Covid-19 has likely rendered a historic “phase-one” US-China trade deal signed in January stillborn, and the need to address the economic devastation that the pandemic has caused will ratchet up the pressure on Beijing to reform its domestic economy, two experts on the bilateral relationship said on Tuesday.
China’s high debt levels going into the pandemic and the likelihood that its GDP will contract as the private sector struggles to regain momentum after many businesses were closed to contain the coronavirus has sapped consumption to a degree that will make it nearly impossible for Beijing to fulfil its buying commitments, according to Rhodium Group founder Daniel Rosen and former Australian prime minister Kevin Rudd.
“The toolbox that was used to get out of the soup in [the global financial crisis of] 2008-2009, the extraordinary stimulus that China was applauded and acclaimed for, is simply not an option today” because easy credit given to support the country’s state-owned enterprises in recent years is too high, Rosen said.
Citing Chinese government data, Rosen showed a graph of the country’s interest payments as a percentage of GDP at over 14 per cent at the end of 2019, up from about 9 per cent in 2008. He added that Chinese companies are struggling under a burden of about US$2 trillion worth of debt service obligations.
China’s interest payments as a percentage of GDP were at over 14 per cent at the end of 2019, up from about 9 per cent in 2008. Click to enlarge. Chart: Rhodium Group. alt=China’s interest payments as a percentage of GDP were at over 14 per cent at the end of 2019, up from about 9 per cent in 2008. Click to enlarge. Chart: Rhodium Group.
The Chinese government “will be very reluctant to engineer a stimulus strategy at the same order of magnitude than they did last time, even though the objective economic need this time is considerably larger,” Rudd said.
The assessment by Rudd and Rosen runs counter to expectations voiced by US President Donald Trump, who said last week that he was confident that China would follow through with its pledge to buy an additional US$200 billion worth of exports “because I know President Xi [Jinping], who I like and respect, and I think he will honour the deal he made with us”. Trump has been pushing to reduce China’s trade surplus with the US as a major foreign policy goal since he took office in 2017. That surplus rose to a record US$276 billion in that year, prompting the US leader to start a bilateral trade war with Beijing in July 2018.
When they signed their phase-one agreement in January, the two sides pledged to start negotiations on phase two, which would address structural economic issues, including Beijing’s support to state-owned enterprises.
Following through with the agreed-upon increase in purchases from the US would also damage other exporting nations already ravaged by Covid-19 and create difficulties for American suppliers, Rosen said.
US President Donald Trump and Chinese Vice Premier Liu He show the signed China-US phase-one economic and trade agreement during a ceremony at the White House on January 15. Photo: Xinhua alt=US President Donald Trump and Chinese Vice Premier Liu He show the signed China-US phase-one economic and trade agreement during a ceremony at the White House on January 15. Photo: Xinhua
“It is going to be disastrous for anybody else in the world selling fossil fuels, any kind of substitutable agricultural products, and myriad other things,” Rosen said. “Boeing would win out over Airbus, despite the problems going into the past year, for China to try to fulfil that pledge at this juncture in time.”
Rudd, who is now president of the Asia Society Policy Institute in New York, agreed, saying that the amount of additional exports that China pledged to buy “was huge prior to the coronavirus erupting across all of our countries’ public health systems”.
“I would be deeply sceptical, therefore, as to whether China will be in a position to deliver on that,” he said. “And frankly, given the supply side problems in the United States, which are likely to unfold as a consequence of the virus, [I am also sceptical of] the extent to which American exporters could necessarily make that level of increase in what they sold to Chinese consumers.”
“As for the phase-two deal, which was structural changes, with the US side demanding to the Chinese economy and the future role of state owned enterprises around the world and seeking to place them on the same competitive level playing field as other global players, I wouldn’t hold your breath for phase-two negotiations beginning any time soon,” Rudd said.
Rosen, meanwhile, suggested that Beijing may not have any choice but to veer away from the state-led economic approach that took hold under Xi, which has kept growth intact.
Harbour cranes lift containers from the loading area at Qingdao port. China’s foreign trade dropped in March as the economy reeled from the coronavirus outbreak. Photo: AP alt=Harbour cranes lift containers from the loading area at Qingdao port. China’s foreign trade dropped in March as the economy reeled from the coronavirus outbreak. Photo: AP
Instead of relying on government support for its state-owned enterprises, Rosen said, the Chinese government has few options except “reform and opening, and making a clear signal that the future for China is going to involve a very compatible globally market-friendly approach”.
For its part, China has called for dialogue on the trade deal and the Covid-19 pandemic.
China’s ambassador to Washington said in an April 3 interview that the two countries were still working to implement their trade deal despite the recent strains in their relationship prompted by the outbreak.
“As far as I know, we’re still doing our part of the deal,” Cui told the PBS show GZERO World in an interview broadcast on April 12.
“The global economic landscape has been drastically changed,” Cui said. “So I just hope our two economic teams, if they can sit down together or just have a conference call, they can really make a good assessment of the changing realities and coordinate our response to that.”
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