Tag Archives: China

Zhou Anti-Graft Probe Tests Limits of Xi’s Power

IT COMES AS little surprise to this Bystander – or to most others – that former security chief Zhou Yongkang is under investigation. The announcement that Zhou is suspected of serious Party disciplinary violations – for which read, serious corruption – only formally confirms rumours that have been circulating for months – rumours that were informally confirmed by Zhou’s disappearance from public view since last October and investigations of his family and dozens of associates in the oil industry and security circles.

As tigers go, Zhou is the biggest to be brought down by an anti-corruption campaign since the time of the Gang of Four; he headed the Ministry of Public Security until his retirement in 2012, oversaw the state oil sector, and was a member of the Politburo standing committee.

By disgracing such a senior powerbroker, albeit one past the zenith of his political power, President Xi Jinping is sending a clear signal to both his political adversaries and to the public: his anti-corruption campaign will be wide-ranging and no mere exercise in frightening off political rivals, though it is certainly that, too. Zhou was a supporter of Bo Xilai, the former mayor of Chongqing who was given a life sentence last year for corruption and abuse of power after challenging Xi for the leadership. He also remained a powerful figure in the state oil industry, and thus an obstacle to Xi’s economic reforms.

Zhou’s investigation will also be seen as Xi signaling that he believes he has consolidated his power sufficiently that no official or politician is beyond the reach of his anti-corruption campaign. That is a message that will play well with most Chinese, who are at the sharp end of petty official corruption day-in, day-out. Yet popularity is one thing and political power another. Whether a Party investigation of Zhou turns into court proceedings will indicate how absolute Xi’s political control over the Party has become.

Party discipline means expulsion and house arrest without public prosecution. Zhou’s case indicates that Xi isn’t yet in a position to antagonize all the high-level power brokers and elders in the Party, notably former President Jiang Zemin, by initiating court proceedings that could lead to lengthy jail terms or the death penalty – and the lid being publicly pulled back on the multimillion dollar business enterprises of many of the ruling elite and their families. For now, suffice it to say that the long-standing understanding that serving or former Politburo standing committee members will not be incriminated in anti-graft probes clearly no longer holds.

That is a more startling message for the political elite than the one to lower level officials have had to swallow, that the days of flaunting their perks and privileges and expecting expensive gifts as a right of office are over. So far, according to statement’s by various judicial officials, 51,306 officials were investigated for corruption and related economic crimes in 2013, a twelfth more than in the previous year. That number included 20 ministerial- and vice ministerial-level officials, about half of whom can be considered associates of Zhou.

Xi advocates that corruption threatens the Party’s long-term viability. One common facet of industrializing countries that successfully move up the economic development ladder is that they reform and strengthen their institutions. In China, the Party remains the paramount institution, so reforming that is Xi’s priority. For now though he is emphasizing clean governance over the rule of law, by using top-down political power to set the Party on what he believes is the correct course. The fine line he has to walk is between cleaning up the Party and tearing it down in the process of tearing down his political opponents.

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Another Day, Yet Another Food Safety Scare

IT IS AN embarrassment for a company that says “food safety and quality assurance are guiding principles in delivering products that go above and beyond our customers’ requirements” when it is accused of supplying meat to fast-food chains that has gone past its sell-by date and other food safety violations. The Shanghai Municipal Food and Drug Administration is investigating Shanghai Husi Food, the local unit of OSI Group, a food supply group based near Chicago in the United States, for the “alleged use of expired raw food material production and the processing of it in food.” The allegations were first made in a report on Dragon TV.

McDonald’s and KFC’s owner Yum, the two top brands in China’s $174 billion fast-food market, are among the global fast-food franchises that OSI supplies in China. McDonald’s buys beef, chicken and lettuce from Shanghai Husi. Like KFC, it has immediately stopped buying from it.

For both chains, it is another food-safety setback following one in 2012 involving chicken pumped with excessive amounts of antibiotics. KFC’s owner Yum has also hand to contend with the reputational challenge of an outbreak of bird flu. This Bystander also recalls Wal-Mart being caught up in an incident in 2011 involving out-of-date duck meat. And we won’t even mention the case of fox allegedly being passed off as donkey meat.

OSI says it is dealing “directly and quickly” with what it says it believes is “an isolated event”. Most of all, this latest food-safety scare highlights the difficulty for any multinational in enforcing strict processes to assure quality and product safety along its supply chain when that chain is dependent in large part on local staff.

