A weekly bulletin offering news and analysis related to the Middle Kingdom. This week, there was a Huawei storm amid the trade war truce.
An Uneasy Break
The much anticipated Trump-Xi meeting in Argentina produced what I’d call an uneasy holiday break at best. I’ll get to the holiday-season-bit first, before getting to why it’s uneasy.
What’s the Deal: The White House called the meeting “highly successful,” while Foreign Minister Wang Yi said that the talks were “very positive and constructive, and reached a principled consensus.” But the statements issued by the US and China don’t seem to add up. What we do know for sure is that there will be a 90-day pause by the US with regard to raising tariffs on Chinese imports. The threat otherwise was for the 10% tariff imposed on imports worth $200 billion to be raised to 25% starting January 1, 2019. The 10% rate, meanwhile, stays on, while the two sides engage in negotiations over the next 90 days. This Bloomberg piece offers quite a neat comparison of the statements issued by the two sides.
The differences are evident. This Evelyn Cheng piece for CNBC further elaborates on how state media has reported the deal, with only Global Times mentioning the 90-day window. China’s Ministry of Commerce, however, did later discuss the 90-day window, and former PBOC Governor Zhou Xiaochuan believes that “there is a pretty high possibility to reach some sort of success during the 90-day negotiation window.” However, beyond trade imbalance, market access, IPR issues and tariffs, there also appear to be differences between the two sides with regard to China controlling the export of fentanyl to the US and whether Xi had committed to revisit the Qualcomm-NXP deal. Essentially, what remains tricky to decipher is whether the differences are a product of differences in perception or is each side playing to its domestic constituency, or perhaps it’s a bit of both.
How it’s Working: Since the G20 meeting, White House economic adviser Larry Kudlow has said that reduction in Chinese tariffs on US cars, agricultural and energy commodities would be a “litmus test” to prove that trade talks are on track to succeed. Trump, meanwhile, has tweeted that China has agreed to reduce and remove tariffs on US cars, and that he believes Xi “meant every word of what he said” in Buenos Aires.
Bloomberg reports that Chinese officials have begun preparing to restart imports of US soybeans and liquefied natural gas. China’s Ministry of Commerce says Beijing will “start from agricultural products, autos and energy to immediately implement specific items that China and the US have agreed upon. Gao Feng added that “In the next 90 days we will work in accordance with the clear timetable and road map to negotiate in areas where both sides have an interest and there are mutual benefits, such as intellectual property rights protection, technology cooperation, market access, and the trade balance.” In addition, Reuters reports that China’s Unipec plans to resume US crude shipments to China by March. Also, the NDRC has announced a set of 38 different punishments to be applied to IP violations. The punitive measures could restrict firms’ access to borrowing and state-funding support.
The Huawei Saga: Now for the uneasy bit. While Trump and Xi dined to a deal in Argentina, Canadian authorities arrested Huawei CFO Meng Wanzhou in Vancouver. Meng is not just the CFO of Huawei, she’s also its founder Ren Zhengfei’s daughter. Ren’s a former PLA man. The arrest was reported on Wednesday. Canadian authorities say Meng is sought of extradition to the US. During a hearing in the Supreme Court of British Columbia on Friday, Meng was accused of using a Huawei subsidiary called Skycom to evade sanctions on Iran between 2009 and 2014. She is accused of “conspiracy to defraud multiple financial institutions.” The charge is that she she had misrepresented to US bankers the link between Huawei and Skycom. If ZTE-like probe and sanctions are to hit Huawei, the damage could be immense, given that US firms account for 33 of its 92 core suppliers. Meng’s detention led to angry reactions in Beijing, with the Chinese foreign ministry demanding explanations from the Ottawa and Washington while calling on Canada to “correct the mistake.” Beyond the official circles, Meng’s detention appears to have also struck a raw nerve among experts and ordinary Chinese.
