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October 12 - October 25, 2018

METRIX

metrixThis is the volume of gold – calculated in tonnes – China dug up in 2017. The People’s Republic has been the top gold producing nation for many years. Even though production fell by six percent compared to 2016, China still outpaces the second-biggest gold producer Australia by 130 tonnes. 

Topic of the week: Economic growth figures

Zhuhai-Macau-Bridge
The largest sea-crossing bridge in the world was inaugurated on Monday. Source: ImagineChina.

 

China’s growth falls to lowest level since 2009 even before trade war hits

Economic growth in China has fallen to 6.5 percent in the third quarter – the lowest level since the global financial crisis in 2009. In an attempt to reassure the population and investors, party and state leader Xi Jinping departed on a highly symbolic trip to the South of China this week. In 1992, Deng Xiaoping had reaffirmed China’s reform and opening up policy in a similar “Southern Tour.”

Visiting a high-tech industrial facility in Zhuhai on Monday, Xi praised China’s economic sovereignty. On Tuesday, Xi attended the opening ceremony of the world´s longest sea bridge connecting Hong Kong and Macao with the Chinese mainland. Shenzhen, China´s first Special Economic Zone and the most famous stop of Deng´s tour, is also on the agenda. Xi will visit Tencent and Huawei, which symbolize China´s transition from shoe manufacturing to high-tech.

GDP Growth

Xi was not the only one trying to reestablish trust in China´s economy after the release of the disappointing growth figures on October 18. In an interview, Vice Premier Liu He described the economic outlook as “very bright.”

The slowdown in domestic economic activity was partially the result of the campaign to reduce debt, as well as of a slew of new regulations, such as stricter environment standards. The government has started to counteract these effects with a more active monetary and fiscal policy.

What is troubling for China is that growth starts to decline even before the effects of the trade war with the United States have started to hit its economy. Exports held up while domestic consumption and investment dropped, suggesting that the economic fundamentals are shaky.

The room for manoeuvre will shrink, however, as soon as the US tariffs start to hit China’s export manufacturing industry. The Trump administration’s additional 10 percent tariffs on 200 billion USD worth of Chinese products will reset to 25 percent in January.

There are limits to how much of the expected drag on growth can be offset with more stimulus, especially as a loose monetary policy will increase risk in the financial system. Nominal GDP in the third quarter grew at a rate below total credit growth. This means that the economy is still taking on credit at a higher pace than it can repay debt.

Max J. Zenglein, Senior Economist at MERICS: “The drop in growth makes it clear that the resilience of the Chinese economy has limits. China´s stability-minded leaders are confronted with a combination of external and internal risks. The trade war with the United States will force them to act at the risk of undermining their aim to reduce China´s domestic debt build-up. There aren´t many good options."

 

China and the World

Xi meets Abe, may meet Trump, in attempt to protect China

Xi Jinping appears keen on making friends and mollifying his opponents amid China’s increasingly dramatic showdown with the United States. Highlighting the recent thaw in relations with Japan, the Chinese president is hosting prime minister Shinzo Abe for the latter’s first state visit to Beijing this week. One month later, a potential meeting between Xi and US president Donald Trump on the sidelines of the G20 summit in Argentina may offer an opportunity to de-escalate the US-China trade war.

Xi’s meeting with Abe will be the first formal summit between China and Japan’s leaders since 2011, and it will be a powerful symbol of both countries’ efforts to overcome their historical animosity. Beijing, faced with a trade war with the United States and a growing international sensitivity to the “China threat,” is interested in taking the warming of the relationship since 2017 to the next level.

Xi and US president Donald Trump are expected to meet before the formal start of the G20 summit in Argentina next month. According to the South China Morning Post, the meeting has been tentatively scheduled for November 29.

If confirmed, it would be the first bilateral encounter between the two leaders since the Trump administration declared a trade war on China by imposing punitive tariffs on 200 billion USD worth of Chinese imports, triggering retaliation from China.

