A weekly bulletin offering news and analysis related to the Middle Kingdom. This week, China and India continue their delicate dance, as Philippines steps back and Taiwan steps forward.
1. The SCO Summit
Leaders of the Shanghai Cooperation Organisation member states will be gathering in the Chinese city of Qingdao over the weekend. Expect Xi to roll out the red carpet with a welcome banquet and fireworks display.
State media reports tell us that the members are to discuss the “implementation of the bloc’s guiding ‘Shanghai Spirit’ and the prospect of a community with a shared future.” The Shanghai Spirit refers to norms of mutual trust, mutual benefit, equality, consultation, respect for diverse civilizations and pursuit of common development.
In terms of outcomes, the summit is to result in the Qingdao Declaration, a five-year outline for the implementation of the “Treaty on Long-term Good Neighborliness, Friendship and Cooperation,” a three-year outline for cooperation on combating terrorism, separatism and extremism, along with discussions on a draft related to drug trafficking. Additional agreements on economic development and connectivity are also likely to be inked.
This is the first SCO summit since India and Pakistan came on board as full members. This Global Times piece argues that the inclusion of the two South Asian nations has given “special meaning” to the organisation. Both countries will participate in a joint SCO military drill, dubbed Peace Mission 2018, in August. Chinese experts say such an interaction is indicative of the significance of the SCO.
Indian Prime Minister Narendra Modi will be attending the summit and will also meet with Chinese President Xi Jinping at the sidelines of the event on June 9. Preparatory talks between the Indian foreign secretary and China’s vice foreign minister were held this week ahead of the Qingdao meeting.
While the focus during the SCO summit will be on terrorism, discussions on connectivity projects, including BRI, are on the table. It is highly unlikely, but still remains to be seen if the outcome document contains an Indian endorsement of BRI. India’s ambassador to China Gautam Bambawale discussed the SCO summit on Chinese state TV, saying the major message from the meeting will be one of the need for multilateralism and multipolarity. On the bilateral Sino-Indian dynamic, Bambawale said: “We are not going to be going away from each other or apart from each other. We are going to do this (develop and manage differences) together.”
Among the other invitees, it has been announced that Xi will be holding bilateral meetings with Kyrgyz President Sooronbay Jeenbekov, Kazakh President Nursultan Nazarbayev and Russian President Vladimir Putin. Iranian President Hassan Rouhani will pay a working visit to China during the weekend.
Iran enjoys observer status with the SCO. Rouhani’s visit is significant since it comes soon after the Trump administration backed out of the 2015 nuclear deal. China, Russia and European states have been working together to maintain the integrity of the deal. However, on Monday, Iran’s Supreme Leader Ayatollah Khamenei said that he had ordered preparations to increase uranium enrichment capacity if the nuclear deal collapsed. The announcement has led to concerns in Europe, with France’s foreign minister saying the Tehran was sailing close to a “red line.” A Xinhua analysis indicates that Beijing is concerned that any provocation from Tehran could push European states closer to Trump’s position.
China’s foreign ministry, meanwhile, has called for “all relevant parties…to bear in mind the long-term and overall picture.” It views safeguarding the JCPOA as important international nuclear non-proliferation regime and for peace and stability in the Middle East. The ministry has also indicated that discussions on Iran joining the SCO are likely to take place at the Qingdao Summit.
2. The Indo-Pacific Theatre
Modi attended the annual Shangri-La Dialogue in Singapore over the last weekend, where he delivered the keynote speech. Modi’s pitch was that “the destiny of the world will be deeply influenced by the course of developments in the Indo-Pacific region.” India’s vision, he says, calls for a “rules-based order” that yields a “free, open, inclusive region.” These phrases have of late become stock diplomatese, generally to critique Chinese actions in the region. (Read my take on this here.)
Modi also specifically discussed the Sino-Indian dynamic, stating: “No other relationship of India has as many layers as our relations with China. We are the world’s two most populous countries and among the fastest growing major economies. Our cooperation is expanding. Trade is growing. And, we have displayed maturity and wisdom in managing issues and ensuring a peaceful border.”
