Eye on China World

Veterans, Intellectuals and Debt

A weekly bulletin offering news and analysis related to the Middle Kingdom. This week, Xi aims to modernise the PLA and control its veterans, even as opposition to him grows.

1. China’s Army Day

The People’s Liberation Army marked its 91st anniversary this week. On August 1, 1927, a group of soldiers in Nanchang rebelled against the Kuomintang forces amid the Chinese civil war, leading to the formation of the Red Army. It is this force that much later morphed into the People’s Liberation Army. Over the years, the PLA, which today is a rapidly modernising force, has evolved into an important social, economic, political and diplomatic actor in the Chinese system, and each of those traits were evident this week.

For starters, Xi Jinping extended his greetings to the PLA during a group study session of the CPC Politburo, and stressed that the military end all of its paid services by the end of the year. These include services like running kindergartens, publishing services and being in the real estate business. Most of these were services that the PLA began engaging in the late 1970s, and Xi has been seeking to crack down on these as part of his wider anti-corruption campaign and effort to build a modern armed forces capable of winning wars. Do recall that in early July, the PLA Daily had lamented that the forces were suffering from a “peace disease.” I’d concur with longtime China-watcher and author of Sinocism Bill Bishop’s view that the choice of the PLA’s commercial activities as the focus of the session reflects Xi’s firm grip on authority. (More on that debate below.)

In addition, a few new documents were issued. One of these called for integrating military and civilian standards across a number of fields, such as in satellite navigation, manned space technology and semiconductor technology. My understanding of the Xinhua report is that over the next three to five years, the aim is to ensure that 60% of standards in key areas should be universal. The other two regulations that were issued related to military discipline and supervision, and “stipulate the responsibilities of Party governance and supervision of Party committees and discipline inspection commissions at all levels in the military.”

Speaking of discipline, the newly-established Ministry of Veterans Affairs held a press conference this week, demanding that they “respect the law and not threaten the stability of our society.” This comes amid reports over the past few months of large groups of disaffected veterans petitioning and protesting in different parts of the country. It’s not just veterans who are unhappy with the government’s handling of the situation. In order to address some of the concerns, minister Sun Shaocheng has announced that a new veterans welfare law is in the works. The ministry will help over 80,000 ex-servicemen and women and nearly 40,000 veterans find jobs this year. Along with this, pensions for disabled soldiers, police officers, state officials, and militia members as well as for family members of martyrs and deceased soldiers are being hiked by 10%.

Finally, I’d like to focus on the PLA’s expanding diplomatic role and capacity. Just in this week, there have been reports of China donating four boats and 30 rocket-propelled grenade launchers to the Philippines. The country’s National Defense University is expanding its global reach by increasingly sending cadets abroad to study to develop their “international strategic vision and cultivate talents in joint combat command.” Beijing also was quick to respond through the PLA to provide humanitarian and medical assistance in the aftermath of the Xepian Xe-Namnoy dam accident in Laos. And for all the differences over influence operations and trade between China and Australia, Wang Jingguo, Defense Attaché of the Chinese Embassy in Australia, has confirmed that the two sides will hold joint military exercises and engage in a defense dialogue this year.

2. Hopes and Fears

For a while, there have been reports of discontent in China amid rival factions, party elders, the intelligentsia and even ordinary public with regard to Xi’s consolidation of power. But these have intensified over the past few weeks – for instance recall the debate over People’s Daily’s lack of coverage of Xi a couple of weeks ago and the story of the detained ink-splash protester Dong Yaoqiong. And then came further reports of elite infighting and even reports of gunfire in Beijing amid rumours of a coup.

Merriden Varrall and Charlie Lyons Jones document and discuss these in The Interpreter this week. It’s, of course, extremely difficult to outright dismiss any such whispers and rumours, but as I’ve mentioned above and as Varrall and Jones also seem to conclude, Xi’s grip on the Party and the Party’s grip on power continue to remain rather firm. This is despite him facing “his most severe challenge since coming to office” as Dr Willy Wo-Lap Lam argues rather convincingly in this Jamestown Foundation piece. It’s an article that I highly recommend for the genuine insight it offers on CPC’s elite politics and decision-making systems.

However, that is not to dismiss the fact that there is genuine unease with Xi’s rule among key sections of society. This growing discomfort has been wonderfully articulated by Tsinghua University law professor Xu Zhangrun in a lengthy critique posted online on July 24. The essay, titled ‘Imminent Fears, Immediate Hopes’, is being translated by Geremie R Barme for China Heritage. Xu’s critique hits at the heart of Xi’s policies and politics, as he outlines eight fears and hopes for China, arguing that all he is doing is “Putting My Life on the Line Simply to Say What Everyone Knows and Thinks.” Xu hits out at the recent constitutional amendments, the evolving personality cult around Xi, the gradual erosion of property rights and encroachment on personal freedoms, a foreign policy of grand gestures and wasteful international largesse and demands that privileges of party nobility be curtailed, officials disclose details of their assets and the authorities rehabilitate “4 June.” (Chris Buckley’s report in The New York Times captures the entire discussion very well.)

