Managing the Economy

Manoj Kewalramani

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The Private Economy

The leadership duo of Xi Jinping and Li Keqiang sought to assuage growing concerns about the economy this week. In a letter to entrepreneurs, Xi lauded the private sector for its poverty alleviation work, adding that “the sector’s position and role is beyond any doubt. Any opinions or actions that deny or weaken the private sector are wrong.” Xi, thereby, pledged his “unwavering” support for the private sector. The sentiment of the “two unwaverings” was also echoed across Party-state media, as this Bloomberg report informs. Read all this along with recent remarks by Vice Premier Liu He and a statement by the State Council.

On October 19th, Liu told reporters that it was “wrong” to believe that state firms were forcing a retreat of the private sector. According to Xinhua, Liu argued that SOEs and infusion of state capital wasn’t meant to acquire private businesses, rather this was a way of “helping and even restructuring private firms which are in liquidity crunch.” The liquidity crunch is, in part, a product of efforts to control debt under the deleveraging campaign. Already the campaign has hit the shadow banking sector. Maintaining growth while continuing the deleveraging effort was one of the core agendas of the State Council Financial Stability and Development Commission meeting over the weekend. SCMP reports that this was the commission’s 10th meeting in two months. The meeting ended with a statement that recognized the need to ensure proper funding support for smaller private companies. That was followed by another State Council meeting, led by Premier Li, after which a range of potential measures were announced to support the private sector.

As part of this effort, Bloomberg reports that the People’s Bank plans to give 10 billion yuan to China Bond Insurance Co. to provide credit support for debt sales by private enterprises. PBOC Governor Yi Gang, meanwhile, has said that “more efforts will be made to optimize the policy system and guide financial institutions to provide financing support to private enterprises with prospects, market and technology advantages. In addition, the NDRC says that it welcomes private investment in projects related to major national strategies. The NDRC says private investment growth in the first three quarters of this year rose 8.7% from a year ago and outpacing the overall investment expansion by 3.3 percentage points.

Amidst the talk of supporting the private sector, this week was also the first time that the State Council reported on the condition of state-owned assets in full length to the country’s top legislature. The report says that SOAs in non-financial enterprises had reached 183.5 trillion yuan ($26.4 trillion) by the end of 2017, while that in financial enterprises had hit 241 trillion yuan ($34.7 trillion). Another interesting list that came out this week was of 100 entrepreneurs who had made “great achievements in the development the private economy” over the past 40 years. The list was published by the All-China Federation of Industry and Commerce and the United Front Work Department. Not surprising that BAT chiefs were recognized, but there were some interesting exclusions.

In the backdrop of this conversation, Xi embarked on a southern tour, with comparisons rife with Deng Xiaoping’s famous 1992 Southern Tour. All of this, of course, is part of the Party marking the 40th anniversary of the beginning of the Reform and Opening era, to which Xi pledged commitment in the “new era.” Part of the tour involved formally opening of the nearly $20 billion Hong Kong-Zhuhai-Macau sea bridge. However, much of the focus, this far, has been on self-reliance in manufacturing, poverty alleviation and upgrading China’s free trade zone policies. People’s Daily reports that some of Xi’s stops included visits to a toy factory, an e-commerce industrial park and the home of a poverty-stricken family.

Wang visits Israel

Wang Qishan, China’s Vice President and a confidant of Xi Jinping, visited Israel and Palestine this week. Wang is the most senior Chinese official to visit Israel in 18 years. Trade, economic ties and technology and innovation cooperation are the key public focus during the visit, with the 4th meeting of the China-Israel Joint Committee on Innovation Cooperation being the showpiece event. Eight joint agreements were reportedly signed in the fields of science and technology, the life sciences, innovation, digital health and agriculture. The Innovation Conference of 2018-2021 action plan was also signed. There are also talks of a free trade agreement being discussed.

Xinhua reports that China-Israel bilateral trade volume in 2017 crossed $13 billion. Chinese investment in Israel tops $7 billion. Chinese products, such as Xiaomi cellphones, are increasingly becoming popular in Israel. Several Chinese companies have also built research and development centers in Israel, including Huawei, Xiaomi and Lenovo.

Beyond economics, there is some rather subtle political signalling underway. For instance, during Wang’s quick visit to Palestine, the two sides signed an MoU on free trade talks. While there are indications that China is keen on playing a role in the peace process, there wasn’t any explicit statement on the issue by Wang. All that’s trickled out so far are reports that Palestinian Prime Minister Rami Hamdallah met with Wang and urged China to back President Mahmoud Abbas’s peace initiative. Wang reportedly merely reiterated that China backs a two-state solution.

But before he headed for Ramallah, Wang visited the Western Wall and the Church of the Holy Sepulchre accompanied by representatives of Israel’s Foreign Ministry. This is significant since these sites are located in the Old City in East Jerusalem, which Beijing does not recognize as Israeli territory.