The remarks were welcomed by the Chinese side as “positive.” The tone and language, however, changed when discussing US Defence Secretary James Mattis’ address at the SLD (Details on how China fared at SLD here). The Global Times in its editorial discussing the Indo-Pacific conceptualisation terms the US approach as one of “driving a wedge between China and India.” It also adds that China views the Indian Ocean as a “transportation route” whereas the US considers it a “major battlefield for consolidating its global hegemony.”
Reports (link in Chinese), however, suggest that China is enhancing facilities at its base in Djibouti. Importantly, part of the work is building a new 450-meter-long terminal, which experts suggest could eventually dock the Liaoning carrier and amphibious assault ships. Chinese vessels also reportedly tailed the Indian Navy’s vessels which were returning after bilateral drills with Vietnam. Meanwhile, a Joint Secretary level meeting of the that members of the Quadrilateral Security Dialogue took place in Singapore on June 7. Just like after the first meeting in November 2017, each side issued a separate statement. An earlier TOI report on the possible meeting had said that “At both Wuhan and Sochi summits, Modi was quizzed by his counterparts on how far India would go with the Quad. Russia and China are increasingly conflating the ‘Indo Pacific’ policy with the Quad.” The annual India-US-Japan Malabar drills are also set to begin this week, although at least one Chinese military strategist, Major General Du Wenlong, believes that the drills are of “low combat value.”
Separately, while there appears to be positive talk on military-to-military diplomacy between India and China, there is yet to be an official statement on the proposed hotline and Hand-in-Hand bilateral drills. However, the two militaries are said to be discussing the possibility of a Chinese border forces delegation visiting India “to strengthen border management and control and further mutual trust.”
Possibilities of cooperation and systemic differences between the two countries also came to the fore this week. For example, aviation officials from India and China met for the first time in a decade in order to discuss boosting connectivity. Likewise, key Chinese companies in the sugar sector participated in an event organised by the Indian embassy in Beijing. India Today reports that China consumes around 14 million tons of sugar annually while producing only 10 million tons. Indian companies, therefore, are pitching for exports of upto 1 to 1.5 million tons, estimated at $500 million. An agreement on this could be possible later this year.
However, a deal on the Regional Comprehensive Economic Partnership doesn’t seem likely. Mint reports that “ahead of the July RCEP ministerial in Tokyo, China demanded tariff elimination in more than 90% of traded goods for granting non-reciprocal market access to India. India’s current offer is of tariff elimination in 73% of traded goods to China. In addition, many countries negotiating the terms of the RCEP want India to open up its market for 92% of traded goods, while India is only ready to offer market access for up to a maximum of 85% items with deviations to countries like China, Australia and New Zealand.” The report also adds that the Chinese side was “very demanding and not flexible” during the talks.
3. Tackling Trump
Beijing appears to be indicating that talks with the Trump administration on the trade dispute have made progress. On Thursday, China’s Commerce Ministry said that it does not want an escalation of trade frictions and is willing to expand imports, although no specific details have been offered. Trump has threatened tariffs on up to $50 billion of Chinese exports, with a final list of goods for duties likely to be issued by June 15th.
US Commerce Secretary Wilbur Ross traveled to Beijing to hold talks with Liu He over the weekend. The discussions ended with a Chinese statement that was devoid of specifics and contained a threat that any imposition of tariffs would negate the “outcomes of the talks.” However, there have been reports that the Chinese side has offered to expand imports by $70 billion.
