Eye on China

Whirlwinds of Change

A weekly bulletin offering news and analysis related to the Middle Kingdom. This week, Xi Jinping’s visit to Africa and the BRICS meeting saw the signing of many deals.

1. Visits & Deals

Chinese President Xi Jinping journeyed from the UAE to Africa this week before attending the BRICS summit in South Africa. During the visit to the UAE, the two sides agreed to set up a “comprehensive strategic partnership.” Deals related to energy, finance and trade were inked. The joint statement issued following the visit also talks about joint military drills. A measure of UAE’s enthusiasm to deepen engagement with China was this statement by Minister of Economy Sultan Bin Saeed Al Mansouri, terming BRI “China’s gift to the world.”

From the UAE, Xi flew to Senegal, where President Macky Sall awarded Xi Senegal’s top medal of honor and they both visited a wrestling arena built with Chinese support. But Before he landed, Xi’s newspaper article lauded China as Senegal’s second-largest trading partner (bilateral trade estimated at over $2 billion) and biggest source of financing. The piece also touches on cooperation in water, agriculture, education and trade. The visit saw Senegal become the first West African nation to sign on as a BRI partner. This is significant, given that Senegal’s location could enable China to more easily access US markets. Reporting on the visit, Global Times says that China will not only be building infrastructure such as highways, bridges and ports in Africa, but also help develop local maritime and tourism resources, introduce fishing and sea product processing technologies.

The next stop was Rwanda, where Xi went seeking to build “a friendship higher than mountains.” After talks with President Paul Kagame, the two sides signed some 15 agreements on trade, infrastructure, investment, e-commerce, human resource, culture, science and technology, aviation, mining, law enforcement, visa exemption for diplomatic and service passport holders, among others. Beyond the numbers, however, a significant outcome to note from this visit was this statement by Kagame:

China relates to Africa as an equal. We see ourselves as a people on the road to prosperity. China’s actions demonstrate, that you see us in the same way. This is a revolutionary posture in world affairs, and it is more precious than money.

What puts this into greater perspective is a reminder of a Donald Trump controversy from earlier this year when he derided African nations. From Rwanda, Xi traveled to South Africa. The two sides discussed a broad range of issues, including China-Africa relations, given that Xi and South African President Cyril Ramaphosa will co-chair the FOCAC Beijing summit in September. In terms of deals, 14 agreements were inked between government departments, state-owned enterprises and private companies. These include a Chinese pledge of $14.7 billion in investments and loans for energy and logistics enterprises.

I’d like to also draw attention to a few themes that have emerged during Xi’s visit. The first is debt and the resource race. WSJ reports that China already holds 14% of Africa’s debt. The second is industrialisation, i.e. the promise that China brings which makes it popular for African states seeking to develop. The third is this encapsulated in this wonderful Foreign Policy piece, which talks about how Africa is an important market for Chinese technological development.

  1. Mutual Trust has Increased’

Indian Prime Minister Narendra Modi had a “very productive” meeting with Chinese President Xi Jinping in South Africa on Thursday. Both sides reaffirmed their commitment to maintaining tranquility at the border, although periodic transgressions, such as this one reported from Sikkim, appear to still be taking place. The Press Trust of India reports that NSA Ajit Doval is likely to visit China this year for talks on the boundary, as the two sides deepen engagement following from April’s informal summit in Wuhan. Indian Foreign Secretary Vijay Gokhale has been reported as saying that both leaders believe that “mutual trust has increased” between the two sides. Chinese ministers for defense and public security are also slated to visit India and August and October, respectively. Meanwhile, an Indian trade delegation will visit China on August 1 and 2 to discuss exports of soya, sugar and non-basmati rice and the possible import of urea. A specific Indian pharmaceutical delegation will visit Shanghai on August 21 and 22. Chinese media, meanwhile, quoted Xi as saying that the two leaders had provided “a top-level design for bilateral ties in a macroscopic perspective.”

