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China’s Good Muslims And Bad Muslims

IN 2015, AUTHORITIES in Karamay, the oil town in the far north of Xinjiang, China’s troubled far-west province, temporarily banned men with big beards or anyone wearing Islamic clothing such as hijabs, niqabs and burqa from travelling on the city’s buses.

The restriction came a week after an attack in which nearly 100 people, including 59 of the attackers, branded terrorists by authorities, had died, and in the midst of a year-long anti-terrorism crackdown announced in the wake of a deadly bombing attack in the provincial capital, Urumqi, in May earlier that year.

Now, following a futile attempt to discourage beards and veils, Beijing has announced blanket ban across Xinjiang on “abnormal” beards, the wearing of veils in public places and, incongruously, the refusal to watch state television.

The 15 specific measures introduced categorise as ‘extremism’ what could be as easily described as religious observance as proselytising. State media describe them as drawing a clear line between legal religion and illegal religion, providing legal support for protecting the former and purging the latter.

China is far from alone in taking this tack towards its domestic Islamic extremists. France, Belgium the Netherlands, Bulgaria and Egypt are all countries that have imposed varying degrees of prohibitions on face-covering dress. However, as measures to counter religious extremism, China’s latest regulations seem more likely to alienate further the Uighur Muslim population that already feels their culture is under attack from Han Chinese settlers than to reduce the threat levels perceived or actual.

Beijing has been fighting a low-level but increasingly violent insurgency in its natural-resources-rich western reaches for decades. The 8.4 million-strong Uighur minority in Xinjiang, mostly Turkic Sunni Muslims, though far from universally supportive of the tiny separatist groups that would like to re-establish the republic of East Turkestan, resent the growing Han dominance of the province, which was once more four-fifths Uighur but is now dominated by Han Chinese.

Uighurs feels their culture and economic prospects being increasingly diminished, and especially since the anti-Han riots in Urumqi in 2009 that left some 200 dead, initiating the current cycle of crackdowns. That sense of marginalisation has increased since not just by the paramilitary policing that has become part of everyday life but also by the squeezing of the native population out of Party and government jobs, where Islamic observance can be most effectively banned.

In what appears to be a visible defiance of Chinese control, Uighur women have taken to wearing veils, although Uighurs have traditionally not practised strict forms of Sunni Islam that demand them.

However, the same trend is also being seen among women from China’a largest Muslim group, the Hui, who are treated much differently by authorities than Uighurs. Hui are not concentrated in one region but spread out across the country; though of Arab-Persian-central Asian descent they are Chinese-, not Turkic-speaking and are often physically indistinct from Han Chinese. Crucially, they do have any separatist ambitions.

The contrast between the freedom of religious expression for Muslims in central and eastern China and the tight strictures on Uighurs in Xinjiang is striking, and a marker of the difference of treatment for those groups that assimilate and those that do not.

This Bystander has noted before that China’s anti-terrorism policies are based on the same techniques as Beijing uses to crackdown 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 the aim of counter-terrorism policy is to alleviate the conditions and reduce the underlying factors that give rise to radicalization and recruitment among the domestic population, then characterising all Uighurs as being somewhere on the terrorist/separatist spectrum is not going to achieve that.

Violence has flared up in recent months in Xinjiang’s southern Uighur heartland after a relatively quiet period. Amplified by a fear of the return of battle-hardened fighters from Iraq, Syria and Afghanistan, this has brought a large tightening of security, epitomised by President Xi Jinping’s call for Xinjiang to be surrounded by a “great wall of iron”.

However, while the Party maintains tight controls over foreign religious influences in the country, there is growing physical evidence of more conservative Arab countries such as Saudi Arabia funding the construction of mosques and schools in China, particularly those in the Salafist tradition, which might turn even China’s assimilated Hui Muslims more religiously conservative with unknown consequences.

China has somewhere between 20 million and 40 million Muslims. The official census figures veer towards the lower end of that range, but even that would put China in the top 20 of Islamic countries, though as a proportion of the total population it is tiny, less than 2%.  In future, Beijing may have a different Islamic issue to confront, but for now, it frames the one it has in Xinjiang in the same context as Tibet and Taiwan — and that may render it unsolvable in the only way it knows how, a combination of coercion, bribery and absorption.

