It Is Stable As She Goes For China’s Economy

China’s President Xi Jinping addresses the annual Central Economic Work Conference held in Beijing from December 10 to 12, 2019. Photo credit: New China News Agency.THE NEWLY CONCLUDED annual Central Economic Work Conference, attended by President Xi Jinping (seen above addressing the meeting) and the top economic leadership, lays out no significant change of policy direction for China’s economy and seeks to maintain a steady course to deliver a ‘moderately prosperous society’ by 2020.

Within the umbrella objectives of fighting the ‘three tough battles’ against financial risk, poverty and pollution, and rebalancing the economy for long-term sustainable growth, the critical policy tasks highlighted in the statement issued after the meeting include:

  • prioritising stability;
  • maintaining a prudent and stable monetary policy stance but being more flexible with fiscal policy, which is likely to mean another income tax cut and other targeted tax support;
  • pursuing social policies to meet basic needs with a high priority on providing adequate numbers of jobs;
  • deepening supply-side structural reform, which means continuing with market opening and in particular financial market reforms.

Some of the key policy objectives highlighted at last year’s work conference got another airing, including:

  • continuing property-market reform, on the principle that ‘housing is for living in, not speculation’;
  • continuing upgrading of the industrial sector and especially high-tech manufacturing, but fleshed out this year by reference to faster implementation of coordinated development strategies for regions such Beijing-Tianjin-Hebei, the Yangtze River Delta and the Guangdong-Hong Kong-Macao Greater Bay Area. (With President Xi Jinping visiting Macao next week there could be more detail on this last one, and in particular how he might see Macao as an alternative financial centre to Hong Kong);
  • acceleration of the reform of state-owned assets and enterprises;
  • better protection of foreign investment and an additional cut to the negative list of sectors off-lenites to foreign investment;
  • diversification of export markets.

There is also a hopeful, even wistful line in the statement about lowering overall tariff levels.

The challenge, as it has been for some time, is to continue structural reform and manage the consequent slowdown in GDP against an increasingly challenging external environment, notably a fractious relationship with the United States.

The statement encapsulated it thus:

The country faces rising downward economic pressure amid intertwined structural, institutional and cyclical problems. The global economy continues to slow down, the world is still undergoing in-depth adjustments due to the global financial crisis, profound changes are accelerating, and sources of turbulence have substantially increased. We need to be well prepared with contingency plans.

The prominence and specificity given to stability and ensuring citizens’ well being underlines the political risks that the leadership sees in a global economy that is exerting greater downward pressure on domestic growth than it would like. The margin for error is diminishing.

The official economic targets for 2020 will not be made public until next March’s government work report delivered at the back-to-back meetings of the Chinese People’s Political Consultative Conference (CPPCC) and the National People’s Congress (NPC).

Next year, remember, is the date for completing the goal of doubling total and per capita GDP between 2010 and 2020. Nothing will be allowed to destabilise achieving it.

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One World, Two Norms Of Human Rights

DECEMBER 10TH WAS International Human Rights Day, the anniversary of the UN’s 1948 Universal Declaration of Human Rights that enshrined the principle that human rights are indivisible, inalienable and universal. It was also the opening day of the two-day South-South Human Rights Forum in Beijing which brought together some 70 representatives of developing nations in Asia, Africa and Latin America on the premise that human rights are country-specific. The forum is another building block in China’s systematic attempts to construct a new international order with Chinese characteristics.

The first such forum, in 2017, issued the Beijing Declaration, which defined human rights primarily in economic terms, framing the rights to subsistence and development as the primary basic human rights. A Foreign Ministry spokesperson reiterated that definition yesterday, highlighting China’s achievements in providing food and shelter, the alleviation of poverty, and the provision of health, education and social security as evidence of human rights advancement in the country.

The Chinese government and people attach great importance to human rights cause, espouses a people-centered view of human rights, integrates the principle of universality of human rights with national conditions, and regards the rights to subsistence and development as its primary and basic human rights, opening a new path of human rights protection with Chinese characteristics based on its national conditions.