Also, with both Modi and Xi not just in Africa but also visiting Rwanda one after the other, there’s been much talk this week about the role of China and India in Africa. Is there a competition? Does a competition serve India’s interests? Can there be cooperation between Beijing and New Delhi in Africa? This Global Times piece argues that “in a third-party market like Africa that does not involve each other’s core interests, China and India should particularly explore opportunities for cooperation.” The Chinese foreign ministry, meanwhile, says that the two countries “are on the same page” when it comes to Africa and can potentially explore other cooperation models like ‘China-India plus one’ or ‘China-India plus X.’ Analysts argue that both India and China have distinct strengths, which can be leveraged by African states to diversify from the West.

Despite this, some old concerns resurfaced this week. During a recent hearing, Congresswoman Ann Wagner inquired about reports of China quietly resuming its activities in the Doklam region. That sparked a discussion within India, with the government denying that there had been any new developments in the area. VK Singh, MoS External Affairs, told the Rajya Sabha this week that there have been no new developments at the site of the face-off site and its vicinity, and status quo prevails in the area. Doklam also reportedly featured in talks between Chinese Vice Foreign Minister Kong Xuanyou’s visit to Bhutan. Kong met with Bhutanese Prime Minister Tshering Tobgay and the country’s King Jigme Khesar Namgyel Wangchuck. The Wire reports, based on Chinese foreign ministry statements following Kong’s visit, that China appears to be rather keen on getting Bhutan onboard BRI.

  1. BRICS’ ‘Golden Decade’

The 10th BRICS summit in Johannesburg, South Africa, saw leaders of five major emerging economies argue that the “multilateral trading system is facing unprecedented challenges,” while pledging support for “the rules-based, transparent, non-discriminatory, open and inclusive multilateral trading system, as embodied in the World Trade Organization.” Apart from the WTO, the statement following the summit also pledged support for multilateralism and the central role of the United Nations. All sides reiterated their “commitment to shaping a more fair, just and representative multipolar international order to the shared benefit of humanity.” There was emphasis on combating terrorism and support for the Iran nuclear deal, among other things.

For his part, Xi called for turning the vision of the second “Golden Decade” of BRICS into reality. The Chinese president framed the issue of trade, protectionism and access to new technologies as a North-South issue, arguing that “constant flare-ups of geopolitical conflicts and the escalation of protectionism and unilateralism are directly affecting the external development environment of emerging markets and developing countries.” He then put forward a four-point proposal, which includes stepping up engagement among BRICS nations, commitment to multilateralism and the UN charter, more people-to-people exchanges and building a network of partnerships, such as BRICS-plus format.

  1. Looming Currency War?

Even before he was elected president, Donald Trump had claimed that the Chinese government was manipulating the yuan keeping it artificially low. The US government under Trump, however, has refrained from formally labelling China as a currency manipulator. But as the trade war continues, this could perhaps change. Treasury Secretary Steven Mnuchin says that the US is watching the falling yuan, and that its weakness would be reviewed as part of the department’s semi-annual report on currency manipulation, which is due on 15 October.

This is because the yuan has been on a steady downward slide since April. That slide has become steeper over the past six weeks, as the Yuan fell by 5% against the dollar to stand at roughly 6.8 to the dollar. Or as Trump says, it is “dropping like a rock” — which for him is a sign of China’s manipulation of its currency to offset the impact of tariffs. All of this has led to speculation that a currency war has now begun. The Chinese side has dismissed such charges, arguing that its currency’s value is driven by market forces and that it has no intention to devalue the yuan to help exports. The Chinese foreign ministry also added that threats and intimidation on trade, i.e. the threat of tariffs on all Chinese exports to the US, would never work.

The question that then emerges is would a devalued yuan be in the Chinese government’s interest and if observers believe that the Chinese government is actively devaluing the currency. An interesting Global Times piece quotes Chinese analysts as saying that while the possibility of a currency war cannot be ruled out after the trade war, there is no sign China is interfering with the yuan’s exchange rate at the moment. In general, other analysts seem to agree. For instance, this Bloomberg piece argues that James Daniel, the IMF mission chief for China says that the yuan is “fairly valued,” with the recent changes being “expected from a flexible exchange rate.” Christopher Balding argues that “it’s unlikely that China wants a significant and sustained fall in the yuan. That would amount to trading one set of problems for another: Consumers and businesses would face a double whammy of price increases due to tariffs and reduced purchasing power due to a weakening currency.” Writing for SCMP, Paola Subacchi concurs, arguing that “a weaker renminbi would undermine the Chinese government’s goal of shifting away from export-led growth and towards a model based on higher domestic consumption.”

