China’s New National Security Law Emits An Icy Blast

CHINA HAS PASSED a National Security Law that sweeps a broad range of economic, political and social activities within its remit. The new legislation is far more all-encompassing than the counter-espionage law that it replaces. Pretty much anything Beijing wants to consider as a matter of national security it now has the legal footing to do so.

That can include ideology and culture, energy security, economic development, information, financial stability and just about everything in between. Civil rights campaigners have expressed disquiet about China’s growing crackdown on activism and dissent. Those concerns are only likely to be amplified by forthcoming counterterrorism and foreign NGOs legislation.

However, the greatest impact of the new law could be felt by companies. It requires that internet and information systems must be “secure and controllable” by the government. That makes foreign financial firms and IT companies extremely uncomfortable, but all foreign firms should be uneasy.

Much will depend on how discriminating China chooses to be in implementing the new National Security Law. Many ministries and agencies can make use of it to pursue policy objectives, including the promotion of domestic national champions. Some parts of government may use the new law aggressively, others sparingly.

The selectiveness of application can give foreign companies the impression that they risk having the law brought down on them seemingly randomly. That, in itself, will have a chilling effect.

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Drought Diplomacy In North Korea

North Korean leader Kim Jong Un visits Farm No. 1116, under KPA (Korean People's Army) Unit 810, in this undated file photo released by North Korea's Korean Central News Agency (KCNA) in Pyongyang on June 1, 2015. KCNA

CORN AS HIGH as Kim Jong Un’s thigh. That, at least, is what the picture above released by North Korea state media on June 1 shows.

The reality is likely to be different.

The isolated regime is suffering its worst drought in a century — probably its fourth ‘worse drought in a century’ of the past decade. Pyongyang’s news agency, KCNA, reported last week that paddies in the main rice-farming provinces of Hwanghae and Phyongan were drying up for lack of rain. Food supplies, never plentiful, are now at risk of falling — again — to the level of famine.

The devastation wreaked on the economy by the drought s compounded by the fact that 50% of the country’s electricity is generated by hydropower. Reports finding their way to this Bystander suggest that most parts of the economy are already feeling the effect of power shortages.

North Korea was hit by severe and fatal famine in the 1990s and relied on international food aid to get through. However, Pyongyang’s suspicion of humanitarian workers and reluctance to allow independent monitoring of food distribution, makes international agencies reluctant donors.

Relations between Beijing and Pyongyang are arguable at their lowest ebb. China even rebuffed North Korea’s putative interest in joining the Asian Infrastructure Investment Bank. Nonetheless, China’s foreign ministry said last week that the country was willing to help its drought-stricken erstwhile ally avoid a humanitarian disaster.

One set of questions is what price, if any, Beijing can extract from Pyongyang in return over its controversial nuclear program, and whether Pyongyang is ready to grasp an excuse providently offered to it by nature as an opportunity to back down from the nuclear tests and missile launches that have brought international sanctions down on it.

Another is whether Pyongyang can get food aid from Russia or Cuba, both places recently visited by senior North Korean officials, as an alternative to China, and even whether the regime is over-egging the pudding in regard to the severity of the drought. Last year, according to North Korea’s news agency, food production increased by 48,700 tons compared to 2013 — regardless of reports of severe drought.

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Zhou Yongkang Gets His Preordained Day In Court, Life Imprisonment

THE TIANJIN MUNICIPAL No. 1 Intermediate People’s Court has sentenced Zhou Yongkang to life imprisonment. The ruling follows the court’s conviction of the former head of the security apparatus on charges of bribery, abuse of power and disclosing state secrets.  The short trial was held behind closed doors on May 22nd, state media report.

Neither the verdict nor the sentence handed down on the most senior figure to be brought low by President Xi Jinping’s anti-corruption campaign comes as much of a surprise to this Bystander.

Zhou’s protege was the disgraced Chongqing Party boss Bo Xilai, who challenged Xi for the leadership. Bo is now in prison following his wife’s murder of British businessman Neil Heywood and a slew of bribery, embezzlement and abuse of power convictions. The charges against both men were narrowly economic, not specifically political.

However, for all the new leadership’s embrace of rule by law, both cases look a lot like politics by other means.

