Mr Xi Goes To Pyongyang

IT HAS BEEN 14 years since a Chinese leader has visited North Korea. President Xi Jinping’s arrival in Pyongyang on his first visit since assuming power will provide a welcome boost to his North Korean counterpart, Kim Jong Un. It also comes ahead of the G20 summit in Osaka towards the end of this month, when Xi will meet US President Donald Trump.

While trade and technology will top their agenda, Xi will find it a useful bargaining chip to have the latest word from Pyongyang on the denuclearization of the Korean peninsula, a process in limbo since the collapse of the Hanoi summit between Kim and Trump in February.

Xi will also want to reassure himself that sanctions-hit North Korea remains potentially stable despite the tensions over denuclearization and economic deprivation. Some assistance on the latter by way of humanitarian aid and tourism (an area not yet subject to sanctions) will likely be forthcoming.

There is also much signalling going on here: from Pyongyang to Washington that North Korea still has China’s support, and from Beijing to Washington that denuclearization is not a bilateral issue and that China remains a critical player.

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Hong Kong Still Faces Its Worst Nightmare: Being Nothing Special

Panoramic view of the Hong Kong night skyline, 2008. Photo credit: Base64, retouched by Carol Spears. Licensed under the Creative Commons Attribution-Share Alike 3.0 Unported license.

CARRIE LAM, Hong Kong’s chief executive, has bowed to her people over her masters. There will be a reckoning for that at some point. After a week of violent clashes between police and protestors, she has finally accepted that a controversial bill to enable easier extradition to the mainland has to be withdrawn indefinitely.

The largest local demonstrations since the Umbrella movement in 2014 are a victory for street democracy that will be looked on with alarm in Beijing. This is what the much feared ‘social instability’ looks like. It is not so much the rubber bullets — Beijing can crackdown on a crowd with the best of them — but the will of the Party being defied and overturned.

For Hong Kong, it feels, to this Bystander, that a critical moment has arrived, but one that will only delay not reverse China’s reabsorption of the former British colony. Under the joint declaration by which the United Kingdom returned Hong Kong in 1997, the territory was meant to have 50 years under its existing governance norms before ‘one country, two systems’ became ‘one county, one system’. Beijing has been increasingly telescoping that timetable with minimal pushback internationally.

Global attitudes to China’s rise have changed of late, however, and Hong Kong’s protestors have seized their opportunity. It may be fleeting. In 1997, Hong Kong’s economy was the equivalent of 20% of China’s GDP. Today, that figure is 3%, such has been the pace of China’s economic growth (and political hubris with it).

Hong Kong is no longer as important to the mainland as it once was. Its claim to being special is diminishing. Its long-term destiny looks increasingly to be its worst nightmare — just another big city in China.

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China Edges Away From Deleveraging And More Towards Stimulus

 

Workers polish escalator parts in Zhejiang,China in 2016. Photo credit: ILO. Licensed under the Creative Commons Attribution-NonCommercial-NoDerivs 3.0 IGO License.

THE DISMAL MONTHLY industrial output numbers for May, the weakest year-on-year growth in 17 years, point only too clearly to the binary choice for China’s policymakers: stimulate to keep the economy on track to grow at the 6% annual rate the official target demands, or deleverage to reduce systemic financial risk and continue to rebalance the economy in the cause of long-term sustainable growth.

They are doubling down on the first. Targeted stimulus, undertaken since last year, has come up short in the face of the global slowdown of growth and trade caused by the uncertainty generated by the United State’s foreign policy in general and trade policy in particular, with China directly in the Trump administration’s crosshairs when it comes to the latter.

Fiscal and now increasingly monetary loosening is already underway and local authorities’ are being given renewed licence to take on debt to enable real estate and infrastructure projects, just the sort of investment that ran up public sector debt in the first place, and which has been steadily reined in over the past four years.

There will be more loosening to come. Vice Premier Liu He told the Lujiazui Forum in Shanghai on Thursday that Beijing has plenty of policy tools and is capable of dealing with its various challenges. This was widely taken to be signalling imminent further cuts in either interest rates or the reserve ratio requirements for banks. Liu also put a positive spin on the international pressures on China, saying they would force the pace of rebalancing of the economy and opening of the financial sector.

This Bystander is not holding his breath. The longer deleveraging is put off in the cause of maintaining GDP growth above target, the greater the debt burden grows, and the closer the day of financial reckoning becomes.

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China Will Shun Trilateral Arms Control

CHINA WILL HAVE no truck with US efforts to include it in the nuclear arms control agreements that the United States and Russia have traditionally struck bilaterally.

