China’s First-Quarter GDP Growth Highlights Rebalancing Shortfalls

MORE UNRUFFLED WATERS for the Chinese economy–at least on the surface. First-quarter GDP growth, as reported by the National Bureau of Statistics, came in at 6.9% year-on-year.

That is its fastest pace in six quarters and the first back-to-back quarterly increase in GDP in seven years. The first-quarter number is also well in line with the 6.5% official annual growth target set last a month.

However, a closer look at the components of growth suggests that deeper currents swirl dangerously, and particularly that the old-school model of state investment-led growth still holds sway. Fixed asset investment in the first quarter, up 9.2%, was an acceleration from 2016’s 8.1% growth rate. Infrastructure investment rose by 23.5% while real estate development was up 9.1%. Industrial production also rose.

Worryingly for the rebalancing of the economy towards greater domestic consumption, retail sales growth slowed to 10% in the first quarter from 2016’s 10.4% expansion.

US President Donald Trump’s backing off from threatening a trade war with China because he needs Beijing’s cooperation in dealing with North Korea has provided breathing room for China’s economy, which it appears to be exploiting with some gusto.

The stimulus that Beijing has given the economy has led the International Monetary Fund to raise its forecasts for China’s growth this year and next in its latest World Economic Outlook to 6.6% and 6.2% respectively. That is 0.1 and 0.2 percentage points higher than its January forecasts and 0.4 and 0.2 percentage points higher than its October 2016 forecasts.

The question remains, however: how sustainable can this pace of growth be long-term without rebalancing taking more substantial hold and the problem of excess leverage being tackled?

As the IMF puts it:

The medium-term outlook, however, continues to be clouded by increasing resource misallocation and growing vulnerabilities associated with the reliance on near-term policy easing and credit-financed investment.

At some point, as prime minister Li Keqiang again emphasised, Beijing will have to switch growth gears. That will mean unwinding its most recent stimulus–very carefully. But that is unlikely to start happening until after President Xi Jinping has consolidated his political control at the critical Party plenum later this year.

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The Sound Of Another Trump Flip-Flop

100 yuan notes

IT IS ALL going rather swimmingly for China with the United States right now. Following the happily smooth summit between President Xi Jinping and US President Donald Trump in Florida last week, the US president has said that China is not manipulating its currency.

During his election campaign last year, Trump had repeatedly accused Beijing of artificially driving down the value of the yuan to increase its export competitiveness, and had said he would label China as a currency manipulator on his first day in office.

His about-turn pre-empts the US Treasury’s forthcoming biannual report to Congress on the foreign-exchange policy of the United States’ principal trading partners: being designated a currency manipulator by the US Treasury legally triggers US Congressional sanctions against the offending country.

In the Obama-era, the Treasury had always found a way to avoid that, but the risk to China once Trump won the election last November was acute.

Trump now accepts that China has not been manipulating its currency for a while. His need to work with Beijing on dealing with North Korea — regardless of his previous comments that the United States would take unilateral action against Pyongyang if China failed to rein in its neighbour as Washington expected — appears to have helped clarify his vision.

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China-America First

US President Donald Trump and China's President Xi Jinping walk in the grounds of Trump's Mar-a-Lago resort in Florida, April 2017.

DONALD TRUMP MARKED his first meeting as US president with the visiting President Xi Jinping with a display of naked American power, Cruise missile strikes against an airfield in Syria in retaliation for the Assad regime’s chemical attack on a hospital. The timing was coincidental, if opportune, but it was an act of defining and defending national interest of which only one of the two superpowers is currently capable, let alone comfortable, in undertaking.

The signalling was palpable. Moreover, it was an action that also had many observers quickly connecting the dots to North Korea, a country Trump had threatened unilateral US action if China did not start to exert the control over its ally that Washington believes it can and should.

