Eye on China World

A Trade Deal and a Transatlantic Split

A weekly bulletin offering news and analysis related to the Middle Kingdom. This week, a US-China trade deal appears possible, but Huawei causes rumblings in Europe.

1. Trade Talks Extended

A Sino-US trade deal appears to be on the horizon. The two sides have agreed to extend the current round of talks in Washington by two days, till Sunday. On Friday, Vice Premier Liu He met with President Donald Trump, sharing with him a letter sent by Xi Jinping. Trump says that there’s a very good chance a deal will happen between the two sides. To that, Liu added that “it is extremely likely that [a deal] will happen.” Trump also said that he will “certainly consider” the possibility of extending the March 1 deadline, if talks continue to go well, and that he is likely to meet Xi “probably fairly soon in the month of March.” He further added, “Ultimately, I think the biggest decisions and some even smaller decisions will be made by President Xi and myself.” Trump has suggested his Mar-a-Lago resort as a possible venue.

But already, some decisions are being announced. For instance, it is reported that the two sides have agreed to a deal on the issue of currency manipulation, although the details on the deal are not public. Politico quotes Derek Scissors, a China policy expert at the American Enterprise Institute, as saying that the pact may contain a pledge that China will not let its currency depreciate beyond 7 renminbi to the dollar. In addition, Bloomberg reports that the Chinese side has offered to buy $30 billion of US agriculture goods per year.

On the broader deal, however, US Trade Representative Robert Lighthizer, says that while negotiations have moved forward, “a few very big hurdles” remain. But then Lighthizer and Trump have been butting heads over the talks. An example is this reported exchange over MoUs. According to Reuters, the current talks revolve around the drafting of six MoUs covering the major issues. The report says:

“The six memorandums include cyber theft, intellectual property rights, services, agriculture and non-tariff barriers to trade, including subsidies. An industry source briefed on the talks said both sides have narrowed differences on intellectual property rights, market access and narrowing a nearly $400 billion U.S. trade deficit with China. But bigger differences remain on changes to China’s treatment of state-owned enterprises, subsidies, forced technology transfers and cyber theft of U.S. trade secrets.”

One more point to note is the Huawei saga. Trump brought up US charges against Meng Wanzhou and the Chinese telecommunications giant. He told reporters that he “may or may not include” a resolution to the Huawei situation as part of a broader deal with China. Given this approach by the US administration, it’s unsurprising that Mike Pompeo’s say not to Huawei campaign in Europe has fallen on deaf ears.

2. Europe’s Huawei Saga

Pompeo’s recent visit to Europe saw him telling allies and partners that they must ensure that their 5G rollout stays clear of Huawei. He tells us that the concerns the US flagged were about Huawei’s links to the PLA and the threat to privacy. The second piece of his message was that “if a country adopts this and puts it in some of their critical information systems, we won’t be able to share information with them, we won’t be able to work alongside them.” The US campaign against Huawei was also one of the focus points of the debate between Mike Pence and Yang Jiechi at the Munich Security Conference. But Washington’s threats are having very little impact. (India’s Huawei discussion is in the next section.)

  • The Wall Street Journal reports that the German government is leaning towards working with Huawei. German Economy Minister Peter Altmaier didn’t confirm that report, but says that talks are still underway with regard to Huawei’s future in the country. One solution could be to tighten security requirements for telecoms firms wanting to join the 5G build-out in Germany, effectively making tighter oversight of Huawei possible.
  • In Britain, the National Cyber Security Centre, a wing of GCHQ, is reportedly suggesting that the security risk from Huawei is manageable. MI6 chief Alex Younger also believes that an outright ban might not be feasible. However, a RUSI report, out this week, argues that “allowing Huawei’s participation is at best naive, at worst irresponsible.” Also note that the reclusive Huawei founder Ren Zhengfei offered an exclusive to the BBC this week, denying the company’s links with the Chinese state. “We only provided equipment to telecom operators and that equipment does not have an ideology,” he explained.
  • Pompeo’s pitch has some supporters in Italy. Reuters reports that lawmakers from the Lega party have called on the government to ban Huawei. The government’s view, however, is a bit different. It focuses on broadly foreign companies. Michele Geraci, undersecretary at the Ministry for Economic Development, told Bloomberg that “People always say Huawei yes or no, the real question should be about foreign equipment manufacturers being allowed to access your network…I don’t see Huawei as an issue, for me it’s just one of 25 names of equipment manufacturers that you can choose from, with different prices and different quality.”