It is not that joining successor agreements to the Strategic Arms Reduction Treaty (START) or the (Intermediate-Range Nuclear Forces (INF) Treaty would unnecessarily crimp Beijing’s nuclear arsenal.

Deployed, stockpiled and retired strategic nuclear weapons, 2018, Russia, China and United States

As the chart shows, China has far fewer strategic nuclear weapons than Russia and the United States, and already larger arsenals of medium- and intermediate-range cruise and ballistic missiles than either of those two. And it would welcome the United States, in particular, limiting its nuclear weapons. For US President Donald Trump, nuclear arsenals are a central dimension of the new great power competition that shapes his world view.

It is more that Beijing has no interest in subjecting itself to the oversight and compliance frameworks that are part and parcel of such treaties. China’s main nuclear interest at this point, by its own declaration, is deterrence. It has said it wants to keep its nuclear capabilities at the minimum level commensurate with deterring a potential first strike and its national security.

That minimum level has been steadily increasing in recent year, however. Along with the overall professionalising of the People’s Liberation Army, Beijing has been modernising and expanding its nuclear delivery systems. It has an estimated 280 nuclear warheads (the exact number is a state secret). Just over half are land-based with the rest carried on submarines and bombers.

Great powers are nuclear powers. Beijing would not want Washington, and even, if to a lesser extent, Moscow, taking too close a look at what it increasingly has.

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China-US Trade: Storm Before The Calm Before The Storm

US PRESIDENT DONALD TRUMPis far from alone among his compatriots in taking a harder line against China. There is now agreement across the political spectrum in the US about the course the president has set, which Beijing would underestimate at its peril.

Let this Bystander recap where we are:

  • trade talks have stalled;
  • tariffs on Chinese imports to the United States have been imposed with more threatened;
  • US measures are being taken against the leading telecoms equipment maker Huawei that will have significant business consequences for the company in its Western markets;
  • powers have been activated that if deployed would cut off Huawei and other Chinese multinationals’ access to US components and technology on which they rely, such as, in Huawei’s case, Google’s Android operating system and Qualcomm, Intel and Micron Technology’s chipsets; and
  • sanctions against Beijing for its actions against Uighurs in Xinjiang, while still being held in reserve by the US administration, are now being talked about openly, as is criticism of the proposed extradition law for Hong Kong.

Until about a week ago, it seemed as if Beijing had navigated its way through the trade talks to a place that was acceptable if uneasily so and was, following its customary negotiating practices, backtracking at the eleventh-hour to ease its main pain points.

These included how the scale of its concessions, the conditions under which they have been made and how equally any agreement would be perceived to be in China, points on which the Trump administration, which regards all negotiations as zero-sum games, had no interest in accommodating.

The Clinton administration’s similar experience with talks over China’s accession to the WTO two decades ago would have provided some precedent to draw on, but the US administration’s default position is that any and all trade deals made by a Democratic predecessor are the worst deal in history, and allowing China into the WTO particularly egregious.

The consequence is that President Xi Jinping is increasingly being pushed into a corner. The tone of state media has in recent days been more defiant and nationalist. Officials have been quoted along the lines of, we would prefer to resolve the issues through dialogue but if the United States wants a trade war, then bring it on.

For now, there will be more tit-for-tat retaliation on tariffs while China will take informal administrative measures against US companies operating in China proportionate to the measures imposed on Chinese companies by the United States. If there is to be trade war, Beijing will wage a guerrilla campaign while Washington will fire its financial big guns. That will include quiet operations by Beijing in the three other theatres where the Trump administration is fighting its ‘strategic rivals’, Iran, North Korea and Russia.

The next breakpoint is the G20 meeting in Osaka next month where Trump and Xi will be in attendance, offering the possibility of a similar session to the one held during the last G20 summit in Buenos Aires over dinner on December 1 that kicked off the current round of discussions.

Trump believes that the United States has a stronger economy, and thus, he holds the upper hand. Being tough on China plays well electorally for him. No Democrat is going to campaign on being soft on China. For that reason, too, he will be in no hurry to strike any deal that does not look triumphant from a US perspective, providing the US economy holds up, and US consumers do not notice that they are paying up to an estimated $2,000 a year for Chinese products because of the US tariffs.

Xi’s position domestically remains strong, but the troubles with Trump provides scope to embolden internal critics The National Development and Reform Commission, sidelined by Xi’s centralisation of control generally and over economic policy in particular, and seen by Xi when he took power as controlled by other factions, is, tellingly, starting to show signs of recovering its standing.

The republication of old Xi speeches by Party theoretical journals is also a straw in the wind that Xi is in a position where the rectitude of his line on economic development needs reinforcing.

