The Curious Incident Of The Growth Forecast That Didn’t Change

Inspector Gregory of Scotland Yard: “Is there any other point to which you would wish to draw my attention?”
Sherlock Holmes: “To the curious incident of the dog in the night-time.”
Gregory: “The dog did nothing in the night-time.”
Holmes: “That was the curious incident.”

THE INTERNATIONAL MONETARY Fund’s newly published World Economic Outlook forecasts China’s growth this year and next at 6.8% and 6.3% respectively. Those are exactly the same numbers it published in its July and April revisions to its 2015 Outlook.

Since April, the Fund has cut its forecasts for the global economy to 3.1% from 3.5% for this year and to 3.6% from 3.8% for 2016. China’s stock market has slumped precipitously. The economy’s appetite for commodities, particularly base metals, has diminished, further depressing global commodities prices. The People’s Bank of China has devalued the yuan and been spending down the country’s foreign-exchange reserves to defend the currency. The U.S. Federal Reserve has been sufficiently concerned about the combined effect on the U.S. economy of all those factors to delay raising its policy interest rates. Investors have begun to fret that a gradual slowing of China’s growth may turn into a hard landing.

Yet the IMF’s forecasts for China have remained serene. Either its forecasters are prescient to a point their track record scarcely justifies or they are being, let us say, judicious in their judgement. They do have some previous in that last regard, albeit that is not unique to China.

The Outlook’s summary description of developments in the economy:

Investment growth slowed compared with last year and imports contracted, but consumption growth remained steady. While exports were also weaker than expected, they declined less than imports, and net exports contributed positively to growth. Equity prices have dropped sharply since July after a one-year bull run. While the authorities intervened to restore orderly market conditions, market volatility remained elevated through August.

And the rationale for the forecasts.

Growth in China is expected to decline to 6.8 percent this year and 6.3 percent in 2016—unchanged projections relative to April. Previous excesses in real estate, credit, and investment continue to unwind, with a further moderation in the growth rates of investment, especially that in residential real estate. The forecast assumes that policy action will be consistent with reducing vulnerabilities from recent rapid credit and investment growth and hence not aim at fully offsetting the underlying moderation in activity. Ongoing implementation of structural reforms and lower oil and other commodity prices are expected to expand consumer-oriented activities, partly buffering the slowdown. The decline in stock market valuations is assumed to have only a modest effect on consumption (reflecting modest household holdings), and the current episode of financial market volatility is assumed to unwind without sizable macroeconomic disruptions.

Burying down in to the report reveals downside risks, notably if “the macroeconomic management of the end of the investment and credit boom of 2009–12 proves more challenging than expected”, i.e., if the debt bomb goes off with more of a bang than a whimper.

The Fund thinks that if any further slowing of growth is moderate, policymakers will pay more attention to defusing the credit risk than on supporting growth. However, if there is the threat of a hard landing then old-school pump-priming will be undertaken to shore up growth, even though that heightens the debt risk in the longer term.

The Fund’s prescription for the future also remains unchanged.

Policymakers in China face the challenge of simultaneously achieving three objectives: avoiding a sharp growth slowdown in the transition to more sustainable patterns of growth, reducing vulnerabilities from excess leverage after a credit and investment boom, and strengthening the role of market forces in the economy. Modest further policy support to ensure that growth does not fall sharply is likely to be needed, but further progress in implementing the authorities’ structural reforms will be critical for private consumption to pick up some of the slack from slowing investment growth. The core of the reforms is to give market mechanisms a more decisive role in the economy, eliminate distortions, and strengthen institutions. Examples include financial sector reforms to strengthen regulation and supervision, liberalize deposit rates, increase the reliance on interest rates as an instrument of monetary policy, and eliminate widespread implicit guarantees; fiscal and social security reforms; and reforms of state-owned enterprises, including leveling the playing field between the public and private sectors. The recent change in China’s exchange rate system provides the basis for a more market-determined exchange rate, but much depends on implementation. A floating exchange rate will enhance monetary policy autonomy and help the economy adjust to external shocks, as China continues to become more integrated into both the global economy and global financial markets.

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Settlement And Security In Xinjiang

REPORTS EMERGING FROM Xinjiang about a deadly attack at a coal mine by suspected Uighur separatists in mid-September have got this Bystander thinking of that peculiar state organization, the Xinjiang Production and Construction Corps (XPCC). Also known as the Bingtuan (‘military corps’), the XPCC is a paramilitary economic development agency that has widespread administrative and judicial authority in the semi-autonomous region.

