Lending Edging Out Of The Shadows

DOWN IN THE detail of the monthly monetary aggregates for March released earlier this week is the curious point that the M2 measure of money supply slowed its growth even as new bank lending appeared to speed up.

M2 rose 11.6% year-on-year in March, down from February’s 12.5%. New bank lending in the first quarter, at 3.61 trillion yuan ($582 billion), was up 20% year-on-year.

With our usual caveats about reading too much into one month’s figures and making apples and oranges comparisons, it does seem that a large increase in lending hasn’t translated into economic activity in the real economy. Even allowing for the slowing of the economy, it looks as if intermediary credit is being rolled into the banking system — or to put it another way, out of shadow banking and into the (hopefully) cleansing light of the formal banking sector.

Given the warning contained in the IMF’s latest World Economic Outlook published earlier in the week that shadow banking was one of the main vulnerabilities of China’s economy —a warning repeated in the Fund’s Global Financial Stability Report, which said curtailing the riskiest parts of shadow banking should be China’s overall financial stability priority — and the central bank’s long standing concerns about the systemic risk that the $3.2 trillion sector poses to financial system, that is to be welcomed.

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IMF Says Structural Reforms Key To China Soft Landing

THE INTERNATIONAL MONETARY Fund has left its forecast for China’s GDP growth this year at 6.8%. That is broadly unchanged from its January update, though go down to two decimal places and there is a slight lowering of the forecasts. A year ago, the Fund was forecasting 7.3% growth for this year.

The number for the first quarter has come in at 7.0% year-on-year, down from 7.3% for the fourth quarter of last year and its slowest pace since the 2008 global financial crisis. The official target for the full year is ‘about 7%’.

The new edition of the Fund’s World Economic Outlook says Beijing’s attempts to rebalance the economy will continue to be a drag on growth, though managing the glide path of slowing the economy to a more sustainable long-term growth rate is the plan. “The authorities in China are now expected to put greater weight on reducing vulnerabilities from recent rapid credit and investment growth. Hence the forecast assumes a further slowdown in investment, particularly in real estate,” the IMF says.

Its forecast for 2016 remains at 6.3% (again, a slight softening if you go to more decimal places). The effect of that will be felt in commodity-exporting countries and China’s main trade partners — and much more widely if China’s economy slows faster than that, the so-called ‘hard landing’.

The question domestically is the extent to which structural reforms and lower oil and other commodity prices will expand consumer spending, and thus moderate the pace of the overall slowdown. On the answer to that question lies the extent to which Beijing will need to make a monetary policy response, either by cutting interest rates or lowering banks’ reserve requirements ratios.

China has room to ease. Cheaper commodities, including oil, and the appreciation of the currency is keeping inflation low. The IMF forecasts consumer price inflation to be 1.2% this year and to increase gradually into 2016. However, as the Fund notes, “striking a balance between reducing vulnerabilities, supporting growth, and implementing reforms remains challenging”.

Giving market mechanisms a more decisive role, eliminating distortions, and strengthening institutions is key. The Fund underlines the need for financial and state-owned enterprise reforms to increase the efficiency of resource allocation and reforms in the pension system and other social safety nets to shift the composition of growth toward domestic consumption.

The need for such reforms are the more urgent because the demographics that underpinned the productivity gains that drove double-digit rates of growth for three decades are now moving against China more strongly than in any other leading emerging economy.

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China’s Environment And The Slowly Expanding Pockets Of Dissent

OFFICIALS IN THE southern Chinese town of Luoding in Guangdong province have cancelled plans to build an incinerator plant following mass protests this week. This volte-face followed more citizen concern about an explosion earlier in the week at a PX petrochemicals plant in Fujian that triggered some of China’s biggest environmental protests in 2007. The week also brought news that the environment ministry on March 30 had vetoed the construction of the $3.75 billion Xiaonanhai hydroelectric dam on the middle reaches of the Yangtze River 40 kilometres upstream of Chongqing.

The proposed dam threatened scores of species of endangered freshwater fish. Its cancellation marks a rare victory for Chinese environmental campaigners over the country’s powerful state-owned dam-building industry.

Environmental issues are highly sensitive for the Party. They are increasingly becoming the locus of social activism and dissent, and constitute the largest class of ‘mass incidents’ involving more than 10,000 people. As such, they are a potential source of that most feared threat to the political status quo, instability. Worse from the authorities point of view, environmental non-government organizations are a seed that could grow into political movements able to challenge the Party’s institutional monopoly of political power.

Beijing is managing this dissent by tolerating it in limited areas, and increasingly allowing spontaneous (i.e., no coordinated collective action) small-scale local activism. It has controlled labour unrest in much the same way. Worker incidents are not allowed to be coordinated by preexisting groups. They have to be specific to an individual enterprise. And they can’t have a life beyond the resolution of the specific incident, i.e. they can’t spawn a lasting organisation. The same blueprint is being applied to environmental protests.

