War of Words - China-Bhutan Talks - Xi on Democracy & Common Prosperity - US-China Engagement - Evergrande Crisis - Inspecting Financial Institutions - Engaging Europe- China's Hypersonic Missile
Dear Subscribers,
I hope this finds you well. I wanted to highlight two things before we get on with the newsletter.
First, there was was a central conference on work related to people’s congresses in Beijing this week. Xi Jinping praised the people’s congress system and China’s “whole-process democracy.” I urge you to read through the full breakdown of the speech in my daily tracker.
But here are three points that I wish to highlight.
Xi said that the system was a “a great creation in the history of political systems as well as a brand new system of great significance in the political history of both China and the world.”
He said that systems/institutional competition (制度竞争) is an important aspect of competition in overall national strength, and institutional/systems advantage (制度优势) is an important advantage for a country to gain strategic initiative.
Finally, do note his comments about democracy not being an “ornament only for decoration, but to be used to address the issues that the people really care about.” And it being about delivery rather than elections and promises.
To me, all of this underscores that Xi does believe that there is a systemic and ideological competition that’s emerging. He believes that China actually has a rather strong hand in this competition, and it need not operate from a defensive posture. This will not just have foreign policy implications but also implies that Xi is interested in continuing to innovate on domestic policy. There’s no template per-say that he believes will help China answer the questions of the future.
The second thing I want to share is the first piece from a four-part series that I am writing for the Hindustan Times on ideology in Xi Jinping’s China. Subsequent pieces will be published over the next three weeks. Please feel free to share thoughts and feedback.
I. India-China Tensions
Let’s begin with the war of words between India and China after last Sunday’s 13th round of Corps Commander-level talks. The PLA’s Western Theater Command was the first to issue a statement after the talks. It said that
China and India held the 13th round of corps commander-level talks at the Chinese side of the Moldo-Chushul border meeting point on Sunday, during which India insisted on unreasonable and unrealistic demands, adding difficulties to the negotiations, the PLA Western Theater Command said in a statement released on Monday. Eyeing the overall situation in the China-India relations and the relations between the two countries' militaries, China has made tremendous efforts to ease and cool down the border situation and fully demonstrated its sincerity, said Senior Colonel Long Shaohua in the statement. China’s determination to safeguard sovereignty is unwavering, and China hopes India will not misjudge the situation, cherish the current, hard-earned situation and take actions with sincerity to safeguard the peace and stability at the border by abiding to the relevant agreements and consensus reached by the two sides, Long said.
In response, India’s MEA said that:
“The Indian side pointed out that the situation along the LAC had been caused by unilateral attempts of Chinese side to alter the status quo and in violation of the bilateral agreements. It was therefore necessary that the Chinese side take appropriate steps in the remaining areas so as to restore peace and tranquillity along the LAC in the Western Sector. This would also be in accord with the guidance provided by the two Foreign Ministers in their recent meeting in Dushanbe where they had agreed that the two sides should resolve the remaining issues at the earliest. The Indian side emphasised such resolution of the remaining areas would facilitate progress in the bilateral relations. During the meeting, the Indian side therefore made constructive suggestions for resolving the remaining areas but the Chinese side was not agreeable and also could not provide any forward-looking proposals. The meeting thus did not result in resolution of the remaining areas.”
Basically, things didn’t go as planned. A lot of the reporting prior to the talks had said that this round would lead to disengagement at Hot Springs. But, things seem to have gotten worse. Once again, I think Suhasini Haidar’s round-up and assessment of all of this is excellent.
The PLA is also clearly annoyed about the coverage on the Indian side regarding events related to the incident in the Dongzhang area in the Eastern Sector on September 28. I had covered this in last week’s edition. Two additional developments underscore this further. First, there’s a new leaked video from the Chinese side on social media, purportedly showing Indian troops in captivity after the clash in Galwan in June 2020.
Also this week, we had the Chinese foreign ministry lash out at Indian Vice-President Venkaiah Naidu’s visit to Arunachal Pradesh. Zhao Lijian said that:
The Chinese government has never recognized the so-called ‘Arunachal Pradesh’ established unilaterally and illegally by the Indian side and firmly opposes the Indian leader's visit to this above-mentioned area. China urges the Indian side to earnestly respect China’s major concerns, stop taking any action that would complicate and expand the boundary issue, and refrain from undermining mutual trust and bilateral relations.
The MEA responded promptly saying that “Arunachal Pradesh is an integral and inalienable part of India. Indian leaders routinely travel to the state of Arunachal Pradesh as they do to any other state of India. Objecting to the visit of Indian leaders to a state of India does not stand to reason and understanding of the Indian people.”
What this means is that for the second year in a row, troops on both sides are going to deal with the harsh winter conditions of the region. I also thought that these comments from Fudan University’s Lin Minwang were interesting.
“Troops from both sides encountered each other last winter, and they were both experienced [in the conditions]…They are not really worried about the winter snow and cold weather. They both will have made preparations for the continuation of the stand-off.” Lin said one of the frictions between the two sides was India’s proposal for both sides to return to their positions in the western section along the LAC of April last year. But China would only recognise the positions maintained in the aftermath of the 1962 border war. “From China’s perspective, India has been encroaching on China’s territory since 1962…China will not accept India’s proposal of clarification of the LAC.”