The transatlantic split is not just at a governmental level, but also among telecom operators. Over the past week, there’s been a spat of sorts between two groups representing US and European service providers, as this Bloomberg report explains. GSMA, a London-based wireless industry group, wants European governments to think carefully about decisions that could delay 5G rollout. But CTIA, a Washington-based group, responded to that, saying the GSMA “does not represent the views of all wireless operators or all regions.” CTIA, with members that include US market leaders AT&T and Verizon Communications, has urged US regulators to go slow in crafting rules on equipment security.

Also Read: US allies split on Huawei

3. The Azhar Card

Much of the discussion about China in India and vice-versa this week has been about terrorism and Pakistan. First, let’s look at the issue of Masood Azhar’s listing under the UN 1267 Committee. Soon after the attack, New Delhi did call on “all members of the international community” to act against Azhar. France has reportedly offered India to move a proposal for Azhar’s listing at the UNSC. His organisation, JeM, was named in the UNSC statement this week, condemning the Pulwama attack. But that doesn’t mean that Beijing’s changing its line on Azhar. Recall the Xiamen BRICS statement last year also mentioned JeM. There were two statements by the Chinese foreign ministry on the issue of Pulwama that are noteworthy.

The first says that “the situation in South Asia is generally stable, which is hard-won and should be cherished and upheld by relevant parties. China hopes that Pakistan and India can exercise restraint, engage in dialogues and realize an early ‘soft landing’ of this issue.” The second is interesting in that it says “following the relevant resolutions and the procedures of the 1267 Committee, China will engage in relevant discussions in a constructive and responsible manner, and keep close communication and coordination with India and other parties concerned.” This comes as Indian Foreign Minister Sushma Swaraj is heading to Beijing for the Russia-China-India foreign ministers dialogue on February 27. And reports in the Pakistani press that the US has told “Pakistani officials in Islamabad and to Pakistani diplomats in Washington” to relent on Azhar’s listing.

Random thought bubble: Azhar’s a card for Beijing, which has grown in value over time. So don’t think of his listing as something sacrosanct between iron brothers or fundamental to CPEC protection. Given the right incentives – and there are many if India can work with partners – his listing will be traded.

Meanwhile, the Swadeshi Jagran Manch has written to Prime Minister Modi, urging him to make it difficult for Chinese companies to operate in India. The letter says that it is well know that China has placed hurdles in India’s path when it comes to Azhar’s listing, so Modi should “create similar hurdles for Chinese companies that are using India for their economic gain.” The companies in focus were Chinese messaging and content apps, with user data being a sticking point. All this is happening as Huawei India CEO says that he is “positive” about the company participating in 5G trials in India. Jay Chen is reported to have said: “I had many interactions with various government departments such as Department of Telecom (DoT), Ministry of Electronics and IT (MeitY), and Prime Minister’s Office (PMO)… up till now nobody has told me ‘you have a problem’. Everybody said ‘we understand’ and some clearly told me ‘yes, it is politics’.”

That’s sort of along the lines of what the Wall Street Journal is reporting (paywall free version in Business Insider). The report says that Journal reporters accessed parts of a memo sent earlier this month from India’s Home Ministry to the Prime Minister’s Office and the head of the National Security Council. According to the memo, the US side had discussed Huawei with New Delhi. The report also quotes an unidentified senior Indian official as saying that “Huawei is today at the frontier on 5G and so can’t be ignored…All technologies have security concerns and vulnerabilities, so singling out Huawei won’t be correct.” The official also added India would select its 5G vendors “on our terms, not under pressure [from the US].”

Finally, on a less controversial note, the Economic Times reports that the Chinese Army has proposed to conduct sports events at designated military camps inside their territory as part of efforts to develop greater understanding between commanders of the two armies. According to GOC-in-C, Eastern Command, Lt Gen MM Naravane, the proposal is under consideration.

