US Democrats’ Midterms Success Will Not Change US-China Relations

OUR MAN IN Washington writes that the success of the US Democratic party in retaking control of the lower house of Congress in this week’s US midterm elections will not make much difference to the bipartisan consensus in Washington in favour of being tougher on China, certainly in the short-term and probably not for the duration of the Trump presidency.

In the unlikely event that Beijing was expecting American voters to deliver a stinging rebuff to their president at the polls, it will have been disappointed.

The new Congress, which does not convene until January, will let the Democrats play the spoiler in the House, where they now have a slim majority, but not advance their agenda. In the Senate, Trump’s Republicans increased their majority, and thus strengthened President Donald Trump’s nominating power, should he need, for example, to put in place a new Defense or Treasury Secretary who is more of a ‘China hawk’ than the incumbents.

The Democrats will not come to office unified in their position over trade, over which Congress, not the White House technically has ultimate authority as it writes the laws regarding trade deals and tariffs, and authorises the President’s remit over individual trade negotiations..

The Democrats old House leadership (in terms of both incumbency and age), which is likely if not certain, to continue in the new Congress, still reflects the interests of labour unions and has traditionally been sceptical of free trade. Some of new, younger, progressive Democrats have expressed pro-free trade sentiments. Elizabeth Warren, a possible if unlikely Democrat presidential nominee for 2020 and a veteran leader of the Democratic left, has complained that Trump’s punitive tariffs on China do not go far enough.

Two key figures to watch are Massachusetts Rep. Richard Neal, who is likely to become chair of the Ways and Means Committee, which gives him influence over budget allocations, and New Jersey Rep. Bill Pascrell, who is expected to chair the House trade subcommittee.

Neal is on record as a supporter of robust and enforceable labour and environmental provisions in trade deals, a position followed by many Democratic legislators, while Pascrell has opposed a putative free trade deal with the Philippines on the basis of the Duterte administration’s human rights record.

Pascrell has also hounded the Trump administration over its steel and aluminium tariffs and made rhetorical points about how Congress is trying to lower trade barriers in contrast to an administration that seeks to raise them. However, scoring political points by demanding the administration clarifies its tariff strategy and insisting it does not harm U.S. exporters or importers, is not the same thing as trying to force Trump’s hand over China trade in a direction it does not want to turn.

One area where there might be some momentum, because there is also support for it among House Republicans, is to rein in the president’s ability to unilaterally raise tariffs without consulting Congress, an attempt to wrest back some of Congress’s authority over trade that it has traditionally wielded.

In the current Congress, bills to that effect have failed to make it out of committee. However, were they to do better in the new Congress, they still face being killed off in the Senate, where there is a supportive Trump majority that Senate Majority Leader Mitch McConnell has signalled would be used to that end.

The Senate will likely be less fertile ground for those hoping to lower the tensions between Washington and Beijing. Many Democrats there, including Senate Minority Leader Chuck Schumer of New York, have spoken in support of the administration’s protectionist policies. Senators in Rust Belt states, where Trumpism has taken particular root, also look favourably on tariffs that could shield their local industries. Senator Sherrod Brown of Ohio, who leads the protectionist wing of the Democratic Party, recorded one of the most emphatic Democratic victories of last Tuesday.

There are issues other than trade between the two countries, of course, notably North Korea, the South China Sea and Taiwan, as well as the general one of Trump’s ‘America First’ stance at home and abroad, with China now categorised a strategic adversary of the United States.

The Congressional gridlock that he will face in the final two years of his first term may tempt him to become more active in foreign affairs in the run-up to the 2020 presidential elections. If there is one thing that is certain about the Trump administration is its unpredictability.

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China And Japan Warm Commercial Ties As A Matter Of Convenience

CHINA-JAPAN RELATIONS have blown hot and cold since the two resumed diplomatic ties in 1972, and there is self-evidently history as to why that is the case.

Japanese Prime Minister Shinzo Abe’s current three-day visit to Beijing is the first by a Japanese prime minister for seven years, an indication in itself that the bilateral relationship is coming out of a chilly phase. The ‘historic turning point’ lauded by the official statements is over-egging the pudding at this point.

There is a geographical logic to the trade deals agreed during the trip ($18 billion worth). This has been given additional fillip by the US administration’s imposition of tariffs on both Chinese and Japanese exports. Both neighbours need to diversify their sources of supplies and their markets as a result. They are both already among the biggest trading partners of the other and the $30 billion currency swap agreed during Abe’s visit will underpin that.

However, Japanese carmakers have not yet got the all of the better access to the Chinese market they want, and Tokyo has not provided as ringing an endorsement of the Belt and Road Initiative as China would wish.