Some 50 people were reportedly knifed to death in the attack on the Sogan colliery in Aksu prefecture. Most of the casualties were Han Chinese, including workers and police. If the casualty numbers and identity of the attackers turn out to be true, it would have been both the most deadly single attack by Uighur militants and the first time they had struck at an industrial site.

Politburo member Yu Zhengsheng, speaking at the 60th anniversary celebrations on October 1 of Xinjiang’s founding as an autonomous region, said that long-term stability and security is the top priority in Xinjiang, with counterterrorism as its focus.

“We must be fully aware of the severe situation we are facing,” he said probably with the attack in mind though authorities have not acknowledged that it has happened. “The three forces (separatism, terrorism, and extremism) are the biggest threats for Xinjiang… We must clench our fists tight and take the initiative to crack down on violence and terror activities.”

Aksu prefecture is one 14 areas in Xinjiang that have cities, settlements, and farms under the control of an XPCC regiment, belying its military roots. The headquarters of the regiment in Aksu is in Aral, a town of more than 200,000 people built by the XPCC on the edge of the Taklamakan desert. The prefectural capital of Aksu is Aksu City, a stop on the ancient Silk Road that is little more than a three-hour drive from Aral in the direction of the border with Kyrgyzstan.

The XPCC dates back to the 1950s. It was a Mao Zedong initiative, rooted in a centuries-old tradition of sending military units to settle and cultivate remote border regions. The aim was to combine the economic development of frontier regions with border defense and the keeping of minorities from being troublesome. Production and Construction Corps, comprised of former soldiers, were dispatched to Inner Mongolia and Heilongjiang as well as Xinjiang.

The XPCC fell victim to the Cultural Revolution, being disbanded in 1975. However, Deng Xiaoping revived it in 1981 in response to fears about Soviet encirclement and rising militant Islam in Central Asia. Turkic-speaking, Muslim-majority Xinjiang was seen as a vulnerable frontier.

There was forced migration from the East, particularly of women to provide wives for the soldier-farmers. The region’s remoteness and harshness also made it ideal for political banishment. Ai Qing, the poet father of artist Ai Weiwei, was exiled to a Bingtuan-run penal colony in the late 1950s. Generations of dissidents have followed him to labour-reform farms and prison factories.

To this day, the XPCC has a role with the army and armed police in combating separatism through its militia. Nonetheless, its line of authority is civilian, jointly to central and provincial government, though the Xinjiang authorities leave the Bingtuan to its own devices. The corps has a bureaucratic status equivalent to that of the provincial government.

It is a state within a state, its role a blend of American Peace Corps and West Bank settlers. The analogy with Israel is appropriate in another way. The Bingtuan has made the desert bloom. Over the years, it has built the irrigation and other rural infrastructure that lets its farms, stockbreeding, and commercial enterprises now generate upwards of an estimated $24 billion or one-sixth to one-seventh of Xinjiang’s economic output.

The Bingtuan has also built half a dozen cities. It is a far cry from the early days of hunger and hardship when teams of ex-soldiers would yoke themselves together to pull ploughs by hand to break the desert soil.

As of the end of 2013, the Bingtuan had 176 regiments, 14 divisions, an area of 70,600 square kilometers under its administration. More than a million hectares of farmland and more than 2.7 million people — overwhelmingly Han Chinese and equivalent to one in eight of Xinjiang’s total population — fall under the XPCC’s jurisdiction.

Its 1-million-strong workforce is primarily engaged in growing cotton, fruit and vegetables and in light industry, the XPCC having handed most of its mining interests over to the Xinjiang provincial authorities.

It has more than 4,400 businesses ranging from food processing to paper manufacturing, cement and electricity, with 11 of them publicly listed and trading under the umbrella of the China Xinjian Group. It also runs two universities.

Increasingly it is building cities. It controls ten, four of which have become cities since 2011. Urbanization is a central prop of the XPCC’s counter-terrorism strategy. In April last year, President Xi Jinping visited the Bingtuan and called to strengthen its role due to meet what he called the new conditions. As the Sogan colliery attack shows, the mission of the soldier-settler-farmer-colonists is far from complete.

