorganization, which has posed the biggest challenge for China.
Having considered the circumstance described above, the best response for China is to make China’s domestic conditions, policies and strategic choices better than that of the United States and create a better environment for Chinese enterprises, optimize the policy system and enhance administrative efficiency. I believe that the policy integration advantage which will be created by our government soon will surpass the United States.
I think that our actions are not fast enough and our determination is not strong enough. For instance, we have not achieved structural adjustments in tax reform. For enterprises, they need to see that the tax rate in China is better than that of the United States so that they can truly feel that our environment is better than the United States.
Is the strong economic growth of the United States sustainable? It will last for some time but not very long. The following reasons will explain why the US economy may suffer serious losses.
First of all, if the US continues its trade sanctions against China and imposes tariffs on another 260 billion Chinese goods, this will result in higher prices for American consumers because more than 60% of China’s exports to the United States are consumer goods. The rising cost of foreign investors (foreign-funded enterprises) will be passed to the US companies, which means that the sanctions will hurt the US itself. When that happens, many American companies, including the US soybean farmers, manufacturers and consumers will form a new force to oppose Trump’s policy.
Secondly, the domineering practices of the US will lead to global resistance as many countries dislike or are afraid of dealing with the United States. Some of them do not want to deal with the US at all due to America’s selfishness, protectionism and populism. Instead, they have turned to other countries and consequently, the US economy will be hit hard.
Thirdly, the massive debt of the US is also a serious problem. The current debt of the US has reached 21 trillion and the debt for 2018 is now close to $5 trillion, much higher than the estimated 4.5 trillion. Its military spending, expenditure on infrastructure and investment are also on the rise, all of which will lead to an increase in its debt. The US is living on debt and this is not sustainable because the economy will collapse when the US default.
The most dangerous thing is the US stock market. Just like the 2018 financial crisis, the bubble is amplified through the stock and capital market. The stock market turned junk bonds into financial derivatives and sell them to the rest of the world, which not only led to the financial crisis in the United States but also to the rest of the world. I believe that once the US stock market crashes or falls sharply, the US economy will be hit hard.
Our government will create a better environment and give entrepreneurs a clear signal. The white paper also mentioned that we have to protect property rights, intellectual property rights, the interests of foreign-invested companies in China. We must translate this signal into specific plans and come up with a timetable, a roadmap so that the companies can feel that we are doing whatever we can to create a better business environment for them.
We do not want to see that the US economy collapses and hope it goes well all the way. We should draw lessons from the United States and increase our competency. We are not afraid of the trade war, but it will be a terrible thing if we cannot improve ourselves as soon as possible.
China.org.cn: In your opinion, the US economy is doing all right at the moment but its future is full of uncertainties and risks.
Chen Wenling: Yes, I think so.