A weekly bulletin offering news and analysis related to the Middle Kingdom. This week, important speeches take place, and Huawei lawyers up.
1. Two Sessions
China’s annual political sessions, i.e., the meetings of the NPC and CPPCC, are currently underway in Beijing. It’s a time when there’s a lot of noise. Here are the important developments so far that you should note:
a. Li’s Speech: One of the big highlights of the NPC session is the Premier’s Government Work Report, the Chinese equivalent of the State of the Union. Here’s a breakdown of Li Keqiang’s speech (Unofficial translation/ Official highlights):
- China is still in a period of “strategic opportunity.” There, however, is “profound change” in the “external environment.” There are “serious challenges caused by the growing pains of economic transformation.” China’s “innovation capacity is not strong.” And “there is still public dissatisfaction in many areas, such as education, healthcare, elderly care, housing, food and drug safety, and income distribution.”
- In terms of the last year, China’s GDP grew at 6.6% and is at RMB 90 trillion. 13.61 million new jobs were created. Surveyed unemployment rate is at around 5%. Service sector’s GDP contribution is around 60%. China’s total volume of trade in goods exceeded 30 trillion yuan, and utilized foreign investment totaled $138.3 billion. Rural poor population reduced by 13.86 million.
- Li spoke about all the key areas of interest going forward, i.e., maintaining growth in order to ensure employment; the three tough battles of managing risks, ending poverty and tackling pollution; and pursuing supply-side structural reform as the “main task;” all round opening up; pursuing innovation-driven development; coordinated development across regions.
- Key goals for 2019 are: GDP growth of 6-6.5%; Over 11 million new urban jobs; A reduction of over 10 million in the rural poor population; Personal income growth that is basically in step with economic growth; A drop of around 3% in energy consumption per unit of GDP.
- There’s a whole list of promises that Li makes and steps that he outlines in order to achieve the broad goals of the government. Expect more of what one’s seen in the past year, i.e., no large-scale stimulus, better targeting of investments, a range of tax cuts, subsidies and support for emerging industries, support for rural revitalisation and new urbanisation, etc.
b. Security and Defense: What’s also keenly watched at the NPC is the announcement of China’s annual defense budget. This year we learned that the defence spending figure for 2019 is set at 1.19 trillion yuan ($177.49 billion). That’s a 7.5% increase year-on-year. Although this is lower than the 8.1% increase in 2018, it still outpaces GDP growth in percentage terms. Soon after the announcement, there were reports and statements, arguing that the spending is needed “for advancing defense and military reforms, supporting military training and diverse tasks, modernizing weapons and equipment, and improving welfare of service personnel.” Moreover, emphasis is given to the point that China’s defense spending still remains well below 2% of GDP. What some pieces also point out is that defense spending aims to bridge the “historical gap” between Chinese force capacity and that of other major powers. Unfortunately, the Chinese government doesn’t provide a breakdown of the outlay. But personnel costs are likely to a big part of the outlay, particularly with increasing frictions over veterans rights and proposed new legislation on this by Minister of Veterans Affairs Sun Shaocheng.
Also worth noting is that official internal security spending continues to be much higher than defense spending at RMB 1.387 trillion. Also, the draft annual allocation for foreign affairs is RMB 62.7 billion ($9.35bn). India’s MEA’s budget allocation in 2019 was Rs. 16,000 crore (roughly $2.28). MEA budget’s year-on-year hike was roughly 6.7%. China’s foreign affairs hike’s 7.4%.
c. CPPCC’s Diplomatic Agenda: Staying on diplomacy, Wang Yang’s speech to the advisory body, highlighted the work that the CPPCC is to do in this context. Remember, the United Front – China’s magic weapon – comes under the CPPCC’s purview. Wang said the CPPCC would “actively carry out exchanges of high-level visits, and create new ways of conducting public diplomacy and people-to-people and cultural exchanges in 2019.” In this year, the body will host the 17th session of the Sino-EU Round Table, the Belt and Road Seminar for International Cooperation, and the International Seminar on Peaceful Dialogue between Different Religions. It will work on recruitment of overseas talent and political advisors are expected to tell China’s stories to the outside world.
d. Wang Yi on Foreign Affairs: State Councillor and Foreign Minister Wang Yi held a press conference on Friday. (Official Highlights) He spoke about a range of issues, without really saying much. In that, the answers had lot of rhetorical flourish, but nothing we didn’t know before. Below’s a quick takeaway:
- China sees multilateralism as a cornerstone of the international system…China will surely become stronger, but will not be assertive. China values its independence, but will not go it alone.
