Xi Wants to Play Nice with Neighbours - China's White Paper on Trade with US - Li Wants to 'Create Demand with High-Quality Supply'
Hi folks,
I’m on a break this week, so the newsletter will be inconsistent. But today, there were a few important developments to cover as we enter a new trading paradigm. Also, these are likely to be among the lead reports in tomorrow’s paper anyway.
Cheers,
Manoj
I. Neighbourhood Work Conference
First, a rare conference was held in Beijing today. The Xinhua reports (English report) that Xi Jinping attended the central conference on work related to neighbouring countries. Li Qiang, Zhao Leji, Wang Huning, Cai Qi, Ding Xuexiang, Li Xi, and Han Zheng also were in attendance. The timing of this conference is really interesting. The first conference related to neighbouring countries since Xi took charge was in 2013. This meeting is the first since then. If you are interested, in late 2023, China released a document titled: “Outlook on China’s Foreign Policy on Its Neighborhood In the New Era”. The report below seems to suggest that Beijing wants to play nice with its neighbours. Actions will eventually be the guide, but I guess Delhi should take this as a positive signal too.
Anyway, as per the report, in his speech, Xi “systematically summarised the achievements and experience of China's neighbourhood work in the new era, scientifically analysed the current situation, and outlined the goals, tasks, ideas and measures for the next phase of neighbourhood work, and emphasised the need to focus on building a community of shared future in the surrounding region.”
“The conference highlighted that China’s vast territory and long borders make its neighbourhood a vital foundation for national development and prosperity, a key front for safeguarding national security, a priority area in the country’s overall diplomacy, and a crucial link in building a community with a shared future for humanity. The conference called for viewing neighbouring regions through a global perspective and strengthening the sense of responsibility and mission in advancing China’s neighbourhood work. The meeting believes that since the 18th Party Congress, under the strong leadership of the Party Central Committee with Comrade Xi Jinping as the core, principles of amity, sincerity, mutual benefit and inclusiveness in its neighbourhood diplomacy, advocating for the building of a community with a shared future with neighbouring countries. Guided by head-of-state diplomacy, China has worked with neighbouring countries to deepen all-around cooperation, strengthen exchanges in various fields, and maintain peace and stability, thereby securing historic achievements and transformation in neighbourhood work. We must adhere to and make good use of the experience formed through exploration in practice.”
“China’s relations with its neighbouring countries are currently at their best in modern times, and are also entering a critical phase where regional dynamics and global transformations are deeply intertwined. It is essential to adhere to the guidance of Xi Jinping Thought on Socialism with Chinese Characteristics for a New Era, closely focus on the central tasks of the Party and the country, coordinate the domestic and international situations and the two major issues of development and security, hold high the banner of a community with a shared future for mankind, take the construction of the ‘five major homes’ of peace, tranquility, prosperity, beauty and friendship as the common vision, take good-neighbourliness, secure neighbourhood, prosperous neighbourhood, sincerity, amity, mutual benefit, inclusiveness, and shared destiny as the concepts and guidelines, uphold the Asian values of peace, cooperation, openness and inclusiveness, use high-quality Belt and Road cooperation as the main platform, and pursue the Asian security model that features sharing weal and woe, seeking common ground while shelving differences, and prioritising dialogue and consultation as strategic support, join hands with neighbouring countries to jointly create a better future. 会议指出，当前我国同周边关系处于近代以来最好的时期，同时也进入周边格局和世界变局深度联动的重要阶段。要坚持以习近平新时代中国特色社会主义思想为指导，紧紧围绕党和国家中心任务，统筹国内国际两个大局、发展安全两件大事，高举人类命运共同体旗帜，以建设和平、安宁、繁荣、美丽、友好“五大家园”为共同愿景，以睦邻、安邻、富邻、亲诚惠容、命运与共为理念方针，以和平、合作、开放、包容的亚洲价值观为基本遵循，以高质量共建“一带一路”为主要平台，以安危与共、求同存异、对话协商的亚洲安全模式为战略支撑，携手周边国家共创美好未来.
The meeting stressed that to build a community of shared future for neighboring countries, it is necessary to:
consolidate strategic mutual trust with neighboring countries, support regional countries in steadily pursuing their own development paths, and properly manage contradictions and differences;
deepen development integration, build high-level interconnectivity networks, strengthen cooperation in industrial and supply chains;
jointly maintain regional stability, carry out security and law enforcement cooperation, and address various risks and challenges;
expand exchanges and communication, and facilitate personnel exchanges.