And these comments from Liu Zongyi from the Shanghai Institutes for International Studies:
India’s demands included disengagement at Hot Springs, the Depsang Plains and Demchok, requiring Chinese troops to withdraw behind India’s version of the border line. The two countries have differing interpretations of where parts of the LAC are drawn. “These are the places that used to be controlled by China,” Liu said. “Now India is asking Chinese troops to move backwards to the position it designated, which is not acceptable.” Hopes of achieving full disengagement before the harsh Himalayan winter were fading after the fruitless talks, and the military stand-off was likely to continue, Liu said. “This is a sovereignty issue that there’s no room for China to compromise on.” —
Two points to note on all of this. First, it’s simply not true that these areas were “controlled” by the PLA. Second, if Beijing’s putting the sovereignty argument at the centre, then it’s only going to get all the more difficult to reach an agreement.
Moving away from the boundary issue, India-China trade is on course to breach the $100-billion mark. So far this year, trade value is at 90.37 billion, up 49.3% year-on-year. PTI reports that China’s exports to India went up to $68.46 billion, up 51.7% year-on-year. Indian exports totalled to $21.91 billion, up 42.5%. So the trade deficit with Beijing is at $46.55 billion. India’s biggest exports to China are iron ore, cotton, and other raw material-based commodities. India imports mechanical and electrical machinery in large quantities, while imports of medical supplies have soared in the past two years.
Also do note this tweet by the Indian ambassador to China:
Finally, do note that Nayanima Basu reports for ThePrint that India is planning to host a meeting next month involving the national security advisers of all countries in the region with a stake in Afghanistan’s stability. Invites have reportedly been sent out on Friday, with the Pakistani and Chinese NSAs also being invited.
Also Read:
As India-China talks fail & tensions rise, Delhi concerned about another ‘Galwan-like flare-up’
India-China border conflict: Ladakh villagers want to be relocated as they are ‘living in fear’
Chinese PLA runs tank drills on Indian border as Ladakh talks fail
II. Understanding Common Prosperity
This week, Qiushi journal published an article with Xi Jinping’s byline addressing the issue of common prosperity. This article is drawn from a speech that Xi Jinping at the 10th Session of the Financial and Economic Commission. The article came towards the end of the week. Earlier in the week, we had a two-part series in the People’s Daily along with other pieces discussing the subject. You can access them in my weekly tracker: Part-1 + Part 2.
The Qiushi piece begins by saying that since reform and opening up, the Party has understood that poverty is not socialism. It broke “the shackles of traditional institutions, allowed some people and regions to get rich first, and promoted the liberation and development of productive forces.” 改革开放后，我们党深刻总结正反两方面历史经验，认识到贫穷不是社会主义，打破传统体制束缚，允许一部分人、一部分地区先富起来，推动解放和发展社会生产力.
He then argues that following the work done after the 18th Party Congress, the country has “now reached a historical stage of making solid progress in promoting common prosperity.” But why should common prosperity be pursued? Xi says:
High-quality development requires high-quality workers. Only by promoting common prosperity, increasing the income of urban and rural residents and enhancing human capital can we improve total factor productivity and consolidate the foundation of high-quality development.
He warns that income inequality, the gap between the rich and poor and the collapse of the middle class in some countries have led to “social disintegration, political polarisation and populism.” China must avoid this by promoting common prosperity and achieving social harmony and stability.
He also warns that China’s development remains unbalanced and inadequate, and new technological innovation while boosting economic development is also having a “profound impact on employment and income distribution, including some negative impacts that need to be effectively addressed.”
Finally, he says that Common prosperity is an essential requirement of socialism and an important feature of Chinese-style modernisation. When we talk about common prosperity, we mean affluence of all the people, their material and spiritual well-being, not the prosperity of a few people, nor uniform egalitarianism.” 共同富裕是社会主义的本质要求，是中国式现代化的重要特征。我们说的共同富裕是全体人民共同富裕，是人民群众物质生活和精神生活都富裕，不是少数人的富裕，也不是整齐划一的平均主义.
Then Xi gives us targets. He says that by 2035, more substantial progress will be made in achieving common prosperity for all, and there will be equalised access to basic public services. By the middle of this century, common prosperity for all will be basically achieved, and the gap between people’s income and actual consumption level will be narrowed to an appropriate range. We should promptly formulate an action plan for promoting common prosperity and put forward a scientific, feasible indicator system and assessment methods that are suited to China’s national conditions. 到2035年，全体人民共同富裕取得更为明显的实质性进展，基本公共服务实现均等化。到本世纪中叶，全体人民共同富裕基本实现，居民收入和实际消费水平差距缩小到合理区间。要抓紧制定促进共同富裕行动纲要，提出科学可行、符合国情的指标体系和考核评估办法.
He then outlined some principles that must be followed:
Encourage hard work and innovation. This involves pursuing high-quality development; creating opportunities for access to education and development; and opening up channels for upward mobility; and creating a system in which everyone can participate and grow rich; countering tendencies of “involution” and “lying flat.”