Here are some reactions: PTI quotes Zhu Feng, an international relations expert at Nanjing University as saying that, “the incident could turn out to be a breaking point” in Sino-US ties. The Global Times edit called it an attempt to “stifle Huawei.” Lu Xiang, an expert on China-U.S. relations at the Chinese Academy of Social Sciences, says: “If someone from the United States is hoping to use threats to an individual’s personal safety in order to add weight in the talks, then they have most certainly miscalculated.” Mei Xinyu, a research fellow with a Ministry of Commerce think tank, argues that the US and Canada had “trampled on international law by basically “kidnapping” Chinese citizen Meng Wanzhou.”
This Bloomberg story offers a peek at the mood among officials in China. It argues that bureaucrats are split depending on whether they are responsible for the economy or national security. “The first group saw a need to keep the two issues (trade war and Meng’s arrest) separate, while the second wanted to push back more forcefully against the U.S.” The piece quotes Michael Hirson, Asia director at Eurasia Group, as saying” “Ms. Meng’s arrest threatens to make China’s leadership look powerless in securing the release of not only a citizen, but a senior executive and daughter of one of China’s business icons…Nationalist sentiment will thus make it harder for Beijing to offer major concessions to Trump.”
Trilaterals & IOR
Indian Foreign Secretary Vijay Gokhale met with visiting Vice Foreign Minister of China Kong Xuanyou in New Delhi this week. MEA’s statement says that they “reviewed the progress made in India-China bilateral relations” since Wuhan, “discussed the agenda for bilateral engagement in the coming months” and “exchanged views on regional and international issues of common interest.” This comes days after Prime Minister Modi and President Xi Jinping’s meeting at the sidelines of the G20 summit. Xinhua reports Xi as saying that Sino-Indian ties had seen “increasingly positive momentum” and that the two sides should “deepen their practical cooperation, expand bilateral trade, and enhance cooperation” across a range of areas. Also, Xi wants the two sides to “explore ways to carry out cooperation with third parties in a broader scope.”
Also at the sidelines of the G20, Modi met with Prime Minister Shinzo Abe and President Trump. The foreign secretary’s briefing following that meeting makes for interesting reading if you are in Beijing. It says: “They all agreed that a free, open, inclusive and rules based order is essential for the region’s peace and prosperity.” But then it adds: “Prime Minister in particular felt that it is necessary for the three countries to reach out to all the stakeholders to explain the benefit of the Indo-Pacific strategy and their advantages to these countries.” The Chinese foreign ministry responded to the JAI meeting, saying the following:
We remain open to normal cooperation among relevant parties. We hope such cooperation will promote mutual trust and cooperation in this region and play a constructive role in promoting the development of peace and prosperity in the region.” Another noteworthy statement by the Chinese foreign ministry this week was on the Kartarpur corridor: Geng Shuang said, “We are glad to see the good interactions between Pakistan and India. Both are important countries in South Asia. The stability of their relations means a lot to the world peace and development.
Another key trilateral on the sidelines of the G20 was the meeting between the leaders of India, China and Russia. The views expressed by all three leaders were very similar and “they all felt we should work together to steer global economic governance,” said India’s foreign secretary following that meeting.
Amidst all this, do note that speaking ahead of Navy Day this week, Indian Navy chief Admiral Sunil Lanba spoke about security in IOR and China’s role. According to this TOI report, he said: “We have overwhelming superiority over Pakistan in all domains at sea. In the case of China, with the forces it can currently bring to bear in the IOR, the balance of power is in our favour…” It is also reported that the government has given initial approvals for construction of 56 warships and six submarines over the next decade. The Indian Navy currently has 140 warships and 220 aircraft. The reported goal is to become a 212-warship and 458-aircraft force by 2027. Admiral Lanba believes that India needs three aircraft carriers to ensure sea control.
