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I Have Always Had Strong Confidence in the Chinese Economy


Yao Yang, a leading economist at Peking University, argues pessimistic assessments of China’s growth trajectory underestimate strengths of the Chinese economy. These strengths, in Yao’s view, include China’s technological prowess, especially in clean energy products of the future such as EVs and solar panels, and its scale and cost advantages in manufacturing. Yao argues that Western efforts to “derisk” may impinge on China’s technological development temporarily, but will come at higher costs for the United States and its partners, given the funds required to reshore manufacturing and the projected revenue losses of selling key technology products to China.

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I have always maintained strong confidence in the Chinese economy. I would like to discuss trends in the Chinese economy amid the changes in the international economic landscape by looking at the following factors.


Is the world decoupling from China?


Since the start of the pandemic, there has been a great deal of talk about the so-called decoupling theory. When the pandemic first began, many people said that the world would decouple from and break ties with China. However, this would not conform to economic laws. During the pandemic, China’s foreign trade growth rate actually increased, and its export growth rate was higher than the world average. Therefore, Chinese exports as a share of world trade have not declined, but increased. Before the pandemic, Chinese exports accounted for only 11% or 12% of world trade, but now this number has reached 14%. In other words, the dependence of the entire world on China has been increasing, not declining, over the past three years. Therefore, claims such as “the whole world is moving away from China” are wrong.


How is it that China not merely maintained its position in foreign trade, but also strengthened it? This is because China’s manufacturing industry is very strong. It not only has certain technical advantages, but also overall cost advantages. These cost advantages make it more difficult for other countries to catch up. First of all, it is impossible for developed countries to match China’s cost advantages. They have already passed this stage. Although several developing countries have labor advantages, they cannot match China in other aspects.


Let’s talk about simple logistics costs. About seven or eight years ago, we were still talking about logistics costs being too high, accounting for 30% of the entire sales cost. Who is talking about logistics costs today? When we buy something, it is shipped through logistics. Without noticing it, our logistics have become the best in the world. Living in China, we often don’t realize this, but it is apparent if we go to other countries. I was in Germany not long ago, and it took two hours to take the train from Dresden to Berlin. If I were in China, a train ride of the same distance would take less than an hour. During the two hours on the train, there was no heating and it was very cold. The train journey was very stop-and-go, so the two-hour journey was delayed by 25 minutes. This would be unimaginable in China.


In terms of export value, the total value of Chinese exports declined slightly year-on-year (YoY) in the first three quarters of this year, but the total value of global exports also declined this year. China’s advantage is that it still has a large trade surplus, and its share of exports to Asian, African, and Latin American countries is rising. Many people are worried about losing the markets of developed countries, but developed countries represent a very small proportion of the total world population. Countries in Asia, Africa, and Latin America make up the main body of the world. Though the West does not shine bright, the East will shine bright. During this period, our exports to countries in Asia, Africa, and Latin America have increased. The countries cooperating in the building of the “Belt and Road” account for 46.5% of China’s exports, and this proportion will increase.


In addition, the export volume of China’s “three new products” [新三样, solar cells, lithium-ion batteries, and EVs] is also soaring. The share of exports represented by electric vehicles, solar panels, and lithium batteries is increasing, and worldwide exports are increasing, including to developed countries.


Some people say that foreign investment is declining. Foreign investment is indeed declining, but the decline in foreign investment began as early as after the financial crisis. Why did foreign investment decline after 2008? It is because China abolished super-national treatment [超国民待遇, preferential policies for foreign investment] for foreign investment in 2008. At the same time, domestic companies began to catch up, and foreign investment felt the pressure.


Does China lag behind in technological fields?


In fact, China ranks at the forefront of global technology in many aspects. In the field of intermediate-level technology, overall, China ranks second in the world, behind only the United States, and even surpasses the United States in some fields, such as power batteries, solar electric panels, and other new energy products, where we are 20 years ahead of the United States. This is also reflected in the fact that China’s manufacturing industry is both large and strong. In 2020, the added value of China’s manufacturing industry exceeded the combined added value of the manufacturing industries of the United States, Japan, and Germany. For the manufacturing industry, our scale is a strength, and lower costs are an advantage.


In China, there is an extremely incorrect view that believes that we cannot be strong if we are not first in the world in technology, but economists always say that the one with the lowest cost is the strongest. If you have advanced technology but can’t sell a single product, it is of no use or benefit to companies. Companies compete through cost. When your cost is higher than others, sentiment and technology will not be enough to will over the market.


We have reason to believe that the next 30 years will be China’s best moment in a thousand years. We have world-leading AI, new energy, and electric vehicles. Some people say that we are not leaders in AI and our computing power (compute) is controlled by others. However, China can also do well in compute, and it is mostly in terms of corpora that we lag behind. This is because Western countries have been accumulating for 300 or 500 years, while we have only been doing so for less than 100 years. However, China surpasses all other countries in AI applications.


China’s cutting-edge technologies do not lag behind either. China ranks first in the world in the fields of nuclear fusion, quantum computing, quantum communications, and photonic chips. It is even possible that China will achieve breakthroughs in these top technologies.


Industrial relocation is not a bad thing


Industrial relocation is inevitable. Labor-intensive industries will inevitably relocate elsewhere and cannot stay in China forever. 90% of the income received by Chinese people comes from wages. If wages are to rise, labor-intensive industries must relocate elsewhere. This process has been going on for more than a decade. It is inevitable.