The expectations for such a meeting on both sides may not align though, as reporting by the US news outlet Axios indicates. Bill Bishop, who also publishes the Sinocism newsletter, cited unnamed sources as saying that, “the Chinese side at least is hoping for some sort of Trump-Xi framework deal to cool trade tensions while setting a schedule to come to a detailed agreement.” On the other side, Trump appears to have no interest to compromise at this point and may want them to “suffer more,” as Axios’ national political reporter Jonathan Swan reported, quoting White House sources.

CCP political meddling overseas prompts Five Eyes alliance to reach out

The so-called Five Eyes intelligence alliance, grouping the United States, the United Kingdom, Australia, Canada and New Zealand, is building up a coalition against political influencing efforts by the Chinese Communist Party (CCP) after repeated cases of Chinese interference in all its member states.

Earlier this month, an organization close to the Chinese government was named in a police investigation into alleged vote-buying in municipal elections of three Canadian cities. The Canada Wenzhou Friendship Society had sent out WeChat messages urging voters to support candidates of Chinese descent while offering transportation subsidies. The organization has ties with the Overseas Chinese Affairs Office and other bodies of the CCP’s propaganda apparatus, according to the online newspaper StarMetro.

Shortly after this episode, an MP of New Zealand’s National Party accused his party leader, Simon Bridges, of illegally concealing donations from Chinese tycoon Zhang Yikun. The businessman would have offered the money to secure seats for Chinese candidates in the parliament. Zhang, a member of the United Front Work Department and former PLA member, is a prominent figure in the country’s political scene. New Zealand has been a major target of China’s political influencing efforts.

On October 12, Reuters cited anonymous officials saying the Five Eyes alliance is building an informal intel coalition together with like-minded countries, including Germany and Japan. The article revealed that unofficial meetings for sharing information would include topics like Chinese foreign direct investment (FDI) and political interference. The expansion of Five Eyes consultations to third countries indicates that momentum is gathering for a concerted international reaction to influencing efforts of authoritarian countries, particularly China and Russia. It would be the first time an intelligence coalition specifically targeted China. According to the Reuters report, the attempted takeover of the German semiconductor firm Aixtron in 2016 was a wake-up call.

Yet challenges to a cohesive counter-intelligence response to China remain. Canadian Prime Minister Justin Trudeau, advised by his cyber intelligence community, rejected American pressure to ban Chinese telecom giant Huawei from his country’s 5G networks for national security reasons. In August, Five Eyes member Australia had banned Huawei and ZTE from providing 5G technology for the country's wireless networks. The UK saw its signals intelligence service, GCHQ, warn that it could provide 'only limited assurances' that telecoms equipment provided by Huawei did not compromise national security.

Frank N. Pieke, Director and CEO of MERICS: “International coordination is critical when it comes to tackling China’s political influencing and espionage. But if democratic countries remain divided, good intelligence will not be enough. However, this should not lead to a general suspicion of Chinese people, companies or other institutions, and be based on solid evidence rather than suggestions or hearsay.” 

Politics, Society and Media

China paints glossy picture of Uighur internment camps in Xinjiang

Chinese authorities have admitted the existence of internment camps for terror suspects in Xinjiang for the first time. They are now trying to present these places as educational facilities with the aim to discourage Uighurs and other Muslims from joining extremist groups.

In an interview published by the Xinhua news agency, the governor of the Autonomous Region, Shohrat Zakir, said that these “training courses” included activities such as reading, writing, dancing, singing and sports. The facilities were run under „humane“ conditions. The state-run television station CCTV broadcast a 15-minute documentary about a “training center” in the city of Hotan. The film shows students learning Mandarin, baking, woodworking and sowing. The cafeteria is decorated with balloons, the rooms are equipped with air conditioning.

The positive reports are meant to defuse the severe criticism of Beijing’s policies by human rights activists and experts on Xinjiang. The accuse the Chinese government of human rights violations in minority province. They report massive surveillance of the 12-million strong Muslim population, and arbitrary arrests of alleged suspects who are kept in inhuman internment camps.