Also Read:

4. Government Work Report

The Central Committee met on Friday to discuss the draft work report that Premier Li Keqiang will deliver during the NPC session next month. The report says:

  • “Facing complicated international situations and arduous tasks of reform, development and maintaining stability,” the Party led by Xi made “important progress on the way toward securing a decisive victory in building a moderately prosperous society in all respects.”
  • China will continue to promote high-quality development and take pursuing supply-side structural reform as the main task.
  • Effective steps should be taken to stabilize employment, the financial market, foreign trade, foreign investment, domestic investment and expectations. (Note: there’s a big stress on employment – so watch that space going forward.)
  • On issues of discipline, it argues that “efforts should be made to expose political deviation in the implementation of the Party’s lines, guidelines and policies.” There was a specific mention of corruption related to poverty alleviation programs. That’s emerged as a major issue, even under the CCDI’s annual report.
  • Last point to note: “The political standard must be incorporated into every aspect of official assessment to ensure that leading officials and cadres at all levels closely align themselves with the CPC Central Committee with Comrade Xi Jinping at the core in terms of political stance, direction, principle and path.”

Also Read: The struggle to reform China’s economy

5. Credit Picks Up

January’s credit numbers were the big focus for much of the press this week, given that they beat expectations. Bloomberg reports that “aggregate financing was 4.64 trillion yuan ($685 billion) in January…financial institutions made a record 3.23 trillion yuan of new loans, versus a projected 3 trillion yuan.” Reuters reports that demand for credit picked up sharply in the corporate sector, followed by the household sector. “Corporate loans jumped to 2.58 trillion yuan from 473.3 billion yuan in December, while household loans rose to 989.8 billion yuan from 450.4 billion yuan, according to Reuters calculations based on the PBOC data.” Another point to note is that the 4.64 trillion yuan mentioned above refers to total social financing (TSF). This includes off-balance sheet forms of financing that exist outside the conventional bank lending system, such as initial public offerings, loans from trust companies and bond sales. The data tells us that new policies to help private and small companies get financing has led to a spike in shadow banking – the first such reported increase in 11 months. The good folks at Trivium China, however, remind us that “authorities are still focused on containing risks in the shadow banking sector.”

For most analysts, the data show that fiscal, monetary and administrative easing measures adopted by the Chinese government are beginning to have an impact. Bank of America Merrill Lynch’s note on the issue says this “indicates that the PBoC’s easing efforts are finally kicking in, as liquidity is passed on from financial institutions to the real economy.” In contrast, Japanese financial firm Nomura believes that  high levels of debt in a slowing economy mean that some borrowers are taking up new credit to pay off existing loans “instead of funding real economic growth.” Caixin’s editorial view is also not bullish on credit growth. It argues that January’s numbers are a product of a number of factors, such as the new year break and the desire to take “new credit to roll over existing debts.” In addition, it says that around “2 trillion yuan worth of off-balance sheet assets, like trust loans and entrusted loans, are maturing in 2019. Due to continuing pressure on banks to cut down on financial risks, they are unlikely to be renewed. This means a large amount of credit will effectively be taken out of the economy.”

On Wednesday then, Premier Li Keqiang reiterated, after a State Council meeting, the government’s stance on maintaining a prudent monetary policy and the promise that it will not resort to “flood-like” stimulus. The same meeting also provided this brief statement about authorities at all level taking the into account views of enterprises/businesses when framing policies and regulations. Xinhua reports that “the country will step up efforts to solicit opinions from enterprises and industry associations or chambers of commerce while formulating and implementing relevant regulations.” So it’s not all black box policymaking.

6. The No 1 Document

Also this week, the “No. 1 central document,” which discusses agriculture and rural areas was released. Beyond the regular affirmations of the importance of agriculture, this sentence tells us what the government’s agenda is: “Work must be done to deepen agricultural supply-side structural reform, win the tough battle against poverty, give full play to the key role of rural primary-level Party organizations, and push forward rural vitalization in all respects, according to the document.” So we’re going to see more party involvement in a space where there was some political freedom.

A key driving force of the policy in rural areas is the goal to end poverty by 2020. In this context, Xinhua reports that the “focus will be put on providing assistance to areas of extreme poverty, via favorable policies ranging from major projects, poor resident relocation, finance and nurturing of talent.” In addition, there is a stress on rural infrastructure, living environments and public services.