- We still have a positive outlook on China-US relations…Decoupling from China would mean decoupling from opportunities.
- Wang backed Huawei’s recent actions (discussed below), saying that the China supported the company in its refusal to be “silent lambs.”
- BRI is not a debt trap that countries may fall into, but an economic pie that benefit the locals. It’s no geopolitical tool, but a great opportunity for shared development.
- (In Latin America), external interference and sanctions will only aggravate tension and bring back the law of the jungle…The sovereignty and independence of every country is precious, and must be cherished and preserved in equal measure.
- On India-Pakistan, he spoke about China’s “mediation efforts,” the need to respect sovereignty and territorial integrity, and expressed hope that the two countries will transform the crisis into an opportunity and meet each other halfway.
- On India, he said, our friendship and cooperation will surge ahead like the Yangtze and the Ganges.
e. Xi Watch: Much of the reporting about Xi in China at this point of time is about him meeting with delegations from different parts of the country and listening to them and sharing his views with them. That’s the standard fare. But let’s just take a look at three stories about Xi that have dominated state media headlines, because they tell us about the priorities of the leadership and the narrative that it would like to push domestically. So, Xi called for greater cultural confidence, stressed on the fight against poverty and emphasised the strategic resolve in building of ecological civilization. The first involves cultural, literary and artistic works needing to be “people-centered,” i.e., they should reflect reality and be conducive to solving real problems. More importantly, he called for efforts to undertake the mission of recording, writing about and praising the new era. The second is significant given the goal of eradicating extreme poverty by 2020. The third is about the promise of “high-quality development,” which Xi offered as a new deal to Chinese citizens as the country’s pace of growth slowed. Finally, do check out this NYT piece on Xi’s decision to dispense with hair dye in favor of the gray streaks. While most of the analysts quoted in the piece talk about the decision as an image-building exercise, i.e., to project the image of Xi as a paternal, humble, relatable and hard-working leader. To me, it’s probably a reflection of Xi no longer needing to project vigor and youth like others. He’s no longer one of a collective.
f. Secret Program: Trivium China’s Friday brief reports that China’s Vice Minister for Industry and Information Technology, Wang Jiangping, told CPPCC delegates on Thursday about China’s secret microchip and software policy. The remarks were leaked online before being taken down. The project is apparently called “Zhengxin Zhuhun.” Under this, Wang said “the state will give strong policy and funding support, because industries such as microchips and software need to be iteratively developed.”
2. Huawei Lawyers Up
There were four major developments in the unfolding Huawei saga this week. First, the Chinese tech giant upped the ante with a lawsuit against the US government in a Texas court. The suit challenges a congressional ban on federal agencies’ use of Huawei’s products. The company says that the law to this effect is unconstitutional. “The U.S. Congress has repeatedly failed to produce any evidence to support its restrictions on Huawei products. We are compelled to take this legal action as a proper and last resort. This ban not only is unlawful, but also restricts Huawei from engaging in fair competition, ultimately harming U.S. consumers,” said Huawei Rotating Chairman Guo Ping. Speaking to the press, Guo also lashed out at USG for branding Huawei as a threat, hacking its servers, stealing emails and source code. In doing so, he was building on his recent article in the Financial Times, which referenced the Edward Snowden leaks and argued that the US case against Huawei has a lot to do with this: “if the NSA wants to modify routers or switches in order to eavesdrop, a Chinese company will be unlikely to cooperate.”
Back to the case in Texas, this Reuters explainer breaks down the details well, while also arguing that Huawei isn’t likely to walk away with a win. It says that as per legal experts, “the firm is likely to lose its case because U.S. courts tend to avoid second-guessing Congress’ actions relating to national security.” Bloomberg reports that in order to file this case, Huawei has turned to a law firm with close ties to the Trump administration. Lawyers from two firms, Jones Day and Morgan Lewis & Bockius, are said to be working for Huawei, with each having some linkages with Trump. On March 14, meanwhile, Huawei and two affiliates will be arraigned in a New York court on accusations the company committed bank and wire fraud and violated sanctions against Iran.
Second, extradition proceedings against Huawei CFO Meng Wanzhou began in Canada on Wednesday. The first hearing in the case is set for May 8. Meng’s lawyers have reportedly sought to highlight the political nature of this case in reference to Donald Trump’s recent remarks about a deal with China. In addition, they have filed a civil claim, which alleges that instead of immediately arresting her, Canadian authorities had interrogated her “under the guise of a routine customs” examination and used the opportunity to “compel her to provide evidence and information.” The Guardian reports that the suit also claims Canada Border Service Agency agents seized her electronic devices, obtained passwords and unlawfully viewed the contents and intentionally failed to adviser her of the true reasons for her detention.
