China in the Year of the Rooster

While many worry about President Trump and rising protectionism in The West, the mood across China is optimistic.

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 By: Conner Murphy, Lynx Global Intelligence

 

This week China celebrates the year of the rooster, and in a week hundreds of millions will return to work, eager to see what the future brings. While many worry about President Trump and rising protectionism in The West, the mood across China is optimistic. Here’s why:

The Trump Question

What is President Donald Trump going to do next? This is the question on everyone’s mind, and indeed, nobody seems to know the answer. Mr. Trump’s executive actions (not to mention tweets) over the past week have certainly increased the likelihood US and China will experience increased trade friction. Mr. Trump has recently proposed a 20% tariff on all goods made in Mexico, and could potentially propose such a tariff on Chinese goods as well. Meanwhile, congressional leaders are floating a plan to tax imported goods on consumption, effectively implementing an import tax across the board, regardless of country-of-origin.[1] Such broad trade barriers are unlikely, as backlash from China would be swift. While Trump’s goals are unknown, Congress will act to prevent an all-out trade war; this would be detrimental to the American people, business interests in China, and national security objectives.  

Instead, barriers will most likely be imposed on specific product categories produced by the steel, electronics, and agriculture industries. This will disrupt some supply chains and place several large companies in Trump’s crosshairs, forcing them to choose between US or Chinese interests. If you are a shareholder in Apple, this may be worrisome, but it presents opportunities for smaller companies hoping to expand in the Chinese market, as they will be able to avoid most new regulations. Nonetheless, the future remains unclear, and it will be critical for companies hoping to succeed in Chinese markets to keep a close eye on developing relations and policies, and remain well-informed as to how any potential changes may affect their business interests.

Xi Jinping, the new champion of globalization?

Chinese president Xi Jinping recently made headlines when he attended the Davos World Economic Forum, where he gave a speech defending the merits of globalization in the face of growing protectionism in The West[2]. He emphasized the importance of global cooperation and held up China as a beacon of opportunity, listing off China’s planned reforms, infrastructure projects, and free trade zones in the works. Chinese Premier Li Keqiang echoed this message recently in a Bloomberg op-ed[3], in which he sought to sooth the fears of international investors. He emphasized that China is, “opening new sectors of the economy to investment and widening access to many others,” and further explains that to attract investment and increase domestic demand, China will be focusing on compliance oversight, tax reform, infrastructure development, entrepreneurship, and innovation. This is great news.

Like leaders everywhere, the Chinese leadership will always paint a rosier picture than exists, and the substance of these comments should be taken with a grain of salt. For example, while China has moved to promote investment in certain sectors, it has also taken serious action to further regulate internet access and protect domestic tech industries. The government has also used a heavy hand in financial markets over the past year, actively working to avert a collapse of the RMB and prevent a nationwide economic crisis. Most regulations and laws remain murky, and compliance is difficult across many sectors.

Regardless of these issues, reforms are underway, and global events will likely accelerate them. As many Western economies enter a new era of protectionism, China appears keen to stand out as a hub for global investment. With slowing economic growth, rising wages, and explosive urbanization, China is ready to tap into the potential of international investment and domestic consumer demand. The Chinese government does not like to shock the system, so these reforms will not happen overnight. However, the Chinese government clearly strives to stand out as a champion of globalization – and when the Chinese government really wants something, they tend to get it.

 

[1] More on the congressional tax plan:  Reuters. Breakdown: Border tariff vs. border-adjustment tax.

[2] Xi’s speech transcript [English Translation]: World Economic Forum. President Xi’s speech to Davos in full

[3] Li Keqiang’s full Op-ed: BloombergBusinessweek. China Premier Li Keqiang: ‘Economic Openness Serves Everyone Better’

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