CHINA VS USA TRADE WAR

Economy How China can survive Trump threats, avoid Japan’s mistakes: Zhang Yansheng16 Dec, 2024 - 03:45 pm

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Seasoned researcher says Trump’s ‘extremist’ protectionism will isolate US and cede the high ground on multilateralism to China Economist Zhang Yansheng is a researcher with the China Academy of Macroeconomic Research. He is also a former secretary general of the academic committee of the National Development and Reform Commission, China’s top economic planner. Zhang has presided over or taken part in research projects for several of the country’s five-year plans and published more than 20 books on international finance and trade.

In this interview, Zhang discusses Beijing’s response plan for tariffs and trade encirclement during Donald Trump’s second White House term and what Chinese companies should look out for when expanding overseas.

This interview first appeared in SCMP Plus.

China’s Politburo recently laid out its economic strategy for 2025, which includes a more proactive fiscal policy and a “moderately loose” monetary policy. What are your thoughts on these developments?

Next year is crucial to the Chinese economy, as it marks the transition from the 14th to the 15th five-year plan. The combination of a more proactive fiscal policy and moderately loose monetary policy, along with “unconventional” countercyclical adjustments, suggests that despite the numerous policies introduced since September, the market, businesses and academics believe these measures have been insufficient.

Next year’s focus will be on increasing central fiscal spending and adjusting the deficit ratio, which is essential for addressing financial shortages among local businesses and the public. This year’s fiscal deficit ratio in the US was estimated to be 7.8 per cent compared to China’s 3.8 per cent, indicating room for a potential increase in China - though not implying we need to immediately catch up to the US. Fiscal measures are seen as crucial because they directly inject capital into the economy, while monetary policies need to address currency stability and deflationary pressures.

As regards stabilizing the real estate and stock markets, the focus is on preventing systemic risks similar to Japan’s real estate bubble, which led to prolonged economic stagnation. For real estate, the emphasis will be on resolving issues like ensuring the completion and delivery of housing projects.

For the stock market, maintaining confidence and expectations is essential as it impacts personal finance, innovation incentives and corporate financing. Policies should aim to establish mechanisms that sustain consumption, address short-term consumption deficiencies and remove major cost burdens like education, healthcare and housing.

Everyone in China is worried about Donald Trump’s second term as US president. He threatened 60 per cent tariffs and said he would consider removing China’s most favoured nation trade status during his campaign. Do you think this will materialise?

Trump, in my view, has a great deal of contradictions. For example, he recently said that he would impose a 10 per cent levy on China, 25 per cent levy on Canada and Mexico respectively. He blames Mexico and Canada for being irresponsible, they don’t control the drugs, they don’t control the illegal immigrants. While for China, he said raw materials for drugs come from China. But what we don’t know is whether such a statement is a negotiating move, or a threat of what he will actually do. This remains to be seen.

Regarding his election vow of a 60 per cent tariff on China and a 10 per cent tariff on the world, this is much like the Smithsonian Agreement from the early 1970s. This was the cancellation of the convertibility of the US dollar to gold at US$35 [an ounce]. .

What will happen to China if it doesn’t counter the tariffs?

Some studies show China may suffer a huge loss without countering. But no countering from China does not mean that China will not circumvent them. Countering is tit-for-tat action, while circumventing is what companies can do to avoid tariff barriers.

For Trump, one concern is the administrative costs to carry out the tariffs. In terms of trade, we see hundreds of thousands of traders with goods coming from all directions, how can he know the origins? That could involve lawsuits, which can drag on for years or decades. So he has to figure out if he can actually do that. He needs to think about the cost of acquiring and processing information. It’s almost impossible.

Are China and its companies more prepared to deal with a second trade war? What cards do you think the government can play? And how much room do Chinese companies have to manoeuvre in terms of diversifying export destinations?

I think China will respond by saying free trade, free investment and free movement of labour and factors of production are good. China will tell the US, “If you are unkind to me, I won’t fight you. You are doing wrong, why should I do wrong?”

From this perspective you can see that China's response to protectionism is not to follow. “You think you’re the only country in the world?” Over time, we can see that extremism will be crushed little by little.

