Portfolio: U.S. Demands on China's Economy
Video Transcript:
Analyst Matt Gertken examines the recent agreements between the United States and China and suggests the United States is demanding greater and faster reforms than China is willing to allow.
Editor’s Note: Transcripts are generated using speech-recognition technology. Therefore, STRATFOR cannot guarantee their complete accuracy.
This week was a big week in China news. The United States and China sat down for strategic and economic dialogue, China's new economic statistics revealed that the economy is starting to slow its pace of growth a little bit and beneath all of this there is a growing awareness that the U.S. is going to be putting more pressure for China to open up and more rapidly reform its economy. The United States and China concluded the strategic and economic talks this week with an agreement to hold consultations on the Asia-Pacific region. That's really the big takeaway from this round of dialogue, but looking at the economic issues you can see a number of technical agreements that the two sides made.
China gave some concessions -- they said the U.S. would be able to invest more in Chinese stocks and bonds, U.S. companies would be able to offer mutual funds or car insurance in China. They also pledged that the indigenous innovation policies that have been so controversial will not really apply to government procurement contracts, meaning that U.S. companies would be able to be considered at any level for Chinese government. We'll see how that's implemented, there's obviously a lot of reason for doubt, but clearly China making that statement and making that pledge to the United States was important. And the Chinese also said that they would stop condoning the theft of intellectual property from the U.S. at least in regards to software that is being used on Chinese government computers. One industry group suggested the U.S. may lose about $8 billion a year because of that kind of theft.
The U.S. concessions had mainly to do with the suggestion that the U.S. will gradually ease the controls on its exports so that China can import more high-technology goods from the U.S. which it was hoping to do. Also, the U.S. said that it would allow more Chinese investment in, and of course there are national security concerns for the U.S. and that will continue to apply on a case-by-case basis. But overall, what China was really demanding was to get more access into the U.S. market, and there is a number of interests in the U.S. of course that would like to see that happen, so the U.S. claims that that will proceed very rapidly going forward.
Now at the same time that the dialogue was taking place, new economic statistics came out of China showing that in the month of April, the pace of growth in China is starting to slow a little bit. This comes as the government has taken over the past year, very, very tiny steps incrementally to moderate the pace of growth, and what we're seeing is some of that bearing small fruit. We've seen that industrial output has started to slow its pace of growth a little bit, and also we've seen inflation stabilize a little bit, even sinking slightly compared to the previous month. Inflation of course has been the big worry. We're still at three-year highs, in terms of inflation, and we're also seeing asset bubbles grow as people withdraw their money from banks and invest in things that they think will gain in value namely real estate, because they're afraid of this inflation problem. And we're also seeing social frustration bubble up in different parts of China because of the rising prices, and that's not going away. So fighting inflation will remain the priority in the short term even as we're starting to hear the conversation shift a little bit among experts in China who are starting to see that in the second half of the year the government may have to become more accommodative and push growth a little bit more, which makes sense in terms of a normal Chinese economic cycles.
Now beneath the mostly technical discussions between the U.S. and China, reinforced by these new economic statistics, there is a growing awareness that the U.S. is going to begin to put more pressure on China to open up its economy and reform in ways that bring it into line with mainstream international practice as led by the United States. One event that created dissonance with the dialogue was China registering an $11.4 billion trade surplus for the month of April, but the U.S. is familiar at this point with large trade surpluses on a monthly basis from China and these negotiations are not really about a month by month development. Rather, the U.S. is expecting something much bigger. They're putting pressure on China gradually to entirely rebalance and transform its economy. They're aware that many in China are also arguing for this rebalancing to take place, but they're also aware as the trade surplus shows, that this process is not happening very quickly. Vice Premier Wang Qishan said that China needs to make sure that all of its leaders are on the same page when it comes to this transformation of their economic model. His implication is of course that there are factual disagreements in China that are preventing reforms from happening. While it's certainly true that there are factional divisions within China, it's also curious that he would choose this platform and the United States to make that comment and what it suggests is that the Chinese are using these internal divisions as an excuse for the fact that they continue to move very slowly and reluctantly on the reforms that the U.S. is demanding.v
