Even A Small Belt And Road Would Be Huge

Chinese President Xi Jinping delivers a keynote speech at the Belt and Road Forum in Beijing, May 14, 2017.

ONE BELT, ONE ROAD is ambitious. A network of roads, railways, ports, pipelines and other infrastructure that will crisscross China and Central Asia connecting to Europe and Africa via land routes (the Belt) and shipping lanes (the maritime Road).

It already covers two-thirds of the world’s population, one-third of global GDP and about a quarter of the world’s trade in goods and service.  China, President Xi Jinping announced at this weekend’s Belt and Road forum in Beijing (seen above), proposes to throw $124 billion at developing his vision of the next great engine of global trade.

Those monies would be a downpayment on what is estimated to be $900 billion of related investment, financed by a variety of Chinese or China-backed banks, funds and investing and development institutions. One Belt, One Road will, depending on your point of view, be 21st-century merchant hegemony writ large or the world’s largest platform for regional collaboration.

Leaders from 29 countries, the heads of the International Monetary Fund, World Bank, the UN, and a host of other dignitaries attended the forum this weekend, including most notably Russian President Vladimir Putin (absentees include the leaders of the United States, Japan and India). All the attendees, no doubt, will have had their private fears and hopes about the scale of this project to redraw over many decades the geoeconomic, and likely, the geopolitical map of Eurasia.

Whether China will hold the course, especially under Xi Jinping’s successors, is one question about the project. There are also legitimate concerns that some investment gets misallocated and ends up on being spent on ‘highways to nowhere’ and other projects that never should be built in the first place. Moreover, private and non-Chinese investment will be needed as well (and be a bellwether of global acceptance of the idea).

However, such is the scale of One Belt, One Road that even if only a fraction of it materialises, it will make Eurasia look a very different place.

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It Is Not Having An Aircraft Carrier; It Is What You Can Do With It.

TOWING THE HULL of a vessel out of dry dock and mooring it at the neighbouring berth is not much by way of a naval manoeuvre, but when the vessel is China’s first indigenous aircraft carrier, such a ‘launch’ carries a certain symbolism and an opportunity for patriotic pride.

The as-yet-unnamed sister carrier to the Liaoning, China’s starter carrier, herself bought as an unfinished hull from the Russian Navy, will now have to be fitted out and then undergo sea trials. It is likely to be 2020 before she is commissioned into service.

Soon, construction will get underway at the Dalian dry dock on a third Type 001/001A carrier. That will give the PLA Navy the standard carrier set navies everywhere want — one vessel on operations, the second in maintenance and the third being used for training.

This trio will be small beer by the standards of the US carrier fleet. It will comprise Admiral Kuznetsov class carriers, which naval men dismiss as aircraft-carrying cruisers, though that still lets the Liaoning pull rank on the best that India and Japan has, and it is more than a training vessel, better regarded as a moderately capable warship.

Nonetheless, talk of China being able to project military power beyond the ‘Near Seas’ (Yellow, East and South China Seas) is premature. At best, it will be able to project a bit of military power close to home, and perhaps especially against the smaller neighbours on the periphery of the South China Sea. The perception that it can may be the most important impact.

The Type 001/001A carriers are underpowered and have an old-fashioned ‘ski-jump’ aircraft launching system, both of which limit the PLA-Navy’s air power at sea. Also, the Shenyang J-15 multirole fighters the carriers carry are limited in both range and endurance. The latest, fourth-generation fighters represent a significant improvement over the previous versions but fall a long way short of fifth-generation fighters such as the F-35Cs deployed by the United States Navy.

However, under China’s incremental ‘crawl, walk, run’ approach to carrier development, the third Type 001/001A carrier will be considerably more capable flagship for a combat-capable carrier group than the Liaoning.

However, think of the Type 001/001A carriers as collectively being the ‘crawl’ stage; the ‘walk’ phase is already underway at the state-owned Jiangnan shipyard on Changxing, the island opposite Shanghai at the mouth of the Changjiang River. This Bystander noted at the start of last year the four new docks built there for the construction of two mid-sized aircraft carriers, suggesting that the Type 002s will be larger than the Type 001/001As.

Since that post, the satellite imagery shows that a roof has been built over the dry dock, presumably to obscure the view of prying ‘eyes in the sky’. At Dalian, anyone could see the Liaoning’s construction from the roof of the nearby IKEA store.

