Six China experts assess how National People's Congress outcomes will affect global trade

China is contending with the dual maladies of protectionism and unilateralism in the global trade system and the impact of monetary policy adjustments by the US and Europe. Increases in the prices of major commodities and heightened geopolitical risks as well as a slowing of trade growth are informing China’s trade policy in 2019.

China is implementing basic reforms to (1) move away from dependence on an export-driven economy and foreign markets; (2) evolve from a low-end commodity based economy to a higher-end technology-focused economy, promoting the services sector and smart manufacturing; (3) increase global trade and influence through the Belt & Road Initiative (BRI) and regional and global trade pacts. Notably missing from the NPC proclamations were any specific reforms or plans to reduce tensions with the U.S. underlying the current trade war between the two countries.

With respect to the BRI, China looks to aggressively increase economic and trade cooperation listing specific projects in over 10 countries to help improve trade integration, logistics and transportation networks. The focus is on integration of economies and the supply chain and creation of a digital Silk Road. Two main goals are to strengthen the RMB as a world currency and increase FDI in China as well as externally.

With respect to US-China relations there were no specific strategies pronounced on how China will address the complaints by US trade negotiators, only that China will support the liberalization and facilitation of trade and investment and “will act on the consensus reached by the Chinese and US presidents in Argentina.” China pledges to take part in the reform of the WTO, uphold the multilateral trading regime and “play a positive role in the formulation of multilateral trade rules”. However, no specific initiatives were laid out.

The conclusions from the NPC have a number of important bearings on global trade.

First, China will stimulate the economy so as to achieve a still-high growth target. However, the biggest beneficiary will be the private sector, which is still very much focused on manufacturing (much of which continues to be export-driven). The VAT tax cuts will also benefit the manufacturing sector, which should be good news for Chinese exporters.

Second, the newly approved Foreign Investment Law should be conducive to China receiving more foreign direct investment, which should be instrumental in maintaining China’s trade openness, as a good proportion of that investment will be an integral part of the global value chain.

Third, the tone maintained at the NPC regarding the US-China trade war has been very conciliatory, pointing to the many ways in which the US and Chinese economies are interlinked rather than to the issues in which the two countries are divergent.

Finally, the RMB seems to be one of the key sticking points in the negotiations between the US and China. The stimulus announced by Premier Li, both on the monetary and fiscal side, is inconsistent with a stronger RMB which US negotiators appear to be requesting from China. A key lesson can be drawn from the Japanese experience of the 1980s: a strong currency with lax monetary policy can only lead to a massive asset bubble with very negative consequences down the road. Luckily Chinese policy makers are fully aware of the negative consequences for Japan of surrendering to the US on the exchange rate.

China’s 2019 NPC conference has confirmed no change in the country’s long-term ambitions to develop advanced manufacturing capabilities. Premier Li Keqiang made no reference to the country’s ‘Made in China 2025’ plan in his working report, but the government remains understandably committed to upgrading China’s manufacturing sector and the report identified a range of fiscal measures to support investment and innovation.

This matters as the country’s export manufacturing sector is at inflection point. Leading export manufacturers are still more likely to be automating production lines or introducing smart manufacturing processes, rather than moving production lines to low-cost countries, such as Bangladesh or Vietnam. The fact China’s export sector has experienced sector-wide consolidation over the past decade accelerates the trend, as larger firms are better able to invest in advanced manufacturing techniques.

Trade tariffs no doubt matter in the short-term. But the ability of Chinese manufacturers to improve efficiency matters more for trade balances over the long-term. Government policy support will have mixed success and, as history suggests, may result in overcapacity. But by setting the direction of overall industrial policy, the government will only encourage manufacturers and technology firms to step up their investment in manufacturing innovation, a development that will contribute to global trade tensions in the years to come.

The 2019 NPC and CPPCC meetings did not threaten whatsoever Xi Jinping power and position at the pinnacle of the Chinese Communist Party (CCP) but have highlighted the multiple economic and political difficulties he will need to overcome in the coming months.

To be sure, NPC and CPPCC delegates’ criticism has been subdued. Nonetheless, some delegates have publicly raised concerns over the effectiveness of major policy initiatives that underpin China’s economic reform plans and foreign policies. For instance, they have echoed the well-known increasing domestic concerns about the Belt and Road Initiative (BRI), notably the lack of profitability of some of its projects as well as the reservations regarding cost and debt expressed by countries such as Malaysia and Kenya. Other delegates have surprisingly qualified “Made in China 2025” as “a waste of taxpayers’ money” or indicated that the “Thousand Talents Plan” had been “overpromoted”, uselessly alerting the US security community.

Behind these mild objections, observers sense a growing discomfort among the Chinese elites with current policies, which will make the coming months of trade negotiations with the US internally challenging.