A weekly bulletin offering news and analysis related to the Middle Kingdom. This week, China edges closer to the Arab world and Europe, while India stands to benefit from the trade war with the US.
1. Arabs, Africa & Europe
We’ve seen China engage in high-level diplomacy across three continents–Asia, Africa and Europe–this week. First, the eighth ministerial meeting of the China Arab States Cooperation Forum took place in Beijing. Foreign Minister Wang Yi’s article ahead of the meeting offers a glimpse at the growing China-Arab states relationship. The framework to keep in mind here is called “1+2+3,” where one refers to energy cooperation, two priority areas refer to infrastructure+trade and investment facilitation, and three is the high-tech sectors identified for breakthroughs (nuclear energy, aviation satellite and new energy).
At the forum in Beijing, President Xi Jinping delivered the keynote address. He promised deeper cooperation via a Sino-Arab future-oriented strategic partnership, which has been described as a “new historic chapter” in Sino-Arab states ties. Unsurprisingly, there was no mention of human rights and repression in Xinjiang by anyone.
Here’s what such a partnership looks like in the near term:
- Deeper cooperation in connectivity, energy, industrial upgrades and finance sectors.
- More Chinese loans. Xi promised loans worth $20 billion towards economic reconstruction and industrial revitalisation and $105 million in aid, with support for Palestine, Syria, Yemen, Lebanon and Jordan.
- A consortium of banks from China and Arab nations, with a dedicated fund of $3 billion, to be set up.
- Efforts in order to move towards setting up a China-GCC free trade area.
- A joint declaration underscoring commitment towards Belt and Road Initiative.
- Respect for each others’ core interests, which Foreign Minister Wang Yi emphasized.
- The so-called China Solution for regional conflicts in the Middle East: Pursue a “peaceful, equal, constructive and inclusive” policy.
- Reiteration of Chinese support for the two-state solution with regard to the Israeli-Palestinian issue, defined as “the root of conflicts” in the region.
Meanwhile, the two-week China-Africa Defense and Security Forum ended this week. Defence ministerial delegates from 49 African states were reportedly present at the event. There has been much talk about Beijing working on a continental military strategy, likely to come to the fore during the China-Africa summit in September–although details are sketchy so far. China’s Defense Minister General Wei Fenghe met with the delegates, promising an approach based on “sincerity, real results, affinity, and good faith.” Practically, this implies not just greater Chinese role in “peacekeeping, disaster relief, humanitarian aid and escort missions,” as CGTN reports, but also the possibility of increased arms sales, sustained military presence and capacity building activities. Moreover, there are signs that China is indicating that going forward there will be a deeper correlation between Chinese military presence and business/investments.
Finally, Premier Li Keqiang was an on whirlwind six-day European tour over the past week, with state media calling it a reaffirmation of China’s commitment to free trade. The first stop was Sofia, for the China-CEEC leaders dialogue–the so called 16+1 dialogue. China-CEEC trade volume is said to be at roughly $70 billion; Chinese investments in the 16 CEEC countries is at $10 billion. There were no new infrastructure deals announced during Li’s visit, but what was stressed was sectoral cooperation in infrastructure building, agriculture, energy and finance. The 16+1 framework is controversial for the EU, which sees it as problematic in the context of European unity. Respecting those sensitivities appeared important for Li. The Premier emphasized that China’s policies in this context are not “geopolitically motivated” and actually “helps narrow the gaps within the EU for balanced development.”
Li then headed to Germany, where he and Chancellor Angela Merkel made common cause against US President Donald Trump’s trade policies. Although François Godement believes that Trump’s policies areing sufficient to bring China and Europe together. While that remains to be seen, for now Germany and China signed deals worth $23 billion during Li’s visit, with BASF, BMW, Volkswagen, Daimler, Siemens and Bosch also announcing deals and partnerships. Bloomberg reports that BMW, in fact, is likely to now become the first foreign company to own a majority stake in a Chinese venture. Politico reports that as China and Germany deepen ties owing to headwinds from the US, going forward German companies will be permitted to own majority stakes in Chinese ventures. Merkel and Li also spoke about the need to support the Iran nuclear deal, on which Wang Yi put forward a 5-point Chinese proposal during a meeting in Vienna this week.
2. Tariffs, Tesla & Kim
At the NATO summit in Brussels this week, Donald Trump described the two days he’d spent with Xi in Beijing in November 2017 as “magical.” But that’s not stopping him from brinkmanship when it comes to his trade war. This week, the US announced potential 10 percent tariffs on Chinese imports worth $200 billion. This is in line with Trump’s earlier threats to escalate if Beijing imposed its initial reciprocal tariffs on July 6. The tariffs will undergo a two-month review process, with hearings in late August, before they can be imposed. The list of goods to be targeted, experts say, indicates that Washington is focussing on key Chinese manufacturing export industries. How bad could all this get? Well, Treasury Secretary Steven Mnuchin, who has been seen as a voice for dialogue in the Trump administration, said this week that talks to bridge the differences between the two sides have “broken down.”
