Tag Archives: Liu He

Beijing And Washington Look For Little Wins To Stop Things Getting Worse

TO SAY THAT Beijing and Washington are resetting their fractious relations would be way overstating the case. Yet, in the narrow area of bilateral trade, there appears to be effort being made on both sides to talk to each other more, or at least talk to each other about talking to each other more.

The readouts of the video call Vice Premier Liu He and US Trade Representative Katherine Tai held on October 9 both emphasise a resolve to resolve trade disputes through consultation. However, the tone of how that was expressed differs in the two versions.

If not explicit, there is still an echo in the Chinese readout of it being the United States responsibility to conduct talks in the manner China wishes. In contrast, the US readout speaks more to the substantive issues of difference, albeit in the most general agenda-listing way.

The US readout is an exemplar in brevity, befitting Tai’s mastery of speaking without saying anything and, to mix metaphors, plays an exceptionally straight bat on the issue of lifting Trump-era tariffs and sanctions, a priority ask of the Chinese side. It added nothing publicly to Tai’s recent statement about restarting the tariff exclusion process, which was not that illuminating in the first place and is being driven by the concerns of China-dependent US electronics manufacturers more than anything.

The day before Liu and Tai spoke, China’s ambassador to Washington, Qin Gang, took a more confrontational line towards the Biden administrations continuation of another Trump strategy, excluding Chinese companies from access to US capital markets and Chinese investors from US technology companies in the name of national security. If this continues, Qin said, there will be “serious consequences”.

Beijing appears to believe that its approach is achieving results and will point to the resolution of the extradition order against Meng Wanzhou as evidence. The Biden administration has undoubtedly been more accommodating to China’s sensibilities than Trump, although that is a low bar.

Yet it also seems to be running on two tracks, a hard and a soft line. That may just mean that the Biden administration is itself split on how hard it should be on China, with Biden, by inclination and political calculation, leaning towards a softer approach. One thing he does not need now domestically is another foreign policy crisis.

Equally, he has many constituencies to satisfy within his Democratic Party. Their interests span trade to national security and human rights. Most will be happy to see a continuation of the hardline course Trump charted. Similarly with the coalition of allies he is trying to bring along in a united front of nations who see China as their leading strategic competitor.

It may thus be that Biden is seeking to compartmentalise his China policy so that a floor can be put under the state of the relationship to prevent it from deteriorating further. Four silos readily suggest themselves: climate, trade, national security and human rights, probably in that order of thorniness, or to put it another way of distance from Beijing’s ‘red lines’.

Climate is a global issue and falls into the multilateral institutional diplomacy with which Biden is comfortable. Trade, too, once the febrile and unpredictable tweets and slavish devotion to sanctions that were the hallmarks of the Trump administration are removed from policymaking, becomes essentially a technical discussion between officials and amenable to fudge that few outside trade nerds will examine closely behind the assertions of achievement.

It also provides a framework of conventional diplomacy that can provide an anchor for the broader relationship. The complex bilateral issues of national security and the intractable ones of human rights then can find a safe harbour where they may not be resolved but can bob around while being less likely to cut free and cause greater havoc.

.

Leave a comment

Filed under China-U.S., Trade

Beijing Doubles Down On Crypto

CHINA HAS AGAIN put the boot into cryptocurrencies.

Vice Premier Liu He issued a statement saying that tighter regulation of crypto is needed to protect the financial system and hinted at prosecutions of illegal financial activities. This doubles down on the warnings earlier in the week issued by three financial self-regulatory bodies — the National Internet Finance Association of China, the China Banking Association and the Payment & Clearing Association of China — about the investment and legal risks involved in trading in virtual currencies.

News of the statement sent bitcoin and other cryptocurrencies into a further swoon. It also fuelled speculation that Beijing plans a further crackdown on crypto.

Trading in virtual currencies already violates several laws and regulations, including exchanging legal currencies for cryptocurrencies and exchanges between different virtual currencies. The prohibition on exchanging crypto for physical money means that the only channel for virtual currency exchanges is the exchanges’ over-the-counter (OTC) trading.