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China’s Second-Quarter GDP Growth Exceeds Expectations

CHINA’S SECOND-QUARTER growth came in at a slightly better-than-expected 7.5%. That is 0.1 percentage points up on the first quarter. Thank a series of targeted stimulus measures for that. Both retail sales and industrial production rose in the quarter.

With the stimulus effects likely to carry over to the third quarter, the official target of 7.5% GDP growth for the full year is back on track. Additional stimulus is unlikely for now except in the slowest growing provinces, where local authorities are still spending heavily, old school.

Low inflation leaves Beijing with some monetary policy flexibility, but cutting interest rates or banks’ reserve requirements to help business get more credit has to be balanced against reigniting asset prices, particularly property.

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A Beijing Boost For China’s Electric Vehicle Makers

CHINA SEES ELECTRIC vehicles as the way to leapfrog its way to leadership of the global car industry. Promoting green technologies will also help the country tackle its widespread and worsening pollution, even though the impact of electric vehicles will mostly be in mitigating the problem from getting worse.

Despite government backing since 2009, production is currently modest, to say the least. The goal is to be building half a million electric vehicles a year by the start of 2016 and twice that number by 2020.

To that end, the government has announced an industrial-policy boost. Central government departments and municipal administrations will have to allocate a third of their annual vehicle procurement to “new energy” vehicles. That covers hybrids as well as vehicles powered by hydrogen cells, but in practice means electric vehicles. Local authorities are also instructed to install charging stations — one for each electric vehicle on the road.

Some financial incentive for officials to follow these new directives seem inevitable, given the increasing pressure on local-authority budgets now land sales are a less readily available honeypot. Any subsidies will have to be carefully structured to ring fence them from any potential international trade disputes.

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Trade Drives Shifting Alignments Of Northeast Asia

LET US LOOK at President Xi Jinping’s visit to Seoul and Japan’s embryonic rapprochement with Pyongyang in the hard light of commerce. To this Bystander, it is that more than politics that is reshaping the alignments of the region.

China has been South Korea’s leading trade partner for the past decade. It now accounts for a quarter of South Korea’s trade, and a larger share than that of the U.S. and Japan combined. China-South Korea trade will if anything grow, as a result of a forthcoming free trade agreement between the two countries and a new agreement to make more yuan and won directly convertible.

In raw numbers, China-South Korea trade is more than 40 times greater than China’s trade with North Korea, $247 billion vs. $6.6 billion, even though the latter has trebled since 2007 as Beijing has sought to ease Kim Jong Un’s regime back from the brink of Beijing’s nightmare — an economic collapse of the North triggering a flood of refugees across the border into Jilin and Liaoning provinces.

A new generation of leaders in Beijing views Pyongyang differently than its predecessors. More than half a century on from the end of the Korean War, unwavering support of comrades-in-arms just seems outdated and especially now China, South Korea and Japan have become economic powers in their own right. Beijing wants to distance itself from Pyongyang, though not by so much it allows room for Tokyo and increasingly Moscow to step in. It is telling that Xi’s recent visit to Seoul was his fifth meeting with his strongly pro-U.S. South Korean counterpart Park Geun-hye since becoming president though he has yet to visit Pyongyang.

Japan’s latest promise to ease some minor sanctions against North Korea in return for Pyongyang re-investigating abductions of Japanese nationals by North Koreans in the 1970s and 1980s is a sign of how Tokyo is working the new folds in the regional landscape. Continuing concerns about Pyongyang’s nuclear programme in the unpredictable hands of Kim Jong Un will limit how far Tokyo will want to carry its rapprochement, and Washington won’t let it go too far for the same reason.

The North’s nuclear ambitions remain the elephant in the room for China, too. Xi is unlikely to push Kim as hard on this as Park would like. In Seoul, he avoided any sign of support for Park’s criticism of the programme and stuck to Beijing’s line of calling for the denuclearization of the peninsula.

Nor will the U.S. want relations between one of its two main Asian allies and China to become too cosy. On that front, it will take some comfort in the fact that Park rejected Xi’s proposal of a joint celebration of next year’s 70th anniversary of Korea’s liberation from Japan at the end of World War II. Every leader in the region has a middle against which he or she needs to play two ends. In contrast to the dangerous eddies of northeast Asian geopolitics, the course of commerce runs swiftly and truer.

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Gauging Hong Kong

THE TURNOUT FOR Hong Kong’s annual July 1st rally in support of the territory’s continuing autonomy was the largest in a decade.