In response, China’s Ministry of Commerce issued a detailed statement outlining Beijing’s perspective. The statement says US economic woes are “purely caused by domestic, structural reasons.” It also adds that Trump’s trade war not only targets China, but “the whole world.” The People’s Daily, on the other hand, is not as sanguine in its tone, saying that the White House had “lost its rationality” amid “overbearing arrogance” and “bullying behaviour.” Global Times, meanwhile, terms Trump’s actions as “extortion.”
The new tariffs threat rules out the option of reciprocal reaction from Beijing, opening the door for “qualitative” actions. WSJ reports that these actions include “holding up licenses for US firms, delaying approval of mergers and acquisitions involving US companies and ramping up inspections of American products at borders.” But even this is a delicate balancing act of carrots and sticks for Beijing. Publicly, it has so far sought to assure American companies given that majority of them are on its side and it desires to use them as a lobby group in the US. Add to this Elon Musk’s recent visit to China, with Tesla announcing its first factory outside the US in Shanghai. Importantly, this would be a wholly foreign-owned venture in China.
Finally, the one other somewhat obliquely connected card that Beijing holds in all this is its influence in Pyongyang–a city that Xi might visit soon. US Secretary of State Mike Pompeo’s latest visit to North Korea reportedly exposed the limitations of Trump’s approach, with the blame being laid on Beijing’s doorstep. But then, as Shi Yinhong, an expert on Sino-US relations at Renmin University, says: “Now, the US is having a trade war with China so that it cannot hope for China to help out as China did last year.”
3. India’s War Gains
In a speech this week, Chinese ambassador to India Luo Zhaohui discussed India-China relations and the US-China trade war. He argued that China “shares quite the same language with India on various international and multilateral issues,” seeking cooperation in issues of global governance, upholding free trade, and promoting economic globalization. Washington’s tariff pressures against China are opening new opportunities for Indian businesses.
The Economic Times reports that India could export soya bean, groundnut and oilmeals to China if the US-China trade war persists. The report adds that “industry hopes to export $100 million worth of soya bean meal to China and around $50 million of groundnut because of the two enabling factors. At present, India does not export any soya bean oil or flour of soya bean but sends negligible amount of oilcake obtained from soya bean oil extraction to China. Groundnut exports are subject to a 15% duty in China.”
Another area of expanded trade is the pharmaceutical sector, where the winds of change appear to be encouraging. Reuters quotes an unidentified head of an Indian export promotion group as saying that China is preparing to give swift regulatory approvals to India-manufactured drugs. The same piece also quotes an unnamed government official as saying, “we do feel that China is receptive at this time and it’s all about making prices competitive.” Global Times also reports that the two sides are in talks on further opening China’s pharma market for Indian firms. No concrete deals, however, have yet been announced or signed yet. So, one should take reports of deals on reduction of tariffs on anti-cancer drugs that came out this week with a pinch of salt for the moment.
While trade is likely to expand, increased connectivity might take a bit more time. ET reports that India has rejected the Chinese government’s request to allow its carriers add more flights on the India-China route after strong opposition from Indian carriers who said that they have plans to launch flights to China. The report also tells us that carriers from each side are allowed to operate 42 flights a week according to the current quota, with the Chinese having used up about 93% of the quota compared with the 12% used by Indian carriers.
Switching to military ties, after a Chinese military delegation’s visit to India last week, it has now been reported that a small Indian military delegation led by Eastern Army Command chief Lt-General Abhay Krishna will visit China to discuss CBMs along the LAC. The much talked about military hotline, meanwhile, has apparently hit a snag owing to operational and protocol issues that have emerged from different command and control structures of the forces of the two countries, reports The Print. Another report in The Print claims that the Indian Army has decided to shelve all new raisings – create battalions with fresh recruits – for a China-specific Mountain Strike Corps, owing to financial constraints. The creation of 90,000 troops for the MSC was taken five years ago.
Finally, a bit of politics, with Xinhua’s lengthy piece speculating whether the NDA government will call early general elections. The report talks about the BJP being “concerned at losing popularity” as evident by “poor performance in recently held by-polls” and “not-so-successful” economic policies. Assessing the piece, however, India Today’s Ananth Krishnan reports that “the general sense among strategic experts (in Beijing) who follow India is an expectation that Prime Minister Modi will return for a second term.”
4. Indo-Pacific Watch
The second India-China Maritime Affairs Dialogue was held in Beijing on Friday, with the two sides sharing “perspectives on maritime security and cooperation, blue economy, and further strengthening of practical cooperation.” India’s Ministry of External Affairs says that the Indian side also “elaborated on India’s vision for the Indo-Pacific region as articulated in Prime Minister (Narendra) Modi’s keynote address at this year’s Shangri-La Dialogue in Singapore.” The statement also adds that both sides “emphasised the need to further strengthen maritime cooperation as an important area of India-China bilateral relations, and as a platform to strengthen political and strategic mutual trust between the two countries.” Prior to this meeting, Chinese analysts had argued that India was unlikely to sacrifice its foreign policy principle of strategic autonomy while pursuing what is a US-led Indo-Pacific strategy.
