A weekly bulletin offering news and analysis related to the Middle Kingdom. The long term effects of the trade war, Sino-Pakistan ties and the World AI Conference dominated headlines.
1. The Escalation Ladder
Last week, there was discussion about resuming Sino-US trade talks after US Treasury Secretary Steven Mnuchin invited Vice Premier Liu He. This week, however, talks look extremely unlikely, with US President Donald Trump announcing a 10% tax on Chinese imports worth $200 billion, starting September 24. WSJ reports that these will be hiked to 25% if there isn’t any progress towards resolving the dispute by the end of the year. The Chinese government vowed to retaliate and did on September 19th, announcing tariffs on goods worth $60 billion.
Trump has threatened to respond to this by additionally taxing Chinese imports worth $267 billion. This would effectively mean that all Chinese exports to the US come under the purview of the trade war. Beijing has so far followed a policy of reciprocal action, but with the latest sanctions on goods worth $60 billion, it has run out of goods to tax. Therefore, the focus now is likely to shift to other areas. At a China Development Forum Special Session on Sunday, Finance Minister Lou Jiwei warned that Beijing could adopt export controls. Caixin tells us that this would mean banning exports of key components, intermediate materials and equipment that US manufacturers depend on. Lou didn’t specify any products in his remarks. However, as Bloomberg reports, given that China controls a vast majority of the global rare earths supply and accounted for 78% of US rare earths imports in 2017, this is a sector to watch out for.
Short-term Outlook: In the short-term, there’s likely to be more jockeying by both sides, and it’ll be interesting to note if the talks that have been spoken of actually take place. US Commerce Secretary Wilbur Ross has been reported as saying that “the question about whether or when to have a discussion is very importantly in [China’s] ballpark.” The Chinese Commerce Ministry statement after Trump’s announcement said that there was “new uncertainty to the consultations between the two sides.” WSJ reports that Liu He huddled with advisors shortly after Trump’s announcement, with there being a possibility of low-level officials meeting.
Long-term Outlook: Alibaba’s Jack Ma believes that we’re headed for a 20-year confrontation between China and the US. He says that the collapse of “friendly China-US cooperation and reasonable bilateral trade relations” means that he can no longer fulfill the pledge of creating 1 million jobs in the US. In many ways, the trade war isn’t really about trade. From a Chinese point of view, Zhang Baohui, director of the Centre for Asian Pacific Studies at Lingnan University in Hong Kong captures the sentiment, arguing, “More and more in China’s elite circle now think Trump’s trade war is not just about fair trade and trade balance. Rather, it is a containment program to change China’s long-term power trajectory.” From the US point of view, this is about systemic suspicion, trade, technology and supply chains. What’s, therefore, underway is decoupling, as Christopher Balding argues in this Bloomberg piece. This would be a process that would entails pain at home and the need to work with partners internationally.
Also worth noting is this piece by Tom Mitchell and Gabriel Wildau in the Financial Times. They argue that, “The Chinese economy’s direct exposure to the US tariffs is limited. Gross exports to all countries equalled 18% of China gross domestic product last year…Exports to the US alone accounted for only 4% of Chinese GDP.” In addition, the piece claims that the “biggest impact from the tariffs will be felt by foreign and privately owned companies, not state-owned enterprises,” with private firms facing increasing political pressure. The net effect is that Beijing can continue fighting a tariff war, while those who believe in the state’s expanded economic role gaining strength at home.
Two India and trade war related stories to check out:
- India urges China to lift ban on rapeseed imports amid US trade war
- India again defers retaliatory tariffs on US to avoid full-blown trade war
The Axis Expands
Two visits this week tell us about a new dynamic that’s evolving in the China-Pakistan relationship. First, Pakistan PM Imran Khan headed to Saudi Arabia for his first foreign visit after taking office. The visit has led to an announcement of KSA becoming a “strategic economic partner” in CPEC. Details of what this partnership will entail in terms of specific investments are to be worked out during a visit by a Saudi delegation to Pakistan next month. For now, there are sketchy reports putting the investment figure at $10 billion, with one specific project being an oil city in Gwadar. As an aside, Merics has put out a useful map on CPEC projects, if you are interested in what’s been going on in terms of the projects.