Meanwhile, the Trump administration’s steel and aluminum tariffs against the EU, Canada and Mexico on national security grounds could potentially lead to a showdown at the G7 meet in Quebec on Friday. The EU is reportedly already planning retaliatory tariffs, while the Canadian Prime Minister Justin Trudeau has termed the national security justification as “insulting.” Things between the two North American neighbours only grew worse after a call between Trudeau and Trump this week, where the US president accused Canada of burning down the White House in 1812 (Note: It was the Brits who did that.) In Beijing, such fissures between the US and allies on trade would be seen as a welcome sign. Indications of this are already evident in the Chinese diplomacy and press. Exhibit A: China, EU uphold multilateral free trade amid headwinds hand in hand. Exhibit B: China and EU face a common challenge in safeguarding free trade
Another reason for Beijing’s optimism is the fact that the Trump administration has finally eased off on ZTE. Reuters reports that under the deal, ZTE will change its board and management within 30 days, pay a $1 billion fine and put $400 million in escrow. The US will suspend its 10-year ban on ZTE in return, but it can activate the ban if there are any violations. “We will closely monitor ZTE’s behavior. If they commit any further violations, we would again be able to deny them access to U.S. technology as well as collect the additional $400 million in escrow,” said Wilbur Ross.
Beyond the trade issues, another spy scandal has come to the fore, with US officials arresting former Defense Intelligence Agency officer Ron Rockwell Hansen on charges of espionage. Hansen is accused of “acting as an unregistered foreign agent for China.” Earlier this year, former CIA officer Jerry Chun Shing Lee was arrested for giving classified information to China and playing a role in crippling the CIA’s network in the country. Also, there are reports of US diplomats suffering from apparent sonic attacks in China.
4. The Sea and Strait
Tensions continue in the South China Sea, with reports stating that two US Air Force B-52 bombers flew near the Spratly Islands. The Diplomat reports that the bombers were flying from Diego Garcia, in the Indian Ocean, to Andersen Air Force Base on Guam in the western Pacific Ocean, as part of a “routine training mission.” China’s Foreign Ministry responded sternly to the reports, saying that “China won’t be scared by any so-called military ship or aircraft, and we will only even more staunchly all necessary steps to defend the country’s sovereignty and security.” Hua Chunying also took the opportunity to justify Chinese militarisation of the islands.
Hua said: “If someone armed to teeth comes to your doorstep every now and then, poking around and showing off muscles, aren’t you justified in sharpening vigilance, taking precautions, and increasing defense capacities?” Meanwhile, satellite imagery suggests that Chinese surface-to-air missile systems on Woody Island, in the Paracels, may have been removed or relocated.
Across the waters in the Philippines, Rodrigo Duterte offered a rather odd reason for his government’s China policy. Let me summarize his argument: He says that he didn’t want to press China since that would result in a war. The Philippines, according to him, would certainly lose a war with China. Knowing that, he cannot take such a decision, lest it lead to a massacre or internal revolt by the army. This just doesn’t sound right, given that most observers agree that the Philippines defence establishment view China as a continued source of threat and has been a votary of closer ties with the US to counterbalance Beijing.
Speaking of counterbalancing, Taiwan is ramping up military drills to train in repelling invading forces, while Taiwanese media reports are discussing a proposal by an unnamed think tank for Taipei to offer the Taiping Island in the Spratlys for a potential US base in the region. This is akin to an idea that had been floated a few weeks ago by an US-based academic about building a “Freedom Island” base in the South China Sea. All of this is highly unlikely. It is still unclear whether a senior US diplomat will attend the re-opening of the The American Institute in Taiwan on June 12, the US’ de-facto embassy there. What does appear likely, however, is the possibility of a US warship passing through the Taiwan Strait. The last time a U.S. aircraft carrier went through the area was in 2007. While this would invite China’s ire, it wouldn’t violate any laws and would also send a signal to Beijing that the US will stand by Taipei.
China’s pressure campaign has already resulted in Taiwan losing two diplomatic allies last month. Beijing has also launched a campaign against private enterprises to change their public messaging to depict Taiwan as part of the mainland. The latest company to give in was the Australian carrier Qantas, despite Taiwan’s objections. The White House, however, has reportedly told American airliners not to concede. The Global Times’s advice to Washington is that it mustn’t meddle in decisions of private companies (Oh, the irony!).
