Eye on China

Diplomacy with Chinese Characteristics

A weekly bulletin offering news and analysis related to the Middle Kingdom. This week, China extends a hand to America, Japan, North Korea and Iran.

  1. Possible Trade Thaw

China’s economy tsar, Vice-Premier Liu He, is set to visit Washington to build on the momentum from talks last week in Beijing. During that negotiation, the American delegation reportedly asked a $200 billion reduction to the trade deficit by 2020 and end to subsidies with regard to the Made in China 2025 program. A detailed list of the US’s tough demands was leaked and were available on social media. Some analysts have compared the US list of demands to the modern-day version of the “unequal treaties” of the mid-1800s.

Much of the reportage after the meeting indicated that there had been no breakthrough during the talks. And Beijing continues to deploy strong rhetoric, while taking steps to delay US agricultural, automobiles and other imports. The two sides also engaged in a rather fiery exchange at the WTO this week.

However, the fact Liu is traveling to Washington so soon is an indication that there has been forward movement. This is also borne out by Chinese media commentary after the US delegation’s visit and the personal engagement of Trump and Xi. Wall Street Journal reports that Liu will be coming with an offer to import more US goods in order to address Donald Trump’s concerns. This SinoInsider assessment, meanwhile, offers a good breakdown of how the trade dispute could eventually be resolved.

So far, the biggest casualty of the Sino-US trade friction has been tech giant ZTE. This week, the company reached out to the US Commerce Department asking it to suspend the seven-year ban on it doing business with American technology exporters. Just how bad is the situation for ZTE? Well its manufacturing and sales have been paralyzed, as all “major operations” have reportedly been suspended.

Amid these frictions, China’s State Administration of Foreign Exchange (SAFE) reported the country’s first quarterly current account deficit in nearly 17 years this week. SAFE pointed towards seasonal factors as the reasons for China recording a deficit of $28.2 billion in its current account – which covers merchandise and service imports and exports – for the first three months of 2018.

Beyond trade, there was another bilateral dispute that cropped up this week. The Trump administration hit back following reports of the Chinese Civil Aviation Administration issuing notices to US and Australian airlines, among others, to refer to Taiwan, Hong Kong and Macau as “Chinese territories.” Some airlines are reportedly already taking steps in this context. The White House, however, dismissed such requests as “Orwellian nonsense,” with the Chinese embassy in Beijing translating the statement in Mandarin and putting it up on Sina Weibo, kicking up a storm.

  1. The Dalian Discussion

It appears that Xi’s developing a taste for informal summitry. After walks in Wuhan with Narendra Modi, the Chinese president headed to Liaoning Province for a walk-and-talk session with North Korean leader Kim Jong Un. This is the second meeting between the two men in just over a month. The Kim-Xi meeting comes at a time of hectic diplomatic activity heading into the Donald Trump-Kim Jong Un meeting. New York Times reports that easing sanctions and economic support along with phased denuclearisation were the two significant focus areas of the Kim-Xi conversation.

Soon after, it was reported that North Korean airline, Air Koryo, is planning to launch charter flights between Pyongyang and Chengdu. Reports also suggest that the prospect of peace is leading to heated property market activity in the Chinese border town of Dandong.

Soon after that visit, Trump called Xi, with the White House saying that they agreed on the importance of continuing sanctions until North Korea permanently dismantles its nuclear and missile programmes. Meanwhile, new US Secretary of State Mike Pompeo was in Pyongyang this week to iron out the details and secure the release of three American detainees. The trio returned home, with Trump welcoming them and promising that the summit with Kim, set for June 12 in Singapore, would be a “big success.”

  1. Rapprochement in Tokyo

Chinese Premier Li Keqiang began a landmark visit to Japan on Wednesday, taking forward the budding thaw between the two Asian rivals. State media quoted Li as saying that he hoped the “two countries can meet each other halfway, and maintain long-term, healthy and stable growth of their ties.”