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We will also be open to the United States market because the US business sector wants to do business with us. We can distinguish between the vast American business and academic community from the few extremists in the government.

What does Trump mean for the yuan? What will be the next trends in the exchange rate? How will yuan internationalisation go?

Some people see the devaluation of the yuan as a strategy to hedge against tariffs,

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Many economists say the size of China’s economic stimulus will depend on Trump’s tariffs. For example, if the tariffs are relatively heavy, then the stimulus would in turn be larger. What do you think?

First, the era of the past 45 years – when China participated in international circulation and divisions of labour – is over. In that era, China’s outward-oriented economy was characterised by exporting, serving other people’s markets and developing ourselves by utilising other markets. That is why a big country should expand its imports, not its exports.

China is not a country with a heavy foreign dependence. China’s foreign trade dependence was 64 per cent in 2006, 34 per cent in 2021, and I believe it will probably be 24 per cent in the next 10 years. This means the numerator – the growth rate of imports and exports – is decreasing, and the growth rate of GDP in the denominator is increasing. But we need to figure out one thing: what is the purpose of the internationalisation of the yuan? I believe the long-term goal of internationalisation is development of the yuan into a super-sovereign currency, a process which will slowly unite more currencies.

The Chinese government has rolled out policies to stimulate domestic demand, such as a trade-in programme and various subsidies. Do you think these measures are effective? How can consumer confidence be further enhanced?

First of all, I believe the trade-in programme for durable goods is valid. If you look at the latest consumption data, the effect of the programme is quite obvious – especially in appliances and automobiles – but overall consumption is weak. They may want to prepare for tough times. Even though they have strong financial positions right now, they may think they can’t make it through the next three to five years.

Another important point is deflation. The government hasn’t stepped in over the past few years, not until recently. So it takes time for the economy to turn around. People have to see to believe, see things are serious this time around and then people’s confidence can go up. They dare to invest, dare to consume and develop the economy.

What is your view on the government’s pivot towards the economy and the central economic work conference?

The problem with China’s economy right now is that there is a lack of money at the local level, a lack of money for businesses and a lack of money for the people. There is no shortage of projects. Local governments don’t want projects, as they view projects as liabilities. Let’s look at how the pivot played out. The government held back large-scale stimulus until September, but started with – especially with special bonds – an emphasis on the national strategic projects. This, in local governments’ eyes, had nothing to do with them.

There are only two ways to get the economy going; one is to speed up at all costs, and the other is to get quality up at all costs ... Our government hopes to improve quality

The Politburo meeting at the end of September sent two clear messages: first, we must have effective fiscal support; second, policies can’t only be limited to the national level, we must get localities, enterprises and individuals involved. China needs to solve problems.

I personally still think that China’s economy can get out of this predicament. But the next five years, 2026 to 2030, are likely to be more difficult than in the past. The reason is the uncertainty that comes with Trump.

How can we understand China’s drive for high-quality growth？

Development comes first, but high-quality development is the core of the new era. China’s innovation drive is growing fast. We have seen intense research and development, patent application and robust applications of technology. As a result, Chinese goods are becoming higher quality and providing more value for money. But obviously the real problem now is the downgrading of demand for quality products and downgrading of consumption.

That is why the economy is fundamental to the problem. There are only two ways to get the economy going; one is to speed up at all costs, and the other is to get quality up at all costs. Our government hopes to improve quality.

The “Made in China 2025” plan has made significant progress, and China’s method of mobilising resources nationwide to make breakthroughs has gained traction. How do you view this system’s role in driving economic growth and addressing external challenges?

In terms of mobilising national resources, let’s look at the approach the US has taken.

The change of strategy towards technological development started from 1945, when US President [Franklin] Roosevelt’s adviser [Vannevar Bush] told the government science is the ultimate source of economic growth. Over the next 70 years, the US – which had previously been a follower in science and technology – started to surpass others.

The second major milestone was in 1957, during the technological competition between the US and the Soviet Union. The Soviet Union launched the Sputnik satellite and the US realised it was falling behind in space technology.

The US therefore made two critical decisions: First, it decoupled on tech, forcing the Soviet Union to rely on itself. Second, the federal government invested heavily in science and technology, focusing on original innovations from “0 to 1.” This funding went through the Department of Defense. Thus, US technological innovation was not driven by companies or the market, but by government agencies.