Abe also needs to secure a better seat at the table in the discussions over North Korea, which are becoming increasingly a quadrilateral affair between Pyongyang, Seoul, Beijing and Washington, sidelining Tokyo, which has a particular issue over Japanese citizens kidnapped by North Korea that is not shared by the other four.

The key point of conflict between Beijing and Tokyo remains their territorial dispute over islands in the East China Sea known as the Diaoyu to China and the Senkaku to Japan. Anti-Japanese riots broke out in China just six years ago following moves by Japan to extend its sovereignty over the islands. Cars made by Japanese manufacturers and other Japanese products were vandalised in China. Tourism, trade and investment between the two countries fell off a cliff. Beijing froze high-level contacts.

Anti-Japanese nationalist sentiment remains a switch that Beijing can flip on or off at its convenience.

Asia’s two largest economies making common commercial cause in the face of the challenges posed by the Trump administration is one thing; resolving long-standing political differences will be another. The challenge will be greater for Japan than China, as it now has two ‘frenemies’ to deal with not one.

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Latest China GDP Figures Show Stable But Challenged Growth

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IF THERE IS a scintilla of concern for authorities in the third-quarter GDP growth figure, covering July-September, it is that the tariffs imposed by the United States have not had much time to have a material impact.

At 6.5% year-on-year, the third-quarter number represents the slowest quarterly growth rate since the first quarter of 2009 in the immediate aftermath of the 2008 global financial crisis. However, it is still in line with the official growth target for the year. For the first nine months, GDP grew at an above-target 6.7%, according to the National Bureau of Statistics, which generally portrays the economy as “running within reasonable range in the first three quarters, and [continuing] to stay stable with good growing momentum”.

However, as the economists like to say, all the risks are on the downside: Trump’s tariffs; the ticking debt time bomb; and the pains of rebalancing.

In particular, with the Trump administration ramping up its tariffs in the current quarter and no resolution to the trade frictions between the two countries in sight, further policy support for the economy is going to be needed. However, policymakers’ scope to stimulate the economy is limited by high debt levels, in part taken on to finance the infrastructure investment boom that was the stimulative response to the 2008 financial crisis.

Giving banks more freedom to grow their loan books, trusting their credit judgements are better — or less politically swayed — than they have been in the past, will be preferred to increasing direct government spending. There will some of that, though, too, if growth is seen as slowing uncomfortably fast once the current round of US tariffs takes effect, or is followed by another.

Investors are less than convinced. Hence the raft of bullish statements from President Xi Jinping’s top economic adviser and the heads of the securities regulator, the combined insurance and banking watchdog and the central bank urging investors to stay calm as the main stock market index neared a four-year low.

However, the important words are yet to be spoken. Those will exchanged between Presidents Xi and Donald Trump when they meet at the G20 leaders’ summit in Buenos Aires at the end of November and may give an indication of which direction the trade disputes between the two countries are headed in.

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Even The Ever-Optimistic IMF Frets Over China-US Trade Tensions

THE INTERNATIONAL MONETARY FUND has cut its forecast of China’s 2019 GDP growth by 0.2 percentage point to 6.2% because of the expected impact of tariffs imposed as a result of its trade dispute with the United States. In its newly published World Economic Outlook, the Fund also projects 6.6% growth for this year, down from 6.9% in 2017 as the policy measures to slow credit growth and deleverage the economy take effect.

However, the IMF expects China to apply domestic stabilisation measures that will boost growth in 2019 by 0.5 percentage points to offset the impact of the tariffs, which the Fund estimates to cut growth by 0.7 percentage points potentially.

The Fund’s baseline forecast takes account of tariffs announced by mid-September. Maurice Obstfeld, the director of the IMF’s Research Department, says he is less optimistic about a resolution to the trade dispute with the United States than he was six months ago. In one scenario modelled by the Fund, an escalation of trade restrictions could cut 1.6% of China’s GDP in 2019.

Obstfeld, who retires soon, also took what by the IMF’s diplomatic standards was a hugely political swing at ‘America First’ unilateralism. He concluded what will be his final forward to the Outook with this paragraph.

Multilateralism must evolve so that every country views it to be in its self-interest, even in a multipolar world. But that will require domestic [Obstfeld’s italics] political support for an internationally collaborative approach. Inclusive policies that ensure a broad sharing of the gains from economic growth are not only desirable in their own right; they can also help convince citizens that international cooperation works for them. I am proud that during my tenure, the IMF has increasingly championed such policies while supporting multilateral solutions to global challenges. Without more inclusive policies, multilateralism cannot survive. And without multilateralism, the world will be a poorer and more dangerous place.