The snag there is that OTC transactions can be used for money laundering, which runs slap bang into the anti-corruption campaign. OTC traders can require buyers to provide documentary evidence that they are not money laundering, but convincing authorities is another matter.

As well as closing off opportunities for individuals to convert cryptocurrencies, authorities can crackdown on financial institutions for providing crypto-related services. Banks have already been warned of the risk of violating laws and regulations when they are involved in any virtual currency-related businesses.

However, this is more by way of a warning not to take advantage of loopholes in the rules on virtual currency-related business than closing the loopholes.

That, though, will likely come with more and more specific violations being codified. Meanwhile, the ban on financial institutions being indirect involved in crypto-related business provides a catch-all compliance obligation that regulators can impose as strictly as they feel they need to.

That, in turn, can be dialled up or down to reflect how firmly authorities feel they have crypto under their thumb. Private crypto will not be allowed to compete with the People’s Bank of China’s digital yuan, which is a key component of authorities’ broader plan to maintain control of a rapidly digitising economy. 

1 Comment

Filed under Banking, Economy, Technology

US-China Trade Deal: A Less Than Wonderful World

Vice Premier Liu He and US President Donald Trump present the signed US-China Phase One economic and trade agreement during a ceremony at the White House in Washington DC on January 15, 2020. Photo credit: Xinhua/Wang Ying.

DONALD TRUMP TODAY applied his humungous signature and, in a tiny but telling sign of the continuing competition between the two powers, Vice Premier Liu He inscribed his name in matchingly large characters on the Phase One US-China trade agreement. The signing of the deal in a White House ceremony signals a pause to the escalating tariffs war between the two countries, but, as this Bystander has noted before, far from its conclusion.

The US president left the room to the strains of ‘What a Wonderful World’. Nonetheless, the next year and beyond in the world’s most critical bilateral relationship is likely to be uneasy. As Liu noted, both sides now must focus on the implementation of the deal.

However, even what that deal is still seems open to interpretation. In another telling couple of moments during the signing ceremony, Trump said that China had agreed to buy $50 billion worth of US farm produce. In his remarks, Liu put the figure at $40 billion, which is in line with the numbers in the actual agreement behind Trump’s signature.

Game on.

2 Comments

Filed under China-U.S., Trade

US-China Trade Talk Progress Seems Real If Ill-Defined

VICE-PREMIER LIU HE will be back in Washington next week for a further round of trade talks with the United States.

This follows a lightning round in Beijing on Thursday and Friday with US Treasury Secretary Steven Mnuchin and Trade Representative Robert Lighthizer. Afterwards, both sides talked up the progress made particularly, it is widely reported, over ‘forced technology transfer’, the requirement for foreign investors to yield intellectual property in return for market access.

There is still no official word on the chapter and verse of this progress, and the use of words such as ‘constructive ‘and ‘candid’ to describe the talks suggest significant sticking points remain, particularly over enforcement mechanisms, as we have noted before in regard to China’s proposed new foreign investment law. So this Bystander will reserve judgment for now.

Regardless, it does seem that Beijing is engaging with the issue to a degree that it has not before. Its old argument that there was nothing to talk about as forced technology transfer did not happen, has been abandoned for the threadbare nonsense that it always was.

The outstanding questions now are to what extent will Washington gloss over some of the unresolved matters and how far it will be prepared to go in making concessions that will let China’s top leadership not lose face domestically.

There will also need to be a close reading of the Chinese- and English-language versions of whatever final text of a deal is agreed for each of the six areas of discussion: forced technology transfer and cyber theft; intellectual property rights; services; currency; agriculture and non-tariff barriers to trade. Many a slip…

1 Comment

Filed under China-U.S., Technology, Trade

China Readies A New Era In Financial Policymaking

Headquarters of the People's Bank of China, Beijing 2015. Photo Credit: bfishadow. Licenced under Creative Commons.

THE GOVERNANCE REORGANISATION rubber-stamped by the recently concluded National People’s Congress has significantly changed the policy-making and regulatory landscape of the financial system.

As with other parts of the administration, it has consolidated agencies and strengthened the Party’s leading role over state administration.

