A weekly bulletin offering news and analysis related to the Middle Kingdom. This week features the Politburo meeting, PLA Navy’s progress in the trade war and the dues of CPEC.
The presidents of China and the US spoke on the phone this week, with Donald Trump saying that “big progress (is) being made” towards a deal that is “comprehensive, covering all subjects, areas and points of dispute” between the two countries. The Xinhua readout of the call tells us that Xi spoke about the consensus that the two sides had reached in Argentina, adding that he hoped the teams from China and US “can meet each other halfway and reach an agreement beneficial to both countries.” Also note, this bit about Xi appreciating “the willingness of the US side to develop cooperative and constructive bilateral relations.” This is being said amid reports that Trump is considering an executive order to declare a national emergency that would bar US companies from using telecommunications equipment made by China’s Huawei and ZTE. Reuters reports that the executive order, which has been under consideration for more than eight months, could be issued as early as January.
So what can we expect next? Well, China’s Commerce Ministry says that teams from the two countries have been “in close communication, and consultations” even during the holiday period. Earlier in the week, the ministry had confirmed two vice-ministerial level calls, which it said had led to “new progress.” Bloomberg reports that a US delegation will visit Beijing early next month for talks. The delegation will be led by Deputy Trade Representative Jeffrey Gerrish and will include Treasury Under Secretary for International Affairs David Malpass, although there isn’t yet any official confirmation of this. The Chinese side hasn’t either confirmed any dates, but the Commerce Ministry has said that “specific arrangements for face-to-face consultations in January” have been made.
In the interim, there are a few signs that one can note. First, Chinese customs authorities this week cleared the way for imports of brown rice, polished rice and crushed rice from the United States, provided they meet Chinese standards. Reuters quotes unidentified officials from a Chinese government-affiliated think tank as saying that the move should be seen as a “goodwill gesture” while adding that “the price of U.S. rice was not competitive, compared with imports from South Asia.” Second, Chinese customs data showed that the country bought zero US soybean in November. The big gainer in this case was Brazil, with China soybean imports from that country shooting up over 80%. Beijing resumed buying US cargoes earlier this month after the G20 ceasefire, but the numbers are still unclear. Third, China has announced lowering of import taxes on more than 700 goods and scrap export tariffs on 94 goods from January 1. This is the third round of tariff cuts announced this year.
Fourth, China’s proposed new foreign investment law, which promises equal treatment and intellectual property protection. More details on a draft legislation were made public this week. SCMP reports that “according to the draft law, the government will seek feedback from foreign companies when drafting rules related to foreign investment and it will set up a mechanism to handle complaints. Other changes include foreign-invested firms being able to raise funds by issuing stocks and bonds, and they will have the freedom to send income overseas in either yuan or foreign currencies.” It further adds that: “The draft law also states that goods produced in China by foreign companies are to be given equal treatment in government procurement and an equal chance to join the process of drawing up industrial standards.” Do note that none of this is coming to pass any time soon. The draft legislation is now open for public comment till February 24. It’s unlikely, therefore, to be up for approval at the NPC meeting in March. Another legal change that’s likely to be projected as addressing US concerns is the introduction of the right to claim punitive damages in case of IPR infringement. The NPC standing committee has reportedly accepted this as part of a new draft of China civil code.
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Core Xi; 2019 Agenda
A two-day meeting of the Politburo of the Communist Party this week underscored the “core” status of Xi. A similar meeting was held around the same time last year, with the Politburo expressing its support of Xi. At that time, jostling was underway to set into motion the constitutional amendments of March 2018. This time around the Politburo’s remarks should be read in the context of all the reports about Xi’s summer of discontent, given the weakness in the economy and the handling of the trade war.
Xinhua reports that “members of the Political Bureau were asked to conduct criticism and self-criticism in light of work experience and how they have taken the lead to implement Xi’s instructions and key Party regulations and policies.” The statement following the meeting stressed “strengthening the Party’s consciousness of the need to maintain political integrity, think in big-picture terms, follow the leadership core and keep in alignment.”
