Steps Toward Central-Local Fiscal Reform; Beijing Overhauling Ministry of Foreign Affairs To Better Capitalize On Global Opportunities?; Lobbying Weakens CFIUS Reform; Pankaj Mishra Declares The End of The "China Fantasy" and the "Free Trade Myth"
Good Morning. I plan to take a personal day Monday as we have movers coming that day. I will try to get a newsletter out Sunday evening but that depends on how the packing goes. Things should be back to normal Tuesday. Thanks for your patience.
The Essential Eight
1. Steps Toward Central-Local Fiscal Reform
China is planning to reform the division of fiscal power and expenditure responsibilities between central and local governments in basic public services, according to a circular recently issued by the General Office of the State Council.
The reform is aimed at establishing a basic public service system featuring well-defined rights and responsibilities, coordinated financial powers and a reasonable standard. It should also be a safeguard mechanism to ensure its operations.
It was decided that 18 items under eight categories are included in the shared fiscal responsibilities between central and local governments, including compulsory education, basic employment services, and basic healthcare insurance.
The central government will take charge of formulating a national standard for ensuring the delivery of basic public services, which should ensure the basic needs for people’s life and development while improving its level in line with economic development and financial capability.
2. The "China Dashboard" Sees Growth Prioritized Over Reform
Beijing continues to prioritize high growth by deferring implementation of its comprehensive economic reform program, according to analysis by the Asia Society Policy Institute (ASPI) and the Rhodium Group (RHG) of data available through the third quarter of 2017. Telling signs include enduring local fiscal gaps, below average cross-border investment, and large high capital-output ratios.
The analysis is part of The China Dashboard, an online, interactive tool designed by ASPI and RHG. The dashboard, updated quarterly, tracks China’s progress toward its reform agenda unveiled at the Third Plenum meeting of China’s leadership in November 2013. The assessment is based on economic and environmental indicators, reflecting measurable outcomes rather than stated policies.
This reset of expectations toward stoking the spirits of expansion by signaling a GDP growth upturn is key. Deleveraging will not go away as the policy focus of technocrats, and regulators continue to target informal financing channels early in 2018. Monetary growth hit an all-time low of 8.2% year-on-year (yoy) in December 2017. But a heightened emphasis on growth raises concerns. The outlook for sustainable progress on almost all of our reform indicators is predicated on China’s believing that its material self-interest depends on efficient growth, and that efficient growth in turn depends on reform and opening to the world economy in a manner that requires decisive marketization. We expected fidelity to the Party, state involvement, and non-liberal approaches to the economy to compete with standard market approaches post-Congress. However, we did not expect Chinese economists to argue, as we hear them saying now, that the policy package China intended was never market oriented in the manner the term is used in OECD economies, and that different and non-convergent economic models are the new normal.
3. Is Beijing Overhauling Ministry of Foreign Affairs To Better Capitalize On Global Opportunities?
Bloomberg reports it is. It is interesting given that over the last few years MoFA seems to have only declined in influence.
The ruling Communist Party has ordered a sweeping overhaul of the Ministry of Foreign Affairs aimed at making China a more effective global player, according to four people familiar with the matter. The plan calls for most agencies to stop replacing staff in Chinese embassies by next year, giving ambassadors direct control over their portfolios, said two of the people, who requested anonymity because they’re not authorized to speak to media.
The overhaul promises to create a more empowered diplomatic corps better able to represent China’s interests with one voice as they oversee more than a dozen trade deals, supervise infrastructure projects and manage loans to foreign countries. The Foreign Ministry will wield a veto over financial and personnel decisions at embassies, the four people said...
Empowering the Foreign Ministry could weaken the very agencies such as the Commerce Ministry that have helped China establish interests around the globe, but the government has decided has it’s worth the risk. Chinese leaders believe the country needs a more consolidated diplomatic structure after Xi told party cadres in October China was “approaching the center of the world stage,” one of the people said, citing internal instructions...
China budgeted 54 billion yuan ($8.5 billion) for foreign affairs last year, almost double from 2013. The White House, meanwhile, requested $27.1 billion for international programs, almost 30 percent lower than 2016.
