China’s Unexpected European Bank Bonus

CHINA IS PLAYING a long game when it comes to gaining the power and influence over the world’s multilateral institutions to befit its standing as an emerging global power. But it has gained a big short-term win with its proposed $100 billion Asian Infrastructure Investment Bank (AIIB).

Britain, first, and now France, Germany and Italy have broken ranks with the United States in signing on to be founding members. South Korea and Australia are reconsidering their initial adherence to the U.S.’s line of having nothing to do with the AIIB.

The new bank will be a rival to the World Bank (U.S. dominated) and to the Asian Development Bank (dominated by Japan) when it comes to funding development projects in the region — although Asia’s infrastructure needs, at an estimated $8 trillion, are so great there would be plenty of lending demand to go around. However,  an ability to dispense large scale investment funding will give Beijing new-found political clout in the region, not to mention an order pipeline for China’s state-own engineering firms and their legions of suppliers — a honeypot also irresistible to the Europeans.

Beijing is already backing two other development funding initiatives, the $100 billion BRICS Bank with Brazil, India, Russia and South Africa, and its own $40 billion Silk Road Fund. For its part, Washington is promoting the TransPacific Partnership, a trade and investment agreement that Beijing has pointedly not been invited to join and is countering with the partly overlapping proposed common market with ASEAN plus India, the Regional Comprehensive Economic Partnership, and the bigger Free Trade Area of the Asia-Pacific. (That is TPP vs RCEP and FTAAP for acronym collectors.)

With the U.S. and China jockeying for position in the region via these new economic institutions, one indication of Washington’s desire to emasculate the AIIB from the outset was the unusually sharp and public criticism that it heaped on Britain for applying to be a founding member. It is now the U.S. rather than the U.K. that looks the outcast.

There is still much to be decided about the AIIB. The deadline for signing up for founding membership is the end of this month, but the target date for articles of association is not until the end of this year. The working assumption has been that capital participation and thus voting power, will be proportionate to members’ GDP.

Absent the U.S., that was always going to mean that China would have the most votes among the now 27 countries Beijing says have signed on. The involvement of four big European economies would deny it a majority. Matters like veto rights over projects, required voting majorities and even the basis on which GDP is calculated now become matters to watch carefully in the drafting of the AIIB’s charter as the new bank’s governance standards become another front in the China-U.S. rivalry in their own right.

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China’s Changing Arms Trade

THE 143% RISE in China’s arms exports in the past five years over the previous five comes as scant surprise. Defence and aerospace have been prioritized as a strategically significant national industries as Beijing seeks to lessen its dependence on foreign technologies (military and civilian) while at the same time maintaining double-digit growth in defence spending to upgrade its military.

The Stockholm International Peace Research Institute (SIPRI) tracks the numbers. It reckons that several Chinese arms-producing enterprises are now large enough to count among the world’s top 100 arms firms. However, it excludes firms like Avic, Norinco, Poly Technologies and China South Industries from its ranking because of the lack of transparency into the data. Nonetheless, the arms trade is providing a steady stream of earnings to help fund the modernisation of the People’s Liberation Army, and, no doubt, to enrich PLA-linked enterprises.

The latest annual SIPRI arms trade numbers also put the scale of China’s arms exports in to an international context. China has nosed into third place in the arms national arms-exporters rankings, and is roughly on par with France, Germany and Britain, all off whom have a 4%-5% global market share. The United States (31% global market share) and Russia (27%) still dominate the arms trade. That said, China has doubled its global market share over the past decade.

China's arms exports, 2005-2014, ($m, Constant 1990 dollars)

SIPRI looks at five-year runs of arms sales to iron out annual fluctuations. Individual arms contracts can necessarily be large. Our charts, drawing on SIPRI’s data, show annual figures to give a sense of the ebb and flow of the arms trade. For example China’s arms sales in 2014, at an estimated around $2 billion in nominal terms (SIPRIs numbers are constant 1990 dollars), were down from the previous year’s $3.7 billion. Sales in the two largest categories, aircraft, which would include drones, and armored vehicles, halved; on the five-year perspective they increased by one and a half fold and two and a half fold respectively. In the fastest growing category, air defence systems, SIPRI recorded no sales last year for the first time in four years.

