Author: Yao Yang, Peking University

The conclusion of phase one of the trade negotiations between the United States and China has been  welcomed by global markets because it has brushed off many uncertainties caused by the tense relationship between the world’s two largest economies over the past two years.

According to the now publicised text, the deal is a more or less one-sided agreement targeting China. Over the next two years, China will need to increase imports from the United States by US$200 billion. China also needs to take steps to further open its markets, strengthen intellectual property rights protection, get rid of forced technological transfers and increase the transparency of its exchange rate policy.

In return, the United States will cut half the tariffs it imposed in 2019, while keeping the 2018 tariffs intact. This is sufficient for President Trump to claim victory in the trade war. Equivalent to 1 per cent of US GDP, the US$200 billion increase in exports to China will certainly boost his chances of re-election.

Despite its one-sided nature, the phase one agreement is not all bad for China. For one thing, China has geared up on policy reform. It has adopted a new law for liberalising foreign direct investment, banning forced technological transfers and allowing wholly foreign-owned financial institutions to operate in the country.

And the US$200 billion increase in purchases is not necessarily bad for China. Purchasing more US goods will deepen economic ties between the two countries. US voices calling for decoupling with China are growing louder. But the new purchases will strengthen integration in two ways. One obvious way is through the purchases themselves. If the target is reached, China’s imports from the United States will almost double, and if China’s exports to the United States stay the same, the US trade deficit with China will be eliminated.

The second way lies in how the purchase agreement is going to be fulfilled. While China can find ways to increase its imports from the United States — including diverting some imports from other countries — there is a question about how the United States can increase its supply of US$200 billion exports in such a short period of time. The US economy is now in full employment; except in agriculture, there is not much slack in the economy.

One possible remedy is to allow Chinese companies to invest in the United States’ production capacity. For example, liquefied natural gas (LNG) could contribute a large share to new exports, but there are insufficient LNG pipelines and port terminals in the United States. If Chinese companies are allowed to invest in those facilities, US LNG exports to China will be expedited. As a result, the two countries will be even more deeply integrated.

Importing more US products is also good for the welfare of Chinese people. High tariffs have created a large wedge between consumer prices in China and those in the United States. In addition, to fulfill China’s commitment to cutting carbon emissions, and also to increase people’s living standards, China has to cut the share of coal in its energy mix and increase clean energy sources, including natural gas. Importing more gas from the United States will help fulfil that goal.

The conclusion of the phase one agreement shows that the United States has not ‘given up’ on China. Despite some hysteric panic about China, mainstream US politics still favours maintaining normal, if not deeper economic relations with China. After two years of strife, the two countries now enter a new phase of rapprochement.

Last October, 37 scholars from China, the United States and other countries signed a joint statement calling for a pragmatic approach to settle the US–China trade dispute. The starting point was that both countries should leave room for each other to conduct domestic policy to address domestic concerns, as well as respond to the external spillovers of each other’s domestic policies. Beggar-thy-neighbour policies should be corrected, and domestic policies with spillover effects should be negotiated. If negotiation fails, the negatively affected party can use domestic policy to safeguard its interests.

Dividing the negotiations into phases is consistent with this idea. The first phase dealt with issues concerning cross-border trade and investment. The second phase will deal with structural issues, particularly subsidies and state-owned enterprises in China, and restrictions on technological transfers in the United States.

The World Trade…

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Author: Ryan Manuel, Official China Ltd.

In Zhongnanhai, the Beijing compound where China’s Communist Party leaders reside and conduct business, 2019 was a bad year. The trade war with the United States dragged on  — an accountability issue for President Xi Jinping who’s responsible above all for foreign policy. Despite common perceptions that he’s an autocrat with a totalitarian’s attitude to power and a bureaucrat’s attention to detail, Xi couldn’t easily get his cabinet to sign off on the US–China trade deal. The proposed text fell apart amid bitter debate about whether it was sufficiently nationalist.

Xi’s strategy of using others to negotiate issues while personally staying above the fray failed. For months, China’s lead trade negotiator was a vice minister of commerce. Meanwhile, back in Beijing, everyone deflected responsibility in order not to be blamed for the constant ups and downs of dealing with US President Donald Trump.

While this shows that China is less dictatorial than outsiders may think, it also reflects Xi’s 2020 dilemma. He wants a deal done but cannot be seen as weak. He wants to make China more self-sufficient but needs access to foreign technologies to make that happen. The unusual events of the past few years, which saw China become the primary proponent of an international order it didn’t establish, are therefore likely to continue into 2020.

Xi is a realist and he and his fellow leaders have already presented themselves as facing a ‘difficult international environment’ in their assessment of the year — led by foreign reactions to Chinese domestic political events. There is increasing international outrage over China’s policies in Xinjiang where it was estimated that over one million Uyghurs were detained. The leak of documents on Xinjiang to The New York Times by a ‘concerned official’ was the most authoritative such release in decades.  There’s likely to be increased pressure on Xi from international bodies, although much of the outrage that comes through modern social media is filtered by China’s Great Firewall.