Xi’s visit was always going to be scrutinised for the subtle signs of a power play between the two men. The ‘optics’ would be as important as the outcomes. However, it also carried considerable domestic political risk for Xi, making the trip to the United States early in Trump’s presidency (and to a golf course resort, at that) with all the risk of Trump’s unpredictability providing a loss of face for no very certain reward. The deflection of much of the world’s attention elsewhere would not necessarily have been unwelcome.

It is hard, though, to imagine the trip was undertaken without assurances there would be some return. The pre-trip speculation was of an agreement, if longer on affirmation than detail, on a joint reset of tackling North Korea’s nuclear ambition and some public US affirmation to Beijing over arms sales to Taiwan and the ‘one China’ policy.

In the event, the publicly announced outcomes were more modest, though likely of Beijing’s design, a 100-day plan to discuss trade talks directed at boosting US exports and reducing Washington’s trade deficit with China, and an invitation to Trump to make a state visit to China, which the US president accepted for a date to be arranged.

Trade is the lowest-hanging fruit for restoring relations between the two countries to an even keel. The direction of travel favours more US exports to China, especially once the rebalancing of the economy to more domestic consumption takes hold, while the One Belt, One Road initiative, to which the United States has now been asked to join, offers the prospect for more business and investment than China can handle alone.

Difficult issues — North Korea, Taiwan, the South China Sea — offer scant prospect of early harvesting.

The agreement to trade talks is positive, in the sense that it shows Trump can be steered away from his fiery anti-China rhetoric of the campaign trail last year. Further evidence that the reality of office is taking hold over the rhetoric of candidacy is that the Trump administration has so far declined to carry through on pre-election threats to brand China a currency manipulator or impose punitive tariffs on Chinese exports to the United States.

That the US president said that he was willing to further strengthen cooperation with China in economy, military affairs and people-to-people exchanges and support China’s efforts in pursuing corrupt officials who had fled China with ill-gotten gains will all be taken as evidence of success by Xi’s team, whose overarching goal was to restore stability and order to the relationship so they can manage it. Trump’s description of his personal relationship with Xi as “outstanding” will have been a bonus, though Trump will likely find eventually that that friendship will come with trappings.

State media have been quick to present the Florida summit as continuation of policy between the world’s two leading nations. “Expanding win-win cooperation” and “managing differences” and developing “dialogue and cooperation between China and the United States in such areas as diplomacy and security, economy, law enforcement and cyber security, as well as social and people-to-people exchanges” represents a good outcome for Xi, even if it is not the language of concrete gains for American manufacturing workers that reverse trade deficits and job losses that Trump had previously told his blue-collar economic nationalist supporters he laid squarely at China’s door.

The harsh truth is that it is not that group that stands to benefit from growing US trade with China. The winners will be the same ones that were the winners from globalisation.

The longer-term win for Xi is that summit has steered one of the world’s most important relationships, that between China and the United States, further in the direction of an arrangement of international affairs that is based on bilateral relationships between great powers than the post-World War Two system of international rules — something Xi has previously described as “a new model of great power relations” and which aligns with China’s efforts to construct a parallel architecture for global governance with itself in the centre.

The US president, who seems to prefer to focus on winning battles rather than wars, may well not realise what his guest has walked away with.

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China’s Good Muslims And Bad Muslims

IN 2015, AUTHORITIES in Karamay, the oil town in the far north of Xinjiang, China’s troubled far-west province, temporarily banned men with big beards or anyone wearing Islamic clothing such as hijabs, niqabs and burqa from travelling on the city’s buses.

The restriction came a week after an attack in which nearly 100 people, including 59 of the attackers, branded terrorists by authorities, had died, and in the midst of a year-long anti-terrorism crackdown announced in the wake of a deadly bombing attack in the provincial capital, Urumqi, in May earlier that year.

Now, following a futile attempt to discourage beards and veils, Beijing has announced blanket ban across Xinjiang on “abnormal” beards, the wearing of veils in public places and, incongruously, the refusal to watch state television.

The 15 specific measures introduced categorise as ‘extremism’ what could be as easily described as religious observance as proselytising. State media describe them as drawing a clear line between legal religion and illegal religion, providing legal support for protecting the former and purging the latter.