  1. Trade War Alignments

Beyond the yuan debate, the interesting development on the trade war front this week was the US-EU accord. European Commission chief Jean-Claude Juncker and Trump announced that the two sides were pulling back from the brink to “work together toward zero tariffs, zero non-tariff barriers, and zero subsidies on non-auto industrial goods.” The two sides painted the agreement as a “new phase in the relationship,” which had been under tremendous strain since Trump’s election. Trump is reportedly going to refrain from imposing tariffs on car imports from the EU and the two sides are set to work to resolve existing differences.

Analysts believe that an EU deal emboldens Trump in his war with China. On the surface, Beijing, which has been keen to court the EU as a partner against Trump, appeared to welcome the deal. The Foreign Ministry reacted saying that it hoped the deal would serve the cause of multilateral trade. But Beijing’s anxieties are clearer in media commentaries. For instance, this Xinhua piece argues that the Trump-Juncker talks failed to bridge the “substantial differences” that continue to exist between the two sides. Meanwhile, this Global Times editorial argues that Trump “will likely break his word” to the EU, and that while Beijing had been engaging Brussels, “it did not think China and the EU could become allies against Washington.” In contrast, Trump’s economic advisor Larry Kudlow says that Juncker has pledged that he would help the United States confront China over its trade practices.

As frictions continue, the US House of Representatives passed a new bill this week targeting Chinese investments. Also, Qualcomm’s $44 billion bid to take over NXP – the world’s biggest ever semiconductor sector takeover – failed owing to Chinese antitrust concerns. The US and China, meanwhile, continued to spar at the World Trade Organisation. US Ambassador Dennis Shea attacked China as “the most protectionist, mercantilist economy in the world.” His Chinese counterpart Zhang Xiangchen argued that Shea’s remarks had a whiff of gunpowder, adding that the US was trying to demonise China to take the heat off itself. For now, it appears that the two sides are talk at and not to each other.

China’s Ministry of Commerce has clearly stated that there has been no contact to restart talks, while US Trade Representative Robert Lighthizer told the Senate this week that “we clearly have a chronic problem with China,”which is likely to take years to resolve. One of the difficulties of resolving the differences now is the impact of a deal on Xi Jinping’s domestic standing. This Bloomberg piece argues that already Xi is encountering a backlash at home for his approach and while the Chinese government “still wants to cut a deal with the US and is open to talks, but it will be hard for Chinese negotiators to trust their American counterparts.” The conflict for Xi is best encapsulated by Ether Yin, a partner at advisory firm Trivium, who says: “If another deal is rejected it would also reflect badly on Xi. Negotiations are about who has the upper hand. If you’ve been rejected once and then you approach the other party again, it makes you look weak.”

What further adds to Xi’s problems when it comes to a negotiation is this perscient observation by Edward Luce in the Financial Times, “Beijing’s stance (in the trade war negotiations) is theological. Mr Xi’s ‘Made in China’ goal is to his economic strategy what Taiwan is to China’s national identity. It is non-negotiable.”

  1. Debt Jitters & Stimulus

Beyond the trade war, debt, or more appropriately the management of money supply and ensure systemic credibility to ensure stability given overall debt, remains a major concern for Beijing. This week, the focus was on China’s massive (estimated at $190 billion with around 1,836 platforms) peer-to-peer (P2P) lending industry. P2P platforms in China raise money from depositors before lending it to corporate borrowers, and their decline is seen as a result of China’s tightened credit environment and monetary policy in China.  

