Category Archives: China-U.S.

China Reaffirms Its Arctic Ambition

Drift ice in the Arctic Ocean seen from the deck of the Chinese icebreaker Xue Long, 2010. Photo credit: Timo Palo. Licenced under Creative Commons

THIS BYSTANDER NOTED China’s Arctic ambition as long ago as 2010. Since then global warming has made northern shipping routes from Asia to Europe through the Arctic only more feasible as summer sea ice has further diminished.

In 2013, China acquired observer status at the Arctic Council, which comprises nations with an Arctic littoral (full members) or an interest in the region (observers). The previous year, the Ukraine-built diesel-powered Xue Long (Snow Dragon; seen above in 2010) then the world’s largest non-nuclear icebreaker, had made the first passage from China to Iceland through the far north.

It has been participating in Arctic research trips since 1999; China has had a research station on the Spitzbergen Archipelago since 2004. A larger and stronger indigenously designed version, the Xue Long 2, is due to come into service next year. It will be a hybrid research vessel-ice breaker that can carry up to 90 scientists and crew. Nuclear-powered icebreakers will follow. Development contracts were signed between the National Nuclear Corporation and State Shipbuilding Corporation in 2016.

Not only would a northern route through the Arctic lessen the costs and dangers of shipping Chinese goods to Europe via the traditional and lengthier sea routes through the Moluccan Straits, the Indian Ocean and the Horn of Africa, it would also make drilling for oil and gas a practical possibility. The region may hold up to a quarter of the world’s untapped fossil energy reserves.

On Friday, the State Council Information Office, the government information office directed towards foreign audiences, released an English-language white paper, China’s Arctic Policy, that sets out Beijing’s intentions towards the development (and conservation) of Arctic resources over the coming decades, in particular, shipping routes.

It manages to slip in the presumably intentionally eye-catching phrase, Polar Silk Road, there times but the document is mainly an affirmation of the long-standing position that China sees itself as having interests in the Arctic and intends to be active in the region’s economic development and governance.

Chinese mariners, fishermen, scientists, petroleum engineers and even tourists plying the increasingly less icy waters of the Arctic in ever more significant number, will concern Russia, for one. The United States will see yet more evidence of China’s asserting itself globally, notably when the white paper says responsibility for the region now goes beyond the eight nations, including Russia and the United States, with territorial sovereignty in the Arctic.

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China’s Economy: Normal Slowing Will Resume in 2018

THE ECONOMY STORMED along in the second half of last year, taking growth for the year to 6.9%, comfortably outstripping the official target of ‘around 6.5%’.

It was riding the coattails of the fiscal stimulus introduced in the first half of the year and also the pick-up in global trade, partly helped by the robust growth in the United States and some recovery in Europe, which boosted China’s exports. At 8.7% of China’s GDP growth, net export volumes made their largest contribution to growth since 2008.

Policymakers have been managing a slowdown from the giddy decades of double-digit growth. The overall lesson from last week’s figures is that economy is fitfully rebalancing and that there was some slowdown in credit growth as official efforts to cool the property market, deleverage and upgrade industrial capacity gained some traction.

That last year turned out to be the first acceleration since 2010 should prove to be an anomaly. Normal slowing will resume this year. And especially if policymakers push ahead with measures to control financial risks.

The most recent forecast from the World Bank, which recently upped its estimate of GDP growth in 2017 to 6.8% (a 0.3 percentage point increase from its forecast a year ago and reiterated in June) says it expects 6.4% growth this year (a 0.1 percentage point increase from its previous number).

Beijing has plenty of headroom in meeting its 2010 target of doubling aggregate and per capita growth by 2020. The economy needs to average no more than 6.3% growth to achieve that.

That headroom will also let Beijing tackle its most pressing economic-related problems: curbing escalating debt; cutting excess heavy industrial capacity; becoming environmentally cleaner; and dealing with the risk of unemployment as the economy is rebalanced towards domestic consumption and higher-value-added manufacturing.

