MERICS Blog - European Voices on China en Belt and Road reality check: How to assess China’s investment in Eastern Europe <span>Belt and Road reality check: How to assess China’s investment in Eastern Europe</span> <span><span lang="" about="/en/user/301" typeof="schema:Person" property="schema:name" datatype="">smuscat</span></span> <span>Tue, 07/10/2018 - 15:08</span> <div class="layout layout--onecol"> <div class="layout__region layout__region--content"> <div class="field field--name-field-blog-date field--type-datetime field--label-hidden field--item"><time datetime="2018-07-10T12:00:00Z">10/07/18</time> </div> <div class="field field--name-field-authors field--type-entity-reference field--label-hidden field--items"> <a href="/en/team/thomas-s-eder" hreflang="en">Thomas S. Eder</a>, <a href="/en/team/jacob-mardell" hreflang="en">Jacob Mardell</a> </div> <div class="field field--name-field-announcement-text field--type-text-long field--label-hidden field--item"><p><span><span><span><span><strong>The reality of Beijing’s investment in Central and Eastern European countries falls short of the rhetoric at the 16+1 summits. Numbers on Chinese investment connected to the Belt and Road Initiative tend to be inflated and misleading. Only a fraction of the reported sums is connected to actual infrastructure projects on the ground. And most of the projects that are underway are financed by Chinese loans, exposing debt-ridden governments to additional risks.</strong></span></span></span></span></p></div> <div class="field field--name-field-main-image field--type-image field--label-hidden field--item"> <img srcset="/sites/default/files/styles/max_325x325/public/2018-07/MERICS_Silk_Road_v8.jpg?itok=o_VixeU8 325w, /sites/default/files/styles/max_650x650/public/2018-07/MERICS_Silk_Road_v8.jpg?itok=ZMtDYFG5 650w, /sites/default/files/styles/max_1300x1300/public/2018-07/MERICS_Silk_Road_v8.jpg?itok=LrtelR_L 1280w" sizes="(min-width: 1290px) 1290px, 100vw" src="/sites/default/files/styles/max_325x325/public/2018-07/MERICS_Silk_Road_v8.jpg?itok=o_VixeU8" alt="The MERICS Belt and Road Tracker draws from a database of projects in China&#039;s Belt and Road Initiative (BRI)." title="MERICS Belt and Road Tracker. Static map of projects worldwide." typeof="foaf:Image" class="img-responsive" /> </div> <div class="field field--name-body field--type-text-with-summary field--label-hidden field--item"><p><span><span><span><span>Great fanfare and grandiose promises have been the hallmark of previous 16+1 summits. The seventh annual summit of the sub-regional platform initiated by China with sixteen Central and Eastern European (CEE) countries on July 7 was different. The initial Eastern European euphoria about China’s investment promises has given way to a more sober mood – with some heads-of-government who had been eager to attend in the past keeping a distance from the event.</span></span></span></span></p> <p><span><span><span><span>The new skepticism is justified. As the database behind the <a href="">MERICS Belt and Road Tracker</a> shows, most of the promised infrastructure funding has not yet materialized. And for many projects that did get off the ground, Chinese money comes in the form of enormous loans that might overwhelm the tiny target economies.</span></span></span></span></p> <p><span><span><span><span>After earlier rumors that the summit might be cancelled this year, Poland only sent a deputy prime minister and Lithuania only its minister of finance. Even on the customary announcement of (often vague) deals, results look rather meager. Tellingly, the <a href="">China-Serbia Friendship Bridge</a> completed in 2014 was <a href="">trotted out</a> as an infrastructure deliverable for the third time. While some on the Chinese side worry about the financial sustainability of an ongoing global investment spree, a number of CEE governments appear to take a more sober look at the benefits they might reap. </span></span></span></span></p> <p><span><span><span><span>The 16+1 grouping was first formed in 2012, predating Xi Jinping’s Belt and Road Initiative (BRI) by just over a year, but the two are strongly associated. Beijing sees the 16+1 format as a platform for the <a href="">promotion of BRI</a>, and <a href="">infrastructure</a> is a principal focus of 16+1 cooperation. But how much infrastructure is actually being built by the PRC in 16+1 countries, how much money does China spend, and how much of it comes in the form of loans that have to be repaid whether the projects make economic sense or not?</span></span></span></span></p> <p><span><span><span><span>The regularly updated MERICS BRI database can tell a meaningful story about Beijing’s economic involvement in the region. The available data provides clues as to the character of Beijing’s investment, but even the overall sparsity of information sends an important message as it illustrates the gap between 16+1 rhetoric and the reality on the ground.</span></span></span></span></p> <p><span><span><span><span><strong> Most “deals announced” remain in planning stage</strong></span></span></span></span></p> <p><span><span><span><span>Depending on the source, BRI is called either a <a href="">900 billion USD</a> or an up to <a href="">8 trillion USD global initiative</a>. Yet only a fraction of the lower number is backed up by actual projects on the ground. BRI investments in 16+1 countries are similarly plagued by confusion over figures and a tendency towards inflation. </span></span></span></span></p> <p><span><span><span><span>Media reports often arrive at their figures for the sum of “deals announced” by collating <a href="">planned projects</a> based on vague Memoranda of Understanding (MoUs) and expressions of interest by Chinese companies. Many parties share an interest to push Belt and Road-related figures upwards: local officials in BRI target countries like to impress constituencies, journalists like to capture readers, and Chinese officials are keen to cultivate the hype surrounding BRI.</span></span></span></span></p> <p><span><span><span><span>But there is zero guarantee that all these “deals announced” will materialize. Figures bandied about after 16+1 summits do not therefore reflect the reality of Beijing’s economic impact in the region.</span></span></span></span></p> <p><span><span><span><span>According to the MERICS BRI database, Beijing has since 2013 (co-)financed now completed infrastructure projects in the 16+1 region to the tune of 715 million USD. More than 3 billion USD of Chinese financing is connected to projects currently under construction. For planned projects, the figure is either below 7 billion USD, or above 10 billion, depending upon what you count and whom you believe. If you count any project for which Export-Import Bank, a Chinese policy bank, has suggested a number, then the figure is very high indeed, but experience suggests that many such projects are never realized. Context and explanations are needed to make these numbers mean anything.</span></span></span></span></p> <p><span><span><span><span>The Banja Luka - Mlinište Highway in Bosnia Herzegovina, for example, is strongly associated with 16+1 investment. Sinohydro signed a preliminary agreement on implementing the project in 2014, for 1.4 billion USD, and this figure was then widely reported in English-language media. Four years later, though, final approval for an Export-Import Bank loan financing the highway section was <a href="">still pending</a>. This highway is actually one of the projects emerging in the region that we have fairly good information on, but the preliminary nature of the agreement is not reflected in media reports on the project.</span></span></span></span></p> <p><span><span><span><span>Also in 2014, China Huadian signed an <a href="">agreement</a> on the construction of a 500MW power station in Romania, <a href="">reportedly</a> for 1 billion USD. Talks faltered, appeared to resume in 2017, and there has been no progress reported since. It is unclear whether and when this project will materialize, but it is the sort of “deal” counted by those totting up the value of Chinese investment in 16+1 countries. An even larger figure – 1.3 billion – was <a href=";mm=01&amp;dd=20&amp;nav_id=89039"><span>reported</span></a> in connection with Kolubara B, though it was <a href=""><span>later claimed</span></a> that a cooperation agreement with Italian company Edison had already been signed, three years prior to the expression of interest by Sinomach. </span></span></span></span></p> <p><span><span><span><span><strong>Chinese loans might overwhelm small economies</strong></span></span></span></span></p> <p><span><span><span><span>Another important point is that Chinese “investment” in the region – and this very clearly emerges from the MERICS database – often refers to concessional loans from Chinese policy banks. This is financing that needs to be paid back, with interest, whether the project delivers commensurate economic benefits or not. It does not make sense to measure these loans against EU funds, which often come in the form of grants, nor to compare them with private investment based on profit calculations.</span></span></span></span></p> <p><span><span><span><span>As with <a href="">Belt and Road projects elsewhere</a> in the world, loans made by Beijing to CEE countries create potential for financial instability. Smaller countries, which might lack the institutional capacity to assess agreements (such as risks associated with currency fluctuation), are particularly vulnerable. </span></span></span></span></p> <p><span><span><span><span>The <span><span>Bar-Boljare motorway in Montenegro illustrates this point. It is being built by the China Road and Bridge Corporation (CRBC) with an 809 million EUR loan from Exim Bank</span></span>. The <a href="">IMF claims</a> that, without construction of the highway, Montenegro’s debt would have declined to 59% of GDP, rather than rising to 78% of GDP in 2019. It warns that continued construction of the highway “would again endanger debt sustainability.”</span></span></span></span></p> <p><span><span><span><span>The motorway is typical of many BRI projects in that it is being built by a Chinese state-owned company, <a href="">using mostly</a> Chinese workers and materials, and with a loan that the Montenegrin government must pay back, but which a Chinese policy bank will earn interest on. On top of this, Chinese contractors working on the highway <a href="">are exempt</a> from paying VAT or customs duties on imported materials. </span></span></span></span></p> <p><span><span><span><span>Clearly the reality of Beijing’s investment in CEE countries falls short of 16+1 <a href="">rhetoric</a>. Particularly small Western Balkans economies would do well to not overestimate the volume of the infrastructure investment they might expect. And they would be well advised to not underestimate the (different kind of) strings attached. </span></span></span></span></p></div> <div class="field field--name-field-blog-paragraphs field--type-entity-reference-revisions field--label-hidden field--items"> <div class="field--item"> <div class="paragraph paragraph--type--image-whole-width paragraph--view-mode--default"> <div class="layout layout--onecol"> <div class="layout__region layout__region--content"> </div> </div> </div> </div> </div> </div> </div> Tue, 10 Jul 2018 13:08:26 +0000 smuscat 7771 at “Hollywood is compromising freedom of expression to stay in China” <span>“Hollywood is compromising freedom of expression to stay in China”</span> <span><span lang="" about="/en/user/306" typeof="schema:Person" property="schema:name" datatype="">komprakti</span></span> <span>Fri, 07/06/2018 - 10:12</span> <div class="layout layout--onecol"> <div class="layout__region layout__region--content"> <div class="field field--name-field-blog-date field--type-datetime field--label-hidden field--item"><time datetime="2018-07-06T12:00:00Z">06/07/18</time> </div> <div class="field field--name-field-announcement-text field--type-text-long field--label-hidden field--item"><p>Interview with Martha Bayles</p> <p><strong>For Hollywood China is a huge market it cannot afford to ignore. But closer co-operation with the Chinese movie industry has not always gone well: Expensive co-productions like “The Great Wall” flopped at box offices worldwide in 2016. Yet Hollywood is still keen on China and willing to go a long way to please Chinese censors by tweaking scripts or replacing Chinese