ASEAN Drills

The first ever China-ASEAN maritime drills began on October 22 off the coast of Zhanjiang. As per reports, there are more than 1,000 military personnel and eight ships – three from China, and one each from Singapore, Brunei, Thailand, Vietnam and the Philippines – taking part in the exercise. The Straits Times reports that the drills involve five serials or components, i.e., manoeuvring in close formation, a communications drill, a joint search-and-rescue operation, helicopter cross-deck landings and a simulated maritime replenishment. One of the focus is also testing out codes like the Code for Unplanned Encounters at Sea.

Discussing the drills in this piece, Prashanth Parameswaran argues that “China has been keen to cast this as part of its ongoing effort to boost ties with Southeast Asian states on the security side…Beijing has also highlighted this as its commitment to promoting regional stability, in spite of its continued actions in the maritime realm including in the South China Sea that are perceived to undermine it.” Foreign Minister Wang Yi also met with envoys of ASEAN states in Beijing this week. Wang said that China supports “ASEAN’s central position in regional cooperation.” As per the Chinese foreign ministry, the envoys “noted that among all the ASEAN dialogue partners, the ASEAN’s relations with China stand out as the strongest relations.”

Despite such comments, there are some important points to keep in mind when analysing ASEAN’s objectives and actions. First, while there is cohesion, there are differences in the interests and perceptions of different ASEAN member states. Second, a key objective of ASEAN states is security and stability in the region, particularly with increasing tensions between China and the US in the light of recent encounters in the South China Sea. Therefore, they’d like the ASEAN Plus partners to get on board with a codes of conduct, such as the newly agreed guidelines on air encounters. Third, while ASEAN states are looking to manage and improve relations with China, they are also partnering with the US. Essentially, there is hedging underway. For instance, a first-ever maritime exercise is also planned with the US in 2019. Finally, new research by Dr. Huong Le Thu shows that the general perceptions of the Quad among ASEAN members states is rather positive. The paper claims that while “there is no such thing as one ASEAN view… a majority opinion (57%) across the ASEAN respondents supports the Quad initiative as having a useful role in regional security; only 10% of respondents oppose it, while 39% indicate they would support it in future if the Quad successfully materialises.”

CPEC’s ‘Significant Shift’

China will be Imran Khan’s third international destination since assuming office as Pakistan Prime Minister. Before he visits China, Khan would have traveled to Saudi Arabia twice and Malaysia. Khan visited Saudi Arabia this week, bagging a $6 billion lifeline for his country. This comes in the form of $3 billion cash deposits with the State Bank of Pakistan, in addition to a one-year deferred payment facility for the import of oil, worth up to $3 billion. What this does is that it frees up Khan’s hand a touch in negotiations with the IMF, scheduled for November 7.

Dawn reports that during his trip to China, Khan will “inform the Chinese leadership that his government wanted to bring about a significant shift in the projects falling under the purview of China-Pakistan Economic Corridor.” The report adds that “Under the previous government there was an emphasis on infrastructure schemes, but the present government wanted projects involving agriculture, job creation and foreign investment take centre stage.” So what does one make of this?

..while Khan does want a major shift in the way CPEC is being conceptualized, he is still betting heavily on Chinese investment and aid to jumpstart Pakistan’s economy. While CPEC as Khan envisions it would require flexibility from Beijing, cooperation with Khan could actually lead to a BRI model that is both more sustainable for and more enticing to host governments around the world.

As an aside: Amidst all the upheavals in CPEC, French Ambassador to Pakistan Marc Barety has said that France is ready to invest in the subsequent phases of CPEC provided transparency is ensured.

While the economic component of the China-Pakistan relationship appears to be undergoing a churn, the security relationship remains strong. A new RAND report claims that Pakistan accounted for 42% of China’s total arms sales over 2000-14.

Trade War Negotiations

Reports this week indicate that even if Trump and Xi meet in Argentina, the Sino-US trade impasse isn’t likely to ease. WSJ reportsthat the US is refusing to open negotiations unless there’s a firm proposal by Beijing on forced technology transfers and other issues. The report captures the dilemmas facing each side rather well. Beijing, it argues, is worried about revealing its hand, but more so because Trump might make any offer of concessions public, further undermining its position. Along with this, it’s also concerned about Trump’s unpredictable nature, whereby he could make an offer public and then reject it too. In contrast, the US is concerned that “China will string out negotiations and try to get pledges from Mr. Trump in a one-on-one session with Mr. Xi. That would produce agreements that sort of commit to things that will sound good but aren’t meaningful.”

The report also offers some glimpses into the negotiation process, detailing the “80/20 plan” or the “60/20/20 plan.” The plan’s a product of eight broad US demands placed before China in May. The Chinese then divided these into 142 separate items, classified into three categories. WSJ says that as per sources: “Of the demands, 30% to 40% could be done immediately; another 30% to 40% could be negotiated over time; and 20% were off limits because they involve national security or other sensitive issues.”