He talked about the basic economic system, backing backed the “two unwavering,” i.e., support for public and private sectors. He added that it is important to adhere “to the principle of public ownership as the mainstay” and ensure that “entities of different forms of ownership develop side by side.” But it is important to “give full play to the important role of the public sector in promoting common prosperity. At the same time, we need to promote the healthy development of the non-public sector and the healthy growth of non-public sector employees.” He acknowledges that while some people will get rich first, we need to “encourage those who work hard, do business legally and dare to start their own businesses.” 坚持基本经济制度。要立足社会主义初级阶段，坚持“两个毫不动摇”。要坚持公有制为主体、多种所有制经济共同发展，大力发挥公有制经济在促进共同富裕中的重要作用，同时要促进非公有制经济健康发展、非公有制经济人士健康成长。要允许一部分人先富起来，同时要强调先富带后富、帮后富，重点鼓励辛勤劳动、合法经营、敢于创业的致富带头人.
Next, he talks about policies that promote the better distribution of the fruits of development. In this context, in this paragraph he talks about limitations, saying that China still lags behind development countries in terms of its overall level of development, and says that there are limits to what the government can do. Don’t make promises that cannot be fulfilled. The point of all of this for Xi is for China to “resolutely prevent ourselves from falling into the trap of ‘welfarism’ and raising lazy people.” 防止落入“福利主义”养懒汉的陷阱.
He then says that common prosperity is a long-term goal. It won’t be achieved overnight. But, “we cannot wait or rush to get it done.” Ergo, “efforts should be made to build the common prosperity demonstration zone in Zhejiang, and local governments should be encouraged to explore effective paths in light of local conditions, sum up experience, and gradually expand it.” 要抓好浙江共同富裕示范区建设，鼓励各地因地制宜探索有效路径，总结经验，逐步推开.
Xi then says that it is important to put people at the center; correctly handle the relationship between efficiency and fairness; build basic institutional arrangements for the coordination of primary distribution, redistribution and tertiary distribution; adjust tax and social security policies; expand the middle-income group and raise incomes of low-income groups, reasonably regulate high incomes, ban illegal income, and form an olive-shaped distribution structure.
Then he outlines six agenda items:
Make development more balanced, coordinated and inclusive. In this, he specifically talks about speeding up reform of monopoly industries and promoting the coordinated development of the banking and real estate sectors with the real economy.
Increase the size of the middle-income group. This covers rural migrant workers, college graduates, skilled workers, etc. Here, he talks about improving the quality of and access to education, improving the business environment, reducing tax burdens, and providing more market-based financial services to help folks maintain operations and increase incomes, reforming the household registration system. He also talks about enhancing the “salaries and benefits of civil servants, especially front-line civil servants at the grassroots level and employees of state-owned enterprises and public institutions” along with “increasing urban and rural residents’ income from housing, rural land and financial assets.” 要适当提高公务员特别是基层一线公务员及国有企事业单位基层职工工资待遇。要增加城乡居民住房、农村土地、金融资产等各类财产性收入.
Then he talks about ensuring equal access to basic public services. In this paragraph, he reiterates that houses are for living and not speculation.
The fourth point is about regulating high incomes. Xi talks about “protecting legitimate income according to law” but also emphasises the need to prevent “polarisation and unfair distribution.” 在依法保护合法收入的同时，要防止两极分化、消除分配不公. He talks about moving forward with real-estate tax and studying expanding the scope of consumption tax collection. He talks about improving the “management of charitable causes, improving preferential tax policies, and encouraging high-income people and enterprises to give back more to society.” 要加强公益慈善事业规范管理，完善税收优惠政策，鼓励高收入人群和企业更多回报社会. He also talks about addressing “unreasonable incomes” and improve the “management of income distribution monopoly industries and state-owned enterprises.” In this regard, he specifically talks about addressing issues like high incomes of executives under the pretext of reform. He also talks about addressing stock market manipulation, financial fraud, tax evasion and other illegal activities. He also talks about addressing “the disorderly expansion of capital;” the need to “draw up a negative list for access to sensitive sectors” and “strengthen anti-monopoly supervision” He wants to do all this while arousing “the enthusiasm of entrepreneurs.”
Next, we come to spiritual and intellectual dimensions of common prosperity. Here, Xi talks about enhancing the “guidance of core socialist values” and “education in patriotism, collectivism, and socialism”. He also says that “it is necessary to strengthen public opinion guidance with regard to promoting common prosperity in order to clarify all kinds of vague understandings, avoid impatience for success and fear of difficulties, and provide a good public opinion environment for promoting common prosperity.” 要强化社会主义核心价值观引领，加强爱国主义、集体主义、社会主义教育，发展公共文化事业，完善公共文化服务体系，不断满足人民群众多样化、多层次、多方面的精神文化需求。要加强促进共同富裕舆论引导，澄清各种模糊认识，防止急于求成和畏难情绪，为促进共同富裕提供良好舆论环境.
The final point is about rural areas. He says that the most arduous task of common prosperity is in the countryside. Predominantly, this is about preventing people from slipping into poverty. But he also says that it is important to “promote rural revitalisation, accelerate the industrialisation of agriculture, put rural assets to good use, increase farmers’ property income, and enable more rural residents to get rich through hard work. We will strengthen rural infrastructure and public service systems and improve the rural living environment.”