Displacement — that is size to landlubbers — is not everything when it comes to carriers. Offensive capability is what counts.

Propulsion systems — speed and range for the ship and power for the launching systems — are one critical component. China will have to have nuclear-powered carriers at some point if it wants them to be at sea for long periods without refuelling.

Another is being able to carry more offensively-capable aircraft and launch them more powerfully. One reason that ski-jump launches are so limiting is that take-off is fuel-intensive, cutting range and payload (payload includes not only armaments but also such equipment as airborne early warning systems).

The Type 002s could skip a generation of launchers and go straight to electromagnetic launch systems (EMALS), of the sort the U.S. Navy is currently testing to replace its catapult launchers, although that might be a too radical step for what has been a conservative development plan. The first Type 002 is likely to have catapult-assisted launch, assuming the J-15’s can be sufficiently strengthened to take advantage of it.

The third critical component is developing the advanced weapons and communications systems to control a stronger supporting battle group of destroyers and frigates, logistics and supply ships and submarines.

As we said earlier:

If China is to have a blue-water navy capable of projecting force far from its shores, it will need fleet carriers — and eventually supercarriers if it is to fulfil its long-term ambition of matching the U.S. Navy.

China’s experience in building massive oil tankers and ore carriers suggests that its shipyards can build hulls up to supercarrier size and of the quality and strength necessary in a nuclear-powered aircraft carrier. The systems and operational sides of carriers are still a work in progress — and the learning curve is steep — albeit advancing with every new carrier built.

Carriers do not sail them selves (not yet at least). However, China has been preparing an elite cadre of carrier sailors and airmen for three decades, an indication of how long-laid its carrier plans have been.

Such preparation mitigates but does not eliminate the risks of carrier aviation. Small, rolling landing strips are inherently more dangerous than those on land. It took the US Navy and Marine Corps 40 years to get their accident rates down to the average level across the US Air Force (they lost 8,500 aircrew over those four decades, according to one retired US naval aviator).

For all the prestige and patriotic pride that China is investing in its carriers, it is almost certain to suffer unexpected losses and reverses.

Nor are carriers the be all and end all of naval power. They would be disproportionately susceptible to attack in the event of war because of their size and roles. In the ballistic missile age, their longevity during a high-intensity conflict would probably be counted in days, if not hours.

This Bystander would be the first to acknowledge that carriers are only one part of China’s plans for a blue-water navy, albeit an expensive one. Our back of the envelope calculation is that the cost of a carrier battle group runs upwards of $10 billion — and China can build them less expensively than most. However, that sort of money would buy the PLA Navy a lot of hardware far more suitable to the roles it is likely to be undertaking in the foreseeable future.

That is part of the calculation of the price of prestige.

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China’s First-Quarter GDP Growth Highlights Rebalancing Shortfalls

MORE UNRUFFLED WATERS for the Chinese economy–at least on the surface. First-quarter GDP growth, as reported by the National Bureau of Statistics, came in at 6.9% year-on-year.

That is its fastest pace in six quarters and the first back-to-back quarterly increase in GDP in seven years. The first-quarter number is also well in line with the 6.5% official annual growth target set last a month.

However, a closer look at the components of growth suggests that deeper currents swirl dangerously, and particularly that the old-school model of state investment-led growth still holds sway. Fixed asset investment in the first quarter, up 9.2%, was an acceleration from 2016’s 8.1% growth rate. Infrastructure investment rose by 23.5% while real estate development was up 9.1%. Industrial production also rose.

Worryingly for the rebalancing of the economy towards greater domestic consumption, retail sales growth slowed to 10% in the first quarter from 2016’s 10.4% expansion.

US President Donald Trump’s backing off from threatening a trade war with China because he needs Beijing’s cooperation in dealing with North Korea has provided breathing room for China’s economy, which it appears to be exploiting with some gusto.

The stimulus that Beijing has given the economy has led the International Monetary Fund to raise its forecasts for China’s growth this year and next in its latest World Economic Outlook to 6.6% and 6.2% respectively. That is 0.1 and 0.2 percentage points higher than its January forecasts and 0.4 and 0.2 percentage points higher than its October 2016 forecasts.

The question remains, however: how sustainable can this pace of growth be long-term without rebalancing taking more substantial hold and the problem of excess leverage being tackled?

