A New Twist To Trade Tariffs

THE SALES OF Chinese-made twist ties, of the sort used to seal a plastic bag or keep cabling neat, are so small to the United States, barely an estimated $4 million last year, that they do not show up as a separate line item in the trade figures.

However, the tariffs on them newly imposed by Washington are notable for another reason. It is the first successful application of countervailing trade tariffs in retaliation for currency manipulation.

Using trade law tools to address alleged currency malpractice has not been the norm in the United States. Furthermore, currency manipulation assessments have been the domain of the US Treasury, not the US Department of Commerce or the Office of the US Trade Representative. The Commerce department only assumed powers to sanction currency manipulation earlier this year, arguing that undervalued currencies harm US workers by allowing artificially priced imports.

The US Trade Representative, Robert Lighthizer, is an advocate of the approach. He has a Section 301 investigation into Vietnam for currency manipulation pending. That might have been intended as a dress rehearsal for a similar action against China in the Trump administration’s second term that now looks likely not to be.

The twist-ties ruling is preliminary. Final determination is due in February with the tariffs due to take affect in April. That leaves the matter sitting in the in-box of the incoming Biden administration in the United States.

However, the new US president’s team may be more preoccupied then with dealing with US tariffs on Europe’s proposed digital services taxes, led by France — unless the Trump administration’s trade officials can find some bigger trade issue with China to leave behind as they walk out the door.

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China’s Banks Grow Their Global Footprint Differently

Screenshot of IMF Working Paper, Banking Across Borders: Are Chinese Banks Different?

CHINESE BANKS ARE the largest cross-border creditors for almost half of all emerging market and developing economies. They now resemble banks from the advanced economies in their global reach.

However, are Chinese banks different from banks from other countries?

In their recently published IMF Working Paper, Eugenio Cerutti from the Fund and colleagues from the Bank of International Settlements (BIS) conclude that the answer is yes.

They find that whereas bank lending generally correlates positively with trade, foreign direct investment (FDI) and portfolio investment, Chinese banks’ lending in emerging market and developing economies correlates strongly with trade, but not with FDI. Furthermore, unlike other banks, it correlates negatively with portfolio investment.

Why this matters is that understanding the drivers of the fast-expanding global footprint of Chinese banks is critical for assessing potential risks and spillovers that could arise from crises in borrower countries, or even in China itself. Let us remember that in terms of total assets, China constitutes the largest banking system in the world and that four of the 30 largest global systemically important banks are Chinese.

BIS data shows that as of mid-2018, Chinese banks had made loans in 196 of 216 countries, accounting for 7% of total cross-border bank lending. Of 142 emerging market and developing economies, Chinese banks have extended credit in 135 of them, and 63 of them are the recipient of more from Chinese banks than from any other bank nationality. At 24%, Chinese banks’ share of cross-border lending to emerging market and developing economy borrowers is more than double that of Japanese banks, their nearest competitor at 11%.

These numbers are based on aggregating the cross-border claims extended by banks from China and the cross-border claims that are issued by their affiliates located abroad. Thus a nationality-of-ultimate-owner, rather than residency approach. Typically, only three-fifths of banks’ international lending is done out of their home country and only third of that to emerging market and developing countries, so including the affiliates avoids undercounting.

Cerutti and colleagues find, unsurprisingly, that the further the borrower is from the home country, the less ready all banks are to lend to emerging market and developing countries than to advanced economies. For Chinese banks, however, they find:

Chinese banks’ expansion resembles the global reach of banks from advanced economies when lending to emerging market and developing economies and these results turn out to be more pronounced when isolating claims denominated in US dollars. In fact, Chinese banks seem to perceive distance to their borrowing emerging market and developing economy counterparties as less of a barrier than other emerging market and developing economy banks. In that respect, they act more like US and European banks, even though most of the Chinese cross-border lending originates in state-owned banks and it is relatively more recent.

