A weekly bulletin offering news and analysis related to the Middle Kingdom. This week, China draws closer to the US — but relations with India stay complicated.
1. Over to Washington
Round two of the Sino-US trade talks ended in Beijing on Friday. Xinhua’s report after the talks was rather positive. It tells us that the two sides “reached consensus in principle on major issues and had specific discussions about a memorandum of understanding on bilateral economic and trade issues.” The major issues included: “technological transfer, intellectual property rights protection, non-tariff barriers, the service industry, agriculture, trade balance and implementation mechanism; as well as on issues of China’s concern.” The report also sounds positive, in that the two sides are to “step up their work within the time limit for consultations” with talks in Washington next week.
Treasury Secretary Steven Mnuchin, meanwhile, tweeted that the two side had “productive meetings.” SCMP reports, citing unidentified sources, that “the last two days in Beijing made progress but not enough to seal a final deal.” The talks in Beijing were apparently held in a positive atmosphere. A Chinese state media affiliated social media account reportedly noted that “There was laughter coming out of the venue (of the talks). Not only is there a good atmosphere, but the working groups from both sides reportedly worked late, exchanging views all night. There must be things to discuss to keep discussions going so late.” Also a positive sign was the fact that Xi Jinping met with Mnuchin and USTR Robert Lighthizer. Despite all this, key differences still remain.
NYT reports that two sides have been struggling with more than 100 issues raised by the US in May last year. The report says that China has agreed to disclose more of its government subsidies to the WTO. It adds that “Chinese officials have also expressed a willingness to let foreign companies participate in panels that set standards on important industrial issues, like fuel-economy averages for cars. But while that might give foreign companies a glimpse of upcoming rules, they would be in a minority and might not have much influence.” The report further states that the biggest issue remains “China’s ability to keep investing enormous sums of money from the government, and from government-affiliated financial institutions, in a wide range of advanced manufacturing sectors that compete with American industries. These include areas like commercial aircraft manufacturing, semiconductors and artificial intelligence.”
Away from the talks in Beijing, US Secretary of State Mike Pompeo has been on a visit to Europe, where he’s been warning US allies and partners about dealing with Chinese tech firms. “If that (Chinese/Huawei) equipment is co-located where we have important American systems, it makes it more difficult for us to partner alongside them,” he said, adding that Washington just wanted to make sure that its friends “identify the opportunities and the risks with using that equipment.”
Questions about Huawei are being raised in a range of countries. In the Czech Republic, Huawei has threatened a lawsuit if the country cybersecurity agency does not withdraw a warning against its products. This NYT story on how the issue has driven a wedge in the Czech government is rather eye opening. For Beijing, this is all part of the broader conflict with the US. It says what Washington is doing is “bullying” countries. The real issue in this drive against the likes of Huawei and ZTE in Europe is economics. As this report argues, European carriers claim that Huawei offers superior hardware at lower prices than its competition. If Europe banned devices made by the company, they warn that it could potentially fall behind other countries. It adds that all four of Great Britain’s major wireless carriers—Vodafone, Telefonica, Three, and BT Group—have spoken out against the ban. The German government, meanwhile, says it will consult further with telecoms operators and vendors before deciding on the issue.
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2. Economic Data & Agenda
It’s been a week of some rather interesting numbers. First, China’s foreign exchange reserves grew for the third consecutive month in January, up 0.5% from December to $3.088 trillion. Then January trade data showed that both exports and imports grew far more rapidly than most analysts expected. Xinhua reports that goods trade rose 8.7% year-on-year in January to 2.73 trillion yuan ($395.98 billion), as per the GAC. Some of this, of course, has to do with front-loading ahead of the Spring Festival holiday season. That’s a time when one should be watching out for data on domestic consumption, which is a good indicator of consumer confidence and the general shape of the economy. So far this time around, retail sales have grown by 8.5% year-on-year during the holiday season. That’s a good number, but still the slowest pace of growth since 2011. Meanwhile, domestic tourism revenue during the new year break expanded by 8.2% year-on-year. Yet, the downward pressure on the economy remains. SCMP reports that 17 of 31 Chinese provincial-level divisions failed to meet their GDP growth goals last year. The report quotes Guosheng Securities analyst Xiong Yuan as saying, “Apart from Shandong province, the real GDP growth rates of the other 30 provinces were on average, 0.3 percentage point lower than their targets.”