5. Debt Watch
A new report in the Financial Times offers a glimpse at China’s attempts at curtailing debt. The gist of the story is that Beijing’s deleveraging campaign has largely been targeted at state-owned enterprises, while lending for private players has been encouraged. As per data from China Chengxin International Credit Rating, liabilities-to-asset ratio at industrial SOEs dipped two percentage points from the end of 2016 till April 2018. In contrast, the ratio for private companies climbed by six percentage points.
China’s debt to GDP ratio is estimated at 256 percent. It rose just 0.4 percentage points last year, a massive change from average increases of 13 percentage points over the past decade. A large majority of China’s enterprise debt is concentrated in the state sector. While the FT report might indicate greater support for the private sector, it is important to note that the government will bail out ailing state enterprises, while private enterprises don’t necessarily get such backing. Moreover, the government’s crackdown on shadow banking is also hurting the private sector.
Liabilities of SOEs remains a key sticking point in an otherwise positive review of the Chinese economy by Moody’s Investors Service. The assessment says that China’s manufacturing sector, driven by government policies, is showing signs of a shift to higher value-added areas. The IMF also offered a fairly upbeat view on the Chinese economy. The Fund’s China chief representative Alfred Schipke told SCMP that “the economy is doing relatively well, and reforms are progressing.” But concerns remain over SOEs, zombie firms and restrictive trade and investment rules.
Another key area to watch out for is the IPO space. New rules have been finalised to enable overseas-listed companies to list on the mainland. So companies like Alibaba and Tencent can list on mainland markets by issuing China depositary receipts.
6. Investments & Disputes
China’s Commerce Ministry put out new data on BRI this week. The ministry says that China and BRI countries inked trade deals worth $389.1 billion in the first four months of 2018. China’s non-financial investment in those countries also grew to $4.67 billion. A new MERICS BRI tracker, meanwhile, estimates that in the five years since the launch of the initiative, China has invested nearly $25 billion in a range of infrastructure projects. If that number seems small, then that’s because the tracker does not include projects still under construction or in the planning phase.
As investments grow, so do disputes. SCMP reports that according to the Hong Kong International Arbitration Centre, the number of cases it handled involving parties from BRI nations jumped 77 percent to 124 last year. Almost a third of last year’s disputes were between parties from mainland Chinese and other nations covered by the initiative last year. The center has now formed a “belt and road advisory committee” and launched an online resource platform for parties with projects in nations covered by the scheme that are at risk of legal disputes.
7. The Tiananmen Anniversary
June 4 marked the 29th anniversary of the Tiananmen Square massacre. Even today, the events of that fateful day in 1989 find a resonance within and outside China.This year, Reporters Without Borders pointed out that the Chinese government had sent several bloggers on “forced vacations” ahead of the anniversary. In Hong Kong, nearly 17,000 people participated in a vigil to mark the anniversary. The ceremony included speeches, a eulogy for the victims and a moment of silence.
Despite restrictions in the mainland, the events still hold significance for a number of people. For instance, Cui Jian, often known as the “godfather of rock in China,” touched upon the events of 1989 in a concert in Guangzhou this week. He performed a couple of songs that have come to be associated with the 1989 movement, while also saying:
To tell you the truth, until today I still don’t know why I am angry, and don’t know why we suffered that hurt. But this hurt still gives us feeling. Now it is already 2018, that which should have changed still has not changed…so this song still has a bearing on reality. Ok, I hope everyone can understand what I’m saying.
Meanwhile, the US Congress’ China Commission issued a strong statement to mark the anniversary, with US Secretary of State Mike Pompeo also calling for China to make full accounting of the crackdown. Beijing, unsurprisingly, took objection to Pompeo’s remarks.
Note: This NYT piece on the dynamics among PLA soldiers in 1989 and this piece in The Diplomat on the legacy of the crackdown offer excellent insights. Another interesting read is this Joseph Cheng essay on Xi’s human rights record.
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