And then the US reflected on why its technological progress has stagnated since 1980. Under neoliberalism, most funding for innovations came from companies. Companies invest in innovation for returns and shareholder profits. As a result, since 1980, the US has seen a significant decline in scientific breakthroughs.

Today, in the competition with China, the US is thinking about what China excels at and what the US lacks. The US realises that China’s strengths are industrialisation, engineering, and application scenarios – areas where the US is weakest. Therefore, the US is now preparing to set up national industrial innovation platforms to compete with China and address weaknesses.

How can China respond? First, we need to figure out the issue of “having or not having.” The US is treating China like an enemy in war, cutting off supplies. In such a situation, we must solve the problem of dependency. However, if we focus only on self-reliance and import substitution, China risks becoming another Soviet Union.

If we follow a mercantilist approach, “winner takes all,” China risks becoming another Japan. Japan’s problem was dominating certain industries, leading to trade conflict with the US – textiles in the 1950s, steel in the 1960s, cars in the 1970s and semiconductors in the 1980s. When Japan’s semiconductor industry became the world’s leader, it accounted for 83 per cent of the market, triggering a strong reaction from the US.

If China’s exports threaten America’s core industries, such as aviation, the US will go all-out to fight back. In this case, China must avoid the path of the Soviet Union or Japan. Instead, China should explore an open, inclusive and shared ecosystem for innovation, allowing the world to collaborate with us.

Last year, China invested 3.3 trillion yuan (US$454 billion) in scientific innovation. If we allocated just 5 per cent, 165 billion yuan, to create an international cooperation fund, why not seek global partnerships?

What did China do right in the past? First, reform and opening up. Second, seeking truth from facts. Third, focusing on development. No matter whom we face, if we stick to these three principles, we are unstoppable. Look at the US and its past competitors – none were defeated by the US; they all fell because of their own mistakes. If we lose to the US in the future, it will only be because we deviated from the right path.

What does “seeking truth from facts” mean? It means not blindly following authority or books but focusing on reality. If we can mobilise the passion of every Chinese person and inspire them, who can beat us? Can the US, Europe, Japan or South Korea compete with us?

The key is that we must not make mistakes ourselves. Let them worry about their issues, while we focus on doing our work well. That is the most important thing.

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What is China’s most pressing problem when it comes to enhancing total factor productivity right now?

The most urgent issue is systemic reform. That’s the reason the Central Committee in the third plenary session called for the further comprehensive deepening of reforms. For example, we are ranked 11th in the World Intellectual Property Organization’s Global Innovation Index, but our innovation system lags behind.

The US faced a similar problem. After 1980, it passed the Bayh-Dole Act, which allowed achievements resulting from federal funding to be attributed to the inventors’ organizations. Shortly after the act took force, the conversion rate of scientific and technological achievements increased substantially.

In recent years, many Chinese companies have expanded overseas and shifted their domestic and international supply chains. What advice do you have for companies moving forward?

There are four criteria for Chinese companies expanding overseas. The first is the presence of a market. The second is cost, they go where land and labour are cheaper. The third is efficiency, places with talent and innovation. The fourth is resources. Now, a fifth has emerged: geopolitics.

Companies move to places with more favourable geopolitical conditions. For example, if the US doesn’t allow them to enter, they might go to Mexico; if Mexico doesn’t allow them, they might go to Mauritius. Who can say no to China in Mauritius? If the US says to the world, “I’m going to impose 100 per cent tariffs on all of you”, then the world will rebel, so how can it still be hegemonic?

Chinese companies going overseas are primarily avoiding geopolitical risks. Also, some companies have reached the stage of internationalisation. This is especially true for the second and third generations of entrepreneurs. Once, I took 10 second-generation entrepreneurs to Suzhou for research. Afterward, I asked them how far they were from internationalisation. They said 3 to 5 years.

I may be old-fashioned, but my children have a clear view of the US and the world. My grandchildren will likely find it much easier to communicate with Americans, Europeans and Japanese. Internationalisation is an innate part of their DNA.

After going overseas, they have certain needs, such as learning how to manage overseas assets. In this regard, what can they learn from Japan and Hong Kong?