Such inversion of the notion that human rights are universal was called out by the European Union. In a wide-ranging statement marking International Human Rights Day, its delegation in China noted:

China has made remarkable progress in the social and economic situation of its citizens, including poverty alleviation, gender equality, improved access to health and education, and reduced maternal and infant mortality.

At the same time, basic human rights in the civic and political field, including rights enshrined in the Universal Declaration and also in the Constitution of China, are not being guaranteed. China is yet to ratify the International Covenant on Civil and Political Rights it signed in 1998.

China was one of the countries that voted for the UN’s Universal Declaration of Human Rights in 1948, but that was during the civil war that led to the founding of the People’s Republic.

The EU expressed its particular concern over human rights in Xinjiang and Tibet.

Reports point to severe restrictions of the freedom of expression and association, and of the freedom of religion or belief in all of China; as well as continuous large-scale extra-judicial detentions. Destruction of mosques, temples and other religious sites take place systematically. Mass detentions of Uyghurs and other minorities in political re-education centres and intimidation of citizens by mass surveillance in Xinjiang still continue. Uyghurs abroad, including in the EU, are being harassed and in some instances returned to China involuntarily.

With the revelation of two troves of leaked documents on the Xinjiang detentions and the US House of Representatives passing legislation calling for targeted sanctions in response to the detention Uighurs, Beijing has been put uncharacteristically on the back foot. Shohrat Zakir, the deputy Party boss in Xinjiang and regional government chairman, said earlier this week that all those sent to what Beijing calls re-education camps had now ‘graduated’ from their ‘de-radicalization courses’.

How many of the reported up to 1 million detained Uighurs that covers is impossible to verify independently. The official line is that the figures are dynamic, with people coming and leaving. So no precise number can be provided.

Regardless, state media continues to portray this in the light of the new norms of country-specific and economically based human rights China wishes to establish.

Until only a few years ago, Xinjiang often fell victim to violent terrorist attacks which killed many innocent people. It was precisely the regional government’s decisive counter-terrorism measures including the establishment of vocational education and training centers that turned the situation around…Xinjiang’s preventive counter-terrorism and de-radicalization measures so far have proven effective in protecting the human rights of the 25 million people in the region.

The BBC’s account of Zakir’s statement, which asserted that those released from the centres had ‘realised stable employment’, implied that that could mean forced labour in factories. That would be a different and far darker interpretation of subsistence and development-based human rights.

Chinese officials are deeply aggrieved that Western governments and media portray the situation in Xinjiang as one of domestic human rights and not as tackling international terrorism.  They take this rejection of their line to be (yet one more) purposeful attack on China, and a willful disregard of the ‘truth and facts‘ released by Chinese authorities. Those same officials will readily point out that the United States fights Islamic terrorism by waging foreign wars — although that is an analogy that Beijing should be careful in pushing too far with regards to Xinjiang however differently it wants to frame its own norms of human rights.

 

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China Has Long Used Government Procurement To Foster Innovation

A FINANCIAL TIMES’ report that China ordered government agencies earlier this year to replace foreign, i.e., US computer hardware and software with indigenous alternatives over the next three years — the so-called 3-5-2 plan — is being cast in the Western press as a further technological decoupling of the world’s two largest economies. Yet it fits into a long-standing pattern of Beijing using government procurement to promote domestic innovation.

The Government Procurement Law (GPL) of 2002 requires, with some exceptions, central and local governments to buy goods and services produced in China. It excludes military procurement and does not cover state-owned enterprises (SOEs) and any public works they undertake; SOEs are subject to the Tendering and Bidding Law of 2000.

Official procurement statistics cover only procurement under the GPL, which is why government procurement in China looks low by international standards. In 2018, at $507 billion, it represented 4% of GDP, in contrast to the 10-15% typically seen in most countries. Local governments accounted for 95% of all government procurement under the GPL, according to the Word Trade Organization (WTO)’s 2018 biannual review of China’s trade policies. The GPL applies to most but not all provinces.

In 2006, it became formal policy to use government procurement to boost the creation and commercialization of home-grown ideas and technology, under the Medium- and Long-Term National Plan for Science and Technology Development (2006-20). During a visit to the United States in 2011 — following the release the previous year of draft implementation regulations for the 2002 law — then-President Hu Jintao said that policy would be ended and it became an agenda item of the Strategic and Economic Dialogue between the two countries.

