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.

Advertisements

Leave a comment

Filed under Banking, Economy

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.

Leave a comment

Filed under Arts & Culture, Media, Politics & Society, Uncategorized

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.

Leave a comment

Filed under Arts & Culture, Media, Politics & Society

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.

Leave a comment

Filed under China-Southeast Asia

China’s New Problems With Total Marginalisation Of Minorities

REPORTS SUBMITTED BY by Amnesty International and Human Rights Watch to the UN Committee on the Elimination of Racial Discrimination that up to 1 million Uighurs are being held in camps in Xinjiang ‘under the pretext’ of counterterrorism sent this Bystander to our archives. In April last year, we wrote:

China’s anti-terrorism policies are based on the same techniques as Beijing uses to crack down on political dissent, which may betray a fundamental misunderstanding of the problem being faced.

We have also noted the shortcomings of such an approach when it comes to winning hearts and minds. Religious restrictions only serve to feed a vicious cycle of repression and violence. If counter-terrorism policy aims to alleviate the conditions and reduce the underlying factors that give rise to radicalisation and recruitment among the domestic population, then characterising all Uighurs as being somewhere on the terrorist/separatist spectrum is not going to achieve that.

Beijing denies the allegations that Uighurs are held in detention camps and accused foreign media of distorting the Committee’s deliberations, but has made a rare admission that “those deceived by religious extremism… shall be assisted by resettlement and re-education”.

It could be in this particular case that an original accusation that the extensive state security presence in Xinjiang has turned the Uighur autonomous region into something that resembles a massive internment camp has morphed into an allegation of detention camps being set up. For the record, the UN committee’s published comment of concern was:

The arbitrary, prolonged and incommunicado mass detention of Uighurs under the pretext of countering terrorism and religious extremism, with estimates of the numbers of detained ranging from “tens of thousands to upwards of a million”.

Such accusations are long-standing. There is no denying the massive security operation and mass state surveillance in Xinjiang that reaches into every aspect of daily life and that Uighurs are detained for what authorities call ‘preventive security measures’. The lower end of the range cited by the UN committee could be accommodated without the need for special camps.

Authorities argue that their actions have prevented Xinjiang becoming ‘China’s Syria’ or ‘China’s Libya’,  That strikes this Bystander to be over-egging the pudding by the output of a battery farm.

True, Beijing has been fighting a low-level but increasingly violent insurgency in its natural-resources-rich western reaches for decades. Today, that self-evidently poses a threat to Xinjiang’s role as a critical logistics hub for the Belt and Road Initiative.

Yet, the 8.4 million-strong Uighur minority in Xinjiang, mostly Turkic Sunni Muslims, are far from universally supportive of the tiny separatist groups that would like to re-establish a republic of East Turkestan.

They do resent the growing Han dominance of the province, which was once more four-fifths Uighur but is now majority Han Chinese, and a majority that does not understand why the new minority does not feel more grateful for being forcibly made more Chinese.

 

1 Comment

Filed under Politics & Society

China’s CNPC Takes Advantage Of Total Retreat From Iran

WITH WASHINGTON AGAIN turning the financial screws on Iran, China stands to pick up a lot of the pieces that will get broken in the process.

The Iranian state news agency yesterday announced that China National Petroleum Corp. (CNPC) would take over Total’s 50.1% share of the $4.8 billion Phase 11 (of 24) development of the giant South Pars gas field, the world’s largest unitary gas reserve.

Terms, including financial ones, are unknown. Neither Total nor CNPC has made a public comment at this point. Confusingly, the Iranian oil ministry subsequently said that the terms of the contract remain formally unchanged, though that is not necessarily inconsistent with CNPC taking over.

Last year, in signing on, the French energy company became the first sizeable Western oil and gas company to invest in Iran following the lifting of sanctions on Tehran the previous year.

Now the Trump administration has pulled out of the nuclear agreement that enabled those sanctions to be lifted, fresh US sanctions have been imposed that force companies to choose between trading with Iran and trading with the United States.