villains with baddies from North Korea. “Hollywood is compromising freedom of expression to stay in China,” warns film critic and Boston College lecturer Martha Bayles. </strong></p></div> <div class="field field--name-body field--type-text-with-summary field--label-hidden field--item"><p>Questions: <a href="/team/ruth-kirchner">Ruth Kirchner</a></p></div> <div class="field field--name-field-podca field--type-file field--label-hidden field--items"> <div class="field--item"><span class="file file--mime-audio-mpeg file--audio icon-before"><span class="file-icon"><span class="icon glyphicon glyphicon-headphones text-primary" aria-hidden="true"></span></span><span class="file-link"><a href="" type="audio/mpeg; length=36292608" title="Open audio file in new window" target="_blank">Merics Experts 59 - Martha Bayles.MP3</a></span><span class="file-size">34.61 MB</span></span></div> </div> </div> </div> Fri, 06 Jul 2018 08:12:02 +0000 komprakti 7746 at Europe's AI strategy is no match for China's drive for global dominance <span>Europe&#039;s AI strategy is no match for China&#039;s drive for global dominance</span> <span><span lang="" about="/en/user/451" typeof="schema:Person" property="schema:name" datatype="">backendadmin</span></span> <span>Fri, 06/15/2018 - 17:04</span> <div class="layout layout--onecol"> <div class="layout__region layout__region--content"> <div class="field field--name-field-blog-date field--type-datetime field--label-hidden field--item"><time datetime="2018-06-29T12:00:00Z">29/06/18</time> </div> <div class="field field--name-field-announcement-text field--type-text-long field--label-hidden field--item"><p><span lang="EN-US" xml:lang="EN-US" xml:lang="EN-US">Caroline Meinhardt, Michael Laha, Rebecca Arcesati, Václav Kopecký </span></p> <p><span><span><strong><span lang="EN-US" xml:lang="EN-US" xml:lang="EN-US"><span><span>Europe’s cautious approach to developing emerging technologies is hampering its global competitiveness. The European Commission’s AI strategy falls far behind China’s ambitious blueprint in several key aspects, including funding, sector-specific policies, startup incentives, and talent attraction. </span></span></span><span><span>This article is part 2 of a mini-series to present the outcomes of the MERICS European China Talent Program 2018.</span></span></strong></span></span></p></div> <div class="field field--name-field-main-image field--type-image field--label-hidden field--item"> <img srcset="/sites/default/files/styles/max_325x325/public/2018-06/180326_Chinese_Boy_Robot_pbu634266_07.jpg?itok=KAwdKW2D 325w, /sites/default/files/styles/max_650x650/public/2018-06/180326_Chinese_Boy_Robot_pbu634266_07.jpg?itok=RjBOm4_L 650w, /sites/default/files/styles/max_1300x1300/public/2018-06/180326_Chinese_Boy_Robot_pbu634266_07.jpg?itok=LiX-JZoF 1300w, /sites/default/files/styles/max_2600x2600/public/2018-06/180326_Chinese_Boy_Robot_pbu634266_07.jpg?itok=kU2vWY1V 2600w" sizes="(min-width: 1290px) 1290px, 100vw" src="/sites/default/files/styles/max_325x325/public/2018-06/180326_Chinese_Boy_Robot_pbu634266_07.jpg?itok=KAwdKW2D" alt="Chinese boy and robot" title="Image by ImagineChina" typeof="foaf:Image" class="img-responsive" /> </div> <div class="field field--name-body field--type-text-with-summary field--label-hidden field--item"><p><span><span><span lang="EN-US" xml:lang="EN-US" xml:lang="EN-US"><span><span>On April 25, the European Commission released its long-overdue </span></span></span><a href=""><span lang="EN-US" xml:lang="EN-US" xml:lang="EN-US"><span><span>blueprint</span></span></span></a><span lang="EN-US" xml:lang="EN-US" xml:lang="EN-US"><span><span> for a European strategy to boost research in and industry applications of artificial intelligence (AI).</span></span></span> <span lang="EN-US" xml:lang="EN-US" xml:lang="EN-US"><span><span>These new measures represent a first step toward implementing an EU-wide initiative, at a time when Europe is falling</span></span></span> <span lang="EN-US" xml:lang="EN-US" xml:lang="EN-US"><span><span>behind the United States and China in AI development. While the United States is still leading in AI research and top talents, China is rapidly </span></span></span><a href=""><span lang="EN-US" xml:lang="EN-US" xml:lang="EN-US"><span>catching up</span></span></a><span lang="EN-US" xml:lang="EN-US" xml:lang="EN-US"><span><span> with ambitions to overtake.  </span></span></span></span></span></p> <p><span><span><span lang="EN-US" xml:lang="EN-US" xml:lang="EN-US"><span><span>Europe cannot afford to miss out on the vast economic gains promised by AI, which has the potential to add </span></span></span><a href=""><span lang="EN-US" xml:lang="EN-US" xml:lang="EN-US"><span><span>10 to 12 percent</span></span></span></a><span lang="EN-US" xml:lang="EN-US" xml:lang="EN-US"><span><span> to its GDP by 2030. </span></span></span><span lang="EN-US" xml:lang="EN-US" xml:lang="EN-US"><span><span>Beijing’s aggressive push in AI has been met with concern across the EU. German Chancellor Angela Merkel has </span></span></span><a href=""><span lang="EN-US" xml:lang="EN-US" xml:lang="EN-US"><span><span>called for</span></span></span></a><span lang="EN-US" xml:lang="EN-US" xml:lang="EN-US"><span><span> Germany to compete with China in AI and French President Emmanuel Macron </span></span></span><a href=""><span lang="EN-US" xml:lang="EN-US" xml:lang="EN-US"><span><span>announced</span></span></span></a><span lang="EN-US" xml:lang="EN-US" xml:lang="EN-US"><span><span> an AI strategy for France. </span></span></span></span></span></p> <p><span><span><span lang="EN-US" xml:lang="EN-US" xml:lang="EN-US"><span><span>The most striking difference between Europe’s and China’s AI strategies is the level of ambition. The Chinese central government has a penchant for setting lofty goals, but its national AI benchmarks have sent local governments into a frenzy. Provincial and municipal administrations are </span></span></span><a href=""><span lang="EN-US" xml:lang="EN-US" xml:lang="EN-US"><span>trying to outcompete each other</span></span></a><span lang="EN-US" xml:lang="EN-US" xml:lang="EN-US"><span><span> by pledging hundreds of billions of CNY to AI research and development. Tianjin city alone </span></span></span><a href=""><span lang="EN-US" xml:lang="EN-US" xml:lang="EN-US"><span>is planning</span></span></a><span lang="EN-US" xml:lang="EN-US" xml:lang="EN-US"><span><span> an AI fund made up of public and private investment totaling 100 billion CNY (ca. 13 billion EUR) – an amount unimaginable for many European countries, let alone cities.</span></span></span></span></span></p> <p><span><span><span lang="EN-US" xml:lang="EN-US" xml:lang="EN-US"><span><span>China’s AI industry benefits from a powerful combination of financial firepower, a favorable regulatory regime, and readily available data from</span></span></span><a href=""><span lang="EN-US" xml:lang="EN-US" xml:lang="EN-US"><span><span><span><span> nearly </span></span></span></span></span><span lang="EN-US" xml:lang="EN-US" xml:lang="EN-US"><span><span>800 million</span></span></span></a><span lang="EN-US" xml:lang="EN-US" xml:lang="EN-US"><span><span> internet users. If Europe hopes to stay competitive, it will need to go far beyond what the EU Commission report lays out.</span></span></span></span></span></p> <p><span><span><strong><span lang="EN-US" xml:lang="EN-US" xml:lang="EN-US"><span><span>China scores with big vision and targeted incentives</span></span></span></strong></span></span></p> <p><span><span><span lang="EN-US" xml:lang="EN-US" xml:lang="EN-US"><span><span>The State Council’s </span></span></span><a href=""><span lang="EN-US" xml:lang="EN-US" xml:lang="EN-US"><span><span>Next Generation AI Development Plan</span></span></span></a><span lang="EN-US" xml:lang="EN-US" xml:lang="EN-US"><span><span> of July 2017 is the cornerstone of China’s AI strategy. By 2030, China wants to become the world’s leading innovation center for AI, boasting a 1 trillion CNY (ca. 130 billion EUR) AI core industry. A </span></span></span><a href=""><span lang="EN-US" xml:lang="EN-US" xml:lang="EN-US"><span><span>three-year action plan</span></span></span></a><span lang="EN-US" xml:lang="EN-US" xml:lang="EN-US"><span><span> subsequently provided concrete guidelines as to which AI technologies and sectors China could develop. </span></span></span></span></span></p> <p><span><span><span lang="EN-US" xml:lang="EN-US" xml:lang="EN-US"><span><span>The government has implemented targeted incentives to fill China’s development gaps in AI theory and core components. A </span></span></span><a href=""><span lang="EN-US" xml:lang="EN-US" xml:lang="EN-US"><span>plan</span></span></a><span lang="EN-US" xml:lang="EN-US" xml:lang="EN-US"><span><span> by the Ministry of Education addresses the problem of China’s </span></span></span><a href=""><span lang="EN-US" xml:lang="EN-US" xml:lang="EN-US"><span><span>limited talent pool</span></span></span></a><span lang="EN-US" xml:lang="EN-US" xml:lang="EN-US"><span><span> by providing measures to improve AI talent training. A new government-backed </span></span></span><a href=""><span lang="EN-US" xml:lang="EN-US" xml:lang="EN-US"><span>research center</span></span></a><span lang="EN-US" xml:lang="EN-US" xml:lang="EN-US"><span><span> for AI development is one of many moves to pool AI resources from academia, government and industry. Meanwhile, nearly half of all global investment in 2017 into AI start-ups ended up in China and the world’s highest-valued AI start-up, </span></span></span><a href=""><span lang="EN-US" xml:lang="EN-US" xml:lang="EN-US"><span><span>SenseTime</span></span></span></a><span lang="EN-US" xml:lang="EN-US" xml:lang="EN-US"><span><span>, is Chinese.</span></span></span></span></span></p> <p><span><span><span lang="EN-US" xml:lang="EN-US" xml:lang="EN-US"><span><span>Europe’s AI strategy puts forward fewer and less ambitious goals than China’s. By raising its AI investments to 1.5 billion EUR under Horizon 2020 </span></span></span><span lang="EN-GB" xml:lang="EN-GB" xml:lang="EN-GB"><span><span>– the EU’s biggest research and innovation program – the </span></span></span><span lang="EN-US" xml:lang="EN-US" xml:lang="EN-US"><span><span>Commission hopes to stimulate a total increase of 20 billion EUR in private and public AI investment by the end of 2020. Most recently, it </span></span></span><a href=""><span lang="EN-US" xml:lang="EN-US" xml:lang="EN-US"><span>pledged</span></span></a><span lang="EN-US" xml:lang="EN-US" xml:lang="EN-US"><span><span> another 2.5 billion EUR in AI investment as part of its new Digital Europe program. Yet, the Commission’s AI document admits that Europe is lagging behind other parts of the world in private investments by billions of euros.</span></span></span></span></span></p> <p><span><span><span lang="EN-US" xml:lang="EN-US" xml:lang="EN-US"><span><span>Europe is home to a world-leading AI research community, extensive deep tech expertise, and competitive players in robotics, yet its strategy lacks guidance on how to capitalize on these strengths. Much of Europe’s high caliber talent has flocked to more lucrative markets because start-ups are often unable to scale up at home.</span></span></span></span></span></p> <p><span><span><span lang="EN-US" xml:lang="EN-US" xml:lang="EN-US"><span><span>China’s top-down government spending does not guarantee the technological breakthroughs needed to take the global lead in AI. As with previous industrial policy, this approach will inevitably waste vast amounts of resources. Yet, it deserves special attention for mobilizing public and private players. China’s </span></span></span><a href=""><span lang="EN-US" xml:lang="EN-US" xml:lang="EN-US"><span>“wish list” approach</span></span></a><span lang="EN-US" xml:lang="EN-US" xml:lang="EN-US"><span><span> to AI details the technologies the government deems essential without narrowly restricting researchers or entrepreneurs. It has rallied policy-makers, academia, and industry behind one mission and incentivized local governments to support private AI endeavors.