China's arms exports, by category, 2010-14, $ millions, constant 1990 dollars

China’s three biggest customers for arms last year — Pakistan, Bangladesh and Venezuela — accounted for two-thirds of all sales. On a five-year view, China’s top ten customers also included Myanmar, Tanzania, Morocco, Nigeria, Indonesia, Iran, and Sudan, by SIPRI’s count. Chinese weapons have a reputation for being cheap and reliable.

China, Arms imports and exports, 2005-2014

However, the expansion of China as an arms exporter over the past five years may not be as significant as the change in the country’s arms trade balance. The expansion of the domestic arms industry has let Beijing cut its bill for arms imports by 42% between the two five-year periods. As the chart shows, import substitution is moving apace. With the exception of last year, China has been running a modest arms trade surplus since 2009. Its days as a honey pot for what are now its rival arms makers may well be over.

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China’s Cities Face Rising Cost Of River Flooding

CHINA IS THE third most vulnerable country to river flooding after India and Bangladesh, with some 3.3 million people at risk, according to data recently published by the World Resources Institute (WRI). It would rank first in terms of absolute GDP at risk, at $18.1 billion a year, though that accounts for a relatively tiny percentage of the country’s entire economic activity.

The rainy season has brought floods since time immemorial. However, in common with other developing nations, China has rising amounts of economic activity exposed to flood risk. More people, buildings, and infrastructure get crammed into vulnerable regions as the country becomes richer and more urbanized. Floods become larger and more frequent because of climate change. The WRI reckons that by 2030, the $18.1 billion of GDP at risk annually will have risen to $94.6 billion. Economic development accounts for $61.6 billion of the increase; climate change for $14.8 billion.

Floods in cities are both more difficult and costly to manage than those in the countryside. Sewers and storm drains are often old and inadequate, run-offs from hard surfaces absent, and ground storage for rainwater scarce. New building covers ever more floodplain. Ancient streams that could absorb overspill from swelling rivers and channel rainwater back to rivers and ponds get filled in. Redressing these problems are huge engineering tasks that cities cannot complete overnight. Beyond that are longer-term policy imperatives: building greener cities that are less encouraging to extreme weather, and not allowing development in flood-prone areas in the first place.

The numbers quoted here come from WRI’s interactive map of flood risk, the Aqueduct Global Flood Analyser (GFA). They assume China has flood defenses adequate to cope with the severity of flooding experienced every ten years. Changing the assumption to 5-year-flood protection levels turns $27.9 billion a year of urban damage into $139.6 billion over the same period. Change it again to 100-year-flood protection, and current annual urban damage falls to $3.1 billion and the 2030 figure to $18.8 billion.

As that range of numbers suggests, the data is intended to provide policymakers with a guide to the cost-benefit of different levels of flood protection. The GFA looks in more detail at six flood prone river basins in China and two coastal plains that are additionally exposed to rising sea levels.

Estimated Flood Damage ($m)

River Basin Flood protection level
10-yr flood 100-yr flood
2010 2030 2010 2030
Yangtze 5,700 25,200 975 4,700
Eastern Coast 5,500 34,800 1,000 7,100
Xun Jiang 2,200 7,600 362 1,100
Ziya River 1,600 10,400 250 2,000
Huang River 1,600 9,000 264 1,800
Bohai 564 4,200 93 1,000
Southern Coast 138 566 24 92
Tarim 19 32 4 6
Source: WRI Aqueduct Global Flood Analyser

From 2011 to 2020, China’s investment in water conservancy projects, which includes flood defenses, is expected to reach 4 trillion yuan ($617 billion). That would be almost four times as much as spent during the previous ten years.

Nature provides lakes, ponds, streams and floodplains to do much the same job. They cannot be sacrificed infinitely in the name of economic development if China is to deal with flooding and its opposite natural disaster, drought. Urban planners are only just starting understand this. This latest WRI data underscores the urgency of the need to protect, restore and reconnect lakes, ponds, streams and floodplains so they can do what they do best.

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China’s Alpine-Sized Growth

OUR MAN IN Geneva reminds us that 7% annual growth in China’s GDP would be the equivalent of adding a Switzerland, the world’s 20th largest economy, to the global economy every year — or another China of the 1996-vintage. Even the ‘new normal’ remains extraordinary.

