China Gives North Korea The Coal’d Shoulder

OUR MAN IN Munich, where those who make their living from discussing global security were gathered of late, sends word that foreign minister Wang Yi said there that the cycle of sanctions and missile tests has to stop and North Korea and the United States should return to the negotiating table.

Whether that would be as part of a resumption of the six-party talks or a bilateral meeting was unclear, but Wang said Beijing was ready to play the role of mediator, which leaves either interpretation open.

Yet in the meantime, China is suspending all imports of coal from North Korea until the end of this year. This is as close to compliance with UN sanctions against Pyongyang’s nuclear weapons programme that one can get. China is North Korea’s primary export market and coal is its biggest single export.

Last week, China was believed to have turned back from Wenzhou a $1 million shipment of  North Korean coal the day after North Korea had tested an intermediate-range ballistic missile in defiance of UN Security Council resolutions banning the country from carrying out such actions.

Suspending imports is the latest tightening by China as coal exports are what Pyongyang relies on to generate cash, particularly since China stopped importing some precious metals almost a year ago and banned the sale of fuel in the opposite direction. North Korean coal exports to China rose more than 12% last year, coming in through a loophole in the UN sanctions that allows imports on which North Koreans depend for their livelihood.

The mysterious death of North Korean leader Kim Jong Un’s half-brother Kim Jong Nam by apparent poisoning, if proved to be connected to North Korea as suspected, may have also tested Beijing’s patience beyond endurance.

Leave a comment

Filed under China-Koreas

Another Little Bit Of Hong Kong Disappears With Xiao

TYCOON XIAO JIANHUA, the 46-years-old billionaire investor abducted from Hong Kong late last month, was the then 17-years-old chairman of Beijing University’s student union in 1989 and remained loyal to the Party in that tumultuous year. Subsequently, he was aligned with the Shanghai-based faction around Jiang Zemin, president from 1993-2003 and, as a nonagenarian, still casting a long shadow over the country’s elite politics. The allegiances helped Xiao deal his way from student leader to being one of China’s richest people through investments from insurance to coal mines.

However, like any good businessman, Xiao diversified his loyalties. He also built close business links with the family of President Xi Jinping, a position in which, perhaps dangerously, he would have learned much about the president’s family’s business enterprises.

The political rules of the anti-corruption operation have been unpredictable for tycoons for some time. Xiao was lifted by Chinese security agents from the tony Four Seasons hotel in Hong Kong, and, it seems certain, spirited across the border into mainland China and, in all likelihood, one of the unofficial detention centres being used to held businessman and officials who have fallen foul of the anti-corruption campaign.

Xiao is unlikely to be the only businessman with links to the Jiang faction to be helping authorities with their inquiries. Conspiracy theorists will be quick to draw links to the important party congress due later this year where Xi will be seeking to consolidate his power and aiming to put his stamp on the next generation of top leadership. Xiao’s disappearance will send a chill warning to others that this is no time to be playing party politics.

What makes Xiao’s case stand out, however, is that he was seized in Hong Kong, roughly a year on from when five booksellers mysteriously disappeared. Xiao had operated from the city for some years as a place close enough to the rest of China to let him run his mainland business interests while still offering the protection from Chinese security services of an independent legal system — or so he had supposed.

Bit by bit legal and civil rights protections are being eroded in Hong Kong as Beijing increasingly waits out the countdown to the end of 50 years of ‘one country, two systems’ by ignoring the second system and turning the city into just another corner of China of middling importance.

Leave a comment

Filed under Politics & Society

Trump’s Withdrawal From TPP Opens Opportunity For China

THE TRUMP ADMINISTRATION’S withdrawal from the Trans-Pacific Partnership (TPP) free trade agreement opens up space for China to assume leadership of the development of trade and investment within the region.

Its own Regional Comprehensive Economic Partnership (RCEP) goes from being a poor second choice to virtually the only game in town. It limitation is that it encompasses Northeast and Southeast Asia along with Australasia, but not the Americas, the carrot that the TPP offered.

However, without the participation of the United States, the TTP is left floundering, for all the talk from quarters such as Australia that something can be salvaged. That would take several years at the very least.

RCEP would be substantial, accounting for about one-third of global GDP and one-half of the world’s population. It would incorporate all the Asian countries that had signed up for TPP plus TTP waiverers, such as Indonesia, and excluded, such India (not forgetting China itself, of course).

RCEP is considerably less liberalising of trade than TTP, however. The scope for exemptions on awkward sticking points is also greater, which may make reaching an eventually agreement easier, though.

Critically different from the TPP, labour, environmental issues are excluded form the RCEP negotiations, as is the role of state-owned enterprises.

RCEP’s primary focus is the trade in manufactures, although trade in services and investments will be discussed as one at India’s insistence. India is competitive in trade in services though less so in manufacturing and especially light manufacturing. It does not want trade in manufactures to be given priority over trade in services and investment, where its companies are competitive.