Dealing with one aspect of ‘America First’, the US-China trade dispute, the People’s Bank of China has again just eased monetary policy, reversing its recent stance to rein in credit growth and address financial risks though deleverage.

The Fund says applying domestic stimulus will be at the long-term cost of delaying tackling China’s internal financial imbalances. It has advocated for some time that China should de-emphasise the quantity of growth and think more about the quality of growth and the economy’s resilience to financial instability — the shadow banking sector and over-leveraging in local government financing being two of the most glaring point of vulnerability.

“It will be important, despite growth headwinds from slower credit growth and trade barriers, to maintain the focus on deleveraging and continue regulatory and supervisory tightening, greater recognition of bad assets, and more market-based credit allocation to improve resilience and boost medium-term growth prospects,” the Fund says.

In its Financial Stability Report, issued the day after the World Economic Outlook, the IMF says:

In China, financial conditions have remained broadly stable, with an easing in monetary policy largely offsetting the impact of external pressures. China’s equity markets have weakened on rising trade tensions. Tighter liquidity resulting from earlier regulatory efforts to de-risk and deleverage the financial system has led to pockets of stress in corporate bond markets, which prompted Chinese authorities to ease monetary policy. The central bank injected liquidity via cuts to the required reserve ratio and through lending facilities. The exchange rate weakened further, down 7 percent against the U.S. dollar (and down 5 percent compared with a basket of 24 currencies) since mid-June, prompting authorities to reintroduce a 20 percent reserve requirement for foreign exchange forwards.

The trade-off between growth and stability is a difficult one for policymakers in any country. In China, that will always lean towards stability, which will likely mean a more accommodative macro policy stance and only fine-tuning to deleverage.

Hence the IMF repeats its mantra:

Despite a growing emphasis in China on the quality rather than the speed of growth, tensions persist between stated development goals and intentions to reduce leverage and allow market forces to play a larger role in the economy.

An overarching priority is to continue with reforms, even if the economy slows down, and to avoid a return to credit- and investment-driven stimulus. Key elements of the reform agenda should include:

  • strengthening financial regulation and tightening macroprudential settings to rein in the rapid increase in household debt;
  • deepening fiscal structural reforms to foster rebalancing (making the personal income tax more progressive and increasing spending on health, education, and social transfers); tackling income inequality by removing barriers to labor mobility and strengthening fiscal transfers across regions; and
  • more decisively reforming state-owned enterprises; and fostering further market liberalization, particularly in services.

Addressing the distortions that affect trade and cross-border flows is also needed.

All of which, as ever, is more about domestic political priorities than economic policymaking.

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Fan Faces Fine

FAN BINGBING, THE film star not seen in public since June, has been fined 883 million yuan ($130 million) for tax evasion and other offences, state media says. She will avoid criminal charges and prison time if she pays up by a year-end deadline.

Unconfirmed reports in Hong Kong said she has also been banned from working as an actress for three years. It would be unusually for such a ban to be announced by authorities in the absence of a conviction.

A contrite posting appeared on Fan’s Weibo account today, although there is still no indication of her whereabouts.

Her agent remains in detention as a broad investigation into entertainment celebrities’ tax affairs continues. Fan was the highest earning Chinese celebrity last year with an income of 300 million yuan, according to Forbes magazine’s reckoning.

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China’s Film Industry Loses A Fan

IT WOULD NOT be too idle speculation to connect the non-appearance in public of the film star Fan Bingbing these many weeks to the suggestion that the anti-corruption crackdown has reached the heart of the media and entertainment industries.

Her studio as denied the accusation that Fan was using what is known in the trade as ‘yin-and-yang’ contracts — two versions of the contract for an engagement of which the one showing the lower fee is the one intended for the taxman. Their use has been widespread in real estate transactions for at least a decade, not that that makes them any less illegal.

There is, it should be said, no hard evidence either way on which to judge the scuttlebutt that tax evasion was Fan’s ‘crime’, for which, some reports say, she has been arrested, while others suggest, less credibly, that she has fled to the United States to seek asylum. Fan’s public silence would, however, seem to tell its own story.

China’s highest-paid actress did, however, score zero on a recently released ranking of entertainers based on their social responsibility scores. Those can be regarded as a precursor to the ‘social credit’ system now being trialled with the aim of introducing it nationwide by 2020. Low scores could mean for an actor denial of the state licenses they need to work, and provide an easy excuse to film and TV programme makers not to offer parts.

Fan has already been dropped by sponsors, a sure sign she has fallen out of favour with authorities.

Catching tigers as well as flies is a characteristic of President Xi Jinping’s anti-corruption campaign. In June, authorities put limits on the pay of star actors, in part to crack down on tax evasion but also as part of the broader campaign against conspicuous wealth. The pay of actors in Chinese films and TV programmes was capped at 40% of the total production costs, with lead actors limited to 70% of the actors’ pool.

