A weekly bulletin offering news and analysis related to the Middle Kingdom. This week, President Xi Jinping leaves for his foreign tours while a trade spat unfolds at the WTO.
1. Front Page Coverage
Chinese President Xi Jinping embarked this week on the first foreign tour of his second term. Xi is traveling to the UAE first before heading to Africa for visits to Rwanda, Senegal, South Africa and Mauritius. Expect a lot of Belt and Road talk and deals over the next week, as China deepens its focus on emerging markets and developing countries amid Donald Trump’s ‘America First’ approach. As has largely become customary, prior to arriving in the United Arab Emirates (UAE), a signed article by Xi appeared in the local press. Xi wants China and the UAE to be “strategic”, “collaborative”, “interactive” and “innovative” partners. He also highlights cooperation in energy, ports, infrastructure and finance. Analysts believe that further deals in these sectors are likely, going forward.
From the preparations that were underway in the UAE, this visit promises to be a bit of a spectacle. The UAE is reportedly home to some 200,000 Chinese citizens and 4,000 trading companies. Dubai’s Sheikh Mohammed bin Rashid expects the visit to launch “a new phase of fruitful cooperation and promising outlooks.” China-UAE bilateral trade was estimated at approximately $50 billion in 2017, with re-exports being an important piece of that pie.
With regard to the trip to Africa, this CNN piece offers interesting insights. I’d summarize the article by saying that if you scan the continent’s map and you’ll notice the significance of the chosen states: Senegal (on the Atlantic coast), Mauritius (in the Indian Ocean), Rwanda (located in Central Africa and important for connectivity projects) and South Africa (a regional powerhouse and BRICS summit host). Also, do read this quick take by Janet Eom for Axios on numbers related to trade, investment and loans.
The tour will ensure that Xi Jinping dominates the front pages of the Chinese press. Now, given that overwhelmingly Chinese media is party-state controlled, this might sound like an odd thing to focus on. But that’s not quite the case. A recent Financial Times piece about China downplaying the rhetoric around the ‘Made in China’ policy stirred much controversy. The article, citing the Hong Kong-based Apple Daily, claimed that “there had been an unusual reduction of state media coverage of Mr. Xi.” It added that last week, Xi’s photo did not appear on the front page of The People’s Daily – the first such instance in nine months. And on the same day, his name did not appear once on the first page – the first such instance in five years.
This, the FT piece argues, is a sign that the party was trying to shift public focus away from Mr Xi’s policies amid slowing growth and the confrontation with the US. “The trade war with the US has caused panic inside the system, including the fear that China’s tit-for-tat approach will cause trouble for China’s economy,” said Zhang Lifan, a Beijing-based Communist party historian. The article’s claim led to a fair amount of social media discussion. In the end, data put out by Wall Street Journal’s Chun Han Wong indicates that any such reading of tea leaves to assess Xi’s authority can be problematic. Eventually, as though reading into the debates, the July 17th edition of the People’s Daily made an emphatic statement with three pictures of Xi on the front page.
Two Weeks & Counting
Key economic advisor to Donald Trump, Larry Kudlow, director of the National Economic Council, believes that Xi Jinping “is holding the game up” when it comes to the trade talks between the two sides. He added that China had not “responded at all, not one basis point, to our request to do something about the theft of intellectual property and the forced divestiture of our technology.” China’s foreign ministry says that Kudlow is making “bogus accusations.” Reuters reports that no specific meetings are planned so far at the sidelines of the upcoming G20 summit in Argentina between the treasury secretary, Steven Mnuchin, and Chinese officials.
It’s two weeks since tariffs went into effect, formally beginning the Sino-US trade war. What’s happened so far is that the two sides are sparring at the World Trade Organisation (WTO): China is reaching out to Europe, India and other emerging markets, and toning down certain kinds of rhetoric. Xi has also been repeatedly emphasizing the need to focus on indigenous development of core technologies. At the WTO, the US launched formal challenges against China, the EU, Canada, Mexico and Turkey for retaliating against steel and aluminium tariffs. China, meanwhile, lodged an additional complaint regarding Trump’s proposed tariffs on $200 billion worth of Chinese imports.
The 20th China-EU Summit this week ended with a remarkable joint statement. Sample this: “Both sides reaffirmed their commitment to multilateralism and the rules-based international order with the United Nations at its core…China and the EU are committed to upholding all three pillars of the UN system, namely peace and security, development, and human rights.” Premier Li Keqiang, meanwhile, was cautious in arguing that “talks between China and the EU do not target a third party.”