Such rumblings aren’t surprising. As Richard McGregor argues in this piece, Xi’s ruthless power consolidation and anti-corruption campaign has ensured that he “has acquired many enemies along the way in the country’s traditional power centres, the military, retired leaders, the big party families and large swathes of the once-powerful state economy. China’s new classes, the entrepreneurs and the emerging professions, also resent his roll-back of the political openings of previous decades.

McGregor further adds, and this is significant, the “anger about Xi goes well beyond…to the way that he has systematically shut down the various pressure valves built into the system under his predecessors. Checks on the absolute power of the top leader, including term limits, have worked well for the ruling party, so the argument goes. Why jettison them?

An example of a valve being shut is this incident of police in Shandong Province picking up Wenguang Sun, a retired professor, while he was on the phone during a VOA broadcast. Sun had apparently recently written an open letter critiquing Xi’s foreign aid and investment policy and was discussing this during the broadcast.

3. The First Half

On July 31, Xinhua published a report on a CPC Central Committee symposium on economic work, which Xi attended along with other key PBSC members. The symposium was held on July 17, but details have been made public much later. The other interesting thing about the meeting was that it brought together people from beyond the CPC fold. Here’s something that I found noteworthy about the Xinhua report, just because it is a reminder that not everything is and can be central government controlled or driven. “Xi hoped that all related parties would understand the current economic situation correctly, stay confident and resolved, and build a broader consensus. ‘Valuable advice should come out of grassroots surveys,’ Xi said.”

Additionally, on Tuesday, the Politburo discussed the economy, agreeing that their aim would be “seeking progress while maintaining stability.” The statement that has emerged has shown that the government remains focussed on deleveraging and stability (which is likely to temper deleveraging efforts. Note the People’s Bank’s assurance to ensure ample liquidity echoing the statement after the Politburo meeting.)

Official national GDP growth in H1 has been reported at 6.8%. Twenty-nine of the 31 provincial-level regions of China have also released economic data for the first half of the year. This Xinhua report has a reasonable breakdown. Take the data for what it’s worth. Reporting has been deeply flawed in the past – something that is evident by the large year-on-year fluctuations that are seen now too. This SCMP piece examines the data and concludes that the economy is worse off than last year. It says:

According to the inflation-adjusted growth figures for the first six months of the year from 29 provinces, only 15 fared better than the national average, compared with 21 during the same period last year. The number of provinces below the national average rose from seven to 12 during the period.

In addition to this, manufacturing activity, income growth and home sales have all slowed down, indicating broad economic weakness.

The key issue in economic management, however, remains the management of money supply, i.e., credit. That is the lifeblood of the economy. On this, the IMF’s latest assessment (here’s SCMP’s story on this if you want a quick wrap) offers important insights. The Economist’s Simon Rabinovitch has distilled some of the key data points in this short tweet thread. Three points that I’d like to highlight are that while deleveraging has happened, more needs to be done. Capital and credit allocation efficiency needs to be significantly improved, and the state sector is continuing to expand despite a massive efficiency gap in comparison to the private sector. Responding to some of this, the central government has appointed Vice Premier Liu He to head the SOE reform task force.

4. Trade Brinkmanship

The Politburo meeting statement (mentioned above) on the economy also contains the following sentence. “The economy still faces some new challenges and the external environment has changed notably.” I.e., The Donald Trump effect. This week, US Trade Representative Robert Lighthizer informed that Trump wanted to hike the tariff rate on $200 billion worth of Chinese imports from 10% to 25%. The public comment period on this list of $200 is being extended to September 5. Remember, Trump has ultimately threatened tariffs on Chinese imports worth $500 billion — that’s effectively all Chinese imports.

Beijing responded first by complaining about Trump’s “blackmail,” and asserting that it wouldn’t work. Later, the Ministry of Commerce threatened countermeasures; criticized Trump for setting “aside the interests of its own farmers, business owners, consumers, and the interests of the world”; and termed the US president’s approach “two-faced” which it believes was “doomed to be futile.” The bit about the US being two-faced is intriguing in that it indicates that the back channels are working on both sides. This Reuters report also touches on the fact that the two sides are engaged “through informal conversations.”