</span></span></span></span></span></p> <p><span><span><strong><span lang="EN-US" xml:lang="EN-US" xml:lang="EN-US"><span><span>Europe needs a bolder approach to AI policy</span></span></span></strong></span></span></p> <p><span><span><span lang="EN-US" xml:lang="EN-US" xml:lang="EN-US"><span><span>If Europe wants to keep up, it must take a bolder approach to AI policy making. The Commission should devise concrete strategies to encourage AI research, applications, and investment in priority sectors such as robotics, while addressing weaknesses such as Europe’s worrying brain drain. </span></span></span><span lang="EN-GB" xml:lang="EN-GB" xml:lang="EN-GB"><span><span>Europe may be strong in basic research, but academic excellence and patents do not necessarily directly translate into economic benefits if commercialization of new technologies lags behind. </span></span></span><span lang="EN-US" xml:lang="EN-US" xml:lang="EN-US"><span><span>Europe has to envision other mechanisms to attract start-ups, venture capital firms and AI talent, and bring these players together. Some of the tactics that China has rolled out could very well work in Europe. </span></span></span><a href=""><span lang="EN-US" xml:lang="EN-US" xml:lang="EN-US"><span>Tax incentives</span></span></a><span lang="EN-US" xml:lang="EN-US" xml:lang="EN-US"><span><span> for companies, </span></span></span><a href=""><span lang="EN-US" xml:lang="EN-US" xml:lang="EN-US"><span>cash rewards</span></span></a><span lang="EN-US" xml:lang="EN-US" xml:lang="EN-US"><span><span> for researchers, and </span></span></span><a href=""><span lang="EN-US" xml:lang="EN-US" xml:lang="EN-US"><span>preferential visa policies</span></span></a><span lang="EN-US" xml:lang="EN-US" xml:lang="EN-US"><span><span> could help create a more supportive innovation ecosystem in the EU as well.</span></span></span></span></span></p> <p><span><span><span lang="EN-US" xml:lang="EN-US" xml:lang="EN-US"><span><span>Another key advantage is that China seems to be more comfortable with the changes ahead. Policymakers and industry representatives consistently praise AI as a potential force for good. China’s population feels at ease with adopting new technologies into everyday life situations, from mobile payments to AI-enhanced e-commerce chatbots and news aggregator platforms. The European public is more skeptical: a recent </span></span></span><a href=""><span lang="EN-US" xml:lang="EN-US" xml:lang="EN-US"><span><span>survey</span></span></span></a><span lang="EN-US" xml:lang="EN-US" xml:lang="EN-US"><span><span> conducted in the UK reveals a lack of trust in algorithms among civil society. In China, discussions on the socio-economic and ethical implication of AI have </span></span></span><a href=""><span lang="EN-US" xml:lang="EN-US" xml:lang="EN-US"><span>only just emerged</span></span></a><span lang="EN-US" xml:lang="EN-US" xml:lang="EN-US"><span><span>, with AI researchers and policymakers calling for stronger awareness of AI safety issues.</span></span></span></span></span></p> <p><span><span><span lang="EN-US" xml:lang="EN-US" xml:lang="EN-US"><span><span>Politicians across Europe have emphasized that the EU must not take a Chinese or American approach to AI but carve out its own path. The strategy stresses a “European way,” that, “benefits people and society as a whole.” It consists of a commitment to preparing for the inevitable socio-economic changes brought about by AI and creating an appropriate ethical and legal framework. Planned ethics guidelines will focus on the future of work, fairness, safety, security, and social inclusion. </span></span></span></span></span></p> <p><span><span><strong><span lang="EN-US" xml:lang="EN-US" xml:lang="EN-US"><span><span>If Europe wants to set standards it needs to lead first</span></span></span></strong></span></span></p> <p><span><span><span lang="EN-US" xml:lang="EN-US" xml:lang="EN-US"><span><span>The “European way” promises to be more attuned to the socio-economic consequences of AI's rise. However, the current plan is heavily imbalanced. Two of the EU Commission strategy’s three sections detail defensive measures for guarding against risks, while only one section embraces the vast opportunities that AI technologies will bring.</span></span></span></span></span></p> <p><span><span><span lang="EN-US" xml:lang="EN-US" xml:lang="EN-US"><span><span>This will hamper the development of cutting-edge AI in the EU. Already, the General Data Protection Regulation (GDPR) has raised concerns that it could</span></span></span> <a href=""><span lang="EN-US" xml:lang="EN-US" xml:lang="EN-US"><span><span>hinder</span></span></span></a><span lang="EN-US" xml:lang="EN-US" xml:lang="EN-US"><span> <span>AI innovation, by limiting how personal data is used and by raising the legal risks for AI companies. This means that European policymakers need to take into account that certain regulations, such as GDPR data privacy protections, may also pose additional obstacles for the development of AI technologies and the growth of companies that rely on them.</span></span></span></span></span></p> <p><span><span><span lang="EN-US" xml:lang="EN-US" xml:lang="EN-US"><span><span>The European Union will only be able to effectively advocate for its AI standards globally if it is a leader. This will require balancing important discussions on the sustainable, safe, and just use of AI with an ambitious effort to develop top-notch AI technologies.</span></span></span></span></span></p> <p><span><span><span lang="EN-US" xml:lang="EN-US" xml:lang="EN-US"><span><span>If European policymakers want to shape the future of AI, there are a few things they can learn from China when it comes to creating a “European way” – and selling it. Chinese government announcements on AI emanate a sense of enthusiasm about how AI will improve people’s lives and advance China’s economic growth. China may be underestimating the risks of the AI hype. But a European strategy that fails to sufficiently support European advancement in AI technology will not put the EU in a position to compete against China and determine the rules of the AI game.</span></span></span></span></span></p> <p> </p> <p><strong>About the authors</strong></p> <p><span lang="EN-US" xml:lang="EN-US" xml:lang="EN-US"><strong>Caroline Meinhardt </strong>is a Policy Analyst at APCO Worldwide in Beijing</span></p> <p><span lang="EN-US" xml:lang="EN-US" xml:lang="EN-US"><strong>Michael Laha</strong> is a Program Officer at the Asia Society’s Center on US-China Relations</span></p> <p><span lang="EN-US" xml:lang="EN-US" xml:lang="EN-US"><strong>Rebecca Arcesati</strong> is a Yenching Scholar at Peking University</span></p> <p><span lang="EN-US" xml:lang="EN-US" xml:lang="EN-US"><strong>Václav Kopecký</strong> is a Research Fellow at Association for International Affairs (AMO) and a Consultant at CEC Government Relations</span></p> <p><span><span><span><strong><span lang="EN-US" xml:lang="EN-US" xml:lang="EN-US"><span><span>The authors participated in the fourth annual </span></span></span></strong><strong><a href=""><span><span><span><span><span><span><span><span><span><span>MERICS European China Talent Program</span></span></span></span></span></span></span></span></span></span></a><span> in April 2018, during which parts of the argumentation presented in this blogpost</span><span><span> were developed. </span></span></strong><strong><span lang="EN-GB" xml:lang="EN-GB" xml:lang="EN-GB"><span><span>The authors bear sole responsibility for the content.</span></span></span></strong></span></span></span></p></div> </div> </div> Fri, 15 Jun 2018 15:04:05 +0000 backendadmin 7546 at Responding to China’s Belt and Road Initiative: Two steps for a European strategy <span>Responding to China’s Belt and Road Initiative: Two steps for a European strategy</span> <span><span lang="" about="/en/user/301" typeof="schema:Person" property="schema:name" datatype="">smuscat</span></span> <span>Wed, 06/13/2018 - 13:59</span> <div class="layout layout--onecol"> <div class="layout__region layout__region--content"> <div class="field field--name-field-blog-date field--type-datetime field--label-hidden field--item"><time datetime="2018-06-26T12:00:00Z">26/06/18</time> </div> <div class="field field--name-field-announcement-text field--type-text-long field--label-hidden field--item"><p><span><span><span><span lang="SV" xml:lang="SV" xml:lang="SV"><span>Viking Bohman, <a href="/team/jacob-mardell">Jacob Mardell</a> and Tatjana Romig</span></span></span></span></span></p> <p><span><span><span><strong><span><span>The Belt and Road Initiative (BRI) promises to advance global development but also carries daunting risks. If left unchecked, the project could both challenge EU cohesion and undermine European standards. The EU needs the institutional capacity to assess these risks and a coherent narrative to compete with China's. This article is part 1 of a mini-series to present the outcomes of the MERICS European China Talent Program 2018.</span></span></strong></span></span></span></p></div> <div class="field field--name-field-main-image field--type-image field--label-hidden field--item"> <img srcset="/sites/default/files/styles/max_325x325/public/2018-06/180116_China_Iran_Train_pbu731562_12.jpg?itok=TfGyZoqE 325w, /sites/default/files/styles/max_650x650/public/2018-06/180116_China_Iran_Train_pbu731562_12.jpg?itok=bobdZDZo 650w, /sites/default/files/styles/max_1300x1300/public/2018-06/180116_China_Iran_Train_pbu731562_12.jpg?itok=Hxo_iQ4x 1300w, /sites/default/files/styles/max_2600x2600/public/2018-06/180116_China_Iran_Train_pbu731562_12.jpg?itok=dApjkaU5 2600w" sizes="(min-width: 1290px) 1290px, 100vw" src="/sites/default/files/styles/max_325x325/public/2018-06/180116_China_Iran_Train_pbu731562_12.jpg?itok=TfGyZoqE" alt="Train from China to Iran" title="Image by ImagineChina" typeof="foaf:Image" class="img-responsive" /> </div> <div class="field field--name-body field--type-text-with-summary field--label-hidden field--item"><p><span><span><span><span lang="EN-US" xml:lang="EN-US" xml:lang="EN-US"><span>The BRI has contributed to the creation of an impressive network of infrastructure across Asia, Europe and Africa over the past five years. Some EU member states have welcomed Chinese investment with open arms, while others have been more vocal in their criticisms of the initiative.</span></span></span></span></span></p> <p><span><span><span><span lang="EN-US" xml:lang="EN-US" xml:lang="EN-US"><span>As China charges ahead, it is time for the EU to come up with a unified evaluation and response. The EU needs a better mechanism to gather and exchange information on the BRI. It must also respond to the BRI by framing its own development projects within a more convincing narrative. </span></span></span></span></span></p> <p><span><span><span><span lang="EN-US" xml:lang="EN-US" xml:lang="EN-US"><span>Over the past few months, many EU members’ previous </span></span><a href=""><span><span>wait-and-see approach</span></span></a><span lang="EN-US" xml:lang="EN-US" xml:lang="EN-US"><span> appears to have evolved into an actively critical, or at least suspicious, standpoint. In an internal </span></span><a href=""><span><span>EU report</span></span></a><span lang="EN-US" xml:lang="EN-US" xml:lang="EN-US"><span> leaked to Handelsblatt in April, 27 out of the 28 EU ambassadors in Beijing signed their support for the statement that the BRI “runs counter to the EU agenda for liberalizing trade.” A few months earlier, top-level officials from the EU, Germany and France had </span></span><a href=""><span><span>called for</span></span></a><span lang="EN-US" xml:lang="EN-US" xml:lang="EN-US"><span> a joint response to the BRI. In Brussels, a white paper on crafting a competitive European approach to connectivity in Eurasia is currently </span></span><a href=""><span><span>in the making</span></span></a><span lang="EN-US" xml:lang="EN-US" xml:lang="EN-US"><span>.</span></span></span></span></span></p> <p><span><span><span><strong><span lang="EN-US" xml:lang="EN-US" xml:lang="EN-US">Danger of economic and political dependencies</span></strong></span></span></span></p> <p><span><span><span><span lang="EN-US" xml:lang="EN-US" xml:lang="EN-US"><span>The shift in European attitudes seems to stem primarily from a realization of the risks associated with the BRI. Firstly, the political influence that Beijing accrues from investments in Europe is seen as serious challenge to EU cohesion. Last year, Greece </span></span><a href=""><span><span><span><span>vetoed</span></span></span></span></a><span lang="EN-US" xml:lang="EN-US" xml:lang="EN-US"><span> a joint EU human rights statement on China, and in 2016, Greece and Hungary joined hands to </span></span><a href=""><span><span><span><span>avoid criticizing</span></span></span></span></a><span lang="EN-US" xml:lang="EN-US" xml:lang="EN-US"><span> China in a joint statement on territorial issues in the South China Sea.