China Update 14/2017

MERICS China Update, Issue 14/2017

August 25 to September 7, 2017



The facial recognition technology developed by China's tech giant Baidu is up to 99.77 percent accurate, says the New York-listed company. That would mean it is able to distinguish people even better than the human eye. China’s major search engine operator is currently trying to recast itself as a leader in artificial intelligence. The face recognition technology will be applied at Beijing airport and could replace boarding passes as early as 2018.


Flag raising ceremony on Tiananmen square, Beijing. Power shifts in the military leadership are emerging as the 19. Party Congress of the CCP draws nearer.
Source: beibaoke via 123RF

China reshuffles military ahead of Party Congress

China’s Communist Party (CCP) has conducted a major reshuffle of the country’s top military leadership ahead of next month’s 19th Party Congress. The Ministry of Defense announced the appointments of new commanders of ground forces and air force on September 1. A new navy commander had been installed in January.

This is not the only sign that a major shake-up is underway. The Chief of the Joint Staff Department of the People’s Liberation Army (PLA) Fang Fenghui was replaced in late August and is now being questioned on suspicion of corruption, according to media reports. He was replaced as Chief of the Joint Staff Department by Li Zuocheng, an army general who fought in China’s brief border war against Vietnam in 1979 and who served as commander of the PLA ground forces for a few months prior to his new appointment.

Fang Fenghui was also a member the Central Military Commission (CMC), which is headed by President Xi Jinping. He and another senior member, Zhang Yang, were conspicuously omitted from the list of delegates to the Party Congress. This is normally a sign that they will lose their positions on the CMC. This would indicate that a bigger-than-expected number of members of the highest military decision-making body will be replaced. Up to five of the current ten members (not counting Xi) are slated for retirement due to their age. Adding Fang and Zhang would bring that number up to seven.

The military is at the focus of Xi’s ambition to strengthen China as a global power and to present himself as a strong leader. The timing of the reshuffle only weeks before the Party Congress comes at a time when Xi is determined to show who is in control of the party and the state. 

Another reminder of this had been the sudden fall of Sun Zhengcai in July, who is also being questioned on unspecified allegations of “violations of discipline,“ which usually means corruption. Sun, who had served as party secretary of Chongqing, had been viewed as a viable successor to Xi Jinping as CCP General Secretary.

The only thing certain seems to be that the Party Congress will pave the way for Xi’s second term. As the Politburo announced last week, the biggest event on China’s political calendar, which is held every five years, will begin on October 18. The meeting of 2,300 delegates is expected to last for about a week. Observers will watch how many close allies Xi will place in the Politburo’s Standing Committee and if his top anti-corruption fighter Wang Qishan will remain a member even though he is past the normal retirement age of 68.

But most of all, the Congress will signal to what extent Xi’s centralization of power and tight leadership style will shape China in the five coming years and possibly beyond the end of his second term as General Secretary in 2022.


China and India agree to end stand-off at border with Bhutan

China and India have ended their stand-off in a disputed border area. On the eve of the BRICS summit in Xiamen, both sides agreed to an immediate withdrawal of their troops from their joint border with Bhutan on August 28.

The conflict started when China’s People’s Liberation Army was building a road on the Doklam plateau into an area that is claimed by Bhutan. India accused China of a unilateral attempt to change the status quo and sent troops to the region to support its close ally Bhutan. 

China accused India of sending troops into Chinese territory and responded by sending its own troops to the border.

China and India had fought a brief border war over their territorial claims in the Himalaya region in 1962. The territorial disputes remain unresolved until this day and could flare up again at any time.

China hits resistance with plans for expanding reach of BRICS

Beijng’s plan to institutionalize the group’s cooperation with non-BRICS nations was thwarted at a BRICS summit, which China hosted in Xiamen from September 3 to 5. The meeting featured a “Dialogue of Emerging Markets and Developing Countries“ with the heads of state of Mexico, Tajikistan and Thailand. But the other BRICS members Brazil, China, India, Russia and South Africa resisted a Chinese plan to set up a more permanent BRICS-plus format that would bring these countries formally closer to the group. The final communiqué only mentioned BRICS plus as one possible form of cooperation with non-BRICS nations.

The summit also shed doubt on China's commitment to investing into the group, which was originally set up to provide a global counterweight against the United States and Europe on issues such as global economic governance. 

Chinese President Xi Jinping pledged USD 76 million for economic and technological cooperation within BRICS and another USD 4 million to the BRICS-led New Development Bank, which had been set up in Shanghai as an alternative to the World Bank in 2015.

These commitments pale in comparison to Xi's pledge of USD 500 million for a South-South cooperation fund, a Chinese initiative, at the end of the summit. They also fall far behind China’s commitment to funding its two signature projects: the China-led Asian Infrastructure Investment Bank (AIIB) and its Belt and Road Initiative, which Xi pledged to support with USD 124 billion in May.