Footnote: This history of the Bingtuan was produced by the government in 2014 to mark the 60th anniversary of the XPCC’s founding.

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Win-Win Ways In Washington

China's President Xi Jinping addresses the United Nations General Assembly, September 2015

PRESIDENT XI JINPING’S visit to the United States delivered as little, in the eyes of the outside world, as had been expected. On that score, it did not disappoint.

The two headline outcomes, a cybersecurity dialogue and the announcement of a national cap-and-trade carbon market, were a fudge and a repackaging respectively. The two sides agreed not to support commercial cyber-espionage, although what one side sees as cybertheft the other regards as matters of national security. So we’ll see how far that goes. Meanwhile, China has long been running pilot cap-and-trade carbon projects in preparation for launching a national market.

Plenty of other areas of contention remain, from the impact of China’s recent stock market turmoil and currency devaluation on the U.S. Federal Reserve’s interest rate policy to questions of maritime sovereignty in the South and East China Seas.

Even the agreement to start a high-level dialogue on cybercrime, albeit narrowly defined, risks triggering another front in the simmering trade wars between the two, and especially with the U.S. going into a presidential election campaign that has already shown signs of inflammatory anti-China rhetoric before it has even got going.

The proposed cybercrime dialogue provides, though, another example, of how Xi is trying to define issues on Beijing’s own or parallel terms, not on Washington’s. The Asian Infrastructure Investment Bank initiative is another. The Beijing development model in Africa is a third.

Being seen at home to be writing new rules of the game not playing by the old ones and standing shoulder to shoulder with the U.S. as an equal was a significant purpose of Xi’s trip.

State media laid great emphasis for its domestic audience on Xi and Obama forging a new model for great power leadership, a theme echoed in the coverage of Xi’s address to the United Nations General Assembly where Xi was lauded for breathing “new life into the development of international relations, leaving a deep imprint in the history of China’s diplomacy.”

Win-win is the new watchword for China’s diplomacy. It is a portrayal of the country as an alternative to traditional great or colonial powers. China’s narrative is that it is a developing country that will be a partner to others not a master. This fits with a traditional commercial concept that negotiation is about building trust for long-term cooperation rather than resolving an immediate problem at hand.

The reality is that great powers have national interests and it is their power to impose those interests that makes them great powers.

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An Artistic Snapshot Of China’s Slowing Growth

Global total sales value of Chinese art and antiques, 2011-14

THE LATEST ANNUAL survey of the Chinese art market by artnet, a leading art market and auction company based in New York, provides another alternative indicator of China’s slowing growth.

Although art is considered an alternative asset class by financial investors and the Chinese art market experienced the sort of giddy spike in prices in 2011 that would not have looked out of place on the Shanghai stock exchange before the recent collapse of equity prices, this Bystander would not want to extend the metaphor too far.

For one, there has been a shortage of high-quality, high-priced works going under the hammer. Nor should the effect of President Xi Jinping’s anti-corruption campaign on conspicuous consumption be overlooked. Overall luxury spending contracted for the first time in several years last year.

Authorities’ attention has been switching from the the personal luxuries segments (fine wines and spirits, jewelry and cars) to property and, increasingly, art. Gifts of antiques, calligraphy and paintings to officials can now be deemed as bribes. It has long been suspected that art auctions have provided a way to ‘launder’ bribes with ‘gifts’ being subsequently sold at auction at inflated prices.

Yet there are some straws to be taken from the 2014 art-sales figures. Auction sales in mainland China (the overwhelming majority of art sales in the country) declined 9% year-on-year to $5 .5 billion, a 40% fall in value in U.S. dollar terms since the market’s 2011peak. However, sales outside China at $2.3 billion in 2014 ($1.8 billion of which were made in Hong Kong) were barely changed from the previous year.

That suggests that it is domestic Chinese buyers who for reasons of prudence or necessity are keeping their cash in their wallets.

That all said, as the report notes and is true the world round, only a tiny portion of China’s population has the financial means to engage with the art market on an active or regular basis so any broad economic conclusions should be approached with circumspection.

What did catch our eye, however, was that up to 63% of all lots sold for more than 10 million yuan ($1.6 million) last year were left unpaid or only partially paid. This non-payment rate is up 22% from 2013 and points to a credit pinch.