SCMP, citing data from Wangdaizhijia, reports that 114 P2P platforms failed from July 1 to July 24, trapping investors money. Financial Times, meanwhile, cites Online Lending House data, reporting that 150 P2P platforms have suffered “problems” since early June. In all of 2017, the total number of platforms that faced problems was 217. Problems are defined as “investors being unable to withdraw money, police investigating a platform, or owners running away.” Such has been the scale of the problem that in Hangzhou officials have reportedly converted two sporting stadiums to accommodate investors filing grievances and seeking a solution.

It’s not just P2P lenders that are facing the heat. China’s $4 trillion with corporate bond market is also showing signs of strain. Bloomberg assesses that there have been about 33.3 billion yuan ($4.9 billion) in corporate bond defaults so far this year, with the scenario likely to get worse going forward. The report argues that,

Chinese companies face 2.5 trillion yuan of bond maturities in the remainder of 2018, one of the busiest redemption periods. Less market demand for corporate bonds, combined with higher bond yields, means more liquidity crunches may occur at corporations…Analysts expect property developers and local government financial vehicles may be riskier due to more restrictive refinancing policies.

It’s some of these concerns along with the potential consequences of a protracted trade war, which led the People’s Bank on Monday to inject $74 billion through loans to commercial banks to encourage lending to small companies and investments in corporate bonds. This was unexpected since no medium-term lending facility loans were due to mature on the day. While the central bank would like to expand lending and that too quality lending, there are structural problems that many small and regional banks are struggling with owing to the central government’s overarching policy objectives of deleveraging, combating pollution and slashing overcapacity. Reuters reports that “at least 13 lenders, including 10 rural commercial banks, have had their credit ratings cut or outlooks downgraded to negative since the start of 2017,” with bad loans rising because of small business failures, closure of factories and mines, etc. “The spate of ratings downgrades is making it harder for some of them to raise funds in capital markets.”

Along with the PBOC cash infusion, the State Council on Monday announced coordinated fiscal and monetary measures. According to the Xinhua report, these include nearly $10 billion tax cut to encourage businesses to spend more on R&D. Local governments will also be allowed to issue the $200 billion of special bonds earlier to support infrastructure projects. There will also be a state financing guaranty fund, targeting around $20 billion of loans for about 150,000 small and micro firms each year. In addition, financial institutions are being urged to ensure borrowing demand from LGFVs. This comes as some $322 billion worth of onshore and offshore LGFV bonds are set to mature through 2019, as per CreditSights reports BloombergQuint. This Nikkei Asian Review report captures the overarching dilemma well when it says that “The goal is to stave off defaults on risky debts and keep the economy stable. There are concerns, however, that shelving the government’s effort to cut down on China’s enormous debt load could spell financial risk down the road.”

  1. Beijing’s Political Capital

Imran Khan’s Pakistan Tehreek-e-Insaf (PTI) emerged as the biggest winner in the country’s general election held on 25 July. As the mist began to clear, Khan spoke about a number of key issues, including the importance of CPEC and the need to learn from China in eradicating poverty and tackling corruption. Beijing, meanwhile, has welcomed the transition, adding that the “China-Pakistan all-weather strategic cooperative partnership will not be shaken despite how the situation changes.” Some Chinese analysts are already referring to him as China’s new “best friend.” The Chinese media, meanwhile, are warning Khan to be cautious with regard to Western propaganda on the perils of CPEC. I presume this rather well-researched WSJ story is what the Chinese media reports are hinting at.

In all of this, it does appear that while there isn’t too much concern with the change in civilian leadership in Pakistan, there is some anxiety. Nevertheless, one expects that managing Khan shouldn’t be too much trouble, given that Beijing has been increasingly developing a method for cultivating political leaders. For example, Xi’s latest offer of a $295 million  grant for Sri Lankan President Maithripala Sirisena “for any project” that the Sri Lankan leader wishes. However, hopefully Philippines’ Rodrigo Duterte will be a cautionary example for Sirisena. Duterte has been under fire for being soft on China, which had promised $24 billion to the Philippines in 2016 — $15 billion in investments in infrastructure and energy projects and $9 billion in soft loans. A new Bloomberg report, however, reveals that hardly any of those pledges have materialised.

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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.