What we can see is that there are top levels of development in the world. The first level is the UK and the US, which are top-tier in finance and technology, as well as in discourse power, pricing power and rule-making power. Their national strength and market roles are also top-tier. Hong Kong belongs to this tier. The second level includes continental Europe – France, Germany, Italy – and major East Asian countries, such as Japan and South Korea. [Mainland] China is still in the third tier.

China still lags behind Japan and South Korea in terms of internationalisation. They began their global expansion earlier than us. The Meiji Restoration happened in 1868, and the “Black Ships” event – [the forcible opening of Japan to trade by US warships] – took place in 1853. Furthermore, they seized opportunities in the 1950s. This means they are [at least] 30 years ahead of us.

From this perspective, China has made significant progress. The rapid progress of China is due to its national strength and its market’s role in going abroad. China is now increasingly catching up with continental Europe, Japan and South Korea.

In terms of how to look at China, I would classify them into three groups in terms of research and development [intensity], with aggregate R&D expenditure as the numerator and GDP as the denominator.

First-tier cities [and provinces] include Shanghai, Beijing, Tianjin, Guangdong, Jiangsu and Zhejiang. Last year’s data shows that Zhejiang [province] had the lowest, but its R&D intensity was already 3.2, clearly surpassing the average for Organisation for Economic Cooperation and Development (OECD) countries.

Their momentum is innovation-driven, and their internationalisation is accelerating. The second tier includes 12 provinces and cities, such as Anhui, Shandong and Hunan [provinces], which have an R&D intensity lower than the OECD average. If you look at this indicator over eight years, they are very close to the OECD average. Their momentum is still investment-driven, relying on economies of scale, but they are progressing very quickly.

The third tier includes 13 provinces and autonomous regions whose yearly investment is less than half of Guangdong’s annual investment. Their momentum is resource-driven.

Therefore, China is a large country with developed regions, moderately developed regions and developing regions. China’s overseas expansion from the first tier is accelerating. Outstanding enterprises in the second tier are also beginning to expand abroad. The third tier is only sporadically starting to expand abroad.

The peak of China’s outbound direct investment was in 2016, reaching around US$160 billion. Its enterprises are still in an early stage of going abroad, an exploratory phase. However, internationalisation is accelerating rapidly.

You mentioned that Hong Kong is in the world’s top tier. What kind of role can the city play?

With internationalisation, marketisation and rule of law, Hong Kong is in the top tier. Hong Kong’s advantages here are stronger than those of continental Europe, Japan and South Korea.

On the other hand, Hong Kong’s economy and industries are focusing on the most profitable parts of different businesses. But without being deeply embedded in the soil of the real economy, without a root, you will float in the sea or be blown by the wind. Therefore, its characteristics are “short, quick and fast”. When you can seize an opportunity, you do it quickly. Secondly, you focus on the most profitable part and never do the rest on a large scale.

From this perspective, Hong Kong must make these characteristics serve the mainland’s larger economy under the “one country, two systems” framework. The large economy is primarily about scale.

To maintain the foundation of “one country, two systems” in Hong Kong, it is important to figure out how to make Hong Kong understand the mainland, and the mainland understand Hong Kong. Mainland enterprises, institutions and regions need to understand Hong Kong to make the best use of it.

Personally, I think it will take some time, as the mainland is also exploring how to manage “one country, two systems.” In this new phase, the challenge is how to preserve both systems while serving one country. This model needs to be explored. I think the core issue is that the mainland should get to know Hong Kong, and then set off again in accordance with the principle of “Hong Kong people governing Hong Kong”.

( Source: Mandy Zuoin Shanghai

Published: 6:00am, 16 Dec 2024Updated: 3:45pm, 16 Dec 2024

Economist Zhang Yansheng is a researcher with the China Academy of Macroeconomic Research. He is also a former secretary general of the academic committee of the National Development and Reform Commission, China’s top economic planner. Zhang has presided over or taken part in research projects for several of the country’s five-year plans, and published more than 20 books on international finance and trade.