The continuing clampdown on academia and on the media, including social media, which is a potentially powerful way to ‘organise without an organisation’, indicates that this tolerance will not be extended to any bigger thinking dissent or organisation against central government. Ideology remains inviolate.

There is to be no joining of the dots between economic development, environmental degradation and social inequalities. Witness the quick censorship of the online documentary about air pollution, Under the Dome, produced by Chai Jing, a former TV presenter and CCTV investigative journalist, once it had gone viral on social media. Such an approach acts as a social safety valve, allowing a build-up of pressure to be blown off and the system to return to its pre-existing stable state.

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A Rare Win For China’s Rare Freshwater Fish

Environmentalists can celebrate a rare triumph. The environment ministry has stopped the Xiaonanhai hydroelectric dam project on the Yangtze River. The dam is being built by China Three Gorges Corp. Its site lies 40 kms upstream from Chongqing and 700 kms upstream of the company’s eponymous dam that has become a poster child for the environmental damage that can be wreaked by large-scale infrastructure projects.

The location is significant. The dam was championed by disgraced Chongqing Party boss Bo Xilai, who redrew the boundaries of a nature preserve so construction could go ahead. Environmentalists have campaigned vigorously against damming the river at that point. Its waters contain 189 species of freshwater fish found nowhere else, two score of which are endangered. Economists have condemned the dam for its cost — $3.75 billion to build and electricity generation at more than three times the cost per gigawatt of other hydroelectric dams along the river.

Both are good reasons to call a halt to the project. However, the ministry does not have a reputation for being the most fearsome prosecutor of its brief to protect the environment in the face of the power of the ‘hydro-industrial complex’. Would it have vetoed the dam if its sponsor had been someone in better political standing than Bo?

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New Attack Submarines Boost PLA-Navy’s Long-Term Modernisation

chinese-093G-submarine-huludao-shipyard
THREE NEW NUCLEAR
attack submarines are being added to the PLA-Navy, according to state media, taking the country’s sub fleet to about 15 and providing more tangible evidence of the modernisation of China’s military. One report suggests the PLA-N took delivery of the vessels in late-February.

CCTV recently showed a satellite picture of the three subs docked at unidentified berths. This Bystander believes the location to be the Bohai shipyard at Huludao on the Bohai Sea. Our images, acquired from Google Maps, shows one sub in dry dock (above; the black square in the middle of the sub is its vertical missile launching tubes; vertical supersonic missile launching is the vessel’s big advance in capabilities), and two at berth (below). There is little advantage to keeping them hidden. Indeed, China stopped keeping its subs secret in 2009. It is the logistics systems for the latest subs that the rest of the world will want to get a look at.

CCTV said the vessels were Type-093Gs, a longer, faster and quieter (thus less easily detectable) version of the Type-093 nuclear subs of which six are believed to already in service. The PLA-N also has in its sub fleet three old Type-091s and four Jin-class Type-094s, which can carry ballistic missiles.

chinese-submarine-huludao-shipyard

The Type-093Gs are reportedly capable of launching the new YJ-18 supersonic anti-ship missiles. The YJ-18, now in development as a replacement for a mishmash of Soviet-era models, is equivalent in capability for maritime attacks to the Russian (land attack) cruise missile that NATO has nicknamed the ‘Sizzler’. It will be the basis for a series of supersonic and hypersonic (faster than Mach 5) missiles that could be used to attack carrier groups; these missiles fly so fast towards the end that they are difficult for anti-missile systems to intercept.

China is already testing one such hypersonic weapon, the WU-14, which can travel at Mach 10. Were it to come to a hot war between China and, say, the U.S., these missiles would be Beijing’s best bet for knocking out the carrier groups that Washington would likely use to cut China’s maritime supply lines.

The early models in the series will be for attacking ships. The missile can carry a more potent warhead than the PLA-N’s current missiles, and thus be able to penetrate the increasingly heavy armor of U.S. and Japanese warships. Later models are intended for submarine and, eventually, land attacks. The YJ-18 will have a range of 300-400 kilometres from a carrier.

While China’s first carrier, the Liaoning, is operational, it is still far short of being battle ready, mostly because of a lack of pilots trained to operate from carriers. Training more is a priority. And not just for the Liaoning. As many as six carriers are planned, according to senior PLA-N officials quoted recently by the Hong Kong Commercial Daily.

That number has been bruited before. Construction on two improved and indigenously built Liaonings is underway in China Shipbuilding Industry Corp.’s Jiangnan yards in Shanghai with plans for three indigenous nuclear-powered carriers to follow. The newspaper report may be as close to confirmation of those plans as we have had to date.

