Eye on China World

The First Shots of War

A weekly bulletin offering news and analysis related to the Middle Kingdom. This week, China formulates a multi-pronged strategy to deal with the trade war thrust on it by the US, the Communist Party turns 97 and India makes a concession.

1. ‘A Dark Day for Trade’

Friday is the day when tariffs on imports worth $34 billion announced by the US against China go into effect. US tariffs target over 800 products imported from China. Beijing has promised reciprocal tariffs–covering 545 items worth about $34 billion, including agricultural products, vehicles and aquatic products–to be imposed on US imports immediately, but it has made clear that it will not fire the first shot.

Global markets appear to be bracing for the impact of what seems to be the beginning of a trade war. These Bloomberg, Financial Times and Washington Post pieces offer a quick glimpse of the potential impact of these moves. The mood is summed up best by Jörg Wuttke, former president of the European Union Chamber of Commerce in China, when he says that “It’s a dark day tomorrow for global trade.” The real concern right now, however, appears to be Donald Trump’s June 18 threat of escalation if China goes ahead with reciprocal tariffs. Analysts also believe that the impact of a lengthy trade conflict between China and the US could have negative spillover effects for a number of countries, including Taiwan, Hungary, the Czech Republic, South Korea and Singapore.

Over the past few weeks, Beijing has adopted a multi-pronged strategy to deal with what could be a “protracted conflict” with the US.

The first component of this is domestic. There has been effort to defend the Chinese government’s industrial, economic and trade policies. China’s actions are projected as responses to US “threats and blackmail,” which are being employed to contain China’s rise. Along with this, the central leadership has sought to calm domestic markets. The People’s Bank of China has promised to keep the currency stable. The Financial Stability and Development Commission, in its first meeting, indicated an easing of the deleveraging campaign. This is important given that deleveraging is already reportedly impacting growth and the threat is that a lengthy trade war could lead to corporate defaults in China. The media, meanwhile, has been leveraged to warn investors against “irrational overreaction,”  to stem the slide in the stock markets. These actions have also been accompanied by downplaying China’s technological prowess to undermine the West’s threat perceptions with regard to China. To that effect, key Chinese media outlets, such as the Science and Technology Daily and the People’s Daily published commentaries warning against against exaggerated and unsubstantiated claims by Chinese media and commentators about the country’s achievements, saying “arrogance won’t make a country powerful.”

Second, Chinese tariff actions and diplomatic outreach have been carefully calibrated in order to “strike accurately and carefully, splitting apart different domestic groups in US.” An example of these divisions in the US is this John Kasich piece in the Financial Times, which argues that by launching this trade war America is shooting itself in the foot. Chinese state media has also been highlighting the mutually beneficial economic interlinkages between China and US and the warnings put forward by American businesses. Along with this, the Chinese Commerce Ministry says that it will protect the “legitimate interests” of foreign businesses in China, by helping “mitigate any possible impacts” of the trade war. Meanwhile, this Guardian assessment of China’s proposed tariffs indicate a clear preference for targeting Trump’s electoral base.

Third, there has been repeated emphasis on China’s policy of opening up and its support for the multilateral trading system, with the WTO at its core. This has been juxtaposed with US policy, described as “opening fire” on the world. Commerce Minister Zhong Shan published an article to this effect in the People’s Daily this week. Also, Beijing has reached out to partners in Europe in order to bolster its international position. Vice Premier Liu He and Foreign Minister Wang Yi both traveled to Europe this week. Reuters reports that China is asking the EU to adopt a joint stand condemning Trump’s trade policies, while offering to open more of the Chinese market to the EU. Xinhua has called for China and Europe to “resist protectionism hand in hand.” Ahead of Li Keqiang’s trip to Europe, state media is telling us that the premier will tell leaders there that China remains committed to opening and free trade. Europe has tricky choices to make, but much to gain.

2. Xi’s Party’s Anniversary

The Communist Party of China celebrated its 97th anniversary this week. Xinhua tells us that the party currently has 89.56 million members. Membership has remained under 1.5% since 2013, when new rules stresses on quality of members were adopted. Xi’s speeches at a few events in the week and media commentaries allow us to identify some important trends.

For instance, for Xi, political integrity of party workers, political building and self-reform are fundamental going forward. State media quotes Xi as saying that “political integrity will be the foremost criterion for selecting officials.” What this implies in the “new era” is further explained by Chen Xi, head of the CPC Central Committee Organization Department, as he stresses on the “implementation of Xi’s important thought on Party building and organizational work” and the need for “resolutely safeguarding Xi’s core status, and the authority of the CPC Central Committee and its centralized, unified leadership.” All of this, of course, implies that the anti-corruption campaign is likely to remain a potent weapon for Xi to maintain his position at the top of the CPC pecking order.

Along with political integrity, Xi also spoke about merit and suitability as factors for choosing people for certain positions, as opposed to individual’s backgrounds (code for family/networks). However, it’s important to note that Xi himself is a princeling, and in an odd coincidence, this week, Hu Haifeng, son of former president Hu Jintao, was promoted to the post of party secretary of Lishui, a city in the wealthy coastal province of Zhejiang.