The People’s Bank of China (PBOC) has emerged as the institutional lynchpin of the system with the banking and insurance industry regulators merged into the new China Banking and Insurance Regulatory Commission (CBIRC) and now reporting to the PBOC.

The central bank will be headed by Yi Gang, previously deputy to Zhou Xiaochuan, now 70 and who is retiring after 15 internationally respected years as governor. Yi nominally reports to the Standing Committee of the NPC but in effect to Liu He, long President Xi Jinping’s closest economic advisor and now elevated to vice-premier in charge of economic policy.

This all leaves China’s prime minister, nominally the country’s second-ranking official and customarily the one responsible for running the economy, pretty much out of the picture. That has been the de facto case for some time as Liu has been steering financial and economic policymaking from the leading group on the economy.

As vice premier, his remit will run to the financial sector, state-owned enterprise reform, industrial policy and relations with the United States. The remit underlines the twin challenges that China faces from a level of debt approaching 300% of GDP and in dealing with a United States that seems ready to start a trade war if that is what it thinks will let it get the upper hand in what the Trump administration sees as the United States existential struggle with China.

Liu’s academic credentials and worldliness are immaculate for a policymaker. However, his bureaucratic experience does not match. Yi’s promotion at the PBOC signals not only policy continuity at the central bank as it tackles deleveraging but the need for operational expertise, which Yi, a 21-year veteran of the central bank, brings.

Similarly, the appointment of Guo Shuqing as the Party boss in the central bank, and thus Yi’s senior in its political hierarchy, adds another experienced and tough-minded financial regulator to the mix — not to mention another ally of Xi’s.

Guo also heads the new CBIRC, previously having been chairman of the China Banking Regulatory Commission where he led the crackdown on shadow financing and helped clean up the interbank lending market. He has also been prominent in taming the more ambitious overseas acquisition ambitions of some Chinese companies and has experience as a stock market and foreign exchange regulator.

How the duopoly at the head of the PBOC will work in practice is illustrated by the fact that Guo also becomes deputy governor, with the ‘reform’ mandate, while Yi has been appointed deputy Party chief.

Zhou combined both the Party boss and governor’s role (although the foreign ministry has a similar split arrangement.)

China has no truck with Western notions of central bank independence as given to the US Federal Reserve, the Bank of England or the European Central Bank. The PBOC is subordinate to the government, which in the Xi era means evermore to the Party as he strengthens the Party’s leading role.

In that light, it will be Liu who will be setting the direction of, and Yi who will be running China’s financial and monetary policy with Guo ensuring regulatory and supervisory coordination on the one hand and political coordination on the other.

All three men are long-standing advocates of financial liberalisation. However, there are urgent short-term issues to resolve, notably the United States and debt, that will slow progress toward liberalisation. Cautious opening up of access to the financial system to foreign investors and more internationalisation of the yuan will continue, albeit not at the cost in either case of deregulation elevating financial risk.

One of the reasons for the consolidation of the supervisory agencies is to cut out as much as possible the regulatory fragmentation that has allowed the shadow banking system to take root. Financial stability is the political priority right now. The marching orders from the trio’s now all-powerful boss are to clean up the debt and rebalance the economy without crashing it — or having the United States crash it for them.

Leave a comment

Filed under Banking, Economy

Ten Questions About November’s Third Party Plenum

What is a Party plenum?

It is a high-level meeting of the broad leadership of the Chinese Communist Party. In attendance are the Politburo’s Standing Committee, the inner sanctum of Chinese power, currently seven strong, plus the some 200 members of the Central Committee, which is the level of power one rung below the Politburo. Committee members will also be the occupants of the most important state and government positions.

How often are plenums held?

Typically for four days every year in October during a Politburo’s five-year cycle, though they tend to be front loaded, which effects the timing. The current Politburo took over in November 2012, when its first plenum elected the key Party leaders; Xi Jinping was named as Party general secretary  and chairman of the Central Military Commission then. He and Li Keqiang were appointed to the lesser state posts of president and prime minister at the second plenum in February this year.

What is significant of third plenums?

