PKU Economist Yao Yang on US-China Tech War and China's Economy
"If they continue to intensify their technology embargo on China ... Then, I believe, we should fight back. We also have trump cards. We could, for instance, ban the export of rare earths to the US."
Today’s edition consists of a long interview with one of China’s top and most outspoken economists, Yao Yang (姚洋). Yao is, amongst other things, a distinguished professor of economics and director of the National School of Development at Peking University. Many of you will already be familiar with some of his views, but perhaps less so with his take on the US’s tech competition with China. The excerpts below are from an interview conducted by Guancha.cn a couple of weeks ago. Yao’s main points are as follows:
On the US-China tech rivalry:
The US’s tech decoupling from China has been exacerbated by overly strong calls within the PRC for technological autonomy.
China is entirely capable of producing low to mid-end chips on its own.
Yao suggests promoting free trade and stronger ties with major powers such as Japan and Europe as a means of countering Washington’s crackdown.
He proposes that Beijing’s policies and subsidies towards the country’s chip industry should treat Chinese and foreign companies equally.
If the US were to extend its chip ban too far, China should retaliate and use the banning of rare earth exports as a potential weapon.
On China’s economy:
If correctly implemented, the “Outline of the Strategic Plan for Expanding Domestic Demand (2022-2035)” could be as significant a turning point as China’s export-led growth strategy was in the 1980s.
China could enter a new cycle of strong economic growth provided the country does not undergo major policy swings.
China’s 2023 inflation target of 3% should be raised (Yao mentions 5%).
Yao reiterates his long-held argument that his government should provide cash handouts to the Chinese people in order to boost consumption.
Beijing should refrain from intervening too much in China’s economy.
Sinification is a newsletter focusing on foreign affairs as viewed from China. It aims to provide key insights from Chinese think-tank and academic circles on a range of international issues.
US-CHINA TECH WAR
Interviewer: Your new book, Common Sense Economics, repeatedly discusses ‘being wary of the interests of those calling for US-China decoupling’. Over the past three years, Sino-US relations have reached a freezing point and there has been a lot of talk about decoupling, but you have always remained relatively optimistic. Judging from the messages that came out of the recent meeting between General Secretary Xi and Joe Biden, as well as a series of moves such as the German Chancellor's visit to China, [this] may all fit in very well with your predictions. Do you think that the Chinese economy’s external environment will improve in 2023?
Yao Yang: “‘Being wary of the interests of those calling for US-China decoupling’. This is something I said when the epidemic first broke out in China in 2020. At that time, there were many people [in China] who felt that since some Western countries wanted to decouple from China that we should therefore prepare ourselves to do the same. At that point, the United States had already launched its tech rivalry with China. A group of people in China then started saying that we must become self-reliant and develop our own autonomous technologies, particularly high-end chips. At that time, I felt that we should be wary of the interest groups that were behind this [要警惕这背后有利益集团].”
“Looking back, my assessment was [indeed] correct: in the summer of 2022, the state investigated the suspected corruption surrounding [China’s] chip ‘Big Fund’ [芯片大基金], in which high-ranking officials were [also] involved. We all revere scientists, but they are also human beings. This means that they also have an incentive to speak out in favour of their own interests. Of course, we cannot say that because of this, people who are working hard in favour of [achieving] autonomous innovation and ‘Chinese chips’ [‘中国芯’] are therefore bad people. The ‘decoupling theory’ is a so-called self-fulfilling prophecy that becomes more and more likely to materialise the more it is voiced.”
“We have a lot of exchanges with the American intellectual community. Our Chinese scholars would say: ‘You Americans can't play [玩不起]. When you realise that Chinese technology has become too powerful, you try to choke us out [就卡我们脖子].’ To which they would respond by saying: ‘Don't just blame us. You Chinese are the ones who want to decouple from us.’”