China is far from alone in taking this tack towards its domestic Islamic extremists. France, Belgium the Netherlands, Bulgaria and Egypt are all countries that have imposed varying degrees of prohibitions on face-covering dress. However, as measures to counter religious extremism, China’s latest regulations seem more likely to alienate further the Uighur Muslim population that already feels their culture is under attack from Han Chinese settlers than to reduce the threat levels perceived or actual.

Beijing has been fighting a low-level but increasingly violent insurgency in its natural-resources-rich western reaches for decades. The 8.4 million-strong Uighur minority in Xinjiang, mostly Turkic Sunni Muslims, though far from universally supportive of the tiny separatist groups that would like to re-establish the republic of East Turkestan, resent the growing Han dominance of the province, which was once more four-fifths Uighur but is now dominated by Han Chinese.

Uighurs feels their culture and economic prospects being increasingly diminished, and especially since the anti-Han riots in Urumqi in 2009 that left some 200 dead, initiating the current cycle of crackdowns. That sense of marginalisation has increased since not just by the paramilitary policing that has become part of everyday life but also by the squeezing of the native population out of Party and government jobs, where Islamic observance can be most effectively banned.

In what appears to be a visible defiance of Chinese control, Uighur women have taken to wearing veils, although Uighurs have traditionally not practised strict forms of Sunni Islam that demand them.

However, the same trend is also being seen among women from China’a largest Muslim group, the Hui, who are treated much differently by authorities than Uighurs. Hui are not concentrated in one region but spread out across the country; though of Arab-Persian-central Asian descent they are Chinese-, not Turkic-speaking and are often physically indistinct from Han Chinese. Crucially, they do have any separatist ambitions.

The contrast between the freedom of religious expression for Muslims in central and eastern China and the tight strictures on Uighurs in Xinjiang is striking, and a marker of the difference of treatment for those groups that assimilate and those that do not.

This Bystander has noted before that China’s anti-terrorism policies are based on the same techniques as Beijing uses to crackdown on political dissent, which may betray a fundamental misunderstanding of the problem being faced.

We have also noted the shortcomings of such an approach when it comes to winning hearts and minds. Religious restrictions only serve to feed a vicious cycle of repression and violence. If the aim of counter-terrorism policy is to alleviate the conditions and reduce the underlying factors that give rise to radicalization and recruitment among the domestic population, then characterising all Uighurs as being somewhere on the terrorist/separatist spectrum is not going to achieve that.

Violence has flared up in recent months in Xinjiang’s southern Uighur heartland after a relatively quiet period. Amplified by a fear of the return of battle-hardened fighters from Iraq, Syria and Afghanistan, this has brought a large tightening of security, epitomised by President Xi Jinping’s call for Xinjiang to be surrounded by a “great wall of iron”.

However, while the Party maintains tight controls over foreign religious influences in the country, there is growing physical evidence of more conservative Arab countries such as Saudi Arabia funding the construction of mosques and schools in China, particularly those in the Salafist tradition, which might turn even China’s assimilated Hui Muslims more religiously conservative with unknown consequences.

China has somewhere between 20 million and 40 million Muslims. The official census figures veer towards the lower end of that range, but even that would put China in the top 20 of Islamic countries, though as a proportion of the total population it is tiny, less than 2%.  In future, Beijing may have a different Islamic issue to confront, but for now, it frames the one it has in Xinjiang in the same context as Tibet and Taiwan — and that may render it unsolvable in the only way it knows how, a combination of coercion, bribery and absorption.

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Lam Lacks Much Room For Manoeuvre

Carrie Lam, seen at the Asia Society, New York on June 9, 2016 when she was still Chief Secretary for Administration of Hong Kong. Photo credit: Elsa Ruiz/Asia Society. Licenced under Creative Commons.

CARRIE LAM, HONG KONG’S newly elected chief executive (seen above), has a nigh impossible task in satisfying the desires and wishes of both her masters in Beijing and her constituents in Hong Kong, or more precisely, those who would be her constituents had they a vote.