4. Lobbying Weakens CFIUS Reform While Two US Senators Target Huawei And ZTE
Two bills in the House of Representatives and Senate would broaden the powers of the inter-agency Committee on Foreign Investment in the United States (CFIUS) in hopes of stopping Chinese efforts to acquire sophisticated U.S. technology. The bipartisan legislation has the support of President Donald Trump’s administration.
“We are concerned that it vastly expands the scope and jurisdiction (of CFIUS),” said Nancy McLernon, chief executive of the Organization for International Investment, a group that represents global companies with U.S. operations.
Given the alarm that the legislation has caused, Senator John Cornyn’s staff is drafting changes to address industry concerns, according to three sources. Cornyn’s office did not respond to a request for comment
Senator Tom Cotton (R-Arkansas) and Marco Rubio (R-Florida) today introduced the Defending U.S. Government Communications Act, legislation that would prohibit the United States government from purchasing or leasing telecommunications equipment and/or services from Huawei, ZTE, or any subsidiaries or affiliates.
"Huawei is effectively an arm of the Chinese government, and it's more than capable of stealing information from U.S. officials by hacking its devices," said Cotton. "There are plenty of other companies that can meet our technology needs, and we shouldn't make it any easier for China to spy on us" said Senator Cotton.
"Chinese telecom companies, like Huawei, are directly linked to the Chinese government and communist party. For national security reasons, we cannot allow a foreign adversary to embed their technology in U.S. government systems or critical infrastructure" said Senator Rubio.
5. Pankaj Mishra Declares The End of The "China Fantasy" and the "Free Trade Myth"
This is a long essay from the upcoming issue of the New York Times Magazine.
There is little doubt that Beijing is presenting itself as a benign alternative to the United States. In a speech just before his second term as the party’s general secretary, Xi claimed that there were more takers internationally for Chinese “values.” China, he said, offers “a new option for other countries and nations who want to speed up their development while preserving their independence.”
It was always wildly optimistic to suppose that China would eventually be integrated into an American-dominated order and persuaded, if not forced, to adopt its norms. A postcolonial Indian like myself, who traveled to China and read in its modern history and literature over the last decade and half, could only be skeptical of such claims. It was never less than clear to me, whether in the suburbs of Lhasa, Tibet (demographically altered by Han immigration), or in the bookstores of Shanghai (stacked with best sellers with titles like “China Can Say No”), that the quest for national sovereignty and regained strength defines China’s party state and its economic policies.
6. Ambitious New School Project To Launch In DC And Shenzhen
The location is about a mile from where I live, and just down the block from the PRC embassy. Chinese language enrollment seems to be under pressure in US secondary schools, for lots of reasons, and I am skeptical that many DC families who have access to the more traditional, well-known DC-area private school will switch to this venture. But it sounds interesting.
An education company backed by U.S. and Chinese investors is launching a global private school for students ages 3 to 18, with the first two campuses scheduled to open next year in Washington and the Chinese coastal city of Shenzhen.
Whittle School & Studios will offer foreign-language immersion — Chinese in the United States, English in China — with a curriculum centered on mastery of core academic subjects, student-driven projects and off-campus learning opportunities in major world cities.
On Thursday, veteran education entrepreneur Chris Whittle plans to announce the debut of the D.C. campus in fall 2019 at a prominent site near a cluster of embassies — the striking aluminum and glass edifice at 4000 Connecticut Ave. NW once known as the Intelsat building.
7. North Korea's Hackers Have Relocated From China?
So asking China to cut off the telecom links it provides to North Korea won't help much now.
Jong wasn’t involved in those attacks, but for half a decade before defecting, he was a foot soldier in North Korea’s hacker army. Unlike their counterparts elsewhere, who might seek to expose security vulnerabilities, steal corporate and state secrets, or simply sow chaos, North Korean hackers have a singular purpose: to earn money for the country, currently squeezed by harsh international sanctions for its rogue nuclear program. For most of the time Jong spent as part of this brigade he lived and worked in a crowded three-story home in a northeastern Chinese city. The hackers he shared it with were required to earn up to $100,000 a year, through whatever means they could, and were allowed to keep less than 10 percent of that. If they stepped out of line, the consequences could be severe...