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An Architect For A Rich China

RATHER LIKE FINANCIALLY threadbare English nobility marrying American new money in the 19th century China’s Communist Party is embracing the country’s new self-made wealth. Five of the country’s ten richest people will attend the National People’s Congress — China’s parliament — which convenes for its annual showpiece plenary on Thursday. Thirty-six of the country’s 100 richest people will be involved in either the NPC or the meeting of the top political advisory committee that precedes it.

The incongruity is not as pronounced as it might first seem. The trend of the Party co-opting new wealth — and the nascent political interest it represents — is not new, even if it has not been given the same degree of public attention before. Nor are the newly rich necessarily popularly reviled. Many citizens see them as aspiration-worthy models of self-made success, and stark contrasts to the beneficiaries of the corruption and cronyism that has long flourished in the creases where state-owned businesses, government officials and Party elites converge.

Many of these new multibillionaires have made their fortunes in areas such as the internet, e-commerce and telecoms where there were not state vested interests in the first place. As well as having them on the inside of the tent rather than outside it, the new leadership may well find them useful role models in support of President Xi Jinping’s ‘four comprehensives,’ a collection of objectives being bundled up as an ideological foundation for Xi’s vision of the ‘Chinese dream’ — and his contribution to the Party’s theoretical canon.

The quartet of building a moderately prosperous society, deepening (economic) reform, rule by law, and strict party discipline provide plenty of echoes — as does the presence of glorious wealth at the NPC — of Deng Xiaoping’s economic liberalisation of China. That is no accident. Xi continues to establish himself as the country’s paramount leader and take on the Deng-like mantle of being the architect of the country’s future prosperity.

Deng helped a handful of Chinese get rich first, and they they helped a second, if still privileged wave to do so on the back of three decades of helter-skelter growth founded on infrastructure investment and cheap export manufacturing. Xi has to scale that to the mass of Chinese citizens in a more equitable way if the Party is to maintain the legitimacy of its political monopoly. That in turn means making economic growth sustainable by rebalancing the economy on the fulcrum of domestic demand while avoiding the pitfalls of its debt legacy from the old model.

More of his blueprint, in the form of the new five-year plan, will be revealed in more detail over the coming weeks, starting with Prime Minister Li Keqiang’s ‘work report’ to the NPC, which will likely enshrine a new GDP growth target of ‘around 7%’, to replace the existing ’around 7.5%’.

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China’s Defense Spending Detaches From GDP Growth

CHINA’S RAPID GROWTH over the past quarter of a century has provided the wherewithal to create the world’s second best-funded military after the United States. Beijing has kept its annual military expenditure to within a few points of 2% of GDP during that time. That has still let annual military spending rise from $1.8 billion in 1998 to $188.5 billion in 2013, according to the widely respected estimates of the Stockholm International Peace Research Institute (SIPRI), which is also the source of the data in the charts below.

That represents a more than eightfold increase in real terms. China’s spending successively outstripped that of regional neighbours India (late-1980s), Russia (late-1990s) and Japan (early-2000s). Only the US, at more than $600 million a year, now spends more on its military than China.

China, Japan, Russia and India Total Defence Spending, 1988-2013

Last year, China’s total military expenditures in all likelihood passed the $200 billion mark for the first time. This year, the official defense budget, due to be presented to the National People’s Congress in the next couple of weeks, could well top $150 billion for the first time, up from 2014’s $132 billion. That would be at least a 13% increase and would follow last year’s more than 12% increase on the previous year. Those numbers are well in excess of the economy’s 7.4% growth last year, and more in keeping with the double-digit rates of growth in their budgets that the People’s Liberation Army (PLA) has been accustomed to for a couple of decades.

The official budget undercounts total defence spending by at least a third, on best guesses. It doesn’t include some military-related R&D expenditure, overseas weapons procurement, contributions by local and provincial governments through such as covering the operating costs of local military bases and earnings from PLA-owned commercial enterprises. Most significantly, it does not include the cost of the 1 million-strong paramilitary People’s Armed Police, which is primarily responsible for internal security, civil defense and border control.

