A weekly bulletin offering news and analysis related to the Middle Kingdom. This week, there’s trouble in the South China Sea, and China aims for self-reliance as US trade negotiators and Angela Merkel come visiting.
1. Flashpoint: South China Sea
US Defence Secretary James Mattis took center stage this week on South China Sea issues. Mattis bid farewell to the outgoing Vietnam ambassador to the US, vowing to build closer ties with the former foe. Then he traveled to Hawaii, where a change of guard took place in the US Pacific Command – renamed the US Indo-Pacific Command. Admiral Phil Davidson replaced Admiral Harry Harris as Commander of the US IndoPacom. While in Hawaii, Mattis also addressed US policy in the region, saying that a “steady drumbeat” of freedom of navigation operations is to continue in the South China Sea, which he stressed were international waters. Lt Gen Kenneth McKenzie, director of the Joint Staff, upped the ante further on Thursday, telling reporters that that the US “had a lot of experience in the Western Pacific taking down small islands.”
The statements come as US warships carried out a FONOP near the Paracel Islands. Last week it was reported that Beijing had landed H-6K strategic bombers on Woody Island in the Paracels (You can read my analysis here). China said that it had dispatched warships to identify and warn off US vessels, while the Foreign Ministry expressed “strong dissatisfaction.” Later in the week, Hua Chunying lashed out at Washington, saying that the talk of China’s “so-called militarisation” was “meaningless hyping” of the issue. She added: “Does the US truly want the freedom of navigation entitled under the international law? Or does it just want the freedom to do whatever it likes as a hegemon?” Chinese analysts also chimed in, arguing that US FONOPS will only push Beijing “to keep taking defense measures on our islands and reefs.” The US, meanwhile, reportedly termed the actions of Chinese vessels as “safe but unprofessional,” indicating that they moved in an erratic manner.
Also in the region, under pressure at home, the Rodrigo Duterte-led Philippines administration sought to project a tough line. Foreign Minister Alan Peter Cayetano told a public gathering that Duterte has said that “if anyone gets the natural resources in the Western Philippines Sea (South China Sea) he will go to war.” He also stated that the Duterte had made “red lines” clear to the Chinese side, with one of them being the Scarborough Shoal. Cayetano also defended Duterte, saying that the Philippines hadn’t lost any territory during his tenure. That prompted a quick reply from Representative Gary Alejano, who pointed to Chinese Coast Guard vessels and militia fishing boats stationed near Sandy Cay. Alejano also hit out at the government over a May 11 incident, when Chinese Coast Guard and the PLA Navy “challenged and harassed” the Philippine Navy. All this as a Chinese delegation visited Manila, stating that the two sides had agreed to manage disputes diplomatically.
Meanwhile, Vietnamese President Tran Dai Quang met with Prime Minister Shinzo Abe in Tokyo, seeking closer maritime cooperation.
2. Tech Ties with India
Indian firms have a new avenue to crack into China’s massive Information Technology market. NASSCOM partnered with the Chinese government, launching a second IT corridor in Guiyang (Big Data-focussed) this week. Quartz reports that Indian service providers and Chinese customers signed deals worth $6 billion at the launch event. These pilot projects will be executed over the next year.
The first such corridor between the two sides was reportedly set up in Dalian (focussed on IOT) in December 2017. Highlighting the potential for deeper IT cooperation during the event, Ambassador Gautam Bambawale said: “In China, Indian IT companies are present in 10 cities around the country, with a total workforce of around 25,000 employees. However, we believe that the potential for Indian companies to cooperate with China is huge and needs more work and effort.” China’s IT market is estimated at $144 billion.
The positive momentum in bilateral ties is also reflected in the fact that the Indian government has reportedly invited Chinese officials to discuss the Regional Comprehensive Economic Partnership. Commerce and Industry Minister Suresh Prabhu says that India’s primary concerns regarding the RCEP related to China. He also mentioned the importance of protecting India’s agricultural sector, referring to Australia and New Zealand. Another Chinese team is also likely to visit India soon to seek to inspect mills that produce non-Basmati rice in order to expand imports.
Also, in talks in Beijing on May 28-29, the two governments agreed to start formal negotiations on a bilateral social security agreement. PTI reports that the Indian delegation for the talks was led by Vinod K Jacob, Joint Secretary (economic diplomacy and states division) of the Ministry of External Affairs. Social security agreements are aimed at protecting the interests of nearly 55,000 Indian professionals and skilled workers employed in China.