Lim Jong In, head of the department of cyberdefense at Korea University in Seoul and a former special adviser to South Korea’s president, says that North Korea’s hacking strategy has evolved since Jong defected. At the program’s height, he says, well over a hundred businesses believed to be fronts for North Korean hacking were working in the Chinese border cities of Shenyang and Dandong alone. China has since cracked down on these operations in an effort to comply with United Nations sanctions, but they’ve simply been moved elsewhere, to countries such as Russia and Malaysia.
8. Problems In Guangzhou's "Little Africa"
At its peak, about a decade ago, tens of thousands of Africans reputedly lived here, all hoping to repatriate a slice of the economic miracle that has made China the second largest economy on earth. Baohan Street, Little Africa’s main drag, buzzed with Malian merchants and snappily dressed Congolese sapeurs. “You would feel you were in Africa,” reminisced Moustapha Dieng, the leader of Guangzhou’s Senegalese community, whose office overlooks the place some locals call “Chocolate City”.
In recent years though the life has started to drain from Little Africa as Chinese authorities tightened visa rules and cracked down on overstayers amidst a surge in xenophobia some blame on President Xi Jinping’s increasingly jingoistic tone. Today, a Chinese flag and troops brandishing automatic weapons and claw-like man-catchers keep watch over the community’s recently re-urbanised main square.
Business, Economy, Finance And Trade
China Exports Hold Up as Commodities, Base Effects Boost Imports - Bloomberg Exports rose 11.1 percent in January in dollar terms from a year earlier while imports increased 36.9 percent, leaving a $20.34 billion trade surplus, the customs administration said Thursday. Economists said the data may be distorted by a later Lunar New Year holiday compared with last year... After climbing to a two-year high this week, the yuan sank the most since August 2015 after release of the trade data and a Reuters report on potential loosening of curbs on outbound flows.
China's Yuan Toppled From Two-Year High as Trade Data Surprises - Bloomberg The yuan weakened as much as 1.2 percent in Shanghai, touching as low as 6.3550 per dollar on Thursday. The slump marks a reversal for the managed currency, which acts as an anchor for the wider Asian region and has been rallying amid the dollar’s retreat.
China Forex Regulator: Management of Capital Flows Returns to 'Neutral' - Caixin Global “Macro-prudential policies adopted in the previous period have returned to a neutral position. In future, foreign exchange management will promote the balanced management of cross-border capital flows,” Pan wrote in an article titled “Promoting Balanced Foreign Exchange Management to Serve China’s New Era of All-Round Opening-Up.” “The regulator will pursue a neutral policy with regard to the foreign-exchange market.” 潘功胜：进一步推动外汇均衡管理服务全面开放新格局
China revives QDLP outbound investment scheme in boost for foreign funds: sources - Reuters China has resumed an outbound investment scheme after a two-year hiatus, granting licenses to about a dozen global money managers, sources said, signaling that Beijing is less worried about capital outflows amid a surge in the Chinese currency.
China’s Outlook Seems Darkest From a Distance - Bloomberg When it comes to analyzing China, distance seems to make investors’ views of the world’s second-largest economy grow, shall we say, less fond. Whether it’s George Soros (who’s likened China to the U.S. before the 2008 subprime mortgage crisis) or Kyle Bass (who’s said the Chinese economy is built on sand) or Jim Chanos (who’s said, memorably, that China is on a “treadmill to hell”), there’s no shortage of gloomy outlooks. Over-investment, too much debt, bubbly markets, faked data, Ponzi-like financial structures—the litany of looming pitfalls seems inescapable to many investors, especially hedge funds, based in financial hubs from Connecticut to Canary Wharf.
Investing in Chinese Stocks—投资大中华地区股市: HNA Can't Roll Over 1 Billion Yuan in Ultra Short-Term Borrowing HNA will have multiple products coming due all year long. Another 1.7 billion is coming due on Spring Festival, February 16
China’s War on Risk Has Banks Fleeing Shadowy Wealth Products - Bloomberg Interbank holdings of WMPs more than halved last year, to 3.25 trillion yuan ($520 million) in December from 6.65 trillion yuan a year earlier, according to the annual report of China Central Depository & Clearing Co., an industry body. That suggests higher interest rates and increased scrutiny by regulators are deterring Chinese banks from their previous practice of using cheap interbank borrowing to invest in each others’ higher-yielding WMPs.