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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%.

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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.

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Beijing’s Devaluation Dilemma

 

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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.

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China Cracks On With Its Second Carrier

China's second aircraft carrier, CV17, seen under construction in dry dock in Dalian, Liaoning province, in mid 2016

THE CONSTRUCTION OF the hull of China’s second aircraft carrier has been completed, state media reports, and the flight deck is now being installed.

Once that is done, probably by the first or second quarter of next year, the vessel will be floated, and its fitting out will start. Sea trials will likely not begin until 2018 or 2019, so the carrier will not be commissioned into active service until the 2020s.

The picture above was taken in Dalian earlier this year, so the flight deck will by now be looking more complete, though there is still work to be done below deck. Our man with the telephoto lens says the island (conning tower) was being installed by late September.

The vessel, known as 17 (US Navy convention would call it CV-17, but the PLA-N uses just a number), is similar in many respects to China’s first carrier, which carried the number 16 before being rechristened as the Liaoning. Whereas the Liaoning was a refit of the Varig, a surplus Soviet-era Admiral Kuznetsov class carrier bought from Ukraine where it was built, 17 is an indigenous version and will carry the designation of a Type 001A class carrier.

It is about the same size as the Liaoning, unsurprisingly as it is being built in the same Dalian dry dock as its predecessor used, but lighter, displacing about 50,000 tonnes. As can be seen in the photograph, it will have a ‘ski ramp’ launch system at the bow.

It also looks to have more space for aircraft than the Liaoning and less for secondary weapons. 17  will still be capable of carrying less than 50 aircraft, including helicopters, but a few more than the Liaoning. As well as the J-15 fighters and helicopters that the Liaoning has, 17 will probably carry an anti-submarine and early warning patrol aircraft.

Chinese military strategists have indicated that China plans a set of three Type 001A carriers — one to be operational, one in port and one in maintenance.

They will very much be the PLA-Navy’s training wheels. Though operational warships, as a carrier battle fleet, they are far short of the blue-water force China has aspirations for its Navy to be. Nineteen, 20 and 21 — Type 002 class carriers — will be much closer to that. This Bystander will be looking for keels to be laid in 2017, probably in Shanghai yards, but they will not be operational on the high seas for at least a decade. Until then, Beijing will have a carrier force whose primary purpose will be to project force in the South China Sea.

That force will be constrained. For one, the J-15s flying from it are a converted rather than a customised marine fighter, and one that has limited strike capacities. Battle-effective carrier fleets need a range of patrol and other aircraft capable of waging electronic warfare. That 17 will likely carry one or two of them is notable.

Furthermore, ski ramp launches restrict a carrier’s fleet to jets. Transporters needed for resupplying carriers far out at sea might be able to land on them, but cannot take off again. Nor can turbo-prop patrol aircraft operate from them.

The next set of carriers will have either the more powerful catapult launch systems standard on US and Russian carriers or may skip a generation and go to electromagnetic systems as are being developed for the US Navy’s most advanced carrier.

That might prove a step too far too fast for China’s naval architects and designers. They have climbed a steep learning curve with refitting the Liaoning (despite the Varig coming, reportedly, with eight lorry-loads of technical documents). Building its successor from scratch will be proving equally challenging, though it has been achieved in double-quick time by carrier-building standards.

In addition, the submarine force has been the navy’s development priority over the carrier fleet, and thus it got the pick of the available design and development talent — the often forgotten constraint on all navies.

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Stabilised Growth Lets China’s Focus Switch To Deleveraging

GOVERNMENT STIMULUS KEPT GDP expanding at 6.7% for the first three quarters, as close to bang in the middle of the official target range of 6.5%-7% as makes no difference. The economy has stabilised and looks to be back on its glide path of steady but slowing growth. However, the cost has been a deceleration of the ‘rebalancing’ of the economy towards consumption-driven growth and an acceleration in the accumulation of debt, particularly corporate debt, and particularly the debt of state-owned enterprises with excess capacity and real estate.