Third, China’s Central Political and Legal Affairs Commission has formally revealed the charges against detained Canadians Michael Kovrig and Michael Spavor. The former is charged with gathering and stealing “sensitive information and other intelligence” since 2017. The latter is accused of being an “important contact” and providing intelligence to Kovrig. In addition, Beijing has blocked a canola shipment from Canada and increased inspection of Canadian canola exports. That’s classic use of economic tools for strategic aims.
Fourth, the US international campaign against Huawei continues to hit a wall in Europe. In Germany, Bloomberg reports that the interior ministry, the foreign ministry and German intelligence are pushing back against the economy ministry and industry lobby groups, which are softer on Huawei. The product of this seems to be be a middle-of-the-road solution. The Financial Times reports that Germany’s new guidelines for telecoms security do not explicitly bar Huawei from bidding for 5G contracts. But it does say that telecoms equipment can be bought only from trustworthy vendors “which unequivocally abide by national safety regulations, as well as provisions on the secrecy of telecommunications.” It further adds that: “In the planning and buildout of networks, one should avoid ‘monocultures’ by installing network and system components produced by different suppliers.” Something similar is being suggested in the UK, with reports saying the government will place some sort of a limit on operators with regard to the use of Huawei equipment across their networks. Meanwhile, Vodafone says any move to ban Huawei from all parts of new 5G networks in the UK would cost it hundreds of millions of pounds and “very significantly” slow down the deployment of the new technology. Finally, Huawei has opened its new Cyber Security Transparency Centre in Brussels. The company says all regulators, standards organisations and customers were welcome to use the centre.
3. India’s Strategic Challenge
As mentioned above, Wang Yi might have spoken about the Ganges and Yangtze, but the reality is far more complex. This is seen in this new Brookings survey of India’s strategic community. The survey finds that 54% of those interviewed see China’s assertiveness as the most significant external challenge India faces. It adds that only 2% believe that India should collaborate more with China in the event of greater US-China competition.
Speaking on Friday about the post Pulwama situation between India and Pakistan, Wang didn’t at all mention the need to tackle terror. Someone else who didn’t mention this was Kong Xuanyou, China’s vice foreign minister who traveled to Pakistan this week. Kong met with Pakistani Prime Minister Imran Khan, Army Chief General Qamar Javed Bajwa and Foreign Minister Shah Mahmood Qureshi and Foreign Secretary Tehmina Janjua.
Xinhua reports Kong told his hosts that China appreciates the calmness and restraint on the Pakistani side. He “urged both sides to avoid any actions that could further escalate the situation, show good will and flexibility and engage each other in dialogues as soon as possible.” He also “maintained that the sovereignty and territorial integrity of all countries should be respected, and China does not wish to see any actions that violate rules of international relations.”
On March 6, when asked about Pakistan’s actions with regard to issues of terrorism, the Chinese foreign ministry spokesperson said: “The international community should accord Pakistan objective assessment and recognition” noting the “statements Pakistan recently made on counter-terrorism, which, in fact, are in line with its long-term efforts to fight terrorism and contribute to the international counter-terrorism cause.” What’s also interesting is that the spokesperson was asked whether Kong would be visiting India and he sidestepped the question, without saying no. Pakistan’s foreign minister had suggested in early March that a Chinese envoy would be visiting both Pakistan and India. A day later, when specifically asked about whether Kong raised the issue of terrorism in Islamabad, Lu Kang’s reply didn’t even mention the word. However, Dipanjan Roy Chaudhury writes for the Economic Times that China is is believed to be actively considering this time to support the fresh move against Masood Azhar at the UNSC; a vote on this is scheduled for March 13. Kong, as per the report, is believed to have discussed guarantees for the security of CPEC projects in this context.