News in brief


Cambridge University Press stands up to Chinese censors

Reacting to protests from among the international academic community, Cambridge University Press has reversed its earlier decision to remove content from its website within China. The publisher had earlier bowed to pressure from Beijing and blocked access to 315 articles on issues ranging from Tibet and Taiwan to the Tiananmen protests that had been published in its academic journal “China Quarterly.“ It also refused to comply with a second request from the State Administration of Press and Publications, Radio, Film and Television (SAPPRFT) to remove some 100 articles from the website of the “Journal of Asian Studies.“

Beijing has tightened ideological controls of media and academic publications under President Xi Jinping. This presents a dilemma for international publishing houses that increasingly try to enter the Chinese market. Princeton University Press opened its first office in China in late August. Cambridge University Press could set an example for other international publishing companies or distributors of online content. US media reports praised the British publisher for doing something that Silicon Valley companies like Apple and Amazon had failed to do: stand up to China’s censors.

“It may be necessary for academic institutions and publishing houses to set up a joint code of conduct on how to deal with censorship requests from Chinese authorities in the future.”

Mareike Ohlberg, Research Associate at MERICS

Facade of King's College with chapel, Cambridge, UK.
Source: Paul D via flickr

China criminalizes disrespect of national anthem

China has criminalized the inappropriate use of the country‘s national anthem. A new law, which was passed by the National People’s Congress on September 1, threatens to punish offenses with up to 15 days in police detention. The law will make it illegal to “maliciously“ modify the anthem’s wording or to present it in a “distorted and disrepectful“ way. The anthem may only be played on official occasions such as state ceremonies or sports contests, but not at private events. When it is played, citizens are required to rise up and show due respect.

The law will also be included into the Basic Law of China’s Special Administrative Region Hong Kong. The announcement has triggered a heated debate about freedom of expression among parties critical of Beijing in the former British crown colony. Soccer fans in Hong Kong had booed when the Chinese national anthem was played in a stadium in 2015 – drawing the ire of mainland Chinese netizens.

News in brief


China orders ministries to improve access for foreign investors

China has announced a series of measures to facilitate access for international investors to the Chinese market. In a directive issued in mid-August, the State Council ordered its ministries to set up concrete timelines for the further opening of sectors such as automobile or banking. China’s central bank and its foreign exchange regulator were told to ensure that “foreign investors can freely remit their profits, dividends and other forms of investment returns in China overseas.” The document also urged steps to ensure a better protection of foreign companies’ intellectual property rights.

Beijing hopes to revive foreign direct investment, which has recently started to decline among complaints that international companies in China suffer from unfair market access hurdles as well as other disadvantages vis-à-vis their Chinese competitors. This is the first time that the State Council bundles these different measures in a list and orders its ministries to implement them. The directive follows an announcement in July to lift restrictions for foreign investments in certain sectors.

Foreign observers welcomed the step with caution. In an OpEd published in the South China Morning Post, Germany’s ambassador to China, Michael Clauss, complained that many important sectors remained off-limits for foreign investors and that rules in some sectors have recently been tightened rather than relaxed.

“The State Council directive represents an acknowledgement that the economy is not attractive enough anymore to entice foreign investment. ‘Real’ FDI from Japan, the United States and the EU has been dropping strongly over the last years, reflecting increasing overcapacity in China and a more welcoming investment climate in other countries. We now have to wait if the Davos Spirit enters the world of reality, announcements are only the starting point.”

Jörg Wuttke, member of the MERICS advisory board and former president of the European Chamber of Commerce in China

China’s overseas investment focus becomes more state-led and strategic

State-owned companies and funds are leading China’s overseas acquisitions after the government has clamped down on a global shopping spree by the private sector. State actors accounted for USD 28.7 billion in outbound investment in the first half of 2017, beating the private sector for the first time since 2015. As the Financial Times reported, state deals increased by 86 per cent over the second half of last year, while private deals dropped by 40 per cent.

This follows newly introduced investment rules that prohibit “irrational acquisitions” in non-strategic industries ranging from real estate to entertainment. Big Chinese investors such as Anbang and Fosun had been put under scrutiny for investing outside their core businesses, and stricter capital controls were put in place to prevent money from leaving the country. As a result, China’s overall foreign direct investment dropped by 45.8 per cent in the first six months of this year.

The most recent major deals have complemented China’s strategic ambitions in different parts of the world. In early September, state-owned China Merchant Port Holding agreed to purchase 90 per cent of Brazil’s most profitable port terminal, TCP Participações SA, for USD 924 million.

The biggest deal by a private company has been China Legend’s move to buy 90 per cent of Banque Internationale de Luxembourg for USD 1.8 billion. Luxembourg is a hub for Chinese banks operating in Europe, and the finance sector is not on Beijing’s list of restricted industries for overseas investment. Legend said it wanted to use its European presence to provide services to companies that participate in Beijing’s Belt and Road Initiative.