These are the big policy setting meetings for a Politburo’s term. Deng Xiaoping announced China’s opening to the world at a third plenum in 1978 and Zhu Rongji introduced the idea of a socialist market economy at a third plenum in 1993 — as state media have been reminding their audiences incessantly. That is setting up this one to be of the same scale of importance. Xi and Li are expected to advance a sweeping proposal for economic reform to rebalance the economy, starting with financial markets reform and boosting the private sector.

Anything to be read into a November rather than October date for this third plenum?

Nothing beyond the complexity of preparing a reform package on the scale being mooted, squaring away vested interests, and the need to consult more widely than usual on how to implement it as the reforms will touch on such widely disparate areas of the economy.

How detailed will be the action plan coming out of the plenum?

The plenum sets Party policy. The government then has to come up with the detailed policies and priorities that puts the broad strategy into practice.  That is somewhat similar to the five-year plans. It is also a somewhat deductive process. The plenum is unlikely to produce either a blueprint for reform or a timeline. It more sets the overall direction and indicates what broad reforms have had political sign-off.

What are the key signposts to that direction?

  • Get the private sector out from under the shadow of the big state-owned enterprises;
  • Accelerate financial reform, particularly interest-rate liberalization, regulation of shadow banking, and greater internationalization of the currency;
  • Open up hitherto largely protected sectors such as energy, finance and telecoms to more international investment in order to improve their innovation and international competitiveness.
  • Lessen market distorting subsidies for power and other resources;
  • Reform local government financing to make it less dependent on land sales, and the corruption-plagued market distorting investment they encourage;
  • Relax the hukou system of household registrations to support the policy of urbanization, which is seen as critical to rebalancing the economy towards domestic consumption.

These are all  interconnected. For example, reform of local government finance will mean developing a municipal-bond market which will require financial-markets and foreign-exchange reforms to be fully effective.

Any chance of political reforms.

No. The new leadership is making a point of positioning its reforms as a continuation of those of its predecessors. Even though political reform seems to many to be the inevitable consequence of the economic reform path China is taking, the Party is kicking dealing with that day as far down the road as it can. Xi has been talking of the Chinese dream as an echo of the American Dream  and creating a moderately prosperous society. All is being kept within an economic  frame of creating a better standard of living for Chinese. That is the premise the Party’s claim to a monopoly on political power rests.

Where are the points of resistance to economic reform?

Xi has interwoven his anti-corruption campaign and strictures against official extravagance with his message of the need for deep economic reforms. That has mostly gone down well with the broad public and put local and provincial officials and some in the big state owned enterprises who could be expected to be resistant to change on the defensive. That is not to say there doesn’t remain substantial pockets of resistance to change from those who would potentially lose out. The leadership is hammering a message of both the necessity and inevitably of reform. At the recent World Economic Forum meeting in Dalian Li said, “China is now at such a crucial stage that without structural transformation and upgrading, we will not be able to sustain economic growth.”

How quickly will reform happen?

Some big (and profitable) state owned industries and provinces and municipalities are powerful commercial players now in their own right. They have the potential to be roadblocks to reform. Xi recognizes the risks of reforming them from the top down so seems to be pushing changes from the bottom up and side in that will require them to adapt to a new economic environment, but to be able to prosper by doing so. The internationalization of the yuan is an example of that process at work. But it also an example of how Xi’s approach will take many years of incremental change to take effect. But that might prove more effective in the long-term than hammering through change using political clout.

Who are now the key figures in pushing reform?

Xi and Li, who as prime minister is in charge of the economy, are the political prime movers. There has been a consensus among the very highest levels of the leadership for some years that China’s economy will need to move in the direction being advocated. Xi and Li would not have been able to assume the leadership had that not been the case. Among the key technocrats backing them up are central bank governor Zhou Xiaochuan, long-time proponent of reform, and Liu He, the new deputy director of the National Development and Reform Commission. Liu was a central figure behind the publication of the report the World Bank issued last year calling for the reform of state-owned monopolies and warning of China’s risk of being caught in the ‘middle income’ trap which would leave it unable to make a Japan and South Korea-like transition to being a developed economy. Liu has drafted the economic reform speech Xi give at the Plenum.

6 Comments

Filed under Economy, Politics & Society