Xi ends all this by saying that the process of achieving the goal of common prosperity will be dynamic. Not all will get rich at the same time, and there will be imbalances. One needs to be realistic, while continuing to push ahead.
Anyway, along with this I highly recommend this piece by Michael Pettis. He argues that:
“The goal of the common prosperity campaign, it seems, is to rebalance income levels through transfers from those who are rich to those who are not. But rather than doing so by raising wages—which would undermine export competitiveness in a country in which the export sector comprises a disproportionately large share of the economy—Beijing will focus partly on fiscal transfers and mainly on what it calls tertiary distribution. In Chinese economic jargon, primary distribution refers to wages and direct income as a source of disposable household income, whereas secondary distribution refers to fiscal transfers to households, and tertiary distribution—a little bizarrely—consists of donations by businesses and wealthy individuals. Rather than raise wages, in other words, Beijing will pass on what it deems to be the excess profits of businesses and the wealthy to middle- and working-class Chinese households in the form of fiscal transfers and donations from businesses and the wealthy. In this way, the Chinese government can keep domestic wages competitively low, while at the same time raising overall household income levels by effectively delivering to workers and the middle classes a higher share of business profits.
He identifies three problems to this approach:
First, low-levels of and supply-side focus on donations in China
Second, forcing private sector to do this could undermine economic dynamism.
Third, he argues that China’s low consumption rate isn’t primarily caused by an unequal distribution of income among households. It is mainly caused by the low household share of GDP, itself a function of the country’s very high government share of GDP. Therefore, the argument is that instead of business, Beijing should seek to transfer income from local governments to households. But this is politically difficult.
I also recommend this piece by Tianlei Huang and Nicholas Lardy. Amid all the talk about the government cracking down on the private sector, they argue that “the perception that China’s private sector is imperiled is overblown. In fact, the Chinese internet companies subjected to this campaign are a small component of a large private sector that is still investing, growing, and outperforming the state sector.”
They add: “The private companies hit by Beijing's regulatory tightening over the past year, though among the largest in terms of size, are simply a small portion of the entire private sector in China; there are probably many more innovative private firms that have yet grown big enough to be on anyone's radar.” As part of the evidence for this that they cite, they write that, “Monthly investment statistics released by the Chinese statistical authority show that “nongovernmental (minjian) fixed asset investment, which is predominantly made by private firms,4. continues to account for nearly 57-58 percent of total new investment through August 2021, despite the regulatory tightening of the past year.”
They end by saying: “many of the regulatory moves of the past year were abrupt, leading to a sharp decline in the value of some of the best-known Chinese private companies and roiling financial markets. The fast-changing regulatory environment is also making long-term planning more difficult for businesses and investors. Even though Beijing seems willing to trade short-term pain for long-term gains while setting guide rails for future growth, some economic self-harm could have been avoided if there were greater regulatory predictability. With the recent unveiling of a five-year blueprint on rule of law of the Chinese government that sets out goals in strengthening legislation in a range of areas including antitrust, it is widely held that the current regulatory crackdown is just the beginning of a wider campaign.”
I thought this was also an interesting data point:
Also Read:
III. Financial Institutions Inspections
we have a report telling us that as of Tuesday 15 inspection teams have been deployed across 25 financial institutions for a two-month-long assessment process. They’ve set up special telephone lines and mailboxes to receive information and complaints. The entities that are being inspected have also held a meeting with the respective teams in which the principal person in charge of the organisation being inspected was informed of the tasks that will be carried out.
The leaders of the central inspection teams pointed out that finance is the core of the modern economy, and is related to development and security. The inspections fully reflect the great importance attached to financial work by the CPC Central Committee. They are an important measure to strengthen the Party’s overall leadership over financial work, encourage financial institutions to strengthen Party building, especially political construction, promote comprehensive and strict party governance in the financial sector, and deepen the fight against corruption. Drawing on Xi Thought, the inspectors said that they would base their work on CPC plans and requirements on financial security, high-quality development and the synergy of anti-graft and risk control in the sector.
The report adds that they said:
“Taking the promotion of the ‘four consciousnesses’, strengthening the ‘four self-confidences’ and achieving the ‘two safeguards’ as fundamental tasks, we will will work to identify political deviations in fulfilling the party’s leadership responsibilities, and the major contradictions and outstanding problems impacting and limiting the high-quality development of the financial industry.” 把督促增强“四个意识”、坚定“四个自信”、做到“两个维护”作为根本任务，深入查找被巡视党组织履行党的领导责任存在的政治偏差、影响制约金融业高质量发展的主要矛盾和突出问题，
The inspectors also urged the organisations being inspected to consciously maintain a high degree of consistency with the Party Central Committee with Comrade Xi Jinping as the core when it comes to ideological and political action, be loyal and clean in order to fulfil their mandates, fully implement the new development concept and firmly deepen financial reform, better serve the real economy, and maintain the bottom line of no systemic financial risks to ensure the high-quality development of the financial sector.