Intellectual property rights are also a point of contention. Tokyo and Seoul want high levels of IP protection, particularly for their pharmaceutical sectors, and akin to those proposed by the TPP, whereas poorer countries in the region want access to cheap medicines.

Beijing, however, may have both a short and a long game to play. The high standards proposed under TPP for intellectual property protections and the liberalisation of trade in services may well eventually suit Beijing as it gets more success in rebalancing its economy as a more services-oriented and innovate one.

To that end, it may well be prepared to keep the TPP negotiations lingering on should they be of future use. In the meantime, though, Beijing will seize the initiative that Washington has let drop.

Leave a comment

Filed under China-U.S., Economy

Stimulating Growth Puts Reforms At Risk

THERE IS A sprinkling of optimism, albeit tempered with uncertainty, to the International Monetary Fund’s latest update to its World Economic Outlook. This includes an upward revision to the near-term growth prospects for China on the basis that the policy stimulus that helped deliver 2016’s 6.7% economic expansion will continue.

Strong infrastructure and real estate investment were the stimulative effects. One other consequence noted by the IMF was that deflation has come to an end with capacity cuts and higher commodity prices pushing producer-prices inflation into positive territory after four years.

On the strength of all that the IMF is raising its forecast for 2017’s GDP growth by 0.3 percentage points from its forecast in October to 6.5%.

The balance of risk, as the Fund acknowledges, is to the downside, for both China and the global economy. A shift to protectionism is among the more prominent risks along with a more severe slowdown in China.

That latter event could come if a continued reliance on stimulus measures, with the accompanying rapid expansion of credit, exacerbates the slow progress being made in addressing the issue of impaired corporate debt, especially in light of persistent government support for inefficient state-owned firms — all elevating the risk of the adjustment being disorderly the longer it is left.

Besides, before then, capital outflow pressures could make matters worse, especially given the uncertain external outlook.

The warning about continued reliance on stimulus measures repeats what the IMF said last October:

China’s growth stability owes much to macroeconomic stimulus measures that slow needed adjustments in both its real economy and financial sector.

The foreboding this time could be misplaced.

President Trump might make good his promise of 4% annual GDP growth in the United States and his maxim of ‘buy American, hire American’ turn out to be less protectionist than feared, strengthening demand in US trading partners. Or China could ride history’s tilt towards south-south trade harder, raising demand in its trading partners.

The IMF, for one, is not banking on any of those developments. It has left its forecast for China’s GDP growth in 2018 unchanged at 6.0%.

Leave a comment

Filed under Uncategorized

Fake Or Flawed,China’s GDP Numbers Show Slowing Growth

THE OFFICIAL RECKONING of economic expansion last year is 6.7%. As ever, that falls neatly into the target range of 6.5-7% GDP growth.

The cup half full view of the world sees that as meaning China’s managed growth slowdown is on track; the cup half empty view highlights that that is the slowest annual growth rate in more than a quarter century.

There are many who believe China’s economy is growing at nothing like the rate the published numbers say. This Bystander has never been in the camp of those who say they official numbers are so awry that growth now could be as low as 4%. Equally, we don’t doubt that there has been ‘smoothing’ of the numbers over the years.

However, for years, summing the provincial economies never exactly seems to match the size of the national economy as it more or less should, even given both data sets use different systems of data collection.

But now the sceptics can point to the confession of officials from Liaoning that the provincial government had faked its economic data, including fiscal revenue, between 2011 and 2014.

It was Liaoning, loyal readers will recall, even before that, in 2007, where the province’s then Party boss, Premier Li Keqiang, famously said he looked at economic indicators such as railway cargo and electricity generation because he did not trust the province’s official data.

That officials plump their numbers to boost their promotion prospects will come as a surprise to few. GDP numbers are anyway a flawed measure of an economy, and particularly as an economy shifts from manufacturing to services; a country can boost the value of its GDP just by having its lawyers raise their fees — not many people’s idea of economic growth.

Leave a comment

Filed under Uncategorized

Beijing’s Devaluation Dilemma

 

100 yuan notes

THE CLOCK IS ticking down on the inauguration of US President-elect Donald Trump and thus on Beijing’s decision about if and how to devalue the renminbi. China is caught between an exodus of capital and whatever hawkish policies against it that a Trump administration could bring.

The renminbi fell 7% against the US dollar in 2016, in its biggest fall since 1994. Most of the fall occurred in the fourth quarter as the US Federal Reserve started to raise interest rates.

The case for a one-off step devaluation is that it would, assuming it was large enough, staunch the outflows, and end the need to run down the foreign-exchange reserves to defend the currency. The case against is that Chinese companies with dollar-denominated debt could be put in peril, importers would face a squeeze on margins and Trump’s strident accusations of China being a currency manipulator to support its exporters by undervaluing the renminbi would gain more credence.

Also, a Chinese devaluation could set off a round of competitive devaluations by emerging economies that would rock the world economy. There is ‘previous’ in this regard. Beijing’s unexpected devaluation in August 2015 caused global shockwaves.

