1. Talks in Beijing
A vice-ministerial level delegation from the US will visit Beijing for talks on January 7-8. China’s Ministry of Commerce says that the two sides will conduct “proactive and constructive” talks “over how to implement important consensus reached by the two state leaders in Argentina.” This, however, is going to be a long and tricky process. So don’t expect any breakthroughs next week. Some recent changes by Beijing, i.e., de-emphasizing Made in China 2025 and announcing a new foreign investment law suggest openness to some concessions. However, as this NYT pieceargues, Donald Trump’s China negotiator Robert Lighthizer “is intent on preventing the president from being talked into accepting ‘empty promises’ like temporary increases in soybean or beef purchases.”
Former US Treasury Secretary Larry Summers also sounded a note of caution in an interview with Caixin. “Even if an agreement is reached in principle, there are all kinds of questions as to whether it can be circumvented or avoided,” he said, adding that there exists a “strong political imperative” in the US to keep frictions going. What remains to be seen is whether the political imperative remains strong if economic indicators slump. For instance, Tim Cook put out a letter to investorsabout Apple’s changing fortunes in China. Projecting lower revenues, he says “we did not foresee the magnitude of the economic deceleration, particularly in Greater China.” His assessment of the reasons for this are the slowdown of the Chinese economy and Sino-US tensions. Apple isn’t the only Western giant struggling in China. This Bloomberg piece lists out a number of others like Fedex, Starbucks, Daimler and others. Cook’s letter set off a storm in the markets, with the Dow falling 660 points. Another factor in all of this was the fall in the ISM manufacturing index, which tracks manufacturing activity in the US, to 54.1 in December. This indicates slower pace of expansion of manufacturing. This data is leading some analysts to argue that the incentives are lining up for a Sino-US deal. (The Chinese economy aspect is discussed in Section 3 below)
All of this, of course, is taking place as the two sides commemorate the 40th anniversary of the normalisation of bilateral ties. Trump and Xi Jinping spoke on the phone over the weekend. State media reports that Xi expressed his willingness to work with Trump to implement a consensus to advance Sino-US ties “featuring coordination, cooperation and stability.” Xinhua termed the call “an auspicious start (that) may bring about a new look for China-U.S. relations."
A couple of interesting commentaries have also appeared in state media commemorating bilateral ties. And the tone of these is fairly nuanced. For instance, this Xinhua piece argues that while China’s development of the past 40 years is primarily a product of “the diligence, creativity and dedication of the Chinese people,” the country “also benefit from the support and assistance from the rest of the world, including the United States.” The piece also acknowledges that competition is likely to remain a fundamental feature of the relationship going forward. “As two major countries with different social systems, development paths and historical and cultural backgrounds, it is natural for China and the United States to have disagreements and encounter problems...China and the United States need not be afraid of any fair, rational and healthy competition, but must be smart enough to avoid a zero-sum game…"
The idea is that competition is understandable; but we need to avoid confrontation. Unfortunately, PKU’s Wang Jisi believes that the two sides are drifting towards “partial confrontation.” He argues that 40 years ago “parallel security interests” had brought the two sides closer, with China’s subsequent reform and opening policy linking economic interests. “However, without the support of shared value systems, such common interests could not be consolidated or enhanced, especially when people with divergent values have vastly different definitions of their national interests,” Wang adds.
Meanwhile, the US State Department renewed its travel advisory for China this week. It remains at Level 2 and isn’t significantly different from the one issued last year. However, it does add new references to Xinjiang and Tibet, reports Reuters. Also,reports state that acting US Defense Secretary Patrick Shanahan “told civilian leaders of the US military on Wednesday to focus on ‘China, China, China,’ even as America fights militants in Syria and Afghanistan.” Finally, on December 31, 2018, Trump signed into law the Asia Reassurance Initiative Act. The act authorises $1.5 billion in spending for a range of US programs in East and Southeast Asia and “develop a long-term strategic vision and a comprehensive, multifaceted, and principled United States policy for the Indo-Pacific region, and for other purposes.”
2. Cross-Strait Speeches
Two speeches in the past week set the tone for cross-Strait ties in 2019. The first was President Tsai Ing-wen’s New Year address. Much of it focussed on domestic issues. Here are some relevant snapshots with regard to the relationship with China.
Tsai spoke about the New Southbound Policy as a strategy to “adjust previous economic and trade strategies that were overly dependent on China.”
She spoke about an action plan to welcome Taiwanese companies, particularly those in China, to invest in Taiwan.