Amid all this positive momentum, the Global Times, in perhaps the first such strongly-worded piece since the Wuhan informal summit, warned New Delhi ahead of Prime Minister Narendra Modi’s visit to Indonesia. The author says, “If India really seeks military access to the strategic island of Sabang, it might wrongfully entrap itself into a strategic competition with China and eventually burn its own fingers.” The piece also threatens countermeasures in the Indian Ocean. During Modi’s visit, India and Indonesia agreed to step up their defence and maritime cooperation. India further to develop the Sabang port, which is close to the Andamans, and the two sides unveiled a document for maritime cooperation in the Indo-Pacific region.
Beijing, meanwhile, also welcomed a decision by the Indian and Pakistani sides to observe the 2003 ceasefire agreement to stop cross-border firing along the Line of Control. The Chinese foreign ministry also reiterated that CPEC does not alter its stand on the Kashmir dispute.
3. Self-Reliance and Opening Up
President Xi Jinping addressed academicians on Monday, calling for developing China as a leader in the world of science and technology. Xinhua reports Xi as saying that the country should aim for the frontiers of science and technology, lead the direction of its development, and shoulder the heavy responsibilities bestowed by history. Artificial intelligence, quantum information, mobile communications, the internet of things and blockchain are the key areas mentioned in Xi’s speech.
He also demanded focus on “independent innovation,” saying that “the initiatives of innovation and development must be securely kept in our own hands.” Xi’s narrative of self-reliance has only strengthened amid deepening trade tensions with the US and the punitive action that the Trump administration took against ZTE.
However, there are areas where China is signalling greater opening. On Wednesday, China’s State Council announced that tariffs will be slashed on a range of consumer goods, starting July 1. The list of goods includes apparel, footwear, kitchen supplies, fitness products, washing machines, refrigerators, processed foods and cosmetics. Premier Li Keqiang also demanded a “sense of urgency” in attracting foreign investment during an executive meeting of the State Council.
“We must strive to preserve China’s status as a major destination for foreign investment. Opening-up has driven China’s reform endeavors in the past 40 years. Foreign-invested enterprises have been a significant contributor to Chinese exports. More importantly, they have brought to China industrial and value chains, and spurred corporate reform and innovation,” Xinhua quoted Li as saying. Official data show that foreign investment in China at $136.72 billion in 2017.
4. What’s With the Trade War
Turns and u-turns were the theme of the ongoing saga of US-China trade tensions this week. US Commerce Secretary Wilbur Ross is set to visit China over the weekend for the next round of talks. Prior to that, a team of US negotiators arrived in Beijing on Wednesday. US National Economic Council Director Larry Kudlow says that Washington is seeking reforms that allow foreign companies to retain majority stake in joint ventures with Chinese partners. He says such a change will help US firms prevent forced the transfer of technology.
Earlier in the week, the White House announced a fresh round of tariffs of 25 percent on goods worth $50 billion imported from China containing industrially significant technology, including those related to the Made in China 2025 program. The final list of goods covered by this new order is to be revealed on June 15. In addition, AP reports that the US is also considering restrictions on visas for Chinese students, researchers and managers, particularly those focussing on sectors like robotics, aviation and high-tech manufacturing. US National Trade Council Director Peter Navarro, meanwhile, also countered Treasury Secretary Steven Mnuchin’s statement that the trade war was “on hold,” calling it an “unfortunate soundbite.”
The Chinese side responded to the White House statement saying that the decision was contrary to the bilateral consensus reached during Liu He’s recent visit to Washington (Wonder if and how this hurts Liu’s credibility within the CPC structure?). The foreign ministry also criticized what it saw as a “flip-flop” by the Trump administration. However, adding to Beijing’s armoury will be the fracture on trade issues between the US and its allies, European nations, Mexico and Canada, which were hit by steel and aluminum tariffs starting today.
Meanwhile, the ZTE appears to have become a battleground between Trump and Congress. The US president appears to be backing a plan to rehabilitate the Chinese telecom gear-maker. The deal is that ZTE pays a fine of $1.3 billion, buys more American goods, implements changes in management and allows the placement of US compliance officers. But key senators, led by Republican Marco Rubio aren’t thrilled with this. Curiously, the plan comes as Ivanka Trump’s company won new trademarks in China.