</span></span></span></span></span></p> <p><span><span><span><span lang="EN-US" xml:lang="EN-US" xml:lang="EN-US"><span>Another significant source of concern is that several countries along the BRI are already becoming </span></span><a href=""><span><span>heavily indebted</span></span></a><span lang="EN-US" xml:lang="EN-US" xml:lang="EN-US"><span> to China – a point </span></span><a href=""><span>emphasized</span></a><span lang="EN-US" xml:lang="EN-US" xml:lang="EN-US"><span> by IMF top official Christine Lagarde in April. </span></span></span></span></span></p> <p><span><span><span><span lang="EN-US" xml:lang="EN-US" xml:lang="EN-US"><span>These worries about unsustainable financial situations are also linked to misgivings over political strings attached to Chinese economic support. China has on several occasions leveraged its economic capacity to take control of </span></span><a href=""><span>strategically important infrastructure</span></a><span><span><span lang="EN-US" xml:lang="EN-US" xml:lang="EN-US">,</span></span></span><span lang="EN-US" xml:lang="EN-US" xml:lang="EN-US"><span> and Beijing has long </span></span><a href=""><span>demonstrated</span></a><span lang="EN-US" xml:lang="EN-US" xml:lang="EN-US"><span> a willingness to use economic statecraft to exert political pressure abroad.</span></span></span></span></span></p> <p><span><span><span><span lang="EN-US" xml:lang="EN-US" xml:lang="EN-US"><span>Even under the assumption that BRI is purely motivated by the pursuit of common prosperity, it is doubtful that BRI projects would be implemented according to the high environmental, social, and economic standards that Europe would like to see proliferate in global development.</span></span></span></span></span></p> <p><span><span><span><span lang="EN-US" xml:lang="EN-US" xml:lang="EN-US"><span>To better assess and contain risks emerging from the BRI, the EU can do two things, both of which come at a relatively low cost. First, Europe needs to build a solid understanding of the BRI and actively attempt to establish a common position. Second, the EU has to become better at marketing its existing development programs, which are often eclipsed by the hype surrounding BRI.</span></span></span></span></span></p> <p><span><span><span><strong><span lang="EN-US" xml:lang="EN-US" xml:lang="EN-US"><span>Step 1: Intelligence gathering and coordination</span></span></strong></span></span></span></p> <p><span><span><span><span lang="EN-US" xml:lang="EN-US" xml:lang="EN-US"><span>Any meaningful policy discussion starts with establishing a common understanding of the facts. For EU member states seeking to understand the BRI, information about Chinese infrastructure projects and business activity is often hard to come by. To bring all EU members to the same information level, therefore, requires a mechanism for information-sharing and coordination. European institutions such as the </span></span><a href=""><span>Council</span></a><span><span><span lang="EN-US" xml:lang="EN-US" xml:lang="EN-US"> of the EU</span></span></span><span lang="EN-US" xml:lang="EN-US" xml:lang="EN-US"><span> and the </span></span><a href=""><span>European Parliament</span></a><span lang="EN-US" xml:lang="EN-US" xml:lang="EN-US"><span> are already making efforts to understand the BRI but such mapping exercises fall short of the permanent coordination mechanism that is needed.</span></span></span></span></span></p> <p><span><span><span><span lang="EN-US" xml:lang="EN-US" xml:lang="EN-US">Such a mechanism could be integrated into the European External Action Service (EEAS), which has EU delegations around the world.</span><span lang="EN-US" xml:lang="EN-US" xml:lang="EN-US"><span> Drawing on the combined knowledge and competence of member states’ embassies and local networks, including think tanks, academia and businesses, EU delegations in priority BRI countries should be tasked with intelligence gathering.</span></span></span></span></span></p> <p><span><span><span><span lang="EN-US" xml:lang="EN-US" xml:lang="EN-US"><span>New information should be fed back to the EEAS, which would maintain a public database on BRI projects. Ideally, such a database would include contractual details, timeframes, and financing arrangements, helping EU and third party decision makers to clearly assess the risks and opportunities associated with BRI.  While the EU cannot directly steer Chinese investments, it can provide decision makers in third party and EU countries with the means to assess the quality of loans being offered by Beijing.</span></span></span></span></span></p> <p><span><span><span><span lang="EN-US" xml:lang="EN-US" xml:lang="EN-US"><span>The EEAS would also be tasked with analyzing and coordinating member states’ positions toward the BRI, thus actively facilitating the process of reaching a common understanding within the EU.</span></span></span></span></span></p> <p><span><span><span><span lang="EN-US" xml:lang="EN-US" xml:lang="EN-US"><span>Only minimal budget recalibrations would be necessary to establish such a mechanism, drawing as it would on the existing capacity of the EU and its member states. The additional budget allocations for coordination at the EEAS, meanwhile, would be a small price to pay for a deeper and shared understanding of a development project which promises to reshape the world’s economic architecture.</span></span></span></span></span></p> <p><span><span><span><strong><span lang="EN-US" xml:lang="EN-US" xml:lang="EN-US"><span>Step 2: Branding an alternative</span></span></strong></span></span></span></p> <p><span><span><span><span lang="EN-US" xml:lang="EN-US" xml:lang="EN-US"><span>The possibility of establishing an “alternative” to the BRI is being discussed in European policy circles. This discussion, however, overlooks the fact that an EU “alternative” already exists. The EU is already spending billions on infrastructure: within the EU through Cohesion Funds; regionally through mechanisms like the Instrument for Pre-Accession Assistance (IPA); and internationally through the European Investment Bank (EIB) and the European Bank for Reconstruction and Development (EBRD). The main problem is that these efforts are poorly marketed and need to be bundled more effectively, alongside the support of a powerful narrative. </span></span></span></span></span></p> <p><span><span><span><span lang="EN-US" xml:lang="EN-US" xml:lang="EN-US"><span>Beijing has had much greater success with the BRI. Compare the popularity of the “New Silk Road” with the EU’s flagship infrastructure initiative, </span></span><a href=""><span><span>TEN-T</span></span></a><span lang="EN-US" xml:lang="EN-US" xml:lang="EN-US"><span>. The </span></span><a href=""><span><span>Connecting Europe Facility (CEF) for Transport</span></span></a><span lang="EN-US" xml:lang="EN-US" xml:lang="EN-US"><span> has made available 24 billion EUR in infrastructure finance across the EU, but  its principal instrument, TEN-T, is virtually unknown to the public, even within EU borders. Meanwhile, the BRI is an omnipresent topic of discussion, both in foreign policy circles and in </span></span><a href=";t=4s"><span><span>popular media</span></span></a><span lang="EN-US" xml:lang="EN-US" xml:lang="EN-US"><span>. </span></span></span></span></span></p> <p><span><span><span><span lang="EN-US" xml:lang="EN-US" xml:lang="EN-US"><span>The EU already contributes its fair share to development financing. What is lacking is a coherent narrative. To solve this problem, the EU should streamline and rebrand EU initiatives and development funds under a single identifiable label. When the BRI was announced, China incorporated projects that had been underway for years, if not decades, under the new Belt and Road umbrella. In much the same way, the EU could actively associate EIB and EBRD projects with its new brand.</span></span></span></span></span></p> <p><span><span><span><span lang="EN-US" xml:lang="EN-US" xml:lang="EN-US"><span>This brand should be firmly anchored in EU priorities like transparency and sustainability. In contrast to Beijing’s vague </span></span><a href=""><span><span>“Visions and Actions”</span></span></a><span lang="EN-US" xml:lang="EN-US" xml:lang="EN-US"><span> paper, Brussels should also articulate what such lofty sounding concepts mean in practice – i.e., transparent procurement processes and loan repayment under OECD rules.</span></span></span></span></span></p> <p><span><span><span><span lang="EN-US" xml:lang="EN-US" xml:lang="EN-US">Summing up, the EU is lacking both the institutional capacity to deal with the BRI and a coherent narrative to compete with it. To correct this, <span>Brussels needs to adapt its bureaucracy to better understand the initiative and take steps to ensure that its own</span></span><span lang="EN-US" xml:lang="EN-US" xml:lang="EN-US"><span> development model – based on sustainability and openness – is given greater coherence and visibility.</span></span></span></span></span></p> <p> </p> <p><strong><span><span><span>About the authors:</span></span></span></strong></p> <p><span><span><span><strong>Viking Bohman </strong>is coordinator of the <a href="">“Stockholm Belt and Road Observatory.”</a></span></span></span></p> <p><span><span><span><span><span><span><strong>Jacob Mardell</strong> is a project assistant at MERICS and founder of the blog <a href="">"The China Road."</a></span></span></span></span></span></span></p> <p><span><span><span><strong>Tatjana Romig</strong> is a postgraduate student at the University of Heidelberg and co-founder of <a href="">"Mapping China."</a></span></span></span></p> <p><span><span><span><strong><span lang="EN-US" xml:lang="EN-US" xml:lang="EN-US"><span><span>The authors participated in the fourth annual </span></span></span></strong><strong><a href=""><span><span><span><span><span><span><span><span><span><span>MERICS European China Talent Program</span></span></span></span></span></span></span></span></span></span></a><span> in April 2018, during which parts of the argumentation presented in this blogpost</span><span><span> were developed. </span></span></strong><strong><span lang="EN-GB" xml:lang="EN-GB" xml:lang="EN-GB"><span><span>The authors bear sole responsibility for the content.</span></span></span></strong></span></span></span></p></div> </div> </div> Wed, 13 Jun 2018 11:59:56 +0000 smuscat 7506 at Australia and Germany should work together on China <span>Australia and Germany should work together on China</span> <span><span lang="" about="/en/user/286" typeof="schema:Person" property="schema:name" datatype="">h.seidl</span></span> <span>Thu, 06/21/2018 - 17:36</span> <div class="layout layout--onecol"> <div class="layout__region layout__region--content"> <div class="field field--name-field-blog-date field--type-datetime field--label-hidden field--item"><time datetime="2018-06-22T12:00:00Z">22/06/18</time> </div> <div class="field field--name-field-announcement-text field--type-text-long field--label-hidden field--item"><p><a href="/team/lucrezia-poggetti">Lucrezia Poggetti,</a> <a href="">Frances Kitt</a></p> <p><strong><span><span><span lang="EN-US" xml:lang="EN-US" xml:lang="EN-US"><span><span>As political elites In Berlin and Canberra have woken up to the challenge of Chinese Communist Party (CCP) influence, they should work together to address it. The next edition of the biannual meeting of their foreign and </span></span></span></span></span></strong><span><span><span lang="EN-US" xml:lang="EN-US" xml:lang="EN-US"><span><span><strong>defence</strong></span></span></span></span></span><strong><span><span><span lang="EN-US" xml:lang="EN-US" xml:lang="EN-US"><span><span> ministers <span>later this year </span>should put the issue of CCP influence on top of the agenda. </span></span></span></span></span></strong></p></div> <div class="field field--name-field-main-image field--type-image field--label-hidden field--item"> <img srcset="/sites/default/files/styles/max_325x325/public/2018-06/180622_Germany_Australia_123rf.jpg?itok=5cOetWb2 325w, /sites/default/files/styles/max_650x650/public/2018-06/180622_Germany_Australia_123rf.jpg?itok=5VuOSbKx 650w, /sites/default/files/styles/max_1300x1300/public/2018-06/180622_Germany_Australia_123rf.jpg?itok=JPx7LG3o 1300w, /sites/default/files/styles/max_2600x2600/public/2018-06/180622_Germany_Australia_123rf.jpg?itok=pnwGYsUL 2507w" sizes="(min-width: 1290px) 1290px, 100vw" src="/sites/default/files/styles/max_325x325/public/2018-06/180622_Germany_Australia_123rf.jpg?itok=5cOetWb2" alt="Germany Australia" title="Image by luzitanija via 123rf" typeof="foaf:Image" class="img-responsive" /> </div> <div class="field field--name-body field--type-text-with-summary field--label-hidden field--item"><p>Efforts by the Chinese Communist Party (CCP) to influence Australian politics have made headlines since 2017. In recent months, similar attempts have been at the centre of German debates.