It adds that the inspection would focus on the functions and responsibilities of financial institutions, strengthen supervision over the principal responsible persons and leading groups, strengthen supervision over the exercise of power in key areas, and implement the principle of strictness. 要把握共性、突出个性，紧扣金融行业不同板块、不同单位、不同层级特点，聚焦金融单位职能职责，加强对主要负责人和领导班子的监督，加强对重点领域、关键环节权力运行的监督，把严的主基调贯彻到底.
Also this:
“It is necessary to focus on studying and implementing General Secretary Xi Jinping’s important statements on financial work and the major decisions and plans of the CPC Central Committee, and fulfil the three tasks of serving the real economy, preventing and controlling financial risks, and deepening financial reform; focus on the implementation of the principal and oversight responsibilities for comprehensively governing the Party with strict discipline and improving the work style; focus on the implementation of the Party’s organisational line for the new era, strengthening the building of leading groups, cadres and talents, and community-level Party organizations; focus on the rectification of problems discovered during inspections and audits...”要重点了解学习贯彻习近平总书记关于金融工作重要论述和党中央重大决策部署，落实服务实体经济、防控金融风险、深化金融改革三项任务情况；重点了解落实全面从严治党主体责任和监督责任、加强纪律作风建设情况；重点了解落实新时代党的组织路线，加强领导班子建设、干部人才队伍建设和基层党组织建设情况；重点了解落实巡视、审计等监督发现问题整改情况.
And this:
The inspections provide an opportunity to consciously align ourselves with the requirements of the Party Central Committee, calibrate deviations, continuously improve political judgment, political understanding, political execution, keep in mind ‘国之大者’ - (matters of great significance to the state), take the initiative to adapt to the requirements of the new era and new stage, strengthen political responsibilities, perform duties conscientiously, resolutely implement the Party Central Committee on financial work decisions and deployments, and take practical action to practice the ‘two safeguards’.” 要以巡视为契机，自觉与党中央要求对表对标、校准偏差，不断提高政治判断力、政治领悟力、政治执行力，牢记“国之大者”，主动适应新时代新阶段要求，强化政治担当，扎实履职尽责，坚决落实党中央关于金融工作决策部署，用实际行动践行“两个维护”.
On this bit I do also recommend a few other things to read:
First, Lingling Wei’s WSJ report: Xi Jinping Scrutinizes Chinese Financial Institutions’ Ties With Private Firms and Nathaniel Taplin’s piece: For China’s Banks, Corruption Is Only Half the Problem
Second, this thread by Zichen Wang:
IV. Foreign Trade & Li on Economic Direction
Official data with regard to China’s foreign trade from January to September was released this week. The report tells us that:
“China’s total imports and exports expanded 22.7 percent year on year to 28.33 trillion yuan (about 4.38 trillion U.S. dollars) in the first three quarters of 2021, official data showed Wednesday. The figure marked an increase of 23.4 percent from the pre-epidemic level in 2019, according to the General Administration of Customs (GAC). Both exports and imports continued double-digit growth in the first nine months of the year, surging 22.7 percent and 22.6 percent from a year earlier, respectively.”
Also some other highlights from the report:
In the January-September period, China’s trade with its top three trading partners -- the Association of Southeast Asian Nations, the European Union and the United States -- maintained sound growth. During the period, the growth rates of China's trade value with the three trading partners stood at 21.1 percent, 20.5 percent and 24.9 percent, respectively.
China's trade with countries along the Belt and Road rose 23.4 percent year on year during the same period, while the country's trade with members of the Regional Comprehensive Economic Partnership climbed 19.3 percent, customs data shows.
China's exports and imports accounted for approximately 13.2 percent of the global total in the first half of the year, up 0.8 percentage points over a year earlier.
Private enterprises saw imports and exports increase 28.5 percent to 13.65 trillion yuan in the first nine months, accounting for 48.2 percent of the country's total.
The imports and exports of state-owned enterprises rose 25.1 percent to 4.35 trillion yuan in the period.
Later in the week Li Keqiang spoke (full speech and English report) at the opening of the Canton Fair. He spoke about the impact of the pandemic and the said that:
We must insist on the supremacy of life and join hands to fight the pandemic. This bit entailed talking about “vaccine nationalism” and promoting “the spirit of science.”
We must persist in openness and cooperation to jointly promote economic recovery. Here, he talked about the need to have “free trade and fair trade, strengthen policy coordination, increase the production and supply of bulk commodities and key parts, improve the supply capacity of important commodities…” and smooth operation of global supply chains.
We must persist in inclusiveness and benefit, and promote common development. Here he talked about the need to “promote economic globalization toward a more open, inclusive, balanced, and win-win direction.”
He then talked about the Chinese economy. Some of the key point he mentioned are:
The Chinese economy has sustained a steady recovery, and the major economic indicators have been running within an appropriate range.
From Jan to September, the daily average number of newly registered market entities exceeded 78,000. Also, more than 10 million new jobs have been created in urban areas.
But, the recovery is still unstable and unbalanced. There are challenges of high commodity prices and sharp increase in logistics costs. There are issues of high operating costs of mid- and downstream industries and small, medium and micro enterprises. Energy supply is encountering new challenges. Also, the pandemic has restricted the recovery of the consumer market and the service industry.
