China Cracks Down On Cryptocurrencies

THE DEFAULT POSITION of Chinese authorities is that if it exists, it should be regulated. Cryptocurrencies are a prime example.

BTTChina (BTTC), one of the three leading bitcoin exchanges in China and, by extension, one of the largest in the world, says it is to cease trading on September 30 because of regulatory pressure being brought to bear on it. Earlier this week, the National Internet Finance Association, a self-regulatory industry body that the People’s Bank of China set up in 2015-16, warned that there was no legal basis for exchanges trading cryptocurrencies like bitcoin and litecoin and that they were a source of speculative risk for investors and also a conduit for illegal activities such as drug trafficking and money laundering.

Shanghai-based BTTC has read the writing on the wall for domestic cryptocurrency exchanges. So have investors; bitcoin fell by 20% against the US dollar in the latter half of the week.

Word in the industry is that an outright ban on most or all activity one bitcoin exchanges will be instituted shortly. Huobi and OKcoin are the other two leading bitcoin exchanges in China. Both are reported to have received administrative guidance to shut by the end of the month, though both have said they have received no official instruction to do so. (Update: Huobi and Okcoin  have reportedly been given a month’s extension as they have not been heavily involved in ICOs; but authorities expect them to cease trading by October 30.)

If instituted a ban would follow the proscription of initial coin offerings (ICOs), an unregulated means of raising funds increasingly favoured by high-tech startups. These raised 2.6 billion yuan ($398 million) in China in the first six months of 2017 across 65 offerings, which accounted for 20% of the global total. China is the first country to ban ICOs.

A working party of the central government’s office overseeing internet financial risk has been underway for several months, but Chinese regulators are not alone in their concerns about bitcoin exchanges. Their counterparts in Hong Kong, Singapore, the United States and the United Kingdom have expressed similar misgivings in recent months.

The changing mood in China has had a chilling effect on bitcoin. The cryptocurrency reached an all-time high of $5,013 on September 1 but fell below $3,000 this week on the latest reports of the authorities’ crackdown.

The internet financial risk working group says that whereas China accounted for 90% of bitcoin trading volumes two years ago, its share of the now $100-billion-a-year market has fallen to 30%. Trading volumes in Japan and South Korea have been on the rise.

An outright ban on trading in China would hit bitcoin, though not as hard as it would have in the recent past. Bitcoin is still the dominant cryptocurrency though its market share of total transactions is being eroded as Chinese have become less enamoured with it.

However, the setback might equally provide time for the development of an indigenous cryptocurrency. At the same time the central bank is cracking down on the bitcoin exchanges, it is encouraging research into the blockchain technology that underpins virtual currencies.

Advertisements

2 Comments

Filed under Economy

China Rushes To Ready Its Second Carrier For Party Congress

China's first indigenous aircraft carrier, codenamed the 002, seen at its mooring dock in Dalian in 2017 being fitted out.

CHINA SHIPBUILDING INDUSTRY Corp. (CSIC) and Dalian Shipbuilding Industry Corp. (DSIC) are rushing to complete the construction of China’s first indigenous aircraft carrier (seen above at her mooring dock in Dalian earlier this year) so the start of her sea trials can be trumpeted at the forthcoming Party congress. A stronger, more outward looking China is expected to be one of the themes of the meeting.

Outfitting work and system debugging of the 70,000-tonne Type 001A carrier, modelled on the Liaoning, a converted Soviet era carrier bought from Ukraine that is now in PLA-Navy service, are almost complete ahead of schedule, according to a defence ministry spokesman, and the power-systems tests have been completed.

DSIC’s chairman, Liu Zheng, told a company Party meeting last month that the shipbuilder would “greet the 19th CPC National Congress by delivering key achievements on a special product in this special time”.

The timetable for the mooring trials is being telescoped so the carrier can set out to sea in time for the Party congress. Sea trials, which will test propulsion and communications systems under operational conditions, are the final phase before a vessel is handed over the navy to be commissioned into service.

From an April launch to September sea trials would be the blink of an eye in terms of aircraft carrier production, but a signal of the symbolic important Beijing places on its first home-built carrier.

Meanwhile, the first of the successor generation of carriers, the Type 002, is under construction in Shanghai yards.

