Photographer: Qilai Shen/Bloomberg

China Is a Growing Threat to Global Competitors, Kroeber Says

  • Gavekal economist says SOE reform plans have gone ‘backwards’
  • Seeing reform stall is like watching a very slow ‘train wreck’

While the world worries about China’s slowing growth, President Xi Jinping’s goal of restoring national greatness is spurring an increasingly mercantilist mentality that threatens global competitors, according to sinologist Arthur Kroeber.

QuickTake China's Pain Points

An explicit policy of managing down trade and current account surpluses between 2008 and 2012 has "pretty much vanished," while targets in the new five-year plan and a "Made in China 2025" blueprint will lead to an increased trade surplus, said Kroeber, a founding partner and managing director at research firm Gavekal Dragonomics and author of the book "China’s Economy: What Everyone Needs to Know," published this year.

"What China seems to be saying to the rest of the world is: ‘we want to increase our share of all markets both domestically and internationally and we have no interest in any kind of reciprocal opening efforts,’" said Kroeber, 54, in an interview in Beijing. As a consequence, "there’s the risk that politics in some partner countries gets captured by more protectionist interests."

Resistance to opening markets from telecommunications and logistics to banking and health care deprives foreign firms access to the country’s fastest-growing segments, said Kroeber, who splits his time between Beijing and New York. Meanwhile, he says pledges made in late 2013 to reform state enterprises have gone "backwards."

More emphasis on political control and less openness will eventually cause economic stagnation, he says, comparing it to watching a very slow "train wreck." That suggests policy makers don’t have a sustainable growth model for the next five to 10 years, and makes him more pessimistic than ever before in his quarter century of studying China.

Here are excerpts of the conversation:

Question: Is China becoming more mercantilist?

Answer: It’s fair to say that. And you can make this on objective grounds. If you just look at the size of the merchandise trade surplus and balance of payments, this has almost doubled from under 3 percent of GDP four to five years ago and it’s now back up to almost 6 percent of GDP. There’s no strong policy emphasis on managing down the trade surplus.

Then you look at the specifics of ‘Made in China 2025.’ It’s a whole set of numeric targets and, if you add them up, it’s very clear that the aggregate impact of that would be to increase China’s trade surplus. You have embedded in the policy directionality something that is a targeting of essentially an increase in the trade surplus.

Question: So is Donald Trump right about China?

Answer: You could say he’s right in a narrow sense, but OK, what do you do with that? China is clearly moving in a more mercantilist direction, but in a broader sense of how you deal with this I think his recipe is ludicrous and unrealistic. You have to recognize that pretty much every country as it develops spends a lot of time taking a mercantilist view of the world, with no exceptions. The United States was a prime offender for about 120 years up until after World War II. This is what most countries do. It’s also the case that if you compare China to most other emerging markets, India, Brazil, and many non-emerging markets such as Japan, they’re much more open to a larger array of foreign investments and activity than those other countries. By far.

Question: Are trade wars coming?

Answer: In the U.S. you have Donald Trump for example who in the Republican primaries was able to get a lot of support for ideas like a 45 percent across-the-board tariff on Chinese goods, which I don’t think is going to happen even if he gets elected. But what the success of the Trump and the Bernie Sanders campaigns have done is move the whole discussion in the U.S. much farther away from the question of how do we make trade and investment more open to how do we set up more protectionism.

Question: Are conditions getting worse for foreign companies?

Answer: What we do have is informal but increasingly strong pressure on technology companies to come in via joint ventures, and what this amounts to is compulsory licensing of technology; we won’t give you a license to operate your business here unless you do it as a joint venture, and the agreement includes certain technology transfer provisions. That’s changing the terms of entry in a way that’s challenging.

China has had this sequence of technology policies over the years and these revolve around the question of how you restore China’s national greatness, and under Xi Jinping that project of restoring national greatness has become a much more central and explicit core of all policy. They might have had these technology policies before but they weren’t quite as central to the vision, and now they are.

Question: Which industries are most affected?

Answer: Anything in the service sector you can name. Finance would be the largest: banking, insurance, securities. Aviation, telecoms, logistics services, health care, education, you name it. Professional services like law and accounting. These are all highly restrictive.

Question: So Chinese firms expand overseas while foreign firms are excluded from key domestic growth markets?

Answer: That’s clearly what a lot of firms are concerned about. You have enormous government backed financing for ChemChina to take over Syngenta in the agricultural technology area. So you’ve got all this soft money by the Chinese government funding these acquisitions.

Maybe that will end badly a decade from now and they’ll find they wasted a bunch of money, but during the time China is pouring all this money into M&A deals and domestic production facilities that could make life very difficult and put a lot of foreign companies in the rest of the world out of business.

Question: Have China’s reforms stalled?

Answer: It seems pretty clear that the control agenda, as I would call it, has won out. Every time there’s a choice to be made between, do we maximize control or do we ease up a little bit, the answer is always that we maximize control.

What I find disappointing about that is if you look at the history of China’s economy since 1980, the last 30 plus years, basically all of the progress and the dynamism came from decisions from the government to back off control.

If we really have turned a corner on that and the answer is always tighten up then eventually that catches up with you in economic stagnation. It’s like watching a very, very, very, very, slow-motion train wreck.

In many respects things are not that terrible. There’s very vibrant private sector activity, there’s a lot of consumer spending, there’s innovation going on in Chinese firms. There’s a lot of positive stuff going on at micro levels of the economy, so I can’t say I’ve lost hope. They had this reform agenda from the third plenum. Have they executed successfully on most of that? The answer would be no. And on certain things like state-owned enterprise reform they’ve gone backwards and have now set the bar much lower.

— With assistance by Kevin Hamlin

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