Meanwhile, on trade, reports state that China has not accepted India’s proposal to carry out bilateral trade in local currencies. India had apparently made the proposal with an eye at reducing the trade deficit. But analysts like Biswajit Dhar, professor at Jawaharlal Nehru University, believe that “Trade imbalance should not be there with the country with which we want to do trade in rupee. It will not help in bridging the deficit. The partner country should have an opportunity to invest in India to use the rupee.” Chinese experts like Tian Guangqiang, from the Chinese Academy of Social Sciences, argue that the rupee’s weakness against the dollar this year and the fact that it’s not an international reserve currency worked against this proposal. Another analyst, Qian Feng, a research fellow at Tsinghua University’s National Strategy Institute, told Global Times that “Using domestic currencies will help boost bilateral trade… but the conditions for rupee-yuan payments have not matured.” With regard to the Sino-Indian trade relationship and all the talk of post-Wuhan positivity, this quote by an unidentified Indian official to Reuters is very telling.
When we say the Chinese are receptive, it means the talks are happening, but it’s going slow. It can be termed as progress because just a few months ago,we weren’t even talking.
No ‘Hard Cash’
Islamabad doesn’t appear any closer to a deal with the IMF, with The Express Tribune reporting that meeting even the January 15th target appears difficult. The two parties held a video conference on Thursday to discuss the bailout. The report says that the IMF wants “Islamabad to adopt steeper measures before its case was sent for approval to the Executive Board of the IMF.” The Express Tribune report also states that the key issues that divide the two sides are “increase in electricity prices, hike in interest rate, rupee devaluation and tax collection targets.” But Dawn’s coverage of Thursday’s talks also emphasizes that sharing full details regarding CPEC was a key point of difference during November’s talks. Also interesting is that Pakistan has already received $1 billion of the $3 billion pledged by Saudi Arabia and half of that amount has already been spent. UAE and China have yet not provided any cash assistance, despite Prime Minister Imran Khan’s recent statements claiming that Xi had pledged money.
In fact, Long Dingbin, the Chinese Consul-General in Lahore, has expressly refuted Khan’s claim. In an interview with Geo News, he said “instead of hard cash, China plans to eventually provide multiple forms of bailout packages [to Pakistan], in the shape of phenomenal investments in fresh projects, broadening the area of inclusive cooperation and tapping new avenues of collaboration under the China-Pakistan Economic Corridor.” Forget about support through hard cash, reports suggest that Pakistan is negotiating $2 billion in new commercial loans with China. Business Recorder reports that after Khan failed to secure $3 billion in BoP support from Beijing in November, a team comprising Governor State Bank Pakistan, Tariq Bajwa, and Secretary Finance, Arif Khan, held discussions with the Chinese authorities in Beijing. It adds: “The meeting reportedly concluded in just 30 minutes with the Chinese official’s attitude ‘not friendly’.” Also in trouble is another one of Khan’s touted achievements in Beijing, i.e. a $1 billion market access package from China. Dawn reports, citing unconfirmed reports albeit, that “Chinese authorities have informed the government that any package from Beijing will be a part of the second phase of the China-Pakistan free trade agreement.”
While Beijing-Islamabad economic ties might be shaky, the security relationship is deepening. Pakistani and Chinese air forces began the Shaheen VII joint drills this week. The PLAAF contingent comprises combat pilots, air defence controllers and technical ground crew along with fighter jets, bombers and early warning Awacs planes. Amid talk of a Pakistani order for China’s GJ-2 drone, experts at the PLA’s National Defense University were touting its benefits for Pakistan in terms of border control and tackling terrorism. Also, the SH-15 howitzer reportedly made an appearance at Pakistan’s 10th International Defence Exhibition and Seminar in Karachi, sparking speculation. Colonel Vinayak Bhat reports that Pakistan is learnt to have ordered more than 50 of these Chinese guns. The report says that the “SH-15 trials in Pakistan were carried out in secret in the mountains near Karachi. A leaked picture of the trials was published in Chinese magazines.”
The Leader’s Woes
Through most of the year there has been tremendous speculation about elite politics in China in the new era. There has been much talk about public discontent following the March constitutional amendments, public criticism of Xi by some intellectuals, questions over China’s foreign policy given the trade war and rumblings about the handling of the economy. By July-August, the scenario was popularly phrased as Xi’s summer of discontent. Three pieces this week trace what the year’s been like for Xi and what are the prospects for elite politics in China going forward.