Officially, no conditions regarding indigenous innovation have been attached to government procurement since 2016. However, in practice, the drive for domestic innovation, particularly in technology goods and services continued with strong policy support.

At the time, although China had started its application to join the WTO’s Government Procurement Agreement (GPA) as far back as 2007, it had not signed on. Thus was not in violation of its WTO membership. The GPA enshrines non-discrimination as a bedrock principle for member governments’ procurement.

China revised the GPL’s implementation measures in 2014 to bring the law more, if not wholly in line with the GPA, changes that took effect in March 2015. Further amendments were made in 2017.

However, most notably, the ‘buy domestic’ preference survives. One thing that has remained ambiguous throughout is what counts as domestically produced. Authorities have said that domestic and foreign-invested enterprises in China are treated the same and that there is no discrimination with regards to the degree of foreign affiliation or ownership as long as the goods or services are produced in China. However, none of that is codified, leaving ample scope for administrative interpretation, as a circular earlier this year implicitly acknowledged.

China has still not signed on to the GPA. Sticking points include non-sensitive military procurements, sub-central government entities and SOEs, all of which the United States wants to be included, which would mean they would have to fall under the GPL.

China has indicated that it may make some concessions in these areas. In October, state media said Beijing’s seventh revised offer for joining the GPA included some military procurement for the first time, and added more provinces, SOEs and universities to the institutions covered by the GPL. Those would likely be wrapped up in the some-day-one-day-maybe-never trade agreement being negotiated between the two countries. Meanwhile, China remains, in the WTO jargon,’ in the process of acceding’ while having observer status on the WTO’s government procurement committee as it has had since 2002.

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Washington Presses World Bank To Lend Less To China Faster

IN ONE SENSE, the United States is kicking at an open door when it calls on the World Bank to reduce its lending to China. The Bank’s blueprint for that over the next five years lays out just such a course. Last month, it signed off on a ‘country partnership framework’ for China covering fiscal years 2020-25, which says:

Given that China is now an upper-middle-income country and above the International Bank for Reconstruction and Development (IBRD) “graduation discussion income” (GDI), this Country Partnership Framework for fiscal years 2020-2025 reorients World Bank Group (WBG) engagement to remain strong yet be increasingly selective as lending declines, with a focus on China’s remaining institutional gaps and the country’s contribution to global public goods.

The framework sets out how increasingly selective lending will work:

Future IBRD lending will primarily focus on China’s remaining gaps in policies and institutions for sustainable IBRD graduation. WBG operations will also emphasize at least one of the following four criteria: addressing regional or global public goods, fostering the private sector, supporting critical services in lagging regions, and strategic piloting of approaches to address key development priorities, especially in areas relevant to other developing countries.

IBRD lending will average about $1 billion-1.5 billion a year and gradually decline during the [framework] period. Borrowing during the previous framework (fiscal years 2013-19) averaged 1.8 billion a year with a peak of $2.42 billion in FY 2017.

China was the fourth-largest borrower from the IBRD over the past decade, behind India, Indonesia and Brazil. The loans mainly go to provinces and municipalities, not central government and are intended to support the structural reform needed as China rebalances its economy towards a more sustainable growth model.

The proposed reduction in the Bank’s lending to China was part of a deal struck last year to get the United States to agree a $13 billion increase in the Bank’s capital. In calling for further cutbacks in the Bank’s lending to China this week, US Treasury Secretary Steven Mnuchin said part of that deal was to get annual lending to China below $1 billion.

However, Mnuchin’s remarks come just a few days ahead of the Trump administration’s December 15 deadline for imposing additional tariffs on some $156 billion worth of Chinese imports to the United States. They seem intended to ratchet up the pressure on Beijing to conclude a ‘phase one’ trade agreement and fit the Trump administration’s tactic of ‘all-points pressure’, and its general distaste for multilateral institutions.