WSJ’s Emre Peker reports that while the the EU is seeking to enlist Chinese support to counter the US, it has to “balance a desire to partner with Beijing to counter the U.S. with concern over anticompetitive policies in China.” The meat of the story, however, is in the numbers. Baker Mackenzie estimates that Chinese capital has been flowing into Europe. “In the first six months of the year, newly-announced Chinese mergers and acquisitions into Europe were $20 billion compared to $2.5 billion in North America, while completed Chinese investments in Europe exceeded those in North America six-fold, at $12 billion compared to $2 billion.” Along with this, do note this Rhodium Group estimation, which claims that Chinese venture captial funds inked $2.4 billion in deals between January and May 2018, with the main focus being in communications technology and biotech.
Analysts believe that Trump’s trade assault has also led the Chinese government to focus on diversifying trade and reaching out to new markets, which is opening new opportunities for traders and businesses in countries like Brazil, India and Japan among others. Amidst all of this, Xi chaired a meeting Central Committee for Financial and Economic Affairs on Friday. The statement after the meeting called for enhancing fundamental research and seeking major breakthroughs in core technologies, demanding a “sense of urgency and crisis.” Beijing is keen to do so because it believes it is too dependent on foreign suppliers of semiconductors, importing more than 95% of high-end chips used in computers and servers. FT quotes Xin Guobin, deputy director of China’s Ministry of Industry and Information Technology as saying, “We are still decades behind developed countries and the road to becoming a great manufacturing power remains long.”
The Pakistan Axis
On 25 July, people across Pakistan head to the polls to elect a new government. Beijing is keenly watching the twists and turns, given its close political and increasingly deepening economic relationship with Islamabad. For example, this piece in the Global Times characterises Chinese involvement via CPEC as an effort in “teaching one to fish” and improving governance in Pakistan. The piece appears to assure Pakistanis that China would not interfere in the country’s political process (a reaction to the Sri Lanka case) and neither was CPEC a “debt trap” as is being projected. So how do Pakistani political parties and the society at large view CPEC and China’s involvement in the country? Fairly positively, argues Muhammad Akbar Notezai in The Diplomat. The piece quotes Michael Kugelman, deputy director of the Asia Program and senior associate for South Asia at the Woodrow Wilson International Center for Scholars, as saying that CPEC is “arguably one of the most popular public policy developments in Pakistan.” That is, however, not to say that there are no concerns whatsoever, as evident in the conversation of espionage in the media following Huawei’s installation of the first land-based China-Pakistan optical fibre cable.
However, that does not mean that there aren’t frictions and concerns. The chief among these for Beijing is security and stability. For instance, the recent terrorist attack on a political convoy in Balochistan reverberated in Beijing too. In fact, it prompted a personal message of condolence and support from Xi to his Pakistani counterpart Mamnoon Hussain. But while security remains a challenge for the Chinese side, this piece indicates that it is also an opportunity for cooperation, particularly in terms of surveillance technology, predictive policing, etc.
Apart from security and despite the statements to the contrary, debt and financial implications are concerns even for Chinese actors. For example, Business Recorder reports that China is adopting a “go slow” policy on CPEC owing to concerns of non-payment of dues of over $200 million for CPEC energy projects. The report adds that Chinese ambassador Yao Jing recently highlighted eight energy projects which have been completed but are facing financial crises due to non-payment of dues. In comparison, infrastructure projects are in a better position as payment of loans taken for these projects would become due in ten years.
Two other interesting China-Pakistan stories to note this week: The first is about China building eight submarines for Pakistan; the second, about an unprecedented meeting of the spy chiefs of China, Pakistan, Iran and Russia in order to tackle the Islamic State and work together in Afghanistan. The Pakistani foreign ministry has expressed ignorance of the meeting, but the Russian outlet TASS has quoted Sergei Ivanov, the chief of the Russian Foreign Intelligence Service’s press bureau, as confirming that the meeting did indeed take place. If you are interested in an analytical perspective on China’s security concerns and broader approach with regard to Afghanistan, I’d recommend running through this new ECFR report.
New Opportunities, Old Frictions
Two clarifications came from the Indian government this week through a written reply submitted to Parliament by MoS External Affairs VK Singh. The first was the fact that India was discussing its NSG membership bid with China. The second, that Beijing had not formally proposed a trilateral summit with India and Pakistan. All three countries, however, will be participating in the International Army Games 2018, which will be conducted from July 28 to August 11 in Russia. This along with the maritime dialogue, which was held last Friday, possibly indicates improving Sino-Indian military-to-military ties. However, bilateral ties remain remain sensitive as indicated by this story of a Chinese weather station in Yumai township in Lhunze county of Shannan Prefecture in Tibet.