It added: “Xi has shown vision in making strategic decisions, exercised highly adept political leadership and demonstrated clear commitment to the people and a strong sense of responsibility, which proved that he has been ‘worthy of the core of the CPC Central Committee and the whole Party’.”
A few days later, Xi addressed a New Year’s event organized by the CPPCC. His speech there outlined key economic priorities for 2019: “pursue supply-side structural reform as the main task, take tough steps to forestall and defuse major risks, carry out targeted poverty alleviation, prevent and control pollution, and promote sustained and sound economic development.” Bloomberg Economics estimates that the slowdown in the Chinese economy extended for seven straight months into December. The Shanghai Stock Exchange, meanwhile, ended 2018 as the world’s worst market performer for a second year, falling 24.6% over 12 months. The combined capitalisation of the Shanghai and Shenzhen exchanges fell by $2.4 trillion to $6.3 trillion during the year. The National Bureau of Statistics reported that industrial profits fell 1.8% in November – the first such decline in three years – from a year earlier to $86.33 billion
In terms of other items on the domestic agenda in 2019, there was discussion on rural revitalisation plans for the next two years and a target set to lift 10 million rural people out of poverty in 2019. But perhaps the meeting that I’ve found the most interesting is this one on political and legal affairs. As per state media reports, one can surmise that “law-based governance” applies to the country while “rule-based governance” applies to the Party. Further, this year, the report says that the “Party’s successful experience in its long-term leadership over political and legal affairs has been institutionalized,” adding that “The Party’s leadership is consistent with the Chinese socialist rule of law.” And after having said all this, the statement adds, “judicial organs (should) exercise their duties independently and impartially in accordance with the law” and “Party organizations and leading officials (should) take measures to follow through on this stance.”
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The ‘Normal Track’
India-China ties are back on a “normal track.” Some positive developments are taking place in terms of trade and market access. India is keen to talk to China about the Indo-Pacific. There is no total unanimity between India and the US on all issues relating to the Indo-Pacific. There’s no change in New Delhi’s position on BRI and CPEC remains a direct challenge to India’s sovereignty and territorial integrity. That’s a quick summary of a PTI report, based on unidentified sources, about the outlook for Sino-India ties in 2018.
Similar source-based reports were out across media platforms in India. This one from Strategic News International particularly caught my attention, owing to some of the remarks attributed to the sources. In one bit, building roads and laying fibre optics are described as signs that BRI projects being dual use in nature. In another bit, the Chinese are blamed for using BRI to bring about changes in the technical specifications required or the customs requirements in many of the countries, which hurts India’s ability to bid for projects. My take: I sincerely hope that this isn’t how the Indian establishment is thinking. Some of this is simply ludicrous whinging.
Meanwhile, Kunal Singh in the Hindustan Times discusses a recent paper by Anit Mukherjee and Yogesh Joshi, which suggests shifts in Indian military strategy from a “defensive military posture of ‘deterrence by denial’ to a more offensive posture of deterrence by punishment.” He writes that “according to the new strategy, India will not just confine itself to denying Chinese forces territorial gains but will actively impose costs on the adversary and may even open additional fronts.”
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This week marked the 10-year anniversary of the PLA Navy’s formal engagement in anti-piracy operations in the Gulf of Aden. In a piece commemorating this, CGTN reports that “over the past decade, the Chinese Navy has deployed 26,000 officers and soldiers, escorted 6,595 ships and successfully rescued or aided more than 60 Chinese and foreign ships.” Senior Colonel Zhou Bo, from the Office for International Military Cooperation, termed this experience as one through which the PLA Navy is becoming a blue-water navy. The underlying message is of China being a responsible power and an international partner for other navies. The Global Times also put out a lengthy piece discussing the complexities of far seas operations a decade ago and the gradual development of support facilities. People’s Daily reports that 32 commemorative envelopes were issued to commemorate 10 years of convoy missions in the Gulf of Aden and Somali waters. Meanwhile, Zhao Lei in China Daily pens an ode to the country’s shipbuilding industry, specifically discussing the aircraft carrier program.