At the same time, anti-China sentiment in the US Congress is hardening. Legislation in support of the protestors in Hong Kong became law earlier this month, and this week the House of Representatives passed a bill that would punish Chinese officials for abuse of Muslims and ethnic minorities in Xinjiang. There are moves afoot, led by the Republican Senator from Iowa, Charles Grassley, to block the World Bank from lending to China at all. That is unlikely to go anywhere but captures the mood in Congress, where there is also concern that a $50 million World Bank education loan to China ended up being used to fund the Xinjiang detention camps (though this allegation remains unsubstantiated).

In addition to the IBRD lending, the World Bank runs an investment program for China through its private financing arm, the International Finance Corp. (IFC). That is expected to remain little changed at $800 million-1.2 billion a year. Its focus will be on strengthening environmental sustainability and resilience, deepening inclusion and reducing inequality in lagging regions, and crowding in private investment to create a more competitive market environment.

Overall the framework for the next five years has as one of its three principal objectives:

Advancing market and fiscal reforms, by improving the environment for competition and private sector development; and achieving more efficient and sustainable subnational fiscal management and infrastructure financing.

That last should have the support of Washington when it is not taking political shots. So should the Bank’s intent also to use its lending to contain debt and manage financial risks. But there is much in the framework’s goals that will be inimical to the Trump administration, notably the attempt to address institutional and governance gaps, and an intent to deliver global public goods in areas such as climate change and marine plastics.

The Trump administration may also be unhappy with the fact that its hand-picked head of the Bank, former US Treasury official David Malpass, has not taken a sword to the Bank’s lending to China as it had wished.

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Beijing Roughs Up US-China Diplomatic Waters Slightly

The USS Essex, a Wasp-class amphibious assault ship, seen during a five-day visit to Hong Kong in June 2015. Photo credit: US Navy/Mass Communication Specialist 3rd Class Bradley J Gee. Public domain.

THERE IS MORE bark than bite to China’s response to US President Donald Trump signing into law last month the Hong Kong Human Rights and Democracy Act. The legislation mandates an annual review of whether Hong Kong remains sufficiently autonomous from China to justify its special trade status with the United States among other provisions.

The US Navy will be refused requests to visit Hong Kong, and several US-based non-governmental organisations concerned with human rights will be sanctioned. These include the National Endowment for Democracy, the National Democratic Institute for International Affairs, the International Republican Institute, Human Rights Watch and Freedom House.

These NGOs are among the ‘foreign forces’ Beijing claims are instigating the Hong Kong protests and are about as close to the authors of the legislation it can get without sanctioning members of the US Congress directly. However, sanctioning them may be a shot across their bows in warning that their operations in Hong Kong and China may come under yet further scrutiny.

US Navy ships visit Hong Kong typically several times a year. The photo above shows the USS Essex visiting in June 2015. The last one was the Seventh Fleet’s USS Blue Ridge in April; it had visited previously in 2013. The USS Lake Erie and USS Green Bay were refused permission to visit in August, by when the protests in Hong Kong were well underway.

The suspension will have little if any military impact on the US Navy.  Beijing has done this before, and there are alternative bases the US Navy can use in the region, although it maintains a small logistics office in the US consulate in Hong Kong to support its forward-deployed forces in the area. There are eight such logistics offices in the region, coordinated from Japan. Hong Kong, one of the smallest, is used for coordinating US Navy visits to China. There has not been any indication that the latest measures will affect those visits. Three ports in China are open to it, Shanghai, Qingdao and Zhanjiang.

A Foreign Ministry spokesperson said:

China will take further necessary actions in accordance with the development of the situation to firmly defend the stability and prosperity of Hong Kong and safeguard national sovereignty, security and development interests.

That is a pro-forma condemnation of the United States.

None of this suggests any easing of US-China diplomatic relations, though equally no significant deterioration. Where this all leaves the putative trade deal between the two countries remains mired in who-the-hell-knows country. Sovereignty always trumps trade for China, but the routineness of Beijing’s response to the legislation supporting Hong Kong’s protesters suggests it will not let it sidetrack the trade discussions. But then there are plenty of other reasons that they may come off the rails anyway.

