A speech delivered by Chen Wenling at the China Construction Engineering Industry Entrepreneur Conference in 2018
Dear entrepreneurs, ladies and gentlemen,
I am very inspired by the speech delivered by President Cao Yushu. He proposed that enterprises should deal with the future market competition in five aspects, which is not only important for enterprises, but also for different countries. Today’s meeting is for the engineering and construction industry. I heard that most of the participants here are the heads of investment enterprises in the construction industry and they are very concerned about the international situation and hence, I would like to take this precious opportunity to talk about the China-US economic and trade issues, not just trade frictions, but also China-US relations and the world economy pattern.
The world pattern has undergone a profound change, especially China and the United States. From the end of the last century to the beginning of this century, the world economy experienced significant changes and the biggest variable is China. China’s peaceful rise has changed the pattern of the world, including the North-South pattern, the global governance system, order and rules, and the composition of the global economic structure. China’s economy has continued to develop rapidly and steadily. During the 40 years of reform and opening up, China’s economy has grown at a rate of 9.5% every year, making it the world’s second largest economy, the largest trader, and the leading producer when assessed by manufacturing value. The RMB is included in the SDR basket. China has actually become the locomotive that drives the growth of the world economy and the most important force for maintaining a stable world economy, and the “stability anchor” of the world economy, as we call it. On the contrary, the United States, a country used to promote economic globalization and trade facilitation liberalization has triggered the world economic turmoil and made the world economy full of uncertainties.
Nowadays, the China-US economic and trade relations concern not just China and the US, but also the whole world. In fact, the China-US economic and trade issue is not just about trade friction, but also the competition in manufacturing, technology, finance, development path and the future of the world.
The 40 years of reform and opening up has reshaped China’s economic system and unleashed the vitality of China’s economy. During the past 40 years, Chinese leaders led more than one billion Chinese people to work hard and achieved remarkable progress. The great contribution made by China to the world has brought hope to developing countries, emerging economies and all those who love peace and embrace a bright future. At the same time, it made the world’s most powerful countries start to wonder why did China develop so fast? What does China want to do? Later, they started to panic and hence made a serious strategic misjudgment.
Since Trump took office last year, the Trump administration has set China as the main target in some of the most important reports, such as the US National Security Strategy, Nuclear Safety Report and State of the Union Address. After the “9.11” incident in 2001, fighting against terrorism has become the top priority of the US and other countries. China also engaged in global action against terrorism. Now, the United States has placed anti-terrorism in third place, containing China and Russia has become their new top priority, followed by North Korea and Iran, which means that the United States has made a significant adjustment on its overall strategy. Everyone is now concerned about the trade war, but the trade war is only a prelude.
The strategic misjudgment and shift of the United States have led to a series of irrational, irregular and unjust actions. International economic relations should be rule-based, but the actions taken by the United States is very irregular. The increasing aggressiveness and bullying of the US have isolated itself from the rest of the world. The US has chosen “America First”, opposed globalism, international order and regulation which are not in conformity with the interests of the United States. The irrational strategies of the United States have created a turning point in history and development. If the United States continues to go this way, it will inevitably speed up its decline.
On the contrary, China will create a longer period of strategic opportunities, prolong the period of rapid economic development, and steadily achieve the goal of great rejuvenation. China is now facing the most complicated historical moment, which will bring both challenges and opportunities to China and give China the opportunity to become one of the superpowers. The various social and racial problems in the US are dividing the society and Trump has made things worse in the following four aspects.
First of all, Trump has messed up the world. He has no respect for international institutions, order and rules that have been formed since the Second World War. Taking the Paris Agreement as an example, there are 197 countries signed the agreement and 167 of them have already complied with domestic procedures to ratify the Paris Agreement, including the US government. At the APEC meeting held in Hangzhou in 2016, the former US President Barack Obama and Chinese President Xi Jinping formally presented the instrument to the UN Secretary-General and made a solemn commitment. But Trump has withdrawn from the agreement. Luckily, there was no one follow him. Another example is that the US withdrew from the Joint Comprehensive Plan of Action (known as the “Iran Nuclear Deal”). After several years of arduous negotiations, six countries have reached the “Iranian Nuclear Agreement”, but Trump not only withdrew from the deal, but tried to prohibit other countries to do business with Iran. Furthermore, the US has also withdrawn from many international organizations, such as the UNESCO and the UN human rights organizations. In order to ensure “America First”, Trump has withdrawn from many global consensuses and treaties. For example, the United States has even withdrawn from the Vienna Convention on Diplomatic Relations this year, which is a treaty abided by all diplomats. Apparently, President Trump exempted 480 diplomats after taking office. Many countries have no US diplomats for more than a year. Therefore, I think that President Trump has been very successful in messing up the world. His recent withdrawal from the INF treaty signed with Russia has increased the risk of war. The greatest credit of Trump is that he succeeded in messing up the whole world.