Zhou is the highest ranking Party official ever to have been found guilty of corruption. His trial broke the Party’s unofficial rule that the highest level officials don’t get prosecuted whatever their crimes. The public message may be that no official is above the law, but the internal one will be that no official is above Xi’s ever-growing authority.

Recognition of that may well mean than Zhou is the last ‘big tiger’ that will be netted by Xi’s anti-corruption campaign. Plenty of flies to be swatted yet though, and also some small tigers if they stand in the way of Xi’s reform plans.

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Cyber And Space, More Than Blue Water, Next Theatres Of War

 

Photo Credit: Flickr/Times Asi. Licenced under Creative Commons. China’s conventionally-armed ballistic missile, the DF-21C.CHINA HAS BEEN reclaiming land for the deployment of dual-use facilities such as radar stations and landing strips in the disputed waters of the South China Sea for a while. Long-standing readers may recall this 2012 photograph of a radar station at the Zhubi reef in the Nansha Islands (the Subi Reef in the Spratly Islands to much of the rest of the world).

Chinese fishing fleet at Zhubi Reef, South China SeaHowever, the rhetoric around the reclamation — and the reclamation itself — has been ratcheted up in recent weeks. Washington’s new defense secretary, Ashton Carter, is among those recently weighing in to air his concerns. Those of China’s regional neighbours have also been well and repeatedly advertised.

Beijing’s recently released new defense strategy document will do little to calm those concerns. While to this Bystander’s eye, the document does little more than codify developments that have been in train for sometime, explicitly laying out the greater priority China is placing on its navy and “open seas protection” makes a statement in more senses than one.

There is no doubt that China is modernizing its navy to ensure its access to open sea and its ability to defend its sea lanes beyond. Plans for new aircraft carriers, destroyers and nuclear-power subs bear ready witness to that. But for all its rapidly rising defence budget, Beijing still has a long way to go before it can match the capabilities of Washington’s blue-water fleet.

The United States will continue its Asian ‘pivot’ and, more particularly, military overflights to undermine the notion that land reclamation establishes sovereignty over the artificial islands created in those waters — ‘meddling in South China Sea affairs’ by Beijing’s lights, which is one of the risk factors for ‘security and stability along China’s periphery’, as the new strategy document puts it.

However, it is easy to be distracted by China’s naval build-out from the the other priority areas that the new strategy document highlights. The new frontiers of military competition are, to Beijing’s mind, outer space and cyber warfare. The new strategy document puts it thus:

The world revolution in military affairs is proceeding to a new stage. Long-range, precise, smart, stealthy and unmanned weapons and equipment are becoming increasingly sophisticated. Outer space and cyber space have become new commanding heights in strategic competition among all parties. The form of war is accelerating its evolution to informationization. World major powers are actively adjusting their national security strategies and defense policies, and speeding up their military transformation and force restructuring. The aforementioned revolutionary changes in military technologies and the form of war have not only had a significant impact on the international political and military landscapes, but also posed new and severe challenges to China’s military security.

We have noted before China’s ambitious space plans, and the opportunities they provide for developing dual use technologies. The new strategy document promises:

China will keep abreast of the dynamics of outer space, deal with security threats and challenges in that domain, and secure its space assets to serve its national economic and social development, and maintain outer space security.

Earlier this year, there was confirmation of the poorly kept secret that China has both military and state-security-services run cyber-warfare units. Previously Beijing had dismissed all suggestions made in Washington and Brussels that China was behind repeated cyber attacks on U.S. and European targets. Indeed, its sees itself as more hacked than hacker:

Cyberspace has become a new pillar of economic and social development, and a new domain of national security. As international strategic competition in cyberspace has been turning increasingly fiercer, quite a few countries are developing their cyber military forces. Being one of the major victims of hacker attacks, China is confronted with grave security threats to its cyber infrastructure. As cyberspace weighs more in military security, China will expedite the development of a cyber force, and enhance its capabilities of cyberspace situation awareness, cyber defense, support for the country’s endeavors in cyberspace and participation in international cyber cooperation, so as to stem major cyber crises, ensure national network and information security, and maintain national security and social stability.

In the case of international cyber cooperation, China has already been working more closely with Russia on cyber operations further extending Beijing’s strategic cooperation with Moscow.