Leave a comment

Filed under Defence

China Makes A Show Of Force Near The Korean Peninsula

HQ-16A medium-range air-defense missiles being loaded onto their launch trucks during a combat training exercise at a military range near Bohai Bay in early September, 2017. (Photo credit: He Miao, chinamil.com.cn/)

AN ARTILLERY UNIT from the PLA’s new 81st Group Army has conducted a live-fire anti-missile drill in recent days near Bohai Bay, so close to the border with North Korea. HQ-16A medium-range air-defence missiles (Red Flag 16s, seen above being loaded onto their truck launchers for the exercise) were successfully fired and took out their targets, military media say. The drill, held in ‘early September’, was a combat-readiness test against a surprise attack.

The HQ-16A has a maximum range of 40 kilometres and can take out a ballistic missile flying at either a very low or high altitude at a range of 3.5-18 kilometres. Such missiles are only likely to come from one place, and similarly the message from Beijing is being sent in the opposite, despite the defence ministry issuing a statement saying that the drill was routine annual training and did not target any specific country.

On September 5, at the same site, the PLA-Air Force, also live fired HQ-6s (seen below), a short-range air-defence missile intended to counter close range missiles, including those launched at sea, or aircraft flying at low-to-medium altitudes.

An HQ-6 air-defense missile being live-fired by the PLA Air Force fires at simulated sea and aerial targets during an exercise near Bohai Bay on September 5, 2017. (Photo credit: Li Ming and Xie Biao, chinamil.com)

Leave a comment

Filed under China-Koreas, Defence

North Korea’s Double Dilemma For China

IT IS GETTING ugly on the Korean peninsula, and it was not looking all that pretty to begin with.

However exactly powerful a nuclear bomb North Korea tested over the weekend and whatever the white metallic thing was that the country’s leader Kim Jong-un was photographed posing with — and standing far too close to if it was truly a missile nose cone fitting nuclear device —  it is clear that it is too late to stop Pyongyang ‘nuclearising’.

That poses a what-to-do dilemma for US President Donald Trump, who had said that he would not let Pyongyang get this far with its missile programme. It poses an even bigger one for China, which the Western powers, at least, are blaming for not being tough enough on its ally, while from Beijing’s point of view, it is being asked to take all the risk of dealing with Pyongyang while the United States would get most of the benefit.

As this Bystander has noted before, Washington may overestimate Beijing’s sway over Pyongyang. This weekend’s nuclear test marked the third occasion on which North Korea had upstaged President Xi Jinping at a moment when he wanted to project a particular, and strong face of China to the world.

This weekend was meant to be about Xi presenting the BRICS, with China in the vanguard, as the progressive alternative to an increasingly protectionist West. He will not have appreciated Kim hogging the limelight. That Kim feels confident enough to do that to his only ally, again, implies that North Korea is no dutiful vassal state.

That is not to say that Beijing can do nothing more. It can. It remains North Korea’s primary source of oil and could choke that off, just as it has cut off other trade. It has so far resisted the United States’ pressure to impose such a sanction. It fears that doing so could cause a collapse of the regime that would send millions of refugees flooding across the border into northeastern China and, the far bigger concern, trigger a sudden regime collapse in North Korea that would leave US or US-allied troops hard against its border.

Beijing has in the past cut off oil supplies to North Korea on two occasions. Both times Pyongyang returned to the negotiating table in short order, if only for a while.

There are at least two reasons that Beijing will be reluctant to do so again. First, it does not want to be seen at home or abroad to be knuckling under US pressure. Trump has repeatedly lambasted Beijing for not doing more on sanctions (and when it did, then slapped sanctions on some Chinese companies and has subsequently threatened a trade boycott of any country that trades with North Korea, hardly the thank-you that would encourage further co-operation on this front).

Second, it still does not want to cause a sudden shock that would trigger an economic collapse in North Korea. Instead, it will take incremental back-door steps to cut back oil supplies.

There are signs of this already happening. State-owned China National Petroleum Corp. (CNPC) stopped shipping diesel and gasoline to North Korea in May and June. Ostensibly, this was a corporate decision made on the basis of uncertainty over getting paid. However, such as decision would not have been taken without the express consent of the Party committee within CNPC, and that consent, in turn, would not have been given without express consent and more likely direction from higher up.

Last year, China shipped more than 96,000 tonnes of gasoline and nearly 45,000 tonnes of diesel, worth a combined $64 million, to North Korea. Most of it came from CNPC, but this Bystander would hazard that more and more of China’s other energy companies will discover they have misgivings about trading with Pyongyang and slowly but steadily the oil supply will be choked off.

The statement from the foreign ministry condemning the weekend’s bomb test offers further signs of Beijing’s hardening position towards Pyongyang. While it still called for a resolution to the situation through dialogue, its language was far harsher towards North Korea than in the statements that had followed the five previous nuclear tests.