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China’s Debt Hits Close To Home

THIS BYSTANDER HAS been far from alone in highlighting the tightrope that China’s policymakers have to walk between stimulating growth and accumulating more debt as they manage the structural slow down of an economy switching from industrial to services-led growth and facing adverse demographic changes.

Thanks in  part to the People’s Bank of China (PBOC)’s counsel of restraint, driven by the central bank’s twin concerns of the debt bubble bursting and inflation getting out of hand and its measured but steadfast drive for financial sector liberalisation, Beijing has been selective in its stimulus measures to keep a slowing economy expanding at a sufficient pace to hit the official 6% GDP growth target for this year and the larger one of doubling total and per capita GDP between 2010 and 2020.

While the plan has always been to manage a slowing of the economy as it rebalances towards a more sustainable long-term growth model, the impact of the trade and technology disputes with the United States on world trade have put at risk the 5.5-6.0% growth China needs to achieve in 2020 to hit the overarching decade-long goal.

Earlier this month, the central bank cut its lending rates for the first time in three years. The cuts were a token five basis points for the five-year, one-year and seven-day loan rates. There remains plenty of headroom for further monetary stimulus, but not the appetite, on the central bank’s part at least, to occupy it.

Taking a barb at the United States, PBOC Governor Yi Gang said in September that “unlike central banks of some other countries, we are in no hurry to resort to a considerable interest rate reduction or QE policy”. Yi is keeping his powder dry, in the event that significant rate cuts do become necessary to provide monetary stimulus. Yet his priority is to deleverage the economy, or at least in current circumstances to maintain a “stable leverage ratio…to ensure the debt sustainability of the entire society”, as he put it at the same press conference.

In its latest annual financial stability report released this week, the PBOC gave a stark warning about the potential systemic risk in the buildup of household debt, whose total now equals total household income. One figure that caught this Bystander’s eye was the central bank saying that household leverage had hit 60.4% of GDP at the end of 2018. The Bank for International Settlements had pegged the ratio at 54% (four percentage points higher than in the EU, by way of comparison).

The PBOC is particularly concerned about the growth of mortgages and consumer loans. It has warned previously of the buildup of corporate and local-government debt, but turning its spotlight on household debt is a notable change of focus. Easing of mortgage lending standards to boost property investment and the use of consumer credit to increase retail sales have been the main stimuli of growth in recent years. Rising household incomes make the rise in consumer loans manageable for now, although further buildups would test that assumption, especially among low-income households.

A new IMF working paper on China’s household debt notes that

High household indebtedness could constrain future consumption growth and increase financial stability risks…we find that low-income households are most vulnerable to adverse income shocks which could lead to significant defaults. Containing these risks would call for a strengthening of systemic risk assessment and macroprudential policies of the household sector. Other policies include improving the credit registry system and establishing a well-functioning personal insolvency framework.

Regardless, further consumer-focused fiscal stimulus is likely, perhaps a second income tax to follow last year’s 420 billion yuan ($59 billion) one, and the reintroduction of subsidies for electric and hybrid vehicles.

It is the rise in mortgage loans that more concerns PBOC policymakers. Mortgages account for more than half of all consumer debt. There is evidence that they are inflating a speculative bubble, as well a making affordable housing a politically sensitive issue. Nearly two-thirds of outstanding mortgage debt is accounted for by families owning at least two properties. Some of last year’s tax cut has gone into savings rather than retail consumption, with the saving being in the form of property investment.

This all comes against the background of the crackdown on shadow banking, which included unlicensed digital-payments businesses, online lending and other internet finance companies, in the process shutting down all cryptocurrency trading platforms and more than two-thirds of online peer-to-peer lending platforms.

This has split over into the formal banking sector. Three regional banks, Baoshang Bank, Hengfeng Bank and the Bank of Jinzhou, have needed bailouts this year. Up to 30 more have been late in filing financial accounts required by regulators, suggesting further bailouts to come. In addition, corporate bond defaults this year will likely exceed last year’s record.

The ‘big-four’ state-banks are financially robust enough that any such losses can be absorbed without systemic risk. However, having spent several years engineering higher bank asset quality and lending standards, the PBOC will not want to put the big banks in the position of having to underwrite other institutions’ bad debts. Yi has been clear that any can carrying at a troubled financial institution should be done by its shareholders, not the state via the big-four banks.

