A weekly bulletin offering news and analysis related to the Middle Kingdom. This week, China examines itself, bickers with the US and disappoints India on Masood Azhar.
1. Lianghui (Two Sessions) Wrap
The annual NPC and CPPCC sessions concluded this week. Here are some of the noteworthy developments.
- Chasing the Dream: Premier Li Keqiang ended the annual Two Sessions with a press conference (watch here). He broadly stuck to the standard talking points, defending the lowered GDP target while reiterating that a “deluge of stimulus is not a viable option” for the slowing economy. Two key Xinhua headline stories around the NPC and CPPCC sessions were about China’s development being “blessing for world peace” and how the sessions were helping carve out a new roadmap for the Chinese Dream. The first talked about how China was becoming “stronger but not assertive,” would not seek hegemony and that it “does not want any disruption on its journey to prosperity and national rejuvenation.” The second is a round-up of the major talking points that the leadership wants to push during the sessions, i.e., Xi’s leadership, poverty, development, support for the Party system and China’s international standing. One interesting sentence in this is “Xi is leading China in its best time for development in modern times.”
I wonder how this squares with Wang Yang saying that China was facing “unprecedented” level of risks, challenges and social demands this year. All of these, according to him, require the people to “consolidate the self-confidence in our political system,” study Xi Jinping Thought and follow the party line. Also from the economy’s point of view, data show that industrial production growth is now at a decade low at 5.3% in January and February. Surveyed unemployment rate is up from December to 5.3% in January and February. Caixin tell us that this is lower than the target set for this year of “around 5.5%,” but higher than December’s 4.9%. Retail sales rose 8.2% in January and February compared to the same months in 2018. Property investment jumped to 11.6% growth, the highest since November 2014.
Excluding investment by rural households, China’s fixed-asset investment grew 6.1% year-on-year in the first two months of 2019. That’s largely driven by government spending. The data, as per Liu Peiqian, Asia strategist at Natwest Markets PLC in Singapore, “means the economy will take a longer time to bottom out as industrial production and consumption are still under pressure despite the rebound in investment.”
Meanwhile, if you are interested in discussions on the validity of Chinese government economic data, do check out this thread by the Economist’s Simon Rabinovitch. Note that during the Two Sessions, Yin Zhongqing, deputy director of financial and economic affairs committee of the NPC, was candid in admitting that “Some local governments tend to cook their statistics, inflate some figures or conceal some data to stand out from the competition…Fraudulent data persists despite repeated crackdowns…The credibility of [Chinese] data is a long-standing issue.”
- Cadre Burden: Perhaps one of the most interesting yet underreported bit to emerge from the Two Sessions so far is a document by the General Office of the Communist Party of China to address “issues of formalism” and ease “burden of the grassroots.” It designates 2019 as the “basic-level burden-reduction year” as a means to motivate grassroots level cardres or “men of action,” as Xinhua describes them. What all this means in practice is drastic reduction in the number or length of official documents and meetings, improving political education and altering practices associated with supervision and inspection. Trivium China’s assessment of the document is that it shows “the top-down, target-heavy approach of Xi Jinping is not working. It also implies that a lot of mid-level officials are shirking their responsibilities.”
Read the above with this Bloomberg piece on the state of bureaucrats in China. It’s based on interviews with eight officials in China’s ministries and regional governments. These individuals have either quit or are planning to quit the government. It talks about their frustrations with intensified supervision, increased workloads, discrepancy in pay between public and private sector and the increased focus on political performance over ability. All of which is leading to diminished motivation.
- Judicial Report: China’s top judicial organs, the Supreme People’s Court and the Supreme People’s Procuratorate, delivered the annual reports to the NPC this week. Apart from the number of cases handled and concluded, the key aspect of the reports this year was the focus on the nature of cases. These included graft, crime (mafia), IPR infringement and environmental law violations. Two other points that are worth noting are the remarks about the protection of property for private enterprises and tackling corruption within the judiciary. First, Chief Justice Zhou Qiang said that “The legitimate rights and interests of private enterprises and entrepreneurs should be accorded equal protection under the law. He added courts should protect fair competition, be cautious when using “compulsory measures,” and refrain from seizing or freezing assets outside the scope of legal cases. The court should resolutely avoid treating civil liabilities in economic disputes as crimes, in order to allow entrepreneurs to focus on business and reassure them in their investments and operations. Second, he talked about tackling corruption within the judiciary and the need to enhance judicial transparency. How far does the system need to change? Well, this NYT story about the fates of entrepreneur Zhao Faqi and SPC judge Wang Linqing are a must read to understand this. It’s a sordid tale of judicial corruption with allegations against the chief justice himself.