It was state government infrastructure spending, not private investment that kept growth going in the third quarter. An uptick in the property market helped, too, though caution is advised here given there was a 34% surge in sales but a 19.4% fall in new construction starts in September year-on-year as central and provincial governments introduced measures to cool off the property market).

Overall, state fixed-asset investment grew 21.1% in the first nine months whereas private investment was up 2.5%. However, the slowing growth in private investment seems to have bottomed out in the middle of the year while state investment growth similarly appears to have topped out in the first half.

That state investment spending has been on tick. The IMF’s Financial Stability Report released earlier this month highlighted the rising gap between credit growth and GDP growth. Total debt is about 250% of GDP, with corporate debt equivalent to more than 100% of GDP.

It is not so much the size of the debt-to-GDP ratio that is a concern; the United States has a similar ratio, for example, and the eurozone’s is a bit higher at 270%. It is the pace at which China’s is growing that alarms. At the end of 2007, the year before the stimulus to counteract the global financial crisis was launched, the figure was only 147%.

History suggests that any economy that has experienced such a rapid pace of debt growth will be confronted by either a financial crisis (e.g., the United States) or a prolonged growth slowdown (e.g., Japan). It is just a massive challenge for an economy to deploy such volumes of capital productively over a short time. Either the projects available offer diminishing investment returns and more and more loans to fund them go bad; there are only so many bridges to nowhere that can be built. Or credit starts to dry up.

The interconnectedness between the banks and the government due to the centrality of the state-owned sector in the economy makes a crisis unlikely. The government is effectively creditor and debtor. Also, domestic savings, not flighty foreign capital funds the debt. There is plenty of liquidity in the financial system, the People’s Bank of China will readily supply more if needed, and capital controls are in place to check capital outflows should they start to happen on a significant scale.

That is not to say the risk is totally absent. The proliferation of shadow banking products, particularly those offered by the country’s small banks, remains a significant vulnerability that could test the resilience of the country’s capital buffers.

Nonetheless, Beijing’s challenge in managing down debt levels is to avoid the second consequence, prolonged slow growth, and to do it with one hand tied behind its back having set itself in 2010, the target of doubling GDP and per capita income by 2020.

Of late, supporting short-term growth has been given priority over deleveraging to ward off long-term financial risk. Now, that growth looks to have stabilised (and slowing GDP growth to below 8% has not brought the apocalypse of social unrest predicted in the double-digit growth days), the priorities are changing.

The IMF has long expressed concern at China’s debt levels and the perils that persist in the shadow banking system. It recommends corporate deleveraging and opening up of the state-dominated service sectors to private firms, along with a stronger governance regime and hard budget constraints on state-owned enterprises within the broader context of moving to a more market-based financial system.

New guidelines from the State Council allowing creditors to exchange debt for an ownership stake in a debtor company are likely only a first step in that direction.

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The Renminbi Ups Its Status

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THE INTERNATIONAL MONETARY Fund added the renminbi to its basket of Special Drawing Rights (SDR) currencies at the start of this month, thus officially marking it as a member of the elite club of global reserve currencies. It is a membership of which China has long been desirous.

The IMF had decided last November that China could join at the next scheduled SDR review, and that it would constitute 11% of the basket. That gives it the third largest share, behind the dollar and the euro but ahead of the other member currencies, the yen and sterling.

Weightings are meant to reflect the use of a currency in trade and the financial system so China may have been treated generously in this regard. It share of global payments, for example, peaked at 2.8% last year and is below 2% now.

Joining the SDR basket is, at this point at least, as much symbolic as anything, an acknowledgement of the global weight of China’s economy, and encouragement to push ahead with the financial reforms that would make the renminbi the freely usable and widely adopted currency that IMF reserve currencies are meant to be.

That, in turn, would promote more foreign interest in yuan-denominated assets, particularly bonds. Central banks and sovereign wealth funds will, however, build up their renminbi-denominated holdings only gradually.

Looking back in a decades time, though, the change may look more momentous, both if China’s financial markets become deeper and more liquid or it turns out that the renminbi was just the first of several emerging market currencies (India’ rupee is another candidate) to find a place in the SDR basket.

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