This year’s protest had added appeal as a way for Hong Kongers to show their distaste for Beijing’s recent white paper on the former British colony. This was read as foreshadowing tighter political control from Beijing and a less independent judiciary in a more-rapid-than-expected convergence of the two systems in the “one country, two systems” arrangements that now prevail.

Such proposals do not suggest that Beijing has a sure feel for Hong Kong’s political pulse. Hong Kong’s ultimate destiny is to be just another big city in southern China. Getting there will be bumpy unless Beijing demonstrates a more deft political touch.

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China-India Relations In The Modi Era

THE INITIAL FOREIGN policy focus of India’s new prime minister Narendra Modi has been on his country’s regional neighbours. Though China is one of them, it has received the least public attention despite recent talk of “a new age of co-operation” between the two, as Xu Changwen, a researcher at the Ministry of Commerce-affiliated think tank, the Chinese Academy of International Trade and Economic Cooperation, recently described it.

Beijing’s initial reaction to Modi’s landslide victory was muted if respectful. A degree of awkwardness for the world’s largest non-democracy in congratulating the world’s largest democracy on a successful transition of power would have been inevitable, even if China and India weren’t both competitive neighbours. Nor would have the eviction from office of the faction-riddled and corrupt Congress Party after a long run in power been an event on which the leadership of the Party in China would want to linger.

However, Beijing does see an opportunity to reset relations between the two countries now the world’s largest democratic election has put in office a politician who while India’s most controversial is also its most business-friendly. The hope is that the change may open the door to progress on trade and investment relations that could offset years of diplomatic strategic mistrust of Beijing on Delhi’s part.

Modi’s campaign promises set high expectations that he will push ahead the economic reforms that had stalled under the previous coalition government. He will have the advantage of not having to worry about coalition partners, but he will find the structural constraints, corruption and slow global economy just the same as his predecessor left them. Nor will Modi be in any hurry to abandon India’s aspirations to be a regional power. Significantly, Modi’s first foreign trip as prime minister was to Bhutan, a former Indian client state that has its own long-running territorial dispute with China.

Modi is a nationalist. His foreign policy rhetoric will continue to reflect that even as he seeks to advance India’s economic interests. The hardline against Pakistan he pursued as a candidate will continue to prove domestically popular. That is what he is most likely to speak about for now as it will take some time for European nations and the U.S. to rehabilitate him diplomatically, though Washington is expected to expedite the process by inviting him speak to a joint session of the U.S. Congress during his visit to the U.S. for the U.N.’s general assembly in September. However, getting his posturing on Pakistan right will be a difficult balancing act. He risks pushing Pakistan more towards China if he gets the tone wrong.

Modi’s nationalist leanings — and the even more pronounced ones within his party — could also trigger stronger posturing on India’s direct territorial disputes with China. Last February, during a campaign trip in Arunachal Pradesh, over much of which which China claims full sovereignty, Modi criticised Beijing’s “expansionist mindset” and reiterated India’s territorial claims over the state. Nonetheless, this Bystander feels that, given the overwhelmingly domestic focus of his campaign, Modi in office is likely to be more pragmatic and less ideological in foreign policy than Modi on the campaign trail. Nonetheless, the new Modi government has allocated $830 billion for infrastructure development in Arunachal Pradesh.

That suggests, at best, a degree of cautious cooperation with China. The litmus test may come in the proposed visit of President Xi Jinping to Delhi later this year, which will be closely watched for signs of a start on the work to strike a grand bargain to settle bilateral territorial disputes.

More immediate rapprochement is likely over trade and investment, and especially at the state level to which Modi wants to devolve more central government powers. That would be a particularly wrenching change for Delhi’s small — India’s diplomatic corps is one-fifth the size of China’s — but tight-knit foreign policy elite. Traditionally it has had neither the time nor taste for advancing India’s commercial interests. India’s multinationals, when entering new foreign markets, have not had enjoyed the cheap credit and diplomatic support their Chinese state-owned counterparts expect.

When Modi was running Gujarat, China was one of three countries he visited in 2011 (Indonesia and Japan were the other two) to pitch for inward foreign investment in his state. Much of China’s $900 million of direct investment in India has gone to Gujarat. A national Modi government is likely to encourage more Chinese investment in sectors such as energy and infrastructure, but it is likely to be states such as Gujarat and West Bengal that cut the deals.

One sticking point will be India’s growing trade deficit with China, now running at an annual rate of $27 billion on total trade of some $65 billion. Beijing is more likely to use that as a lever for more direct investment by Chinese firms in India for local production that would be a substitute for Chinese imports of manufactures. The proposed low-tax special economic zones and manufacturing hubs that the Modi government has just approved in principle would be a step in that direction.

