A New World Order

Manoj Kewalramani

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A weekly bulletin offering news and analysis related to the Middle Kingdom. This week, Xi outlines his vision for a new world order, as China and India become unusual bedfellows.

1. Xi’s New Foreign Policy

China will look to “build a more complete network of global partnerships, so that new advances will be made in major country diplomacy.” This was the overwhelming message from President Xi Jinping’s speech at the Central Foreign Affairs Work Conference in Beijing over the weekend. Xi has termed his foreign affairs vision and approach as “thought on diplomacy of socialism with Chinese characteristics for a new era,” and outlined 10 key aspects of this approach.

Xi’s speech makes it amply clear that as per Beijing, the global order is undergoing major changes. These changes bring certain threats and opportunities, which China can cash in on by building partnerships to enhance multipolarity.

Yan Xuetong, director of the Institute for International Relations at Tsinghua University and one of China’s leading foreign policy thinkers, seems to agree with part of that assessment.

In an interview this week, he argued that “the international system is moving from a West-centered model to one in which power is redistributed.” What this implies is that we are currently in the midst of a process of global change. As part of this, old norms are being weakened and new norms are yet to take shape. Therefore, the “normal state of things is chaos and disorder.”

Where Yan clearly diverges from the Chinese government’s officially reported view is on the issue of multilateralism and multipolarity. Yan believes “multipolarity is impossible, and a bipolar system within five years is extremely possible.”

Bipolarity would not only imply a new power dynamic but also an ideological contest. A quick review of some of the pieces published this week indicates that the bipolarity vs multipolarity debate is currently underway in China. For instance, this piece by Han Zhu from the Chunqiu Institute cites cases of corruption against former leaders in East Asian countries to argue that the multi-party democracy system is unsuitable for these countries. Of course, there’s no mention of the number of tigers and flies that have been taken down by Xi’s anti-corruption campaign. In contrast, this piece by Fabio Massimo Parenti in the Global Times outlines how China’s approach to international relations is one of multilateralism.

2. Unusual Bedfellows

West Bengal Chief Minister Mamata Banerjee cancelled her visit, scheduled to begin on June 22, to Beijing and Shanghai at the last minute. The reason she cited was “non-confirmation of the political meetings at the appropriate level.” Hindustan Times Beijing correspondent Sutirtho Patranobis tells us that what Mamata wanted was a meeting with one of the seven Politburo Standing Committee members.

While she might not be traveling, Major General Liu Xiaowu, the deputy commander of the Western Theatre Command, will be leading a delegation to New Delhi soon (dates not yet finalised). China’s Defence Ministry says that the talks will be focussed on “border defence and controls and as well as cooperation at the theatre level.” Recall that after the Wuhan informal summit, the Indian side had reported that the two leaders had agreed to provide “strategic guidance” to the militaries. Liu will also be traveling to Pakistan as part of the visit.

The Hindustan Times, citing unidentified experts and government officials, says that there is a definite thaw in Sino-India ties since the Doklam chill. What’s driving Beijing towards such warmth is rather apparent from Chinese media accounts of the two countries sharing common interests in resisting US tariffs, which can act as a catalyst for deepening bilateral cooperation. It’s a view that’s echoed in this Bloomberg piece too, which says that Trump’s policies “are creating unusual bedfellows in Asia.”

An example of such cooperation is the joint proposal that the two countries have reportedly moved at the WTO calling on rich nations to eliminate their farm subsidies that exceed the ceiling amount. Also, purely from a signalling and messaging point of view, China’s announcement this week of slashing tariffs on imports of 8,549 types of goods from India, South Korea, Bangladesh, Laos & Sri Lanka allows Beijing to build on the protectionism vs multilateralism narrative. The goods in question, Chinese ambassador to India Luo Zhaohui tells us, include “chemicals, agricultural & medical products, soyabean, clothing, steel & aluminium products.” However, as Ajay Sahai from the Federation of Indian Export Organisations, says in thisET report, “tariffs are immaterial in China. It is the political will to import” that matters. In any case, escalating trade tensions between China and the US can lead to certain benefits for India, such as potentially greater market access and increased exports to China along with shifting of manufacturing operations to India.

The Hindu’s Atul Aneja, meanwhile, reports that during Nepal’s KP Oli’s visit last week, China proposed a “new dialogue mechanism that would also involve India.” Citing an unnamed source, he says that under the “two plus one” format “China and India can jointly conduct a dialogue with a third regional country.” Recall Ambassador Luo’s trilateral talks with Pakistan proposal, which I’d talked about in last week’s newsletter.