It is equally nigh impossible to imagine that Lam will not prioritise those of the first over those of the latter. She has said that ministers in her administration would “be in charge of their own work” rather than taking their cue from Beijing’s local representatives. However, even if they are not following the script word for word, they will certainly follow the gist.

First, though, she will need to repair the damage done by her predecessor, the hapless and unpopular CY Leung. His five years in office were marked by civil discontent over political reform and an increasing chaffing on Beijing’s part at Leung’s inability to quell divisiveness that was evident not only on the streets of Hong Kong.

As Leung’s chief secretary, Lam will arrive carrying some of her predecessor’s baggage. However, before that, she was a well-regarded career civil servant. That may stand her in good stead, particularly with the Beijing-friendly business establishment whose support she will quickly want to consolidate, probably through more deregulation and tax reform. They (and Beijing, which backed her) will expect her administration to be more competent than that of Leung. She also comes without the scandals that dogged his term in office.

Winning over the opposition in the Legislative Council let alone outside it will be a different matter. It doubts that Lam will compromise on the key political reform issues that stalled under Leung. Possible education reform and more construction of affordable public housing — much needed though it is — will not be enough to offset that.

Lam also suffers from the constraint on every Hong Kong chief executive, the absence of a popular mandate. Hong Kong’s population of more than 7 million is reduced to an electoral committee of 1,194 voters that is more, if not entirely, representative of its pro-Beijing business establishment than the overall population.

A greater constraint lies 2,000 kilometres to the north. Beijing will not tolerate any consideration of the political and constitutional reforms the opposition wants. Independence is no more on the cards for Hong Kong than it is for Taiwan.

Many Hong Kong residents, though, while realistic about the realpolitik of their situation, are protective of the autonomy granted to them for 50 years under the ‘one country, two systems’ agreement by which the United Kingdom returned its colony to China in 1997. They do not appreciate the efforts of Beijing is making to accelerate the full integration of Hong Kong into China before 2047.

The fear is that many of the protections and freedoms granted under the Basic Law, such as access to the courts, private property rights and freedoms of speech, association and assembly will start to erode at the same pace.

As they have shown, some at least are ready to take to the streets to defend those rights. Even worse than an independent Hong Kong, by Beijing’s lights, would be a Chinese Hong Kong that harboured a centre of opposition to the Party. Lam’s term of office will take Hong Kong to the half-way mark to 2047. The trick she will have to pull off is knowing how much reform to allow to sustain popular trust in her administration without pointing even a toe in either the splitist or dissident direction.

Hong Kong’s descent into being just another corner of China of middling importance continues.

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China’s Domestic Counterterrorism May Fail Against Global Jihadis

‘RESTIVE’ IS THE adjective favoured in the popular prints to qualify Xinjiang. President Xi Jinping’s call for the far western autonomous region to be surrounded by a ‘great wall of iron’ suggests the presence of a greater threat.

As does Cheng Guoping, state commissioner for counterterrorism and security.

He says that the Uighur separatists that comprise the East Turkestan Independence Movement are the China’s ‘most prominent challenge to social stability economic development and national security’.

Xi and Cheng’s comments follow the most recent show of force in Xinjiang’s capital Urumqi and other cities such as Kashgar, involving some 10,000 paramilitary police with accompanying armoured vehicles and attack helicopters.

China has been fighting a sporadic and low-level civil war with Uighur separatists for decades that on occasion erupts into deadly terrorist attacks across China. These attacks, usually involving a car bomb or knifings, have become more frequent, dispersed and indiscriminate since 2012, though the number, as far as can be determined, is small.

A May 2014 attack in Urumqi killed 43 and wounded 90. The province simmers with unrest as the now minority Muslim population bristles under what it considers to be culturally and religiously repressive government by ethnic Han Chinese.  Yet there is little on the surface to suggest that the local threat level has suddenly escalated to the degree these actions and Xi and Cheng’s comments would imply.