They also conclude that:

Chinese banks’ positive correlation between cross-border bank lending and trade with emerging market and developing economy countries stands out. It is much stronger than the trade-lending relationship exhibited by Japanese and European banks, and is again more in line with patterns exhibited by US banks. This strong positive correlation between bilateral trade and cross-border lending even prevails when considering the China-specific policy initiatives like the Belt and Road Initiative (BRI) or bilateral currency swap arrangements between the People’s Bank of China (PBOC) and other central banks.

On the other hand, unlike all other banking systems, past portfolio investment is negatively correlated with cross-border lending to emerging market and developing economy borrowers in the case of Chinese banks. This seems linked to China’s capital outflow restrictions and the fact that Chinese portfolio investment is mostly narrowly distributed within a few advanced economy countries. As a matter of fact, when lending to advanced economy borrowers, strong complementarities with portfolio investment emerge. There is only weak evidence on the relationship between Chinese FDI and cross-border lending.

A long- and a short-term question arise from the paper. First, will the current decline in trade due to the Covid-19 pandemic and trade tensions, lead to a decline in Chinese banks’ cross border lending? Given the correlation with trade, that would be sharper for Chinese banks than for others. Furthermore, given that much of the growth of the lending volumes of Chinese bank was driven by credits to low-income commodity exporters that had relatively clean balance sheets because of international debt-write off programmes, more of the same may look far less creditworthy post-pandemic.

Second, will Beijing’s expansion of its capital markets, particularly its bond markets, shift Chinese banks’ correlation between cross-border bank lending and portfolio investment closer to international means? If it does, it could thus increase even more both their total cross-border bank lending and global footprint.

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A US Plan Of Sorts To Counter China’s Plan

Screenshot of the cover page of the US State Department's paper The Elements of the China Challenge, November 2020

The US STATE DEPARTMENT has spent 50 pages explaining, as it sees it, China’s challenge to the United States, which could be boiled down to what would be an unsurprising one-sentence summary, China is executing its long-term plant to use its economic clout and growing military capability to dislodge the United States as the global hegemon and establish a new Beijing-led international order.

The echoes of the foundational paper written in 1947 by the US diplomat George Kennan as the United States entered its Cold War with the Soviet Union are, this Bystander assumes, intentional.

The Elements of the China Challenge lays out the ideological base of the Party’s ambition, some vulnerabilities that the State department believes China has, and a ten-point blueprint for how Washington and its allies should respond. This last is a mish-mash of a new multilateralism and America First unilateralism, and a divergence from the latter that would not have allowed publication earlier in the Trump administration, we suspect.

The intent is to lay down ‘sturdy policies that stand above bureaucratic squabbles and interagency turf battles and transcend short-term election cycles’. Those are admirable objectives in themselves. However, we leave it for others to decide if the document’s authors are aiming for the presumptive incoming Biden administration to be able to pick up the blueprint as a playbook without having to hold its nose, or whether what is by most accounts a beaten down State Department is just hustling to regain turf lost during the current administration.

What is striking about the document is what is not there. Having laid out entirely accurately the central role of economic might and technological development in China’s rise, the document’s ten-point prescriptions are light on economic and technological responses, beyond Mom-and-apple-pie aspirations to maintain US leadership in innovation and technology.

It also treats both nations’ stances as almost mechanical outcomes of their histories. Absent is full-blooded rhetoric about a clash of civilisations and ideologies that has previously been heard from within the Trump administration.

Meanwhile, former US Secretary of State Henry Kissinger, someone knows both China and what a Cold and, come to that a Hot War looks like, has called on the incoming Biden administration to restore lines of communication with China that frayed during the Trump years or risk a crisis that could escalate into ‘a catastrophe comparable to World War I’.

Kissinger told a Bloomberg conference that ‘the United States and China have never faced countries of a magnitude that is roughly equal with the other. This is the first experience. And we must avoid its turning into conflict.’ However, Kissinger feared that Washington and Beijing were ‘drifting increasingly toward confrontation’ with confrontational diplomacy.

Under a Biden administration that confrontation is likely to have a more multilateral aspect, which will get broad Congressional support. Today, Republican lawmakers on the Senate’s Foreign Relations Committee released a report calling for a more multilateral approach to confronting China with expanded help from Europe, the United Nations and other market-led democracies.