</p> <p>While geographically distant, Australia and Germany are well suited to address this challenge jointly, and have started to compare notes through a biannual meeting of their foreign and defence ministers.</p> <p>Germany has been keen on expanding links with like-minded countries in the Asia-Pacific. For Australia, it is a kind of pairing only usually seen with partners in its region, and with the US and UK.</p> <p>Australian intelligence agencies are <a href="">convinced</a> that foreign governments want to deepen their influence in the country. As a result, <a href="">the government is working</a> on laws combatting this.</p> <p>German intelligence services are also increasingly aware of influencing attempts from Beijing. In December, they revealed that Chinese agents were using <a href="">fake LinkedIn profiles</a> to gather information on German civil servants and politicians. Such anxieties are understandable, considering reports about retired top-level German politicians tied to Beijing, who promote China’s official views at home. Observers also scrutinise contact between Beijing and the influential far-right Alternative for Germany (AfD) party and a smaller <a href="">pro-China German political group</a>.</p> <p><strong>Collaboration on CCP influence will help Germany and Australia shape regional debates </strong></p> <p>Beyond concerns over CCP influence on domestic politics, both Germany and Australia play a distinct role in their regions as important and influential European and Asia-Pacific countries respectively. Collaboration on CCP influence will help Germany and Australia shape regional debates and find partners to work with.</p> <p>Beijing’s influence is increasingly seen in Germany as a challenge to <a href="">EU cohesion</a> and <a href="">European integration</a> that adds to existing challenges, including Russian interference, the migrant crisis, and the rise of right-wing populism. Chancellor Angela Merkel has explicitly warned against China’s “<a href="">divide-and-rule</a>” tactics in Europe.</p> <p>Germany is also concerned about the rules-based international order, which is at the core of Europe’s DNA and foreign policy, and worries that it has been weakened by China’s successes at dividing EU member states on <a href="">international law</a> and <a href="">human rights</a>.</p> <p>Increasingly, Germany also sees the CCP influence debate through the lens of systemic competition, with China challenging liberal democratic values central to the European project. In a speech in February 2018, then foreign minister Sigmar Gabriel warned against China: "developing a comprehensive systematic alternative to the Western model that, in contrast to our own, is not founded on freedom, democracy and individual human rights."</p> <p>A Merkel confidant, the Bundestag’s President Wolfgang Schäuble, went further in an interview: "we are in a global competition, politically and economically. I do not want to accept that the Chinese model is winning."</p> <p>Wary about the need to work with regional partners with different political systems, Canberra has tried to avoid talking about values directly. Instead, as the 2016 Defence White Paper and 2017 Foreign Policy White Paper show, Australia uses the rhetoric of a “rules-based order” to describe the norms, standards, and international laws that support Australian interests. In practice, this has been exemplified by Canberra’s support for the international case brought by the Philippines on China’s maritime claims in the South China Sea.</p> <p><strong>Berlin and Canberra should prioritise cooperation at the political level</strong></p> <p>ASEAN needs Australia’s weight to deal with China’s growing influence in the Asia-Pacific just as much as Europe needs the collective weight of EU member states, and larger members such as Germany, to take concrete steps to tackle China’s influence. Both regions would benefit greatly from Australia–Germany exchanges on CCP influence, and learn a lot from one another’s distinct perspective and subsequent approaches.   </p> <p>Germany and Australia should prioritise cooperation at the political level. Foreign and defence ministers should put the CCP at the top of the agenda for the next bilateral meeting later in 2018, to devise concrete responses to deal with Beijing.</p> <p>The German and Australian governments have a lot to learn from one another about the mechanisms and guidelines used to manage CCP influence; how their bureaucracies coordinate on these issues (internally and externally); and the assumptions that underlie their thinking. As liberal democracies, it is their job to find ways to manage interference from authoritarian states while ensuring that they stay true to their democratic selves. </p> <p>If both Australia and Germany are to find robust solutions to CCP influence, collaboration must extend beyond closed-door consultations to include researchers, journalists, and academics. Joint efforts to strengthen democratic resilience will become an increasingly important point of reference and comparison, as both Germany and Australia continue to face headwinds from China’s divisive regional mechanisms in Europe and the Asia-Pacific respectively.</p> <p><span><span><span><span><strong>Frances Kitt</strong> </span></span><strong><span lang="EN-GB" xml:lang="EN-GB" xml:lang="EN-GB"><span><span>is a Research Associate in the East Asia and International Security Programs at the </span></span></span></strong></span></span><strong><a href="">Lowy Institute for International Policy</a>, an independent think tank based in Sydney.</strong></p> <p><strong>This article <a href="">was first published on June 21</a> by the Interpreter (Lowy Institute).</strong></p></div> </div> </div> Thu, 21 Jun 2018 15:36:42 +0000 h.seidl 7716 at “Chinese censorship has evolved into full information control” <span>“Chinese censorship has evolved into full information control”</span> <span><span lang="" about="/en/user/646" typeof="schema:Person" property="schema:name" datatype="">jheller</span></span> <span>Fri, 06/15/2018 - 13:38</span> <div class="layout layout--onecol"> <div class="layout__region layout__region--content"> <div class="field field--name-field-blog-date field--type-datetime field--label-hidden field--item"><time datetime="2018-06-15T12:00:00Z">15/06/18</time> </div> <div class="field field--name-field-announcement-text field--type-text-long field--label-hidden field--item"><p>Interview with: Fu King-wa</p> <p><strong><span><span><span><span lang="EN-US" xml:lang="EN-US" xml:lang="EN-US"><span><span>Internet censorship in China has evolved from just blocking websites into an elaborate system of information control, says Fu King-wa, Associate Professor at the Journalism and Media Studies Centre of the University of Hong Kong. Fu has developed projects that track what has been deleted on the Chinese web. His assessment of the current situation is bleak: The space for public expression is depressingly small, he says. Yet the #MeToo debate in China also demonstrates that that not all discussion can be suppressed – even in China. </span></span></span></span></span></span></strong></p></div> <div class="field field--name-body field--type-text-with-summary field--label-hidden field--item"><p>Questions: <a href="/team/ruth-kirchner">Ruth Kirchner</a></p></div> <div class="field field--name-field-podca field--type-file field--label-hidden field--items"> <div class="field--item"><span class="file file--mime-audio-mpeg file--audio icon-before"><span class="file-icon"><span class="icon glyphicon glyphicon-headphones text-primary" aria-hidden="true"></span></span><span class="file-link"><a href="" type="audio/mpeg; length=27173952" title="Open audio file in new window" target="_blank">Merics Experts 58 - Fu King-wa.MP3</a></span><span class="file-size">25.92 MB</span></span></div> </div> </div> </div> Fri, 15 Jun 2018 11:38:37 +0000 jheller 7541 at "Give Chinese children more time to play" <span>&quot;Give Chinese children more time to play&quot;</span> <span><span lang="" about="/en/user/286" typeof="schema:Person" property="schema:name" datatype="">h.seidl</span></span> <span>Thu, 06/07/2018 - 12:33</span> <div class="layout layout--onecol"> <div class="layout__region layout__region--content"> <div class="field field--name-field-blog-date field--type-datetime field--label-hidden field--item"><time datetime="2018-06-07T12:00:00Z">07/06/18</time> </div> <div class="field field--name-field-announcement-text field--type-text-long field--label-hidden field--item"><p>Interview with <a href="/en/team/didi-kirsten-tatlow">Didi Kirsten Tatlow</a></p> <p><strong>Chinese schools are notorious for their rote learning and endless tests and exams. But the Chinese government wants to change that – at least, the authorities want to introduce more creativity into the classrooms. That’s no easy undertaking, says </strong><strong>MERICS</strong><strong> Visiting Academic Fellow Didi Kirsten Tatlow. For children to become truly creative adults, Tatlow argues, they need time to play and the freedom to think their own way.</strong></p></div> <div class="field field--name-body field--type-text-with-summary field--label-hidden field--item"><p>Questions: <a href="/team/johannes-heller">Johannes Heller</a></p> <p> </p></div> <div class="field field--name-field-podca field--type-file field--label-hidden field--items"> <div class="field--item"><span class="file file--mime-audio-mpeg file--audio icon-before"><span class="file-icon"><span class="icon glyphicon glyphicon-headphones text-primary" aria-hidden="true"></span></span><span class="file-link"><a href="" type="audio/mpeg; length=23132736" title="Open audio file in new window" target="_blank">Merics Experts 57 - Didi Kirsten Tatlow.MP3</a></span><span class="file-size">22.06 MB</span></span></div> </div> </div> </div> Thu, 07 Jun 2018 10:33:18 +0000 h.seidl 7461 at Who’s really responsible for digital privacy in China? <span>Who’s really responsible for digital privacy in China?</span> <span><span lang="" about="/en/user/306" typeof="schema:Person" property="schema:name" datatype="">komprakti</span></span> <span>Fri, 06/01/2018 - 10:43</span> <div class="layout layout--onecol"> <div class="layout__region layout__region--content"> <div class="field field--name-field-blog-date field--type-datetime field--label-hidden field--item"><time datetime="2018-06-04T12:00:00Z">04/06/18</time> </div> <div class="field field--name-field-authors field--type-entity-reference field--label-hidden field--items"> <a href="/en/team/shazeda-ahmed" hreflang="en">Shazeda Ahmed</a>, <a href="/en/team/bertram-lang" hreflang="en">Bertram Lang</a> </div> <div class="field field--name-field-announcement-text field--type-text-long field--label-hidden field--item"><p><strong>Chinese citizens are increasingly concerned about invasive data collection practices of private companies such as Alibaba's Ant Financial. But those hoping that state regulators will rein in these practices should not forget that the government relies on the tech giants to build its social credit system with the goal to monitor and restrict citizens’ behavior.