- Legislative Agenda: Li Zhanshu, NPC Standing Committee Chairman, delivered his annual work report this week. A bunch of new laws are set for drafting this year. These are: Amendment XI to the Criminal Law, the laws on promotion of basic medical and health care, real estate tax, export control, community correction, integrated military-civilian development, guarantee for veterans, and administrative discipline. A bunch of laws are set for revision: the Securities Law, the Law on Officers on Active Service, the Military Service Law, the Law on the People’s Armed Police Force, the Organic Law of the NPC, and the NPC procedural rules. And two new pieces of legislation, on biosecurity and Yangtze River conservation, are in research phase. Perhaps the most talked-about law at this NPC session is the new Foreign Investment Law.
- Foreign Investment Law: NPC deputies cleared the new Foreign Investment Law on Friday, with just 8 votes against it and 8 abstentions. It comes into force on January 1, 2020. State media reports that the law provides “unified provisions for the entry, promotion, protection, and management of foreign investment.” It adds that under the law, “foreign-invested enterprises will equally enjoy government policies supporting enterprise development, and be able to participate in standard-setting on an equal footing and in government procurement through fair competition.” Pan Deng from the China University of Political Science and Law argues that this signifies China’s shift from tax breaks and preferential policies to attract capital to a “law-based business environment and governance system.” BBC’s Stephen McDonell examines the law to explain that “The big-ticket items it is said to address, in terms of the concerns of foreign companies, include intellectual property theft, the requirement for international firms to partner up with a local entity, and unfair subsidies to Chinese companies. It will also address the preferential treatment in awarding contracts to Chinese companies, and forcing foreign firms to hand over their technological secrets as the price of entry to the massive Chinese market. But this law isn’t going to help everyone. There is a ‘black list’ of 48 sectors that will not be open to foreign investment or, in some cases, not open without conditions or special permission.”
Another key point is regarding local subsidiaries of international firms reporting details such as performance indicators relating, labour relations, pollution records, etc to officials without legal guarantees that data will not be passed on to their Chinese competitors. NPC deputies were told this week that provisions have been added to the legislation which make clear that government employees must keep secret any confidential commercial information from foreign firms and must “not leak or give to others illegally.” The US-China Business Council Jake Parker says that they’ve reviewed the final draft received the final draft and were “pleased with the last minute addition of new language to further protect foreign company commercial information and trade secrets.” He added: ‘The addition of language imposing criminal penalties for sharing sensitive foreign company information adopts a much tougher deterrent against counterfeiting and [intellectual property] theft and will offer new avenues for the enforcement of [intellectual property] protection. Enforcement will be the key metric for evaluating success…”
- Quick Takes: First, 100 SOEs will be picked for the next round of mixed ownership reform. So far, three rounds of this reform have taken place, with 50 SOEs picked in each round. If you’d like to learn more about SOE reform, do check out this 2017 report by Houze Song. Second, General Office of the State Council wants authorities to “fully listen to opinions of representative companies, industry associations, and legal associations, especially the opinions of private enterprises, labor-intensive enterprises, and small-and-medium-sized enterprises…when formulating administrative regulations and normative documents.” Third, there has been increasing focus on supporting private and small firms, which have struggled amid the deleveraging campaign. On Wednesday, the China Banking and Insurance Regulatory Commission on Wednesday urged lenders to increase loans to small and microenterprises by 30 per cent by the end of the year from their level at the start of 2019 and to offer such loans at “reasonable” interest rates. Fourth, a CPPCC meeting revealed that China’s spending on science and research funding this year is set to hit 2.5% of GDP. Last year, China spent 1.96 trillion yuan ($291.58 billion) on R&D, or 2.18% of its GDP. Fifth, China’s railway sector is set to witness $119 billion in investment this year. Lu Dongfu, CPC chief for China Railway Corporation (CRC), says the total expansion plan for 2019 is 6800 km. Out of this 3200 km will be high-speed tracks.