She discussed the recent elections in Taiwan, saying that the results “absolutely do not mean that grassroots public opinion in Taiwan favors abandoning our sovereignty, nor do they mean that the people want to make concessions regarding Taiwanese identity.”
Cross-strait exchanges “cannot depend on vague political preconditions, or forced submission to ‘passwords’ or acceptable phrases.”
And then she outlined “four musts” of cross-strait ties, i.e., Beijing must “face the reality of the existence of the Republic of China (Taiwan); it must respect the commitment of the 23 million people of Taiwan to freedom and democracy; it must handle cross-strait differences peacefully, on a basis of equality; and it must be governments or government-authorized agencies that engage in negotiations.”
Soon after, Xi commemorated the 40th anniversary of the Chinese mainland's Message to Compatriots in Taiwan. (Be prepared, there are far too many anniversaries in 2019.)
Here’s a quick breakdown of Xi’s speech:
Xi called unification as “a historical conclusion” and “a must for the great rejuvenation of the Chinese nation in the new era.”
He added that “the principles of ‘peaceful reunification’ and ‘one country, two systems’ are the best approach to realizing national reunification.”
Further, he added “security and interests of development, the social system and way of life in Taiwan will be fully respected, and the private property, religious beliefs and legitimate rights and interests of Taiwan compatriots will be fully protected after peaceful reunification is realized.”
Along with this, Xi also put out a threat: So while he said that “We are all of the same family” and that “Chinese don't fight Chinese,” he added “We make no promise to renounce the use of force and reserve the option of taking all necessary means.”
Tsai swiftly responded to that saying that “We have never accepted the ‘1992 consensus,” adding that “Taiwan will never accept the ‘one China, two systems’ formula, and the vast majority of Taiwan's people are firmly opposed to the approach designed by Beijing.” Taiwan’s Mainland Affairs Council also added that the one country, two systems policy in Hong Kong has deprived its people of freedom and the rule of law. Even the opposition Kuomintang didn’t seem to think that the one country two systems formula would work for Taiwan.
Amid all this, it’s important to bear in mind a few things. Xi’s speech wasn’t signalling a different or tougher posture. It’s classic carrots and stick, as this Bloomberg piece notes. CSIS’ Bonnie Glaser notes: “My initial impression is that the speech is a reaffirmation of current policy. It is notable that there is no mention of a timetable or deadline for reunification — it is just a goal.” David Lu, vice president of the equity department at Taishin International Bank in Taipei, believes that while Tsai took “a hard stance and Xi Jinping was quite soft.” Jonathan Sullivan, an associate professor at the University of Nottingham, argues “Having unification as a national aspiration is incredibly useful for the Chinese Communist Party, which stakes its legitimacy on economic growth and nationalism. The former is becoming more difficult to deliver, and so the latter becomes more important."
3. It's the Economy...
President Xi’s annual New Year’s address this year began with the economy. He said that despite all sorts of risks and challenges, the government had pushed the economy towards high-quality development, sped up replacement of old drivers of growth and kept indicators in reasonable range. Data, however, suggests that things are not that smooth. SCMP reports that Caixin Purchasing Managers’ Index, which tracks the activities of small and medium-sized enterprises, dipped below 50.0 for the first time since May 2017. December’s reading fell 0.5 points to 49.7. This comes soon after the official NBS PMI recorded a drop of 0.6 to 49.4 last month, its first contraction since July 2016.
China’s auto sector is struggling, with sales declining. Michael Dunne, CEO of ZoZo Go, which advises automakers on China, says that “This is the first sustained downturn in memory. We would have to go back to the Asian financial crisis in 1998-1999 to see the last time China had flat or down sales for four months or more in a row.” The property market isn’t faring much better. Gan Li, from the Southwestern University of Finance and Economics in Chengdu, estimating that more than one in five apartments in Chinese cities — roughly 65 million — sit unoccupied. How significant is this? This NYT piece explains: “Housing is key to China’s well-being. It accounts for roughly one-fifth to one-third of China’s economic growth, depending on whether ancillary industries like construction and furniture-making are included. Property is the largest source of wealth for households, a given in a country with strict rules against moving money overseas and a volatile stock market. In major cities, it sometimes accounts for as much as 85 percent of a family’s assets, according to researchers at Southwestern University."
In response, the government says that it will cut banks’ reserve requirement ratios, taxes and fees. Li Keqiang made the comments at a meeting with officials of the country’s banking and insurance regulator after visiting Bank of China, Industrial and Commercial Bank of China and China Construction Bank. Along with this, SCMP reports that the PBOC “has changed the definition of a small business, meaning an enterprise with a credit line of less than 10 million yuan (US$1.46 million) will qualify for targeted reserve-requirement ratio cuts, up from the previous standard of 5 million yuan. This will allow banks to lend more capital to enterprises now classed as small businesses, and therefore free up more reserves from the central bank.” Analysts estimate that this could release anywhere between RMB 400 billion to RMB 700 billion into the economy.