</strong></p></div> <div class="field field--name-field-main-image field--type-image field--label-hidden field--item"> <img srcset="/sites/default/files/styles/max_325x325/public/2018-06/180604_Alibaba_Video_Surveillance_Nursing_Home_pbu733476_05.jpg?itok=X2jpySGi 325w, /sites/default/files/styles/max_650x650/public/2018-06/180604_Alibaba_Video_Surveillance_Nursing_Home_pbu733476_05.jpg?itok=D4hShq5r 650w, /sites/default/files/styles/max_1300x1300/public/2018-06/180604_Alibaba_Video_Surveillance_Nursing_Home_pbu733476_05.jpg?itok=zQGQVOP9 1300w, /sites/default/files/styles/max_2600x2600/public/2018-06/180604_Alibaba_Video_Surveillance_Nursing_Home_pbu733476_05.jpg?itok=d1NLJKPd 2600w" sizes="(min-width: 1290px) 1290px, 100vw" src="/sites/default/files/styles/max_325x325/public/2018-06/180604_Alibaba_Video_Surveillance_Nursing_Home_pbu733476_05.jpg?itok=X2jpySGi" alt="AI video surveillance technology" title="Chinese tech users who believe that state regulators will rein in tech companies’ invasive data collection practices overlook how intertwined state and corporate interests are. Image by Imagine China" typeof="foaf:Image" class="img-responsive" /> </div> <div class="field field--name-body field--type-text-with-summary field--label-hidden field--item"><p>While the United States is reeling from the <a href="">revelation</a> that political consultancy Cambridge Analytica harvested data from over 87 million Facebook accounts, China’s <a href="">biggest tech companies</a> and regulators are confronting a wave of customers’ concerns about digital privacy. Boundaries between the public and private sector are dissolving as Chinese tech platforms are increasingly required to march in lockstep with government imperatives, and as the state grows more reliant on tech companies to monitor and restrict citizens’ behavior on- and offline.</p> <p>Chinese tech users who believe that state regulators will rein in tech companies’ invasive data collection practices overlook how intertwined state and corporate interests are. Chinese citizens and consumers may be disappointed if they think the <a href="">minor</a> regulatory measures taken against tech companies are going to protect their privacy in the near future.</p> <p>One flashpoint in the evolving conversation about data protection in China is the firm Ant Financial, an affiliate of e-commerce giant Alibaba that bundles the market-dominating mobile payment service Alipay with the commercial credit rating product Sesame Credit. Three years of simmering criticism of Ant Financial’s data collection practices boiled over in January after the company made a major misstep with customers’ information. Although some Chinese citizens have voiced the hope that regulators will rein in Ant’s data collection practices and require the company to reveal which third parties it gives data to, the company’s relationship with the state suggests it is unlikely to change its data-collecting and -sharing models anytime soon.</p> <p>Ant Financial’s Sesame Credit is often mischaracterized as being one and the same as the Chinese government-run social credit system, yet commercial credit platforms are ultimately a small part of that wider state project. In a society where interpersonal social <a href="">trust frayed</a> over decades of political upheaval, since 2014 China’s State Council and National Development and Reform Commission (NDRC) have led the government’s promotion of the social credit system, which Chinese legal scholar Rogier Creemers <a href="">describesas</a> “a set of mechanisms providing rewards or punishments as feedback to actors, based not just on the lawfulness, but also the morality of their actions, covering economic, social and political conduct.”</p> <p><strong>Social credit gathers more than citizens' financial information</strong></p> <p>Social credit is thus construed as a means to repair connections between Chinese individuals, businesses, and legal institutions, and between Chinese citizens and the government itself. So far, however, the government’s social credit system has been guided by <a href="">policies</a> tested only at the provincial level, and may face steep hurdles to implementation and public acceptance if they are to go national. Unlike traditional financial credit scores, state-issued social credit evaluations are based on citizens’ information (e.g. demographics, tax fraud, social insurance payments, court orders), long collected by various branches of government.</p> <p>The novel element of the system is that this formerly siloed information will now be shared across government bureaus in order to assess the state’s need to impose far-reaching punishments. One example that Jeremy Daum of China Law Translate highlights is that if someone loses a lawsuit and fails to perform on the court judgment made against them (such as failing to pay a court-mandated fine), that person can now be blacklisted across multiple government ministries and face restrictions on consumption of air and train tickets, as well as lose the privilege to send their children to private schools.</p> <p>In some province-level pilot tests, ratings based on the information gathered are made accessible to Chinese citizens through local smartphone applications such as <a href="">Honest Shanghai</a> or <a href="">credit websites</a> tied to individual Chinese provinces. In Shanghai, third parties such as micro-loan services, bike-sharing companies, and libraries provide rewards including deposit-free or premium services to people with positive ratings, though the ratings themselves are not government-issued and appear to have no official legal status.Although Sesame Credit scores and social credit pilot test ratings are measured with <a href="">different</a> yardsticks, state media and Ant Financial <a href="">itself</a> nonetheless <a href="">frame</a> Sesame Credit as an important step toward establishing a social credit system nationwide. The crux of Sesame Credit’s role in the state-run social credit system rests on a “Memorandum of Cooperation” (MOC) between Ant Financial and the NDRC. The document is not publicly available, but the NDRC website’s <a href="">article</a> about the August 2016 signing of the MOC on “Implementing Joint Rewards and Punishments” declared that:</p> <p>"Ant Financial Group’s CEO Jing Xiandong stated that Sesame Credit Management Co. Ltd., under the banner of Ant Financial, will share information collected on trustworthiness [守信] and untrustworthiness [失信] with the State Credit Information-Sharing Platform in a timely manner and in accordance with the relevant laws, regulations, and supervisory requirements. Ant Financial will rely on its own rich scenarios [场景] to promote joint encouragements for trustworthiness and joint punishments for untrustworthiness, and will use its cloud computing and big data capabilities to actively cooperate with the NDRC’s promotion and development of big data technology, monitoring developments in municipalities’ credit statuses. Ant Financial will become a benchmark of Internet firms using credit information to enact joint reward and punishment mechanisms, and will contribute some of its power to the construction of an honest society.”</p> <p><span><span><span><span><strong><span lang="EN-US" xml:lang="EN-US" xml:lang="EN-US"><span>Private companies share “credit data” with Chinese government </span></span></strong></span></span></span></span></p> <p>Notably, Ant Financial is one of <a href="">several</a> private companies to sign similar memoranda on joint rewards and punishments as well as sharing “credit data” (broadly construed) with the NDRC’s <a href="">State Credit Information-Sharing Platform</a>, which claimed to have 37 “market institutions” (市场机构) participating as of September 2017. Other signatories include group discount and delivery service <a href="">Meituan-Dianping</a> and the ride-sharing company <a href="">Didi Chuxing</a>.</p> <p>Well before signing the memorandum, in 2015, Sesame Credit began to lower the scores of users who it discovered were on the national blacklist of debtors and judgment defaulters kept by the Supreme People’s Court. From Ant’s <a href="">2016 Corporate Sustainability Report</a>, the company notes that as a result of this cooperation, Sesame Credit users’ scores dropped and users were restricted when seeking services from e-commerce platforms including Alipay, Taobao, and Tmall, as well as affiliated microlending, car rental, and dating services. “They were punished both online and offline. In addition, they were not allowed to take planes, soft sleepers on trains or buy luxury products,” the Ant report said. Chinese Communist Party-backed newswire Xinhua <a href="">lauded</a> Ant Financial for spurring debtors to pay up so as to raise their Sesame Credit scores.</p> <p>Yet it may be a while before Ant Financial gets more praise from state media. In the first week of January 2018, Ant Financial made headlines with a serious blunder that shined an unexpected spotlight on digital privacy concerns in China. Offering Alipay users online access to a summary of their 2017 spending habits, the company automatically checked a box in the contract granting Alipay the users’ consent to a Sesame Credit evaluation. Rather than asking customers to opt in, the checked box had to be un-checked by the consumer if the consumer wanted to opt out. Left checked, the box gave Alipay permission to access users’ personal financial data for credit-scoring purposes.</p> <p>Chinese citizens flocked to social media to upbraid the company for burying the consent in the fine print, essentially luring users into turning over their data. Ant Financial <a href=";is_hot=1#_rnd1515045535047">apologized</a> on the social media platform Weibo and the company was called in by the Cyberspace Administration of China for an official <a href="">reprimand</a>. Although several news stories described this incident as a wake-up call to the importance of privacy violations in China, in fact, a small number of Sesame Credit users have been critical of the system since 2015.</p> <p><span><span><span><span><strong><span lang="EN-US" xml:lang="EN-US" xml:lang="EN-US"><span>Online criticism focused on commercial companies</span></span></strong></span></span></span></span></p> <p>In a December 2017 <a href="">report</a> on the implementation of China’s social credit system, we exposed some of the critiques of Sesame Credit and other private companies’ commercial credit scoring products. We analyzed debates on Chinese blogs and question-and-answer forums such as Sina, Tianya, and Zhihu from June 2016 to June 2017. A search of posts that included one or more of the keywords “social credit system” (社会信用体系), “Sesame Credit” (芝麻信用), “honesty system” (诚信体系), “credit system” (征信体系), or “Credit China” (信用中国) revealed that virtually all critical comments related to social credit were directed at private companies’ opaque, invasive collection of personal information and avoided knocking the state-run pilot programs. A cross-check of Free Weibo, Weiboscope, and other sources that collect censored social media posts yielded no meaningful results. We were unable to explain why online critics went after the commercial companies and not the state-run data collectors that share data with these companies to restrict users’ actions (such as the above examples of Alipay blocking blacklisted people from making certain purchases).</p> <p>While we have yet to grasp the long-term implications of the government-run social credit system in citizens’ daily lives, the impact, both positive and negative, of Sesame Credit and other commercial credit trackers is palpable. For instance, Ant Financial’s partnerships with a host of third-party vendors—including bike- and car-rental companies, hotels, foreign consulates, and hospitals—waive deposits for Alipay users who have high Sesame Credit scores or reward them with free expedited services. By the same token, Alipay users with low scores are barred from access to such services.</p> <p>A shadowy side of China’s commercial credit rating products is becoming clearer: In December 2017, <a href="">Wired</a> magazine reported that car rental company Shenzhou Zuche waives deposits on the cars it rents to Sesame Credit users with scores above 650—and then tells Ant Financial if the customer crashes the car. While this type of data exchange with a credit company is far from novel in the West, privacy concerns arise in China because Sesame Credit’s <a href="">user agreement</a> does not indicate if users are notified when the third party sends data back to Ant Financial. The policy does state, however, that third parties that can provide information directly to the company include telecommunications operators, private companies, and government credit platforms, among others. One <a href="">thread</a> on Zhihu from 2015 to 2017 opens with the question “Does Alipay’s Sesame Credit Endanger Personal Privacy?” Reading Ant Financial’s terms of service, one commenter <a href="">complained</a>: “The companies that cooperate with [Alipay’s Sesame Credit] can limitlessly consult anyone’s credit [information] within the span of a month. . . Openly selling users’ information! Is this really a business model?”