In this interview, Zhang discusses Beijing’s response plan for tariffs and trade encirclement during Donald Trump’s second White House term and what Chinese companies should look out for when expanding overseas. This interview first appeared in SCMP Plus. For other interviews in the

China’s Politburo recently laid out its economic strategy for 2025, which includes a more proactive fiscal policy and a “moderately loose” monetary policy. What are your thoughts on these developments?

Next year is crucial to the Chinese economy, as it marks the transition from the 14th to the 15th five-year plan. The combination of a more proactive fiscal policy and moderately loose monetary policy, along with “unconventional” countercyclical adjustments, suggests that despite the numerous policies introduced since September, the market, businesses and academics believe these measures have been insufficient.

Next year’s focus will be on increasing central fiscal spending and adjusting the deficit ratio, which is essential for addressing financial shortages among local businesses and the public. This year’s fiscal deficit ratio in the US was estimated to be 7.8 per cent compared to China’s 3.8 per cent, indicating room for a potential increase in China - though not implying we need to immediately catch up to the US.

There will be a stronger emphasis on local transfer payments and the use of special local government bonds as capital to help improve local government asset and liability conditions. This is vital for resolving debt problems among businesses, which can stimulate the national economic cycle.

The core issue with the “moderately loose” monetary policy is how to effectively utilize both broad and targeted monetary policies. Targeted policies will likely focus on sectors like technological innovation and green transformation. Fiscal measures are seen as crucial because they directly inject capital into the economy, while monetary policies need to address currency stability and deflationary pressures.

Expanding domestic demand comprehensively is also a priority, especially if external conditions worsen, such as potential tariffs or the removal of China’s most favored nation trade status. Reducing dependency on external demand and bolstering domestic demand are key. Developing new productive forces through innovation and demand-driven strategies is critical. Increasing citizens’ incomes and addressing their concerns will also be important for boosting the middle-income group’s growth.

As regards stabilizing the real estate and stock markets, the focus is on preventing systemic risks similar to Japan’s real estate bubble, which led to prolonged economic stagnation. For real estate, the emphasis will be on resolving issues like ensuring the completion and delivery of housing projects.

For the stock market, maintaining confidence and expectations is essential as it impacts personal finance, innovation incentives and corporate financing. The government is expected to continue refining and targeting its policies in these areas.

In my understanding, [the Politburo’s phrase] “unconventional tools” refers to solving specific problems. These might include enhancing consumption by ensuring stable incomes, which relates to wages, property, business and transfer incomes. Policies should aim to establish mechanisms that sustain consumption, address short-term consumption deficiencies and remove major cost burdens like education, healthcare and housing.

Everyone in China is worried about Donald Trump’s second term as US president. He threatened 60 per cent tariffs and said he would consider removing China’s most favoured nation trade status during his campaign. Do you think this will materialise?

Trump, in my view, has a great deal of contradictions. For example, he recently said that he would impose a 10 per cent levy on China, 25 per cent levy on Canada and Mexico respectively. He blames Mexico and Canada for being irresponsible, they don’t control the drugs, they don’t control the illegal immigrants. While for China, he said raw materials for drugs come from China. But what we don’t know is whether such a statement is a negotiating move, or a threat of what he will actually do. This remains to be seen.

This reminds me of his investigation into steel and aluminium in 2018. At that time, China only ranked 11th in terms of steel exports to the US, after Japan, South Korea and some countries in Europe. But he began the 301 investigation targeting China, and then the trade war escalated. So that was his first move. Looking at the current threat, it’s very much like what happened in 2018.

Regarding his election vow of a 60 per cent tariff on China and a 10 per cent tariff on the world, this is much like the Smithsonian Agreement from the early 1970s. This was the cancellation of the convertibility of the US dollar to gold at US$35 [an ounce]. The US at that time demanded the other major countries either appreciate their currencies or pay tariffs. These big countries said, “Well, who am I to pay you a tax in the form of a tariff?” They chose to devalue. Finally, Bretton Woods went bankrupt.

Sixty per cent is actually a big threat to China, and I would assume Trump would think the US is losing out as the trade deficit is too big. There is also the argument that China’s most favoured nation status should be revoked. How will this play out with his other threats? It doesn’t make any sense. It’s like a war.

There is a lot of ambiguity in Trump’s threats, and he looks very random.