That, at least, aligns with prescription five of the State Department’s document.

However, US President Donald Trump plans to make an appearance on Friday during the virtual Asia-Pacific Economic Cooperation (APEC) forum, which is also due to be attended by President Xi Jinping. It is an event that Trump has shunned for three years. On the grounds of always expect the unexpected with this US president, US-China relations could look a lot better, a lot worse or just a lot different by Saturday.

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Going Too Fast Off-Balance Could Trip China’s Recovery

THE LATEST BATCH of high-frequency economic data from the National Bureau of Statistics raises a couple of red flags about the unbalanced nature of the recovery and a reminder that China cannot get too far ahead of the rest of the world’s steep climb up the cliff of recovery.

Retail sales gained 4.3% year-on-year in October but lagged industrial output, up 6.9% for the same period, while in January-October, private firms invested 0.7% less year-on-year, while state-owned firms invested 4.9% more. Goods imports were down 2.3% year-on-year in January-October. Exports gained 0.4% in January-October, but if the resurgence of COVID-19 cases in the United States and Europe continues, global demand will stall again, and with it, demand for China’s exports,

On the sunny side of the ledger, more than 10 million jobs were created from January to October. This is 1 million more than the annual target, and thus will tilt the balance of the argument about where growth should come from away from more stimulus and towards domestic consumption.

That is the long-term plan for the economy, but the longer short-term recovery remains unbalanced, the more the risk of financial instability grows.

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RCEP Provides Beijing With A Win-Win

Schematic representation of membership of the East Asia Summit, RCEP, ASEAN, the Quad and the CPTPP or TPP-11. Graphic: China Bystander.

CHINA IS ON the north-northwestern rim of the Regional Comprehensive Economic Partnership (RCEP). Yet it will be at the heart of the economic bloc that the trade agreement will cement.

RCEP is due to be signed on November 15 during the virtual twin ASEAN and East Asia Summits. The latter involves the ASEAN Plus Six — the six being China, Japan, South Korea, India, Australia and New Zealand — and the United States and Russia. As RCEP does not include India, the United States or Russia, it will have a summit of its own, too.

The 15 RCEP members (China, the ten ASEAN nations, and the four other countries with which ASEAN has free trade agreements, Australia, Japan, New Zealand and South Korea) account for approaching 30% of the world’s gross domestic product and one-third of its population. More significantly, they will likely account for most of the world’s economic growth in the coming decades.

Whether that will make this the Asian century rather than the Chinese century in succession to the long American century, is a matter for the future. For the present, it is the world’s engine of growth that will drive the recovery of the global economy from its Covid-19-induced recession.

India withdrew from the RCEP negotiations late on, concerned about both the impact of the dismantling of regional tariffs on its farmers and Chinese imports on its manufacturers. It may return at a later date. Most ASEAN countries would welcome that. Beijing will be indifferent, especially if border tensions with India remain.

The United States was never in, pursuing the TransPacific Partnership (TPP) instead as a geopolitical counterweight to the China-led RCEP as part of President Barak Obama’s ‘pivot to Asia’. President Donald Trump’s withdrawal from the TPP as soon as he took office in 2017 left its successor, the Comprehensive and Progressive Agreement for TransPacific Partnership (CPTPP, also known as TPP-11), a pale shadow of a competitor to RCEP, especially as Beijing moved purposefully to fill the resultant vacuum.

The Trump administration’s putative Indo-Pacific economic grouping based on private sector investment and the Quadrilateral Security Grouping (the Quad: India, Japan, Australia and the United States) never amounted to anything. Many ASEAN nations are uneasy about the Quad, uncomfortable with its security and military focus that pushes them towards choosing between Washington and their neighbour who is often their main trade and investment partner.

There is talk that the prospective incoming US president, Joe Biden, might join the CPTPP, but this Bystander feels it is too late; that horse has bolted. An alternative would be for the United States to seek to join RCEP, on the better-to-be–inside-the-tent theory. That would require a US-ASEAN free trade deal first.