</p> <p>Similarly, critics are troubled by the public shaming mechanism Ant Financial exercises when users fail to repay loans. One commenter on bulletin board service (BBS) Rong360 recounts the <a href="">story</a> of a friend who failed to repay a small loan using an Alipay feature called Huabei. The distressed debtor was mortified to discover that Ant Financial called people in his address book to notify them about the money he owed. In another Zhihu <a href="">thread</a> tellingly headed “Does Huabei’s Practice of Phoning My Friends to Tell Them That I Owe Money Violate Citizens’ Privacy Rights?” one person called the user agreements employed by Huabei and Sesame Credit “roguish” (流氓). Others noted that phone shaming resembles a legal <a href="">method</a> employed by certain local governments.</p> <p><span><span><span><span><strong><span lang="EN-US" xml:lang="EN-US" xml:lang="EN-US"><span>Sesame Credit calculates strength of friendship</span></span></strong></span></span></span></span></p> <p>Sesame Credit’s opaque data collection and assessment methods have sparked further disquieting allegations. In a <a href="">long post</a> on BBS site Tianya, someone who purported to be a bank employee claimed that a Sesame Credit software tester showed the person and their coworkers what should have been confidential Excel spreadsheets full of sensitive user data. The employee said further that Sesame Credit looked at IP addresses to calculate the strength of relationships between users and their friends, on the theory that people who access the web via the same networks are assumed to have closer ties. What’s more, friends’ Sesame Credit scores affect one another, meaning one’s own score can be dragged down simply by being associated with someone else who has a low score. The bank employee writing on Tianya found the process “shocking, horrific,” and compared Ant Financial’s staff to “secret agents in the movies.”</p> <p>Another typical complaint that reflects both the unease with current data abuses by giant tech companies and the apparent trust the public puts in regulators to fix the problem is the <a href="">call</a> for a national law to protect personal data—legislation that could shield citizens from the resale and misuse of their data: “The fact that China has yet to pass an effective Personal Data Protection Law leads to excessive information collection, leaks, and resale, and makes it hard to ensure the veracity and accuracy of data.”</p> <p>For a long time, progressive—and anonymous or pseudonymous—voices of China’s legal and tech communities have offered “constructive criticism” of the government, <a href="">calling</a> for such a law—a draft of which has been <a href="">in the pipeline since 2003</a>. Interspersed with social media posts critical of the tech companies are recurring suggestions that Chinese should have faith in the state to crack down on their unchecked data collection, evaluation, and exchange.</p> <p><strong>Can data privacy protections work in China?</strong></p> <p>What incentives do Chinese regulators have to rein in tech firms’ privacy abuses given their potential dependence on private firms’ cooperation with new initiatives like the NDRC’s State Credit Information Center? Foreign observers <a href="">argue</a> that recently published Chinese standards for data privacy will bring China closer to resembling the European Union’s General Data Protection Regulation, though it remains to be seen how effectively these new standards will be implemented when it comes to limiting invasive data collection practices.</p> <p>Breaking laws carries a more severe penalty than does flouting standards. A September 2017 Cyberspace Administration of China <a href="">review</a> of privacy protections built into some of China’s most widely used smartphone apps—including Alipay—was incapable of preventing Ant Financial from later trying to gather user data without clear consent. Ant Financial’s recent disregard of its users’ data privacy may be the tip of the iceberg of evidence that Ant and similar companies are employing lax user protections in a thriving, highly competitive, data-driven industry.</p> <p>A recent development suggests one way citizens might push back against Chinese tech companies’ privacy invasions: When search giant Baidu was found to be collecting user information—including messages and call logs—without clearly notifying users, the Jiangsu Consumer Council filed a lawsuit against the company. The lawsuit against Baidu was <a href="">withdrawn</a> in March, by which time the company claimed to have “removed improper functions.”</p> <p>As more citizens feel the tech giants have <a href="">violated their privacy</a>, it will be harder for Beijing to turn a blind eye to these complaints, especially if tech companies’ far-reaching data access helps determine user punishments and rewards. On the one hand, the government is trying to engineer trust in data-intensive rating systems, and scandals surrounding privately collected data raise the risk of a public backlash against data mining writ large. On the other hand, a growing lack of trust in profit-obsessed technology companies coupled with both low awareness of and transparency around how private companies’ data is shared with and used by government platforms could bolster the government’s ability to crack down on private data miners.</p> <p>Ultimately, the ubiquitous tools these companies create are becoming a form of infrastructure that functions <em>as regulation</em>: the design of these products determines what users can and cannot do. As one Zhihu critic <a href="">wryly noted</a> in response to the question, “Can Sesame Credit Be Obstructed by Government Policies?”: “If these scores are able to tell the government which people are political activists, I don’t think the government wouldn’t support them.”</p> <p><strong>This article was first published by <a href="">ChinaFile on May 30, 2018</a>.</strong></p></div> </div> </div> Fri, 01 Jun 2018 08:43:09 +0000 komprakti 7201 at Why China has to fear a second wave of capital flight <span>Why China has to fear a second wave of capital flight</span> <span><span lang="" about="/en/user/301" typeof="schema:Person" property="schema:name" datatype="">smuscat</span></span> <span>Thu, 05/24/2018 - 14:02</span> <div class="layout layout--onecol"> <div class="layout__region layout__region--content"> <div class="field field--name-field-blog-date field--type-datetime field--label-hidden field--item"><time datetime="2018-05-28T12:00:00Z">28/05/18</time> </div> <div class="field field--name-field-authors field--type-entity-reference field--label-hidden field--items"> <a href="/en/team/maximilian-karnfelt" hreflang="en">Maximilian Kärnfelt</a> </div> <div class="field field--name-field-announcement-text field--type-text-long field--label-hidden field--item"><p><strong><span><span>There are many indications that China could suffer a second round of capital flight. Interest rates in Western economies are up, and Chinese savers don't have access to favorable rates at home. Fears of tax increases or currency devaluation are other factors that might drive wealthy Chinese to try to move their capital abroad and circumvent the government's strict capital controls.</span></span></strong></p></div> <div class="field field--name-field-main-image field--type-image field--label-hidden field--item"> <img srcset="/sites/default/files/styles/max_325x325/public/2018-05/182505_Geldscheine_Yuan_123rf_86046423_m.jpg?itok=_ClD_3c- 325w, /sites/default/files/styles/max_650x650/public/2018-05/182505_Geldscheine_Yuan_123rf_86046423_m.jpg?itok=GnA9qdXR 650w, /sites/default/files/styles/max_1300x1300/public/2018-05/182505_Geldscheine_Yuan_123rf_86046423_m.jpg?itok=KDkCznAL 1300w, /sites/default/files/styles/max_2600x2600/public/2018-05/182505_Geldscheine_Yuan_123rf_86046423_m.jpg?itok=_PIBUOxO 2507w" sizes="(min-width: 1290px) 1290px, 100vw" src="/sites/default/files/styles/max_325x325/public/2018-05/182505_Geldscheine_Yuan_123rf_86046423_m.jpg?itok=_ClD_3c-" alt="Picture" title="The strength of China’s capital controls might soon be put to the test. Image by Zhao Fei via 123rf." typeof="foaf:Image" class="img-responsive" /> </div> <div class="field field--name-body field--type-text-with-summary field--label-hidden field--item"><p><span>Since 2015, the specter of capital flight has been haunting the Chinese economy. In that year, faced with the threat of a currency devaluation and an aggressive anti-corruption campaign, investors and savers began moving their wealth out of China. The outflow was so large that the central bank was forced to spend more than $1 trillion of its foreign exchange reserves to defend the exchange rate.</span></p> <p><span>The Chinese government was eventually able to dam up the flow of capital out of its borders by imposing strict capital controls, and China’s balance of payments, exchange rate and foreign currency reserves have all stabilized. But even the largest dam cannot stop the rain; it can only keep water from flowing further downstream. There are now several signs that the conditions that originally led to the first massive wave of capital flight have returned. The strength of China’s capital controls might soon be put to the test.</span></p> <p><strong><span>Why is capital flight so damaging for China?</span></strong></p> <p><span>Before listing the reasons why a second bout of capital flight is looking increasingly likely, let us first address the underlying question: is capital flight truly so damaging for a country that fighting it can be economically justified? In the case of China, the answer is probably yes, for the following reasons:</span></p> <ul><li><span>First, a government’s ability to pay for its domestic and foreign expenditure can be affected by capital flow out of the country. Large flows out of the country reduce the tax base, potentially reducing government revenue. Outflow can also result in a currency depreciation, increasing the cost of foreign investments. The Chinese government has large commitments both at home and abroad, so this is naturally a great concern.</span></li> <li><span>Second, asset price bubbles need a constant supply of liquidity. If capital flight is severe, such bubbles are deprived of funding and can subsequently burst, potentially causing a damaging crisis. China’s real estate market is clearly vulnerable to this.</span></li> <li><span>Third, as the Mundell-Flemming trilemma states, a country can only choose two of the following three: independent interest rates, free capital flows and a fixed exchange rate. If a country tries to have all three at once, then once the country enters a depreciatory cycle, foreign currency reserves must be committed. And once they are depleted, the fixed exchange rate can no longer be maintained. The Chinese central bank’s controlling rate is not the same as the US Fed’s, and the country manages its exchange rate. Therefore, it must control the flow of capital.</span></li> </ul><p><span>These three reasons make it clear that without capital controls, the Chinese government could face considerable difficulties in meeting its obligations and ensuring stability.</span></p> <p><span>Capital flight stems from a combination of fundamental and psychological factors. Interest rate differentials between foreign and domestic investment and savings opportunities, as well as differences in tax rates are fundamental factors than can lead to cross-border flows. Psychological factors are related to the anticipation of changes in the socioeconomic environment which could negatively affect wealth holders. Such anticipations can largely be distilled into the suspicion that if capital is not moved outside of the country’s borders a large portion of it will be soon be appropriated or lost. And since investors are somewhat like herd animals, if one scares, panic often follows.</span></p> <p><span>There are currently both fundamental and psychological factors that point to the possible return of capital flight. The West seems to have finally emerged from the Great Recession that followed the Global Financial Crisis in 2008. Western economies are once more returning to their long-run economic growth trends.</span></p> <p><span>On top of this, central banks in the United States, Europe and Japan have begun reducing their balance sheets and are increasing controlling rates. These factors are driving rates up, narrowing the interest rate differential. Chinese rates are still higher than those in the West, but regular savers do not have access to the returns in the interbank market. For complex reasons related to China’s developmental model, rates paid for regular bank deposits are instead purposefully kept below the rate of inflation. Tax cuts in the United States will also make it a more attractive investment destination.