There has also been no news yet on any deal with Saudi Arabia to help Pakistan manage its balance of payments crisis. All that’s come out of Khan’s visit is a promise by the Kingdom to provide “maximum assistance,” without any hard numbers. This Asia Times piece explains what the Islamabad’s options are and what it has been doing to raise revenues and impose fiscal discipline. Finance Minister Asad Umar unveiled a mini-budget in parliament on Tuesday, proposing tax measures, withdrawal of subsidies, removal of tax and duty exemptions and cutting down on development outlays to minimize the whopping deficit. WSJ reports that the budget could get Pakistan’s economy in better shape to meet the demands of a possible IMF bailout.
While Khan was in Saudi, Pakistan’s Chief of Army Staff Qamar Javed Bajwa traveled to Beijing, engaging in talks with CMC vice-chairperson Zhang Youxia and President Xi Jinping. Reuters reports that Xi assured Bajwa that China places a “high premium” on ties with Pakistan. The Hindustan Times tells us that the both sides reaffirmed their commitment to CPEC, emphasizing that those who oppose it will not succeed. However, that’s just a small part of the whole story.
As per the Xinhua report, Xi told Bajwa that the two sides were “iron friends” who remained “highly aligned” with each other on major international and regional issues. He also highlighted the need to maintain “high-degree mutual trust and concrete measures” to ensure CPEC’s implementation. This is an interesting statement for two reasons. First, this report regarding a meeting between Federal Minister Pir Noorul Haq Qadri and Chinese Ambassador Yao Jing to discuss Chinese policy in Xinjiang. Qadri apparently sought easing of restrictions and “patience” with Uighurs and also proposed that perhaps a Pakistani religious delegation could visit Xinjiang to help with “ending extremist ideology.” Second, the reports of Pakistan’s new civilian leadership wanting to renegotiate CPEC, which I covered last week.
Now read all of this in the context of this remark by Bajwa to Zhang Youxia, “The Pakistani military and its new government are consistent in their policy towards China.” This underscores how the China-Pakistan relationship is fundamentally driven by the security establishment on both sides — something that Zhang emphasized calling this the “backbone” of the relationship. Andrew Small explains all this wonderfully in this Sinica Podcast. In terms of the future direction, we can expect cooperation on regional and common security challenges, along with a focus on counter-terrorism, arms and equipment technology and training.
World AI Conference
Tech majors from around the world gathered in Shanghai this week for the World Artificial Intelligence Conference. Given that the global conversation around trade and technology are taking a more nationalistic and protectionist turn, this event led to some interesting outcomes. First, the Shanghai government announced a set a new measures to support and develop the AI industry. Second, China’s AI industry has witnessed significant growth, with the country accounting for the second highest number of AI firms.
Third, Liu He spoke about the need to be “inclusive and support each other” to respond to the “double-edged sword effect of new technologies,” as he pitched for “cross-national and cross-discipline cooperation.” Xi Jinping’s letter to the conference said: “Countries should deepen their cooperation and deal with the new issues caused by AI, in areas such as law, security, employment, ethics and government governance, together, so that everyone can grasp this development opportunity.” Even the Global Times believes that US-China frictions should not lead to them not cooperating in AI development. All of this is a far cry from the techno-nationalist approach that Xi had put forward in the months leading up to this conference.
The shift in mood is best captured in this remark by Sensetime CEO Tang Xiao’ou: “Hey Google, let’s make humanity great again.” In fact, Reuters reports that Amazon and Microsoft have announced plans to build new AI research labs in Shanghai. Google, on the other hand, is building a set of China-focused AI tools. All of this, of course, is a result of the Chinese government’s focus on AI as a strategic sector.
Note: I’ve been working on a detailed report on China’s AI strategy and its prospects for success. The report will be launched on October 1. So if you are keen on understanding more about this sector, do make sure to check it out.
While still in the tech space, also check out this SCMP piece based on an article by Zhuang Rongwen, the director of the Cyberspace Administration of China, in the Party journal Qiushi. Zhuang emphasizes the notion of cyber sovereignty and the need to fight a “people’s war” to rehabilitate the “cyber ecology.” He says, “The internet has become the main battlefield and forefront of propaganda and public opinion work. To take the helm of ideology work, we not only need the driving force of party members and mainstream media editors and reporters, but also need to fully make use of the broad masses of internet users.”
It’s the expansion of the tech industry in China along with this ideological commitment that’s led to Eric Schmidt arguing that we could end up seeing the bifurcation of the Internet into Chinese and American led versions within a decade.