As the IMF puts it:

The medium-term outlook, however, continues to be clouded by increasing resource misallocation and growing vulnerabilities associated with the reliance on near-term policy easing and credit-financed investment.

At some point, as prime minister Li Keqiang again emphasised, Beijing will have to switch growth gears. That will mean unwinding its most recent stimulus–very carefully. But that is unlikely to start happening until after President Xi Jinping has consolidated his political control at the critical Party plenum later this year.

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The Sound Of Another Trump Flip-Flop

100 yuan notes

IT IS ALL going rather swimmingly for China with the United States right now. Following the happily smooth summit between President Xi Jinping and US President Donald Trump in Florida last week, the US president has said that China is not manipulating its currency.

During his election campaign last year, Trump had repeatedly accused Beijing of artificially driving down the value of the yuan to increase its export competitiveness, and had said he would label China as a currency manipulator on his first day in office.

His about-turn pre-empts the US Treasury’s forthcoming biannual report to Congress on the foreign-exchange policy of the United States’ principal trading partners: being designated a currency manipulator by the US Treasury legally triggers US Congressional sanctions against the offending country.

In the Obama-era, the Treasury had always found a way to avoid that, but the risk to China once Trump won the election last November was acute.

Trump now accepts that China has not been manipulating its currency for a while. His need to work with Beijing on dealing with North Korea — regardless of his previous comments that the United States would take unilateral action against Pyongyang if China failed to rein in its neighbour as Washington expected — appears to have helped clarify his vision.

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China-America First

US President Donald Trump and China's President Xi Jinping walk in the grounds of Trump's Mar-a-Lago resort in Florida, April 2017.

DONALD TRUMP MARKED his first meeting as US president with the visiting President Xi Jinping with a display of naked American power, Cruise missile strikes against an airfield in Syria in retaliation for the Assad regime’s chemical attack on a hospital. The timing was coincidental, if opportune, but it was an act of defining and defending national interest of which only one of the two superpowers is currently capable, let alone comfortable, in undertaking.

The signalling was palpable. Moreover, it was an action that also had many observers quickly connecting the dots to North Korea, a country Trump had threatened unilateral US action if China did not start to exert the control over its ally that Washington believes it can and should.

Xi’s visit was always going to be scrutinised for the subtle signs of a power play between the two men. The ‘optics’ would be as important as the outcomes. However, it also carried considerable domestic political risk for Xi, making the trip to the United States early in Trump’s presidency (and to a golf course resort, at that) with all the risk of Trump’s unpredictability providing a loss of face for no very certain reward. The deflection of much of the world’s attention elsewhere would not necessarily have been unwelcome.

It is hard, though, to imagine the trip was undertaken without assurances there would be some return. The pre-trip speculation was of an agreement, if longer on affirmation than detail, on a joint reset of tackling North Korea’s nuclear ambition and some public US affirmation to Beijing over arms sales to Taiwan and the ‘one China’ policy.

In the event, the publicly announced outcomes were more modest, though likely of Beijing’s design, a 100-day plan to discuss trade talks directed at boosting US exports and reducing Washington’s trade deficit with China, and an invitation to Trump to make a state visit to China, which the US president accepted for a date to be arranged.

Trade is the lowest-hanging fruit for restoring relations between the two countries to an even keel. The direction of travel favours more US exports to China, especially once the rebalancing of the economy to more domestic consumption takes hold, while the One Belt, One Road initiative, to which the United States has now been asked to join, offers the prospect for more business and investment than China can handle alone.

Difficult issues — North Korea, Taiwan, the South China Sea — offer scant prospect of early harvesting.

The agreement to trade talks is positive, in the sense that it shows Trump can be steered away from his fiery anti-China rhetoric of the campaign trail last year. Further evidence that the reality of office is taking hold over the rhetoric of candidacy is that the Trump administration has so far declined to carry through on pre-election threats to brand China a currency manipulator or impose punitive tariffs on Chinese exports to the United States.

That the US president said that he was willing to further strengthen cooperation with China in economy, military affairs and people-to-people exchanges and support China’s efforts in pursuing corrupt officials who had fled China with ill-gotten gains will all be taken as evidence of success by Xi’s team, whose overarching goal was to restore stability and order to the relationship so they can manage it. Trump’s description of his personal relationship with Xi as “outstanding” will have been a bonus, though Trump will likely find eventually that that friendship will come with trappings.