However, Beijing now sees external as well as internal threat. That is challenging its notions of how to deal with ‘terrorists’.

Three recent videos, purportedly made by the Islamic State group and an al-Qaeda affiliate, raise the spectre that China could import the radical Islamic extremism that it has so far avoided. Beijing has long used the bogeyman of radical connections between Xinjiang separatists outside and the Muslim Uighur minority within to exert repressive domestic control.

The 30-minute video that surfaced in February, in particular, gives some weight, at last, to those warnings. It shows Uighurs training in Iran and threatening that blood would ‘flow in rivers’ in China — although also in Russia and the United States.

There are well-documented reports of Uighurs having gone to Afghanistan, Syria and Iraq to fight for radical Islamic groups. The numbers of Chinese ones — 100-150 on the estimates we have seen — scarcely seem to justify the extraordinary reaction of authorities, although one of the Islamic State videos includes what is thought to be the first instance of Uighur-speakers declaring allegiance to Islamic State and its self-proclaimed caliphate.

One question is whether Beijing’s fears are overblown and its response proportionate; another is whether it can adapt a counterterrorism approach developed in response to domestic concerns to international terrorism.

China, unlike the United States and Russia, has little by way of a military footprint in West Asia thanks to its profession of non-interference in the affairs of other countries. It is not involved in either the US or Russian/Iranian-led actions against Islamic State in Syria or Iraq, the usual prerequisite of Islamic State acts of terror against a country.

A hostage taking and killing in 2015 is the sole known case involving targeting a Chinese citizen, although seven Chinese were among the 20 killed in a bomb attack on Bangkok’s Erawan Shrine and three Chinese citizens were among the 27 who died during an attack on the Radisson Blu Hotel in Mali’s capital, Bamako, both the same year.

However, China’s growing global footprint and expatriate labour force, and especially the expansion of ‘One Belt, One Road’ across Eurasia, makes it almost inevitable that it would eventually be unable to avoid coming into harm’s way from international jihad.

As we noted recently, China and Afghanistan share a short border through which the forces Beijing so fears could enter the country directly. China border-police controls are keeping it under close surveillance in the event that, as Islamic State loses territory in Syria and Iraq, the group falls back to being an insurgent guerrilla force and its leaders and others of global jihadist movements relocate to Central Asia and Afghanistan, far too close to China for Beijing’s liking.

However, the capacity of Islamic State to coordinate and stage large-scale attacks inside China will be limited. Furthermore, Beijing’s already-fierce repression in Xinjiang and tight censorship everywhere mitigates the caliphate’s strategy of inspiring lone wolves and affiliated terror groups through a radicalising narrative of domestic marginalisation of Muslim minorities.

This has had some success in Europe and the United States, but beyond the difficulty in having the message penetrate the Great Firewall, disaffected Muslim minorities do not exist in China in the widespread urban pockets they do in, say, France, Belgium and Germany.

Hitherto, China has dealt with the threat of domestic terrorism, which it considers one and the same as separatism and extremism, with a three-pronged strategy: enhancing regional economic growth; stronger internal security; and strict controls over ethnic and religious activities. All have been heavily applied in Xinjiang with the additional factor of ethnic Han inward migration.

Beijing’s likely response to the new external threat that it sees to its emerging core national interests will be to crack down even harder on the one place it knows there are a lot of Muslims. Already law regulates and constricts religious practices and public life in Xinjiang, such as growing beards, wearing the veil and fasting during Ramadan — all symbols, the authorities say of “Islamic extremism” (like in the US, ‘Muslim’ and ‘terrorist’ will quickly become conflated).

Since last year Xinjiang residents who have a passport are required to turn it into local police, to whom they must reapply for its return if they want to travel abroad. There were reports last year of another Muslim minority, Kazakhs living in border districts of Xinjiang, being told to give DNA samples and fingerprints when applying for travel documents. Uighurs who speak in favour of greater political freedoms risk imprisonment.