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The Measure Of Cement


EVERY NOW AND then this Bystander spots a chart that is worth the proverbial 1,000 words. This one, seen on the BBC site and one of several comparisons between the Chinese and U.S. economies ahead of President Xi Jinping’s visit to Washington, is one such.

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Bangkok Bomb’s Possible Uighur Connection Presages New Crackdown

SUSPICION, IF SCANT hard evidence, is growing that there is a Chinese Uighur connection to the bombing of the Erawan shrine in the Thai capital Bangkok last month.

Thai police say that an alleged accomplice to the still-fugitive bomber had in his possession when captured near the Cambodian border a Chinese passport identifying him as Yusufu Mieraili, born in Xinjiang, home to China’s Turkic Muslim Uighur minority. Unnamed Chinese officials have declared to state media that Mieraili is a member of the Muslim separatist East Turkistan Islamic Movement (ETIM).

Thai authorities said at the weekend that they had issued a warrant for the arrest of the suspected organiser of the plot, whom they named as Abudusataer Abudureheman, a 27-year-old from Xinjiang. He is reported to have fled Thailand.

Muddying the picture is reports of Malaysian police arresting three people suspected of helping the bombers leave Thailand. They are two Malaysians and a Pakistani.

Authorities in Beijing are known to be watching the case closely. If, as it is being suggested, the bombing was retaliation for Thailand’s repatriation to China in July of 100 Uighurs, then it would provide Beijing with vindication — at last — for its long-standing claim that the ETIM is an international terrorist threat.

The group, which Washington, at Beijing’s urging, also put on its list of foreign terrorist organizations post-9/11 but now seems to have quietly dropped, wants an independent East Turkistan state stretching from Xinjiang somewhat indeterminately westwards. Most of the 8 million Uighurs live in Xinjiang, but the diaspora spreads to Kazakhstan, Kyrgyzstan, Uzbekistan, Afghanistan, Pakistan, Turkey and a lesser extent beyond.

East Turkistan has had two brief periods as an independent state. Mao’s revolution put an end to that. In 1955, it was declared to be China’s Xinjiang autonomous region.

Uighur militants have been fighting a low-key war with Beijing for years. More recently, particularly since late 2013, they have been able to extend attacks beyond Xinjiang, despite a hardening security crackdown on Uighurs in the region. The Turkistan Islamic Party (TIP), which may be a splinter cell from ETIM or the ETIM in another incarnation, claimed responsibility for fatal attacks in Shanghai, Beijing, Guangzhou and notably Kunming, where 33 people, including four of eight knife-wielding attackers, died at the railway station. In Urumqi, a car bomb killed 42 people including all four attackers, all believed to be Uighurs.

However, the opaque and obscure ETIM, which was first heard of around 1997, has scarcely shown the capacity to operate across international borders with any consistency, if at all. One of its founders, who moved the organization in the late 1990s from Xinjiang to the Afghanistan-Pakistan border, was reportedly killed shortly after in a U.S. drone strike against al-Qaeda bases; another languishes in a Chinese jail.

Its current leader is reputedly Abdullah Mansour, although little is known about him or the rest of the leadership. Mansour told the Reuters news agency last year that it was his Islamic duty to fight China. However, it seems more focused on the Middle East than the Middle Kingdom. A ‘Turkistan brigade’ of foreign fighters, including Uzbeks, is reportedly in Syria alongside al-Qaeda aligned forces, supported by militant Uighurs in Turkey.

It is nigh impossible to know the strength of the ETIM though it probably numbers in the low hundreds. Reuters news agency quoted Pakistan intelligence sources as putting the number at 400. More than 20 Uighurs captured by the U.S. in 2001 in Afghanistan fighting with the Taliban were held for several years in Guantanamo Bay. Once released, they were not repatriated to China by the United States. Pakistan, however, has been readier to hand over captured Uighurs to Beijing.

As in other parts of the western Marches, minorities have long complained of the Han colonisation of the regions in which they have traditionally lived, a suppression of their religions and cultures, and a worsening of their economic prospects compared to the newcomers. Shortly after the revolution, in 1953, three-quarters of Xinjiang’s inhabitants were Uighur. In the latest published census (2000) they accounted for barely two-fifths. Beijing says its sole intention is to promote economic development.