Secondly, Trump has disrupted the relationship with his allies. The US has a very strong ally system as it has now 88 allies. However, China has adopted a non-aligned partnership and the partnerships it has established with 82 countries can be divided into 12 different types, such as the all-weather strategic partnership, comprehensive strategic partnership of coordination, comprehensive strategic partnership, comprehensive partnership and partnership. The United States has always preferred the ally-based relationship: the United States bears the responsibility and obligation to defend its allies, offers them financial assistance and in return, its allies follow where the US goes. Nonetheless, this kind of ally-based has changed greatly. For example, the French President Emmanuel Macron proposed to build an army, the German Chancellor Merkel expressed her support but Trump is totally against his idea. Previously, the US assumed 68% of the NATO costs but now, President Trump refused to bear this cost. All the allies of the US have started to rethink their relationship with the US, including Japan and South Korea, they do not want to simply follow the US. Instead, they want to distance themselves from the US, or strengthen cooperation with China.
Thirdly, Trump has disrupted the China-US relations. Despite frequently frictions, China and the US have always been on the track of cooperation since they established diplomatic relations 40 years ago. However, President trump has messed the China-US cooperation. Not long ago, Mark Brzezinski, the son of the famous American strategist Brzezinski, met with us at CCIEE. In his presentation, he reviewed the works his father did for the China-US diplomatic relation and showed 40 valuable photos of China that were not shown to the public, and his father’s diary. He believes that China and the US should seek common ground while reserving differences. Establishing diplomatic relation between the two countries is not the only purpose and the ultimate goal is to develop a lasting friendship between China and the US. I totally agree with him and also believe that China and the US should avoid conflict and confrontation, respect each other, achieve mutual benefit and win-win outcome.
Comparing with the previous administration, President Trump and his administration are the most irrational one and has the highest ever employee turnover, as high as 83%. Followed by Ronald Reagan with a turnover rate is 59%, and Obama with 37%. During my visit to the US in March of this year, I asked a vice president of the US-China Relations Committee: why can president Trump fire anyone he wants so easily? Is there any restriction on him? He replied that the president was elected through democratic election and the President has the right to form the government he wants. The way president Trump fire someone is very simple and brutal, he can just fire someone through Twitter. For example, the former US Secretary of State Tillerson was once visiting Africa, President Trump fired him by sending a tweet.
There are 150 vacancies in the White House but 60 of them remain unfilled. Moreover, we can see that all the staff chosen by President Trump are tough hawks. There are three major forces behind the trade negotiations: the US Department of Commerce, the US trade office, and the trade negotiation representative office. From December 3 to 7, Mr. Zeng Peiyan, Chairman of China Center for International Economic Exchanges led a team to participate in the US-China CEO and Former Senior Officials’ Dialogue. During this period, Chairman Zeng Peiyan met with Henry Kissinger, Michael Bloomberg, and John Thornton of the Brookings Institution.
At the welcome dinner, Trump’s son-in-law Jared Kushner had a long conversation with the president of the US Chamber of Commerce. Kushner said that the Trump administration is a very efficient team but keeps a low profile, which means they do not explain anything despite many misunderstandings. For example, many people say that the relationship between the United States and Mexico is not very good, but in fact, the Mexican foreign minister has come to the White House for more than 100 times. The negotiations between the US and Mexico are very effective, and an agreement has been reached but this is not known to the outside world. The China-US trade war started from $3 billion, then to $50 billion, and finally to $200 billion. Trump said that if China takes counter-measures, he will increase the tariff from 10 % to 25% on January 1, 2019. After the meeting between the Chinese and US leaders in Argentine, the deadline was extended by 90 days, implying that the 25% tariff will start to take effect if no agreement can be reached within these 90 days. He said that the US also hopes to reach an agreement with China during the negotiation. According to my analysis, the following reasons will explain why the US also wants to reach an agreement with China.
