Chinese Vice Premier Liu He meeting U.S. President Donald Trump in May 2018

Expectations are high for the next round of trade talks in Washington. Vice Premier Liu He, China’s top trade negotiator, is expected to travel to Washington on January 30 to continue discussions, though the visit could be delayed if the partial shutdown of the U.S. government is not resolved by then. “It’s a positive development to show that enough progress was made in talks earlier this month,” said Nicholas Lardy, Senior Fellow at the Peterson Institute for International Economics, a Washington-based think tank. “But the chance is still slim that a complete resolution will be reached in this round.” “The most likely outcome is that the U.S. accepts all the concessions China has made and takes off the tariffs for a period to allow China time to enforce its promises. But most importantly, the U.S. ultimately needs to implicitly accept that China was never going to eliminate ownership restrictions by foreign owners in certain sectors such as media,” Lardy added.

Andy Rothman, former U.S. diplomat and China strategist has added his voice to the growing chorus of experts who believe a short-term resolution to the trade war can be reached within months. Rothman, who spent 17 years in the U.S. foreign service focused on China, and is now an investment strategist, said a deal could be struck by the summer, with domestic issues leading to increased motivation on both sides to reach an agreement. China is facing an economic slowdown that is beginning to show up in regional growth data, while the U.S. stock market has been underperforming, as the federal government shutdown continues. He expects the current negotiating deadline of March 1 to be extended. “Now that a negotiation is seriously under way, there is no reason for the U.S. to go back and put more tariffs in place, as long as progress is being made towards a deal,” he said. “It is rare that a trade negotiation gets finished on time and President Trump can extend the deadline.”

In this respect, he agreed with Robert Zoellick, former U.S. Trade Representative under President George W. Bush and former World Bank President, who also told the South China Morning Post last week that a deal could be struck. However, not everybody thinks an agreement is imminent. Many say that nothing of substance can be agreed between the countries within three months, including Tommy Wu, Senior Economist at Oxford Economics, who said: “We are unlikely to see negotiations completed before March 1, but because of the progress expected to be made in these talks, the U.S. is likely to postpone the tariff hike again.”

China could use large purchases of U.S. goods, promises of long-term dialogue on structural changes to its economy, and active cooperation on infrastructure projects to fashion a short-term compromise that would satisfy the United States and avoid a further escalation of the trade war, said Kent Calder, Professor at Johns Hopkins University’s School of Advanced International Studies in Washington and a Japan expert who served as a special adviser to the U.S. Ambassador to Japan in bilateral trade talks. “Japan made lots of purchases from the United States. For example, big Japanese airlines bought heavily from U.S. aircraft producers,” he said during a speech at the Center for China and Globalization in Beijing. But growing competition over technology is adding complexity to the bilateral negotiations, he warned, adding that negotiations to resolve these structural issues could take years.

Meanwhile, China has decided to double the quota under the qualified foreign institutional investors (QFII) scheme, through which overseas funds can buy China’s A-shares, to USD300 billion effective immediately. “This can be seen as China making a genuine gesture to further liberalize its capital market to facilitate the trade war negotiations with the U.S.,” said Commerzbank’s Senior Economist Zhao Hao. “It reflects China’s desire to reduce tensions with the U.S. towards resolving the trade issues, as the lack of market access has been one of the sticking points,” said Aidan Yao, Senior Emerging Asia Economist at AXA Investment Managers.

China has been introducing more financial opening up measures since last year as the dispute with the United States heated up. Beijing has promised that within three years it will fully scrap restrictions on foreign ownership in the financial service industry, including in banking and insurance. Through all programs, including the stock connect, foreign investors held about 6.7% of the total market cap of China’s stock market by the end of September, up from 5.16% at the beginning of 2018. To compare, foreign capital made up 24% of U.S. market capitalization, and 30% of Japan’s value at the end of 2017.

Opening of the 5G innovation park in Hangzhou

An innovation park for 5G mobile communications technology opened in Hangzhou, capital of Zhejiang province last week, but some analysts warned that 5G is not yet ready to be commercially implemented. After years of hype about the ultrafast speed of 5G networks and technological advancements, some industry leaders in China are now calling for patience for the final rollout of the technology believed to change everything from mobile communications, to driving, to urban planning. They argue that we could still be far away from fully realizing its full potential due to lagging infrastructure and technologies, limited real-world applications and high costs, the Global Times reports. China is leading the world in the development of 5G technology.