State media have been quick to present the Florida summit as continuation of policy between the world’s two leading nations. “Expanding win-win cooperation” and “managing differences” and developing “dialogue and cooperation between China and the United States in such areas as diplomacy and security, economy, law enforcement and cyber security, as well as social and people-to-people exchanges” represents a good outcome for Xi, even if it is not the language of concrete gains for American manufacturing workers that reverse trade deficits and job losses that Trump had previously told his blue-collar economic nationalist supporters he laid squarely at China’s door.

The harsh truth is that it is not that group that stands to benefit from growing US trade with China. The winners will be the same ones that were the winners from globalisation.

The longer-term win for Xi is that summit has steered one of the world’s most important relationships, that between China and the United States, further in the direction of an arrangement of international affairs that is based on bilateral relationships between great powers than the post-World War Two system of international rules — something Xi has previously described as “a new model of great power relations” and which aligns with China’s efforts to construct a parallel architecture for global governance with itself in the centre.

The US president, who seems to prefer to focus on winning battles rather than wars, may well not realise what his guest has walked away with.

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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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Lam Lacks Much Room For Manoeuvre

Carrie Lam, seen at the Asia Society, New York on June 9, 2016 when she was still Chief Secretary for Administration of Hong Kong. Photo credit: Elsa Ruiz/Asia Society. Licenced under Creative Commons.

CARRIE LAM, HONG KONG’S newly elected chief executive (seen above), has a nigh impossible task in satisfying the desires and wishes of both her masters in Beijing and her constituents in Hong Kong, or more precisely, those who would be her constituents had they a vote.

It is equally nigh impossible to imagine that Lam will not prioritise those of the first over those of the latter. She has said that ministers in her administration would “be in charge of their own work” rather than taking their cue from Beijing’s local representatives. However, even if they are not following the script word for word, they will certainly follow the gist.

First, though, she will need to repair the damage done by her predecessor, the hapless and unpopular CY Leung. His five years in office were marked by civil discontent over political reform and an increasing chaffing on Beijing’s part at Leung’s inability to quell divisiveness that was evident not only on the streets of Hong Kong.

As Leung’s chief secretary, Lam will arrive carrying some of her predecessor’s baggage. However, before that, she was a well-regarded career civil servant. That may stand her in good stead, particularly with the Beijing-friendly business establishment whose support she will quickly want to consolidate, probably through more deregulation and tax reform. They (and Beijing, which backed her) will expect her administration to be more competent than that of Leung. She also comes without the scandals that dogged his term in office.

Winning over the opposition in the Legislative Council let alone outside it will be a different matter. It doubts that Lam will compromise on the key political reform issues that stalled under Leung. Possible education reform and more construction of affordable public housing — much needed though it is — will not be enough to offset that.

Lam also suffers from the constraint on every Hong Kong chief executive, the absence of a popular mandate. Hong Kong’s population of more than 7 million is reduced to an electoral committee of 1,194 voters that is more, if not entirely, representative of its pro-Beijing business establishment than the overall population.

A greater constraint lies 2,000 kilometres to the north. Beijing will not tolerate any consideration of the political and constitutional reforms the opposition wants. Independence is no more on the cards for Hong Kong than it is for Taiwan.

Many Hong Kong residents, though, while realistic about the realpolitik of their situation, are protective of the autonomy granted to them for 50 years under the ‘one country, two systems’ agreement by which the United Kingdom returned its colony to China in 1997. They do not appreciate the efforts of Beijing is making to accelerate the full integration of Hong Kong into China before 2047.

The fear is that many of the protections and freedoms granted under the Basic Law, such as access to the courts, private property rights and freedoms of speech, association and assembly will start to erode at the same pace.

As they have shown, some at least are ready to take to the streets to defend those rights. Even worse than an independent Hong Kong, by Beijing’s lights, would be a Chinese Hong Kong that harboured a centre of opposition to the Party. Lam’s term of office will take Hong Kong to the half-way mark to 2047. The trick she will have to pull off is knowing how much reform to allow to sustain popular trust in her administration without pointing even a toe in either the splitist or dissident direction.

Hong Kong’s descent into being just another corner of China of middling importance continues.

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