2. Europe’s New Strategy
Chinese Foreign Minister Wang Yi is heading to Brussels for the ninth China-EU High Level Strategic Dialogue on March 18. Ahead of the visit, the European Commission has put out a EU-China – A strategic outlook document this week. This document is going to be the subject of a bloc-wide discussion later next week and it’s likely to frame the EU’s approach towards China before the 21st China-EU summit in April. Here’s what it says:
- “There is a growing appreciation in Europe that the balance of challenges and opportunities presented by China has shifted…Its increasing presence in the world, including in Europe, should be accompanied by greater responsibilities for upholding the rules-based international order, as well as greater reciprocity, non-discrimination, and openness of its system.”
- The bloc needs a “flexible” and “whole of EU” approach to China. This is because “China is, simultaneously, in different policy areas, a cooperation partner with whom the EU has closely aligned objectives, a negotiating partner with whom the EU needs to find a balance of interests, an economic competitor in the pursuit of technological leadership, and a systemic rival promoting alternative models of governance.”
- The document then lists out a set of 10 actions, such as cooperation in combating climate change, the need for reciprocity and open procurement opportunities, calling on Beijing to address issues related to subsidies and forced technology transfers, expressing the desire to deepen engagement with China on peace and security, a common EU approach to the security of 5G networks and an EU-wide implementation of the Regulation on screening of foreign direct investment.
Unity appears tricky, given the controversy over Italy signing up to join BRI. Prime Minister Giuseppe Conte has called this a “strategic choice” by Rome. Following Italy could be Malta, with the country’s finance minister Edward Scicluna saying that “certain prejudices” should not come in the way of good business. On the other hand, look at Paris and Berlin. France’s Emmanuel Macron has been visiting Djibouti, Ethiopia and Kenya this week, promising “respectful” partnerships, i.e., in which “international investments to weaken the sovereignty of our partners.” Meanwhile, Germany’s decision on Huawei remains ambiguous. This week, the BND intelligence service told a committee of lawmakers that Huawei is not a trustworthy partner.
The Trump administration also reportedly sent a warning to Berlin that it would scale back data-sharing with German security agencies if China’s Huawei got a role in Germany’s next-generation mobile infrastructure. Angela Merkel on Tuesday said that while “we will define our standards for ourselves…we will of course discuss these questions with our partners in Europe as well as the relevant authorities in the United States.” A NATO-wide consultation on the “security aspects on investments in 5G networks” is also underway. Also the EU Parliament has passed a non-binding resolution “expressing their deep concern” about cyber security threats from China. The big concern for most American allies, however, is likely to be Trump cutting a deal on Huawei with Beijing as part of a broader trade deal.
3. The Technical Hold
On March 13, China placed a technical hold on the listing of JeM chief Masood Azhar as a designated terrorist under the UNSC Sanctions Committee 1267. The announcement came an hour before the deadline for the listing. India’s MEA, without naming China, said it was “disappointed” by the outcome. The subsequent day, China’s MFA spokesperson explained, “China is conducting a comprehensive and in-depth review on the listing request…We still need more time and that is why we decided to put a technical hold on it.” Lu Kang added that China hoped the concerned parties “settle their issues through dialogue and consultation and avoid adding more complex factors to regional peace and stability.”
Remarks by some Chinese analysts on this have also been interesting reading. In this Global Times piece, Liu Zongyi says “New Delhi always links a small issue to the larger canvas of China-India bilateral ties, and asks for favors without paying back.” Long Xingchun says: “China will not change its position. If China does, it will be a repudiation of its previous stance and leave the impression that it was deliberately blocking India’s bid in the past. This will have a much wider impact on China’s diplomacy.” And Zhang Jiadong drops this gem: “China and India should eye the bigger picture and prevent differences over concrete issues coming in the way of bilateral relations.” But more importantly, he added: “Many anti-China terrorist organizations and their leaders are still active in many countries and regions and are sometimes treated as guests.”
