Global Source Partners
China: Notes from Washington/Trade War
Andrew Collier | Oct 17, 2019
I just returned from a three-day trip to Washington DC meeting local corporates, the Mansfield Foundation, CSIS, the State Department, and officials at the White House. Overall, the tone in Washington is decidedly negative. There is a growing consensus that China is rising, the trade war is hurting, and authoritarianism is increasing – and it is the role of the United States to counter these dark trends. It has truly boiled down to a Manichean “clash of civilizations.” I do not agree with many of the viewpoints and believe they misrepresent the mindset of the Chinese leadership.
Meanwhile, while I was in Washington, “stage one” of the trade agreement was announced. It addresses two of four initial White House demands: purchase of US goods and market entry for U.S. financials. Subsidies and IP protection are to be arranged in stage two. This is a clear failure of the trade talks and an obvious payoff for President Trump’s political base.
Trade deal – not much there
The trade deal was a remarkable abandonment of the White House’ political goals. In one swoop, the President walked away from his main goals. USTR Head Robert Lighthizer’s year-long negotiations to enact limits on Chinese corporate behavior fell by the wayside in the face of political imperatives. We assume Steven Mnuchin simply wanted the problem to go away and either pushed a deal or went along with it, most likely at the request of the President.
It is highly unlikely stage two will be successful because the requests of China are impossible. Namely:
State subsidies. Elimination of state subsidies was always the least likely result of the talks. They are the heart of the Chinese financial system. There are several reasons for this:
- The profits of ten companies account for approximately 70% of net profits of central SOEs. They are politically powerful, remit a portion of profits to the state, and in some cases address Xi Jinping’s desire to create Chinese global giants. He does not want their reach diminished.
- These central SOEs are significant consumers of capital due to their inefficiency. From 2001 to 2009, the average return on equity of SOEs was 8.16%, while that of non-state owned industrial enterprises was 12.9%. In 2009, the return on equity of SOEs was 8.18%, while it was 15.59% for non-stated owned industrial enterprises.
- Ministry of Finance data shows that more than 40% of state enterprises lost money in 2016. Therefore, without subsidies they would be in trouble.
(Full report available at Global Source Partners)