Also, state-owned China Railway Corporation has announced that it plans to put a total of 6,800 km of new track into service this year. Around 3200 km of this will be high-speed rails. In all, this is a 45% expansion from 2018. SCMP reports that this hike in railways infrastructure comes as fixed asset investment, a major growth engine of growth, slowed to a decade-low of 5.9 per cent in the first 11 months of 2018. This, of course, added pressure on economic growth, which was facing trade war headwinds. The report adds that “Beijing had originally planned to cut 2018 railway investment to 732 billion yuan (US$106.63 billion) from 801 billion yuan in 2017, but instead opted to raise spending after the first round of US tariffs were imposed on Chinese exports, eventually spending 802.8 billion yuan last year."
Finally, three more noteworthy points in Xi’s New Year’s speech. Apart from development and poverty alleviation, he spoke about “self-reliance,” reducing healthcare costs, and the need to take care of veterans. All of these are important points of friction. With regard to healthcare costs, the biggest impact of this is being felt by Chinese drugmakers. Bloomberg reports that a pilot program that requires select cities bulk-buy certain drugs together is forcing companies to bid for contracts and driving prices down by an average of 52%, one by as much as 90%. The program is likely to soon be extended to more cities. This is reshaping the market in the country and will lead to greater focus on consolidation and R&D.
Thinking aloud: Wouldn’t this be a good opportunity for Indian drugmakers to look for partnerships? More focus on R&D means more money in that direction; effectively less incentive to reverse engineer; therefore, potentially better IP protection.
4. Huts, Trade & Apps
Indian and Chinese soldiers celebrated New Year’s day with a Border Personnel Meeting. The BPM was conducted at PLA “huts” at Chushul-Moldo & DBO (Daulat Beg Oldie)-TWD (Ten Wen Den) meeting points in eastern Ladakh. The pictures that were tweeted out by the Indian Ministry of Defence spokesperson’s account show that the Chinese hut is not quite what you would imagine when you think of the word hut. While along the border, Economic Times reports that “a 10-year-old plan to acquire 2,600 future infantry combat vehicles for the Indian Army at a cost of around Rs 60,000 crore is staring at an uncertain future as it is stuck due ‘divergent views’ among the stakeholders on its implementation.” The report says that a meeting between the army and defense ministry on the future infantry combat vehicles (FICV) project, scheduled for last month, was postponed. The report adds that sources say the “Army wants the FICVs as soon as possible as both China and Pakistan were significantly enhancing their border infrastructure. They said the Army was particularly concerned over China deploying light tanks along certain sensitive sectors along the nearly 4,000 km border.” One example of this is the Type 15 light tank, which is now confirmed to be in service in Tibet.
Meanwhile, Minister of State for External Affairs General VK Singh responded to questions about India’s China policy in the Rajya Sabha this week. He said that engagement between the two sides has been “multifaceted with “commonality of views.” He added that “both sides agree that progress in bilateral relations should be guided by the consensus reached between their leaders that at a time of global uncertainty, India-China relations are a factor of stability and that the two countries must not allow their differences to become disputes."
One area where Sino-Indian diplomacy is likely to be focussed this year is the RCEP trade deal. Bloomberg reports that China has sought talks with India on the issue, with a meeting likely to held before the end of January. The report adds that New Delhi has drawn up a list of issues, which include providing zero-duty access to fewer Chinese goods as opposed to those offered to other members of RCEP and a longer period to phase out levies on Chinese goods compared to 20 years offered to the others.
Geethanjali Nataraj and Garima Sahdev have an interesting piece in The Hindu Business Line on RCEP. The piece acknowledges the complexities that RCEP poses, given the political significance of agriculture, the desire to include services, India’s trade deficit with 10 of the 16 RCEP countries and hesitations by Indian industry. But in the ultimate analysis, they argue that the “benefits of RCEP in the long run far outweigh the costs in the short run. The RCEP can substantially increase investment in India from countries like Japan, South Korea and China. An RCEP without India will still go ahead, but not without locking India out from Asia."
Finally, Shadma Shaikh in Factor Daily tells us that five out of the top 10 mobile apps in India are Chinese, as per Google Playstore rankings. The corresponding number for 2017 was 2. Also the number of Chinese apps in the top 100 Playstore apps has reached 44. The piece also provides a really detailed breakdown of the approaches of different Chinese tech giants in India and their attempts to grow by devising strategies to suit the local market.