</span></p> <p><strong><span>Investors are driven by real and imagined risks</span></strong></p> <p><span>There are also real or imagined economic and political risks that could cause investors to decide to move their money abroad. The Chinese financial system—and corporates in particular—have since 2009 rapidly become highly leveraged. This means that a bailout of the financial system, either through raised taxes or the printing press, is not out of the question.</span></p> <p><span>Secondly, the existing capital controls ironically have resulted in the RMB appreciating close to the level that it reached in 2015, just before the devaluation. Exports have begun to fall and there have been reports that exporters see this as a greater problem than potential tariffs. If exports continue falling, policy makers might be tempted to devalue the currency to support exports. All the above risks could easily persuade wealthy Chinese that moving capital out of the country is the best insurance policy against potential future losses.</span></p> <p><span>However, a key point remains: if a large enough group of investor-savers decide to move their capital out of the country, the currency will come under pressure. A relatively small number of actors can in this way cause an enormous chain reaction. As Chinese foreign exchange reserves equal only <a href="">10%</a> of money supply, a large-scale capital exodus would quickly deplete liquid currency reserves.</span></p> <p><span>There are many signs that the difficulties China struggled with in 2015 could return. Even in the current calm, few would doubt that outward capital flows would be immense if controls were completely relaxed. Perhaps the most likely cause of renewed capital flight would be a possible bailout of the financial system as a part of the ongoing deleveraging campaign. Few wealth holders would like to be subjected to the taxation or inflation that would have to follow and would try to move their wealth abroad if they suspected a bailout was imminent.</span></p> <p><span>The dams are keeping the water in for now. But time has passed, and no one can be sure if they will hold once the rain begins anew.</span></p> <p><strong><span>This article was first published by <a href="">China Economic Review on May 11, 2018</a>.</span></strong></p></div> </div> </div> Thu, 24 May 2018 12:02:27 +0000 smuscat 7116 at Cutting import tariffs can help China’s economy – and global trade <span>Cutting import tariffs can help China’s economy – and global trade</span> <span><span lang="" about="/en/user/301" typeof="schema:Person" property="schema:name" datatype="">smuscat</span></span> <span>Thu, 05/24/2018 - 09:39</span> <div class="layout layout--onecol"> <div class="layout__region layout__region--content"> <div class="field field--name-field-blog-date field--type-datetime field--label-hidden field--item"><time datetime="2018-05-24T12:00:00Z">24/05/18</time> </div> <div class="field field--name-field-authors field--type-entity-reference field--label-hidden field--items"> <a href="/en/team/rolf-j-langhammer" hreflang="en">Rolf J. Langhammer</a> </div> <div class="field field--name-field-announcement-text field--type-text-long field--label-hidden field--item"><p><span><span><span><strong><span lang="EN-US" xml:lang="EN-US" xml:lang="EN-US">At a time of rising protectionism, China is sending a signal of liberalization by lowering its import tariffs on cars. The unilateral move is only a first step if China wants to prove its commitment to the multilateral trading system. Sacrificing outdated protections can also help China’s transition towards a higher value-added economy. </span></strong></span></span></span></p></div> <div class="field field--name-field-main-image field--type-image field--label-hidden field--item"> <img srcset="/sites/default/files/styles/max_325x325/public/2018-05/Blog_German%20car%20sales%20in%20China_pbu805663_29_imaginechina.jpg?itok=f1JoqMKZ 325w, /sites/default/files/styles/max_650x650/public/2018-05/Blog_German%20car%20sales%20in%20China_pbu805663_29_imaginechina.jpg?itok=Rf1NA9oX 650w, /sites/default/files/styles/max_1300x1300/public/2018-05/Blog_German%20car%20sales%20in%20China_pbu805663_29_imaginechina.jpg?itok=vD8RTmXs 1300w, /sites/default/files/styles/max_2600x2600/public/2018-05/Blog_German%20car%20sales%20in%20China_pbu805663_29_imaginechina.jpg?itok=DsbJ-P1C 2600w" sizes="(min-width: 1290px) 1290px, 100vw" src="/sites/default/files/styles/max_325x325/public/2018-05/Blog_German%20car%20sales%20in%20China_pbu805663_29_imaginechina.jpg?itok=f1JoqMKZ" alt="Car sales" title="German luxury carmakers stand to gain from China&#039;s lowered import tariffs. Source: ImagineChina/Xu Congjun." typeof="foaf:Image" class="img-responsive" /> </div> <div class="field field--name-body field--type-text-with-summary field--label-hidden field--item"><p><span><span><span><span lang="EN-US" xml:lang="EN-US" xml:lang="EN-US">Right before German chancellor Angela Merkel’s trip to Beijing, China has doubled down on its pledge to save the global trading system from a wave of protectionism. In the wake of Xi Jinping’s promise given in Davos in 2017, China has taken a few steps such as </span><span lang="EN" xml:lang="EN" xml:lang="EN">dropping the requirement that forced foreign investors to enter into joint ventures with Chinese partners</span><span lang="EN-US" xml:lang="EN-US" xml:lang="EN-US">. But by and large, the international business community remained unconvinced of China’s true commitment to </span><span lang="EN" xml:lang="EN" xml:lang="EN">further liberalize access to its markets.</span></span></span></span></p> <p><span><span><span><span lang="EN" xml:lang="EN" xml:lang="EN">This may be about to change. By </span><a href=""><span lang="EN" xml:lang="EN" xml:lang="EN">reducing import tariffs for cars from 25 to 15 percent</span></a><span lang="EN" xml:lang="EN" xml:lang="EN"> by July 1, the Xi leadership has started to tackle one of the biggest obstacles to China’s credibility as a global leader on trade: the country’s highly selective and distorted tariff structure. The move delighted the shareholders of German carmakers such as Audi, BMW, Daimler, and Porsche that export their premium models to China. The overall effect on these companies’ profits may be limited however, since the </span><a href=""><span lang="EN" xml:lang="EN" xml:lang="EN">lower import tariffs will also lead to lower prices</span></a><span lang="EN" xml:lang="EN" xml:lang="EN"> for the middle-class models they produce in China.</span></span></span></span></p> <p><span><span><span><span><span lang="EN" xml:lang="EN" xml:lang="EN"><span>As f</span></span><span lang="EN-US" xml:lang="EN-US" xml:lang="EN-US"><span>or China, allowing cheaper car imports may seem courageous, but it is in China’s own interest. The change in tariffs will be felt in the Chinese economy, but in the long run, it will facilitate the transition to a higher value-added economic model.</span></span></span></span></span></span></p> <p><span><span><span><span> <span lang="EN-US" xml:lang="EN-US" xml:lang="EN-US"><span>China’s current production model is rooted in the time when the country’s focus was on being the world’s extended workbench. The combination of low labor costs and high tariffs on finished products such as cars induced international companies to move their assembly lines to China. But due to China’s lower technological level many critical components were imported (at lower tariff rates), meaning that most of the value-added remained abroad. The cost of importing intermediate products was offset by the savings in labor costs during the assembly stage in China. For Chinese companies as well as for international companies willing to produce in China, the high import tariffs on finished or downstream goods also meant that their assembly stages were then strongly protected from international competition in the Chinese market.</span></span></span></span></span></span></p> <p><span><span><span><strong><span lang="EN" xml:lang="EN" xml:lang="EN">China’s tariffs are high and inflexible</span></strong></span></span></span></p> <p><span><span><span><span lang="EN" xml:lang="EN" xml:lang="EN">Even compared to other emerging economies, China’s tariff structure has been rigid. First, China maintains a tariff level for non-agricultural products (9 %), which is considerably higher than that of its two main trading partners, the United States and the European Union (both below 4%). Especially in the upper ranges (between 15 and 25 %), the Chinese level is far higher than that in the world’s other two large trading blocks. Second, China has been less willing than countries like India or Brazil to unilaterally lower tariffs from the maximum level allowed under WTO rules (“bound tariffs”). Since its WTO entry in 2001, this rigidity explains why China’s “applied” tariffs on non-agricultural products have been almost identical with the “bound” tariff rates.</span></span></span></span></p> <p><span><span><span><span lang="EN" xml:lang="EN" xml:lang="EN">This behavior no longer serves China’s own economic interests. It has cemented a production structure in cross-border supply chains in which China’s role is often reduced to that of a finishing-touch assembler of inputs. </span><span lang="EN-US" xml:lang="EN-US" xml:lang="EN-US"><span>The current tariff structure discriminates against the production of upstream products such as battery production or data technologies for e-mobility that are defined as central sectors in the “Made in China 2025” industrial policy strategy and that the Chinese government supports with generous subsidies.</span></span></span></span></span></p> <p><span><span><span><strong><span lang="EN-US" xml:lang="EN-US" xml:lang="EN-US"><span>Lower tariffs would help China’s transition</span></span></strong></span></span></span></p> <p><span><span><span><span lang="EN-US" xml:lang="EN-US" xml:lang="EN-US"><span>If China continues to lower the high import tariffs on finished products, this would increase competition with producers abroad. Especially in combination with rising wages, China would likely end up losing many low-skilled manufacturing jobs in assembly to less developed countries. This is true for the car industry, but also for a number of other industries that have been </span></span><span lang="EN" xml:lang="EN" xml:lang="EN">overproportionately protected, </span><span lang="EN-US" xml:lang="EN-US" xml:lang="EN-US"><span>from</span></span><span lang="EN" xml:lang="EN" xml:lang="EN"> textile and clothing to several food industries.</span></span></span></span></p> <p><span><span><span><span lang="EN-US" xml:lang="EN-US" xml:lang="EN-US">Yet </span><span lang="EN" xml:lang="EN" xml:lang="EN">all of these industries can no longer be a backbone of China’s industrial structure as China charges ahead with its industrial upgrading plans laid down in the Made in China 2025 strategy. China will have to sacrifice a number of processing stages and even entire low-tech industries, which had been symbols of China’s transformation in the reform era.</span></span></span></span></p> <p><span><span><span><span lang="EN-US" xml:lang="EN-US" xml:lang="EN-US"><span>This overdue transition would be a necessary step in China’s development towards an advanced economy. The competition created through lower import tariffs would incentivize domestic investment in the production of those intermediate products that so far had less chance to compete with products from abroad than the downstream stages of production.</span></span><span lang="EN" xml:lang="EN" xml:lang="EN"> Changing the tariff structure might therefore one day result in China becoming a competitive producer of intermediates instead of only a finishing touch producer. </span></span></span></span></p> <p><span><span><span><span lang="EN" xml:lang="EN" xml:lang="EN">A series of deep unilateral cuts of tariffs below the bound level would bring a double dividend to China. It would help the country’s economic transformation while enhancing the global standing of its leadership – as a leader in global trade, if not as the savior of the WTO.</span></span></span></span></p></div> </div> </div> Thu, 24 May 2018 07:39:05 +0000 smuscat 7096 at