A weekly bulletin offering news and analysis related to the Middle Kingdom. This week, China and the US talk, and Xi warns against black swans and gray rhinos .
1. ‘That’s a lot of soybeans’
The US and China held talks on a possible deal to end the trade war in Washington this week. The White House described the talks as “intense and productive,” covering a wide range of issues, such as forced technology transfers, IPR protection, tariff and non-tariff barriers faced by American companies in China, cybertheft, government subsidies to state-owned enterprises, opening up agricultural and manufacturing markets, currencies and the trade deficit. Two other important points to note from the statement are that March 1, 2019, is a “hard deadline” for the US and the focus was on technical discussions and enforceability of an eventual deal. SCMP quotes US Chamber of Commerce’s Myron Brilliant as saying that government subsidies and forced technology transfer were among the issues on which China failed to bring substantial ideas. But that’s not the only gap that remains.
NYT reports that speaking to the press on Thursday, USTR Robert Lighthizer said that the two sides have yet not agreed on a draft framework for an agreement and neither have the talks so far involved conversations about rolling back American tariffs on Chinese goods. In contrast, Donald Trump was far more positive, as he read aloud a letter sent to him by Xi and stated that Liu He had told him of Xi’s pledge to buy 5 million tons of soybeans. “That’s a lot of soybeans,” the president added, although do note that the US annual exports of soybeans to China are around 35 million tons.
Meanwhile, the Chinese delegation, led by Vice Premier Liu He, characterised the talks as “candid, specific and fruitful” with “important progress” being made for the current stage. That last bit is important, given that the next stage is likely to be talks in Beijing to hammer out further details. The end of this process, as Trump has pointed out, is likely to be a meeting between himself and Xi Jinping, possibly sometime later this month. That makes sense. Any Sino-US deal on trade will be a political deal at the highest level, so it has to involve the two leaders meeting. But the issue is whether the two sides are anywhere close to a deal.
One of the structural changes that the Chinese side is likely to have highlighted is the NPC Standing Committee’s decision to table the new foreign investment law for parliamentary approval in March. The announcement came on Wednesday, just before the talks in Washington. Xinhua tells us that this new law will replace three existing laws on Chinese-foreign equity joint ventures, non-equity joint ventures (or contractual joint ventures) and wholly foreign-owned enterprises. The law, FT reports, formally bans what are seen as forced technology transfers and other illegal interference by government officials in the operations of foreign-invested enterprises. The report further states that while the Chinese side has focused on drafting new laws and regulations related to technology transfer and intellectual property protection, US negotiators are demanding an overhaul of Chinese industrial policies, regulatory approvals and concrete steps to combat alleged instances of state-sponsored corporate cyber espionage.
Cyber espionage is one part of the tangle that Huawei finds itself in. This week, the US Justice Department unsealed two indictments against Huawei, several of its subsidiaries and its CFO Meng Wanzhou. The charges against Huawei include stealing trade secrets, violation of sanctions against Iran, wire fraud, obstructing justice, stealing robotic technology and so on. One of the really damaging components of the indictments is a reference to a 2013 bonus program, which encouraged Huawei employees to steal competitors’ secrets and post the information on an internal website in exchange for financial reward.
Reuters reports that Huawei sought to discuss the charges with US authorities “but the request was rejected without explanation.” The company “denies that it or its subsidiary or affiliate have committed any of the asserted violations” and “is not aware of any wrongdoing by Ms. Meng.” China’s foreign ministry has also urged the US to drop the arrest warrant and end “unreasonable suppression” of Chinese companies. The US, meanwhile, has formally requested Canada for Meng’s extradition, which needs to be decided within a 30-day period. This puts the deadline for the trade talks and Meng’s extradition at around the same timetable. What’s interesting is that after this week’s talks, it appears that both sides want to establish some daylight between the trade talks and the action against Huawei (Here’s Steven Mnuchin doing so).
In one way, I’d agree with this. The trade war is a momentary phenomenon with limited impact, but what’s happening with Huawei is part of long-term strategic competition. At a domestic level, this is playing out in tougher laws on technology. This week a bipartisan group of lawmakers introduced a bill in the US Senate to combat tech-specific threats to national security posed by foreign actors like China. At the global level, as Gordon Sondland, US envoy to the EU, says: “The US is very supportive of the discouraging the purchase of any Chinese digital products that involve potential national security implications and steering people away from Huawei into Western products is our desired outcome.”