Where the margins of safety are considerably thinner is if there is a trade war with the United States.

As we noted recently, US President Donald Trump is itching to impose tariffs on Chinese steel and aluminium imports into the United States. More recently Washington has said that an investigation into intellectual property transfers to China has been launched, with Trump warning that China is in for “a very big intellectual property fine”.

His self-restraint because he needs Beijing’s help with North Korea is wearing thin. Nor will it have been helped by the revelation that an ex-CIA officer arrested in New York this week may have been the mole responsible for passing information to Chinese intelligence that led to the dismantling and death of the CIA’s intelligence network in China between 2010 and 2012.

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China Caught Between Smuggled Oil And Trade Wars

BOTH CHINA AND Russia deny Western accusations that their vessels have been involved in ship-to-ship transfers of oil on the high seas to North Korean tankers in likely contravention of UN sanctions against the Pyongyang regime for its missile testing programme.

Since November, South Korea has detained two ships — one Hong Kong- and the other Panama-registered, alleged to have been involved in such transactions while the UN Security Council has blocked three North Korean- and one Palau-flagged ships from docking at international ports on suspicion of carrying or transporting goods banned by sanctions.

The United States has a list of six more such vessels it wants internationally sanctioned, five China-flagged and one Hong Kong-flagged. Last week, Beijing blocked Washington’s efforts at the UN to have the six ships blacklisted.

In September, the UN cut North Korea’s allowed imports of refined oil to 2 million barrels a year. Its latest round of sanctions further cut the annual quota to 500,000 tonnes and 4 million barrels of crude oil, required the repatriation of all North Korean contract workers abroad within 24 months, and a crackdown on ships smuggling banned items including coal and oil to and from the country.

The United States had wanted a complete ban on oil imports and a freeze of the overseas assets of the government and its leader, Kim Jong-un. That it did not get them, seems to have frayed the patience of the ever-mercurial US President Donald Trump. He told the New York Times last week,

“I have been soft on China because the only thing more important to me than trade is war…If they’re helping me with North Korea, I can look at trade a little bit differently, at least for a period of time. And that’s what I’ve been doing. But when oil is going in, I’m not happy about that.”

Trump had earlier tweeted that China had been “caught RED HANDED” (his all caps) allowing oil into North Korea.

The prompt for that public accusation was a Chosun Ilbo report quoting South Korean government sources as saying that U.S. spy satellites had detected Chinese ships transferring oil to North Korean vessels about 30 times since October. Which is a very roundabout way for a US president to make an accusation based on his own country’s intelligence, especially since U.S. State Department officials have confirmed Washington had evidence that vessels from several countries, including China, had engaged in transshipping oil products and coal to North Korea.

China had long turned a blind eye to smuggling to North Korea but in 2017 started to crack down on it as it shifted stance and began to turn the economic screws on Pyongyang.

The question now is whether Beijing is still turning a selective blind eye. Or is North Korea’s smuggling network, which includes bartering via Russian ports and forging the nationalities and destinations of ships, so well organised that it is beyond being able to be shut down?

The broader concern is that either way Trump will take it as an excuse to move onto his confrontational anti-China trade agenda in 2018. Trump has long argued that foreign countries are taking advantage of America and that America needs to fight back — and that is a message he wants to use to rile up his base support, in 2018 ahead of the US mid-term elections, and again in 2020 when he will be running for re-election as president.

The White House is split on the wisdom of starting a trade war. However, the word from our man in Washington is that the ‘America First’ economic nationalists among Trump’s advisors are currently ascendant and pushing to strike early ahead of the mid-terms while the president himself is itching to slap tariffs first on Chinese electronics and then on steel and aluminium.

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China Trade Does America A Service

US PRESIDENT DONALD Trump lambasted cheap Chinese imports for destroying American jobs when he was on the campaign trail last year.