He then said: “Development is the foundation and key to solving all problems in China.”
He then spoke about China’s foreign trade, arguing that “in recent years, the average growth rate of China’s imports has been higher than that of exports. Last year, the global share of imports increased to 11.5%. We will maintain the continuity and stability in our foreign trade policy and continue to expand imports of high-quality products and services.” He spoke about establishing new integrated pilot zones for cross-border e-commerce. Before the end of the year, there will be full coverage of all cities in Guangdong. He also spoke about the development of new business forms such as overseas warehouses and overseas smart logistics platforms.
On foreign investment, he promised to “further shorten the negative lists on the market access of foreign investment, zero out the manufacturing items on the negative list in pilot free trade zones, and keep easing access to the services sector.” He added that “China will ensure the high-standard implementation of the post-establishment national treatment for foreign investors.” He wants foreign investors to increase investment in such areas as medium and high-end manufacturing and modern services and in the central and western regions. He added: “Foreign-invested firms are encouraged to undertake commissioned research and development business and projects in China’s National Science and Technology Plan.”
On international regimes, he said that China welcomes all regional free trade arrangements that conform to WTO principles. On the WTO, he said that “we have faithfully fulfilled our WTO commitments. The current overall tariff level has dropped to 7.4%, which is a relatively low level in the world. China supports the necessary reforms of the WTO, but it must adhere to its basic principles and core values, and fully accommodate the interests and concerns of all parties.” He spoke about pushing the implementation of RCEP and then promised to “actively promote the process of joining the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP).” He also talked about China eyeing deals to expand its role in “global digital and green governance.”
Finally, Q3 economic data is expected next week. CNBC reports that “most major investment banks have trimmed their economic predictions for the year and warned that abrupt power cuts and a property market slump may drag down growth. CNBC tracked estimates for China’s full-year GDP from 13 major banks, 10 of which have cut their forecasts since August. The median prediction is growth of 8.2% this year, following the latest cuts. That’s down 0.3 percentage points from the prior median forecast. Of the firms CNBC tracked, Japanese investment bank Nomura has the lowest full-year forecast for China at 7.7%. Southeast Asia’s largest bank, DBS, has the highest at 8.8%.”
SCMP reports that buffeted on all sides by a property slump, energy crisis, weak consumer sentiment and soaring raw material costs, China’s third quarter economic growth could drop to as low as 4.9 per cent, analysts say…after posting 7.9 per cent gross domestic product (GDP) growth in the second quarter, economists have been steadily downgrading their growth forecasts ahead of Monday’s official data release. Natixis has offered one of the most bearish outlooks, predicting a slump to 4.9 per cent growth in the third quarter, while both Standard Chartered Bank and the median estimate of analysts in a Bloomberg poll said the economy would expand at 5 per cent.”
Also Watch: Is China's economic model broken?
V. Engaging Europe
On Friday, Xi Jinping spoke to European Council President Charles Michel. Xinhua says that Xi called China and the EU “two major independent forces, and comprehensive strategic partners.” He pointed to “new problems” in the relationship this year, calling for the need to “perceive each other correctly, and stay committed to dialogue and cooperation and to mutual respect and mutual benefit.” He identified the need for policy communication in “green and digital fields.” Xi also “expressed the hope that the EU will uphold strategic autonomy, distinguish between right and wrong, and work with China to push forward the development of China-EU cooperation.”
As per Xinhua, Michel said that recent developments in the international situation have made the EU and its members more aware of the importance of enhancing strategic autonomy. He added, the two sides need to cooperate in fighting the pandemic, promoting economic recovery, addressing climate change and safeguarding regional peace and stability. And he reportedly said that the EU abides by the one-China policy and has never changed its policy on Taiwan-related issues, adding that the EU will uphold strategic autonomy in handling international affairs.
They also talked about the situation in Afghanistan. I could not find an official readout from the EU side; it astounds me why in this information age, one would let the other set the narrative. But here’s what Michel tweeted:
Earlier in the week, Xi spoke to outgoing German Chancellor Angela Merkel. Xinhua English has the story too. Here’s a snippet:
“Xi said that ‘for making acquaintances, the most valuable thing is mutual understanding, and for people to have mutual understanding, the key lies in knowing what is on each other's mind.’ ‘This saying is not only a good illustration of our in-depth exchanges over the years, but also reflects the important experience in maintaining the smooth and sound development of China-German relations over the past 16 years,’ Xi added. As the Chinese people put a premium on friendship, said Xi, China will not forget old friends and will always keep the door open for Merkel, voicing the hope that Merkel will continue supporting the development of China-German and China-EU relations.”
Xi added that under Merkel, the two countries had shown that states can “avoid the zero-sum game and achieve mutually beneficial results on a win-win basis.” That’s how he hoped ties would continue to develop.
More from Xinhua: “He said the two sides should view China-EU relations from a broader perspective, understand each other objectively and comprehensively, and handle differences rationally, peacefully and constructively. ‘It is hoped that the EU can insist on independence, truly safeguard its own interests and the unity of the international community, and work together with China and other countries to resolve the issues of peace and development,’ Xi said.” --- Is it just me or does it sound like Xi’s doing a good job of playing on European insecurities?