The decision that Beijing takes will tell us something about how it viewed the recent Indo-Pak exchange. Sumit Ganguly and Rajan Menon argue in The National Interest that “China’s brass has carefully watched the latest India’s military performance. The important question is whether, in light of Pakistan’s downing of the MiG, Beijing’s perception of India’s military strength has been influenced in ways that could embolden China’s leaders down the line. If it has indeed had that effect, deterrence, while it held recently on the India-Pakistan border, may have been weakened along the India-China border. For India that’s no small matter: China, not Pakistan, remains its most formidable foe.” The further state that India needs to “improve its intelligence, surveillance, and other defense capabilities…along the Line of Control.” It “needs to do all this for reasons that go beyond Pakistan. Because military clashes between India and Pakistan offer free lessons to China’s leaders, India’s national security planners have every interest in ensuring that the lessons Beijing learns are, from the standpoint of Indian security, the right ones. The wrong ones could lay the groundwork for another, more dangerous, crisis—and not along the Line of Control in Kashmir.”
Meanwhile, on the economic front, there’s some rather interesting news with regard to the trade deficit. Ananth Krishnan writes in ThePrint, GAC figures show that in 2018, India-China bilateral trade reached $95.5 billion, up 13 per cent from the previous year. “India’s imports, however, made up just $18.8 billion…The trade imbalance, in China’s favour, is now $58 billion, up from $51 billion in 2017. China’s exports to India have grown to $76.7 billion, now accounting for a record 80 per cent of the total two-way trade.” But if one looks at the data from April 2018, the story begins to turn. Biswajit Dhar in the Hindu Business Line argues that “In the first nine months of 2018-19, India’s exports to China have grown by an impressive 34 per cent (as against less than 10 per cent overall), while imports from its northern neighbour have declined by nearly 4.5 per cent (as against an increase of 14 per cent overall).” Consequently, “India’s trade deficit with China during April to December 2018 was $41.3 billion, down from nearly $47 billion in the corresponding period in the previous fiscal.” The piece further examines the real issue that is at hand, i.e., the composition of bilateral trade, which remains problematic.
Finally, a new report talks about the negotiations between India and China with regard to the RCEP deal. It says that China has asked India to allow duty-free import of 85% of its products into the country. China is reportedly willing to give duty-free access to 92% of Indian exports, provided the bar was raised for Chinese products. India has offered to open up 74% of its market to Chinese goods in phases.
4. ‘We’re Not There Yet’
US Ambassador to China Terry Branstad has told WSJ that “a date hasn’t been finalized” for a meeting between Trump and Xi. He added that while there had been significant progress, “we’re not there yet. But we’re closer than we’ve been for a very long time.” Jake Parker of the US-China Business Council in Beijing told Financial Times that Trump walking out of the Hanoi summit with Kim Jong Un “just totally spooked” the Chinese. They want a Trump-Xi meeting to be a signing ceremony and not a negotiation. So despite much reportage of the two sides being the final stages of a deal, there’s still work to be done. What all this basically means is that we are likely to see another round of talks between negotiators.
Hudson Institute’s Michael Pillsbury, who has advised the Trump administration, also believes more talks are likely. According to this NYT report, Pillsbury believes Xi’s silence on the talks was an ominous sign, and that several of the points that the United States thought China had agreed to were far from settled. The report adds that differences over an enforcement mechanism, the process and timing to roll back tariffs remain. It’s also unclear whether the structural changes that were initially demanded of Beijing are likely to be part of the deal. The NYT report adds “The emerging deal would allow China to sign long-term contracts for the purchase of oil, gas, soybeans and other natural resources that its economy needs and cannot easily produce at home. It wouldn’t require Beijing to buy large volumes of American manufactured goods, which could threaten jobs in China’s vast but slowing manufacturing sector. The agreement would also do little to limit China’s government programs to assist the development of high-tech manufacturing.”
On the structural issues, Politico reports, citing an unnamed source, that in part of the agreement that’s being discussed, China is expected to pledge to eliminate all market-distorting subsidies, including those that fuel overcapacity in the steel and aluminum sector, and those used to boost 10 different high-tech sectors under the Made in China 2025 program. “But the US government did not demand that the Chinese government table a comprehensive list of its market-distorting subsidies. So there’s no common understanding between the two sides as to what are the market distorting subsidies. It’s just this broad language.”
Meanwhile, former Chinese former finance minister Lou Jiwei says that Beijing isn’t likely to make major concessions. “China’s concessions probably won’t be very big because a lot of their demands are what we already plan to reform,” he said this week. One such example is the new foreign investment law, which NPC delegates will vote to back during the current session. Reuters reports that as per Chinese officials, the law will replace existing regulations for joint ventures and wholly foreign-owned enterprises. It will ban forced technology transfer and illegal government “interference” in foreign business practices. Wang Chen, vice chairman of NPC standing committee, told deputies on Friday that the law “includes many stipulations that ensure domestic and foreign enterprises are subject to a unified set of rules and compete on a level playing field.”