Home Lending Expected to Tighten Further in Major Cities Around China - China Banking News China Securities Journal reports that personal home loan rates have continued to rise in a slew of cities around China, including Beijing, Guangzhou, Hangzhou, Nanchang and Shenzhen, while banks themselves are becoming far more cautious about extending credit.All four of the big state-owned banks announced at the start of February that first home loan rates in Guangzhou would rise from 10% to 15% above the benchmark rate,.
China to ramp up measures for corporate deleveraging - Xinhua "The debt-to-equity swap deserves much credit for reversing the fast rise of debt and bringing about a decline in the overall leverage ratio. It has been a market-driven, rules-based process, which has worked well so far," Li said. Figures from the National Bureau of Statistics show that by the end of 2017, the debt-to-asset ratio of industrial enterprises with annual business revenues at or above 20 million yuan has dropped 0.6 percentage point year on year to 55.5 percent. The figure for State-controlled enterprises for the same period was down by 0.9 percentage point to 60.4 percent. // // Comment: but banks do not seem to like the debt-to-equity swaps...
Chinese M&A boom provides slim pickings for global law firms - FT $$ Several top mergers and acquisitions lawyers have told the Financial Times that Chinese businesses, particularly state-owned enterprises, are unwilling to pay the kinds of fees western companies routinely budget for. In a country where the legal system is relatively new, state-to-state negotiations and personal relationships are regarded as far more valuable than legal advice. “Some Chinese parties will still say ‘we’ve worked at the deal, now we just want the attorneys to draw up the documents’,” says a US lawyer whose firm has worked on some of the biggest China outbound deals of recent years.
Alipay, Tenpay Fined for Violations in Cross-Border Payments - Caixin Global Alipay, affiliated with e-commerce giant Alibaba Group, was fined for violating rules of business scope and information reports related to its cross-border payment services. Tenpay, the payment service of Tencent Holdings’ popular messaging app WeChat, was accused of failing to submit risk reports to authorities and improperly handling services for customers, according to the journal. Also on the fine list is Globebill, the payment unit of Chongqing-based big data company IZP Group. Caixin learned earlier that Globebill’s cross-border transaction license was revoked by the State Administration of Foreign Exchange (SAFE) in April over suspicion of falsified transaction data and other violations.
Daimler New-Energy Vehicle Investment Gets Green Light From Beijing - Caixin Global China’s state planner has approved Daimler AG’s $100 million investment in the new-energy car unit of Beijing’s BAIC Motor, formalizing a tie-up aimed at helping the German carmaker meet China’s strict quotas for new-energy car sales set to take effect next year. Daimler agreed to invest in BAIC BJEV under a strategic framework agreement first reached in June. It bought 208 million shares of the unit in September for 3.05 yuan apiece, giving the deal a total value of about 6.3 billion yuan ($1.0 billion).
Feds open new GSK China bribery investigation - The FCPA Blog GlaxoSmithKline said in a securities filing Wednesday that the DOJ and SEC asked for information about third-party advisers the company hired in China during a corruption investigation there.
Fintech Association Warns Against Overseas Cash Loans - Caixin Global Some overseas institutions that facilitate cash loans or cryptocurrency trading, initial coin offerings (ICOs), and illegal digital asset transactions are at risk of being banned by their local governments, the Beijing branch of the National Internet Finance Association, a self-regulatory body set up by the Chinese central bank and other financial watchdogs, said Tuesday.
Politics, Law And Ideology
China to tighten control over guns, explosives - Xinhua China will stage a two-year campaign against gun and explosives crime across the country, the Ministry of Public Security announced Wednesday. The crackdown will target the manufacture and sale of guns and explosives in China and the smuggling of related goods from other countries, said Minister of Public Security Zhao Kezhi.
