In the hunt for global talent, China’s Huawei will not be poaching engineers from US technology giants such as Qualcomm or Apple anymore. “If they are connected to the US, the long arm of US jurisdiction can reach our company,” Huawei founder Ren Zhengfei said earlier this year. “If they have a US identity, we will not hire them.”
His decision to sever the link between the world’s largest telecoms equipment maker and the world’s largest pool of tech talent is just one symptom of a much larger battle over trade and technology that is playing out between China and the US — and causing growing damage to the Chinese economy.
The Trump administration’s decision last week to declare China a “currency manipulator” — a response to Beijing letting the renminbi slip through the symbolically important level of seven to the dollar — was just the latest evidence that both sides are digging in for the long run.
Economists worry that if China’s international links wither, so too will the productivity of its workforce and its capital, a casualty of its narrowing access to foreign technologies and talent.
“A disengaged China — whether it’s by China’s choice or the choice of others — is not good for productivity growth,” said Scott Kennedy of the Center for Strategic and International Studies in Washington. “I’m quite worried about China’s economy in a disengaged world.”
The trade war comes at a difficult moment in China’s modern economic history. Huge returns generated by its young, vigorous labour force are starting to fade as the population ages.
Investment-led development over the past two decades produced double-digit growth but also created a pile of corporate, household and government debt equal to nearly 300 per cent of gross domestic product. It has become a drag on economic growth, which hit a 30-year low in the second quarter of this year.
That leaves growth in total factor productivity — which measures innovation-related efficiency gains — as the main driver of future growth.
China’s total factor productivity fell by 0.6 per cent in 2017, according to a calculation by BNP Paribas Asset Management.
Most economists agree that the economic and political reforms China embarked on in the late 1970s have boosted the effectiveness of its workers and capital deployment. As foreign companies enter the country, they bring with them new technologies and talented people and fuel competition, all factors that either rub off on local businesses or drive them to do better.
Wang Tao, chief China economist at UBS in Hong Kong, said the “true sources of Chinese productivity growth” were “productivity or efficiency gains from reform and opening, as well as from technological progress” and “those brought by investment”.
UBS projects that tighter restrictions on technology transfer will push down total factor productivity — the most commonly used metric — by enough to knock off about half a percentage point from annual GDP growth each year for the next 10 years.
Chinese productivity is not only threatened by reduced access to new technology. Further disruption comes from a drop-off in the exchange of talent through students, professors, engineers and western companies. Mr Ren’s decision to restrict Huawei’s employment of US citizens is a pointed reminder.
One Beijing-based recruiter for a large US university said that approvals for US student visas had noticeably declined over the past year.
“If you have less exchange centres, less Chinese graduates in the west and less multinationals in China, there’s going to be less human capital,” Mr Kennedy said.
Some experts fear the trade war could also push China away from market reforms. That would strengthen the power of the state to call the shots, something many analysts see as a leading cause of economic inefficiency.
State-owned companies are notorious for their poor use of capital and labour, often keeping their doors open only to maintain employment. They also receive generous government subsidies, capital that could be invested in other ways.
Julian Evans-Pritchard, senior China economist at Capital Economics, said: “There’s a chance that the trade war will force China to double down on state-led industrial policy and push foreign tech companies out. This could result in lower productivity.”
But not all economists agree that severing its links to the US will hurt China’s productivity.
BNP Paribas Asset Management said Chinese policymakers have mitigated some of the impact of the trade war by allocating capital more efficiently.
“Previous debt-fuelled excess investment . . . led to sluggish or declining productivity growth,” BNP said in a recent report, whereas a new approach “has shown some initial success with rising marginal efficiency of debt financing”.
Zhang Xiaobo, a professor of economics at Peking University’s National School of Development, said wariness of the US might prompt China to become more integrated with other emerging economies that could provide productivity-boosting ideas.
Alternatively, it would give China reason to accelerate efforts to create its own technology, he said. “In the long run, the trade war may induce the Chinese government to conduct in-depth reforms so as to stimulate domestic demand and encourage indigenous innovation.”