The first two pieces are from the China Leadership Monitor. In the first piece, Minxin Pei argues that Xi emerged from the summer of discontent “with no obvious diminution of his authority.” In fact, since the August retreat meetings, “the key pillars of Xi’s domestic political agenda (have) include(d) restoration and consolidation of strongman rule, reinvigoration of the CCP’s ideological commitment and organizational discipline, and reassertion of control over Chinese society.” However, in terms of his economic and foreign policy, Pei argues that Xi “still has to offer a clear new policy direction that demonstrates his full grasp of the gravity of China’s new challenges and the policy instruments at his disposal to meet these challenges.”
In the second piece, Guoguang Wu argues that Xi has further consolidated power through 2018 “in three areas, namely, formal institutional operations, informal politics, and the rise of his personality cult.” He has enhanced control “over the military, the police, and the party propaganda machine—the triple pillars of CCP power, dubbed the ‘the gun barrel, the knife handle, and the pen-holder’.” Wu then discusses resistance to Xi’s authority, saying: “elite discontent has been sporadically expressed in cadres’ speeches, social-media communications, and comments in many other public or semi-public venues.” Cadre-level resistance also takes the shape of work slowdowns, indifference to daily responsibilities, and engaging in gossip against the dominant leaders. Purges of Fang Fenghui and Zhang Yang indicate discontent among generals. The gist of his conclusion is that while collective action by elites to counter Xi is difficult, they may choose not to cooperate. And “as such soft resistance by the elites grows, it is likely that governance by the dictator of the huge nation will confront many challenges to promote both his domestic and foreign agendas.”
Finally, the third piece on this subject is Willy Wo-Lap Lam’s China Brief article, in which he says that Xi essentially has five political foes:
- First: fellow princelings who are the offspring of party elders closely tied to Deng Xiaoping’s reforms.
- Second: regional administrators who fear the trade war’s potential to exacerbate unemployment.
- Third: Potentially, PLA officers who resent purges of powerful cliques in the military, coupled with the favoritism of officers from the former Nanjing Military Region.
- Fourth: Intellectuals are also chafing under Xi’s ironclad control over their freedom of expression.
- Fifth: Potentially the middle class, as the economy slows.
A Week of Xiplomacy
Xi returned to Beijing after a lengthy international tour, during which he visited Spain, Argentina, Panama and Portugal and attended the G20. The Chinese foreign ministry outlined the achievements of the visit in a lengthy statement. What’s interesting to note here are the projection of Xi and China as the leading interactional actor and the details of the welcomes that Xi received in different countries – boosting ties and steering international governance, as this Xinhua report summarizes. There’s a similar tone to this CGTN report, with the summary being that China led and steered the G20 towards a positive outcome.
In Portugal, the two sides inked a BRI MoU, with special emphasis on transport connections and energy. This the first such deal for a Western European country. AP reports, the Portuguese government wants China to help develop Sines, Portugal’s biggest Atlantic port, and expand national energy company Energias de Portugal overseas. SCMP reports that China is already a major investor in Portugal, having played a role in the 2011 EU-IMF bailout. In the privatisations that followed Chinese firms bought stakes in Portuguese energy, utility and financial companies. The report also quotes Jan Weidenfeld, head of the European China Policy Unit at the Mercator Institute for China Studies in Berlin, saying: “For Brussels, this is a bit of a diplomatic defeat. EU ambassadors in Beijing agreed on clear guidelines that caution member states when it comes to signing MOUs on the belt and road plan, effectively suggesting they should not.”
Panama, meanwhile, became the first Latin American country to sign up to BRI. In addition, a Chinese consortium called Panama Cuarto Puente, comprising China Communications Construction Company and its unit China Harbour Engineering Company, has been awarded a $1.4 billion contract to design and build a bridge over the Panama Canal.
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