LS Committee on China-India Ties
The Committee on External Affairs’ report on China-India relations including the Doklam standoff was published this week. A fair bit of the media coverage (The Hindu, Scroll & Hindustan Times as examples) termed the report as lauding the government. But that’s not quite the case. There is broad appreciation, but there’s also a fair amount of criticism on specific issues. Here’s some key points to note:
- Broad view: The report acknowledges the power asymmetry between India and China, arguing that it is within this context, “that India has to define for itself a relationship with China by successfully avoiding adversarial posturing. The success of India’s overall foreign policy hinges on how skillfully this element of statecraft is achieved.” Likewise it argues that, “despite some hostile posturing by China…the Committee have reasons to be enthused by a broad consensus reached by the two countries…that their ties should become a factor for regional and global stability and that the two countries shall ensure that their differences do not become disputes.”
- On Taiwan: The report says that the committee is concerned that, “even when India is overtly cautious about China’s sensitivities while dealing with Taiwan and Tibet, China does not exhibit the same deference while dealing with India’s sovereignty concerns, be it in the case of Arunachal Pradesh or that of the China-Pakistan Economic Corridor.” It argues that it isn’t content with “India’s continuing with its conventionally deferential foreign policy towards China,” calling for a “flexible approach” that involves “using all options including its relations with Taiwan.”
- On the neighbourhood: The report calls out the External Affairs Ministry for its “ambivalence” adding that, “the Committee would be inclined to see it (China’s growing influence) as nothing less than a veiled containment policy.” India, it argues, therefore, “needs to bring into play adroit and pro-active diplomacy on the one hand while significantly augmenting the delivery and efficiency of its development assistance in the Region on the other.”
- On BRI: The report praises the Indian government’s principled position on sovereignty, sustainability and transparency with regard to BRI. It calls for India to actively offer a regional alternative, through its ‘Act East Policy’, ‘Neighbourhood First policy’, ‘Go West’ Strategy, “Spice Route” initiatives, while leveraging institutions like AIIB and BRICS Development Bank to fund projects. With regard to CPEC, it calls for more action to expose China’s “double standard” in the “international fora.”
- On Doklam: The Committee “commend(s) the Government’s overall handling of the crisis as it managed to send necessary signals to China that India will not acquiesce in its unilateral and forceful attempts to change the status quo at any of India’s territorial boundaries.” However, it says that it is concerned that Chinese infrastructure built “uncomfortably close to the tri-junction has not yet been dismantled.” It also says that although “the Government has categorically denied any Chinese activities near the actual face-off site, an ambivalent view has been expressed while confirming such activities for other areas in the Doklam plateau,” warning that “China’s strategic intentions should not be taken casually.”
- Border Dispute: The report argues that, “diplomatic energies be channelled to ensure that instances related to inaccurate depictions of India’s boundaries are taken up forcefully and with urgency with the respective countries.” It calls for “a comprehensive Border Engagement Agreement” between the Indian Army and the PLA, “subsuming all established mechanisms for confidence building including border personnel meetings, flag meetings, meetings of the Working Mechanism for Consultation and Coordination on border affairs (WMCC) and other diplomatic channels.” The report also calls for India to make it clear that it “will adhere to the 2012 Understanding reached by the Special Representatives that the tri-junction boundary points between India-China and third countries will be finalized in consultation with the concerned countries only.” Finally, it emphasizes the need for improved border infrastructure and “improved co-ordination between the Army and the Air Force for better “early warning and control support to the forces on the ground when difficult situations arise, including through the deployment of unmanned aerial vehicles or drones.”
Jockeying in Afghanistan
The Chinese foreign ministry lauded Pakistan foreign minister Shah Mehmood Qureshi for visiting Afghanistan recently – this first foreign visit since assuming office. Spokesperson Geng Shuang said that China supports the Afghanistan-Pakistan Action Plan for Peace and Solidarity and preparations are being made for the second trilateral Foreign Ministers’ Dialogue. Qureshi’s daylong visit seemed to be a charm offensive of sorts, given that it began with a goodwill gesture of gifting wheat across the border. Qureshi reportedly handed over a letter for Imran Khan to Afghan president Ashraf Ghani, whom he invited to visit Pakistan. He also underscored the importance of cooperation in counter-terrorism and security. Pakistan is also offering to train Afghan police and law enforcement agencies in Pakistani institutions. Another significant development is the reported desire of Imran Khan to grant citizenship to hundreds of thousands of Afghan refugees born in Pakistan.