Alas, that’s where the storm clouds appear to be the darkest this week. The Type 001A, which is the country’s first domestically built carrier, is set for a fourth round of sea trials. SCMP reports that the current trials “may involve take-off and landing drills for some of its 32 J-15 fighter jets, would mean technical snagging was complete and the carrier will soon go into service.” However, while this is happening, serious questions persist about China’s carrier program. Earlier this month, Sun Bo, former general manager of the China Shipbuilding Industry Corporation, was charged with taking bribes and possibly leaking confidential information about the Liaoning aircraft carrier. This week, there are reports of more researchers and senior officials being caught in the corruption net. SCMP reports that Jin Tao, 54, the former research head of CSIC, and Bu Jianjie, a submarine scientist and former director of another CSIC research arm, have also been booked on serious corruption charged.
While on the subject of the navy, another story to note is the China Aerospace Science and Industry Corporation’s stated desire to push the sale of the CM-401 supersonic anti-ship ballistic missile. China Daily’s report says that the ASBM can carry a 290-kilogram warhead and has a maximum strike range of 290 km and a hit rate of 90%. Ajai Shukla, in the Business Standard, examines the potential impact of the sale of the CM-401 and M-20B ASBMs from China to Pakistan on the naval balance between India and Pakistan.
Brazil and Ecuador
US Secretary of State Mike Pompeo is set to travel to Brazil next week. The visit comes as Jair Bolsonaro takes charge as the country’s president. In contrast, Vice Chairman of the NPC Standing Committee Ji Bingxuan will be traveling to Brazil to attend Bolsonaro’s swearing in as Xi’s special envoy.
The Washington Times reports that according to a senior State Department official, the two men are “likely to discuss China and China’s predatory trade and lending practices.” Matias Spektor, associate professor of international relations at Fundação Getúlio Vargas, writes in the Financial Times that Bolsonaro “plans to use the fact that China is indeed expanding its influence in the region to draw Latin America into the global diplomatic battlefield. In exchange for tilting Brazil in the direction of the US, he wants concessions from the White House.” However, Spektor isn’t very optimistic about the prospects of Bolsonaro’s approach: “To counterbalance Brazil’s losses from a confrontation with China would require major US concessions on trade and investment. There is no evidence to suggest that Mr Trump would be willing or able to deliver,” he argues.
The other interesting China story from South America relates to Chinese investments in Ecuador. “China took advantage of Ecuador. The strategy of China is clear. They take economic control of countries,” the NYT piece quotes ,” said Ecuador’s energy minister Carlos Pérez as saying. The piece is a must read. It’s a fascinating account of how circumstances, ideology and prospects of personal gain for officials were critical in the Chinese winning the bid for the Coca Codo Sinclair Dam. “Both nations were willing to overlook deep design flaws, questionable economics and independent warnings that the technical studies for the dam were decades out of date,” the report states.
The outcome is apparently a substandard product that’s no where close to living up to its promised capacity. “Engineers had tried to generate the project’s full 1500 megawatts, but neither the facility nor Ecuador’s electrical grid could handle it. The equipment shuddered dangerously, and blackouts spread across the country…” the report says, adding “Now, 7,648 cracks have developed in the dam’s machinery, according to the government, because of substandard steel and inadequate welding by Sinohydro.”
The story also talks about China having lent some $19 billion to Ecuador for a range of infrastructure projects, with much of the repayment taking place in oil deliveries. Consider this quote on Ecuadorian oil:
To settle the bill, China gets to keep 80 percent of Ecuador’s most valuable export — oil — because many of the contracts are repaid in petroleum, not dollars. In fact, China gets the oil at a discount, then sells it for an additional profit. Pumping enough oil to repay China has become such an imperative for Ecuador that it is drilling deeper in the Amazon, threatening more deforestation.