At the same time, China’s foreign exchange reserves, being used, regardless of Trump’s claims, to prop up the currency through market intervention, are being eroded. While comfortably large at more than $3 trillion, even they cannot be run down indefinitely. The People’s Bank of China has already used $1 trillion of the reserves to defend the currency, taking them in December to their lowest level in six years.

And what probably matters more is investor sentiment. To that end the central bank earlier this month orchestrated liquidity squeeze in the offshore market in Hong Kong, to make it more expensive to bet against the renminbi, a signal intended equally to be read in the onshore market.

As the devaluation debate rages among policymakers, Beijing has been putting administrative measures in place to reduce the outflows. A stop has been put to the dodge of using investment-linked insurance policies in Hong Kong both to move savings overseas and switch into dollars. The level at which banks are now required to report all yuan-denominated cash transactions has been lowered to 50,000 yuan from 200,000 yuan.

The individual annual quota of $50,000 in foreign currency is unchanged, but citizens are being asked for more detailed information about why they need the cash;  tourism, business travel and medical care and education overseas is looked on favourable, but not purchases of overseas property and financial assets.

Similarly, a closer eye is being kept on Chinese firms foreign direct investment, especially M&A involving real estate, hotels and cinemas. Bitcoin exchanges, which account for 95% of global trading in the crypto-currency, are being leant on to stop a backdoor way to cash out of the yuan. There is even speculation about a crackdown on the excessive transfer fees Chinese football clubs are paying to bring in foreign stars.

In this environment, state-owned enterprises are likely to be leant on to repatriate foreign currency earnings held offshore while foreign firms will find it harder to repatriate their profits.

All of this flies in the face of policies to internationalise the currency that have been persued for some time, and whose continuance was implicit in the IMF’s adding of the renminbi to its basket for Special Drawing Rights last October.

The other conventional prop for a currency is higher domestic interest rates. However, with more than 1 trillion yuan of corporate bonds due to mature every month from now until the third quarter of this year, higher rates would impose a massive refinancing burden on companies.

Also, it is far from clear how much strain higher rates would put on the shadow banking system and what the spillover would be to the rest of the financial system, but the sense is that it is a significant risk.

That leaves devaluation — gradually or in a one-step change — as the most likely option.

In a sense, that is inevitable. Dollar strength globally is probably a bigger factor than renminbi weakness. Last month, however, that did not prevent Trump tweeting, “Did China ask us if it was OK to devalue their currency?” Nor is it likely to do so again.

Financial policymaking is difficult at the best of times, never more so than at a time of unpredictability — and with a clock ticking.

Leave a comment

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

World Bank Holds Its Growth Outlook For China Unchanged

THE WORLD BANK has left its growth forecasts for China to 2019 unchanged from its projections published last June. In the latest edition of its Global Economic Prospects, the Bank reiterates its view that growth this year will slow to 6.5% from 2016’s 6.7%, and then slow further to 6.3% in both next year and 2019.

The Bank takes note, however, of “resurfacing concerns about buoyant property markets, as growth slows gradually toward more sustainable levels, with a rebalancing from manufacturing to services”.

There is little unexpected in the Bank’s sketch of the economy. Growth has been concentrated primarily in services, while industrial production has stabilized at moderate levels. Strong consumption growth highlights the internal rebalancing on the demand side. Investment growth has continued to moderate from its post-crisis peak, concentrated in the private sector; investment by the non-private sector accelerated in 2016.  Fiscal and credit-based stimulus to growth in 2016 focused on infrastructure investment and household credit.

china-economy-chartCredit growth remains well above the pace of nominal GDP growth, with loans to households accounting for an increasing share of credit extension in 2016 on the back of a continued real estate boom, especially in first-tier cities. The ratio of household debt to GDP has surpassed 40%, up almost 10 percentage points over the past three years. Meanwhile, the ratio of non-financial corporate sector debt to GDP reached 170% in 2016.

Producer price deflation came to halt as input prices stabilized. If the cycle has swung back to reflation, as an uptick in global commodity prices as well as recent producer price index numbers might indicate, that would be a significant turning point.

Capital outflows remained sizable last year and continued to put downward pressure on the currency. During 2016, the renminbi depreciated by about 5% in nominal trade-weighted terms (and some 7% against the US dollar) albeit broadly in line with fundamentals.

The renminbi was added to the basket of currencies that make up the International Monetary Fund’s Special Drawing Right in October last.

Soft external demand, heightened uncertainty about global trade prospects and slower private investment are the key risks to the growth outlook for this year. Macroeconomic policy is likely to remain supportive. Meanwhile,  rebalancing from industry to services and from investment to consumption is expected to moderate.

Progress in reducing financial excesses will likely be similarly modest, barring deep structural reforms to state-owned enterprises and corporate restructuring  — both highly unlikely in a year that will see a party plenum that will start to line up the next generation of top political leadership. No sharp policy changes will be implemented which would raise disruption risk, even though the longer it takes to tackle deleveraging the higher the eventual cost will be.

Leave a comment

Filed under Economy