There has been the flood of stories about Chinese influence overseas — especially activities involving the nebulous United Front. Expect these too to increase in the year ahead. The case of Chinese telecommunications giant Huawei sent shivers through overseas business communities. The arrest of a Huawei senior executive in Canada on an American warrant was followed by the detention of two Canadian citizens in China.

The ongoing protests in Hong Kong remain a weeping sore that Beijing is unlikely easily to be able to salve. Hong Kong remains essential to Beijing’s future plans, acting as both an international arbitration centre and the prize regional stock exchange.

The ‘difficult international environment’ makes it is easy to miss the changes taking place in China’s domestic politics.

Xi’s signature anti-corruption drive continued its sweep, adding rules that make it easier to remove officials for perceived incompetence and lack of obedience to ideological norms rather than just for graft. This is Xi’s way: he changes rules within the Chinese Communist Party and then uses China’s legal system to ensure that the public service — 80 per cent of whom are Party members — is also bound by Party rules.

A central preoccupation is Xi’s fear that local leaders do not follow central command and, therefore, that he should centralise power and put his own name and face onto reforms. He has changed how leaders are held accountable, adding a system of personal accountability to the previously inviolable rule of collective decision making. Rather than the public not knowing who made a decision and passing the blame onto a committee, Xi is making individuals responsible for decisions.

He has also extended the Party’s reach over grassroots local politics — shrinking the scope of local leaders to run their own affairs. His annual meeting of Party leaders, the Fourth Plenum of the 19th Congress of the Party Central Committee offered few new reforms as almost all of the heavy lifting had already been done through Xi’s rule changes.

The Chinese economy remains a source of worry. Domestic debate rages over whether China should accept a lower and more sustainable growth rate or whether it should push on for the targeted 6 per cent GDP growth. Last year saw the pork crisis and fears of rapidly rising food prices. The direction of fiscal policy is confused as local governments deal with conflicting messages about whether…

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Authors: Xiaoyan Lei, Peking University, and Chen Bai, Renmin University

The shrinking demographic dividend and managing an ageing population are now major challenges to China’s economic development. According to the most recent population projections released by the Population Division of the United Nations, World Bank and China’s Population and Development Research Center, the ageing of China’s population will have four main characteristics in the coming years.

First, the elderly population will enter a period of sustained high growth, especially after 2030 when the average annual growth of the population aged 65 or above will exceed 11.2 million. In 2050, the number of people over 65 is expected to exceed 400 million, close to one-third of the population. At that time, about 10 per cent of all households will have at least one member over 65. The proportion of the elderly in China will not only be higher than the average for OECD countries, but twice that of less developed countries.

Second, the growth of the elderly population will gradually transition from the young-old (60–80) to the oldest-old (over 80). While the proportion of the young-old is decreasing year by year, the growth rate of the oldest-old can be expected to increase. Around 2050, the number of the oldest-old will reach 144 million and exceed the total number of oldest-old in Europe and North America.

Third, the total dependency ratio will continue to increase and will reach about 73 in 2050. That is, every 100 people of working age will need to support 73 people, including 22 children and 51 individuals aged 65 above. At that time, China’s total dependency ratio will be 32 points higher than it was in 2018 at 41.

Fourth, by around 2030, the old-age dependency ratio will be greater than the child dependency ratio. This means the obligation of care for the elderly is increasingly becoming the main burden for the working-age population. By 2050, the old-age dependency ratio in China will have risen to 49.9, which is 6 points higher than the average level of the OECD countries.

The decline in household size in China is occurring primarily because of the country’s demographic transition. The country’s average household size started to decrease in 1982 when strict family planning policies were launched. Since then, the average family size has continued to drop, from 4.4 in 1982 to 2.89 in 2015. Over the next 30 years, China’s average family size will decrease to 2.51 and the downtrend will be most dramatic in rural areas.

Correspondingly, there will be unprecedented growth in the number of elderly individuals living alone. The number of ‘empty-nest elderly’ suffering from insufficient care and companionship from family members is projected to increase from 17.5 million in 2010 to 53.1 million in 2050.

In general, there are two mechanisms through which population ageing is likely to affect economic growth in China. The first mechanism is the decreasing supply of labour. With a low overall fertility rate, the ever-expanding population of people over age 65 will continue to compress the growth of the working-age population. By 2050, the number of working-age people will fall by about 200 million.

While delaying the retirement age somewhat alleviates the problem of a shrinking labour supply, older workers are not perfect substitutes for younger workers and productivity per worker may decrease.

The second mechanism is the effect of ageing on savings and investment growth. A growing elderly population tends to reduce the savings rate as savings become the source of spending. As a result, it will be difficult for China to maintain high levels of domestic savings. A larger ageing population will also lead to an increase in government spending, especially on health care, pension security and other welfare benefits.

The resources available for productive investment will reduce, which will ultimately affect economic growth. Private consumption may also weaken. This might drive down aggregate demand and the incentive for businesses to invest.

The Chinese government will not only have to promote the reform and innovation of its social security system, but also address urgent issues such as building a long-term care system and providing medical security for ageing workers. It is also necessary to make full use of modern technology to improve the utilisation and efficiency of human resources and to cope with the challenge of a shrinking future labour supply.

The practical results of the ‘universal two-child’ policy launched in 2015…

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