As an aside, it is important to keep an eye on Chinese moves with regard to Iran. The US is calling on both India and China to cut oil imports from Iran by November 4. Could we see some coordination in this area too? For now, though, Reuters reports that India is planning a “drastic reduction or zero” of imports of Iranian oil starting in November in order to protect its exposure to the US financial system. China, on the other hand, seems unfazed.

3. ‘Pacific Ocean is Vast Enough…’

James Mattis embarked on his first visit to China this week, the first such visit by a US Defence Secretary since 2014. In a prelude to the visit, we’ve seen tensions over trade, the Indo-Pacific strategy and the South China Sea. Mattis met with Xi, China’s Defence Minister Wei Fenghe and CMC Vice Chairman General Xu Qiliang. China’s defence ministry said that the visit was “positive and constructive” despite the two countries holding different opinions over some security issues. In terms of outcomes, Xi’s reported remarks of China being committed to peace but unwilling to give up “even one inch” of territory dominated the media narrative. But let’s probe a little deeper.

Xinhua tells us that the comment about territorial integrity was made along with a historical caveat. “Any inch of territory passed down from ancestors cannot be lost while we want nothing from others,” Xi said. This, of course, is a time-tested Chinese approach, i.e., using history selectively and thereby refusing to acknowledge others claims in disputes. Beijing’s uncompromising position on territorial integrity is evident from its reported refusal to negotiate with the US on the issue of the listing of Taiwan by airlines.

Getting back to the Mattis meeting report, Xi does accept the differences that exist between China and the US, but believes that they “share common interests…far outweighs differences.” In addition, he believes that the “Pacific Ocean is vast enough to accommodate China and the United States, as well as other countries.” This is an interesting quote. It’s a direct acknowledgement of the Indo-Pacific strategy without any warnings or disparaging caveats. Perhaps, there is greater confidence in Beijing now with regard to its equation with Tokyo and New Delhi.

4. Trump’s Trade Tangle

Meanwhile, on the trade war front, there appear to be far too many bends and turns along the road to July 6, which is when the announced tariffs of $34 billion by both sides come into effect. The Chinese tariffs are particularly targeted at Trump’s base, as theGuardian notes. This week, we’ve learned that Trump is backing away from announcing tough new restrictions on Chinese investment in the US. But is there really Trump backing down? This is what the new legislation permits, as per the Financial Times:

“Under the existing system, a Treasury-led panel, called the Committee on Foreign Investment in the US, reviews all Chinese acquisitions on national security grounds. The new legislation — versions of which have passed both houses of Congress, but must be reconciled before Mr Trump can sign it into law — would broaden the scope of investments subject to Cfius review to include minority investments in startups in key sectors and real estate transactions. It would also toughen and potentially widen the US export controls that govern the trade in sensitive technologies, particularly those with potential military applications.” This CSIS analysis also explains why this does not indicate the US backing down or softening its position.

There’s also confusion on the ZTE front. Reuters reports that the Chinese telecoms giant is expected to announce a radical management overhaul following a shareholder meeting on Friday, in line with conditions laid out in a $1.4 billion settlement deal to lift a crippling US supplier ban. But its fate still hangs in the balance since, the US Department of Commerce has apparently still not worked out the details necessary for lifting the ban.

Mixed messages are not just a Trump thing. Reports from Beijing also leave one with the feeling that the Chinese side is struggling to comprehend and respond to what is a very fluid situation. Early in the week, South China Morning Post reported that after Xi’s meeting with top MNC executives in Beijing on June 21, it has been made clear that China will not target US companies operating in the mainland. However, the Wall Street Journal’s coverage of the same meeting attributed this quote to Xi: “In the West you have the notion that if somebody hits you on the left cheek, you turn the other cheek. In our culture, we punch back.”

If for no other reason, trade frictions with the US have been helpful for Xi in shifting the blame for weakness in the economy and the equity markets from structural factors such as a slowing economy and Xi’s deleveraging policy. There, however, appears to be real concern in some quarters in China over the health of the economy and the potential impact of a trade war. Bloomberg reports that a government-backed think tank, National Institution for Finance & Development, has warned of potential “financial panic” amid “bond defaults, liquidity shortages and the recent plunge in financial markets…at a time of rising U.S. interest rates and a trade spat with Washington.” I’d add mis-reporting of data to that list too. It’s in this context that the People’s Bank of China tweaked the required reserve ratio this week to inject greater liquidity into the system.