Denuclearising the peninsula is probably less of a concern for Beijing than Washington, though Beijing would be more than happy for North Korea not to have an independent nuclear deterrent, and especially if its absence bought a removal of the THAAD missile defence system from South Korea as well.

Its priority is to have as much stability on the peninsula as there can be. South Korea response to Pyongyang’s nuclear test (live-fire missile exercises), the planned deployment of a US nuclear-powered aircraft carrier in near waters and a Seoul-Washington agreement in principle to increase the 500-kilogramme permissible payload on South Korea missiles will all destabilise the peninsula more than stabilise it, not to mention discomfort Beijing.

In this environment, Beijing has two sets of relationships to manage, one with Pyongyang and the other with Washington. Both have highly unpredictable players on the other side. Beijing’s preferred option is to work through the United Nations to mitigate the volatility and to put the United States on the track of recognising that North Korea’s nuclear ambitions can no longer be contained, only managed.

The UN Security Council met today, and its member countries will be working on a new set of tougher sanctions expected to be presented for a vote at the beginning of next week. There is still a gulf to bridge between the Chinese and US positions. Meanwhile, China will be applying its own economic squeeze on North Korea to get Kim back to any sort of negotiating table before he provokes the United States into taking actions that will trigger the regime chaos that Beijing so fears.

Leave a comment

Filed under China-Koreas, China-U.S.

VAT And China’s Other Taxing Problems

CHINA STARTED TO replace its Business Tax with a value-added tax (VAT) in 2012 when a pilot scheme was launched in Shanghai. VAT has since been steadily expanded, both geographically and sectorally.

Earlier this month, following an executive meeting of the State Council, chaired by Prime Minister Li Keqiang, plans were announced for streamlining the administration of VAT and acknowledging that it has become a universal national tax.

The service sector first saw the tax in May last year when it was applied to property, financial and consumer services sectors. At the same time, VAT was extended fully nationwide.

Authorities say that between then and June, the switch to VAT has saved businesses 85 billion yuan ($12.8 billion) in taxes, providing an important boost to the ‘rebalancing’ of the economy towards consumption. Total tax savings since the pilot scheme started is put at 1.6 trillion yuan.

In July, the four VAT brackets (17%, 13%, 11% and 6%) were reduced to three with the elimination of the 13% bracket. Agricultural products, tap water, publications and several other ‘13%’ goods were moved down to the 11% bracket, though that still leaves more VAT tiers than the international average.

The new plans foresee digitization of the tax system, simplifying procedures for tax filing and switching from physical to electronic versions of the invoices-cum-receipts (fapiao) that serve as legal proof of purchase for goods and services. Fapiao are a key component of enforced compliance with China’s tax law as they compel companies to pay tax in advance on future sales.

The VAT fapiao is also used for tax deduction purposes within VAT, so digitising the whole process should streamline the accounting.

The tax is still referred to as “the VAT reform pilot program” though that status as a pilot looks like ending de jure as well as de facto; the State Council executive meeting also indicated that more detailed national VAT legislation would be forthcoming.

There is more work to be done on standardising it as a national tax. There are still inconsistencies between sectors in the rates applied to the same goods and services. Also, some tax payers are not able to make full VAT deductions. A further issue to address is compliance costs for taxpayers with multiple business locations.

One major issue that a national VAT does not address is how the tax take is shared at the provincial level. (Germany and Japan, for example, use allocation rules based on population and aggregate consumption, respectively.)

However, China has a bigger problem of fiscal redistribution to tackle. The country has the largest share of local government spending in the world, largely because public services and the social safety net (health, education, welfare, etc.) are centrally mandated but delivered and paid for at the local level. Many federal countries decentralise their social insurance system, but China is a rarity in having both its public pension system and unemployment insurance managed at the local level.

Yet, since the fiscal reforms of 1994, provinces and municipalities have negligible revenue raising powers of their own. Further, although 60% of taxes are collected by local government, those taxes are handed over to central government with some to be returned via revenue-sharing and other transfer schemes through rules that are still not completely transparent.

Transfers from the central government were supposed fully to finance local-government deficits since provinces and municipalities were barred from issuing debt.  In practice, however, local governments were given increasingly large unfunded mandates. Because of the prohibition on issuing debt, they resorted to selling land and using off-budget special-purpose vehicles to borrow and spend on infrastructure, starting the infamous local-government debt bomb ticking.

Local governments debt had reached the equivalent of around 40% of GDP by 2015.

A fiscal reform plan was announced in 2016 to address the misalignment, but it will take a comprehensive imposition of taxes such a market-value-based property tax, local surcharges to personal income tax and maybe even an additional provincial-level VAT — though that is difficult technically to administer; few if any countries have pulled it off.