Of course, the United States’ attempts at decoupling have also had a “chilling effect.” The United States has built a “small yard with high walls” [小院高墙, strict limitations but only on certain fields], and many of the products it restricts have little or even nothing to do with national security. However, many distributors in the United States require Chinese companies to set up another factory outside China just in case, so many companies have no choice but to establish factories abroad.


Even if this is the case, it may not be a bad thing for China. The Japanese economy has barely grown in the past 30 years, but this does not mean that income has not grown. This is because Japan has massive overseas investments, and the same is true for the United States. In fact, at least half of Japanese and half of the U.S. [economic activity] is overseas. China has now reached such a stage. Looking back in 20 or 30 years, we will see that half of Chinese [economic activity] is overseas. All developed countries have tread this path, and this relocation has actually strengthened China’s status as the “world’s factory.”


In the past, the place of China, the “world’s factory,” in the supply chain was to assemble goods to be sold to developed countries in Europe and North America. Now we sell some intermediate products to developing countries in Asia, and these ASEAN countries assemble them and sell them to Europe and the United States. This actually represents China’s industrial upgrade. We are engaged in industries with relatively high levels of technology, and the assembly industry is relocating to Southeast Asia. For example, a lot of clothing on the Chinese market is already produced in Southeast Asia. To a certain extent, this has not weakened the connection between China and the United States, because many Chinese products are re-exported to the United States through these countries.


The costs of technological decoupling are higher for the United States


Let’s first look at the measures taken by the United States. The first is “Keep Away,” which means punishing China and restricting China. Establishing an entity list is the most common approach, and several companies were subsequently added. China now has more than 700 companies and entities on the U.S. entity list and faces a bundle of export controls.

先来看美国的举措,首先是Keep Away,就是惩罚中国、限制中国,设立实体清单,这是最常用的,之后又加了几个企业上去。现在我国在其实体清单上有700多家企业及实体,并面临着一揽子出口管制 

Another measure is called “Run Faster.” The United States is also formulating industrial policies, such as the CHIPS and Science Act. The United States will invest approximately US$150 billion in the next five years, and the chip field will receive US$57 billion. The Inflation Reduction Act is actually a new energy investment law that directs hundreds of billions in funding. These funds will be used toward the reindustrialization of the United States. The United States itself knows that punishing China comes at a cost. China is the world’s largest chip market, accounting for about 40% of the global market. If the United States loses the Chinese market, U.S. chip companies will suffer great losses.

另外一个举措叫Run Faster。美国也在制定产业政策,比如说《芯片和科学法案》,5年之内美国投资大概1500亿美元,芯片领域能分到570亿美元。《反通胀法案》实际上是千亿级别的新能源投资法,通过这些资金来建设美国的再工业化。美国自己也知道惩罚中国是有成本的,中国是世界上最大的芯片市场,占到世界份额的40%左右,失去了中国市场,芯片企业损失很大 

Therefore, the cost of decoupling is very high for the United States. It may strike down a thousand foes, but at the loss of 800 of its own troops. In the long run, its own losses will likely reach 1,500. Nowadays, China’s investment in the chip field continues to increase, and China ranks first in the world in photonic chips. It is very likely that China will be the first to achieve a breakthrough. Originally, the United States was already the leader in the traditional chips field and China had no need to focus on that area. Instead, China could concentrate on research in other industries. This was beneficial to all mankind. However, because of this limitation, we still have to do this thing [make traditional chips].


China and the United States will not completely decouple


Of course, the United States is the global hegemon, and the “chilling effect” does really exist. After the ban, investment between China and the United States basically stopped. In particular, U.S. investment in China dropped to almost zero, and China’s investment in the United States grew smaller and smaller.


However, if the question is whether China and the United States will fully decouple in the future, or whether the United States will comprehensively contain China, my answer is no. There is no sign that the United States will comprehensively contain China. The cost of comprehensive decoupling is too high, and its allies will not follow its lead. Europe is hedging its bets, and its business with China has not decreased. Many European companies are returning to China to set up new factories, and then set up a new factory in the United States to spread the risks. That is, they don’t want to put all their eggs in the Chinese basket.


There is no problem with the Chinese economy itself


China’s economic recovery has gone through twists and turns. Since the end of 2021, the domestic investment growth rate has been declining. Investment is affected in advance as it looks to the future.


When looking at China’s economy, we must look at the linkage between politics and economics. You cannot understand China’s economy by looking at the economic side alone, but must consider it in conjunction with politics. We are the generation that has benefited most from reform and opening up. However, we must also see that some problems have arisen in the process of reform and opening up, and these problems must be corrected in the new era.


Real estate and local government debt are two obvious examples. There is a single idea behind this series of corrective measures, which is that long-term pain is worse than short-term pain. If we do not make these corrections, many problems will accumulate and eventually become big problems. If these problems are solved now, the economy may feel pressure in the short term, but this is better than long-term pain. These problems must be solved by “structural methods” or even by reforms. How to strike the right balance is the art of governance. If these problems are solved properly, China’s economy can still achieve steady progress over the long term.


In short, there is no problem with the Chinese economy itself. According to my calculations, China’s potential growth rate in the future is about 5.5%. Because China’s savings are sufficiently large—savings still account for 45% of GDP—and China’s technological progress is not slow, the overall growth rate cannot be very low.


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Cite This Page

姚洋 (Yao Yang). "I Have Always Had Strong Confidence in the Chinese Economy [我一直对中国经济保有很强的信心 ]". CSIS Interpret: China, original work published in Beijing Daily [北京日报], December 14, 2023

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