Another focus area for the party this week was the youth. He Junke, a 49-year-old aerospace technocrat, assumed the top CYL position this week. Xi has strengthened his control over the CYL over the years. The league seen as a traditional factional base has had been the base for prominent political leaders, including Li Keqiang and Hu Jintao. This week, the CPC Politburo reviewed a document on identifying, training and selecting outstanding young officials. The statement that emerged from that meeting is rather clear about the priorities of central leadership and strength of CYL faction.

“The Party aims to have a sufficient supply of young officials who loyally implement Xi Jinping Thought on Socialism with Chinese Characteristics for a New Era, serve the people with heart and soul, be prepared for new tasks and new requirements, stand up to the tests of difficult jobs, be energetic, well-qualified and professional.”

3. The Maharaja Accedes

India’s national carrier, Air India, has changed the name of Taiwan to “Chinese Taipei” on its website. PTI reports that the airline took the decision following instructions from the government. India’s Ministry of External Affairs reportedly defended the move saying that it was “entirely consistent with international norms and our own position on Taiwan since 1949.” In April, the Civil Aviation Authority of China had sent out letters to various foreign airlines asking them to change the way Taiwan was referred to in their websites. Since then, a number of airlines have acceded to that request, although US airlines have resisted the change. Just this week, Global Times had published a piece calling on Air India to make the change.

The Chinese foreign ministry said that it appreciates the change as an acknowledgement of Air India respecting that Taiwan is an integral part of China. PTI reports that the Taipei Economic and Cultural Center in New Delhi has apparently lodged a formal  note against the name change to the MEA, terming the decision as the airline succumbing to the “unreasonable and absurd pressure” from China. Media in Taiwan have labeled the decision as kowtowing to Beijing.

Meanwhile, a high-level Chinese army delegation is visiting India this week. The delegation is led by the deputy commander of the People’s Liberation Army’s Western Theatre Command, Lt Gen Liu Xiaowu. The military-to-military dialogue is expected to focus on the establishment of a hotline and maintaining peace and tranquility at the borders. India and China are also scheduled to hold a maritime dialogue soon, with Defence Minister Wei Fenghe visiting India. Reporting for the Times of India, Indrani Bagchi, says that India will likely explain its newly minted policy on the Indo-Pacific to China and Russia during maritime dialogues. Meanwhile, the Global Times this week not only warned India on relying too much on the US’ Indo-Pacific strategy but also mocked the postponement of the Indo-US 2+2 dialogue.

In terms of economic ties, after China last week announced the easing of tariffs on certain imports from a range of countries, including India, New Delhi this week granted tariff concessions on 3,142 items to members of Asia Pacific Trade Agreement, which includes China. The Reserve Bank of India also granted licence to Bank of China to set up its first branch in the country. This was apparently in accordance with a commitment by Prime Minister Narendra Modi during the Wuhan informal summit.

But this doesn’t imply that it’s all smooth sailing. Mint reports that the Indian government is preparing a framework to regulate foreign investments in internet and smartphone businesses, especially in view of the increasing Chinese presence in these sectors. The report adds that “given that Chinese smartphone brands control a majority of the Indian smartphone market, regulators have identified three key threats related to Indian consumers—addiction, surveillance and manipulation.”

4. PLA’s African Ambitions

China’s growing clout in Africa has been evident over the past few days with a number of events that have been underway, such as a dialogue on human rights and a think tank forum.

The chief among these events, however, is the first ever China-Africa Defense and Security Forum being held over a period of two weeks in Beijing. Representatives of 50 African states along with the African Union are in China for the event. The delegates are reportedly discussing a major military roadmap aimed at protecting Chinese interests in the continent as well as improving Africa’s response to crisis situations. What’s in the works apparently is a major continental military cooperation plan, which is likely to be announced later this year during the Forum on China-Africa Cooperation (FOCAC) in Beijing in September.

Already, China’s State Administration for Science, Technology and Industry for National Defense has said that China has established “defence industry, science, and technology” ties with 45 African nations. Additional cooperation could expand into arms deals, humanitarian assistance, counter-terror cooperation and anti-piracy efforts, with provision of training, personnel and equipment being central to China’s approach. China’s immediate interests in deepening security cooperation, of course, relate to Chinese projects and personnel in Africa. For those interested, China Digital Times has a useful compilation of articles that touch on China-Africa defence cooperation.

5. New CPEC Report

A new report published by the International Crisis Group offers an interesting assessment of the impact that CPEC is having across Pakistan. Here’s a cheat-sheet on the report:

  • It argues that “while it is too early to assess if CPEC can deliver the economic gains Islamabad promises, the project risks inflaming longstanding tensions between the centre and smaller federal units and within provinces over inequitable economic development and resource distribution.”
  • On Gwadar, it says: “Instead of developing a sleepy fishing village into a bustling commercial hub as pledged by Islamabad and Beijing, the project is producing a heavily militarised zone, displacing locals and depriving them of economic lifelines.”
  • On Sino-Pak strategic ties: “Pakistan’s military establishment views a deeper economic relationship with China, even if tilted in Beijing’s favour, as a counterpoint to rising U.S. diplomatic and economic pressure to end support to Afghanistan- and India-oriented militant proxies. But as it expands its economic footprint in the country, Beijing, too, seems increasingly concerned about the threats posed by such proxies to its national and regional security interests.”