Based on Foreign Minister Wang Yi’s statement, Beijing is banking on key domestic constituencies in the US to persuade the administration to “calm down” and consider the costs of the trade war. However, unless the domestic political climate alters significantly, it appears unlikely that the Trump administration is terribly keen on a deal before the US midterm elections in November. One reason for this assessment is the $12 billion relief package announced for US farmers. While deeply problematic at home and among Republicans, this is indicative of a desire to stay the course for now. It remains to be seen if similar support is extended to other sectors.

Moreover, it doesn’t seem like the Chinese side is expecting a round of talks anytime soon. SCMP reports that Chinese government advisors are working to understand Trump’s thinking and believe that time is “not ripe right now” for talks. The report also quotes Teng Jianqun, head of US research at the China Institute of International Studies, as saying that “the country should be prepared to ‘cut a pound of flesh from our body’ to meet the US challenge.” Both parties appear to be digging in for the long haul. This isn’t just a trade war. It is long-term strategic competition. This sentiment is echoed in a piece by Cui Liru, former president of the China Institutes of Contemporary International Relations. He writes: “the strategic competition between China and the US comes from the latest shift in the relative balance of power between them. It is a power game at the global scale which, in this multipolar world, will not end anytime soon.”

Meanwhile, the US Department of Commerce has added 44 Chinese entities to its export control list on Wednesday for posing a “significant risk” to US national security or foreign policy interests. SCMP reports that this is a “direct challenge to China’s ambitions to become a technological superpower, driven by the Made in China 2025 policy…” In addition, the US Congress passed a $716 billion defence spending bill, which specifically targets Chinese investments in the country. There are different perspectives on how tough the bill is on China. This WSJ piece argues that the bill is tough on China, while this Reuters report says that it doesn’t contain the strict measures that have been discussed in the past.

5. The Indian Deficit

A Special Border Personnel meeting between Indian and Chinese troops took place at Nathu La this week to mark the PLA’s 91st anniversary. The recent thaw in ties was also echoed by BJP General Secretary Ram Madhav during an academic event, where he spoke about how India and China were working together. “Coming together is the beginning, existing together is progress and working together is success. The two countries should strive for working together to address the regional and global issues,” he is quoted as saying.

Despite all this, there remain serious issues with regard to bilateral trade. This Mint story captures the broad issues brought out by the parliamentary standing committee on commerce in this regard. The report claims that “Chinese imports have thrown a spanner in the wheel of India’s economic progress per se, and the industrial sector in particular.” It then identifies structural issues such as industrial capacity, cost of capital and access to credit, the challenges of negotiating FTAs with Chinese companies re-routing exports to India, etc.

Meanwhile, in terms of geopolitics and geoeconomics, US Secretary of State Mike Pompeo announced developmental initiatives – digital connectivity and cyber security, energy and infrastructure – worth $113 million to support the Indo-Pacific strategy. Soon after Australia’s Department of Foreign Affairs and Trade announced a trilateral partnership between the US, Japan and Australia to “mobilise investment in projects that drive economic growth, create opportunities, and foster a free, open, inclusive and prosperous Indo-Pacific.” A lot of analysis since then has focussed on the figure of 113 million comparing it to Chinese BRI spending/loans. Ankit Panda argues in this piece in The Diplomat that “If you’re waiting for the United States to begin dropping infrastructure investment numbers that rival China’s, you may be waiting for a while.” I go along with that and would add that it isn’t necessary for the US or its allies to commit massive numbers. Chinese enterprises are funded and operate differently than their American counterparts.

The other key point from all this is the absence of Quad partner India from this partnership. Rand Corporation’s Derek Grossman argues that recent events, particularly since the Wuhan meeting between Xi and Narendra Modi, indicate that India “could…very well wind up leaving the Quad to avoid antagonizing China.” While that might sound like a major policy shift, the same piece also argues that “even if New Delhi one day officially exits the Quad, it is unlikely to alter its bilateral and multilateral cooperation with the Quad members.” Keep this in mind and consider that while India isn’t part of the trilateral group mentioned above and has expressed concerns with China about US trade policy under Trump, it has decided to hold off on retaliatory tariffs, negotiations on trade frictions are reportedly making headway with a deal likely before the 2+2 meeting on September 6, and the US’s decision to grant STA-1 status to India easing export of high-tech items to India. In addition, US Congress has agreed to ease the Countering America’s Adversaries Through Sanctions Act (CAATSA) burden that India was likely to face owing to its military equipment trade with Russia. The President can now provide waivers to US allies who are reducing arms imports from Russia and expanding defense cooperation with the US.