It will also mean converting the pilot scheme for issuing and trading municipal debt started in 2014 when back door borrowing through special-purpose vehicles was banned, into a national muni-bond market. That, in turn, will require broader financial-system reforms.

Those are proceeding at a cautious, measured pace. Short-term stability and state-centric control is the current leadership’s instinctive approach. That may change after the forthcoming Party congress, but, more likely, it will not. In that context, streamlining VAT to puts greater taxation capacity in Beijing’s hands makes political as well as economic sense.

Leave a comment

Filed under Economy, Politics & Society, Uncategorized

US Imposes More North Korea Sanctions On Chinese Firms

THE UNITED STATES has given another turn to the financial-sanctions screw it is driving into North Korea. The US Treasury has added six Chinese and Russian individuals and ten organisations with financial ties to Pyongyang’s weapons program to its list of entities banned from conducting business with U.S.-linked companies and individuals.

Most notable among the latest additions is Mingzheng International Trading Ltd, which Washington considers a front company for North Korea’s state-run Foreign Trade Bank, which itself has been subject to American sanctions since 2013. In June, the US Department of Justice filed suit against Mingzheng for laundering money on behalf of blacklisted North Korean entities, seeking to seize $1.9 million of the firm’s funds.

These latest sanctions appear to target coal importers and agencies supplying North Korean labour to foreign countries in its continuing attempt to sever Pyongyang’s supply lines of hard currency needed to fund its nuclear and missile programmes. In the same vein, the US had sanctioned Bank of Dandong, bank, along with Dalian Global Unity Shipping and two Chinese citizens, Sun Wei and Li Hong Ri, in June.

The United States charged that “at least 17%” of the $786m in customer transactions conducted through Bank of Dandong’s  US correspondent accounts from May 2012 to May 2015 involved “companies that have transacted with, or on behalf of, US and UN-sanctioned North Korean entities”.

The bank which is mainly owned by municipal agencies, is small in the order of banks; its assets were only $10.7 billion as of the end of 2016. A bond issuance prospectus last year revealed that the bank a 1% stake in Dandong Xinliu Group, a state-owned company engaged in trade with North Korea.

Unlike the UN sanctions recently announced, which required lengthy negotiations with Beijing, this latest round appears to have been imposed unilaterally by the United States, as evidenced by China’s reaction which was to say the Washington should “immediately correct its mistake”.

For his part, Kim Jong-un has ordered a step-up in the production of warheads and solid-fuel rocket engines for long-range ballistic missiles, taking some of the wind out of the sails of United States officials who have started to suggest that the possibility of a resumption of talks on a negotiated settlement might be appearing on the horizon.

1 Comment

Filed under Uncategorized, China-U.S., China-Koreas

China’s Press On Academic Freedom

Cambridge University Press, a leading academic publisher whose China Quarterly is one of the leading English-language social science journals devoted to China has reversed its decision to comply with the demands of China’s censors to block sensitive content.

The university press had initially removed some 300 China Quarterly articles on politically sensitive topics from its website in China on the instruction of the media regulator on penalty of not being allowed to publish at all in China.  The press changed its mind following protests, including a petition published by academics from around the world, condemning restrictions on academic freedom of thought.

It was a dilemma that many foreign businesses have faced: the choice between being shut out of the Chinese market for refusing to comply with authorities’ controls of markets or suffer reputational risk outside China by knuckling under. In information markets, the reputational risk of complying with controls on freedom of expression is potentially a higher cost for an academic institution that it would be for a commercial technology or media company. Online content providers,

Chinese and foreign, have been a particular focus of the censors’ attention this year, as online content, previously more laxly regulated than offline media, has been brought under the same control regime as traditional print and broadcast media.

Tech groups and media companies have bowed to government demands to close down hundreds of mobile video platforms and promised to work more closely with state media. Under the new cyber security law that came into force on June 1, only those online content creators who have been issued with a media licence are permitted to upload videos featuring news or political commentary.

This has reinforced Chinese firms’ pre-emptive self-censorship, and more foreign firms to accept specific demands.

Beijing has to tread a careful line with foreign academic publishers. While censoring politically sensitive material is one thing — and social scientists in Chinese universities, once an important source of policy advice to government, have come under greater freedom of expression constraints since President Xi Jinping took over in 2012 — it is another cutting off the country’s scientists and technologists from the latest foreign academic research in those fields.

Leave a comment

Filed under Media, Politics & Society, Uncategorized