会议强调，构建周边命运共同体，要与周边国家巩固战略互信，支持地区国家走稳自身发展道路，妥善管控矛盾分歧；深化发展融合，构建高水平互联互通网络，加强产业链供应链合作；共同维护地区稳定，开展安全和执法合作，应对各类风险挑战；扩大交往交流，便利人员往来。
The meeting also called to “deepen institutional and mechanism reforms and improve the foreign-related legal and regulatory system.”
II. Trade War: New White Paper & China’s Responses
Second, the State Council has issued white paper “to clarify the facts about China-US economic and trade relations, and elaborate the position of the Chinese side on relevant issues.” The paper makes four broad arguments:
First, China-US trade and investment are substantive, and mutually beneficial. Of course, in doing so, it points to areas that can become pressure points. It also makes the argument that data show that the US enjoys a services surplus with China and that China-US trade is generally becoming more balanced.
Second, China has abided by the Phase-1 trade deal that it had struck with Trump 1.0 in January 2020. In fact, it is the US that has reneged on its commitments under that deal.
Third, while China has been opening, improving the business environment and being an all-round good guy, the US has been protectionist, unilateralist, suppressing countries using export and other restrictions, using human rights and fentanyl as issues to coerce, generalising the concept of national security, abusing trade remedy measures, etc.
The tariffs are a really bad idea; they do five types of different damages. And although the US is fundamentally unilateralist and hegemonic, why not think of “peaceful coexistence” of some G2 variety? I’ll share a specific quote on this below:
“History tells us that cooperation between China and the US is of great mutual benefit, while confrontation will bring nothing but damage to both sides. Strengthening China-US cooperation is in line with the expectations of the whole world. The global economy can realize faster growth if global markets are fair, open, transparent and rule-based, which cannot be achieved without China-US cooperation. Global trade rules must be updated to respond to evolving world economic trends, which also needs to be led by China-US cooperation. With new technologies and products such as AI, biotechnology, and quantum computing constantly emerging and evolving, China-US cooperation is a must for setting relevant rules and maintaining order, preventing and controlling potential security risks, and ensuring peaceful use rather than misuse of technology.”
Now for select quotes and data points from the paper:
It says that US tariffs and restrictions “reveal the isolationist and coercive nature of US conduct. They are in conflict with the principles of the market economy, run counter to multilateralism, and will have serious repercussions for China-US economic and trade relations.”
It also advises that “it is crucial to respect each other’s core interests and major concerns, and find proper solutions to resolve the issues through dialogue and consultation.”
The paper informs that:
“US goods exports to China reached US$143.55 billion” in 2024.
“China is an important export market for US agricultural products, integrated circuits, coal, liquefied petroleum gas, pharmaceuticals, and automobiles. China is the largest export market for US soybeans and cotton, the second-largest export market for integrated circuits and coal, and the third-largest export market for medical devices, liquefied petroleum gas, and automobiles. UN data shows that in 2024, China was the destination for 51.7 percent of US soybean exports, 29.7 percent of its cotton exports, 17.2 percent of its integrated circuit exports, 10.7 percent of its coal exports, 10.0 percent of its liquefied petroleum gas exports, 9.4 percent of its medical equipment exports, and 8.3 percent of its passenger motor vehicle exports.” — Note: Clearly, these are sectors that are going to take somewhat of a hit now.
“According to the US Department of Commerce (USDOC), between 2001 and 2023, two-way trade in services between China and the US expanded from US$8.95 billion to US$66.86 billion, representing a seven-fold increase. China’s statistics show the US as its second-largest trade partner in services in 2023, while US data lists China as its fifth-largest services export market. The US stands as the largest source of China’s deficit in service trade, with the deficit generally exhibiting an upward trend. According to the USDOC, from 2001 to 2023, US service exports to China expanded from US$5.63 billion to US$46.71 billion, an 8.3-fold increase. The US annual service trade surplus with China expanded 11.5 times to US$26.57 billion (Figure 2). In 2019, the number soared to US$39.7 billion. In 2023, China continued to be the biggest contributor to the US service trade surplus, representing roughly 9.5 percent of the total. China’s service trade deficit with the US is primarily concentrated in three areas: travel (including education), intellectual property royalties, and transportation”.
“According to the data of the BEA, USDOC, China’s share of the total US deficit of trade in goods has fallen in each of the past six years, from 47.5 percent in 2018 to 24.6 percent in 2024, while the US trade deficit with other countries and regions has increased substantially in the same period.”
“According to the statistics of the Chinese Ministry of Commerce (MOFCOM), by the end of 2023, the actual accumulated amount of US investment in China was US$98.23 billion. In 2023, the US set up 1,920 new enterprises in China, with an actual investment of US$3.36 billion, up 52 percent from the previous year … The statistics released by MOFCOM show that by the end of 2023, China’s direct investment in the US had reached roughly US$83.69 billion, covering 18 sectors of the national economy. Chinese companies have established over 5,100 overseas enterprises in the US, with more than 85,000 local employees. China has also made a significant financial investment in the US. According to the US Department of the Treasury, as of the end of December 2024, China owned US$759 billion of US treasury bonds, as the second-largest foreign creditor of the US.”