Firstly, the US exports to China this year have fallen by 25%. For example, China imported US$260 billion of chips from different countries in 2017, of which US$87.5 billion was imported from the United States. Like the high-end chips produced by Qualcomm and Intel, they can only realize their value if they become an essential part of the industry chain. In fact, the chips exported by these companies to China are sold to a group of companies like Huawei or ZTE. Unfortunately, the United States restricts the export of high-tech products. If China also increases the tariff on the US exports, the US companies will have to pay 50% tariff, the United States and China charge 25% respectively. China will levy 25% tariff on goods imported from the US, and the US will charge another 25% after these products were assembled in China and re-exported to the US.
Secondly, the impact of China’s sanction on US soybean. In 2017, China imported 95 million tons of soybeans worldwide, of which more than 30 million tons were imported from the United States, accounting for 34% of the total imported soybeans. When China levied a tariff on $50 billion of US goods, the soybean was also included and in the next few months, we imported almost no soybeans from the United States. The US government decided to subsidize US soybeans industry 12 billion US dollars, but so far only 1 billion was made available. The US soybean farmers are very anxious because they did not receive subsidies and they are afraid of losing China, the largest export market. Some farmers have become bankrupt, some farmers are hoarding their soybeans, while some farmers bypass Brazil and Argentina to export their soybeans to China. There are 35,000 soybean farmers in the United States, and 110,000 more people are working at the soybean industry. That means a lot of voters for Trump. The US agricultural products such as beef, pork, have also been greatly affected by the trade war.
Thirdly, the US energy export to China is affected. Since September of this year, the US has produced more than 11 million barrels of oil and natural gas every day, it has surpassed Saudi Arabia and Russia and become the world’s biggest producer. Next year, the US oil production will reach 11.8 million barrels per day, more than anyone else. China is the world’s largest importer of energy, followed by India. The global energy supply is moving westward, shifting to the US-led North America. However, the global demand is moving eastward, mainly to Asia-Pacific region, such as China, India, Japan, South Korea and other economies.
After the Chinese and US presidents met with each other in April 2017, China initiated a 100-day plan to increase its imports from the US, including beef, energy, and aircraft. The Chinese government has fulfilled its commitment very well. In 2017, China’s energy imports from the United States increased by 8 times compared with the previous year. In 2018, US energy exports to China accounted for 15% of its total energy exports. Nonetheless, the US has escalated the trade war and even used other country to abduct Huawei’s executive. This has angered the Chinese people and in the past two months, China did not import any oil and natural gas from the United States. The United States has become the largest energy exporter but has lost its largest energy market. Trump is a businessman and the US government has become a transactional government. Therefore, Trump has completely messed up the China-US relations, especially the economic and trade relations. Furthermore, he also messed up himself, messed up the US market and his bargaining chips.
Fourth, Trump messed up the United States. The American society is now experiencing the most chaotic time in history. It has given up a lot of things that have been upheld in the past, such as the cultural values ??that every American is proud of, including the so-called universal values, the image of being a fighter for freedom and democracy.
The Democratic party, the Republican Party and the American society has formed a consensus on adopting a tough attitude toward China. Mike Pence, Stephen Bannon, and President Trump claimed that the United States rebuilt China and China will not be able to achieve what it has achieved today without the United States. This is totally wrong. During the 40 years of reform and opening up, China opened its doors to the outside world and learned from the world, including the US. It learned from the advanced economic system, technology and education of the United States. China will not go backward. Previously, many Americans expected that China will become a country just like the US but now, they realized that nothing has changed except the fact that China’s economy is getting stronger and stronger. Therefore, the United States has begun to use China as a scapegoat and blame China for all its unsolved problems. The trade war launched by the US has hurt not only China but also the United States itself.