Authorities are also worried about the impact of stars on young Chinese, who are at risk, they fear, of chasing celebrity and “distorted social values” — for which read Western values — rather than following the Party endorsed pursuit Chinese values.

TV dramas last year were instructed to ‘enhance people’s cultural taste’ and ‘strengthen spiritual civilisation’ — strictures that came with a new set of rules governing the programmes’ content.

Reviving Chinese culture is a core strand of President Xi Jinping’s vision of ‘’the Chinese dream’, as is a very particular view of how China will project itself abroad through Chinese values.

The arts have long been seen as a part of the Party’s ideological leadership, with artists, in all realms of the arts, expected to create works that are not only artistic but also politically inspiring. Those are to serve to promote socialist values in line with the Party’s agenda.

Artistic dissent can have no place in that, much as dissent is being cracked down on in a variety of areas from the social sciences to civil society.

The Beijing Trade Association for Performances, which in 2014 took a leading role in the authorities’ crackdown on performing artists alleged to be involved with drug-taking and prostitution, now says it will ‘purify’ the city’s entertainment and performance sector and guide artists towards ‘core socialist values’.

The entertainment industry poses a particular problem in that fandom around TV, movie and music stars creates a potential point of political power that is youth-based, unpredictable and weakly subject to Party control, all characteristics for which the Party does not care.

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China-Malaysia Relations Pass Into A Chilly Phase

RELATIONS BETWEEN MALAYSIA and China have a history of blowing hot and cold. Malaysia’s new prime minister, if new is an appropriate adjective for the 93-year old Mahathir Mohamad, has brought a renewed chill, even though he has been a longtime friend of China by dint mainly of his criticisms of the West.

Mahathir has halted several high-profile, big-ticket infrastructure projects involving Chinese firms for review, including:

  • the $20 billion East Coast Rail Link under construction by China Communications Construction Co. and mostly financed by Export-Import Bank of China;
  • the $10 billion Melaka Gateway project , which involves three artificial islands and a cruise ship terminal, being developed by PowerChina International; and
  • the $2.5 billion trans-Sabah natural gas pipeline led by a subsidiary of China National Petroleum Corp.

Restrictions have also been imposed on the sales of units in Forest City, a $100 million real estate development on four artificial islands aimed at buyers from China.

There is also a report that three pipeline projects suspended in July have been cancelled outright, an oil and gas pipeline in peninsula Malaysia and another on Borneo, and a pipeline linking a Petronas refinery and petrochemical plant in Johor to Malacca. They had a combined cost of $2.8 billion.

Mahathir has several reasons for applying the brake.

One is purely financial. The first three are expensive projects that saddle the country with even more debt. Malaysia can just about manage its foreign-currency debt, but only just about. It cannot afford to let its financial position deteriorate, which, if the troubles of Argentina’s peso and Turkey’s lira spillover into other emerging market currencies, it could do quickly. Furthermore, Mahathir had long held that the country’s debt holds back its development. Nor does he want to risk Malaysia going the way of Sri Lanka, which had to yield control of a new port to China to settle debt it could not repay.

A second is political. In the wake of the 1MDB scandal. Mahathir is cracking down on what it believes is a whole raft of corruption-tainted deals struck during the previous administration of Najib Razak. The three deals mentioned above were all made within Najib’s time, and Mahathir has criticised them for being opaque.

A third is geopolitical. Mahathir is concerned about China’s increasing activity in the disputed waters of the South China Sea, where Malaysia has claims of its own over a dozen Spratly islands and a large acreage of oil and gas. Being in hock to China, which is also Malaysia’s largest trading partner, weakens Kuala Lumpur’s hand in pushing back against Beijing’s maritime assertiveness. Mahathir is strengthening relations with Japan and Australia to counterbalance China’s influence.

A fourth reason Malaysia’s relationship with its city-state neighbour, Singapore. The two nation’s relations with China tend to be the inverse of each other. Singapore’s relations with China are currently on the up.

Mahathir has said he will hand over the presidency to his deputy Anwar Ibrahim at some point, but may choose to make that point further into the future than he initially indicated (within two years). Anwar, though he has backed the review of the Chinese investments, would likely be more favourably disposed towards China. The further out the hand-over, the longer Malaysia-China relations will remain chilly.

Update: The Financial Times is reporting that Pakistan is initiating a similar review of the China-Pakistan Economic Corridor. That would have greater weight for Beijing than Malaysia’s review because of the corridor’s strategic importance, including its access to Gwadar, the port on Pakistan’s south coast on the Arabian Sea.

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