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China’s State-Owned Debt Problem

WHEN, AS IS expected later this year, the U.S. Federal Reserve starts to raise interest rates, it will put renewed strain on emerging economies’ debt management. Those most vulnerable are countries with high levels of dollar-denominated external debt and those with high public debt.

Where does that leave China? As so often, slightly oddly placed.

China’s external debt exposure is low. Foreign debt is estimated to be equivalent to less than 10% of GDP. That modest figure by international standards is because China funded its infrastructure building domestically and not by borrowing from abroad. Thus it has avoided one of the textbook potential triggers of an emerging market debt crisis. It helps that China has a financial system that is semi-detached from global capital markets.

On the other hand, China’s domestic borrowing is huge. Total debt, including debt of the financial sector, nearly quadrupled between 2007 and 2014, by the reckoning of the McKinsey Global Institute (MGI), rising from $7.4 trillion to $28.2 trillion, or from 158% of GDP to 282%. This increase was a consequence of the investment-driven stimulus Beijing launched to offset the 2008 global financial crisis and which was funded by bank credit, albeit domestic not external borrowing.

That new debt was largely taken on by non-financial corporations. MGI calculates that that set’s debt accounts for 125% of GDP. Rating agency Standard & Poor’s estimates that China surpassed the United States as the largest corporate debt borrower in 2013.

China’s non-financial corporations are a broad church, however. Their debt is concentrated within state-owned enterprises, not anymore in private companies with the one significant exception of firms in the property sector. MGI estimates that approaching half of non-financial corporate debt connects in some way to real estate development, with 60 firms accounting for two-thirds of it.

An IMF Working Paper on corporate indebtedness in China published by Mali Chivakul and W. Raphael Lam in March puts it thus, “while leverage on average is not high, there is a fat tail of highly leveraged firms accounting for a significant share of total corporate debt, mainly concentrated in the real estate and construction sector and state-owned enterprises in general.”

Chivakul and Lam go on to argue that development and construction firms could withstand a modest interest rate shock, but other corporations in the wider economy would feel the knock-on effect of a slowdown in the property sector. “The share of debt that would be in financial distress would rise to about a quarter of total listed-firm debt in the event of a 20% decline in real estate and construction profits,” they say.

A separate report from economists at the Hong Kong Monetary Authority comes up with a similar analysis — that China’s debt problem is largely an SEO debt problem — and points the finger at  ‘policy driven lending’. “SOEs’ leveraging has been mainly driven by implicit government support amid lower funding costs than private enterprises,” they say.

There is now less such politically driven new lending than before. That partly reflects the passing of the post-2008 stimulus but also a recognition that private firms create the new jobs that are critical to social stability. It also reflects the shuttering, particularly since 2012, of small, inefficient and heavily polluting and indebted SOEs in industries such as steel, cement and mining.

A further round of such ‘SOE reform’ seems likely. And to this Bystander, the corruption investigations into SOEs seems in part an attempt to accelerate those reforms, given that  SEOs are seen as acting as a drag on the wider push for reform and economic rebalancing.

From SOEs it is but a short step to China’s other deep pool of domestic-debt concern — local government borrowing. Outstanding debt has reportedly reached 16 trillion yuan ($2.6 trillion), up 47% from June 2013. Overall, government debt is equivalent to 55% of GDP, again not a concerning high level by international standards. But it is concentrated in pockets, closely tied to real estate, and a further drag on an already slowing economy.

Beijing has both the political will and the financial wherewithal to underwrite local government defaults and forestall any threat of financial systemic risk. However, policy makers will use the mere hint of it to push local government finance reform and deepening municipal bond markets.

Local governments have relied on land sales for revenue, and also seek to turn a yuan from commercial activities conducted through captive off-balance-sheet special financing vehicles, which have borrowed heavily from both mainstream and shadow banks. So the threat of contaigion is real. Rising interest rates will only make it more so, and aid the cause of local government finance reform.

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China’s Edifice Complex

shanghai-skyline

IT WAS ONLY this year that the tallest building in the country was topped out. At 632 metres, Shanghai Tower, an office-cum-hotel development, reaches 140 metres — and 27 floors — further in to the sky than China’s existing height record holder, the Shanghai World Financial Center that was completed in 2008. Both can be seen in the photo above.

