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Why China’s best response to Trump is to drive consumption, boost household incomes

At last, the call came on Monday. Ever since Donald Trump’s US election victory on November 9, many people had wondered when President Xi Jinping (習近平) and Trump, representing the world’s two largest economies, would have their first interaction given the high stakes at play. In an interview shortly after his election, Trump revealed that while he had heard from most world leaders – including a “beautiful” letter from Russian President Vladimir Putin – he hadn’t yet spoken to Xi.

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Mainland state media noted that Xi had sent a congratulatory telegram on the day of Trump’s victory but it took more than five days for Trump to return the courtesy. An official blog by the People’s Daily labelled the delay a breach of etiquette, adding that former president Hu Jintao ( 胡錦濤 ) and President Barack Obama had their first phone call three days after the latter’s election victory in 2008.

Xi Jinping tells Donald Trump cooperation is the only choice for China and the US

The call on Monday appears to have been cordial enough. Xi told Trump that cooperation was the only choice between the two countries while the president elect said that the two leaders would “have one of the strongest relationships for both countries moving forward” and that they had established a “clear sense of mutual respect”.

But the amiable tone cannot mask the sense that bilateral ties are most likely headed for choppy waters, particularly on trade and investment, if Trump follows through on his fiery campaign rhetoric – rhetoric that branded China a currency manipulator and proposed 45 per cent trade tariffs on imported Chinese goods.

Indeed, instead of striving for cooperation in the foreseeable future, avoiding direct confrontation may be more the order of the day.

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From the perspective of Chinese officials, while they have started to prepare for the worst case scenario, they are still waiting for more concrete signs regarding Trump’s policy intentions towards China, including his detailed agenda for the first 100 days and the key appointments to his upcoming cabinet.

But no matter what happens next, there is also a silver lining to the uncertainties regarding the incoming Trump administration – the chance for China to push on with its “reform and opening-up” at home and abroad.

As argued in this space last week, Trump’s intention to withdraw economically from overseas, and particularly the final nail in the coffin of the US-led Trans-Pacific Partnership, could help China to assert its economic leadership by pushing more aggressively for its bilateral and multilateral free-trade pacts. Xi’s trip to attend the Asia-Pacific Economic Cooperation summit in Lima provided the first opportunity.

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More importantly, Trump’s threats to clamp down hard on trade with China could serve as a strong catalyst for China to accelerate its great rebalancing act – a shift from its reliance on investment and exports to a more sustainable model of consumption. As many economists have argued, the rebalancing of China’s economy – one of the most profound stories of the early 21st century, if successful, could propel the country’s development into a great economic superpower. If it fails, economic and political instability beckon.

The mainland leadership has long realised the perils of what failure to rebalance the economy could bring, with the unsustainability of double-digit growth driven by exports and investment becoming clear particularly in the aftermath of the global economic crisis of 2008.

But the shift has not been easy and there have been many false starts.

After Xi came to power in late 2012, there were initially encouraging signs that the new leadership was keener than ever to accelerate the shift. He proclaimed market forces would play a “decisive” role in the economy and unveiled an ambitious reform blueprint featuring about 300 measures.

But since then, progress has been slow, particularly on reform of the state sector, a key component of the blueprint.

As one policy insider put it, Chinese leaders often work themselves up for immediate action on painful reform measures while they are in meetings – but change their minds as soon as they are out the door.

To be sure, over the past few years, China has released numerous measures and promised to tweak financial, fiscal and tax policies to drive consumption, particularly in the areas of retail, health, travel and sports. Its vast growth potential remains to be tapped – China’s consumption is about 38 per cent of its gross domestic product, compared to about 60 to 70 per cent in Western countries.

Chinese consumers’ enormous purchasing power was borne out on Singles Day this month as Alibaba Group, owner of the South China Morning Post, reported US$17.8 billion in sales, smashing the record it set last year of US$14.3 billion.

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But persuading Chinese to spend more on other days has proven more difficult – the latest data shows October’s retail sales, a key barometer of consumption, grew less than expected at a rate of 10 per cent, down from 10.7 per cent in September.

Moreover, boosting Chinese consumers’ spending power requires a boost in their incomes. At a time when the returns on government spending and investment by state-owned enterprises are diminishing and exports falling, it is imperative the leadership doubles up its efforts to boost the income of Chinese households at the expense of the state sector.

With looming threats from Trump, the clock is ticking.

Wang Xiangwei is the former editor-in-chief of the South China Morning Post. He is now based in Beijing as editorial adviser to the paper