China bans fundraising through cryptocurrencies

China became the first country to ban initial coin offerings (ICO) of cyber currencies. ICO platforms shut down after the People’s Bank of China (PBOC) had called for the immediate suspension of all cryptocurrency financial activities and for arrangements to repay investors for past transactions on September 4. The announcement sent the value of the biggest such currency Bitcoin tumbling against the US dollar.

Analogue to an initial public offering (IPO) with the aim to raise capital on the stock market, companies can raise capital through the generation of a cryptocurrency via an ICO. Investors usually pay in Bitcoin, and they receive digital tokens instead of shares.

The PBOC’s notice followed a notification issued by China’s Office of the Leading Small Group on Internet Financial Risk Special Rectification Work (互联网金融风险专项整治工作领导小组办公室) on September 2 that categorized crowdfunding via ICOs as a form of “unapproved illegal public financing.” 

The document calls for an investigation into past transactions as well as for the establishment of monitoring mechanisms for financial activities using cryptocurrency.

The Chinese government fears that cryptocurrencies enable fraud and the purchase of illegal substances as well as weapons. Bitcoin has also been used to move money out of China despite the country’s capital controls.

Around the world, the lack of legal clarity in the market for cryptocurrencies has led to concerns that cryptocurrencies can destabilize financial markets. It is possible that other governments will follow China’s lead in regulating these activities.

News in brief


One China – One Europe? German foreign minister’s remarks irk Beijing

Reviving Europe’s unity was the theme of Sigmar Gabriel’s speech in Paris. The German foreign minister‘s address at a gathering of French ambassadors was meant to remind Europeans of their joint purpose, but it ended up raising eyebrows in China, which was presented as a threat to European unity.

The German minister appealed to EU members to pursue a joint foreign policy vis-a-vis the Asian power to counter Beijing’s tactics: "If we do not succeed for example in developing a single strategy towards China, then China will succeed in dividing Europe," he said.

China has tried to draw Central and Eastern European countries into its orbit with the so-called ”16+1“ format which focuses on deepening economic cooperation. China has invested heavily in countries connected to its China’s Belt and Road Initiative. Some of these countries have been less willing to criticize China than Western European nations, preventing joint European positions on China’s human rights situation within the UN or on China’s refusal to accept an international court ruling on its territorial claims in the South China Sea. "Some EU member states don‘t want to approve [the ruling], because they do not want to put themselves in conflict with China," Gabriel said.

In the clearest signal to Beijing, he demanded that China should follow a “One Europe“ policy – just as European countries follow the “One China“ policy, which accepts China’s dictum that Taiwan is a part of China and not an independent country. Gabriel’s call added a political dimension to the economic debate of demanding more reciprocity from China in the areas of trade and foreign investment.

Beijing was not amused. “We are shocked by these statements,“ said the Chinese Foreign Ministry’s spokeswoman. She dismissed the comparison to Taiwan by saying that “The EU is a regional organization composed of sovereign states, not a sovereign country itself.” And she added “We hope that he can clarify what he means by ‘one Europe‘ and whether there is a consensus on ‘one Europe‘ among EU members.“

The director of the Department of European Studies at the China Institute of International Studies Cui Hongjian took an equally harsh stance in an article for the party-state newspaper “Global Times”: “It is unreasonable that Gabriel compared the one-Europe policy with the one-China policy. The latter is based on historical facts and political consensus across the Taiwan Straits, and recognized by international organizations and treaties, while the one-Europe policy is only an ambiguous concept.”

Some in Europe may even agree with this characterization of the EU’s struggles to formulate common policies. But Beijing’s comments also appear to prove Gabriel’s point: that China is ambivalent about its support of EU integration and that it fails to acknowledge the legal and political principles underlying the need to form political consensus on foreign affairs among EU member states.

MERICS analysis: Sino-European unity against Trump can’t solve all bilateral issues. Blogpost by Lucrezia Poggetti. 

What Macron could mean for European China policy. Blogpost by Bertram Lang.


A war of stereotypes

China and India may have ended the standoff at their joint border with Bhutan, but the dispute has escalated into a war of memes on the internet. China’s official Xinhua news agency fired the first shot by publishing a video clip titled “The Seven Sins of India“ featuring a turban-sporting invader with a fake Indian accent and fake facial hair. The India Today Group responded in kind: It released a video in which animated versions of China’s state and party leader Xi Jinping and Indian Prime Minister Narendra Modi fight along the common border. Xi launches the attack riding a gigantic fire-spewing dragon. Modi, perched on top of a tiger and armed with a sword and a shield, wins the fight in a David versus Goliath manner. The actual border may be calm, for now, but the online stereotypes suggest that there is more that divides these two nations than the occasional flaring up of long-simmering territorial disputes.

Comic versions of Xi Jinping and Narendra Modi face each other in a stand-off on Youtube (2,524,660 views).
Source: SoSorry via Youtube (https://www.youtube.com/watch?v=xAcQ3uY8GvI)

The  Mercator Institute for China Studies (MERICS)is a Stiftung Mercatorinitiative. Established in 2013, MERICS is a Berlin-based institute for contemporary and practical research into China.