Part of the exercise in risk management will require financial-markets reform and further opening to foreign investors. China has moved steadily but cautiously on that. The addition of Chinese stocks to MSCI’s benchmark indices and the likelihood that other index providers will follow suit, adds new urgency.

The changes will bring an inflow of foreign capital into Chinese equities of at least $40 billion this year and, on best guesses, a further $30 billion in 2020. That will provide a welcome influx of capital, particularly for companies in the private sector. It will also offer some relief for a central government whose consolidated deficit, the IMF forecasts, will grow to 6.1% of GDP this year and next, from 4.8% of GDP in 2018. As the late US banker Walter Wriston famously said, “capital will go where it is wanted, and stay where it is well-treated.”

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Hong Kong Protestors’ Electoral Win May Stiffen Beijing’s Resolve

THE QUESTION NOW is, how will Beijing react?

The landslide victory of the pro-democracy candidates in Hong Kong’s district elections on Sunday and the high turnout that accompanied it has removed any lingering doubts of how widespread is the support for the protests that have been underway in the city for more than three months.

Pro-democracy councillors won a majority of 452 seats up for election taking nearly 60% of the vote. They will now control 17 of the 18 district councils. Pro-Beijing councillors controlled the lot before. Turnout was a record 71%, against 45% in 2015, with just shy of 3 million Hongkongers voting, twice as many as in the previous district elections.

It seems that the pro-Beijing camp massively underestimated the popular support for the protests and believed, erroneously as it turned out, that the election results would underline that, allowing authorities to portray the results as a rejection of violence and to crack down further on the hardest-line protestors. Had they had a more accurate grip on the public mood, the elections might have been cancelled coming as they did at the end of the most violent fortnight of protests to date.

The councils have little authority beyond advising on litter collection and similar hyperlocal matters, but the vote was always going to be a referendum on Chief Executive Carrie Lam’s handling of the protests. In a post-election statement, she said:

The HKSAR Government respects the election results. There are various analyses and interpretations in the community in relation to the results, and quite a few are of the view that the results reflect people’s dissatisfaction with the current situation and the deep-seated problems in society. The HKSAR Government will listen to the opinions of members of the public humbly and seriously reflect.

While state media’s reporting of the results has been muted, to say the least, the stridently nationalist Party-controlled Global Times took a less conciliatory view in an editorial:

Hong Kong radical forces and Western supporters behind them wanted to stage a political demonstration during the voting. They tried to deny the urgency of ending chaos in Hong Kong. But we want to say that the pro-democracy camp winning more seats doesn’t mean Hong Kong voters support violent demonstrations.

Adding:

All forces in Hong Kong, including the opposition, must compete for influence in the establishment. No one should follow the devious path of street politics.

The most significant aspect of the district council elections lies in the nomination powers the pro-democracy protestors will now acquire. The winner of the district council elections can nominate six people to the Legislative Council and 117 to the 1,200-member election committee that selects Hong Kong’s chief executive. Pro-Beijing loyalists’ domination of this committee will not disappear, but the opposition will be able to provide more than a little nuisance value to a process that Beijing has previously portrayed as an exercise in choice, albeit a carefully managed one.

Hong Kong’s problems are political and thus will eventually require a political solution. The election results offer Beijing an opportunity to make at least a gesture in the direction of political reform, as it did during the Umbrella protests in 2014 when it proposed to Hongkongers that they elect a leader directly from a list of candidates it had pre-approved. This, however, was rejected by the leaders of the Umbrella protests.

This time around, pro-democracy leaders may feel emboldened by the election results again not to need to make compromises on their five demands, which include universal suffrage. The later is unacceptable to the Party leadership, whose distrust of autonomy and distaste for the uncertainty of elections will now match its lack of confidence in Lam, although it has no credible alternative to her at present.

Lam says she will listen humbly to the Hong Kong public, but there is not much to hear that she has not already heard. In such unpromising conditions, Beijing may well feel it has no choice but to react with action not words, and crack down even harder than before.

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