5. The Long & Short of It:
A quick round-up of a mix of interesting stories.
Wang’s Africa Visit: For the 29th year in a row, China’s foreign minister has traveled to Africa for his first visit in the new year. Wang Yi landed on Ethiopia on Thursday, kicking off a four-nation tour. He will also be traveling to Gambia, Senegal and Burkina Faso. Debt is likely to be an important issue during the visit. In fact, it’s a question that Wang’s already had to deal with. “Generally, debt in Africa has been a protracted issue left from history. It didn't come up today, still less is it caused by China,” he said on Thursday. It’s a narrative that’s really caught hold over the past year. For instance, last week, the Chinese foreign ministry had to issue a clarificationon reports of a potential Chinese takeover of the Mombasa port if the Kenyan government were to default on a loan for the Standard Gauge Railway. That’s against the narrative that the Chinese prefer, i.e., “China is proven to be a true friend and cooperation partner of Africa based on the principles of sincerity, real results, amity and good faith.” For more on the China-Africa dynamic, I strongly recommend this China in Africa- Year in Review podcast.
Loan and Ships: The Financial Times reported on January 1 that Beijing has pledged to lend at least $2 billion to Pakistan to shore up its foreign exchange reserves and prevent further devaluation of the rupee. The report was based on two unidentified Pakistani government sources. The Chinese foreign ministry has remained tight-lipped about the loan, but even when asked direct questions about it, the ministry’s spokesperson did not deny it. Some reports in Pakistan suggest that this loan will be given at an 8% interest rate. Meanwhile, state media reports that China is building a “most advanced” warship for the Pakistan Navy which could “double the combat power of its fleet.” CGTN reports that the Pakistan Navy’s press statement revealed the ship’s class as Type 054A/P, which the China Daily report inferred to be based on Type 054A, considered the best frigate in service with China's People's Liberation Army Navy. The warship is being built at the Hudong-Zhonghua Shipyard in Shanghai. China State Shipbuilding Corporation says that the ship will be equipped with modern detection and weapon systems and will be capable of anti-ship, anti-submarine and air-defense operations. Pakistan has reportedly ordered four such vessels.
South China Sea: Negotiations on a draft code of conduct in the South China Sea are likely to be extremely difficult. That’s according to a new Reuters report. The report says that Vietnam “wants the pact to outlaw many of the actions China has carried out across the hotly disputed waterway in recent years, including artificial island building, blockades and offensive weaponry such as missile deployments.” It adds that “Hanoi is pushing for a ban on any new Air Defence Identification Zone” and “is also demanding states clarify their maritime claims in the vital trade route according to international law – an apparent attempt to shatter the controversial ‘nine-dash line’.” Another source of friction is Beijing’s demand to exclude foreign oil firms and limit joint development deals among Chinese and East Asian firms. In addition, China wants military drills with outside powers in the South China Sea to be blocked unless all signatories agree.
Ties with Maldives: Maldivian Foreign Minister Abdulla Shahid told Xinhua this week that the new government under President Solih will continue with the projects initiated in the Maldives under the China-proposed Belt and Road Initiative. The remarks were well received in Beijing, if the response by the foreign ministry is something to go by. Meanwhile, Beijing and Male have signed a deal with renovate the building complex of Maldives’ Ministry of Foreign Affairs. The current complex was built by Chinese aid during President Maumoon Abdul Gayoom's regime.
PLA’s NY Resolution: Combat readiness, fostering reform and innovation and party building in the PLA are the key priorities of the Chinese armed forces in 2019, according to the PLA Daily’s New Year editorial. SCMP also reports that at least 38 senior colonels were promoted to the rank of major general in late December. Among them, nine were from the PLA’s ground forces, four were from the air force, three were from the rocket force and 22 from the People’s Armed Police Force.
The Goddess and Rabbit: China’s Chang’e 4 lunar spacecraft landed on the far (dark) side of the moon this week, opening a “new chapter in human lunar exploration” according to the China National Space Administration. On board the spacecraft is the rover Yutu 2 - Jade Rabbit 2. The mission aims to conduct soil tests and temperature analysis. Xinhua reports that the probe also took six live species - cotton, rapeseed, potato, arabidopsis, fruit fly and yeast - to the lifeless environment to form a mini biosphere, which is expected to produce the first flower on the moon. In the future, China plans to begin fully operating its third space station by 2022; put astronauts in a lunar base sometime in the coming decade; and send probes to Mars.
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