China vs U.S. Total Defence Spending, 1988-2013

Those are opaque areas in which to find hard numbers. However, despite the slowing of economic growth, spending on modernising and professionalising the armed forces and strengthening air and coastal defense remains a high priority for Beijing, as is beefed up spending on internal security.

President Xi Jinping remains committed to a robust Chinese presence in the region, especially in the disputed waters of the East and South China Seas. A 2015 budget of $150 billion would be three times the size of Japan’s recently announced record defense budget for fiscal 2015. Xi, conscious of the U.S.’s pivot to Asia, also wants China to be able to project force ever further out into the Pacific and Indian Oceans.

That all means expensive kit, not just aircraft carriers but also new submarines, frigates, destroyers and missile-firing catamarans. It also means anti-ship ballistic missiles, and maritime reconnaissance aircraft and combat planes like the J-10 and J-11 fighters and the forthcoming J-20 and J-31 stealth fighters. Regardless of how much the economy softens, spending on hard power looks immune from any budget cuts that slowing growth might eventually make necessary elsewhere in China’s economy.

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China’s Unwanted Kokang Conundrum

THE ESCALATION OF the fighting just over Yunnan’s border in the Kokang region of Myanmar’s Shan state leaves Beijing with an unwanted humanitarian, security and strategic headache. China is providing food and shelter for some 30,000 refugees that have fled across the border into Yunnan, state media say. Most of the refugees can be assumed to be Kokang, who are ethnically Chinese, and Chinese migrant workers.

China first set up refugee camps following the outbreak of hostilities between the separatist Kokang National Democratic Alliance Army (MNDAA) and Myanmar government forces on February 9. The clashes have since intensified leaving 70 dead, including at least one Red Cross worker after an attack on a Red Cross convoy. The government in Naypyidaw has declared a state of emergency and martial law in the region.

China does not like such instability along its borders at the best of times and has sent troops to reinforce its side of this particular one. Beijing will initially be hospitable to those fleeing the fighting, firstly because they are Chinese, and secondly because the MNDAA was once part of the Chinese-backed Communist Party of Burma.

The MNDAA’s former leader Peng Jiasheng has been in exile in China, if not very publicly, since being driven out of power in 2009 — an event that triggered a similar influx of refugees fleeing the fighting, and which China was less prepared to deal with then than this time. It is Peng’s return now that has caused the renewed flare-up of fighting, ending the ceasefire than has existed since he was driven out.

Peng’s return, this Bystander would hazard, is neither sanctioned nor wanted by Beijing. It has been trying to broker peace deals between the Myanmar government and a score of ethnic groups in the northeast of Myanmar who want varying degrees of autonomy. Naypyidaw wants to strike a comprehensive peace deal ahead of national legislative elections due to be held later this year.

Beyond ensuring peace and stability along its borders, China’s bigger strategic imperatives in Myanmar have changed. The country has natural resources such as jade and desirable crops such as sugar. But more importantly, Naypyidaw’s growing rapprochement with the United States has undermined Beijing’s position as Myanmar’s principal political ally. It is not going to damage that relationship any further by backing separatist groups.

Myanmar is also an important link in President Xi Jinxing’s ‘One Belt One Road’ strategy. This is the development of the ‘Silk Road Economic Belt’ and the ’21st Century Maritime Silk Road’ — or China’s overland and maritime shipping routes to the Middle East and Europe through which political ties and strategic influence are intended to flow as voluminously as energy, natural resources and manufactures. Myanmar is a particular way station in this endeavour between China and Southeast Asia and the Indian Ocean as well as being a prime candidate for Xi’s ‘periphery diplomacy’.

To that end, Beijing wants a stable Myanmar. Its preference is for Naypyidaw to reach a peace settlement with its ethnic rebels to put and to conflicts such as that with the Kokang and with the Kachins, which flared up in 2012 and 2013. It has called for just that course of action.

If, against the odds, Peng does regain control of Kokang, China will be at least passively accommodative towards him. It has done the same in Pakistan or Afghanistan, where it has proven deft at working with local warlords and the central governments. However, that is not a situation Beijing wants to see as it will furnish it with neither border stability nor strategic leverage.

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