Reports by Muslims who have experienced the camps differ sharply from the glossy official media coverage. He had been arrested without access to a lawyer and was forced to consume pork and alcohol, a former inmate from Kazakhstan told the British newspaper “The Independent.” After 20 days in the camp, he thought about taking his own life.

According to estimates, several ten thousand people in Xinjiang are detained in camps, some observers even put the number at several hundred thousand to a million. An independent confirmation of these numbers is difficult due to strict travel restrictions to Xinjiang. There is almost no public discussion about the situation within China.

Falling housing prices trigger protests

Homeowners in Shanghai, Xiamen and Guiyang have taken to the streets to protest falling home values, demanding refunds from real-estate developers that offered price cuts to new buyers. In Shanghai, for example, one agency allegedly reduced the price of listed houses by 25 percent, causing clashes with clients who had bought property at the previous higher prices. There are also social media reports of eruptions in smaller cities, such as Pingdingshan in the north and Shangrao in the southwest.

The developments could signal a turning point for China’s decade-long residential property boom. According to recently released data by the National Bureau of Statistics (NBS), house prices rose by seven percent since last year, the fastest yearly increase. In August alone house prices increased by 1.4 percent. This rise was recorded throughout 64 out of 70 major cities.

The market may have reached its peak however, and price increases fell back to 1.1 percent in September. This decline, together with a drop in sales by floor by 27 percent (yoy) during Golden Week, usually a time of brisk sales, could be interpreted as harbingers of a bust.

Over the last ten years, house prices in China have multiplied three- to five-fold, in some urban centers, such as Beijing, Shanghai or Shenzhen up to ten-fold. News reports estimate that, on average, 80 percent of Chinese households have mortgages, and that expenses for housing, in the form of rent or loan payments, take up 70 percent of families’ wealth.

Movements on the property market, or a perceived slowdown of housing prices, are therefore dangerous for the Chinese economy and social stability. Falling house prices directly shorten the income of large parts of society, and China’s leadership has an interest in keeping house prices afloat. Yet, an increasing share of population residing in urban areas has difficulties finding affordable housing and might potentially benefit from a slowdown.

MERICS analysis: “New solutions for urban residents: Housing security in urban China.” Paper by Zhu Yapeng in MERICS Papers on China No 6.

Economy, Finance and Technology

China faces uphill battle to stabilize stock markets

Chinese authorities are fighting an uphill battle to prop up China’s stock market in the face of rising economic uncertainty. A day-long spike was reversed when lower-than-expected growth figures were released on October 19.

On the morning of the same day, Banking Regulatory Commissioner Guo Shuqing and Central Banking governor Yi Gang respectively said economic fundamentals were healthy and that adequate liquidity would be supplied to the financial system.

The statements caused the Shanghai Composite stock index to increase by four percent in one day, the highest daily gains so far this year. However, once the disappointing growth figures were announced later that day, the markets again dipped, falling by 2.26 percent. It was also reported that some local governments had been buying stocks to support markets.

The poor performance of China’s stock markets illustrates the lack of confidence in the economy. The Shanghai Index has fallen by 22.5 % so far this year. The Shenzhen index has fallen even more, by 32.2 percent.

Part of the reason of the fall has been the fall of the currency. The CNY/USD exchange rate is nearing seven, the lowest level in a decade. Many investors will sell stocks and move their money abroad to avoid losses. Concerns over the US-China trade war have now compounded the fears.

The European View

EU deepens ties with Asia, struggles to connect with China

There has been a considerable deepening of in Europe-Asia economic relations this year, but China has taken a noticeable backseat in many respects. Hence, at this year’s ASEM and EU-ASEAN gatherings in Brussels, the EU took decisive steps to deepen its trade relations with Singapore and other Asean countries, while Chinese Premier Li Keqiang’s promise of further opening China’s economy was greeted with scepticism.