Ahead of the annual NPC session, a number of steps are being taken to set into motion the government’s economic agenda for the year. So this week, Vice Premier Han Zheng, who is also a PSC member, visited the NDRC. He called on the country’s top planner to “improve macro-control, implement policies of tax and fees reductions, stabilize investment, and promote major reform measures in sectors including finance, taxes, state-owned enterprises, electricity, gas and scientific and technological mechanism.” The other big focus of his visit was to urge the NDRC to “monitor employment situation and take measures to stabilize employment.”
The State Council also met on Monday after the holiday break, announcing a couple of key steps. The first is poverty alleviation, with a target of 10 million set for this year. Remember, China plans to eliminate poverty by 2020. At the meeting, Li Keqiang said, “we must strictly enforce the poverty criteria involving the five essential needs of food, clothing, compulsory education, basic healthcare and a place to live.” Also on Monday, the PBOC announced measures to support rural financing. Caixin reports that “rural banks are being urged to boost lending to aid economic development in agriculture and underprivileged areas, and encouraged to issue more special purpose bonds to fund projects in rural regions.” Other measures include help for agriculture companies to list, improving rural insurance and credit guarantee systems, and increased monetary policy support. That’s much in line with the requirements highlighted by a new National People’s Congress field study covered by Trivium China, which views the shortage of capital as a key constraint in rural development.
Another interesting development from the State Council’s meeting was the decision to “streamline the registration and approval of new anti-cancer drugs, announcing that experts will be invited to select new overseas drugs to meet urgent clinical needs, and import policies will be improved for a faster launch of the new drugs in China.”
3. Debt & Default
A large section of the media reports on the Chinese economy this week focussed on the debt problem. Bloomberg reports that two large Chinese borrowers, China Minsheng Investment Group (CMIG) and Wintime Energy Company are struggling to meet bond repayments. The report says that China Minsheng had planned to repay a 3 billion yuan bond on February 1, three days after the maturity, while Wintime Energy had told investors that it’s still seeking financing for payment of 20% of the principal on the defaulted bond, which was due on February 6. It further adds that the cases are “significant because both companies were big borrowers, and their problems accessing financing suggest that government efforts to smooth over cracks in the $11 trillion bond market aren’t benefiting all firms.” CMIG was once viewed as China’s answer to JP Morgan. It’s troubles are being seen as a product of a “combination of mismanagement and tighter lending conditions,” which in itself is a product of a number of factors, including the crackdown on shadow banking. Some reports even state that the government is set to step in and assist CMIG.
Reuters, meanwhile, has two deep-dives into the difficulties faced by private companies in accessing finance and the liquidity crunch faced by vulture funds. The first one focuses on the case of Dongying, a city in Shandong Province. It says that at least 28 private companies in the city are seeking to restructure their debts and avoid bankruptcy, mainly due to souring loans that they guaranteed for other firms. Private companies in China tend to struggle to access formal credit, receiving only around 25% of the total loans disbursed. Moreover, in order to get such loans, they either require substantial collateral or the guarantee of another company, and often the guarantor itself is very likely to have taken on loans guaranteed by other firms. This creates cross-guaranteeing of debt, with defaults quickly cascading across the system when one loan goes bad. The second story talks about the so-called vulture funds, which buy bank NPLs at a discount to recover them for profits. Some of these are private firms and some are state-owned. And with the economy slowing, even this industry is struggling with liquidity.
4. Terror & Influence
Despite the post-Wuhan rhetoric, the last few weeks have highlighted the complexities of the India-China relationship. On Friday, Chinese foreign minister Wang Yi spoke to India’s External Affairs Minister Sushma Swaraj. As per Ambassador Luo Zhaohui, Wang “condemned the Pulwama suicide attack, expressed deep sympathy to families of the victims & injured, and stressed that the Chinese side resolutely opposes and strongly condemns all forms of terrorism.” Earlier in the day, the Chinese foreign ministry had condemned the attack, which had targeted a CRPF convoy. PTI reported that the spokesperson expressed deep “shock,” but did not give an assurance to India that it will back New Delhi’s appeal to list the UN-proscribed Pakistan-based terror group’s chief Masood Azhar as a global terrorist. Jaish has claimed responsibility for the attack. Responding to questions, Geng Shuang said: “JeM has been included in the Security Council terrorism sanctions list. China will continue to handle the relevant sanctions issue in a constructive and responsible manner.” He added, “as to the listing of an individual, we have always upheld an earnest, responsible and professional manner. We always acted in accordance with the requirement of the situation. We will continue to maintain close communication with India and relevant parties on this issue.” After this attack, the Azhar issue becomes a more pronounced source of friction, unless Beijing yields.