Also Listen: The Geopolitics of Technology: 5G Edition (A Takshashila Podcast on the tech war and India’s interests)
2. Xi Watch
This section is going to look at a series of meetings that Xi Jinping’s attended over the past 10 days, highlighting the range of focus areas/concerns for the leadership.
So on January 21, Xi spoke at the opening ceremony of a study session at the Party School of the CPC Central Committee. The meeting was attended by senior provincial and ministerial officials. This meeting was apparently the reason for the shifting of provincial party congress dates, which had been reported earlier.
In his speech, Xinhua reports, “Xi analyzed and raised specific requirements on the prevention and defusion of major risks in areas including politics, ideology, economy, science and technology, society, the external environment and Party building.”
Here’s a breakdown of the points he made:
- Xi wants the party to keep high vigilance against unexpected
“black swan” and “gray rhino” events.
- Xi views the Party facing “long-term and complex” tests across governance, reform, economy and foreign policy, with all of these being interconnected.
- His view on the economy was that it is “generally in good shape while facing profound and complicated international and domestic changes.”
- Employment, property market stability, tackling zombie enterprises, supply side structural reform and lending to small and medium enterprises were specifically listed in the speech.
- Xi spent significant time on technology and innovation, with legislation work concerning artificial intelligence, gene editing, medical diagnosis, autopilot, drones and service robots needed.
- He wants focus on strengthening the ideological and political education among the young.
- Lastly, he emphasized the need for the whole Party to “closely follow the Central Committee in terms of their thinking, political orientation and actions” while recognizing “the intensity and severity of the dangers of a lack of drive, incompetence, disengagement from the people, inaction, and corruption.”
Corruption’s a curious case. According to Transparency International’s 2018 index, China slipped 10 places to 87th. But perhaps as Eugene Tan, associate professor at Singapore Management University’s School of Law, argues “China’s poor showing probably has more to do with how its intentions are perceived, particularly in overseas economic activity.”
A few days later Xi presided over the meeting of the central committee on deepening overall reform. A bunch of documents were approved at the meeting. They cover a diverse set of areas, such as the new science and technology innovation board at the Shanghai Stock Exchange, education reform, legal reform, environmental management and so on. One of the important points to note in the reportage around this meeting was the stress on localisation when it comes to reform. The meeting stressed that reform plans must be adapted to local conditions. What to change and how to change must be based on actual conditions, as opposed to broad one-size-fits all plans.
Public communication was one of the bits that Xi had mentioned during the speech on the 21st. He discussed that in greater detail on January 25 at a group study session of the Politburo. Xi’s focus here was on new media. “Efforts should be made to develop websites, microblogs, WeChat, electronic newspaper bulletins, mobile newspapers, internet protocol television and other forms of new media to enable the voice of the Party to directly reach all kinds of user terminals and gain new public opinion fields,” he said. He further added: “We should strengthen the management of new media in accordance with the law to ensure a cleaner cyberspace.” So expect more innovation in the digital content space in China, but greater control too.
3. Losing Steam
Manufacturing activity continues to remain weak in China. On Thursday, the official Manufacturing PMI was reported at 49.5. This implies contraction in factor activity for the second straight month. However, the 49.5 figure by the NBS was higher than December’s 49.4. On Friday then, the Caixin/Markit Manufacturing PMI for January was released. This figure was 48.3 – down from 49.7 in December. Caixin further reported that new orders had also contracted for the second straight month, to 47.3, the lowest reading since September 2015. Reuters quotes Zhengsheng Zhong, director of macroeconomic analysis at CEBM Group, as saying that the government’s “stance of stabilizing leverage and strict regulation hasn’t changed, which means the weakening trend of China’s economy will continue.” That, however, does not mean that steps won’t be taken to stimulate growth. For instance, the NDRC has announced subsidies for new-car purchases and trade-ins. The policy offers monetary incentives for trading in vehicles compliant with older emissions regulations and compact vehicles popular in rural areas. It also includes lower taxes on used-car transactions, as well as subsidies for upgrading appliances like TVs and refrigerators.
The effects of the economic slowdown are being felt across the country. Bloomberg reports that “the number of Chinese companies warning on earnings is turning into a flood…Of the more than 2,400 mainland-listed firms that have announced preliminary numbers or issued guidance this season, some 373 said they’ll post a loss, the data show. About 86 percent of those were profitable in 2017.” Economic weakness in China is not just a concern for the Chinese government and enterprises. For instance, it’s not just Apple, but even firms like Nvidia and Caterpillar are pointing to China as the reason for their weakened performance. There’s concern, but alarm is unwarranted. There’s still big money to be made, particularly in the tech sector. For example, Hurun Research Institute’s new study says that nearly 100 tech companies in China became unicorns last year, reaching a valuation of $1 billion.