The Long and Short
In section 6 this week, here are a quick overview of some of the important stories:
- Af-Pak: Both countries denied an earlier NYT report that discussed BRI’s military dimensions. Pakistani Foreign Minister Shah Mahmood Qureshi traveled to Beijing for a “deep discussion about new changes to the situation in Afghanistan.” The changes, of course, being a potential US troop withdrawal. The two sides announced a “consensus,” as per China’s foreign ministry. “Both sides believe that military means cannot resolve the Afghanistan issue, and promoting political reconciliation is the only realistic way.” Also note that on Tuesday, Aslam Baloch, the purported mastermind behind the recent attack on the Chinese consulate in Karachi, was reportedly killed in a suicide attack in Kandahar.
- CPEC: The Express Tribune reports that “Pakistan will pay $40 billion to China in 20 years in shape of repayments of debt and dividends on a $26.5 billion investment under CPEC, documents of the Ministry of Planning and Development reveal. The report adds that debt repayments of energy and infrastructure projects amount to $28.43 billion. The rest of $11.4 billion will be paid in shape of dividends to the investors. The report further states that these estimates have been shared by Pakistan’s Ministry of Finance with the IMF. Taking note of this report, the Chinese embassy in Islamabad has issued a clarification, stating “currently, 22 early harvest projects under the CPEC have been completed or are under construction, with a total investment of $ 18.9 billion…The Chinese Government provided concessional loans of $5.874 billion for Pakistan Government’s major transportation infrastructure projects, with a composite interest rate of around 2% in repayment period of 20-25 years….” Repayment of these loans begins in 2021
The embassy added that “Chinese companies and their partners invested $12.8 billion in energy projects in Pakistan. Among them, Chinese companies provide $3 billion from their own equity. The rest $9.8 billion is raised from commercial banks with interest rate of about 5%. The repayment period is 12-18 years.” These it describes as “purely independent business behavior of these companies” and that they are “responsible for their own profits and losses and repayment of loans” and not the Pakistani government.
- Cooperation with Japan: Kyodo reports that the Japanese government is considering sending Maritime Self-Defence Force vessels to the Chinese navy’s fleet review next April. MSDF destroyers and Chinese warships made mutual visits from 2007 to 2011 before the Senkaku-Diaoyu islands dispute flared up in 2012.
- The Marxist Contradiction: Qiu Zhanxuan, head of the Marxist Society at China’s distinguished Peking University, was detained this week. Qiu was on his way to attend a memorial on the 125th anniversary of Mao Zedong’s birthday. SCMP reports that this led to protests at the university. The protesters were forced away and a new committee has been set up to lead the Marxist society. CNN reports that at least 10 young Chinese labor activists have been detained in major cities across China since August. The Party-state’s conflict with the left has deepened this year, as young activists have protested for better labour rights protection, against corruption and income inequality.
- Trial and Tribulation: Wang Quanzhang, one of the most prominent human rights lawyers detained as part of the 709 crackdown, faced a secret trial this week. The hearing at the Tianjin Second Intermediate People’s Court was not made public because “state secrets were involved.” Wang was detained in 2015 amid charges of fanning discontent and plotting to overthrow the Party. While Wang has remained defiant, NYT quotes Xie Yanyi, a recently disbarred Chinese rights attorney who tried to attend Mr. Wang’s trial as saying that: “Even though Quanzhang is innocent, the outlook is bleak. Wang Quanzhang’s wife and loved ones need to be mentally prepared.”
- The Canada Spat: Germany, France, the UK and European Union have all voiced support for Canada after the detention of two Canadians in China. The German foreign ministry spoke about “political motives,” while the French statement described Huawei CFO Meng Wanzhou’s case as being handled “in accordance with the rule of law.” The Chinese foreign ministry reacted to this by reiterating that “Canadian citizens Michael Kovrig and Michael Spavor, because they engaged in activities undermining China’s national security.” Hua Chunying added that France and other allies of Canada should respect China’s “judicial sovereignty.” Alas, my take is that Beijing’s backing itself into a corner with this. Western perceptions of China have been changing for the worse and this only accelerates this trend. For instance, David Mulroney, former Canadian ambassador to China, is calling for a “new normal” in the West’s approach to China, which is based on the recognition that “China is an increasingly irresponsible power and partner, one that feigns compliance with international norms only when it is convenient to do so.”
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