“The real-world application of 5G has actually been exaggerated and Huawei’s achievement has also been exaggerated,” Huawei Founder Ren Zhengfei said in a rare interview with Chinese media. He further noted that there is still a long way to go to realize the full potential of 5G. “We all shouldn’t be so anxious.” Such an assessment from the head of one of the leading companies in 5G technology marked a change of tone in China about 5G technologies and point to some realistic challenges, industry insiders said. Despite the advances and tests, much of the 5G technologies are still in the experimental stage, including coding, multiple access techniques and wireless transmission, and have not been tested fully in real-world situations. “So far, all we can say is that the 5G network has been successful in controlled tests. But in the real world, there will always be problems. That’s just how it works for every new technology,” said Xiang Ligang, Chief Executive of telecom industry news site cctime.com.

Even after the technologies are ready, for the 5G network to go operational, it also requires the support of a wide range of components, including compatible devices such as chips and smartphones. Companies such as Qualcomm and Huawei have boasted 5G-capable chips and other smartphone makers have also launched devices ready for 5G networks. “But to put all these together would require some time, we are still far from the commercialization of 5G,” said Fu Liang, a Beijing-based Analyst who closely follows 5G developments. While 5G networks and devices are expected to be available as soon as in the next few months, the cost to consumers would still be high. For example, a 5G-capable device from China Mobile expected later this year could cost as much as CNY8,000. Nevertheless, Chen Zhaoxiong, Vice Minister of Industry and Information Technology, declared at the park’s opening ceremony in Hangzhou that China’s 5G network is ready for pre-commercialization, the Global Times reports.

The Chinese economy slowed further in the fourth quarter, matching its lowest recorded reading during the global financial crisis in 2009. The fourth quarter growth rate of 6.4%, year-on-year, matched that of the first quarter of 2009, according to the National Bureau of Statistics (NBS). That was the lowest growth rate since the Chinese government began publishing quarterly growth rates at the beginning of 1992. The fourth quarter rate was down from 6.5% in the third quarter. For all of 2018, the Chinese economy grew 6.5%, in line with the government’s target for growth of “about 6.5%” for the year. Last year’s growth rate was down from 6.8% in 2017. Retail sales grew 8.2% in December compared to a year earlier, while industrial production grew 5.7%.

China’s GDP per capita, a closely watched measure of a country’s economic output that accounts for population, is expected to reach a key level of USD10,000 in 2018. “Our country’s population is equivalent to the total population of all developed countries and it is estimated that the GDP per capita will approach USD10,000 in 2018,” He Lifeng, Chairman of the National Development and Reform Commission (NDRC), wrote in an article. While USD10,000 is still significantly lower than that of other developed countries, it represents a remarkable development for a country with more than 1.3 billion people, nearly 20% of the global population. China’s total GDP has risen to the second largest in the world, but its GDP per capita has been low due largely to its massive population. A GDP per capita of USD10,000 will not put China much higher in the global rankings. In 2017, China’s GDP per capita was at USD8,827, ranking 73rd globally, according to World Bank data.

China’s GDP of USD10,000 per capita represented just one-tenth of Luxembourg’s USD104,103 – the highest in the world – and about one-sixth of that of the U.S. at USD59,531, which ranks sixth. China’s GDP per capita was a mere USD89.50 in 1960, compared to USD2,242 for Luxembourg and USD3,007 for the U.S. From 1960 to 2017, China’s population rose from 662.07 million to 1.39 billion. “With a GDP per capita of USD10,000, it means China, with its massive population, has become an upper middle income country, according to UN standards,” said Tian Yun, Vice President of the Beijing Economic Operation Association. “That in itself is a remarkable achievement.”