三位中央巡视组组长谈《中央巡视工作规划(2018-2022年)》————要闻——中央纪委监察部网站 CCDI publishes chat with three inspection group leaders on the 2018-22 central inspections work plan. some of the key goals mentioned another reminder that the CCDI has as its key mandate ideological and political discipline enforcement, not just anti-corruption: 一、深入学习贯彻习近平新时代中国特色社会主义思想和党的十九大精神; 二、把坚决维护以习近平同志为核心的党中央权威和集中统一领导作为根本政治任务; 三、通过巡视不断巩固党执政的政治基础
Foreign passport no amulet in China: Global Times - Reuters Western countries should educate naturalized citizens that their new passport is no “amulet” in China, a hawkish Chinese newspaper said on Thursday, suggesting that detained Swedish citizen Gui Minhai may have thought his foreign passport could shield him from Chinese law.
The Chinese Communist Party’s Experiment With Transparency | The Diplomat In spite of their limitations, adoption of the Open Party Regulations institutionalizes the open party affairs project and strengthens the “cage of regulations” into which Xi has vowed to place the exercise of power. Its passage also signals the CCP’s continued — albeit cautious — support for using transparency to modernize the Chinese governance system. - Jamie P. Horsley is a senior fellow at Paul Tsai China Center
最高法：涉及重大公共利益民告官要见官 可对红头文件进行审查_新闻_腾讯网 最高法7日公布《关于适用〈中华人民共和国行政诉讼法〉的解释》(《行诉解释》)明确，在“民告官”案件中，涉及重大公共利益、社会高度关注或者可能引发群体性事件等案件以及法院书面建议行政机关负责人出庭的案件，被诉行政机关负责人应当出庭。
Foreign and Military Affairs
China's working on the next generation of military exoskeleton. Here's what it can do. | Popular Science Norinco, China's state-owned manufacturer of armored vehicles and heavy ground munitions, has debuted its second-generation military exoskeleton, a body brace designed to help infantry members carry some 100 pounds of weapons, supplies, and ammunition.
UWF cuts ties with controversial Chinese-affiliated Confucius Institute - Pensacola News Journal Citing a lack of student interest, the University of West Florida will not renew its contract this year with the Confucius Institute, a state-affiliated installation of the Chinese government that on Monday drew the condemnation of U.S. Sen. Marco Rubio for its representation of China’s history and policies at Florida academic institutions
Dutch king shares Xi's trade goals - China Daily King Willem-Alexander said the Belt and Road Initiative will bring more opportunities to the Netherlands and his country is ready to participate in the co-building of the Belt and Road. The king's two-day visit to China concludes on Thursday
Faki refutes report accusing China of spying on AU - Xinhua The Chairperson of the African Union (AU) Commission Moussa Faki Mahamat has said that accusations that China is spying on the AU are just rumours. Faki made the remarks while co-hosting the 7th China-AU strategic dialogue with Chinese Foreign Minister Wang Yi in Beijing Thursday. It is Faki's first visit to China since he assumed office in March 2017.
Maldives' embattled president sends envoys to China, Saudi for support - Reuters The embattled president of the Maldives has sent envoys to friendly nations such as China, Pakistan and Saudi Arabia to brief them on a political crisis in the Indian Ocean nation that spurred the imposition of emergency, his office said.
Uighur Thai jail escapees detained in Malaysia and China wants them back- sources - Reuters Eleven ethnic Uighur Muslims from China, missing since their dramatic escape from a Thai jail last year, have been detained in Malaysia and Beijing wants them back, sources familiar with the matter told Reuters. Twenty Uighurs broke out of a cell near the Thai-Malaysian border in November by digging holes in the wall and using blankets as ladders. The escapees were part of a group of more than 200 Uighurs detained in Thailand in 2014.
Why Asean wants a code of conduct for the skies over the South China Sea | South China Morning Post As Singapore tries to get Asean members to agree this year on a code of conduct to manage unexpected encounters in the skies over the South China Sea, China is planning to step up flight drills in the area.
U.S., Israeli drone makers keep wary eye on rising Chinese - Reuters Chinese cut-rate versions of American armed drones like the MQ-9 Reaper have begun showing up in smaller African, Middle Eastern and Central Asian countries, signaling the country’s ambitions to take market share from incumbents such as General Atomics Aeronautical Systems and Israel Aerospace Industries.
China dismisses accusations from former Maldives leader - AP China dismissed accusations from the former leader of the Maldives that it is attempting to effectively buy up the Indian Ocean island state, while the Maldives said Thursday it was sending envoys to three countries to explain its ongoing political crisis.