Opening the EU-ASEAN leaders meeting, European Commission president Jean Claude Juncker said: “The EU's partnership with ASEAN is founded on common interests across many areas. We share common values – in the European Union and in the founding charter of ASEAN – which need to be respected by all." More than rhetoric, this emphasis sends a signal to China.

After an eight-year long process, the EU and Singapore signed a trade deal at the 12th Asia-Europe Meeting on October 18 and 19 – a reassuring development for both sides in the face of shaky trade relations with the United States. The agreement, which still has to be ratified by the European parliament, follows on the heels of the EU-Japan trade pact. It would be the EU’s first such deal with a member of the 10-strong Association of Southeast Asian Nations (ASEAN).

The European Commission also adopted trade and investment agreements with Vietnam at the meeting; and it is currently in negotiations with three other ASEAN states. Concurrent with the ASEM and the EU-ASEAN meetings, Brussels also hosted the EU-South Korea summit.

In his bilateral encounters with the heads of governments of Germany, France, the UK, Greece and Italy, as well as with Juncker, Li stressed China’s recent rounds of opening, which benefitted some European companies.

China's trading partners however see reason to doubt Beijing’s commitment to free markets. Despite the recent exchange of market access offers, negotiations on an EU-China Bilateral Investment Agreement are not expected to make major progress in the near future, while China’s steps to open up the economy tend to be selective and transactional. Recent openings to German multinationals BASF and BMW, for example, are the result of bespoke deals that are also meant to be powerful symbolic geared at mitigating Europe’s criticism of Chinese restrictions on foreign investment. They fall thus short of being a meaningful sign of a movement towards greater reciprocity in EU-China investment relations. According to Reuters, European and Asian leaders at the ASEM summit, “pressed China to allow greater foreign investment in its economy, but ran into familiar resistance from Beijing over state subsidies.”

Profile: Zhang Lifan

China’s liberal conscience: Zhang Lifan sparks new debate with old article

Chinese liberal public intellectual Zhang Lifan has sparked a lively online debate about the role of the private sector in the economy – with an article that is almost a decade old. The CCP publication „Wenshi Cankao“ (文史参考) recently reprinted the article from 2010. Broadly summarized, Zhang’s essay concluded that China’s economy suffered whenever the state sector was strengthened at the expense of private companies.

Netizens must have assumed the article to be a current criticism of president Xi Jinping’s declared preference for supporting state-owned enterprises – and of a recent article by previously unknown investment banker Wu Xiaoping who argued that the private sector should be phased out after it has made its contribution to China’s economic revival.

Zhang’s essay in favor of the private sector can still be accessed on Chinese websites but is no longer available on the website of People’s Daily, the publisher of Wenshi Cankao.

Zhang, a historian by training, was born in 1950. He grew up as the son of Zhang Naiqi, who was prosecuted as a dissident during Mao Zedong’s Cultural Revolution. The younger Zhang has developed a remarkable skill to criticize the government without falling out of grace with China’s ruling class. He gave up his position at the Chinese Academy of Social Sciences (CASS) in 2000 in favor of more academic independence. In 2008 he was among 71 signatories of the Charta 08, which demanded political reforms.

Whereas other supporters of the Charta ended up in jail for their views, Zhang was able to build a reputation as an online commentator. His blog on Sina Weibo had up to 300,000 subscribers. His account was deleted by China’s censors in in 2013 after he had ridiculed the “Fifty-cent army,” a group of online users who disseminate official CCP views for money.

Zhang adopted a Zen-like attitude towards the removal of his Weibo persona. “Surfing through online comments about me being censored, I felt like the soul of a dead person floating in the sky watching people discussing my departure,” he told the South China Morning Post.

In the current discussion about the future of the private economy in the party state, Zhang has resorted to Twitter, using a Chinese proverb to ask the question whether “the donkey will be killed once it finished its job on the mill.”

This newsletter is based solely on freely available media reports. It does not necessarily endorse the opinions expressed in these reports and cannot guarantee that their sources and materials are (legally) valid. Any use of link citations assumes that these links were created in accordance with existing laws and regulations.