5. The Long and Short of It:
- Afghan Summit: India, China and Afghanistan held their first trilateral summit meeting in Kabul. The meeting was chaired by deputy Afghan foreign minister Idrees Zaman and was attended by Indian envoy Vinay Kumar and Chinese envoy Liu Jinsong. On the table were talks about training civil and military personnel, mining, increased energy production, agriculture and transportation development, regional connectivity and establishing a joint chamber of commerce between the three countries.
- Quad’s Future: AP reports that Admiral Phil Davidson, who heads the US Indo-Pacific Command, has hinted that the Quad dialogue is likely to be shelved for now. Speaking in Singapore, he said that the issue of the Quad came up “several times” at the Raisina Dialogues in Delhi, but Indian navy chief Admiral Sunil Lanba “made it quite clear that there wasn’t an immediate potential for a quad.” He, however, added: “That does not omit or prevent our ability to cooperate in crisis and conflict. And we continue collectively, all of us, to seek opportunities in which we might exercise and work together moving forward.” Another noteworthy aspect of Admiral Davidson’s interaction were his remarks on the South China Sea. He said “there has been more activity with ships, fighters and bombers over the last year than in previous years, absolutely…It’s a hazard to trade flows, the commercial activity, the financial information that flows on cables under the South China Sea, writ large.” (Read his full remarks here)
- Mahathir’s Pragmatism: Malaysian Prime Minister Mahathir Mohamad’s had quite an interesting week. The man who stood next to Li Keqiang last year talking about neo-colonialism, now says that he would back the East Coast Rail Link project if there was a significant price reduction. Speaking to SCMP he says, negotiations with the contractor, China Communications Construction Company, were continuing with involvement from both governments. When asked about the Sino-US geopolitical rivalry, he was quite clear. China remains an important economic partner and the US currently is unpredictable. Malaysia, he says, had to “accept that China is close to us.” “And it is a huge market. We want to benefit from China’s growing wealth.” He further added: “We always say, we have had China as a neighbour for 2,000 years, we were never conquered by them. But the Europeans came in 1509, in two years, they conquered Malaysia.” He, however, did add that debt is one way of buying influence. That’s an argument that he repeated in Manila, warning Rodrigo Duterte that his country should “regulate or limit influences from China.”
- Brash Diplomacy: Bloomberg has a great piece this week on the shifting attitudes of Chinese diplomats, driven by ideology, frustration and career progression. The piece says, as per diplomats in Beijing, the behavior of Chinese officials has become far more aggressive and assertive in private meetings in recent years. Their discussions have become more ideological and there is a strong sense of grievance combined with increasing entitlement about China’s international role and rights. The report quotes Susan Shirk, former US deputy assistant Secretary of State for East Asia, as saying: “Chinese ambassadors always feel they have to speak to the leaders in Beijing more than to the local public. Their promotions depend on it. If today what they say is more overtly anti-American or anti-Western then that reflects the changing foreign policy line.”
- Italy’s BRI Deal?: Michele Geraci, Italy’s under secretary in the economic development ministry, says that there is a “good probability” of Rome inking a BRI MoU when Xi Jinping visits the country later this month. If this does happen, Italy would be the first G7 country to sign up to BRI. The White House says that the US was “sceptical that the Italian government’s endorsement will bring any sustained economic benefits to the Italian people.” In response, China’s Wang Yi said on Friday that “Italy is an independent country. We trust you’ll stick to the decision you have independently made.”
- Pollution Index: A new Greenpeace study on air pollution does not read well for India. But it does show that efforts to tackle air pollution in China have reaped rewards, although challenges still remain. The study finds that 22 of world’s 30 most polluted cities are in India; only 5 Chinese cities rank in the top 30. Beijing, meanwhile, is ranked at 122.
- How to Cheat at Xi Jinping Thought/ In sensitive year for China, warnings against ‘erroneous thoughts’
- Chinese invasion of Indian industry
- China’s tech strategy all talk, no action and a waste of taxpayers’ money, says its former finance minister Lou Jiwei
- Chinese women earn a fifth less than men and the gap is widening fast/ Get Ready for China’s Baby Quotas
- Chinese Hackers Target Universities in Pursuit of Maritime Military Secrets
- China’s Factories Are Struggling to Hire Enough Workers
- China’s economy might be nearly a seventh smaller than reported
- No head for heights: China defends Tibet travel restrictions
- China’s exports fall more than 20% in February; overall trade data come in much weaker