5. Making Rules with the EU

The headwinds from across the Atlantic are apparently leading European states to look towards China – albeit with caution. Two European dignitaries visited China this week: European Commission Vice President Jyrki Katainen and French Prime Minister Edouard Philippe. Also, the 7th China-EU High-level Economic and Trade Dialogue was held in China, and European leaders held a major met in Brussels. What we’ve learned from these meetings, in a China context of course, is as follows: 

EU states believe that Trump’s America First approach is opening potentially mutually beneficial opportunities with China. The EU and China will soon be exchanging market access offers on an investment agreement, which has been in negotiation since 2013. 

Concerns, however, remain about China’s industrial subsidies, technology policy and investments and acquisitions. Beijing is seeking to address these by modifying the narrative around Made in China 2025 and its growing technical prowess. But one wonders if the genie can be put back in the bottle. 

The EU and China are setting up a group to update global trade rules and revamp the WTO. Clearly, the Trump disruption along with domestic economic woes have meant that Europe now wants China to play a major role in global governance and norm setting. More details are likely during the China-EU summit later in July. 

It’s not really that much of a coincidence that in this same week we’ve had the Chinese side issue a white paper titled “China and the World Trade Organization.” The document tells us how WTO members have benefited from China’s entry in the organisation and pledges Beijing’s support for multilateralism and openness. 

Finally, the EU remains deeply concerned about Chinese investments and influence in Eastern Europe. Next week, Premier Li Keqiang is headed to Sofia for the “16+1” summit between China and Central and Eastern European countries. Ahead of the meeting, Beijing has sought to assure the EU that “a unified, stable, prosperous EU is in line with China’s basic interests.” 

6. Protesting Veterans

In March this year, China had announced the establishment of a new Ministry of Veterans Affairs. This week offered an example of the challenge that managing veterans affairs poses for the Communist Party.

Radio Free Asia reports that some 1000 People’s Liberation Army protested in Zhenjiang city in Jiangsu Province last Friday (June 22), with the police struggling to contain the protesters. The veterans were apparently enraged at the beating of a fellow veteran who had gone to lodge a petition earlier in the week. The report also talks about how the protest built over time, with support from locals in the city, including taxi drivers.

Building on this, NYT reports that by Monday the protests in Zhenjiang appeared to have dispersed. The report also highlights other similar protests that have targeted officials either on account of mistreatment, poor job prospects or inadequate benefits. For the moment, it appears that the central government understands the potential threats that such protests pose and is working on a twin plank — address the concerns as far as possible through the new ministry while shift the narrative of responsibility to local governments.

7. Beijing’s Dealmaking

There was unease globally as soon as the deal was made public last year, and gradually the Hambantota port deal has come to symbolize the threats posed by China’s BRI. This week, a new NYT report shed light on the murky behind-the-scenes deals that led to the 99-year-lease deal. The report shows how Chinese loans came with clear directions of contracting favoured Chinese companies. It also states that “during the 2015 Sri Lankan elections, large payments (running into millions of dollars) from the Chinese port construction fund flowed directly to campaign aides and activities for Mr Rajapaksa.” “Intelligence and strategic possibilities of the port’s location were part of the negotiations” from the start. During renegotiation of loans, the Chinese side was adamant on equity handover.

The NYT report has also called for some re-consideration in Pakistan. Writing in The Dawn, Khurram Husain says that when it comes to debt, “Pakistan is approaching a moment that Sri Lanka passed in 2015, and Malaysia passed in May.” He adds that “there are genuine grounds to be concerned about what exactly we have signed up for in all the CPEC projects, and those concerns deserve to be addressed in a more open manner than what the PML-N government allowed for.” As an aside while we are on CPEC, India’s acting finance minister Piyush Goyal has said that New Delhi won’t argue against the AIIB funding CPEC projects.

Back to Chinese dealmaking in the Philippines this time. Richard Heydarian in the SCMP reports that promises of Chinese investments have not really borne fruit. For instance, it claims that “during Duterte’s first year in office, Japan (US$600 million) outinvested China (US$31 million) by almost 20 times; Americans (US$160 million) invested five times more.” Moreover, “there are concerns over the quality and sustainability of Chinese investments, i.e., bidding anomalies and corruption.