The Burj Khalifa in Dubai is the world record holder at 828 metres and 163 floors. But the Shanghai Tower’s place in the sun as China’s tallest building will be short lived. The Ping An Finance Center in Shenzhen is due to be completed next year, at 660 metres. The Suzhou Zhongan Center, a hotel, residential and office complex, is scheduled for completion in 2020, at 729 metres. Even that will be in the shadow of the proposed pair of Bionic Towers, in Shanghai and Hong Kong, if that project ever gets off the ground, so to speak. They are envisioned to be 1.3 kilometres tall and contain 300 floors.

For all the well advertised travails of the property market, China is seeing a continuing boom in skyscraper building. Twenty-two of the world’s 38 tallest buildings under construction are in China. There are four in Shenzhen, two each in Kunming, Nanning and Wuhan, and one each in Changsha, Chengdu, Dalian, Foshan, Guangzhou, Jinan, Taiyuan, Tianjin, Wuhu, Xiamen, Zhenjiang and Zhuhai. None of them will be less than 300 metres tall (the definition of a ‘supertall’ building; 600 metres-plus counts as ‘megatall’, 200 metres plus is merely ‘tall’).

Add in completed and topped-out buildings and China will have 67 buildings higher than 300 metres. That compares with 17 in the United States, where the tallest building under construction, in New York, is a mere 273 metres and 47 stories high. Europe has just six — five in Moscow and one in London, but none higher than 374 metres and 95 floors which will be the height of the tallest building now under construction in Moscow.

The number also stands in marked contrast to China of just 25 years ago. In 1990, there were only four tall buildings, with another 45 under construction. By 2000, there were 25 completed and the same number under construction. By 2010, it was 35 and 14 respectively. This year: 353 completed and 150 under construction.

Improved materials and construction technologies — China is a pioneer of tall prefabricated buildings — are behind the vertical building boom everywhere, along with growing pressure on urban land. Also, cities desire iconic towers designed by world-class architects to give physical expression to their rising economic weight.

China’s developers have overwhelmingly been building office and hotel towers. They are only now starting to put up residential tall buildings as has happened elsewhere in Asia, notably India and South Korea. China has, after all, moved more than 300 million people from the countryside to the cities in the past 20 years. The peak of that unprecedented migration may be passed, but the movement of people is not done.

The wildly ambitious and now stalled Sky City in Changsha in Hunan province was meant to include schools, a hospital, apartments, theatres, cinemas, shopping centres, and a ‘vertical farm’ able to feed the tower’s intended 30,000-plus residents. It may never get built and prove to be the poster child for vanity projects that become white elephants, but it may equally prove to be the model for the future.

The Xi-Li leadership is promoting urbanization as an engine that will move the economy towards more consumption and less reliance on investment and exports for growth. Improving city planning by limiting sprawl is a priority for the National Development and Reform Commission, China’s main economic development policymaker. That ambition may be crimped by the slowing economy or, conversely, made more urgent.

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China Struggles To Crimp Cozy Local Business Breaks

THIS BYSTANDER HEARS that there has been considerable resistance to an edict from Beijing late last year instructing local governments to stop offering tax and other incentives to businesses. The proscribed incentives include tax rebates, cheap land, and social security concessions. The aim of the measures, contained in a document from the State Council known as Circular 62, is to standardize local tax and fiscal regimes, knock back local protectionism and generate fairer market competition.

Any incentives not in line with national priorities were to be stopped immediately, and those that local officials felt were had to be submitted to finance ministry review by end-March. However, many local officials have been dragging their feet and protesting that the changes will disrupt local business conditions. Finance ministry officials have softened their initial hard line on implementation of the changes to exhorting businesses crying foul to take professional advice on getting their houses in good order. They are also recognising that the tight timeline they first set is unlikely to be met.

Local officials are feeling squeezed between using a tried and trusted policy tool — preferential treatment for local investors and enterprises — to reverse the overall slowdown in economic growth and the fiscal discipline being imposed on them from above. They have already had their financial freedom crimped by restrictions on their access to off-balance sheet financing, notably through captive special investment vehicles.

The primary driver for that was central-government fears about the risks of the local-government debt bomb going off. The anti-local protectionism measures are more about central government removing the local distortions that bedevil the economy while at the same time exerting more central control over fiscal management.

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