During the visit, the two leaders signed an agreement to establish a hotline between senior military officials on both sides. The aim is to enhance communication in case of incidents involving their navies or air forces. The hotline will be launched within 30 days.

They also agreed to resume a currency swap arrangement in times of financial emergency and launch a public-private sector council to consider potential Belt and Road Initiative projects. South China Morning Post reports that China has also promised a $31.4 billion investment quota, enabling Japanese institutional investors to buy altogether up to that amount in yuan-denominated stocks and bonds.

During the visit, Li also took part in the trilateral dialogue with Japan and South Korea – the first such meeting in two-and-a-half years. The primary outcome from that conversation for Beijing was the reaffirmation to all parties’ commitment to economic globalization as well as trade and investment liberalization. Li also put forward a new cooperation framework, the “China-Japan-South Korea + X model,” which could imply leveraging of each country’s strengths for third-country projects in sectors like finance, energy and technology. Other possible areas of cooperation include production capacity, poverty reduction, disaster management and energy.

Li also met with South Korean President Moon Jae-in, promising deeper trade cooperation and pledging that China will continue to play a “constructive role” with regard to the issue of denuclearisation of the Korean Peninsula.

  1. The Wuhan Effect

The Chinese embassy in Delhi hosted a discussion session to follow up from the Modi-Xi Wuhan meeting. Ambassador Luo Zhaohui told scholars and journalists that the two leaders will be meeting on three more occasions this year, i.e. at the SCO summit in June, during the  BRICS summit in Johannesburg and then in Argentina for the G20.

Luo also wrote a piece in The Tribune interpreting the Wuhan informal summit, the idea for which was first floated in June 2017 during the SCO summit in Astana. He places Wuhan in the context of the larger global picture, arguing that, “China and India are largely relevant to the evolving international structure of ‘rise of the east and decline of the west. and against the headwinds of anti-globalisation and protectionism.” says that “the two sides agreed to carry out ‘China India plus’ cooperation in Afghanistan and speed up the economic cooperation under the BCIM framework.”

India’s ambassador to China, Gautam Bambawale also discussed the outcomes of Wuhan at the 8th India-China dialogue between Ananta Aspen Centre and China Reform Forum. The Indian diplomat emphasized the “necessity of being sensitive to the other country’s aspirations and interests…In the absence of such sensitivity, we may talk to each other but little progress will be made if we do not empathise with the other side’s point of view.”

The Indian government, meanwhile, is reportedly looking to expand pharmaceuticals exports to China. Also, the Indian Navy is conducting a four-day conclave to discuss combat efficiency and military preparedness. Addressing the gathering, Defence Minister Nirmala Sitharaman downplayed any talk of tensions between the Indian and Chinese navies in the IOR. In the interim, The Tribune reports that the Indian Navy is enhancing monitoring of sea traffic to the east, while Sukhoi-30 fighter jets have been stationed at Andaman and Nicobar Islands. Another interesting development this week was the meeting between US Ambassador to India Kenneth Juster and the Dalai Lama, with an invitation for a visit to the US reportedly being extended.

  1. The Iran Deal

China expressed “regret” at Donald Trump’s decision to withdraw the US from the nuclear agreement with Iran. Foreign ministry spokesperson Geng Shuang called on all parties to “implement the JCPOA in good faith” and “ assume a responsible attitude, bear in mind the long-term and overall picture, stay committed to the political and diplomatic solution.” State media in China also hit out at Trump’s withdrawal. The Global Times described it as an example of the US’s unpredictability and “unrestrained capriciousness,” which is tarnishing its reputation.

Geng, meanwhile, also emphasized that Beijing would continue to “maintain normal economic ties and trade” ties with Iran. Bloomberg reports that Beijing has been a major beneficiary of the West’s frayed relationship with Iran, deepening trade cooperation and expanding oil imports..