“When we were touting autonomous innovation in a high-profile manner [高调宣传], the US assumed that China wanted to develop its own autonomous technologies and [in so doing] exclude other countries, that is, to decouple from us [I’m assuming he means from the US]. This made the US determined to reduce its dependence on China and lure manufacturing back to its shores. In turn, China would reinforce its perception that the Americans are out to get us. This is a process that leads to a mutual deepening of [such] conflicting views [这是一个矛盾互相加深的过程].”
Interviewer: “So you mentioned the need not to over-exaggerate [不要过分夸大] the US’s technology embargo? You also mentioned that regarding the US’s tech embargo, such as the one placed on [China’s] chip industry, we [still] have a trump card [杀手锏], why?”
Yao Yang: “Yes. Over-exaggerating the US’s technology embargo is then followed by even more dramatic industrial policies [更加高调的产业政策], and such industrial policies have spillover effects. In fact, we are involved in import substitution in many sectors. This is a normal process. Even if we were not to makes these calls [for autonomous innovation], our country's technology is developing and import substitution is bound to take place.”
“The US-China tech decoupling is bad for the whole world, bad for China and also bad for the United States. The US’s embargo against us in the high-tech field, closing in on us every step of the way, has already reached a point of irrationality [已经到了失去理智的地步了].”
“Because the chip industry relies on sales volumes to win the race. If sales do not reach a certain level, innovation then becomes extremely difficult. The US is now asking US companies to cut off chip supplies to China. This is tantamount to cutting off the revenue streams of their own businesses. Chinese technology companies will of course [also] be hurt.”
“Starting in August this year, the Biden administration banned US companies from selling high-end chip manufacturing equipment to China below 14 nanometres. Now the US is discussing whether the scope of this ban should be extended further to 40nm or to the even lower end of 80nm. If the Americans really do want to take on the sub-80nm chip manufacturing industry, this would imply that the US wants to completely bring down the whole of China's chip industry. However, if the United States were really to do this, I firmly believe that we are entirely capable of producing low to mid-end chips on our own. In which case, the US’s hopes of cordoning off China would be dashed.”
“So how should we respond to the US’s tech embargo? I think we should make a point of pursuing free trade and mutual beneficial integration, and we should strive to get other countries such as Japan and Europe to stand on our side and make them unable to do without us [让他们离不开我们]. China is a supporter of globalisation and, in its actions, of free trade. We have a huge domestic market and welcome companies from all over the world to invest in China. We develop technology in the same way, not behind closed doors, but by getting all countries to take part [in this endeavour] so that none are able to do without us. At the end of the day, the US would have to struggle a bit in order to isolate China.”
“In fact, over the past few years, China has shown a lot of patience and not retaliated amidst the US’s technology embargo. But the Americans bully people too much [欺人太甚]. If they continue to intensify their technology embargo on China, for example by demanding that the sale of all chip manufacturing equipment below 80 nanometres be banned to China, there would be no room left for us to retreat [那我们退无可退了]. Then, I believe, we should fight back. We also have trump cards [杀手锏]. We could, for instance, ban the export of rare earths to the US.”
“However, in dealing with the US-China tech war, I believe that China should take the initiative in striving for a better environment, one that is conducive to China's development.”
“When the US and the Soviet Union were fighting for supremacy and reached a “You die, I live” type of extreme [mentality], they were still both able to sit down and talk. Sino-American relations have not yet reached that extreme. Even from the Americans’ perspective, they still want to cooperate with China. Therefore, there is room for China and the US to sit down and negotiate.”
“So can China and the United States [place themselves] on an equal footing and talk rationally to each other about how they should compete in the high-tech sector? For example, the US cannot ban American companies from selling civilian goods to China, and China's policies and subsidies towards its chip industry could treat Chinese and foreign companies equally etc. I think there is such a possibility.”
Interviewer: Following the 2008 financial crisis, the most discussed topic in China was that China's export-led economy, which relied on foreign demand, had come to an end. So does this “Outline of the Strategic Plan for Expanding Domestic Demand (2022-2035)” have the same significance in terms of being a turning-point as the export-oriented strategy that was introduced in the 1980s?
Yao Yang: “I think that, if this were truly to be carried out, it could have a similar effect.”