If indeed the Bangkok attack is Uighur-related, Beijing is likely grab with both hands the opportunity to jump on any signs of separatism in Xinjiang regardless of whether the ultimate instigators of the Bangkok bombing were the ETIM or sympathizers in Xinjiang or Turkey.

Separatism is a prime fear of Beijing’s and provokes well-armed counterterrorism measures whenever it is perceived. Stability in Xinjiang is a particular concern. The region is not only mineral- and energy-rich, but it is also a critical corridor through which the One Belt (New Silk Road) of the One Belt One Road project passes.

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The Modernisation of China’s Armed Forces That Wasn’t On Parade

WHAT MOST CAUGHT this Bystander’s eye at last week’s parade in Beijing to mark the 70th anniversary of Japan’s surrender to end World War Two in Asia was what wasn’t on show: the aircraft carriers, nuclear submarines and advanced blue-water ships being built for the PLA’s navy and the high-tech kit and code for its information, cyber and space warfare units.

Those are the cutting edge of China’s military modernization, not the ballistic missiles paraded through the streets of the capital on September 3rd with such patriotic pomp. We were slightly baffled by the fuss made in the popular prints of the DF-21D ballistic missile. The ‘carrier killer’ was, after all, deployed last year, officially acknowledged four years ago, and has been in development since the 1990s.

Like most of the hardware trundled through the streets in an overt display of hard-power prowess and progress, the DF-21D promises more than it can yet deliver operationally. It would take a bunch of the land-based DF-21s working in concert with aircraft and submarines to knock out a U.S. carrier group. Limited in range (1,750 kilometers), the missiles would, at best, provide a deterrent to a U.S. carrier coming to the aid of Taiwan or a regional neighbour in the event of conflict.

It is not yet the weapon of a world-class military force. More attention should have been paid to the DF-5B an intercontinental ballistic missile (ICBM), which can deliver a warhead to any part of the United States. The latest addition to China’s ICBM arsenal, the mobile DF-41, was notably absent from the parade — as was the J-20 fifth generation fighter aircraft. And it is the new Jin-class submarines that are letting China make progress toward a credible sea-based second-strike capability.

China’s armed forces long ago pivoted from their role in the 1980s as a land force to defend the long border with Russia to a more mobile force to face threats from the sea. However, they are still far short of the ability to provide open-sea protection as against coastal-waters defense, just as, for all the years of double-digit spending on defense, the PLA as a whole is still yet no match for U.S. forces should it come to all-out war, as the chart below underlines.

That is not to say that Beijing is not expanding its arsenal, particularly its nuclear weapons, nor that it lacks ambition to have world-class fighting forces. It has been pursuing the modernization of the PLA for decades to that end. Much like with the economy as a whole, it is doing so by replacing low-skilled labour out with higher-value-add technology.

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

The 300,000 reduction in the PLA’s numbers that President Xi Jinping announced on September 3rd is only the latest case in point. This cut will reduce the PLA’s strength to 2 million from 2.3 million by removing non-combatants, civilian employees and the lowest-skilled ground forces.

Once the cuts are done, though, it will mean the PLA will be about half the size it was when the modernization drive started three decades ago. (Many of those shed in the intervening years have found new employment in the People’s Armed Police Force and the Border Guard; a hard edge to internal security, a connection of long standing in military doctrine, remains.)

The PLA-Navy (PLA-N) has been in the vanguard of the modernization drive, followed by the PLA-Air Force (PLAAF), the strategic missile force, the Second Artillery Corps (SAC), and then the Ground Forces in that order.

The new shape of the PLA should be apparent by 2020, including a new joint command structure similar to that employed by the United States to manage lean, mobile and multi-functional rapid response units. The announcement of a joint command has been imminent for some time, suggesting that inter-service rivalry remains strong and an impediment.

It may be no coincidence that Xi’s anti-corruption campaign has reached deep into the command of the ground forces. We would surmise that was to clear out entrenched opposition to restructuring the military high command as well as to clear a path for a new generation of officers rising on professional merit rather than their ability to buy promotion.

The long-term target is to have armed forces capable of winning ‘informationised’ wars by the middle of the century. That means armed forces well equipped with the so-called soft elements of hard power — satellite surveillance and the ability to disrupt an enemy’s information superiority by destroying its satellites, irregular warfare capacity, computer network operations, and space capabilities.

Little of that was on parade in Beijing last week, but it comprises the new PLA’s marching orders.

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