These are not the only difficulties that CPEC is experiencing. Reports in the Pakistani press indicate that Chinese officials and businesses are unhappy with the additional hurdles that they are having to encounter in getting clearances. And then, of course, is the serious issue of Pakistan’s financial stability. Reuters reports that China has lent an additional $1 billion to Pakistan to boost its plummeting foreign currency reserves. The report adds that with this loan, China’s lending to Pakistan in the fiscal year ending in June is set to breach $5 billion.

6. Disputes and Settlement

Earlier this year, China announced that it would set up special courts to deal with BRI disputes. This week two such courts were formally established in Shenzhen and Xian, respectively. The Shenzhen court is to deal with Maritime Silk Road related disputes, while the one in Xian will deal with disputes along the Silk Road Economic Belt. These are to be international commercial courts, which are subject to guidelines of the Supreme People’s Court. The jurisdictions of those circuit courts are subject to special guidelines made by the Supreme People’s Court (SPC). The jurisdiction of these courts, however, will only extend to trade and commercial disputes between equal commercial entities. This implies that their jurisdiction does not extend to disputes between states or between investors and states.

On concerns related to impartiality, the Global Times cites Chinese experts as saying that these courts “will include notable and authoritative legal experts and professionals to assure its legitimacy, transparency and impartiality.” Another expert, Bai Ming, from the Chinese Academy of International Trade and Economic Cooperation, is quoted as saying that these courts “are not Chinese institutions, but China-proposed international organizations.” Victor Lau writing for Out-Law.com argues that the need for these courts has arisen since over the past five years since the announcement of BRI, the “total amount of foreign-related commercial disputes has exceeded 200,000,” creating new burdens on China’s legal system. He also believes that in a bid to ensure the credibility of these courts, the SPC is looking to bring international experts on board and is likely to adopt rules similar to those of commercial courts in Singapore and Dubai.

Meanwhile, fresh difficulties have arisen for BRI in Malaysia and Myanmar. The former has announced the scrapping of major Chinese projects, including a $20 billion rail link between Malaysia and Thailand and two pipeline projects. This comes amid concerns over debt and investigations against former prime minister Najib Razak, who had particularly close ties with Beijing. Despite having taken a tough line against China, new Malaysian Prime Minister Mahathir Mohamad is reported to be likely to visit China sometime in August.

In Myanmar, the new Planning and Finance Minister U Soe Win believes that lessons “learned from our neighboring countries” inform the country that “overinvestment is not good sometimes.” That’s the politically correct version of we don’t want to go down the Hambantota road. He, therefore, wants the special zone in Kyaukpyu to be a “as lean as possible.” Myanmar’s external debt at the end of 2017 was $9.6 billion, 40% of which is owed to China, which the minister reportedly says is  “not recommendable.”

The blowback from the Hambantota case has clearly caused setbacks for BRI and rankled Beijing. For instance, the Chinese embassy in Sri Lanka hit out at notions of a “debt trap.” Also, the Global Times took aim at NYT’s recent report on Chinese strategies that led to that deal. However, in doing so, it conceded that “In the future, China will pay more attention to the solvency of the recipient countries…” However, in setting new standards of condescension, it also says that “debt is not a problem, the problem is the unwillingness to work harder.”

Getting back to Myanmar, while the country can resist and renegotiate, the real question is whether it has any real options to hedge against China, given that Bertil Lintner argues that Trump “appears to have deliberately disengaged with Myanmar”?

7. What’s the China Model?

Ever since Xi Jinping’s speech at the 19th Party Congress, there’s been much talk about China providing an alternate developmental model for countries around the world. Xi himself has been touting the desire to offer Chinese wisdom and solutions to address global problems. However, what exactly is this Chinese model, i.e., how did China develop from a poor country to the world’s second largest economy and is there a specific approach that it took, which others can emulate?

In a piece in Foreign Affairs this week, author and China expert Yuen Yuen Ang explains her understanding of the China model. She calls it “directed improvisation.”

In a nutshell, she says that under Deng Xiaoping, “Beijing became a director, not a dictator. Instead of trying to command their way to rapid industrialization and growth, reformers focused on creating the right conditions for lower-level officials to kick-start development in their own communities using local resources.” This often meant serious experimentation at local levels, with a wide array of developmental models – state-led, private players-led, etc – being implemented depending on specific circumstances.

She further adds that, while there was decentralisation, Beijing remained “highly involved in setting boundaries, initiating reforms across policy areas that complemented one another, and defining the criteria of bureaucratic success.”

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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.