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Committee on China-U.S. Dialogue with Dr. Nicholas R. Lardy

On January 24th, the Committee on China-U.S. Dialogue hosted the third of a six-part lecture series in the UW Law School. Dr. Nicholas R. Lardy, Anthony Solomon Senior Fellow at the Peterson Institute for International Economics and former director of the Jackson School, along with Professor David Bachman from the Jackson School, Professor Susan Whiting from the Department of Political Science, and Professor Dongsheng Zang from the School of Law gathered together to discuss the ongoing China-U.S. trade dispute and the prospect of Chinese economy.

In the first part of his lecture, Dr. Lardy focused on economic disputes between China and the U.S., arguing that the Trump administration’s obsession with trade deficits and forced technology transfer are based on exaggerated and often biased reports that blame China. Dr. Lardy demonstrated that the U.S. trade deficit mainly comes from the low savings, high investment structure of the U.S. economy, and that 75% of the technology transfer from U.S. companies to China are invested in wholly foreign-owned firms, which is also gradually playing a much smaller part in China’s economic growth. These disputes have led a certain group within the Trump administration to favor a decoupling of U.S.-China economic relations.

In the second part, Dr. Lardy pointed out the structural issues of the Chinese economy. The unbalanced subsidy to state-owned enterprises (SOE) with low efficiency and low productivity is hurting the Chinese economy and private firms. By showing new data on the low return on assets of the SOEs and the decreasing profitability of the SASAC-owned state companies, Dr. Lardy claims that Chinese President Xi Jinping’s insistence on “making the SOEs bigger” is dragging down the overall growth rate of Chinese economy. In addition, Dr. Lardy also spoke on how China’s economic reform process is being hindered by the sweeping anti-corruption campaign within the party, since the latter has taken the lead in the party’s policy priority.

In the end, Dr. Lardy concluded that resuming market-oriented reform, including eliminating subsidies to state companies and modifying industrial policies, is essential for China’s further integration into the global economy and for legitimizing President Xi Jinping’s claim that China will provide leadership for a more globalized economy.

Professor David Bachman during the comments portion of the discussion.

During the comments section, Professor David Bachman stressed the importance of ideology and leaders in the deterioration of China-U.S. relations, and how the Trump administration’s perception of China’s economic achievements have contributed to the growing security dilemma between the two powers. Professor Bachman also made it clear that China’s state dominance and control in its economy has more “institutional continuity than policy continuity.”

Professor Susan Whiting raised three questions and some possible explanations to Dr. Lardy and the audience. First, what explains Xi Jinping’s support for state economy? Second, will private firms seek more support from shadow banking, as support from the state banking system shrinks, and what does it mean for private firms as the state is now cracking down on shadow banking? Third, should we think about the Belt and Road Initiative (BRI) as a way to bolster demand for SOEs, and what role does it play in the resurgence of the state sector in Chinese economy?

The last discussant, Professor Dongsheng Zang, also came up with a few questions concerning the differences on ownership between Chinese private firms and SOEs, their performances in the global market, the efficiency of state-owned banks, and the latest developments of the so-called “China Model”.

Dr. Lardy briefly answered the comments and questions from three discussants, pointing out that strengthening the state economy is a means of consolidating the state’s control and power within the Chinese economy. Shadow banking, according to Dr. Lardy, is also playing an increasingly important role in supporting the private sector; while risky, the economic outcomes of reform in the state banking system remains to be seen. Finally, Dr. Lardy believed that although private firms cannot be immune to state influence, they are still in a much better position when it comes to competitiveness compared to SOEs. He used examples of Huawei and Alibaba to prove his point.

The Committee on China-U.S. Dialogue will hold the fourth dialogue of the six-part lecture series on February 19th at the UW Law School in room 138 from 4 to 6 pm. To commemorate the 40th anniversary of US-China relations, this event will host Shi Yinhong, Professor of International Relations at Renmin University of China and Counselor for the Chinese State Council, in a discussion with four Jackson School regional experts on the China-U.S. Rivalry in the recent past, present and future.