(Thought Bubble: The above shows this is a transactional issue for Beijing. They’d be willing to give it up for something of value in return. But the listing will barely impact JeM’s capacity to inflict terror. In that sense, it’s symbolic. So one must carefully weigh what on exchanges for this, if anything at all. For more Listen to this Conversations at Takshashila podcast episode: China Shields a Terrorist.)
The issue has led to the Narendra Modi government’s China policy becoming a point of domestic debate heading into the elections in April. Alas, much of the discussion has been rather frivolous in nature. And that, as Varghese K. George argues, makes “mature policy-making an uphill task for India.” There have also been calls to boycott Chinese products and use India’s economic leverage to inflict pain on China for this decision. But this is a non-starter in many ways, as ICS’ Uday Khanapurkar explains in this excellent piece. “Ultimately, a boycott of Chinese imports is neither feasible, nor effective, nor efficient. Expecting China to strain its relationship with Pakistan, an all-weather partner into which it has poured billions of dollars, with such little leverage is folly even if the concomitant domestic costs were acceptable.” Meanwhile, former Deputy NSA Arvind Gupta is warning that Beijing’s decision could lead to “a recalibration of Sino-Indian relations.” In my view, that’s not the lesson from this episode. The lesson is that India needs to build leverage to get things we want. That requires pragmatism, capacity building and sustained engagement.
Although the Azhar issue has dominated the headlines in India, there were some other important reports this week. Many Pubby reports for ET that “Chinese companies are now the main overseas raw material source for the 180,000-jacket order after Indian company SMPP changed its suppliers after winning the bid in April last year.” PTI reports that NASSCOM has launched its third IT corridor in China in Xuzhou, Jiangsu Province. This comes after earlier such deals with Dalian and Guiyang. The first two corridors, reportedly, paved the way for cooperation in co-create mode in the emerging technologies such as AI, IoT and Analytics in the Chinese market. The Xuzhou corridor’s aim is to facilitate partnerships between Indian and Chinese firms wanting to collaborate with companies in Huaihai economic zone looking to adopt digital transformation from verticals such as manufacturing, retail, automotive, healthcare and utilities and help them create innovative product and solutions in the co-create mode. Hindustan Times also has an interesting story on how possible cooperation between the China National Space Administration and Indian Space Research Organisation failing to materialise on the nature of the Indian payload to be carried on the Chang’e-4 lunar mission.
4. US-China Frictions
Three stories dominated the US-China relationship discourse this week. First, even if there has to be a deal on trade, it’s not likely to be inked immediately. Donald Trump said on Wednesday that he was in no rush to sign a deal with Xi. “I’m in no rush. I want the deal to be right,” he said adding that there had to be something done to address concerns regarding IPR protection. The window now is three to four weeks. That’s also the timeframe put forward by USTR Robert Lighthizer and Treasury Secretary Steven Mnuchin. Reuters reports that “the U.S. government is pressing for an end to practices and policies it argues have given Chinese firms unfair advantages, including subsidizing of industry, limits on access for foreign companies and alleged theft of intellectual property.” Lighthizer spoke to Vice Premier Liu He on call this week, with Xinhua saying that “both sides had consultations on key issues regarding the text, and made a plan for the next stage of work arrangements.” On Thursday, Liu spoke to Mnuchin and Lighthizer, with reports suggesting “substantial progress” in the text of a deal. On the currency side of the deal, PBOC Governor Yi Gang said this week that a consensus had been reached that both countries would avoid devaluing their currencies to achieve a competitive advantage for their exports. But NYT’s Keith Bradsher tells us that there might be little new to this deal.