Boosting ties with ‘good neighbours’ in Asean top priority, Chinese defence minister says | South China Morning Post Chang Wanquan, who is also a State Councillor, made the remarks on Tuesday at an informal meeting with defence ministers from the Association of Southeast Asian Nations in Singapore, according to a statement from the ministry on Thursday. “China regards Asean members as good neighbours, good friends and good partners that can ... prosper and endure shared threats together,” Chang told the ministers.
Taiwan earthquake death toll rises to nine, as bodies of three more mainland Chinese recovered | South China Morning Post The three women had been sharing a room at the Beautiful Stay motel in Hualien and had arrived earlier on Tuesday
China tries to charm tech-savvy Taiwanese youth as political ties fray - Reuters For China, Taiwan’s youth is seen as a key demographic to win over amid souring political relations between Beijing and Taipei. But Taiwan’s current government—swept into power with the help of the youth-driven Sunflower Movement—is viewing the success of the incubators and other programs with concern.
Tech And Media
Sponsors flee Chinese rap acts amid fears of censors crackdown | South China Morning Post A second season of Rap of China is now in doubt and artists say music venues are snubbing rap acts. Li Dalong, chief operating officer of Mao Livehouse, which has eight venues across China, said hip-hop artists now face more careful screening for “ideological mistakes” in their music. “The biggest difficulty facing rappers is that sponsors are fleeing. I don’t even know if Rap of China season two will be allowed,” he said.
Society, Art, Sports, Culture And History
Murakami's book on Nanjing Massacre printed in China - Xinhua Presales of the Chinese version of Japanese writer Haruki Murakami's new book "Kishidancho Goroshi", or "Killing Commendatore" have begun in China, with 700,000 copies printed. The book has attracted widespread attention in China for acknowledging the Nanjing Massacre, and is expected to be released on March 10, according to Huang Yuning, director of the literary editing room of Shanghai Translation Publishing House, the Chinese publisher of the book.
Energy, Environment, Science And Health
China to establish ocean science research center - Xinhua | An ocean research center will be built in east China's Shandong Province. The Center for Ocean Mega-Science will be located in a science and education park in Qingdao, a coastal city in the province. Thirteen institutes of the Chinese Academy of Sciences (CAS) including the Institute of Oceanology, will help establish the new center.
Chinese Scientists Discover New Asthma Treatment - Sixth Tone For more than eight months, researchers from four Chinese institutes and two U.S. universities tested over 6,000 drugs, eventually narrowing the field down to one: TSG12, which activates a protein that causes the smooth muscle cells of the throat to relax during an asthma attack. The scientists first tested the drug on mouse models, and later on human smooth muscle cells. Their paper was published Thursday in Science Translational Medicine, an interdisciplinary journal under Science.
4 Million North China Homes Told to Kick Coal Habit as Nation Seeks Blue Skies - Caixin Global China’s Ministry of Environmental Protection said it plans to help another 4 million households in northern China switch from coal to gas or electricity this year to fight air pollution. But the program is facing resistance from regional governments that were hit hard by a natural gas crunch late last year. The plan was announced by Environmental Protection Minister Li Ganjie at a national environmental conference on Tuesday. Li promised to make sufficient supplies of natural gas available to avoid disruption during a similar government drive late last year.
Books And Literature
Two Poets’ War of Words Shows China’s Yawning Generation Gap - Sixth Tone Guo Lusheng vs. Yu Xiuhua // "Last month, Guo and Yu, who previously had nothing to do with each other, found themselves at the center of an unlikely controversy. At a Beijing book release on Jan. 13, Guo critiqued the current state of Chinese poetry, arguing for a re-emphasis on the masses and “national character.” Uncharacteristically, he singled out Yu for censure. “I watched a video in which Yu Xiuhua said her ideal afternoon would involve drinking a coffee, reading a book, chatting a bit, and having a screw,” Guo said. “How can a poet not spend a moment considering the fate of humanity, or thinking about the future of her nation? How can a poet from the countryside not speak of the miseries of rural life or their dreams of prosperity? How can they just forget everything?” The elder poet concluded that Yu was abandoning her obligation to history, saying, “If we do not treat history responsibly, we will find ourselves mocked by i