These measures are likely to be both more tightly enforced and extended, in the name of “maintaining social control” in the resource-rich western marches that give onto the key overland routes through Central Asia to the Middle East and Europe.

However, the One Belt, One Road dimension and the need to protect the growing numbers of Chinese citizens abroad is evolving Beijing’ security interests. Its responses will have to follow suit. It has been exchanging information on Islamic State with the United States, with which it also cooperates on technical matters to counter terrorism such as port security and anti-money laundering.  (Whether and how that will continue with the Trump administration remains to be seen.)

China has also been talking to Pakistan and the Afghan government about ways to promote stability in Afghanistan, and within the Shanghai Cooperation Organization’s Regional Anti-Terrorism initiative. More controversially, it has also pushed for groups it considers to be terrorist to be added to international and national terrorist watch lists.

Beijing slowly recognises that many of the terrorism challenges that it faces have roots beyond its borders and thus will need it to participate in international counterterrorism efforts. However, its has so far shown that it prefers bilateral attempts to apply its three-pronged strategy with economic, policing and security aid to other countries, but that at best has to be done at arm’s length or get China involved in the internal affairs of countries in ways that run counter to its non-interference doctrine.

As it tries to figure that out, its instinctive reaction will still be to over-react at home by doing more of what it knows how.

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Beijing’s Pyongyang Puzzle

IT IS UNUSUAL for Beijing to make public what has previously been a private suggestion that the United States stops its annual two-month military exercises with South Korea in exchange for North Korea halting its nuclear and missile programmes.

It is a trade-off that Washington and Seoul have equally publicly rejected, to no one’s very great surprise. But it indicates a growing sense of urgency on Beijing’s part about the situation on the Korean peninsula especially given the policy vacuums in both Washington and Seoul caused by the new Trump administration and the expected imminent impeachment of President Park Geun-hye respectively.

Pyongyang has said that the four missiles it launched earlier this week were a test strike against US bases in Japan. Provocative language. The same day, the first components of the THAAD missile defence system arrived in South Korea — a deployment seen similarly provocatively in Pyongyang but also in Beijing.

Beijing’s denial of reports of retaliatory pressure on South Korean businesses convinces few.

Meanwhile, the shadow of February’s fatal attack on North Korean leader Kim Jong-un’s half-brother, Kim Jong-nam, at Kuala Lumpur airport continues to fall widely. If, as is widely suspected, it was a North Korean hit, and one involving chemical weapons,  then the Trump administration may move to reverse President George W Bush’s 2008 delisting of Pyongyang as a state sponsor of terrorism.

That, in turn, would dash the hopes of the likely next government of South Korea that the Trump administration may be more willing to enter dialogue with North Korea. On the campaign trail, candidate Donald Trump had said he would be prepared to meet Kim Jong-un, though he has not repeated the offer as president.

The next South Korean government, whoever leads it, it likely to return to the ‘sunshine’ policy of greater engagement with North Korea than the current scandal-embroiled one.

Some evidence is now emerging that the Obama administration was quietly taking a harder line against the North than appeared on the the surface, cyberhacking North Korean missile launches last year, with some success, in retaliation for the believed North Korean hacking of Sony Pictures in 2014. 

However, the Trump administration, in the absence of a better shaped policy, has mainly fallen back on browbeating China to do more to rein in its neighbour, a capacity it may not have, or at least to the degree Washington believes. For its part, China, under whose protection Kim Jong-nam had lived in Macau and Beijing, is hopeful that diplomacy can replace stand-off and the unsettling uncertainty that goes with it.

Last month, it suspended coal imports from North Korea until the end of this year, a hefty blow to North Korea’s revenue as it accounts for two-fifths of the country’s export earnings, and the toughest sanctions China has imposed to date. Beijing had previously been using a ‘living-standards’ loophole in the UN sanctions against North Korea to sustain the coal trade despite its formal adherence to them.

That it has now changed its stance on this indicates both the frustration of many Chinese officials at what looks like an increasingly anachronistic ally in Pyongyang and their impotence to do more.

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