Later on the issue of subsidies, the paper says the following. It does so, however, without sharing data; also, it offers conditional dialogue at the WTO as an option:
“Upon joining the WTO, China pledged to refrain from maintaining or granting export subsidies for agricultural products and made commitments regarding agricultural domestic support and industrial subsidies that surpass those of the average developing members. Since its accession, China has strictly adhered to all WTO subsidy discipline and promptly submitted subsidy notifications to the WTO. In June 2023, China submitted the 2021-2022 subsidy policy notification, involving 69 central and 385 local government subsidy policies, covering all provincial-level administrative regions. In July 2024, China submitted its notifications regarding domestic support for agriculture for the year 2022, aligning its notification year with those of major developed members such as the US (market year 2022/2023) and the EU (market year 2021/2022). China is committed to establishing and improving a fiscal subsidy system in line with international practice, and promoting the transformation of industrial policies from differentiated and selective to inclusive and functional. The Chinese government prioritizes market-oriented and indirect guiding measures, such as public services, technical standards, and skills training to support areas of market failure, including technological research and innovation, the development of small and medium-sized enterprises, green energy efficiency, and the establishment of public service systems. By offering inclusive support across industries, these measures aim to stimulate the vitality of market entities, promote fair competition, and reinforce the socialist market economy system. For instance, it implements preferential policies in personal income tax, corporate income tax, resource tax, property tax, and urban land use tax for eligible self-employed businesses and small enterprises with slim profit margins. To better leverage the role of subsidies in promoting development, China is open to discussions on industrial subsidies within the framework of the WTO. However, such discussions should define their focus, objectives, format, and boundaries in order to prevent them from devolving into sweeping discussions on state intervention or industrial policy, and, most importantly, to ensure they respect the economic systems and development paradigms of member states.”
On “reciprocal tariffs” it says:
The tariffs will increase inflationary pressure in the US.
The tariffs will weaken the US industrial base.
The tariffs will aggravate panic in the financial market.
The tariffs will increase the risk of US economic recession.
The tariffs will distort the allocation of global market resources, undermine the foundations of global cooperation, and affect the long-term steady growth of the global economy.
Also, in response to the US adding additional 50% tariffs on Chinese goods, after China had responded with 34% tariffs to Trump’s Liberation Day tariff hikes, today Beijing announced that it will impose additional tariffs on American products. This will take Chinese tariffs to 84 percent, effective from 12:01 p.m. on Thursday.
In addition, the Ministry of Commerce has added 12 US companies to China’s export control list. Effective from 12:01 p.m. Thursday, the export of dual-use items to these 12 companies will be prohibited, while any ongoing related export activities must stop immediately. The companies are:
American Photonics
Novotech, Inc.
Echodyne
Marvin Engineering Co., Inc.
Exovera
Teledyne Brown Engineering, Inc.
BRINC Drones, Inc.
SYNEXXUS, Inc.
Firestorm Labs, Inc.
Kratos Unmanned Aerial Systems, Inc.
Domo Tactical Communications）
Insitu, Inc.
And, six American companies have been added to the Unreliable Entities List. “These companies, in disregard of strong opposition from China, have in recent years either participated in arms sales to Taiwan or engaged in so-called military technology cooperation with Taiwan, seriously undermining China's national sovereignty, security and development interests, a spokesperson for the Ministry of Commerce said in a statement. China holds the six firms accountable for their unlawful activities, in accordance with relevant laws and regulations, according to the statement.” The companies are:
Shield AI
Sierra Nevada Corporation
Cyberlux
Edge Autonomy Operations
Group W
Hudson Technologies
Finally, as far as the Chinese stock markets are concerned, there’s a concerted effort underway to stabilise them. Reuters reports:
Top Chinese brokerages have pledged to help steady domestic share prices in a concerted effort, the Shanghai bourse said, and scores of listed companies unveiled stock buying plans, as the local market reels from an escalating trade war. The Shanghai Stock Exchange said late on Tuesday it held a meeting with 10 brokerages to stress the importance of stabilising markets in the face of external shocks…Separately, more than 100 Chinese listed companies have published announcements regarding share purchases or buybacks to bolster confidence in a market that slumped to six-month lows this week.”