5. Neighbourhood Watch
A few interesting developments in India’s neighbourhood indicate the push and pull that is underway with regard to China’s growing role in the region. For starters, Japan is reportedly looking to expanding investments in ports in Sri Lanka, Bangladesh and Myanmar as part of its “free and open Indo-Pacific” strategy. The three sites that are under consideration are Dawei in southeast Myanmar, where Japan and Thailand might partner together. Trincomalee in northern Sri Lanka, in partnership with India. And Matarbari in southeast Bangladesh.
Speaking of ports, there appear to be concerns in Myanmar over China’s valuation of the Kyaukpyu port and economic zone. CITIC Group, which won the tender a few years ago, is said to have valued the project at $10 billion, with the port project valued at $7.5 billion. Sean Turnell, special economic consultant to Aung San Suu Kyi, believes that the valuations are “crazy” and “absurd,” indicating that the Hambantota precedent has not gone unnoticed in Myanmar.
And wisely so, given that Sri Lanka has had to now acquire more debt in order to service existing debt. Just this week, Colombo accepted an eight-year $1 billion loan from China Development Bank in order to repay loans maturing this year. The new loan’s rate of return is reported to be around 5.3 percent. Finance Minister Mangala Samaraweera recently said that the country’s debt crisis would further worsen next year, when $4.3 billion has to be paid for debt servicing in 2019.
Bangladesh’s high commissioner to India, meanwhile, is also “very concerned,” about the prospect of diversion of water due to Chinese dams on Brahmaputra. Speaking in New Delhi, Syed Muazzem Ali also discussed the fears of a “debt trap,” which Dhaka has kept in mind in dealing with Beijing.
Finally, despite the warming of China-Nepal ties after the formation of a new, and widely perceived to be pro-chinese government in Kathmandu, Nepal’s finance minister announced on Tuesday that the country would leverage “internal resources and build the West Seti hydroelectric project.” This was an estimated $1.6 billion project which China’s state-owned Three Gorges International Corporation was to develop. Reuters reports that according to Nepali officials, work had yet to begin on the project, scheduled to be completed in 2021-22, as the Chinese company was haggling with the government for better terms on construction and tariffs.
6. Merkel’s Bid for Reciprocity
German Chancellor Angela Merkel visited China this week, the third key Western European leader to travel to China in the first half of 2018. This was Merkel’s 11th visit to the country as Chancellor. Bilateral relations, US trade policies and the Iran nuclear deal were key items on Merkel’s agenda. State media reports suggest that just like earlier visits by the French president and the British prime minister, Merkel refrained from endorsing the Belt and Road Initiative. South China Morning post’s coverage of the visit is indicative of how US policies under Trump are creating room for convergence between Beijing and Berlin.
However, difficult issues, such as German concerns over Chinese investments in the high tech sector, remain to be addressed. For instance, a recent study by the Bertelsmann Foundation covering 175 Chinese investments in German companies between 2014 and 2017 shows that in two-thirds of cases stakes were secured in the very key industrial sectors that Beijing said it wanted to boost over the next couple of years. The key terms in this context for Germany are national security and reciprocity. Beijing has also pointed at recirprocity, hoping that Berlin will view Chinese investments “positively.”
During the visit, Merkel also took the time to meet with human rights activists, notably the family members of lawyers detained as part of the 709 crackdown. She also reportedly brought up the issue of human rights in talks with Premier Li Keqiang.
7. More Men, More Bombs
China’s increasing focus on maritime power development isn’t a secret. It’s been part of a concerted strategy for a long time now. Two interesting reports this week shed light on the advancements in the PLA Navy. The first is this SCMP report, which says that China plans to increase the size of its marine corps from about 20,000 to 100,000 personnel. The increase with expand the size of the PLA Navy, currently estimated at 235,000 personnel, by 15 percent. The piece also quotes Liu Xiaojiang, a former navy political commissar, as saying that a bigger corps could be deployed much farther afield, with members of the expanded corps likely to also be stationed in Djibouti (where the base is being beefed up) and Gwadar. However, debates persist whether PLA Navy advancements are aimed at global power projection or meeting CCP core objectives. although one can debate whether PLA Navy developments. The other linked report was this state media video of aquatic drones, which are being touted as new tools in China’s arsenal.
Finally, another SCMP report, which is based on a document by the China Academy of Engineering Physics, claims that China is aggressively developing its next generation of nuclear weapons. It says, “between September 2014 and last December, China carried out around 200 laboratory experiments to simulate the extreme physics of a nuclear blast.” In comparison, between 2012 and 2017, the US carried out 50 tests. So, is a new nuclear arms race already upon us? James Lewis, senior vice-president at the Centre for Strategic and International Studies, says yes.
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