There are also global issues on where the two countries will make common cause, notably climate change and international trade rules. There will, though, also still be plenty of areas of competition between the two regional powers. Both will compete for influence in South Asia and resources in Africa to fuel their economies. We expect Modi to be more assertive on territorial disputes than his predecessor and to seek closer ties with Japan and South Korea, if only to increase Delhi’s leverage with Beijing.

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China Lays Out Another Mini-Stimulus

THE LATEST ROUND of measures to boost growth show how fine a line China’s economic policymakers are walking. Tax cuts, spending on transport infrastructure along the Yangtze River and easier financing for exporters come after the unexpected fall in imports last month pointed up the persistent weakness in domestic demand. They also follow a previous mini-stimulus in April when the government announced tax cuts for small businesses and the acceleration of the construction of new railway lines. Fiscal spending in May rose by 25% over the same month last year.

While the slowing of the economy overall is a necessary consequence of efforts to rebalance it, and inevitable after three decades of double digit growth, the rate of deceleration has to be carefully managed to keep employment levels up while at the same time not re-inflating any asset bubbles. If GDP growth comes in at its forecast 7.3% this year, that would be its slowest rate of annual growth since 1990, and fast approaching the point that is as far from the official annual growth rate target of 7.5% that the leadership would still be comfortable with describing as “about 7.5%” growth.

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China Expands Its Legions Of Millionaires And Super-Rich

China has moved up a notch to third in having the most ultra-high-net-worth households, according to the Boston Consulting Group’s latest annual global private wealth report. Ultra-high net worth is defined as having more than $100 million in private financial wealth. There were 983 Chinese households that did in 2013, BCG reckons.

China’s ranking in the list of millionaire households remained unchanged at second with 2.4 million, but that is up from 1.5 million in 2012. That year it just edged Japan for second place, but in 2013 pulled clearly ahead, although the Abenomics-driven fall in the value of the yen against the U.S. dollar magnified the effect to some degree.

Private wealth increased faster than it did in 2012 across most regions with the Asia-Pacific region excluding Japan being the fastest-growing region worldwide. Five years ago the region had 50% less private wealth than North America. That gap has since closed by half, thanks to the effects of the 2008 global financial crisis and the continuing rapid growth of the Asia-Pacific region.

The strong rebound in equity prices last year drove an acceleration in the growth of private wealth worldwide, although not in China, where equity markets fell 6.8% in 2012. Instead, BCG says, private-wealth products from the rapidly expanding shadow-banking sector was a prime driver of China’s 49.2% growth in private wealth.

That, and the general slowing of the economy, is likely to moderate the pace of growth of private wealth in China this year, if not by much. As BCG also forecasts, China is likely over the next five years to continue to consolidate its position as the world’s second wealthiest country, and continue to close the gap with the U.S. 

Don’t expect all that wealth to remain in China, however. The BCG report notes the increasing volume of offshore assets being deposited in Hong Kong and Singapore. Chinese money is also flowing into U.S. and European real estate, while officials are increasingly sending their families abroad, offering another conduit for wealth, in this case probably not overly clean wealth, to flow out of the country.

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Jack Ma Takes A Shot At Football Club Ownership

Since time immemorial professional football clubs have been the playthings of successful businessmen. Alibaba’s Jack Ma, by taking a 50% take in Guangdong Evergrande for 1.2 billion yuan ($192 million), is following an ancient tradition.

Why is he doing it? He has shown no interest in the game previously.

There may be money to be made. Talk is of an eventual public flotation of the club, though in Europe listed football companies have not proved particularly successful for investors. Many have reverted to closely held ownership.

It may be that there is a branding play for Alibaba as it spreads its wings beyond e-commerce, Ma has couched his investment in the football club in terms of buying entertainment content. He would not be the first billionaire to see football as such. Rupert Murdoch was a pioneer in that regard. Evergrande’s success on the field since real estate tycoon Xu Jiayin  bought the club in 2010, makes it preeminent among China’s teams, a prerequisite for building a merchandising and media brand.

Alibaba has been on a spending spree ahead of its planned blockbuster listing in the U.S., splashing out some $6 billion on acquisitions to broaden its portfolio of businesses. Most have been Internet companies, but it is starting to make inroads into media and entertainment. Sport, though much changed by television, has not been significantly disrupted by technology. At least not yet. And it is not costing Ma much in the global scheme of things to try.

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