Also, Prime Minister Narendra Modi’s recent visit to Arunachal Pradesh led to a reaction from the foreign ministry. However, the statement wasn’t very different from similar comments in the past. It called on India “to respect interests and concerns of the Chinese side, cherish the momentum of improvement in bilateral ties and refrain from ‘any action that may lead to an escalation of disputes or complicate the border issue’.” The MEA responded by reiterating that Arunachal is “an integral and inalienable part of India.” Discussing the issue, Bidhayak Das writes in SCMP that “New Delhi knows all too well the sway Beijing can hold over anti-India forces in the country’s far northeast…New Delhi now fears Beijing will capitalise on the backlash against Modi’s plans to extend citizenship to settlers who fled to India from neighbouring countries under a controversial new bill.” One of examples that the piece cites is protest in late January in Mizoram, where placards read: Hello China, Bye Bye India.
Meanwhile, the parliamentary standing committee on defense’ report this week discussed the state of strategic border roads, building of which it said was running way behind schedule. Hindustan Times reports government had identified 73 roads measuring 3,812 km along the China border as “strategic roads” and the deadline for their completion was 2012. “Out of these, 61 roads of length 3417.50 km have been entrusted to BRO. Of these, 28 roads of length 981 km are completed and work on the other roads are under progress and are in different stages of completion,” the report noted, stressing the need to speed up the projects.
Moving away from these difficult issues, IANS reports that as per UN Conference on Trade and Development data, India is likely to increase its exports by as much as $11 billion if the Sino-US trade war escalates after March 1. The gains are projected across a range of sectors. Gains from US tariffs on Chinese imports amount to $8.3 billion. Gains from China’s tariffs on US imports are estimated at $2.65 billion. According to the Indian Commerce Ministry, between April and December 2018, exports to China were $12.7 billion, which is closer to last year’s exports of $13.33 billion. So a year-on-year boost is expected. Two other interesting stories are around Xiaomi and Oyo. The former has reportedly shipped more smartphones to India than within its home country in Q4 2018. The latter has gained an important investor in Didi Chuxing to support its bid to expand its Chinese business. Also good news is that Indigo airlines plans to launch twice daily flights to China this year. TOI reports that as of now, there are only 47 weekly flights between India and China (5 by Air India and 42 by Chinese airlines).
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5. The Belt and Road
Dipanjan Roy Chaudhury has a really nice round-up of the latest developments related to the Belt and Road Initiative in South Asia in the Economic Times. It covers the issues that are cropping up in countries around the region. But apart from the specific details regarding each country, this overview is interesting to note: “Of the 115 countries that BRI touches, Asia accounted for 39% of the contract value from January 2014 to June 2018, higher than Africa’s 30%, according to Moody’s Investors Service.
In the case of the Maldives, the Financial Times reports that “Over the past two months, the Maldives has been struggling to establish the full scale of its exposure to Chinese debt, most of which is in the form of sovereign guarantees on Chinese loans to companies. Finance ministry data show that these guarantees amount to $935 million, on top of the $600 million directly owed to Beijing by the government.” Mohamed Nasheed, meanwhile, estimates the exposure at around $3 billion. Nasheed traveled to India this week, but before that, he spoke to the press about China’s effort to expand influence in the Indian Ocean. Meanwhile, the corruption probe against former president Abdulla Yameen appears to be gathering steam. Local police have reportedly charged him with corruption, money-laundering and giving false information to state authorities.
In Pakistan, a team of Chinese experts is set to visit later this month to finalise CPEC projects. On Gwadar, Pakistani officials say that China has agreed to speed up the progress on the port and its auxiliary projects. China’s ambassador to Pakistan Yao Jing also met with Imran Khan this week, saying that the next stage of CPEC would focus on investing and buying more from Pakistan. Beijing’s already reportedly pledged an additional loan of 2.5 billion to help Pakistan in its BoP crisis. This meeting with Yao comes just after Khan met with IMF chief Christine Lagarde in Dubai. After that meeting, Finance Minister Asad Umar said that “Our differences have narrowed. It seems we have come very close to having an agreement with the IMF.”