There is more than symbolic significance in the fact that the RCEP is being signed before the next US administration takes office, even if it will not be implemented until the second half of 2021, following ratification by the signatories.

For Beijing, RCEP is an opportunity to write regional trade rules to its advantage, and also diversify its trade at a time of both unsettled relations with the United States and an eastward shift of the global economy’s centre of gravity. A win-win.

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US Announces New Investment Ban On Chinese Companies With PLA Ties

TODAY WAS DEADLINE day for ByteDance’s divestiture of the short-video-sharing app TikTok, or the United States would ban the app. It is not clear where things stand (update: the deadline has been extended) but US President Donald Trump appears to have moved on to a new executive order.

Today he authorised a prohibition on US investments in Chinese firms held to be owned or controlled by the military. Putting the brakes on the modernisation of the People’s Liberation Army is a particular policy objective of his administration.

The executive order bans US investment firms and pension funds from buying and selling the shares of 20 Chinese companies designated in June by the Pentagon as having military ties. Eleven more companies were added to the list in August. They are also subject to the investment ban, which takes effect on January 11.

The list includes well known companies such as China Mobile and China Telecom, both of which have US-listed subsidiaries.

US shareholders must sell existing holdings by November next year. If more companies are added to the proscribed list, US investors will have 60 days to divest the shares.

This latest measure is based on the International Emergency Economic Powers Act, which gives the US president wide scope to take actions to protect national security, and is becoming an increasingly favoured tool of the administration to counter China.

It follows confirmation of the arrival of US marines in Taiwan for training exercises. While the word is that this is far from the first time that US forces have trained their Taiwanese counterparts, it is the first time that it has been publicly acknowledged — unlike the big-ticket arms sales which tend to get the full hullabaloo.

Another visit by a senior US government official is also reportedly on the cards.

Taken together, and in the wake of Secretary of State Mike Pompeo’s pumping up of the Quad, this is starting to look like a president leaving a plateful for his successor or piling up his own plate in anticipation of a second term.

Either way, it is unlikely to go down well in Beijing.

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Silent Xi

PRESIDENT XI JINPING has not yet publicly congratulated prospective President-elected Joe Biden on winning the US presidential election. There is no hurry for Xi to do so, and every reason for him to bide his time.

The state of US-China relations could look much different by the time President Donald Trump leaves office on January 20, if, indeed, he is to do so. Trump has plenty of scope for action on the China file over the next two months should he chose to take it, particularly if he wishes to exact retribution for what he sees as Beijing’s part in the Covid-19 pandemic that doomed his re-election chances.

No one is expecting a fundamental reset of China-US relations under a Biden presidency; if anything, Biden’s capacity to draw together international allies and engage in US-led multilateralism presents Beijing with an additional challenge. But tone and tenor should change. Letting that settle as quietly as he can over the coming weeks looks to be Xi’s best bet at the moment.

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A Bleak Day In Hong Kong

Screenshot of LegCo press release about the dismissal of four lawmakers following NPC Standing Committee granting Hong Kong government new powers.

THERE IS LITTLE positive to say about the mass resignation by opposition lawmakers from Hong Kong’s Legislative Council (LegCo).

This followed the city’s government sacking four Legco members using the powers newly given to it by the NPC Standing Committee in Beijing to directly dismiss lawmakers whom it deems to have promoted the city’s independence or foreign interference in its affairs.

If the government had hoped to replace the more outspoken elements of the opposition with moderates, it would have been rapidly disabused of the idea by the resignations of all of the remaining 15 opposition lawmakers, who make up a large minority, in protest.

This further diminishes the already shrunken popular standing of LegCo, whose elections due in September were postponed for a year, nominally because of the Covid-19 pandemic but more likely because the opposition was likely to win a majority in the wake of the introduction of the new National Security Law.

All four of the dismissed legislators — Alvin Yeung Ngok-kiu, Kwok Ka-ki and Dennis Kwok of the Civic Party and Kenneth Leung of the Professionals Guild — had already been disqualified from running in the next election. This was the purported basis on which they could not continue to serve in the extended LegCo session.