I think that we should look at the China-US relationship and the China-US trade war from a different perspective. Chinese society is not ready yet to accept the trade frictions or trade war as a new normal. For example, the stock market and bond market declined greatly even before the China-US trade war begins. The stock market and bond market experienced strong turbulence even before the US adds a tariff on US$50 billion of Chinese goods. The tariff on the $200 billion of Chinese goods had not yet to take effect, the stock market and bond market already amplified the impact of the extra tariff. The fierce market turmoil changed the expectation of enterprises and the confidence of investors.
I totally agree with what Mr. Cao has just said that our entrepreneurs must have self-confidence. Due to our lack of understanding of the international trend and our opponents, and our insufficient judgment on the future, we tend to be unconfident sometimes. This kind of lack of self-confidence has led to economic overreaction, and has brought us a lot of unnecessary economic troubles. Indeed, we do have our problems and hence we need to intensify our reform and opening up, but we also need to stay calm and analyze the situation.
One of the consequences of the China-US trade war is that Chinese people have become unprecedentedly interested in the China-US relations, the world pattern and the future of China. For instance, everyone knows how much tariff China and the US will add to each other and how will the two countries respond. The trade war has inspired the Chinese people’s patriotism. The 40 years of reform and opening up have made the Chinese people’s unprecedentedly confident about themselves and proud of their motherland. Apart from that, the trade war has made us realize that China has suddenly become the opponent of the world’s most powerful country. I think that this is a great change in China and this is also a good thing for China. China must go through this process if it wants to become a socialist modernization power by 2050. The current problems between China and the United States will not be resolved very soon and the competition between the two countries will last for quite a while. China will extend four cycles during the competition with the US.
First, China will successfully extend the cycle of economic development.
China’s economy developed rapidly over the past 40 years, with an average annual rate of 9.5% and in the past five years, the growth rate decreased to 7.2%. Personally, I believe that China will maintain medium-to-high-speed growth in the next ten years. 40 years ago, China’s GDP accounted for less than 5% of America’s GDP. In 1992, China’s GDP accounted for 7.8% of America’s GDP. In 2017, however, this figure increased to 65%. If China can maintain an economic growth rate of 6% in the future, while the US maintains a growth rate of around 2%, China’s growth rate will still be three times higher than that of the United States. Even if China’s growth rate will be 5%, we are still two and half times higher than the United States. According to the predictions of some influential international organizations, China’s economic aggregate will surpass the United States and become the world’s largest economy by 2030, so long as China does not make any serious mistakes. By then, China will become the largest economy, the largest trader and manufacturing industry, and the internationalization of the RMB will also make great progress. On the opposite, the United States will face unprecedented challenges in the future.
The dollar has been challenged. The dollar relies on national credit, which is supported by the strong US economy. During the Bretton Woods system, the US dollar pegged to gold and all other currencies pegged to the US dollar. On August 15, 1971, the French President Charles de Gaulle sent the ship to bring some of their gold back from New York because he felt that the US economic problems will affect the value of France’s currency.
When other countries were ready to follow suit, the US president Nixon announced on August 15, 1971 that the dollar will no longer peg to gold and will not should the responsibility as a world currency. As a result, the world’s monetary system went through a big change and all countries have no anchored currency. All the currencies are based on their national credit and a floating exchange rates system was created. However, the US dollar is still used by various countries and hence remained to be a quasi-international currency. After all, the United States has always been the most powerful country and has a strong national creditability, which is why the US dollar has been the No.1 reserve currency and the settlement currency in commodity trade.
Later, the euro appeared and the RMB has been included in the IMF’s SDR basket. Nowadays, the share of the US dollar in international settlement currencies has dropped to 39%, and the proportion of the dollar in other countries’ national reserve has dropped to 62%. In the past, the dollar was widely used for oil trade. For example, the OPEC only accept the dollar as the settlement currency but now ten of these countries are ready to give up the dollar. On September 3, the EU President Juncker said that oil import from the US only accounts 2% of its total energy import, and we do not have to use the US dollar as the only settlement currency. We want to establish a euro payment system. Russia has also begun the process of de-dollarise. For example, all the arms sales of Russia are settled in ruble or local currency. The United States is the largest arms seller as it sells weapons to 98 countries and its value of arms sales accounts for 34% of the world’s total. Followed by Russia, who sells weapons to 47 countries. In the past, all the arms sales were settled in US dollar but now, all the arms imported from Russia must be settled in ruble or local currency, and RMB can also be used. India was a non-aligned country and has a very close relationship with the United States, but it decided to give up the dollar when buying weapons from Russia and oil from Iran.