CNN’s Matt Egan backs that up, arguing that China is likely to gain from the US withdrawal from the nuclear deal, given that Iran remains a key oil supplier for Beijing. “China,” the report argues, “regularly purchased crude oil from Iran, even when the country was still under sanctions,” and there has been an surge over the past few months of Iranian oil exports to China. CNBC, meanwhile, reports that any US sanctions on trade with Iran are likely to be ignored by Beijing.

From an Indian perspective, Harsh Pant and Paras Ratna argue that, “New Delhi will have to adopt a nuanced approach towards Chinese investment in Iran, especially now that Tehran’s reliance upon Beijing is only likely to grow.” What this means in tangible terms is essentially engaging China to partner in the Chabahar project. The Global Times also believes that China and India can work together on oil imports from Iran to eliminate the negative effects of the US withdrawal.

  1. SCS Militarization

Vietnam is the only country in China’s immediate neighbourhood to have issued a reasonably strong response to reports of militarisation of the South China Sea. The Vietnamese foreign ministry has called on Beijing to “show its responsibility in maintaining peace, stability” and “withdraw military equipment illegally installed” in the region.

In comparison, the Rodrigo Duterte of the Philippines is having to explain his friendly posture towards China to his forces. The civil-military tension in Manila with regard to Duterte’s China policy is apparent. Despite Duterte’s ambivalence, the Philippines and the US have begun the Balikatan military drills. More than 8,000 troops, including Australian and Japanese soldiers, are participate in the exercise, which is the largest of its kind since Duterte took office.

All of this comes amid a new report by the Asia Maritime Transparency Initiative, which, claims that China deployed a Shaanxi Y-8 transport plane on Subi Reef on 28 April based on satellite imagery. The PLA Air Force’s new Chengdu J-20 stealth fighter also carried out sea training for the first time this week, sending a signal to regional players, particularly Taiwan.

US strategy in the South China Sea so far has revolved around military drills, building networks and freedom of navigation operations. That’s largely proved ineffective in stopping militarisation. Now there’s an interesting proposal by Professor Sam Tangredi of the US Naval War College to build an “island of freedom” or a removable offshore base in the South China Sea. Zhang Zhixin from the Institute of American Studies at the China Institute of Contemporary International Relations, describes this as a risky proposition that could lead to, “a full range of strategic conflicts” between both sides.

Moving away from contested waters, political change in Malaysia could spell trouble for Chinese investments. Malaysia’s relationship with China was one key electoral issue that led to the stunning electoral victory of former leader Mahathir Mohamad. Mahathir, who had attacked former PM Najib Razak for “selling out” to China, wants to review Chinese investments and has also taken a tough stance on the presence of Chinese naval vessels in the area.

China’s relationship with Indonesia, on the other hand, was boosted by a Li Keqiang visit. Reuters reports that China is the third-largest foreign investor in Indonesia, contributing around 10 percent of total foreign direct investment. The two sides agreed on a range of deals during Li’s visit, including the building of new dams and increasing palm-oil exports from Indonesia.

  1. India’s Neighbourhood

Chinese State Councilor and Minister of Public Security Zhao Kezhi traveled to Myanmar this week to strengthen cooperation in the realms of law enforcement and security. Zhao’s visit came as China works to ease international pressure on Myanmar with regard to the Rohingya issue. AFP reports that the UN Security Council is holding negotiations on a statement that would spell out how to address the crisis. This comes after a 15-member UN team visited the country recently.

Thereafter, the UK circulated a draft UNSC resolution calling for “credible and transparent investigations” into human rights violations, urging Myanmar to hold those responsible for the violence to account. That’s a proposition that hasn’t been accepted by the Chinese side.

Meanwhile, China continues to expand economic engagement with both Bangladesh and Sri Lanka. The Bangladesh Power Development Board (BPDB) and China Huadian Group have reportedly agreed upon a joint venture to build a $2 billion coal plant. In Sri Lanka, a deal has been struck to build a $500 million LNG plant.

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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.