Of course, judging from his previous run for the presidency, he has a trait called “talking the talk”. He’s a businessman, not a politician. So this is one aspect where we have to be on higher alert.

There is also a theory that the tariff may be a bargaining process, but what will emerge at the end of the day? In my view, there’s a consensus that we don’t take countermeasures. As a famous Chinese saying goes, “A gentleman settles a dispute through communication instead of a fight.” So we can take the moral high ground.

What will happen to China if it doesn’t counter the tariffs?

Some studies show China may suffer a huge loss without countering. But no countering from China does not mean that China will not circumvent them. Countering is tit-for-tat action, while circumventing is what companies can do to avoid tariff barriers.

For Trump, one concern is the administrative costs to carry out the tariffs. In terms of trade, we see hundreds of thousands of traders with goods coming from all directions, how can he know the origins? That could involve lawsuits, which can drag on for years or decades. So he has to figure out if he can actually do that. He needs to think about the cost of acquiring and processing information. It’s almost impossible.

Will Mexico listen to you? You’re going to put 100 per cent tariffs on Mexico, and the Mexican president immediately said she’s countering it. China’s investment in Mexico can bring technology, tax revenue and jobs. It’s impossible for Mexico to hurt their own interests just for Trump. He thinks of himself as God.

Are China and its companies more prepared to deal with a second trade war? What cards do you think the government can play? And how much room do Chinese companies have to manoeuvre in terms of diversifying export destinations?

I think China will respond by saying free trade, free investment and free movement of labour and factors of production are good. China will tell the US, “If you are unkind to me, I won’t fight you. You are doing wrong, why should I do wrong?”

From this perspective you can see that China's response to protectionism is not to follow. “You think you’re the only country in the world?” Over time, we can see that extremism will be crushed little by little.

The next step for China is we need to ensure the economy will be good. The most important card to play is further deepening reforms in a comprehensive manner and promoting modernisation, with the most critical part being a high level of institutional opening up.

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We will also be open to the United States market because the US business sector wants to do business with us. We can distinguish between the vast American business and academic community from the few extremists in the government.

For China, if there is political pressure to retaliate, then we have to do the work on that. I think the probability of us countering as the next step is small.

What does Trump mean for the yuan? What will be the next trends in the exchange rate? How will yuan internationalisation go?

Some people see the devaluation of the yuan as a strategy to hedge against tariffs, but I personally don’t think this is effective. With tariffs as high as 40 per cent or 60 per cent, you can’t devalue the yuan enough to offset them. And what can you do if the US establishes limits on Chinese exports or changes rules to restrict purchases?

So you have another strategy, which is to retain the market. Liberalise the businesses and let them explore.

Don’t think about regulating day in and day out. Focus on expanding domestic demand, how to expand our market with its 1.4 billion people. We want our economy to be good, for people to have confidence and dare to spend. Chinese people work very hard. Nobody wants to live on subsidies if they have choices, and what they want is to earn money through hard work.

Many economists say the size of China’s economic stimulus will depend on Trump’s tariffs. For example, if the tariffs are relatively heavy, then the stimulus would in turn be larger. What do you think?

First, the era of the past 45 years – when China participated in international circulation and divisions of labour – is over. In that era, China’s outward-oriented economy was characterised by exporting, serving other people’s markets and developing ourselves by utilising other markets. If you are a small economy, you can do that. But if you are a big economy, the world will give you a hard time. That is why a big country should expand its imports, not its exports.

China is not a country with a heavy foreign dependence. China’s foreign trade dependence was 64 per cent in 2006, 34 per cent in 2021, and I believe it will probably be 24 per cent in the next 10 years. This means the numerator – the growth rate of imports and exports – is decreasing, and the growth rate of GDP in the denominator is increasing. China is becoming more like a big economy.

So if we focus on the domestic economy and expand non-US trade investment and business dealings, then we won’t have that much to lose. You can cry wolf – or cry tariff – to drive domestic restructuring and build the people’s wages up, help the people live a good life.

If we can drive up domestic consumption, that means imports can go up. Imports mean a trade deficit, which means outflow of the yuan, because foreign merchants sell Chinese customers goods and settle more payments in yuan. When this happens, we need to leverage Hong Kong, Singapore and London and actively develop an offshore yuan market.

