Tuesday, May 21, 2019

The rapid development of China over the past 40 years is due to its long-term persistence on reform and opening up. From 1978 to 2018, China has developed itself from being a poor country of 963 million people with RMB 367.87 billion of GDP (US$ 385 per capita) to a population of 1.395 billion people with RMB 90.03 trillion of GDP (US$ 9769 per capita). As such, reform is the main economic and political affair for China.

The persistence of China on the policies of reforming and opening-up that it put in place for around four decades has brought great results. The reform and opening-up policy of China has its own uniqueness and cannot be imitated by other countries. Firstly, China was a poor country with a population of more than one billion people. Despite of this huge challenge, it was able to form social consensus on reform and opening-up, and persist in its initiatives and actions of reform and opening-up, and getting integrated into the global economic system. These collectively made up the driving force for the Chinese economy to maintain long-term rapid growth. Secondly, China's development coincides with the global economy in the "sellers' world". Globalization functions to allocate resources around the world in order to exploit cost advantages to produce more goods at a cheaper price for the world. China has taken advantage of this scenario to rapidly develop, earning itself the moniker of "world's factory". China's past economic development is mostly based on broad-based manufacturing. In addition, China's social development and state governance are also matched with that of a production-oriented society. When the world remained in a sellers' market, it would be unlikely for China's development model to run into any issues.

It should also be pointed out that other than its own efforts, China's reform and opening-up also depends on the external environment. China's economic system underwent vast changes over the past four decades, and in most of the time it enjoyed relatively peaceful and advantageous development environment. Even the West with ideological differences with China, had welcomed its opening-up. From Deng Xiaoping's visit to the United States, China's accession to the WTO, all the way up to period of the era of Obama administration, China was situated in an external environment beneficial for its reform and opening-up.

However, the possibility of an environment disadvantageous to China's reform and opening-up is gradually emerging under the Trump administration. This is chiefly manifested in the form of U.S.-China trade dispute. Under the anti-globalization trend, the United States has directly launched a trade challenge against China. During the era of globalization, the large-scale tariff wars, science and technology wars, market blockades, and the looming financial wars were unimaginable, yet now all of them are emerging to target China and the Chinese companies. Based on Anbound's observation on the U.S.-China trade conflict, America's suppression of China will happen in three stages. Namely, from trade conflicts, to the 5G conflict and finally leading to a battle in the financial markets. These kinds of seemingly illogical situations where both parties suffer losses appear to rise continuously under the Trump government, and they have largely changed the environment for China's reform and opening-up.

While these economic policies appeared to be irrational, they are actually based on America's strategic thinking. Politically, the United States views China as a long-term strategic competitor and believes that China is challenging its global status. Economically, the U.S. is competing with China for market space under the context of global overproduction. What we want to emphasize is that overproduction is a major issue and forms the overall background of the global economy. Failing to grasp this, we will have a hard time trying to understand why the United States is so aggressive and persistent in its efforts to raise a trade conflict.

In 2015, Anbound's chief researcher Chen Gong has analyzed the mechanism of economic crises in the book Urbanization. He believes that urbanization and infrastructure construction will lead to excessive production and a surge in the injection of money. This in turn will create a large amount of inventory and debt, possibly leading to an economic crisis. The overproduction not only affects the global market relations, but also the competitive relationship between countries in the global market. In the world of overproduction, China having strong manufacturing capabilities and production ability, is a force to be reckoned with. Tristan Kenderdine, research director at Future Risk, once stated that if China moved the entire industrial chain abroad and continued to overproduce steel, aluminum, cement, thick glass plates, and textiles without subsidies from the government, these factories will have difficulties in trying to survive.

The global trade war initiated by the United States against China, Canada, Mexico, the European Union and Japan, though outwardly is a move against China, it is actually a measure to halt global overproduction, which includes the overproduction on China's side. The United States does not want the over-produced goods of the world to occupy and control its market space, especially in the scientific and technological field that it regards as competitive.

In fact, ever since the global financial crisis occurred to date, the global over-production levels have begun to adjust themselves. The global market has begun to re-divide itself, where new market divisions have also emerged. In this round of adjustment, some countries are consciously taking the initiative and action, whereas other countries are passively accepting the re-adjustment. China's current reform and opening-up is facing a major change in the global market environment where the world's overproduction is being constrained. This change has created structural contradictions for China that is used to be the "world's factory". Such contradictions will continue for some time to come. It can be argued that the structural adjustments faced by the Chinese economy are in reality part of the global system adjustments from overproduction.

Final Analysis Conclusion:

The trade war initiated by the United States has significantly changed the external environment of China's reform and opening-up. In appearance, the trade war is targeting China, it is more to act as a brake on global overproduction. Understanding this structural change is crucial for China to come up with policy choices for its future efforts in reform and opening-up.

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