On April 9, Atomic Think Tank of Tencent News, Tsinghua PBCSF, and Tsinghua University National Institute of Financial Research (NIFR) co-hosted a dinner themed “Future of Finance and Trade in China under Top-level Design” for the Boao Forum for Asia (BFA) Annual Conference 2018.

The event brought together over 20 distinguished guests, including CHEN Juhong, Vice President of Tencent, ZHU Min, Chair of Tsinghua NIFR, Justin Yifu LIN, Honorary Dean of the National School of Development at Peking University, TU Guangshao, Vice Chairman and President of China Investment Corporation (CIC), and Robert Koopman, Chief Economist of WTO.

During the keynote speech and discussion sessions moderated by ZHU Min, the guests explored how much impact the China-US trade friction had, how the outbound and inbound investment drove growth, and how to fend off risks in an open financial system.

China-US Trade War

The discussion kicked off as ZHANG Yuyan, Director of the Institute of World Economics and Politics at the Chinese Academy of Social Sciences, raised questions over the very concept of trade war: What is it? What are the differences between trade friction, trade conflict, and trade war?

In response, Robert Koopman noted that what is happening between China and the US does not fall into the realm of a typical trade war. China and the US are WTO members, and as the organization’s rules mandate, they both have the right to retaliate for dispute settlement. The right can only be used in compliance with rules upon approval from some competent independent third party, but it is rule-based nonetheless. By contrast, however, “trade wars get around rules. Trade disputes spiral into wars when they grow to considerable scale and break out of rule-based systems.”

Currently, the tit-for-tat tariffs hit roughly USD 200 billion worth of trade, or 1/3 of the total China-US trade, which is a staggering amount, he added.

Koopman also suggested that by using the Section 301 of the Trade Act of 1974 instead of WTO rules, the Trump administration intended a return to the 1980s, when the US won the trade war against Japan, securing favorable concessions and effectively reducing its deficit with Japan. The weapon used in the fight, the Section 301, allows US to take unilateral action against countries for legislative or administrative violation of agreements or discrimination against US interests.

According to Justin Yifu LIN, the US trade conflicts with China and other trading partners are triggered by its trade deficit, which in turn results from insufficient savings and the US dollar’s role as the world’s top reserve currency. This means that the country can run trade deficit forever. However, the Trump Administration does not see this and insists that other countries, including China, should take the blame.

Hans-Paul Burkner, Chairman at the Boston Consulting Group (BCG), said that increasing tariff cannot drive up domestic savings, let alone fix trade deficit. The US needs to address problems at both macro and micro levels. That is where they can find a way out.

JU Jiandong, Unigroup Chair Professor at Tsinghua PBCSF, believed that the disputes over China’s intellectual property and fair trade practices were open for negotiation. The US should see the development of China to its advantage and vice versa, as such development is bound to deliver win-win results. However, any attempt to seek growth at the cost of other countries is too much to be settled through negotiation.

China’s Inward and Outward Investment

Talking about trade frictions, LI Jiange, Director of the SUN Yefang Economic Science Foundation and NIFR adviser, argued that Americans are indignant at China’s trade surplus, but they overlook the capital flow deficit China is to experience soon, when more investment flows outbound than inbound.

His view was shared by TU Guangshao, who described the investment inflow and outflow as two major drivers for cross-sector capital movement, a new earmark of China’s role in global economic integration.

As to the next generation of outbound investors, LIU Yonghao, Chairman of the privately-held New Hope Group, predicted that the private sector would play an increasingly prominent role in China’s overseas investment, potentially replacing the SOEs as the dominant player.

Nicholas Lardy, Anthony M. Solomon Senior Fellow at the Peterson Institute for International Economics, also confirmed that since the 2008 financial crisis, China’s state-owned businesses have seen their overall profitability drop by 60% to 70%. This calls for ramped up efforts in SOE reforms, to address the cause of the poor performance.

Justin Yifu LIN agreed, acknowledging China’s need to remove market distortions and allow the market to function efficiently, notably by tapping into innovation and entrepreneurship. He argued that China stands a good chance to leapfrog the developed countries in technology and institution development.

As he explained, the country has a huge population, which offers a large talent pool for innovative ideas and an enormous market. If an invention is well received in the Chinese market, chances are it can secure a place in the global market, presenting an opportunity for China.

Appropriate Financial Regulation

Financial contagion that comes with globalization makes it necessary to constantly adjust financial regulations, turning financial risk prevention into a relentless practice of moderation.

LI Ruogu, former President of China Export-Import Bank, shared his concerns that “the financial sector brings about risks along with its contribution to economic growth,” but too much of risk prevention may hurt the economy. He also analyzed how globalization and technological progress affected regulatory efforts.

According to LI, the tightening of financial supervision has increased regulatory costs and affected part of normal bank and business operations. If overdone, it may even defeat the purpose and increase financial risks. It is thus imperative to build an ideal regulatory model that reasonably accommodates the needs for development while fending off financial risks - the key is regulation, not burdensome overregulation.

Stephen P. Groff, Vice-President of the Asian Development Bank (ADB), also said that financial regulation should be “neither too much nor little, but just right”. This requires regulators to keep up with the development of the financial sector, adopting sound macroeconomic policies and macro-prudential regulatory framework.

Groff underscored the need to distinguish between “vulnerability” and “risk” when formulating regulatory policies, as they call for different responses. For example, global connectivity may bring vulnerability in that it allows risks to spread, but connectivity itself does not constitute a risk; monetary alliances contribute to vulnerability, but they do not present risks—not until they are ill-managed.

ZHU Yunlai, former Vice-President and CEO of China International Capital Corporation Limited (CICC), said that a number of countries have been easing credit conditions since the 2008 financial crisis, fueling excess liquidity and investment.

Once the money is supplied, they will always be in circulation, particularly to cycles of investment that easily leads to surplus, he explained. The solution is to develop a scientific and systematic risk identification framework that addresses both development and risks, “allowing businesses enough room for growth while keeping risks to a manageable level.”

The talk was followed by open discussions moderated by ZHOU Hao, Associate Dean at Tsinghua PBCSF.