Foreign direct investment (FDI) into the Chinese mainland rebounded in December, jumping nearly 25% year-on-year – taking the year’s total to a record high. FDI in December reached CNY92.34 billion, up 24.9% year-on-year and up 23.2% in U.S. dollar terms, the Ministry of Commerce (MOFCOM) said. A total of 5,830 new overseas-funded enterprises were established last month, up 20.5% year-on-year. In 2018, FDI rose 0.9% to CNY885.61 billion or 3% to USD134.97 billion. Last year saw 60,533 new overseas-funded enterprises established, up 69.8% year-on-year. The country saw nearly 1,700 major FDI projects with a contract value above USD50 million, up 23.3% from the previous year. “As a guiding indicator for foreign investment, the number of major FDI projects posted a marked increase, showing that foreign investors’ confidence in China has not been undermined,” said Tang Wenhong, Director of MOFCOM’s Foreign Investment Administration (FIA).

China’s outbound direct investment (ODI) in 2018 was up 4.2% year-on-year to USD129.83 billion. Financial outbound direct investment totaled USD9.33 billion, skyrocketing by 105.1% from a year earlier, and non-financial ODI grew 0.3% year-on-year to USD120.5 billion. Chinese companies invested a total of USD15.64 billion in 56 Belt and Road countries, an increase of 8.9% year-on-year, accounting for 13% of total ODI.

Shenzhen failed to meet its economic growth target last year due to worse than expected results in key technology sectors but Mayor Chen Rugui remains confident it did enough to overtake Hong Kong and join the ranks of the five biggest city economies in Asia for the first time in its history. The South China boom town has been steadily making ground on Hong Kong in recent years, but its nominal gross domestic product (GDP) in 2017 fell about USD3.4 billion short of a place among the top 5 of Tokyo, Seoul, Shanghai, Beijing and Hong Kong. In 2018, Shenzhen’s GDP increased by 7.5% to about CNY2.4 trillion, Mayor Chen said at the opening of the annual session of the city’s People’s Congress. Its growth target was 8%.

Hong Kong’s 2018 figures, which will not be released until next month, are expected to show GDP growth of about 3.2% to HKD2.86 trillion, which would see it edging out Shenzhen once again. The gap between the two cities’ economies is now so small that fluctuations in exchange rates and methods of calculation can sway the result, although both have sought to play down the rivalry. Shenzhen is known as China’s hi-tech hub and is home to many of the country’s biggest technology companies, including Huawei and Tencent.

While its strategic emerging industries – which includes information technology, biotechnology and new materials – contributed 37% of the 2018 GDP figure, the ratio was down from about 40% in each of the previous two years. The result was also disappointing in terms of Shenzhen’s broader goals, having set itself a target to grow the sector to 42% of GDP by the end of its current Five Year Plan period in 2020. The combined GDP growth among strategic emerging industries slowed to 8.5% in 2018, from 13.6% the year before, although the city still managed to attract 3,000 new hi-tech firms, taking the total to about 14,000. Shenzhen spent about CNY100 billion, or 4.16% of its GDP, on research and development (R&D) last year. The city cut its economic growth target for 2019 to 7%, the South China Morning Post reports.

Beijing will make it easier for foreign talent to obtain housing and gain permanent residency, as a means of attracting more top brains. The city will widen channels to bring in global talent and fuel the city’s efforts to establish a science and technology innovation center, according to a report delivered on by Mayor Chen Jining to the second session of the 15th Beijing Municipal People’s Congress. Chen said that the municipal government will work with multinationals to set up research and development centers, while encouraging universities and colleges to launch innovation centers and support young entrepreneurs.

Last year, the capital formulated 20 new policies to better serve skilled workers and create a favorable environment, including a rule that foreign talent can lead scientific research at the national level, and simplifying entry and exit procedures. A science and technology innovation fund of CNY30 billion was set up in 2017 for new technology incubation, Mayor Chen added. More than 2,300 skilled scientists have been brought in since 2017, and Beijing had provided them public rental housing, said Xu Qiang, Director of the Beijing Municipal Science and Technology Commission. To make them feel at home, seven international hospitals in Beijing launched pilot projects to improve medical services, and three local public primary and middle schools have increased foreign students’ enrollment.

According to the Center for China and Globalization, a think tank based in Beijing, only 1% of the talent in Beijing’s Zhongguancun area is from overseas. Among the overseas talent pool, about 70% are Chinese who have studied abroad and 30% are foreigners. Wang Yaohui, Director of the think tank, said Beijing must accelerate measures to attract foreign talent because that is the only way the capital can make big strides in innovation. Tongzhou district, which will become a new sub-center of Beijing also will attract more international talent to build the district into a high-quality international community, the China Daily reports.