PD has Merkel saying:
“I have always maintained that the EU should independently develop its relations with China, and the two sides can strengthen dialogue and exchanges on issues on which they have differences...I will continue to make positive efforts to promote understanding and cooperation between Germany and China and between Europe and China.” 我一贯主张, 欧盟应独立自主地发展同中国的关系, 双方可以就彼此存在差异和分歧的问题加强对话交流, 相信欧中关系能够克服各种复杂因素继续发展. 我将继续为促进德中、欧中理解与合作作出积极努力.
Amid all this, US Secretary of State Antony Blinken met with the EU’s Josep Borrell in DC. The State Department’s readout says that “the Secretary welcomed the EU’s Indo-Pacific strategy, and he and the High Representative agreed to launch high-level consultations on the Indo-Pacific in late 2021.” Specific talks on China will be held in December. Also do note this from SCMP’s coverage of all of this:
“Europe’s renewed engagement with China comes amid France’s continuing anger over the Aukus pact, which will see Australia scrapping a contract to buy French submarines in favour of US nuclear-powered subs under its three-way alliance with Britain and the US. The announcement has strengthened the resolve in some parts of the EU to re-engage with China after a rocky first six months of 2021 in which sanctions were exchanged and a bilateral investment deal effectively paralysed. France in particular has ramped up its rhetoric about “strategic autonomy”, meaning that European countries should not be beholden to either the US or China. Emmanuel Macron will be expected to discuss this with Joe Biden at the G20 Summit in Rome later this month. In an interview with The New York Times this week, French Finance Minister Bruno Le Maire said: “The United States wants to confront China. The European Union wants to engage China.” He also said the EU must be “independent from the United States, able to defend its own interests, whether economic or strategic interests”. The bloc’s 27 national leaders gathered in Brdo, Slovenia last week for talks that were supposed to be about China, but the agenda was broadened at the last minute to include Aukus, Afghanistan and EU defence strategy. One senior diplomat in attendance said that this was at the behest of France and that during the event “Macron majored on the fallout of Aukus and the need for a proper EU Indo-Pacific strategy”, as well as reinforcing the importance of strategic autonomy. A second diplomat said that China was given “about 10 minutes” in the three-hour discussion, although other topics touched on China indirectly.
VI. Region Watch
Bhutan and China have signed a memorandum of understanding (MoU) for a ‘three-step road map’ to advance boundary negotiations. Expected to give fresh impetus to the boundary talks, the roadmap is said to be constructed on the 1988 Joint Communique on the Guiding Principles for the Settlement of the Boundary and had been decided on during the tenth expert group meeting at Kunming in April this year.
The reaction to the MoU varies. Beijing’s praised the development with Assistant Foreign Minister Wu Jianghao declaring:
‘(the MoU) will make a meaningful contribution to speeding up the negotiation on demarcation and promoting the process of establishing diplomatic ties between the two countries.’
Thimphu anticipates that the diplomatic channel will produce a successful resolution to the dispute, one that is agreeable to both sides. Experts told Global Times that the signing is a milestone that will break the nearly four-decade-long impasse between the two sides. Lin Minwang, a professor and assistant dean at the Institute of International Studies at Fudan University, described to SCMP how the MoU is China’s tactic to apply pressure on India, with the last round of India-China military talks doing little to ease tensions. Medha Bisht, an expert on Bhutan’s foreign policy and boundary issues, told The Wire that the agreement was expected since ‘Much of the ground work had already been done since 2010.’
Officially, India acknowledged the MoU but offered no further comment. A Global Times opinion piece asserted that India must ‘end its old-fashioned control over Bhutan’ and support the border negotiations instead of using Bhutan as a spearhead for its China policy.
The article also calls out India’s ‘abnormal influence’ on others in the region, like Nepal and Sri Lanka. This leads me to a new Carnegie Endowment for International Peace study on how China has leveraged specific vulnerabilities of four countries in the region in pursuit of its interests. Through extensive workshops and comprehensive interviews, the study analyzes China’s impact on the inherent and some nurtured vulnerabilities across four cases. Among the principal takeaways was that the four countries 'exercise agency and ultimately determine the terms of their relationships with China' of which Bangladesh has been an outstanding model. Skilful navigation of the bilateral relationship has led Dhaka to gain without being forced by intense arm-twisting. Recently, Commerce Minister Tipu Munshi said:
‘There is no doubt that China is a great friend of Bangladesh and they play a big role in our development efforts,’
Meanwhile, Ambassador Mahbub Uz Zaman revealed Bangladesh’s willingness to work with China on biodiversity protection. But political friendships are not mirrored on the ground. According to reports, Chinese nationals engaged with a BRI project in Bangladesh have physically, mentally, and even financially harassed the local labour. The report claims that should the tension continue, the Chinese nationals might incite the wrath of the locals that could unfavourably affect China’s FDI in the country.
