US-China trade

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

Published 12 March 2019 | 8 minute read

Just under 3,000 of the most powerful officials in China recently gathered in Beijing for the country’s biggest political meeting of the year: the National People’s Congress (NPC). This article reviews the significance of NPC outcomes for global trade.

Nominally China’s highest political institution, the NPC. It takes place annually during spring, and runs in parallel with the Chinese People’s Political Consultative Conference (CPPCC) – a meeting of the country’s top political advisory body. These two meetings are collectively known as the “two sessions” (lianghui).

Top leadership of the country uses the NPC to ratify premade decisions, but nonetheless it marks a key moment in which the Party leadership announces major policy changes and appointment reshuffles for the year ahead. The Hinrich Foundation invited six China trade experts to assess what the NPC outcomes mean for global trade and for China’s engagement with its international counterparts in the future.

Kenneth Jarrett

Senior Advisor, Albright Stonebridge Group

Prior to joining Albright Stonebridge Group, Mr. Jarrett’s 26-year foreign service career included service as the US Consul General in Shanghai, and various postings in Hong Kong, Beijing, Chengdu, and Singapore. His government roles in Washington, DC, included serving as Director of Asian Affairs at the White House National Security Council. Most recently, Mr. Jarrett also spent five years as President of the American Chamber of Commerce in Shanghai.

Some reassuring outcomes for global trade

This year’s parliamentary meeting did not produce dramatic headlines, but smart management of the Chinese economy is good for all and the NPC’s focus on risk and stability suggests that recent fears about a hard landing are again misplaced. Key outcomes included:

No massive stimulus, a favorite tool in the past. Instead, we have additional tax cuts (VAT), and promises of prudent monetary policy and steps to improve the business environment.
Greater emphasis on the private sector and pledges to improve its access to financing. With genuine follow through, this may assuage worries that the government has over emphasized state-owned enterprises and government management of the economy.
Recognition that growth will continue to slow but remain strong. Maintaining employment levels is a high priority and there was renewed attention to domestic consumption and regional integration plans (Greater Bay Area, Yangtze River Basin).

Swift passage of the Foreign Investment Law was the most explicit signal to the foreign business community. It hits the right themes — national treatment, intellectual property rights, market access, no forced technology transfer — but the language is vague. Foreign companies will want to see how the law is implemented. Approval was accelerated to improve prospects for a US-China trade deal, but the impact in that regard will be modest.

Andrew B. Schroth

Esq., Partner, GDLSK LLP, Asia

Andrew Schroth

Mr. Schroth manages GDLSK LLP’s Hong Kong office, and has a long-standing career as a trade lawyer. He is a frequent speaker in Asia on trade-related matters as well as US import/export law. He counsels government agencies in China and Vietnam and lectures on issues relevant to US trade and custom laws, and has unique expertise on Sino-US trade relations.

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.

Alicia Garcia Herrero

Chief Economist, APAC, Natixis and Senior Research Fellow, Bruegel

Ms. Herrero holds a PhD in Economics at George Washington University and has published extensively in refereed journals and books. She is also a regular contributor in Bloomberg and CNCB as well as a columnist for Nikkei Asia Review and Brink.

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.

Dr. Tim Summers

Senior Consulting Fellow, Asia- Pacific Programme, Chatham House and Lecturer, Centre for China Studies, CUHK

Dr. Summers was a British diplomat for 13 years, including a posting as Consul General in Chongqing prior to taking his PhD. He had presented at numerous academic and policy research conferences, given evidence to the British parliament’s foreign affairs committee, and had published many commentaries in leading media.

The annual gatherings of China’s two People’s Congresses in the first half of March provided an opportunity to take the temperature of policy thinking in China.

There was much that was familiar. In his work report, Premier Li Keqiang reiterated government priorities from poverty alleviation, tackling pollution and managing risks to the economy, to job creation and innovation.

Also prominent were commitments to improve the business environment, including through around US$300 billion in tax cuts. The new Foreign Investment Law codified equal treatment for all investors, symbolically pushing back against criticism that foreign companies face discrimination – though as well as the complaints many foreign companies continue to benefit from the ongoing growth of China’s domestic markets.

While the messages of the congress are on the right side of the argument the Chinese government needs to make to persuade Washington (and Brussels) that it takes concerns expressed by the foreign business community seriously, they will provide thin gruel for a face-saving about face by the Trump administration. The chances of an immediate deal look finely balanced at the moment. But the NPC will not reverse the underlying sense of strategic rivalry which has grown in Washington.

Ben Simpfendorfer

CEO, Silk Road Associates

Before establishing Silk Road Associates, Mr. Simpfendorfer spent over a decade tracking China’s business landscape as Chief China economist for RBS and senior China economist for JPMorgan based in Hong Kong. He is a member of the Foreign Experts Committee, providing policy recommendations to China’s central leadership on the ‘Belt and Road’ initiative under the auspices of SAFEA, and also authored ‘The New Silk Road’ and ‘The Rise of the New East’.

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.

Jean-Pierre Cabestan

Professor, Department of Government and International Studies, Faculty of Social Sciences, Hong Kong Baptist University

Professor Cabestan is Professor and Head, Department of Government and International Studies at Hong Kong Baptist University and Director General of the European Union Academic Programme in Hong Kong. He is also an associate researcher at the Asia Centre at Sciences Po, Paris and at the French Centre for Research on Contemporary China, Hong Kong.

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.

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