The popularity of RMB is rising. For instance, more than 60 countries have already included the RMB into their foreign reserve system. There are 1600 banks around the world have now started to use RMB as a settlement currency, and 28 countries have signed currency swap agreements with China. In October 2018, Japan’s Prime Minister Shinzo Abe visited China and signed 52 cooperation projects, the first one is to implement a currency swap of 200 billion RMB. The UK recently signed a currency swap of RMB 350 billion with China. As can be seen, the dollar is now being challenged.
The US debt has also been challenged. The US takes advantage of the whole world by appreciating or depreciating the dollar because dollar is the main reserve currency of many countries. The United States does not hold the dollar as a reserve. Two-thirds of the US dollar reserves are held by developing countries, of which 1/ 2 is in China. The United States issues US dollar to buy goods from various countries and some countries use the dollar they earned to buy the US debt, eventually, the dollar flows back to the United States, which supports the ultra-low-cost loans in the US.
In other words, the US buy goods from other countries with dollars, then the US dollar becomes the foreign exchange reserve of those countries, which are often used to buy US Treasury bonds. Now, the status of the US debt has also been challenged. Among the 34 countries that hold a large amount of dollar as a foreign reserve, 21 of them have started to reduce their US debt, accounting for 60%. The United States now has a sovereign debt of 21.8 trillion US dollars, accounting for 106% of America’s GDP. The US family debt has reached 40 trillion US dollars, and the rest is US corporate bonds. The total US debt is more than 150 trillion US dollars. The U.S. government heavily relies on issuing government bonds. In the past, everyone thought that the US bonds were absolutely safe and its value will increase as time goes by. However, the US bonds have now become the most questioned in the world. Japan has reduced its dollar reserve for six times this year, amounting to 22.6 billion US dollars. Russia has also reduced its dollar reserve for six times this year, amounting to 33 billion US dollars, and China has reduced its foreign reserve by 20 billion US dollars. Nowadays, it will be very difficult for the United States to get easy money from other countries by issuing US debt, and pass the crisis to the rest of the world, like it did in 2008.
The status of the United States is being challenged. Many countries have started to question American values, creditability, and its image. The trade war launched by the United States has caused worldwide outrage. The trade war is not only against China, but also the European Union, Japan and South Korea. After the United States withdrew from the TPP, it started bilateral negotiations with other countries. It has abandoned multilateralism and adopted one-on-one negotiations. Robert Lighthizer is the core member of the US trade negotiating team, who has 40 years of experience in international trade negotiation and participated in the US-Japan trade friction negotiations. Apparently, Lighthizer is very tough in negotiations.
As one of the main negotiating members, Robert Lighthizer’s negotiating skill is totally out of date, just like what he did 40 years ago, he will focus on trade deficit, surplus, import, and export, nothing new. The US negotiators never thought of how will the international trade evolve in the future: how will the trade law and rules change? How to resolve the trade deficit in service trade? How should we adjust international rules to meet the needs of international economic development? How will the next generation of trade develop? What China wants to solve is to adapt itself to the new economic development, and to design a future-oriented trade pattern, which has been ignored by the United States. China’s business and Internet revolution are affecting not just China but also the entire world. Nonetheless, people like Lighthizer do not see these earthshaking changes and only focus on goods trade. In fact, the white paper issued by the Chinese government has already made it very clear about the problems in China-US economic and trade relations. The United States has exchanged a large amount of physical goods with dollars printed at a cost of a few cents. The trade deficit they are talking about is actually the net income of the US! The US used a worthless piece of green paper to get so many goods and they call this trade deficit. I went to the US and was surprised by the cheap products at various supermarkets. The US dollar is not supported by anything, it is just a piece of paper, and they used these papers to buy a tremendous amount of commodities from other countries.
Trump has spent all his time in the real estate business before he became the president and does not understand international trade. A senior financial expert from the Peterson Institute told me that Trump does not understand international trade and finance. He only knows how to do real estate business. That is why he always considers trade deficit as a loss of the United States. He publicly said that China takes more than 500 billion US dollars from the United States each year. How is that possible? China’s exports to the US only worth 500 billion dollars and how on earth can China earn 500 billion from the US?
