Strategic & Economic Dialogue Conference

Top US and Chinese government officials convened in Beijing for the tenth annual Strategic & Economic Dialogue (S&ED) to discuss issues that impact the two largest global economies, occasionally sparring when China refused to ease limits on foreign businesses. Each heavy-weight economic power sought to promote their own growth policies while guarding their lagging economies. In his opening remarks Chinese President Xi Jinping said: “There is no reason to be scared of having differences, the key is not to adopt a confrontational attitude towards any differences.” The two nations are each facing new leadership - the US will soon elect a new president and one candidate has been particularly hostile towards China. In 2017 five of the seven members of China’s Politburo Standing Committee, the country’s chief decision makers, are set to retire. Both countries are facing economic uncertainty and are wary of making sweeping changes to each’s strategic or economic policies. There was consensus, however, on China’s currency commitment. They have pledged not to devalue the weakening yuan in order to boost their exports and also not to continue their overproduction of steel. The Chinese did not agree to limit aluminum production which has also reduced the prices of commodities globally.

Is China Really Open to Business?

Tensions were palpable as American representatives fought for more equal access for foreign businesses in China where protectionist policies favour Chinese firms. Little progress was made in this regard as China defended its new law that allows police the authority to monitor foreign businesses. This makes for continued challenges for foreign companies to conduct business in China. According to a survey released by the European Union’s Chamber of Commerce that coincided with the summit, European’s businesses are reporting that market access barriers are proving an unpleasant obstacle for them too. China depends upon the European Union, its largest trading market, yet the most recent survey of European businesses found China lacking in its business accessibility. With over 1 billion euros being traded daily between the Eurozone and China, China is still putting up barriers to trade, and a marked majority of those polled were awaiting the removal of market access barriers before increasing their investments. 

China’s Currency Devaluation

Currency volatility was the focus of last year’s discussion as the US has long complained that China has kept the renminbi lower in order to keep trading competitively. In last year’s discussions, China agreed to move towards a market-determined exchange rate and to limit secrecy in its interventions in exchange rate policies, but didn’t, in practice, keep this agreement. 

This past January the People’s Bank of China devalued the yuan, and the move caused global reverberations that damaged fragile economies, including that of the US. Local currencies immediately fell and Chinese investors moved renminbi out of China. This competitive devaluation was an attempt to help the country’s exports which have been in steady decline. More recently China’s central bank has resisted devaluing the yuan in a move that doesn’t come without costs: to keep the yuan from falling China’s central bank has spent about a quarter of its $4 trillion in reserves. China is the world’s second-largest economy with the second-largest trade surplus in history. This surplus means that China, as it moves toward consumer led growth, is importing more than it exports. 

China’s Currency Soon in The Basket

In 1969 the International Monetary Fund (IMF) created an international reserve asset of four major currencies that is termed Special Drawing Right (SDR) and known as ‘the basket of currencies’. The currencies are the US dollar, the pound sterling, the euro and the Japanese yen. On October 1st 2016 China’s renminbi will be added to that basket which functions to minimise the risk of currency fluctuations. In the past the Chinese government had been setting its currency against the US dollar - its main competitor - but now is easing (gradually- this is China, after all) into keeping their currency more in line with those in the basket. Allowing the overvalued yuan to fall more naturally into place in the markets as China is now doing is seen as a positive financial reform. 

First Time Investment Opportunity

Financial ties were forged between the two countries with China’s move to give the US a 250 billion yuan ($38 billion) investment quota. China has previously given the UK, France and Singapore similar quota allowances that allowed them to purchase Chinese stocks, bonds and other assets, but this was the first time it has offered the US the opportunity and also the largest quota given excepting Hong Kong. 

Set up in 2011, The Renminbi Qualified Foreign Institutional Investor programme will be significantly expanded by this move. The programme allows overseas financial institutions to use yuan set aside in a qualified bank to be used to buy Chinese stocks and bonds and make money market investments.

US investors will have greater access to China’s markets and the Chinese will benefit from making the yuan a more globally used currency, which was their intention in establishing the programme. These investments will not hurt China, either. China is struggling to shore up their slow growing economy with stimulus measures that cost more than they yield amid mounting debt. It now takes 4 yuan of debt to produce a single yuan of economic growth. American investors will be cautious as to what they do with this new found opening into the Chinese domestic market, especially given the World Bank’s forecast that China’s economy will see increasingly slower growth. Last year it was at 6.9 pc, this year it’s expected to reach only 6.7 and in 2018 it will likely slow to 6.3. 

Given the tepid US economy and uncertainty ahead of the Presidential elections, the two largest economies will continue eyeing each other warily from opposite corners of the global boxing ring, never mind the diplomatic attempts at polite discussions seen in Beijing. The rhetoric regarding fighting Chinese global competition that will continue coming from the US presidential campaign is counterproductive to the dialogue of diplomatic meetings like the S&ED, making it more difficult to bridge the two countries’ divergent cultures and similar economic issues.