III. Li Meets Entrepreneurs
Finally, Li Qiang presided over a symposium with economic experts and entrepreneurs. Among the attendees, Zhang Bin, Li Xunlei, Shen Jianguang, Wan Min, Zheng Jin, Peng Zhihui, and Wang Zuan spoke. The report says that they agreed that “since the beginning of this year, the overall operation of China’s economy has been stable, showing a trend toward new and positive development, and the new drivers of growth are accelerating and expanding. Although changes in the external environment have brought many difficulties, China’s economy has many advantages, strong resilience, and great potential, and its development prospects remain favorable in the long term. Everyone also put forward opinions and suggestions on how to respond to external shocks and promote sustained economic improvement.” 座谈会上，张斌、李迅雷、沈建光、万敏、郑津、彭志辉、王钻等先后发言。大家认为，今年以来，我国经济运行总体平稳、向新向好，发展新动能加快壮大。虽然外部环境变化带来不少困难，但我国经济优势多、韧性强、潜能大，发展前景长期看好。大家还就应对外部冲击、推动经济持续向好提出意见建议.
After carefully listening to the speeches of experts and entrepreneurs, Li Qiang said that this year’s situation is relatively special. Under the strong leadership of the Party Central Committee with Comrade Xi Jinping as the core, we have calmly and steadily responded to various risks and challenges, and the economy continued its recovery and improvement trend in the first quarter. At the same time, we must clearly see that external shocks have put a certain amount of pressure on the stable operation of China’s economy. We have already made full assessments of this and are well prepared to deal with various uncertainties. China’s development has always moved forward by overcoming difficulties and challenges. As long as we remain confident, united in struggle, and firmly manage our own affairs well, we will certainly be able to turn crises into opportunities and promote long-term, steady development of China’s economy. 在认真听取专家和企业家发言后，李强说，今年的形势比较特殊，在以习近平同志为核心的党中央坚强领导下，我们沉着冷静应对各种风险挑战，一季度经济运行延续回升向好态势。同时要清醒看到，外部冲击对我国经济平稳运行造成一定压力。我们对此已经作了充分估计，做好了应对各种不确定因素的准备。我国的发展从来都是在克服困难挑战中前进的，只要我们坚定信心、团结奋斗，坚定不移办好自己的事，就一定能够化危为机，推动中国经济行稳致远.
Li Qiang emphasised that, in the face of new changes in domestic and international situations, it is especially important to do a good job in economic work for the second quarter and beyond. All tasks must continue to be strengthened and further enhanced. We must implement a more proactive and effective macro policy, take early actions to promote the rapid implementation and effectiveness of existing policies, and introduce new incremental policies in a timely manner based on the needs of the situation, using strong and effective measures to respond to the uncertainties of the external environment. We must expand and strengthen the domestic circulation, take expanding domestic demand as a long-term strategy, increase efforts to stabilize employment and increase income, accelerate the release of service consumption potential while doing a good job in replacing old consumer goods with new ones, promote the integrated development of scientific and technological innovation and industrial innovation, and lead and create demand with high-quality supply. We must fully stimulate the vitality of various market entities, thoroughly implement supportive policies, focus on standardising law enforcement related to enterprises, further resolve problems such as overdue payments, difficulties and high costs in financing, and sincerely help enterprises solve development difficulties, striving to provide a better development environment and policy services for enterprises.” 李强强调，面对国内外形势的新变化，做好二季度和下一步经济工作尤为重要，各项工作都要持续加力、更加给力。要实施好更加积极有为的宏观政策，靠前发力推动既定政策尽快落地见效，根据形势需要及时推出新的增量政策，以有力有效的政策应对外部环境的不确定性。要做大做强国内大循环，把扩大内需作为长期战略，加大力度稳就业促增收，在抓好消费品以旧换新的同时加快释放服务消费潜力，推动科技创新和产业创新融合发展，以高质量供给引领需求、创造需求。要充分激发各类经营主体活力，深入落实各项支持性政策，着力规范涉企执法，进一步解决账款拖欠、融资难融资贵等问题，实打实帮助企业解决发展中的困难，努力为企业提供更好的发展环境和政策服务. (Note: This is quite an important paragraph. The signal that Li is sending is that China will be doubling down on its strategy of stimulating the supply-side rather than actually trying to boost domestic demand.)
Li hoped that entrepreneurs will deeply cultivate patriotism and dedication to the nation, actively respond to changing situations to promote development, strengthen and improve their enterprises, and make more contributions to the overall development of the country. He also hoped that scholars and experts will provide more forward-looking and constructive opinions on new situations and new problems in economic operation. 李强希望广大企业家厚植家国情怀，积极应变局促发展，做强做优做大企业，为国家发展大局多作贡献。希望专家学者发挥专业优势，围绕经济运行中的新情况新问题多提前瞻性、建设性意见.