There were two other noteworthy pieces on the Chinese economy that I’d like to highlight. First, Chinese leaders often expand expenditure towards infrastructure projects to pump up activity. In 2019, China plans to put 6,800 kilometers of new railway lines into operation, including 3,200 kilometers of high-speed railways. That’s the highest target since 2016. This week, Caxin carried an interesting piece by Zhao Jian, the director of the China Urbanization Research Center at Beijing Jiaotong University, on the impact of China’s high-speed railway building spree. The piece argues that often the discussion on HSR development in China ignores the debt and operational loses that plague the sector.
Zhao writes, “The cost of a high-speed railway is two to three times that of conventional railways. And because high-speed rail can only transport people, not goods, there may be sufficient demand for it only in large, densely populated areas, where the income from fares can cover the construction and operating costs. At present, most of the country’s high-speed rail lines have idle capacity…” He further adds that “considering the amount of borrowing that local governments did to finance the construction of the high-speed rail network, the country is now laboring under an enormous amount of high-speed rail debt and the accompanying financial risks.” The piece also proposes recommendations for railways development going forward.
The second piece is about the size of the economy of Chinese cities. This is important from the point of view of building networks and collaboration at the local level – such as city-to-city or state-to-state level ties between Chinese cities/states and Indian cities/states. The GDP of Shanghai and Beijing is over 3 trillion yuan ($447 billion). That’s followed by Shenzhen and Guangzhou. In fact, the 10th highest in the list of cities ranked by GDP is Hangzhou at 1.35 trillion yuan.
4. Difficult Issues
Terrorism, boundary dispute and India’s NSG bid – the three issues that have led to intense friction between India and China over the past few years, were all in focus this week.
The 8th meeting of the India-China Joint Working Group on Counter-terrorism took place this week, with nothing really said about Masood Azhar. The Indian Embassy in Beijing said that “Both sides assessed and exchanged views on regional and international counter-terrorism situation, areas of mutual concerns including cooperation at bilateral and multilateral level.” That’s as prosaic as it could be. In addition, the 13th meeting of the Working Mechanism for Consultation and Coordination on China-India Border Affairs was also held this week. Representatives of the two countries’ foreign and defense ministries attended the meeting. The emphasis was on maintaining peace and tranquility along the border.
Finally, India’s NSG bid came into focus amid a UNSC P5 conference in Beijing. The conference reportedly ended with six consensus points. The second of these points states that the integrity and effectiveness of the NPT regime should be maintained through cooperation. When asked about India’s application in this context, the Chinese foreign ministry said that “there hasn’t been any precedent. What we suggested (was) patient negotiations with the mechanism members to solve this problem through consultations.”
Meanwhile, on the economic front, the Indian Commerce Secretary Anup Wadhawan met with Vice-Minister of General Administration of China Customs (GACC) Zhang Jiwen in Beijing this week. The meeting ended with the two sides signing a protocol for exporting non-basmati rice, fish meal, fish oil and tobacco leaves to China. The GACC has also apparently approved six Indian mills for export of rapeseed meal to China.
There are three more stories in the India-China dynamic that are worth highlighting. First, the statement by US National Intelligence Director Dan Coats on Sino-India ties. “We expect relations between India and China to remain tense, despite efforts on both sides to manage tensions since the border standoff in 2017, elevating the risk of unintentional escalation,” he told lawmakers in the US. “Misperception of military movements or construction might result in tensions escalating into armed conflict,” he added.
Second, this piece in Global Times on the jobs situation in India. Now, I know it is Global Times and one must take it with a bag of salt. But this is what the piece says: “We hope Modi can improve his public standing so that he can consolidate sufficient power to push forward reform and Sino-India economic cooperation as bilateral relations warm up…The Modi administration needs good news in terms of job growth ahead of the upcoming general election. Encouraging Chinese companies to invest in India’s labor-intensive industries will help achieve this goal, and rapid growth in Chinese investment will help consolidate Modi’s political status before the general election.” Nothing against Chinese investments in India; they are as useful as any other investments. But linking this cooperation to electoral fortunes in this manner is nothing but short-sighted. This is the kind of talk that sparks conversations on election interference.