Hong Kong’s chief executive Carrie Lam reportedly said that there would be no by-elections to fill the vacancies as the postponed elections were only nine months away.

The chances of popular protest will increase, but any such expression of discontent will be repressed by legal and police action.

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Beijing Reins In China’s Internet Giants

Screenshot of Alibaba web page, captured November 2020

CHINA’S PRIVATELY OWNED internet companies flourished in large part because they created a de novo area of the economy and thus had no state-owned competitors from the outset. That space is now being closed down, or at least being put under state sway.

New restrictions on the fintech sector led to last week’s abrupt suspension of Ant Group’s proposed blockbuster initial public offering and a public embarrassment of Jack Ma, its billionaire founder. This week, draft regulations have been announced that, when implemented (formally they are out for public comment), would curb monopolistic practices by internet platform and e-commerce companies such as Alibaba Group, also founded by Ma, and Tencent Holdings, the operator of We Chat founded by another of China’s richest men, Pony Ma.

The corporate behaviour that would be proscribed includes collusion to share sensitive consumer data, alliances to squeeze out smaller rivals and to subsidise services at below cost to eliminate competitors. The internet platforms may also have to apply for an operating licence if they use the governance structure known as a Variable Interest Entity, which is standard for internet companies as it lets them have foreign investors and list on overseas exchanges but exists in something of a grey area when it comes to Beijing’s blessing.

After a meeting earlier this month between antitrust and cyberspace officials and two dozen tech giants, authorities issued a statement giving fair warning of the new mood:

Internet platforms are not outside the reach of antitrust laws, nor are they the breeding ground for unfair competition.

Nothing will happen immediately. The State Administration of Market Regulation watchdog is taking public comments until the end of this month. As always, it will be the application of the administrative rules once the regulations are formalised that will matter.

The State Council has also said new regulations on internet transactions will be coming next year. Yet the message from the Party to some of the country’s most powerful companies and private billionaires is clear. The bonus for authorities is that the new rules should also bring some protections for consumers and small businesses, which will be popular.

China is far from the only country struggling with the power and disruptive horizontal spread of big tech. The EU and the United States are facing variants of the same issue.

However, in China, the Party has the additional complication of having to stop the horizontal spread of the platforms into areas, such as banking, in which state-owned enterprises are not only dominant but also essential policy tools.

Authorities also have to balance promoting internationally competitive Chinese tech companies with keeping them under firm control at home — a microcosm of what will be one of the most significant challenges for the Party in moving the country up the development ladder to the innovation-based economy.

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IMF Raises A Virtual Eyebrow To China’s Financial Risks

BENEATH THE BALLYHOO of the US presidential election, the International Monetary Fund wrapped up its Article IV Mission staff visit to China (conducted virtually this time, of course). Its report confirms the IMF’s recent upgraded projections of 1.9% GDP growth this year and 8.2% next with what are now the new-normal caveats.

While the recovery is advancing, growth remains unbalanced as it relies heavily on public support while private consumption is lagging. The outlook faces downside risks, stemming from rising financial vulnerabilities and the increasingly challenging external environment.

The report indicates that moderately expansionary macroeconomic policies in 2021, supported by a shift from public to private demand, will help to balance the recovery better. It would also like to see slightly expansionary fiscal policy with a shift from spending on infrastructure towards strengthening social safety nets and promoting green investment.

It would add further structural reforms to the policy mix, too, including expanded opening up of domestic markets, reform of state-owned enterprises and ensuring competitive neutrality with private firms while promoting green investment and more robust social safety nets.

Nothing there that deviates from the party line of either the IMF or China’s economic policymakers. However, the Fund does seem more exercised about the financial risks than it is wont to display in public.

As the recovery takes hold, exceptional financial support measures to avoid a credit squeeze should be replaced with proactive efforts to address problem loans and strengthen regulatory and supervisory frameworks. A comprehensive bank restructuring framework will lower systemic risks and continue de-risking.

All of which are coming, if in a more piecemeal fashion.

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