It will be those latter three carriers that will propel the PLA-N into a blue-water force to be reckoned with. The Liaoning, a refitted ex-Soviet carrier, the Varyag, is, at 58,500-tons, lightweight by carrier standards — half the size of U.S. carriers. It also launches its aircraft with a ‘ski-jump’, not a catapult. That limits the fighters that can operate from it.

The Liaoning carries helicopters and modified Shenyang J-15 fighters, but couldn’t launch the fifth-generation J-31 fighter. It is better described as an aviation-capable patrol ship than a carrier of the line. Letting the PLA-N learn the ropes of carrier operations is its main purpose.

Modern catapult launchers use electromagnetic systems that require massive amounts of energy, of the magnitude a nuclear-powered carrier would be capable of generating. China Shipbuilding Industry was tasked in 2013 with developing nuclear power technology that would be compact and safe enough to install in ships such as carrier and icebreakers, and possibly into nuclear stealth bombers.

Nuclear bombers are probably years off, but a first nuclear-powered carrier is likely within a decade. The two second-generation Liaonings due to be commissioned in 2020 are likely to be conventionally powered. It is a racing certainty that the carrier after those would be nuclear powered.

To put that in perspective, China has had nuclear-powered subs for 40 years, but that is still 15 year fewer than the U.S. In 2022, the U.S. Navy will mark the 60th anniversary of its first nuclear-powered U.S. carrier while the PLA-N may still only be getting its first into the water. What is certain though is that the PLA-N is playing determined catch-up.

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The Case Of Zhou Yongkang And Politics By Other Means

THE FATE OF Zhou Yongkang, former head of the security apparatus and the most senior figure to be brought low by President Xi Jinping’s anti-corruption campaign, neatly underscores the difference between rule of law and rule by law. The 72-year old Zhou faces charges of bribery, abuse of power and the intentional disclosure of state secrets, a formal indictment that, for all the putative improvements to the judicial system, will lead to a guilty verdict as surely as night follows day.

However, Zhou, a former Politburo member, is far from alone among senior Party figures that have enriched themselves and friends and families by dint of their position. The investigation and criminal charges against him are politics by other means.

Zhou’s protege was the disgraced Chongqing Party boss Bo Xilai. Bo challenged Xi for the leadership and is now in prison following his wife’s murder of British businessman Neil Heywood and a slew of bribery, embezzlement and abuse of power convictions.

Scores of Zhou acolytes in Sichuan province and in the oil industry, a powerful vested interest that poses obstacles to Xi’s economic reforms, have also been investigated and in many cases prosecuted. Before becoming security chief Zhou was a senior official at state-owned oil giant China National Petroleum Corp. and Party boss in the southwestern province.

The charges against Zhou are narrowly economic, not specifically political, even though the Supreme Court’s annual work report to last month’s National Peoples Congress accused both Zhou and Bo of “trampling on the rule of law, violating the party’s unity, [and] engaging in unauthorized political activities”. Narrowing the scope makes it easier for Beijing to stage an ‘open’ trial and keep the focus on the anti-corruption campaign rather than subject itself to the risks of airing the Party’s dirty laundry in public.

Zhou’s case will be heard in a court in Tianjin, in accordance with a practice of trying senior party officials in cities where the accused has no power base and local court officials can be relied upon to rule by law.

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Beijing Counts Its AIIB Blessings — And Reaches 46 So Far

THE ASIAN INFRASTRUCTURE Investment Bank (AIIB) is turning into the gift that just keeps on giving for Beijing. State media report that the China-instigated lending institution attracted 46 applications by the March 31 deadline for would-be founding members. The list includes the likes of Australia, the U.K. and a raft of other European nations who defied Washington’s desire that its allies have nothing to do with the AIIB.

It also includes Taiwan. Even this potentially awkward application for Beijing (and controversial one in Taipei) is being turned by Beijing to its advantage. “The AIIB is open and inclusive,” Taiwan Affairs Office spokesman Ma Xiaoguang is quoted as saying. “We welcome Taiwan to participate in the AIIB under an appropriate name.” (Taiwan belongs to the Asian Development Bank as Taipei, China.) Beijing’s magnanimity in accepting its “renegade province” pointedly makes the U.S. stance look even more mean-spirited.

It also opens the door to Hong Kong to join by the time the founders list is finalised on April 15. Members’ stakes seem set to be based on relative GDP. Hong Kong membership would provide Beijing with a conveniently captive wodge of votes to add to its own, and the AIIB with the city-state’s financial markets expertise.

The April 15 date might also provide time for the sole Asian holdout, Japan, to come on board, though June is the more likely date being mentioned in Tokyo. As for the U.S., the only position that would be worse than being left isolated over the AIIB would be to join now in what the rest of the world would inevitably regard as an embarrassing climb-down. Even Beijing would scarcely believe its good fortune should that happen.

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