But that’s clearly not proving to be good enough for Washington, given White House trade adviser Peter Navarro’s recent commentsabout the ball being in China’s court. However, from Beijing’s point of view, it’s difficult to figure out what stroke to play, given the ebb and flow of the Trump administration’s policies. This anxiety and confusion was echoed in China’s reaction to the US decision to not send senior government officials to the upcoming China International Import Expo.

“The United States, on the one hand, asks China to open its markets to U.S. products and services, yet on the other hand, the United States is not willing to send anyone to come when we open the door and invite people from all over. This way of speaking and acting, I think everyone will believe, as I do, is extremely contradictory and hard to understand,” said foreign ministry spokesperson Hua Chunying in response.

Hua’s quote of the week, however, came in the context of an NYT report claiming that China, and Russia were intercepting calls made on Trump’s personal iPhone to try to gain an insight into his thinking. This was Hua’s response: “Reading this report, I feel that today in the United States there really are some people who are doing their utmost to win best script at the Oscars…If they are really very worried about Apple phones being bugged, then they can change to using Huawei.”

Meanwhile, what’s further going to harden views in Washington is a new report by the Economic Policy Institute, which claims that “Growth in the US’s bilateral trade deficit with China between 2001 and 2017 cost 3.4 million American jobs. While that might allow Trump rhetorical gains, US tech giants and cybersecurity firms appear to have dented his argument that China was seeking to meddle in the midterm elections. Amidst all this, SCMP reports that Alan Turley, deputy assistant secretary on China and Mongolia in the US Commerce Department, met with his Chinese counterpart last week, in what is seen as the resumption of “working-level” contact between the two sides on trade.

Exports and Security

India’s Commerce and Industry Minister Suresh Prabhu has revealedthat Chinese authorities will hold a meeting in November specifically with Indian exporters to address their concerns relating to market access and trade regulations. Rice, sugar and rapeseed (after China lifted the ban on Indian rapeseed) are three products that are currently in focus for expanding Indian exports to China. Five more rice mills have been cleared to export to China, according to the government. This takes the total to 24 mills. Bloomberg reports that the Indian government is also working on a plan to boost shipments of some 200 products to China. It says that “New Delhi wants China to scrap levies on items including uncombed single cotton apart from castor oil, menthol, granite, diamonds and glass envelopes for picture tubes when negotiations for expansion come up in April 2019. Another product that’s being pushed is tea, with a promotional event held by the Indian embassy in Beijing this week. India last year exported $25 million worth of tea to China.

Moving from trade to security, China’s Minister of Public Security Zhao Kezhi visited India this week, inking an internal security agreement with Home Minister Rajnath Singh. The deal “will strengthen and consolidate discussions and cooperation in the areas of counter-terrorism, organized crimes, drug control and other such relevant areas,” according to India’s home ministry. Despite the deal and reports that India raised its concerns about JeM chief Masood Azhar and ULFA leader Paresh Baruah, the Chinese foreign ministry didn’t seem to suggest that there had been a change in Beijing’s view. This Manoj Joshi piece offers a good outline of the negotiation process of the agreement and what it’s meant to do. Also, it’s important to note that Minister of State for Home Affairs Kiren Rijiju, who hails from Arunachal Pradesh, was present during the signing of the agreement, despite reported Chinese protests.

China’s Security Vision

Beijing hosted a key military forum this week. The 8th Xiangshan Forum was co-hosted by the China Association for Military Science (CAMS) and China Institute for International Strategic Society (CIISS). You can find a quick backgrounder on the forum here. Delegates from a number of countries, including Southeast Asian states, the US, India, North Korea and NATO attended the event.

In his letter to the delegates, Xi said that “China is following a new concept of common, comprehensive, cooperative and sustainable security.” Chinese Defense Minister Wei Fenghe contrasted that with the “hegemonic and confrontational security model.” No prizes for guessing who he had in mind when saying this. That’s the overwhelming message that Beijing desires to send out. In addition, Wei also reiterated the the PRC’s position on Taiwan and criticized countries “outside of the region” for raising tensions. Despite all this, the Chinese Defense Ministry says that it is working with the Pentagon on a visit by Wei to the US.

Some of the key news stories to come out of the forum so far have been Singapore Defense Minister’s statement that China must help shape to maintain the world that it inhabits. Navy Secretary of the Pakistan Navy Rear Admiral Javaid Iqbal’s remarks that China’s port building work in Gwadar “has no military overtones.”

While we are on the subject of China’s security vision, do take a note of remarks by Rear Admiral Han Xiaohu, Commandant of the Naval Command College of the PLA at the recent Galle Dialogue 2018 in Colombo.

Han reportedly argued that an “equitable and rational maritime order” is important to guarantee peace and stability in Indian Ocean, which is not the job of any single country. But such an order, as per him, must be built on the basis of respecting Indian Ocean regional countries’ core interests. China, he said, would like to join hands with regional and ex-regional countries…to provide financial support for security and jointly shoulder maritime security responsibility.