Moving away from South Asia to Africa, Brendon Cannon has an interesting piece in The Diplomat. His central point is that while China appears to currently be the dominant power in Africa, “the inevitability of Chinese power and durability in Africa is not only exaggerated, but increasingly questioned by Africans and their leaders.” He identifies “four pitfalls of Chinese power projection in Africa: racism, debt, direct competition with locals, and labor relations.” Another piece to read with regard to China’s Africa involvement is this one by Joyce Chimbi in the Global Times, largely because it calls for greater transparency and data regarding Chinese investments and internal mechanisms of its relations in Africa.
One expanding component of BRI is the Digital Silk Road, which focuses on constructing and expanding telecommunications infrastructure. This Kieran Green piece for CCP Watch on DSR offers an interesting perspective on the expanding role of Chinese cybersecurity firms. The piece argues that as part of this effort the PRC has enhanced state linkages with China-based cybersecurity firms. The three broad objectives in doing this are: expanding overseas presence of indigenous cybersecurity companies. evangelizing China’s vision for Internet governance and integration of Chinese security software into critical infrastructure to support espionage and security goals.
6. The Long and Short of It: A quick summary of some interesting China-related stories
- A Turkish Spat: On February 9, the Turkish Foreign Ministry issued a remarkable statement, criticizing the Chinese government for “violating the fundamental human rights of Uighur Turks and other Muslim communities in the Xinjiang.” Specifically, it said the government was carrying out “arbitrary arrests” and engaging in “torture” and “political brainwashing.” One part of the statement was about the reported death of poet Abdurehim Heyit, who has been in detention in China. Soon after state-run China Radio International’s Turkish service released a video featuring a man identifying himself as Heyit. He claimed to be alive and well, although he was being investigated for allegedly violating Chinese laws. The Chinese embassy in Turkey put out a strong statement, adding that Chinese residents and tourists traveling to Turkey “be wary and pay attention to their personal safety.” The Chinese foreign ministry reacted by saying that Heyit was “alive and in good health” and that Turkish “double standards on counter-terrorism…will only end up hurting itself.” The situation leads to two big questions: first, why did Turkey react now? Second, what next? For both of these, I’d recommend this Diplomat podcast with Shannon Tiezzi.
- The Venezuela Talks: “It’s fake news.” That’s how the Chinese Foreign Ministry responded to a WSJ report this week on Beijing opening dialogue in Washington with representatives of Juan Guaido, the man who claims he is the real Venezuelan president instead of Nicolas Maduro. The report says that China is concerned about oil projects in Venezuela and almost $20 billion that Caracas owes Beijing.
- PLA Training: A couple of interesting developments to note here. First, Xi Jinping signed off on a first-of-its-kind trial regulation on the supervision of military training. The regulation comes into effect on March 1. The regulation aims to “rectify practices that are inconsistent with the requirements of actual combats. It also details the criteria for identifying malpractices and discipline violations during military training.” The focus here is improving combat readiness, which has been high on Xi’s agenda, given concerns over the “peace disease” affecting the PLA ability to meet future challenges. For more on what the peace disease is, do check out this recent testimony by Dennis Blasko to the U.S.-China Economic and Security Review Commission.
- Security Funding in Africa: African foreign ministers and Chen Xiaodong, Assistant Foreign Minister of China, met in Addis Ababa on Wednesday. Chen said that China’s four major principles in its cooperation with African countries in the peace and security sector are “playing a fair, impartial and constructive role, helping Africa build up its own peacekeeping capacity, addressing the root causes as well as the symptoms, and pursuing cooperation for win-win results.” Following that a statement issued on behalf of AU peace and security commissioner Ambassador Smail Chergui recently talked about China providing $180 million worth of funding to the body’s peace and security efforts. This involves $100 million for the African Standby Force (ASF) and the African Capacity for immediate Response to Crisis (ACIRC) and a second of $80 million. Apart from providing peacekeepers, China has also lent technical and logistical support to the AU’s security efforts.
- Pressuring New Zealand: The relationship with China is rapidly emerging as the most challenging foreign policy issue for the New Zealand government. Amid the 5G debate in the country, Huawei this week took out newspaper commercials comparing its presence in 5G networks to the All Blacks in Rugby. The advert says: “without Huawei, New Zealand will miss out on the most advanced 5G technology available, and consumers may end up paying more for it.” That’s just a polite reminder. The real pain point being pushed is tourism, with the local embassy issuing rather odd warnings to Chinese tourists. In addition, Beijing recently failed to provide a minister to attend the New Zealand-based launch of the Year of Chinese Tourism campaign. And then there is the curious case of an Air New Zealand jet on its way to Shanghai being forced to return to Auckland after several hours in the air because paperwork for the flight apparently included a reference to Taiwan.
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