Many have described the deteriorating US-China relations as a new era of cold war. But I believe it’s more like an economic cold war, rather than a full-blown cold war, because what the United States cares most is retaining its dominance as an economic power.
It’s likely that in the near term, the US may start to restrict exports of semiconductor equipment and the most advanced types of chips to China.
While that could affect US companies such as Applied Material, Nvidia, AMD and Intel, I am more worried about China getting overambitious on investments in the fields of semiconductors, artificial intelligence, robotics and other strategic technologies in the name of national security – and even at the expense of profitability and efficiency. This mindset would lead to a huge waste of resources.
As China’s market is gradually maturing, tapping global demand is very important. Xiaomi and Huawei, for example, have expanded in the Indian market while Alibaba has invested in Lazada to boost its presence in Southeast Asia.
Going forward, it’s going to get increasingly difficult for these Chinese firms to expand overseas.
In response to rising tensions with the US, China has done a few things right.
For example, Beijing has made some correct structural reforms. It has taken measures to liberalize the automotive, finance and pharmaceuticals sectors while lowered tariffs in several industries.
China is also further deepening the capital accounts reform. The MSCI and FTSE Russell indices have added A shares, while the Bloomberg Barclays Global Aggregate Index has included yuan-denominated government and policy bank securities. These developments would boost demand for yuan-denominated assets.
Unfortunately, the government still relies too much on cyclical adjustments through monetary and fiscal policies. We’ve seen a renewed boom in infrastructure projects but limited progress in structural reforms.
The market was widely expecting a lowering of the value-added tax during the week-long National Day holiday. But what happened was the central bank announced another cut in the banks’ reserve requirement ratio, which could only ease tight liquidity in the short term.
Private consumption still represents less than 40 percent of the GDP, below the normal level of 50 percent. And the rising debt of individuals and households bodes ill for the consumption trend.
Tax cuts for individuals and corporates is the only way to go.
This article appeared in the Hong Kong Economic Journal on Oct 09
Translation by Julie Zhu
[Chinese version 中文版]
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