Meanwhile, the Economic Times reports that India and China are likely to jointly train Afghan diplomats. This is being reported as the capacity building project that has emerged following the Wuhan summit. The ET report also says that Delhi and Beijing hope to undertake joint projects in Afghanistan in health, education and food security. There’s no official confirmation on any of this for now. The post-Wuhan framework for such joint cooperation in a third country is defined as China, India plus one or China, India plus X. The Hindu’s Atul Aneja believes this offers an opportunity for India to “join and shape the conversation” in countries in the region and build trust with China.
Amidst these possibilities and opportunities, there were also some frictions this week. For starters, India raised a host of issues regarding its trade with China at the WTO, from the trade deficit, access to the Chinese market to visa restrictions. Also, India’s Ministry of Commerce and Industry has recommended 25% duty on imports of solar cells from China and Malaysia. That’s far lower than the 70% that was proposed in January. Moreover, as per the recommendation, this number will ease to 20% after one year. Six months later, it will further ease to 15%. The Indian Finance Ministry has to give its approval to this recommendation for it to take effect. Chinese analysts are apparently seeing these moves as part of a “risky” and “bigger strategy, under which India appears to be trying to side with the US in the hope of being exempted from US tariffs on steel and aluminum.”
Tianxia, Tianchao & Jimi
A new paper by Didi Kirsten Tatlow, visiting fellow at the Mercator Institute of China Studies, offers interesting insights into how the Communist Party of China under Xi Jinping is leveraging age-old imperial governance norms to achieve its foreign policy objectives. The paper explores three specific concepts:
- Tianxia (all under heaven): “An abstract Confucian ideal of the whole world known to the emperors with China in the middle. Once restricted to Asia, the concept is now going global.”
- Tianchao (Heavenly court): “The real, existing state during imperial times, which was ruled by an emperor who was the chosen ‘son of heaven’ (tianzi). The predecessor of today’s one-party state.”
- Jimi (Bridling and feeding): “A method used to pacify non-Chinese territories and create vassal states by reward and threat. An earlier version of today’s ‘carrot and stick’.”
Through these, it seeks to explain China’s foreign policy objectives – such as the building of a community of shared future for mankind – and approaches – such as coercing multinationals to accept the party’s stance on Taiwan. The author believes that we are living “in a time of system competition.” Given this, it is important that policymakers and analysts not dismiss such historical Chinese concepts as mere words. “They are visions, or codes, with power implications.” An example of how some of this is playing out in the world is this SCMP story on debates over Chinese influence in Singapore.
BRI’s Bumpy Road
While Xi Jinping is likely to be busy inking BRI deals in UAE and Africa, there are new, debt-related concerns that are emerging. A riveting Reuters report this week discusses the implications of a Chinese-funded highway that seeks to link the port of Bar on Montenegro’s Adriatic coast to Serbia. The first 41 km stretch of the 165 km highway is currently under construction. But the Chinese loan for the phase has sent Montenegro’s debt soaring, to nearly 80% of GDP, with the government initiating austerity measures. What is even more striking are the details of how the project, which was repeatedly deemed as economically unviable, was sanctioned and the conditions attached to the Chinese loan. Depending on where this road leads, it could possibly be the next Hambantota, reports on which continue to invite Chinese ire.
Meanwhile, Tun Daim Zainuddin, special envoy of Malaysian Prime Minister Mahathir Mohamad, visited Beijing this week. Soon after winning the election, Mahathir has put a number of key Chinese projects in the country on hold. This is part of a broader corruption investigation against his predecessor Najib Razak. During his trip, Diam reportedly delivered a letter from Mahathir to Li Keqiang and emphasized that the new government in Kuala Lumpur supported BRI. No decisions were announced on the stalled projects, but this paves the way for a potential visit by Mahathir later this year.
Social credit & AI
Two stories this week offer insights into the social implications of the rapid developments that are taking place in China’s tech industry. The first is this What’s on Weibo piece on a student from Wenzhou in Zhejiang Province being denied admission to a university owing to his father’s poor social credit score after he failed to pay debt owed to a local bank. The story was also reported in state media, with CGTN picking up social media chatter around this case of “collective punishment.”
The second story is about a new study published on China’s AI industry in Tsinghua University. SCMP reports that as per the study, China’s artificial intelligence industry attracted nearly 60% of all global AI investment from 2013 to the first quarter of 2018. However, the country accounts for only 8.9% of the global AI talent pool – well behind the US’s 13.9%. It estimated China’s AI market at 23.74 billion ($3.55 billion) yuan in 2017. That’s quite some way away from the RMB 150 billion target of the State Council for the year 2020. It also adds that computer vision, voice recognition and natural language processing account for a bulk of the Chinese market.
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