But we need to figure out one thing: what is the purpose of the internationalisation of the yuan?

I believe the long-term goal of internationalisation is development of the yuan into a super-sovereign currency, a process which will slowly unite more currencies.

The Chinese government has rolled out policies to stimulate domestic demand, such as a trade-in programme and various subsidies. Do you think these measures are effective? How can consumer confidence be further enhanced?

First of all, I believe the trade-in programme for durable goods is valid. If you look at the latest consumption data, the effect of the programme is quite obvious – especially in appliances and automobiles – but overall consumption is weak.

Consumption downgrades are still the trend. Once I asked a young man: are you getting paid less? “Not really.” Is your job security at stake? “Not really.” I said, then how come your consumption has downgraded? He said because confidence has downgraded. I asked but why, if nothing has changed? He said almost every day there’s news about lay-offs or bankruptcies.

So there’s a massive impact from the downsizing of big foreign firms, big private firms, big internet firms or big state-owned enterprises. Why? They may want to prepare for tough times. Even though they have strong financial positions right now, they may think they can’t make it through the next three to five years.

So how can the government reform so these companies can see the coming spring? The government has to address issues like the financing of the stock market, which now doesn’t work. How can you make it work? That’s why one of the central government’s policies is to boost the capital market. I think the core issue is still a question of confidence.

But our government is not very good at managing expectations, which means our government is not very good at communicating with the market. I’ve been asked what the policy package is about. Does it work? This is something where the government is in the best position to articulate, right? But there are always questions. First, why doesn’t the government talk to the market? Secondly, why doesn’t the government talk to the market in human language?

When I was conducting research on Wall Street, the Wall Street people said: if your government learns to talk to the market, the market will cooperate. The market will know if it goes against you, it loses money, and if it goes with you, it makes money. We are now on the opposite side. We all know the famous saying “don’t fight the Fed”.

Why doesn’t China learn? The Hong Kong side is very good in this aspect. The mainland has to learn from Hong Kong.

Another important point is deflation. The government hasn’t stepped in over the past few years, not until recently. So it takes time for the economy to turn around. People have to see to believe, see things are serious this time around and then people’s confidence can go up. They dare to invest, dare to consume and develop the economy.

What is your view on the government’s pivot towards the economy and the central economic work conference?

The problem with China’s economy right now is that there is a lack of money at the local level, a lack of money for businesses and a lack of money for the people. There is no shortage of projects. Local governments don’t want projects, as they view projects as liabilities.

Let’s look at how the pivot played out. The government held back large-scale stimulus until September, but started with – especially with special bonds – an emphasis on the national strategic projects. This, in local governments’ eyes, had nothing to do with them.

The Politburo meeting at the end of September sent two clear messages: first, we must have effective fiscal support; second, policies can’t only be limited to the national level, we must get localities, enterprises and individuals involved.

China needs to solve problems. These are a lack of demand in the short term, a lack of endogenous momentum in the medium term and in the long term, [external] resistance to high-quality development like Trump 2.0.

I personally still think that China’s economy can get out of this predicament. But the next five years, 2026 to 2030, are likely to be more difficult than in the past. The reason is the uncertainty that comes with Trump.

How can we understand China’s drive for high-quality growth？

Development comes first, but high-quality development is the core of the new era. This is [in official rhetoric] about innovation becoming the driving force, coordination becoming endogenous, [the green transition] becoming universal, opening up becoming the way forward and sharing becoming the fundamental purpose.

This suggests that China’s economy is no longer speed-oriented, it is quality-oriented.

China’s innovation drive is growing fast. We have seen intense research and development, patent application and robust applications of technology. As a result, Chinese goods are becoming higher quality and providing more value for money. But obviously the real problem now is the downgrading of demand for quality products and downgrading of consumption.

That is why the economy is fundamental to the problem. There are only two ways to get the economy going; one is to speed up at all costs, and the other is to get quality up at all costs. Our government hopes to improve quality. For me, a gross domestic product growth rate of 4.5 per cent is acceptable.

Now China has reached a new stage, which is how it can reaccelerate total factor productivity through a multipronged approach.