Xi has a delicate balancing act to pull off, none the less, rebalancing and deleveraging the economy while not letting trade frictions slow growth rapidly enough to put the main policy targets at risk. Meanwhile, for Chinese companies like Huawei, the race is on to develop indigenous technologies before their stockpiles of critical US components run out and expand sales to non-Western markets.

In that last regard, at least, the tide of economic history is on their side, albeit in the long run. Getting through the short term will be the rough bit on the trade side. But even if Trump gets his trade deal in timely fashion for the 2020 US elections, the struggle for technological supremacy between the world’s two great powers will continue long after.

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Huawei’s 5G Coins It In Despite Washington’s Objections

HUAWEI’S FIRST-QUARTER results suggest that the United States’s campaign against the world’s biggest telecoms equipment maker is having limited effect, especially outside the advanced economies.

The company has long denied Washington’s allegation that Beijing ultimately controls it and that its equipment could be used for espionage in the service of Chinese state security, the basis of the Trump administration’s campaign to prevent other governments from using Huawei’s 5G equipment.

Huawei says its income was 179.7 billion yuan ($26.8 billion) in January to March, a 39% increase on the same period a year earlier. It did not disclose its net profit but said it operated at an 8% net profit margin, slightly higher than in the first quarter of 2018.

It reported sales increases in all its three customer groups — carriers, enterprise and consumer customers. On the contentious 5G technology, it said it had signed 40 contracts with leading global carriers, and shipped more than 70,000 5G base stations, a number it expects to reach 100,000 by May. It says 2019 will be ‘a year of large-scale deployment of 5G around the world’.

In practice, only a handful of countries have heeded Washington’s exhortation to follow it in banning Huawei from their 5G telecoms network: Australia, New Zealand and Japan, all close US allies in Asia.

Europe, which will likely lead 5G rollouts — eleven EU countries have 5G auctions scheduled for this year and six for 2020, with 30% of its internet users expected to be on 5G by 2025 — has been more ambiguous in its response.

Denmark, Germany, Italy, Norway, Poland and the United Kingdom all have expressed concerns about the cybersecurity risks of contracting a firm with opaque links to Beijing. However, Belgium has declined to ban Huawei, saying it has found no deliberate technological compromises in its equipment that could be misused by China’s state, but it will keep the equipment under review. Germany has taken a similar line but is drafting quality and cybersafety standards for 5G suppliers and talking about a ‘no-spying agreement with China.

France is debating 5G legislation that would impose extensive security tests. The report of a Dutch government investigation into Huawei is due in May when the United Kingdom is also expected to make a final decision. London has repeatedly raised concerns about Huawei equipment and the firm’s ability to fix cybersecurity problems but also has one eye on a post-Brexit trade deal with China.

For all of Europe, keeping China, a critical trade and investment ally, on side while securing the Internet of Things devices and automated vehicles that 5G will enable, from malicious state and non-state cyber attacks will be a delicate balancing act, made harder still by the current unease of the transAtlantic relationship. Washington may ban US firms from working with any others, including European firms, who use Huawei technologies and equipment.

Brussels and EU member governments will try to keep the decision-making process on the technical level and not get sucked into the political dimensions that saw Meng Wanzhou, Huawei’s chief financial officer and daughter of its founder, Ren Zhengfei, arrested in Canada in December at Washington’s request on charges of bank and wire fraud in violation of US sanctions against Iran. (She denies wrongdoing.)

The European Commission’s recently published recommendations on 5G network cybersecurity rejected bans on specific suppliers (unnamed, but for which read Huawei) and told member states to come up with joint EU-wide security checks for firms building 5G networks in Europe by the end of this year.

While Europe will be an important beachhead for Huawei’s 5G equipment and offers a near-term market, the company is looking beyond Europe. Many parts of Asia, Africa, Latin America and the Middle East will transition from 2G/3G/4G to 5G over the next ten years. That is where Huawei’s future sales lie.

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China’s First-Quarter Growth Lays Base For Hitting 2019’s Target

FIRST-QUARTER GROWTH came in slightly better than expected at 6.4% (consensus estimates were for 6.3%), and unchanged from the final quarter of 2018, confirming that the targeted stimulus applied since the second half of last year is taking effect.

The combination of fiscal and monetary measures helped boost industrial production in March by 5% year-on-year and retail sales by 8.7%. Fixed asset investment increased by 6.3%.

Beijing is targeting growth for the year at between 6% and 6.5%.

The challenges remain balancing growth with deleveraging and the prospect of a slowing global economy. The outcome of the trade talks with the United States is the wildcard.

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