Earlier in the week, the MEA had convened a conference of its diplomats this week, with issues related to China being among the top priorities. Reports suggest that India is planning on a broad, three-pronged approach to deal with China’s increasing engagement in the Indian Ocean neighbourhood. The three prongs are: track Beijing’s activities carefully; pursue its own projects and commitments; and educate and advise neighbours on the consequences of engaging with China. Also this week, Indian naval ship INS Sumitra entered Indonesia’s Sabang port. This is an important and controversial location for the Chinese, given that Sabang is at the mouth of the strategically important Malacca Strait. an official statement from the Indian embassy in Jakarta said that the ship was visiting for a “routine operational turnaround.” However, it is clear that there have been specific conversations on jointly developing the port, with ET reporting that a joint team led by foreign ministry officials of both countries visited Sabang this week to explore collaboration to develop strategically located deep-sea port.
5. Xi’s Overall Reform
Xi Jinping presided over the third meeting of the committee for deepening overall reform, with a range of documents being finalized. Xinhua has put out an entire list of the documents that were cleared, but here are some that I believe are of high significance, given that they concern bureaucratic structures, economic management and tackling corruption.
- Pilot promotion mechanism for management staff in public institutions at or below county level.
- A document on financial policies for promoting deeper military-civilian integration.
- A plan to set up a new prosecution division on public interest litigation in the Supreme People’s Procuratorate.
- A regulation on preventing and punishing statistical falsification.
- A third-party evaluation of government purchased services.
Another important focus domestically is the campaign against debt, which by all measures appears to be easing. People’s Bank of China advisor Liu Shijin believes that China is now “entering a phase of stabilizing leverage,” which, as this Caixin piece tells us, implies that the government and central bank are looking “to strike a balance between deleveraging and protecting a slowing economy.” This WSJ piece offers a good round-up of the events over the past few months that have led to a relaxation of the deleveraging campaign.
It’s not all gloomy, however. China’s innovation is improving, with the country ranking as the 17th most innovative economy in the world. Exports appear to be holding strong. And a new Reuters poll of economists indicates that China is on track for 6.6% GDP growth this year.
6. Freedom & Despair
Just about a year after the death of her husband, Liu Xia, the wife of the late Nobel Peace Prize winner Liu Xiaobo, is finally free. Liu landed in Germany this week, after living in virtual house arrest in China for years. Images of a smiling Liu arriving in Berlin–a city that hosts many Chinese dissidents–were splashed across the papers around the world. This NYT piece tracks the complex negotiations between Germany and China that led to Liu’s freedom. This, in many ways, was a personal initiative of Chancellor Merkel.
Also, it’s important to note that the Chinese government’s decision to let Liu go was a strategic one. For instance, this SCMP piece quotes Tienchi Martin-Liao, the Cologne-based president of the Independent Chinese PEN centre, telling Die Zeit newspaper that the Chinese government had treated Liu Xia “as a gift to the German government, so that the relationship between the two countries could be intensified.” So it’s not really a surprise that this has happened the week Li Keqiang visited Germany.
None of this signifies a softening of the Chinese state’s position on critics and dissidents. As though emphasizing that, a day after Liu landed in Germany, the People’s Intermediate Court in Wuhan sentenced veteran pro-democracy and rights activist Qin Yongmin to 13 years in prison on charges of subversion. Prosecutors reportedly cited Qin’s writings on democracy as evidence of his subversive activities.
7. BRI Snags and Progress
The Financial Times reports that a new study by RWR Advisory Group, a Washington-based consultancy, says that 14% (234) of the 1,674, Chinese-invested infrastructure projects announced in 66 Belt and Road countries since 2013 have hit trouble so far. What constitutes trouble is public opposition to projects, objections over labour policies, performance delays, concerns over national security. While 14% implies that 86% of the projects have not hit snags, it is important to assess the total value of the projects that fall within this 14% cluster. Responding to queries on Twitter RWR Advisory Group clarified that these 234 projects account for 33% of the total value of projects in these countries.
Some of the problems that BRI projects are facing are evident in Myanmar. ET reports that Myanmarese farmers are protesting against the construction of a Chinese oil pipeline, which passing through the Rakhine. The farmers are accusing China National Petroleum Corporation of human rights violations and failure to compensate them. Despite such incidents, China and Myanmar have reportedly agreed on 15-point MoU on building an economic corridor. Xinhua tells us that the two sides are “expected to reach an agreement soon” on building the deep-sea port in Kyaukphyu. And Beijing is stepping up its role as a broker in the peace talks between the Myanmarese government and rebels. Also
It’s not just the Silk Road Economic Belt and the Maritime Silk Road that’s leading to concerns, even the Digital Silk Road is coming under scrutiny. For instance, CNBC reports that while China is hoping to build fiber optic cables, international trunk passageways, mobile structures and e-commerce links in BRI countries, analysts fear that it could install “backdoor mechanisms that could increase [Beijing’s] intelligence and propaganda operations in BRI partner countries.” An example of this is Danielle Cave’s latest report for the Australian Strategic Policy Institute, which discusses Huawei’s link to the recent African Union spying scandal.