Finally, a more pragmatic take in the Chinese press was offered by Ding Hao, deputy director of the Asian-African Military Affairs Office of the Foreign Military Studies Department under the PLA’s Academy of Military Sciences. Ding was responding to reports of the Indian Navy’s third air base in the Andaman and Nicobar islands to beef up surveillance of Chinese ships and submarines entering the Indian Ocean through the nearby Malacca Straits. He says, these are “overseas territories of Dominion of India and that it is a normal move for the Indian military to establish military bases there.”
- Russia-India-China Foreign Ministers to meet soon to discuss Afghan situation & fluidity in geo-politics
- Consul General stresses on cultural relations between Chinese provinces & Eastern India
5. The Long and Short of It:
- China’s Argentine Space Station: A Reuters report this week focussed on a Chinese space station in Argentina. The report says that the station’s stated aim is peaceful space observation and exploration and, according to Chinese media, it played a key role in China’s landing of a spacecraft on the far side of the moon in January. But the remote 200-hectare compound operates with little oversight by the Argentine authorities. The report adds that “China’s space programme is run by its military, the People’s Liberation Army. The Patagonian station is managed by the China Satellite Launch and Tracking Control General (CLTC), which reports to the PLA’s Strategic Support Force. Beijing insists its space programme is for peaceful purposes and its foreign ministry stressed in a statement that the Argentine station was for civilian use only.” Of course, this has led to concerns being expressed by US officials.
- BRI Ports and Awards: COSCO Shipping Ports Ltd has inked a deal with a Peruvian polymetallic miner to acquire 60% of its stake in a terminal project for $225 million. Terminales Portuarios Chancay SA is now the first terminal project controlled by COSCO in South America. While that deal’s done, it’s still not clear what’s happening with the nearly $20 billion East Coast Rail Link project on Malaysia. Last week, Economic Affairs Minister Azmin Ali said that the government had cancelled the ECRL because the costs of paying interest on the Chinese loans were unsustainable. Now Finance Minister Lim Guan Eng says no final decision had been taken. Even Prime Minister Mahathir Mohamad hasn’t been very clear about the future of the project. Reuters reports that China had apparently offered to nearly halve the cost of the project. Finally, the ambassadors of Pakistan, the Maldives, Sri Lanka, Malta, and Bosnia-Herzegovina in China were conferred with Silk Road Super Ambassador Awards in Beijing on January 24. That’s how you incentivise foreign diplomats to further your agenda. Sometimes, as in the case of Canada’s John McCallum, this leads to trouble and even arguments about “influence campaigns.”
- Chinese Loans: This week stories from three countries tell us how different actors are dealing with Chinese loans. For starters, the Sri Lankan government wants more. It is reportedly set to sign another deal with China – this time for $1 billion in concessional loan for a highway linking Colombo to Kandy. The money will apparently be used for the first stage of the central highway. The second stage will be financed by Sri Lankan consortiums and the third by Japanese loans. Sri Lanka and China are also said to be working to finalise a bilateral FTA by sometime this year. In contrast, Ibrahim Ameer, Maldives’ Finance Minister, told Financial Times that Male is to ask Beijing to reduce the outstanding debt in light of the allegedly inflated contracts, as well as adjust the interest rates and repayment schedules. The report adds that “According to the Maldives’ central bank, the government currently owes $600m to China, including $374m to fund an expansion of its international airport and $68m towards the construction of a road bridge.” Finally, data from Kenya’s National Treasury show that World Bank loans to the country as of September 30, 2018, surpassed Chinese lending. In fact, the amount of outstanding Chinese loans fell from June to September. This, as per analyst Reynaldo Desouza, “could be a result of partial repayment of Chinese debt and an advancement of new loans by the WB.”
- Pak-Saudi Connection: Saudi Crown Prince MBS is set to visit Pakistan soon, with massive investment pledges (around $15 billion over three years) in the offing, particularly with regard to Gwadar. All of this, this Nikkei Asian Review piece argues, is making Beijing anxious. The analysts quoted in the piece essentially talk about how Pakistan is eyeing Riyadh as an alternative source of support, while Beijing is likely concerned about losing its privileged position in Gwadar and having to share some of the economic gains. Sabena Siddiqui makes similar arguments in this piece for The Diplomat. However, interestingly, she argues that an increased Saudi role in CPEC has implications with regard to the US. She quotes Theodore Karasik from the Gulf State Analytics in Washington, as arguing: “Saudi moves and investment in Pakistan are a set and established policy that seeks to better integrate Islamabad into Riyadh’s camp” and “align U.S. and Saudi policy with Pakistan as part of the larger picture of the Islamic Military Counter Terrorism Coalition.”
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