Second, Beijing and Washington have spared this week on the issue of human rights. US State Department spokesman termed China’s actions in Xinjiang a “great shame for humanity.” Robert Palladino added that “We are committed to promoting accountability for those who are committing these violations and considering targeted sanctions as well, targeted measures, as well.” Secretary of State Mike Pompeo also hit out at Beijing, saying it was “in a league of its own when it comes to human rights violations.” Michael Kozak, the head of the State Department’s human rights and democracy bureau, spoke to reporters about violations in Xinjiang, saying “For me, you haven’t seen things like this since the 1930s.” Meanwhile, Adrian Zenz, a scholar from the European School of Culture & Theology, whose research has been critical to revealing information about the re-education camps in Xinjiang, says: “Although it is speculative it seems appropriate to estimate that up to 1.5 million ethnic minorities – equivalent to just under 1 in 6 adult members of a predominantly Muslim minority group in Xinjiang – are or have been interned in any of these detention, internment and re-education facilities, excluding formal prisons.”
Beijing, meanwhile, is accusing the US of “ideological prejudice.” It says the US’ 2018 China human rights report is “full of ideological bias, disregards the facts, confuses right and wrong, and makes groundless accusations.” On Xinjiang, the provincial government chief Shohrat Zakir told a meeting during the Two Sessions that the “fight against instability, extremism and secessionism is long, complex and intense,” i.e., the PRC isn’t yielding to international criticism. In addition, the Information Office of the State Council published its own Human Rights Record of the United States in 2018 report. Xinhua tells us that the report discusses “human rights violations in the United States of different areas: the severe infringement on citizens’ civil rights, the prevalence of money politics, the rising income inequality, worsening racial discrimination, and growing threats against children, women and immigrants, as well as the human rights violations caused by the unilateral America First policies.”
Third, the two sides also argued over the South China Sea. Two US B-52 bombers flew over the waters this week – the second such mission in this month. Also, Pompeo accused China of “blocking energy development in the South China Sea to coerce” i.e., prevent “Asean members from accessing more than 2½ trillion in recoverable energy resources.” To this, China’s foreign ministry responded arguing that “nations outside the region should refrain from stirring up trouble and disrupting the harmonious situation.”
5. Tech Take
Google continues to face pressure in the US owing to its operations in China. This week, testifying before the the Senate Armed Services Committee, General Joseph Dunford, the chairman of the Joint Chiefs of Staff, said that “the work that Google is doing in China is indirectly benefiting the Chinese military.” That’s not surprising given the efforts being made in China in the direction of civil-military integration. Just this week, the PLA’s Eastern Theater Command Navy signed a strategic cooperation agreement with six state-owned enterprises to develop military facilities, train personnel and share technology.
General Dunford’s remarks are likely to add to concerns among Google’s employees about work on a secret search engine for China. It’s not just Washington where there are concerns about Google. Huawei has reportedly built alternative operating systems just in case frictions with the US lead to Google’s Android OS becoming unavailable for its phones. Huawei apparently began work in this direction after a 2012 US investigation into the company and ZTE. But that’s just one small part of the tech troubles in China. Reports tell us that from NetEase, Didi Chuxing to JD.com, China’s tech giants are cutting jobs and reducing employee perks amid faltering growth in the wider economy and tightening regulation.
Finally, new research by Field Cady and Oren Etzioni from the Allen Institute for Artificial Intelligence claims that China is soon set to overtake the US in terms of AI research. Their work is based on the analysis of over 2 million AI papers published till the end of 2018. The results, they argue, show “that China has already surpassed the US in published AI papers. If current trends continue, China is poised to overtake the US in the most-cited 50% of papers this year, in the most-cited 10% of papers next year, and in the 1% of most-cited papers by 2025.”
- China may soon run its first annual current-account deficit in decades
- China’s growing presence in Indian Ocean a challenge for India: Navy chief Lanba
- China, Pakistan upgrading fighter aircraft used against Indian Air Force: Report
- China Defends Tibet Policies 60 Years After the Dalai Lama’s Exile
- Hu Jintao’s son parachuted into top job in scandal-hit Xian
- Boeing groundings put U.S.-China trade-linked jet order in limbo
- China, Vietnam Regularly Clashing at Sea Despite Diplomacy/Behave responsibly, Vietnam exhorts as South China Sea tensions rise/ China’s latest island grab: Fishing ‘militia’ makes move on sandbars around Philippines’ Thitu Island
- China’s race to test ‘mutation-free’ gene-editing technology on cancer patients
- China offers help to Venezuela to restore power