Speaking of labour dynamics in BRI projects, a report suggests that China has sought compensation from Pakistan for the Chinese nationals wounded and killed after a bus carrying the Dasu Hydropower Project's staff was hit by an explosives-laden car. The Chinese firm, China Gezhouba Group Corp, which suspended work on the Dasu project after the incident in July has not resumed work. The company maintains it will not proceed until a compensation package and more security for Chinese nationals are provided. Pakistan China ties have come under further strain over unreliable Chinese military hardware and inadequate servicing and maintenance. Armed drones, designed by Chengdu Aircraft Industry Group of China and sold by China National Aero-Technology Import & Export Corporation (CATIC), were inducted into the Pakistan Air force (PAF) in January 2021. However, the unmanned combat aerial vehicles (UCAVs) have been grounded due to defects within days of induction. Additionally, the spare parts provided by the firm with the drone were a mismatch, while the fueling equipment was unserviceable due to contamination.
VII. The Long & Short of It…
a. China’s Hypersonic Missile:
Demetri Sevastopulo and Kathrin Hille report for the Financial Times that China tested a nuclear-capable hypersonic missile in August. The missile circled the globe before speeding towards its target, demonstrating an advanced space capability that caught US intelligence by surprise. The report says that:
five people familiar with the test said the Chinese military launched a rocket that carried a hypersonic glide vehicle which flew through low-orbit space before cruising down towards its target. The missile missed its target by about two-dozen miles, according to three people briefed on the intelligence. But two said the test showed that China had made astounding progress on hypersonic weapons and was far more advanced than US officials realised. The test has raised new questions about why the US often underestimated China’s military modernisation. “We have no idea how they did this,” said a fourth person.
b. Evergrande Risks ‘Controllable’:
Evergrande, the embattled Chinese property giant, continues to struggle for survival. CNBC reports that the company another payment to investors in U.S. dollar-denominated debt on October 11. So far, the company has missed three interest payments and will default if it fails to pay $119 million by October 23, reports SCMP.
While there are clearly concerns in Beijing, if the PBOC is to believed, these are not unmanageable. Zou Lan, director of the People’s Bank of China’s financial markets department, said this week that the risk from Evergrande are “controllable.” Zhou added that “China Evergrande Group’s problems in the real estate industry are an individual phenomenon,” he said, noting that property prices have remained stable. “Most real estate businesses are operating stably and have good financial indicators, and the real estate industry overall is healthy.”
The report adds that: “Zou added Friday that authorities would protect individual consumers when it came to their house purchases, and provide financial support for the resumption of construction.” Zhou also had some strong criticism for the company. “It had poor management in recent years. It failed to run its businesses cautiously according to changes in market conditions, but expanded blindly…This led to the deterioration of operational and financial indicators and eventually broke into a crisis.”
Meanwhile, Reuters reports that Evergrande Group’s chief executive is holding talks in Hong Kong with investment banks and creditors over a possible restructuring and asset sales. The Evergrande case differs from the Lehman situation in many ways. One key aspect is the company’s physical assets, which can be monetised. But this is not going to be easy. This week Reuters reported that Guangzhou government-backed Yuexiu Property dropped a proposed $1.7 billion offer to buy Evergrande’s 26-storey office tower in Wan Chai. Reuters cited two sources saying Yuexiu’s board had opposed the move over worries that Evergrande’s unresolved indebtedness would create potential complications in completing the transaction smoothly.
c. Le Yucheng on US-China Ties:
Chinese Vice Foreign Minister Le Yucheng spoke to CGTN’s Liu Xin, offering some details about the nature of re-engagement between the US and China. I covered the talks between Liu He and Katherine Tai and Jake Sullivan and Yang Jiechi last week. Minister Le said his this week:
what happened in Afghanistan is an epitome of the once-in-a-century changes across the world. The most important thing to be learned is that the time has passed when superpower can just throw its weight around. The United States is a giant, mighty and formidable, while Afghanistan is a war-torn country, poor and weak. But everyone sees clearly how the United States left Afghanistan in a panic after paying a high price. As we said before, gone are the days when one country, armed with only a couple of cannons, could occupy another. The Afghan War once again shows that hegemony cannot be maintained however advanced the weapons you have.
He then talked about the recent engagement between the two countries, and added:
“the two sides have recently established a joint working group to discuss how to address some specific issues in bilateral relations. And they do have made some progress. This proves that dialogue and cooperation are indispensable, and that confrontation and conflict will lead us nowhere. We take seriously U.S. recent positive statements on China-U.S. relations. We hope to see them translated into policies and actions, and more concrete steps being taken so that the two sides can work together to answer what we call the ‘Question of the Century’: whether we can handle our relations well. This is a question the two sides must provide a good answer.”
On AUKUS, he said: “AUKUS is a small bloc composed of Anglo-Saxon nations. It advocates a new Cold War, and stirs up zero-sum geopolitical games. AUKUS brings only harm, nothing good at all.”
He also criticised the Biden administration on the proposed democracies summit and the Taiwan issue. His comments on the Meng Wanzhou issue are also noteworthy:
“The Chinese authorities always had Meng Wanzhou in mind during her nearly three years of illegal detention. President Xi Jinping paid personal attention to the situation. During his phone call with U.S. president, President Xi raised the issue explicitly and urged the U.S. to properly resolve it as soon as possible…Meng Wanzhou was freed from not only the electronic tracker, but also the shackles of hegemony and coercion, and it shows that nothing can stand in the way of Chinese people's march forward.”
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