For most Western companies, it is no choice at all. Total had already indicated that it would have to walk away from the South Pars project in the new circumstances.

CNPC, which has had a presence in Iran since 2004, already had a 30% stake in Phase 11. Iranian state-owned Petropars owns the rest.

The project is intended to supply gas to the domestic Iranian market from 2021 with excess to that requirement being exported, now assuredly eastwards rather than westwards. That gas could either be shipped or sent to China via the network of pipelines existant, under construction or planned across Central Asia and Pakistan.

China is already the largest market for Iran’s exports of crude oil and condensates, taking 24% of the total last year.

In addition, Chinese banks have extended $25 billion in credit lines for infrastructure investment, suggesting Chinese firms will easily be able to slip into the spaces vacated by Western multinationals and be in a position to negotiate favourable terms now they will be the only game in town for Tehran.

2 Comments

Filed under China-Middle East, Energy

Trump’s 3-D Re-engagement with Asia: Development, Defence and Diplomacy

THE BELT AND Road Initiative and the United States’ vision for the Indo-Pacific have a common end if different means.

Both are critical components of establishing the two powers’ respective influence over a region that is already well on its way to becoming the world’s economic centre. The former uses state-led infrastructure; the latter seeks to unleash the commercial might of private business, primarily US private business.

The Trump administration’s withdrawal from the Trans-Pacific Partnership, one of its earliest acts, cemented regional fears among the United States’ allies that the ‘America First’ rhetoric of the Trump campaign in 2016 presaged US withdrawal from the region, leaving a vacuum that China would need little encouragement to fill.

Whatever the validity of that fear — and US commercial imperatives were always going to mitigate against significant disengagement — Washington has had a struggle to reassure its traditional regional allies, who, after all, still have to live cheek-by-jowl with their huge neighbour, regardless of the tweet-du-jour coming from Washington.

The uncertainty surrounding the outcome of both Trump’s putative trade war with Beijing and his intervention in North Korea through a summit with North Korean leader Kim Jong-un have kept nerves taught.

While the political scientists hijacked the term Indo-Pacific from the marine biologists and oceanographers slightly more than a decade ago, it has only been over the past five years than it has gained currency with political leaders in the four key Into-Pacific powers, the United States, India, Japan and Australia. In the past year, it has started to take shape as an economic entity.

Today, US Secretary of State, Mike Pompeo, put some more flesh on those bones by announcing $113 million of investment in technology, energy and infrastructure investments in the region. This was, he said, a ‘down payment’ on a new era of US economic commitment to peace and prosperity in the region.

US officials say that this commitment is not aimed at countering the Belt and Road Initiative, but the underlining of the transparent and commercially led nature of the investments and the choice of phrases such as ‘strategic partnerships, not strategic dependence’ speak for themselves, as does Pompeo’s assertion that the United States would oppose any country that sought to dominate the region.

The money will go to improving partner countries’ digital connectivity and expanding US technology exports to the region ($25 million), helping regional energy production and storage (some $50 million) and creating a US government agency to support infrastructure development ($30 million). Much of the remainder of the money will go to a fund to let regional nations access US private legal and financial advisory services.

There will not be, it seems, a return of the United States to TPP. Pompeo said that the Trump administration would only be doing bilateral trade deals in the region.

He did, though, trail a coming announcement by US President Donald Trump on regional security assistance, reaffirming the administration’s emerging three-D approach to the region: development, diplomacy and defence.

Compared to, say, the $62 billion that China is providing for the China-Pakistan Economic Corridor and the estimated $1 trillion of Belt and Road Initiative projects underway, $113 million looks like small beer, and especially as much of the money will end up delivering export sales of goods and services to US firms. An America First foreign policy is still an America First policy.

The question becomes then, can US business leverage that into a credible competitive alternative model for regional development. Washington’s traditional regional allies will still take some convincing as much as they would like to have a strong counterweight in the United States to China’s growing regional power and influence.

1 Comment

Filed under China-Southeast Asia, China-U.S., Trade