We should pay attention to the current trade friction or trade war between China and the United States, but we should not over-amplify it. We should treat it as an important historical opportunity, which can be used to extend the cycle of China’s economic development. In the next 10 years, the Chinese economy will maintain medium- and high-speed growth and China will become the largest economy.
Second, it will extend our period of strategic opportunities.
The United States is losing its creditability and its international status is also declining, which will give China a new strategic opportunity. Now China’s prestige and influence are on the rise. China always follows what Deng Xiaoping said before: do not take the lead. However, China now has no choice because China’s proposition is correct and other countries feel that China’s proposition is the trend of world development and represents the interests of most countries, thus, there are so many countries support China. China does not want to be the bearer of economic globalization, but many countries support China and want China to take the lead in many aspects. China is now being pushed to the center of the world stage and became another major participant in the international community. Therefore, I believe that China’s period of strategic opportunity will be extended because of the increasing influence and status of China. The paper issued at the CPC 16th National Congress in 2000 also pointed out that the next 20 years will be an important period of strategic opportunities for China. I believe that the current strategic opportunity period has a new meaning, such as the “Belt and Road” proposed by China, the new layout of regional development, the national innovation and development strategy, China’s poverty alleviation strategy and so on. The new strategies launched by China has generated new strategic dividends. For example, the rapid development of new economy, new formats, new kinetic energy and new business models are creating combined dividend for China’s future innovation. The multiplied strategic dividends will not only extend the period of strategic opportunity, but also enlarge the strategic dividend.
Third, China’s manufacturing boom cycle will be extended.
I think there are two mistakes in the past industrial adjustment. The first mistake is the over-emphasize on the service industry, which is likely to hollow out China manufacturing industry. The United States, the European Union, and Japan have experienced great difficulties in reviving their manufacturing industries and it will be even harder for China to do so. Therefore, we should attach great importance to the manufacturing industry, and the real economy.
The second mistake is the over-emphasize on heavy chemical industry during the industrial transformation and upgrading. As a result, the advantages of the textile industry, clothing, shoes, hats, bags, toys and furniture are fading away while the heavy chemical industry now accounts for more than 71%, while the consumer goods industry accounts for about 20% only. The labor-intensive industries are shifting to Southeast Asia, South Asia, Africa, North America, and South America. This kind of transfer will greatly reduce the employment of the manufacturing industry, increase the cost of importing consumer goods, thereby reducing the welfare of the nation. The manufacturing industry is China’s greatest strength because we have the most complete industrial system in the world, including a complete industrial chain, supply chain, service chain and value chain. The challenge is that we have to move towards the mid-to-high end of the industrial chain. We should form a new industrial layout based on our research and development. The trade war reminds us that we need to extend the manufacturing boom cycle and master the core technology of manufacturing. Otherwise, our industrial chain will be cut off by sudden sanctions. Therefore, I believe that the China-US trade war will actually help us to extend our manufacturing boom cycle.
Fourth, the life expectancy of all Chinese people will be extended.
We should increase people’s sense of acquisition, happiness, presence, responsibility and value because these are the greatest welfare brought by 40 years of reform and opening up. It is also the reason why the Chinese people are so satisfied with the government. On December 8th, China Net and Peking University held a dialogue at Peking University: 40 years of reform and opening up. Five guest speakers from different fields were invited to talk about how they feel about the 40 years of reform and opening up, including Fu Zhiwei, the Minister of Railways, the aviation hero Yang Liwei, and the former vice president of Peking University, Hong Kong’s Justice of the Peace, Chan Kam-lam, and me. This conversation lasted for three hours and everyone was so proud of China’s achievements when they recalled the 40 years of reform and opening up.
Recently, the “Economist” magazine conducted a country satisfaction survey in 50 countries. The first question is that do you think your country will get better and better in the next decade? 91.4% of the Chinese respondents said yes, only 38% of Americans and 12% of Italian think their countries will become better. The second question is that are you satisfied with your country? 83% of the Chinese people are satisfied. As Chinese, Chinese entrepreneurs and researchers, we are proud of our country.