Interviewer: On 3 December 2022, you and six other economists published “Proposals for the liberalisation of economic activities", which made a total of seven key recommendations. Not long after, on 6 December, the top central decision makers discussed China's economy in 2023 and on 7 December introduced ten new prevention and control measures. Soon after, the Central Economic Work Conference contained several major tasks that included the recommendations you had made. Was it your advice that caught [their] attention? Or was it the severe economic situation at the time that made paying special attention to the economy and easing the [zero-COVID] prevention and control policies the consensus? What was the reason?
Yao Yang: “All six of us were relatively aligned in our thinking, especially as the epidemic controls were still quite stringent at that time, so we wanted to see a gradual opening up. Whether our suggestions were eventually absorbed by the Central Economic Work Conference, that we don't know. But I think our recommendations were probably what most people wanted to see. So from this point of view, the Central Economic Work Conference was also incorporating the voices and ideas of all levels of society, and we were just one of many voices.”
Kudos to Zichen Wang and his particularly insightful newsletter Pekingnology for providing a translation of this important piece by Yao and colleagues on the day it was published:
Interviewer: "In your seven proposals, you mentioned the need to ‘raise the deficit rate in 2023 and encourage the resumption of production and work in all sectors by launching a new round of activities to expand domestic demand, with an emphasis on [building] new infrastructure’. However, in a later discussion with Zeng Guang, you clearly suggested that expanding domestic demand was mainly about stimulating consumption rather than investment, and that the government should hand out money directly to the people. This suggestion was very controversial. The counterargument is that: first, the people don't have money, and second, when they do have money, they are afraid to spend it and will turn it into savings. Evidence shows that the savings rate went up after the epidemic. How do you see this?
Yao Yang: “There has indeed been some controversy [over this]. Many people think that handing out money is not a good idea because once the government hands out money, some people will turn it into savings, and so ultimately consumption won’t go up. This type of argument is inconsistent with findings by research.”
“I believe this [argument] is still overlooking the current new consumption trend of Chinese people, especially young people. Many young people are now borrowing money to spend and this is how school loans have become popular.”
Interviewer: In [your book] ‘Common Sense Economics’ there is a speech from 2021 in which you say that a new boom period for the Chinese economy is coming and mention several reasons for this, including the fact that the restructuring of the Chinese economy over the past decade has now been completed. Do you still stand by this view?
Yao Yang: “I still stand by this view. I think people's current expectations of China's economic growth are too low. China's potential growth rate is still at 5.5%, so it is entirely possible that the Chinese economy will enter a new boom cycle in the next few years, provided there are no major policy fluctuations. The main reason for this is that China's economic growth has been falling since 2012 and the Chinese economy has been undergoing structural changes. In 2016, China's economy enjoyed a small upswing, but the brief economic recovery did not last, and then there was the three-year-long epidemic. During the past five or six years, the Chinese economy has been running at a low level [中国经济一直处在低位运行]. Economies work in cycles – when there are lows, there will be rises [有低谷就会有上升].”
Interviewer: You are quite optimistic about the Chinese economy. So if China's economy is to take a new turn next year and enter a new boom period, what are the risk factors that we need to pay attention to?
Yao Yang: “I am still relatively concerned about [potential] policy swings. [That is,] the government notices that the economy is somewhat overheated, that real estate is up, and [then decides] to start macro-regulating again [又开始宏观调控]. Other economists have similar concerns.”
“I reckon that we will still be setting ourselves an inflation target of 3% in 2023. In my opinion, 3% is too low. Could we tolerate an inflation rate of 5%? Doing so would send a signal to everyone that the Chinese government is able to tolerate a slightly overheated economy, given that the economy has been ‘overcooled’ for so many years. When the economy is in an upward phase, we should stay on the sidelines for a longer period of time [应该多观察一段时间] and not be too quick to introduce tighter policies, regulations and controls, [thereby] repeating the mistakes made in 2021 with the overhaul of [China’s] real estate and online platforms [i.e. tech companies]. This dealt a blow to, and weakened, market confidence and economic forecasts.”