US trade tariffs on China and the ban on controversial telco Huawei have sparked a wave of investment in research and development from Chinese businesses as they rush to innovate to protect future growth.
Wendy Liu, the head of China strategy at leading economic firm UBS, said the trade war, along with ongoing issues between the US and China over intellectual property “really woke up Chinese entrepreneurs”.
“Previously they thought they could just procure things from different parts of the world and I think the [US] situation and in particular the Huawei situation made them more aware of their own vulnerabilities,” Ms Liu said during a media roundtable at UBS’ Greater China Conference in Shanghai on Monday.
A study conducted by UBS that collected data from 500 Chinese companies found there was a new focus on directing funding to research and development and capital expenditure at the expense of travel, entertainment and marketing budgets. However, she warned the benefits for Chinese businesses would not be apparent for several years.
“I think it’s early days because it takes time. There’s nothing magical about innovation, it takes money and time. But we do see a shift in focus and a lot of [research and development] we are seeing are enhancements to manufacturing capability,” she said.
“But certainly, I think people are far more aware of the gaps and are working on the gaps. So, the test is three years or five years from now.”
While Chinese businesses are looking at ways to offset the tariffs, the trade war is also dragging the US economy down, according to UBS chief US economist Seth Carpenter, who blamed the tensions as the main reason he was “somewhat pessimistic about the near-term outlook for the US economy”.
He has forecast gross domestic product (GDP) growth to drop to about 0.6 per cent for each of the first two quarters of this year before rising to 1.7 per cent in the third quarter.
“[It’s] not the end of the world, not a recession, but a substantial slowdown that lasts about a couple of quarters,” Mr Carpenter said, adding it was “unanticipated” by most of the market at the moment.
One of the reasons for his gloomy outlook is that the ‘phase one’ deal between China and the US to cut tariffs in half won’t be implemented until about February.
Mr Carpenter said it was “plain false” that goods affected by the tariffs could be imported from elsewhere, with data showing only a portion of intermediate goods could be sourced from elsewhere.
“If you have these goods that are necessary to produce things and you’re not importing them and you’re not producing them domestically, you’re kind of stuck,” he said.
For this reason, he said the phase one deal was “too little, too late” with the effect of the tariffs working through the economy at the moment.
“As we’ve moved through time, as the tariffs have hit the US economy and hit the global economy, we’re seeing slowdown,” he said.
The state of the economy is usually seen as a critical factor in the outcomes of political votes, with the US presidential elections set to take place in November. Despite this, Mr Carpenter said US President Donald Trump was “unusual among politicians in the US” and despite the trade war directly affecting manufacturing and farming jobs he said it “doesn’t necessarily have to be the biggest driver for Trump”.
The author attended the Greater China Conference as a guest of UBS.
Source: Thanks smh.com