Essentially, Indian policy to cope with the geopolitical shifts that are taking place must be driven by Indian interests, which do not lie in binaries. As former foreign secretary Shyam Saran argues in this Hindustan Times piece, “India should be bold in leveraging its relations with each major power to upgrade its relations with another and retain maximum room for manoeuvre.”

6. Debt Narrative Pinches

China’s ambassador to India posted a rather odd tweet this week about Pakistan’s public debt. Pakistan is obviously not part of Luo Zhaohui’s portfolio, but he felt the need to share data put out by State Bank of Pakistan to show that only 10% of Pakistan’s foreign debt is from China. All this comes as Imran Khan looks set to take charge as Pakistan’s Prime Minister, and reports tell us that soon after the election China agreed to provide a $2 billion loan to arrest Pakistan’s sliding official foreign currency reserves. Analysts view the new loan as an expression of Chinese support and limitations of Pakistan’s options.

Over the past few months, there has been repeated discussion of Pakistan potentially reaching out to the IMF for a bailout later this year. This week, Financial Times reported that Pakistani officials had drawn up plans for a $12 billion bailout from the IMF. Responding to this, Mike Pompeo, in a CNBC interview, warned the Fund. “Make no mistake, we will be watching what the IMF does…There’s no rationale for IMF tax dollars — and associated with that, American dollars that are part of the IMF funding — for those to go to bail out Chinese bondholders or China itself.” The criticism on debt hasn’t gone down well in Islamabad or Beijing. However, this post by Mark Sobel, former US representative to the IMF, is telling in terms of the prevalent view in Washington.

“The fund must also ensure that its resources are not used to bail out unsustainable Chinese CPEC lending. The fund needs to have at its fingertips comprehensive data on all CPEC lending—its terms, maturities, and parties involved. Chinese lending should be on realistic terms and consistent with Pakistan’s sustainability. Otherwise, China should reschedule or write down its loans, sharply reducing the value of its claims.”

Writing for Dawn, Khurram Husain evaluates the proposals that Sobel makes for the IMF in offering support to Pakistan. His assessment reveals that Sobel’s propositions aren’t without precedent and there are limits to how far “even for the closest of friends” can support “chronic sufferers of external sector deficits.”

Moving away from Pakistan, Myanmar and Malaysia are two BRI partners where debt sustainability has been a major concern of late. Wang Yi met with the new Malaysian Prime Minister Mahathir Mohamad this week. (Here’s China’s foreign ministry’s readout of the meeting) The meeting was an effort in easing frictions. Ever since Mahathir’s election, there has been intense scrutiny of Chinese investments/loans as part of the broader anti-corruption investigation into the Najib Razak regime. Mahathir is expected to visit China later this month, with renegotiation of earlier loans likely to be on the agenda. In Myanmar, meanwhile, Reuters reports that the government has decided to scale down the BRI-linked Kyaukpyu port from a project worth $7.3 billion to $1.3 billion. This is a product of concerns over unsustainable debt. However, there has, so far, been no official announcement from either side to that effect.

7. The Politics of a Revolution

In the developing world, sanitation and toilets are important public policy issues that have broad implications. So when Xi Jinping announced the toilet revolution in April 2015, it wasn’t quite dismissed or scoffed at in India as it was in the West. After all, it came just months after Modi had launched the Swachh Bharat campaign in October 2014.

However, a new article by Neil Thomas for Marco Polo argues that the process by which Xi came to sign off on the Toilet Revolution as a major policy “is a prism through which to examine how the central government takes account of popular opinion, how bureaucratic interests are championed by China’s top leaders, and how agencies can effectively implement national policy campaigns.”

The piece delves into history to trace calls for strengthened sanitation policies, going back to the late 1980s. It then traces the policy’s route through the career of Li Jinzao, the chief of China’s National Tourism Administration. As Li rose up the ranks, he scaled up the model he’d developed as mayor of Guilin city to build a national policy.

In the process, he altered his narratives in order to adapt to the priorities of the central leadership. And once he formally obtained that support, it became easier to mobilize bureaucracy at various other levels “because top-level support generates bottom-up enthusiasm for compliance from ambitious younger cadres vying for attention and hoping to distinguish themselves for promotion.”

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About the author

Manoj Kewalramani

Manoj Kewalramani is a multimedia journalist based in New Delhi. Over the past 11 years, he has worked with prominent news networks in India and China. His news and editorial work includes field reporting, commissioning and managing assignments and producing shows and documentaries along with formulating and executing digital news strategies. Manoj is an alumnus of Takshashila’s Graduate Certificate in Public Policy. At Takshashila, he curates a weekly brief, Eye on China, which tracks developments in China from an Indian perspective.