A National Bureau of Economic Research working paper by Robert Feenstra of the University of California, Davis and Akira Sasahara of the University of Idaho, which  recently came across our desk though published in August, suggests the damage may not have been as extensive as previously thought once the gain in jobs from US exports to China are taken into account.

Looking at the impact of trade on employment in the United States from 1995 to 2011, the authors say:

For merchandise exports and imports from China, we have found added demand of 3.7 million jobs and reduced demand of 2.0 million jobs, respectively, giving a net gain of 1.7 million jobs.

Including services trade, Feenstra and Sasahara count a much larger net gain of 4 million jobs.

Different modelling approaches give some variation of results, showing that in merchandise trade the net job gain from the China trade could have been as low as 730,000 jobs or as high as 2.7 million and for trade in all sectors from 4 million to 5.1 million jobs. But all show a net gain in jobs.

At least some of that growth will have been as a result of China’s growth stimulating global growth and thus world trade.

Previous studies have estimated that since China’s accession to the World Trade Organization in 2001, unleashing the ‘China shock’ on world trade, Chinese imports accounted for one-quarter of the decline in U.S. manufacturing employment and have contributed to the unusually slow employment growth following the 2008 financial crisis.

Imports from China — or anywhere — else have twin effects. They create import competition and labour-market dislocation, but also benefit domestic consumers through lower prices. Trump concentrated on the former.

But what Feenstra and Sasahara highlight is the importance of services in the United States’ global trade. Thus Trump’s emphasis on restoring manufacturing jobs, if politically salient, is economically misplaced.

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A President At Court

Donald Trump seen in Washington, November 2011. Photo credit: Gage Skidmore. Licenced under Creative Commons

IT IS THE time US President Donald Trump spends in Beijing that will be the most critical part of his more-than-weeklong tour of five Asian countries that he started this weekend.

To the other four countries on his itinerary — Japan, South Korea, Vietnam and the Philippines — he will offer some measure of assurance that the United States’ traditional security guarantees to the region can be squared with his ‘America First’ economic nationalism.

Trump’s withdrawal from the Trans-Pacific Trade Partnership (TPP), a cornerstone of his predecessor Barack Obama’s ‘Asian pivot’, has been deeply felt with some concern across the region. Nowhere less so than in Japan, where Prime Minister Shinzo Abe had invested considerable political capital in TPP and must now still assume the role of the principal regional counterweight to China.

The Trump administration is increasingly referring to the region as the Indo-Pacific, not Asia-Pacific, to diminish the Asia part, which to most Americans implies Chinese. The two regions are not the same to a geologist or marine biologist,  but the co-option of the term by geopolitical strategists is blurring the distinction. However, it will take more than rebranding to assuage Asian allies’ anxieties.

In Beijing, the mood will be very different. Trump will be pampered and feted at the court of ‘the King of China’, to use Trump’s phrase. The US businessmen accompanying the US president will sign multi-billion dollar sales deals that will help to diminish China’s trade surplus with the United States, but in designated sectors, notably energy, of Beijing’s not the free-market’s choosing.

Discussions about North Korea have potential to be contentious, but Trump may well find himself an uncharacteristically restrained guest as Xi holds to China’s ‘dual approach’ line and stresses the need to get all parties back to the negotiating table.

Most of all Beijing will project the visit of a meeting of two superpowers, who will jointly “map out a blueprint for the development of bilateral ties in a new era”, as Vice Foreign Minister Zheng Zequang puts it. China-America First, perhaps, but every photo opportunity will be carefully used to convey which of the two leaders is the great draftsman.

It is a formula that worked well for China when Xi visited Washington in January. On these trips, the optics are as, if not more important than the outcomes.

As soon as Trump has departed Beijing, Xi will head to the Asia-Pacific Economic Cooperation (APEC) summit in Danang in Vietnam. Trump, too, will be there, and the allies and adversaries on both sides will make their judgements about which of the two superpowers will figure most prominently in their lives.

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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.

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