China Politics Weekly
China Politics Weekly aims to keep business leaders, investors, diplomats, scholars and other China hands up to date on important trends in China. It is produced by Trey McArver, a London-based consultant providing advice and intelligence to firms and investors engaged in China and the region. You can find out more about Trey and CPW in this interview.
April economic data released last week was not pretty. Of particular concern is the fact that nominal GDP growth appears to have dropped below the average lending rate, meaning that servicing existing debt will become more difficult, increasing the risk of instability in the financial sector.
Premier Li acknowledged the weakness in the economy and promised more robust government actions to combat the slowdown, saying, “we must take more forceful actions to stabilize growth and combat difficulties”.
Targeted monetary easing will continue, but will have little success in increasing credit or stimulating the economy (though it may help sustain the bull run in the stock markets). More aggressive spending may help to give the economy a boost at the end of Q2 and into Q3, but will not stop the economy’s overall downward trajectory. Instead of looking for the economy to bottom out before bouncing back to 7% growth, companies and investors should prepare for a continued slowdown and focus their energies on how to succeed under conditions of slower growth.
The slowing economy makes structural reforms more urgent than ever. As Li said this week, “Our country is in a crucial period with challenges that need to be overcome and problems that need to be resolved”.
At the heart of the government’s reform agenda is reducing state intervention in the economy. On Tuesday, the government held a dedicated nationwide videoconference on administrative reform. Wednesday’s State Council meeting also focused on the issue, and Thursday saw promulgation of a State Council circular setting out government reform objectives.
The plan lists 65 tasks, complete with timelines and responsible bodies for implementation. It is a thoroughly pro-market, pro-business plan that seeks to:
- cancel over 200 items of government approvals and cancel all non-administrative reviews;
- reduce the number of investment projects that require review;
- further cancel verifications and approvals of vocational qualifications;
- eliminate charges on business that violate the law or are excessive;
- simplify the process for capital registration;
- integrate the business license, the certificate of organization codes, and the certificate of taxation registration into one certificate; and
- overhaul and regulate intermediary services.
The plan looks good on paper, and there is every reason to believe that central government technocrats believe in cutting red tape. The problem, as always, will be in implementation at the local level. As I argue in a recent editorial, “imposing discipline upon local party officials is arguably the most important — and most challenging — task facing Beijing’s leaders. Many of the key problems facing the country, from corruption to pollution, overcapacity to unsustainable debt levels, have been caused in large part by local leaders acting in contradiction to the wants of Beijing. China’s future, and the party’s legitimacy, rest on being able to impose discipline on wayward officials.”
There is reason for (guarded) optimism here. Li has ordered the government to set up a “comprehensive platform for supervision” that will use big data, cloud computing and “Internet plus” technologies. As the government becomes more sophisticated in employing these technologies, there is every reason to believe that they should aid the center in its efforts to rein in local governments.
Indian Prime Minister Narendra Modi was in China this week, making good on his pledge to visit the country during his first year in office. The optics looked good, with Xi’s offer to meet Modi in his home province of Shaanxi (mirroring Modi’s reception of Xi in Gujurat last year) showing that both sides are trying to put the best foot forward. Talks between the two leaders ran long by over an hour- another good sign.
The friendly tone, however, is not backed up by much practical cooperation. The reported USD 10 billion in deals signed during Modi’s visit pales in comparison with the USD 46 billion in deals reported during Xi’s recent visit to Pakistan. The gap looks even larger when you factor in that India’s economy is nine times the size of Pakistan’s. It’s good to see that China and India are working towards better relations, but there is no question as to who is China’s preferred partner in South Asia.
A different kind of trans-Pacific partnership
China’s active diplomacy turned itself towards Latin America this week, where Premier Li Keqiang is in the midst of a nine-day tour that will take him to Brazil, Columbia, Peru and Chile. China has pursued closer ties with the Latin America under this administration. While this is Li’s first trip to the region, President Xi Jinping has already visited twice. China has also created the Forum of China and the Community of Latin American and Caribbean States (CELAC), which held its first ministerial meeting in Beijing earlier this year. The group noticeably excludes the United States.