Meanwhile, the Pakistan Foreign Office issued a statement quashing reports that it was considering supporting India-Afghanistan trade through the land route via Pakistan. Soon after Qureshi’s visit, Ghani traveled to New Delhi, where he held talks with Prime Minister Narendra Modi on the peace process, the presence of IS and Pakistan, among other things. Mail Today reports that Ghani informed Modi that after meeting with Qureshi, his impression was that “there has been no discernible change in the new government in Pakistan.” The Hindu reports that Ghani also specifically mentioned to Modi the seige in Ghazni city in August, highlighting the role of attackers from Pakistan. In addition, the Hindustan Times reports that the Sino-Indian joint project in Afghanistan that was announced and Wuhan and was later revealed as an initiative to train diplomats will begin next month. “The diplomats will be first trained at New Delhi’s Foreign Service Institute before they travel to Beijing for the next training phase,” the report said citing and unidentified source.
Europe’s Connectivity Plan
Ahead of the October Asia Europe Meeting (ASEM), the European Commission this week announced a new EU Strategy on Connecting Europe and Asia. The document claims that this approach is based on a distinct European way, which emphasizes sustainable, comprehensive and rules-based connectivity. This will translate into engagement in priority transport corridors, digital links and energy cooperation and building partnerships based on commonly agreed rules and standards.
Discussing the document, EU foreign affairs chief Federica Mogherini argued that connectivity could not be confined to regional pockets, nor could it be achieved at the expense of environmental considerations. She also added that she had discussed the blueprint of this strategy with Asian partners “starting with China.” According to this Financial Times report, critics of the EU plan argue that it is “too cautious and unrealistic and “no match” for China’s efforts. “This is not comparable to Belt and Road: it’s more of a status report and it completely lacks an attractive narrative. Belt and Road is about China’s influence. It is gaining strength and importance to the detriment of European Union member states,” the report quotes an unidentified diplomat saying.
However, Fraser Cameron, Director of the EU-Asia Centre, argues in The Diplomat that the plan “has set down a marker that the EU is part of the game” in Eurasia. He claims (I am paraphrasing) that the plan has been developed in an environment of concern with regard to Chinese acquisition of ports in Europe, Beijing’s state enterprises-driven economic model and concerns over Chinese debt diplomacy. But the EU realises “that mere peer pressure would not drive China to reconsider its strategy. To secure its own political and economic interests, the EU had to put forward an ambitious and comprehensive response, which was to strengthen its own links with the host countries and to present them with a credible and sustainable alternative offer for connectivity financing.”
Responding to the release of the plan, China’s foreign ministry said that, “the leaders of China and the EU have reached consensus on seeking synergy between the Belt and Road Initiative and the EU’s connectivity plan. Our two sides have also established the China-EU connectivity platform.” Even the good folks at the Global Times don’t see the EU plan as problematic in the context of BRI.
One other noteworthy story regarding BRI this week is about the role of SOEs in its development. In his remarks, Xu Fushun, deputy director of SASAC, said that 80 central enterprises have undertaken more than 3,100 investment projects as part of BRI over the past five years. The future roadmap for SOEs that he outlined is for them to focus on “major project” and “high quality” cooperation under BRI.
The Frailty of Fealty
Much has been written about the impact of Xi’s centralisation of power and emergence as the core leader. This Bloomberg piece by Peter Martin and Dandan Li brings together the multiple strands on thought on this with new evidence. The piece quotes a range of experts to argue that greater control by Beijing is welcome from a markets point of view. However, it undermines the dynamism and adaptability that led to China’s remarkable growth.
For example, the report talks about a July CCDI report, which detailed “how cadres across the board — from localities to state-run enterprises — frequently failed to follow party instructions and demonstrate sufficient loyalty to Xi.” Following this, the government, the report claims, told ministries to document how they are following Xi’s orders.
Such an approach of centralisation, Ether Yin, a partner at Trivium China, says is a “bigger risk for China’s development than the trade war. If they keep going with centralization, all the provinces will have to adjust their economic structure based on central government policies and orders. That kind of diversity might gradually vanish, and that’s not good for the economy in the long run.”
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- China Urges India To Be Fair To Chinese Telecom Firms
- Calls grow for U.N. action on China’s Muslim ‘re-education camps’
- In Pakistan, Chinese money grapples with a Karachi-Lahore divide
- Tropical Maldives heads to polls amid criticism over fairness of vote+ India’s loss in the Maldives is China’s gain, and it is showing
- US hits China’s CGTN and Xinhua with foreign agent orders+ China solicits opinions on banning import of overseas news programs
- China central bank unexpectedly injects 265 billion yuan via one-year MLF
- Germany considers billion euro fund to stop China buying up vital tech firms
- A Chinese Company Reshaping the World Leaves a Troubled Trail
- China says has ‘effective’ contacts with the Vatican