Other key targets are: “Efforts will be made to ensure that grain planting area remains steady at 1.65 billion mu (110 million hectares) and arable land area is kept above 1.8 billion mu, as well as develop 800 million mu of high-standard farmland by 2020.” Also, there will be an effort to “expand imports of agricultural products in short supply at home, diversify importing channels, and foster the development of multinational agricultural corporations.” Soybean planting also got a specific mention, given that it has been a casualty of the trade war.

The other important aspect noted in this document is with regard to rural land reforms. Caixin reports that as per the document, China will push forward reforms in rural land expropriation and trading and will speed up the establishment of a unified land market between rural and urban areas. Under current laws, rural land is collectively owned by a village committee and can only be used for agriculture or homebuilding. It cannot be sold. Some land designated for industrial construction can be sold to developers through public auction, but rural land allotted to farmers for building homes can’t be traded publicly. Loosening this has been part of numerous pilot programs, but there isn’t yet a national policy in place for this.

7. The Greater Bay Area

China on Monday issued the Outline Development Plan for the Guangdong-Hong Kong-Macao Greater Bay Area. Reuters reports that the Greater Bay Area covers nine cities in Guangdong along with Hong Kong and Macau. The goal is to promote “coordinated development and create a model for high quality development.” The plan outlines long-term goals till 2035. BBC reports that “The plan aims to develop technology, deepen links between financial systems and infrastructure, while securing quality of life…The blueprint lays out strategic visions for the major cities in the region to become hubs in different sectors, reports say. Hong Kong would strengthen its status as a finance and trade hub, Shenzhen – home to Chinese telecoms giant Huawei – would consolidate as a tech hub, while Macau would focus on tourism and trade with the Portuguese-speaking world.”

“In other words, the cities will continue to do more or less what they already do,” as Nisha Gopalan argues in this Bloomberg piece, outlining the contradictions and vagueness of the plan. What state media has, however, helped us learn is that Xi has been personally behind pushing this plan. For more details on the plan and its potential impact and pitfalls, do check out this China Briefing note by Mark Preen for Dezan Shira and Associates .

8. Mideast Balancing

Saudi crown prince Mohammed bin Salman Al Saud was in Beijing this week, after a trip to Pakistan and India. Saudi Aramco signed off on a $10bn refinery and petrochemical project hours before MBS met with Xi. The refinery will be located in the coastal area near Panjin in Liaoning. Do note that China is Saudi Arabia’s largest trading partner, with bilateral trade in goods totalling $63.3bn last year. MBS and Xi met later on Friday. Xi wants the two sides to “speed up the signing of an implementation plan on connecting the Belt and Road Initiative with the Saudi Vision 2030.” He also wants progress on cooperation in areas such as energy, infrastructure, trade, investment and high value-added industries. Also on the table is the establishment of a China-Gulf Cooperation Council (GCC) free trade zone. In a statement of direct support for MBS, Xi is reported to have said that China steadfastly supports Saudi Arabia pushing a diversification of its economy and societal reforms.

Interestingly, Xi also spoke about jointly exploring a governance path in the Middle East featuring the moves of “promoting peace through development.” The one interesting bit from MBS’s statement was this, which outlines Riyadh’s attitude towards the treatment of Uighurs: “We respect and support China’s rights to take counter-terrorism and de-extremism measures to safeguard national security.”

Prior to MBS’s visit, a large Iranian delegation, including Parliamentary Speaker Dr. Ali Larijani, Foreign Minister Mohammad Javad Zarif and a dozen of ministers and vice-ministers, was in China. CGTN tells us that the delegation discussed measures to safeguard the nuclear deal that Trump’s trashed, and ways in which the two sides could work together. While Zarif held talks with his counterpart Wang Yi, Larijani also met with Xi. Wang reportedly told Zarif that “the situation in the Middle East and the world is undergoing major changes, and relations between China and Iran are also facing a new situation.” In this context, Beijing valued Iran’s role in regional affairs and expected Iran to have a more constructive role in such affairs. Zarif, meanwhile, stressed that “our relationship with China is very valuable to us. We consider the comprehensive strategic partnership between Iran and China as one of our most important relations.”

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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.