So far the trip has displayed all the hallmarks of the typical overseas visit of a Chinese leader: lots of rhetoric about a “community of common destiny” coupled with pledges for massive amounts of investment. In Brazil, Li and his coterie of 200 Chinese businessmen signed investment pledges of over USD 50 billion. Such deals are only the tip of the iceberg. In addition, it was announced that China Investment Corporation (CIC) has set up a company to manage overseas equity investments; the company will manage a fund that is expected to be over USD 40 billion. A USD 20 billion line of credit for infrastructure funding was also established, and Li also announced plans for a USD 30 billion fund to support industrial production capacity in the region. The China-Latin America Cooperation Fund also appears to have grown; when announced last year it was described as a USD 5 billion fund; on Li’s trip it is now said to have USD 50 billion.
China’s domestic economic agenda is very much at the heart of these deals, particularly when it comes to cooperation on “production capacity”. China wants to upgrade its economy, which means creating world-leading firms, increasing the export of Chinese technologies and moving “sunset industries” overseas. Li summed it up in Brazil, when he said, “we hope to export not only advanced technologies and equipment to Brazil, but also to set up factories and production streamlines to help create jobs”.
Li is doing more to promote Chinese industry abroad than simply acting as their chief salesperson to foreign governments. On May 16 the State Council issued a guideline that said “the government will work to help Chinese companies ‘go abroad’” by offering tax breaks and concessionary financing.
The growing footprint of Chinese industry abroad is a good thing for the world economy. Although Chinese overseas investment is sometimes met with skepticism, it often creates jobs and provides much needed investment in recipient countries.
However, Chinese investment abroad presents dangers for foreign companies. As Chinese companies gain more experience operating in foreign countries, they will increasingly challenge MNCs in more and more markets around the world. Companies that can assess the risk and prepare accordingly will be more successful in protecting market share.
Li’s visit to Latin America attempted to portray a friendly and open China. Meanwhile, back in Beijing Xi Jinping struck a much different tone, warning again of the dangers of foreign influences. The forum for these admonitions was the Central United Front Work Conference, held for the first time since 2006.
The United Front was designed to let non-Party organizations input into China’s policymaking process. United Front work has grown in importance under Xi. This can be seen by the fact that the Party’s United Front Work Department is fronted by a Politburo member (Sun Chunlan) for the first time in over two decades.
Liberals had hoped that the elevated status of the United Front would signal a larger voice for interest groups outside the Party. These hopes were misplaced; instead the new prominence of the United Front means exactly the opposite. The Party is not interested in what those outside the Party think- it wants those outside the Party to think what the Party tells them to think.
The work conference enumerated a slew of conservative goals, including indoctrinating non-Party intellectuals, co-opting new media sources to “cleanse” the internet and indigenizing religion within China, among others. It is not a good time to be a free thinker in China.
AIIB AOA OKed, to be signed ASAP
Preparations for establishment of the Asian Infrastructure Investment Bank (AIIB) took an important step forward this past week. The 5th Chief Negotiators’ Meeting was held in Singapore this week, and saw agreement on the bank’s Articles of Agreement (AOA). The AOA are scheduled to be signed next month.
Shi Yaobin, vice minister of Chinese Ministry of Finance and permanent chair of the Chief Negotiators’ Meeting, said “we will establish the AIIB by the end of the year, and start its operation as soon as possible, after legal ratification in certain number of countries”.
The Chinese are wasting no effort in ensuring the bank’s success. In and of itself, the AIIB is not a game changer, but it is part of a larger constellation of events that have signaled China’s growing influence in Asia and the world. I talked about these issues and more on a recent episode of the Sinica podcast, which can be found here:http://popupchinese.com/lessons/sinica/the-furor-and-the-asian-infrastructure-investment-bank.