Gerard Lyons on China's Robust Growth & Trade Tensions with the United States

CGTN Europe

CGTN Europe speaks to a distinguished economist Dr. Gerard Lyons about China's solid Q1 growth figures and the rising trade tentions with the United States.

Transcript

00:00Let's talk to the distinguished economist and senior independent director of the Bank of China,

00:05Gerard Lyons. Gerard, welcome back to the program. Good to see you. Well, strong growth in China in

00:09the first three months of this year, before, of course, U.S. tariffs kick in in earnest.

00:16What's your reading of those numbers? Well, they were solid growth figures. On the positive,

00:23it's now the second successive quarter that the growth figures in China have been robust

00:28are much better than expected. In the fourth quarter of last year, they were 5.4%.

00:33This quarter, the first quarter, 5.4%. Retail sales were up quite significantly in March,

00:39which was also another positive. But despite that, and as your correspondent said,

00:44there's undoubtedly been some front loading with exporters increasing production and exports in March

00:50ahead of the tariffs. Even though the tariffs were much worse than expected, it was well known that

00:56there would be an announcement of higher tariffs. And also, perhaps also worrying,

01:00is that urban unemployment in the 31 biggest cities in China rose between the end of last year,

01:07when it was 5%, and is now 5.3% in the first quarter. So they were robust figures,

01:13but probably boosted ahead of the tariffs. And there are some underlying worrying features,

01:19such as the rise in unemployment as well. China's appointed this new trade envoy.

01:24How much difference does it make to have those eyeball-to-eyeball relationships in this difficult

01:31relationship? Well, clearly, it's important. And also, as I understand it, the new representative

01:38is a legal expert, which highlights the legality involved here. I think the real challenge,

01:44though, is this, that normally good economics is good politics. But when it comes to tariffs,

01:50the economics and the politics pull in different directions. We know from history, from our economic

01:56models, and also basically from what we've seen in terms of the theory of economics, that tariffs are

02:05bad economically. And also, if you respond with higher tariffs, that's also bad economically.

02:11But the politics in America's case is seen as justifying the tariffs, and the politics in

02:17China's case is seen as justifying the retaliation. So we need to see tariffs significantly reduced

02:24to mitigate any of those underlying worrying features. So while it's good that there are

02:29negotiations going on, the scale of the tariffs at the moment being proposed suggests that we need

02:35to see a sea change to get back to where we really need to be.

02:39The World Trade Organization outlook for global trade deteriorating sharply due to the tariffs.

02:46For those of us who are not distinguished economists, what are the knock-on effects going to be to

02:52ordinary people, ordinary consumers around the world?

02:57Well, there are two key issues here. First, the direct impact, and then second, how policy responds.

03:04The direct impact of the two biggest economies, China and the United States, being in a trade war,

03:10is that, as the World Trade Organization said, world trade will be hit. Therefore, world growth will slow.

03:17That will dampen employment opportunities, particularly in the export sectors.

03:22Companies who are directly involved in exports, say, to the States, or in America's case, to China, will be impacted.

03:30But also ASEAN and Southeast Asia, these are what's called high beta regions.

03:35They tend to do well when the world economy is growing strongly.

03:38They, too, will suffer. So the direct impact will be world growth will be weaker.

03:43That will affect employment opportunities, and that might hit some people directly by being out of work,

03:49and there's less income to go around.

03:50The second effect, though, is how countries respond in terms of policy.

03:55In terms of China, I would expect to see targeted fiscal policy aimed at boosting consumption.

04:02That's using government spending to actually help, and government subsidies.

04:07And then, also, I would expect, in China's case, to see unconventional monetary policy,

04:11pushing interest rates lower, and actually maybe doing a bit more in terms of the Chinese central bank

04:19buying government bonds to try and keep interest rates low well into the future.

04:25So, globally, the direct impact is not good, but that can be mitigated slightly,

04:31taking away some of the damage if governments across the globe respond.

04:34Unfortunately, global debt is already very high.

04:39That reduces the room for manoeuvre of many countries.

04:43And the ability to cut interest rates will very much depend on what happens to inflation.

04:48So, in China's case, because inflation is low, they do have the ability to use monetary policy,

04:53namely interest rates and the central bank buying government debt to do a bit more.

04:58So, people naturally will be worried,

05:00that may be mitigating that is the fact that policy can also respond to try and undo some of the damage.

05:07Gerard Lyons, good to see you.

05:08Thanks so much for coming back on the programme.

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