Don't poke the panda bear

3 min
Ludovic Subran
Ludovic Subran Chief Economist for Euler Hermes

From the Beijing Olympics, to comic books, to the World Wildlife Fund (WWF), panda bears are known for being both the symbol of China and the quietest animal on earth – granted they have some bamboo handy.

Back in the 1970s, gifts of giant pandas to American and Japanese zoos formed an important part of the diplomacy of the People's Republic of China (PRC). This practice has been termed "panda diplomacy". Forty years later, China is recognized for much more than panda bears, being the second largest economy only to the US.

Forty years later, it looks like President Trump has decided to launch the bull-in-a-China-shop diplomacy. From the campaign trail to his latest announcements, China has been, echoed by polls, the number one target of America First policies. All the world looks in awe as defiance and volatility come from the threat of protectionism. Could this lose-lose game jeopardize China’s economic success story?

In our June issue of The View, we try to unveil how China has changed, and more importantly how fast it keeps transforming, making it hard to catch up. Over the past ten years, Xi Jinping and Li Keqiang have succeeded in transitioning China from an investment- and export-driven economy to a consumer-driven superpower, with rapid industrialization and servitization. Secondly, China continues to surprise the rest of the world with innovative policy-making, aligning public and private sectors’ incentives for stability and long-term growth. Quick fixes and international worst practices are not welcome. If I had to point to three super policies, I would mention: rapid financial liberalization, combined with taming credit risks through macro prudential policies; the Belt and Road Initiative, which will create unprecedented soft power opportunities; and a fascinating innovation and industrial policies embedded in China 2025, which already brought to life the famous BATX (Baidu, Alibaba, Tencent and Xiaomi, the acronym for the Chinese GAFAs). It is important to note that this innovation policy came at the expense of numerous zombie state-owned enterprises which went belly up in the past years.

China’s strengths do not make it less vulnerable to a full-fledged trade war. The recent depreciation of the renminbi to the dollar – allegedly good for Chinese competitiveness – makes it difficult for Chinese authorities to rely on private savings to finance growth domestically and abroad. It also reduces profitability and disposable income. In addition, credit risk, though receding, is still high in China. Authorities need more time to deflate the real estate bubble, increase financial literacy, boost governance and regulation, and develop safety nets.

Yet, retaliation cannot be ruled out. “Only one eye for one eye” says the law of talion . But limited bilateral trade deficits with the US require imagination to make it even. From longer time to clear customs, to playing hard to get for international investors to repatriate their dividends (especially in financial services), to calling up economic patriotism to curb entire markets, the tool box that China has to dent global trade, growth, and liquidity should not be underestimated.

How cute is a giant panda? Peaceful, unconcerned, stolid.

Have you seen Kung Fu Panda by DreamWorks?

Just don’t poke the China bear.