CHINAwatch

Are China's ambitions in the South China Sea a threat?

TV panel debate on Inside Story with Aljazeera English on 30 May amid the Asia Security Summit at the 10th Shanghri-La Dialogue of the International Institute for Strategic Studies (IISS) in Singapore from 29 - 31 May, 2015.

The other discussants were Malcohm Cook, Senior Fellow of the Institute of South East Asian Studies in Singapore and Gordon Chang, a New Jersey-based foreign policy analyst and author of "The Coming Collapse of China" in 2010. 

Reforming Shadow Banking in China

A Brookings Institution Paper (May 2015) by Douglas J. Elliott, Fellow, Economic Studies, Initiative on Business and Public Policy and Dr Yu Qiao, Nonresident Senior Fellow, Foreign Policy, Brookings-Tsinghua Center, throws further light on China's perceived Shadow Banking risks.

The Paper notes that such risks do exist but are often over-exaggerated. It points out that ""societal benefits, on the whole, appear to be even greater. Therefore, China's shadow banking should be reformed, to reduce the risks and increase the benefits, and not abolished or shrunk simply for the sake of reducing its importance".

The following is a summary of selective extracts from the Paper - 

"Shadow banking in China must be viewed in the context of a system which remains dominated by banks, especially large state-controlled banks, and in which the state provides a great deal of direction to banks, through a variety of regulations and formal and informal guidance.

In the last few years, those constraints have become sufficiently binding that business has flowed to shadow banks.

There are a number of pressures pushing business away from banks towards shadow banks, including the fact that:

• There are caps on bank lending volumes imposed by the People’s Bank of China (PBOC).

• The limit of bank loans to deposits of 75% has been constraining.

• Regulators discourage lending to certain industries.

• Most non-bank channels have lower capital and liquidity requirements.

• Shadow banks are not subject to bank limits on loan or deposit rates

• Shadow banking avoids costly PBOC reserve requirements.

Six reasonable estimates in the recent past produced figures ranging from about RMB 5 trillion to RMB 46 trillion, or roughly 8 to 80 percent of the size of China’s Gross Domestic Product (GDP).

Dr. Yu, a co-author of this paper, estimated the size at RMB 25 trillion, or 43% of GDP, in 2013. This compares to an estimate from the Financial Stability Board (FSB) that global shadow banking assets were equivalent to 120% of GDP. On the same basis, the US was at 150%. Thus, China’s shadow banking sector is relatively small compared with advanced economies.

Using figures from the PBOC’s measure of Total Social Finance (TSF), shadow banking accounted for about 18% of net flows of TSF in 2014.

However measured, it is clear that, despite its rapid growth, shadow banking remains substantially less important than formal banking as a source of credit in China.

The financial system and the central government appear to be well positioned to deal with such a crisis.

First, shadow banking is small enough compared to the size of the total financial sector to be handled without disaster. Second, most of the shadow banking is closely enough tied to banks that they are likely to end up honouring their implicit guarantees and dealing with most of the mess on their own. Third, the authorities have more than enough fiscal capacity to deal with even a large shadow banking crisis, given quite low central government debt to GDP ratios, even when adjusted for off-balance sheet obligations, such as the need to rescue some local and regional governments.

In fact, the Chinese central government has taken already taken important measures to tackle this issue in recent years.  In October of 2014, a document entitled “The Directions of the State Council on Management of Local Government Obligations” was issued to outline a framework and principles for regulating how local governments raise, use and repay their debts.

In the beginning of 2015, the Ministry of Finance (MOF) approved a local debt swap scheme with a quota of RMB 3 Trillion. Under this scheme, each provincial government is able to sell low-interest local bonds directly to commercial banks to replace high-interest debts obtained from shadow banking channels. A quota of RMB 1 trillion has been allocated to the provincial level as of the first quarter of 2015.

In sum, China’s shadow banking sector is not especially large by international standards, is relatively simple (with low levels of instruments such as securitized assets and derivatives), and is overseen by regulators who have so far shown themselves alive to the most important risks (namely funding risk and lack of transparency) and have taken prudent steps to minimize these risks. The authorities take seriously their mandate to maintain financial stability, and have acted pre-emptively (for instance in the inter-bank squeeze of June 2013) to nip in the bud practices that might threaten that stability.

We believe there are eight key objectives that should be pursued in designing a better regulatory approach to shadow banking:

• Expand financial services to SMEs, rural businesses, and households

• Diversify financial services provision beyond the current bank-centric model

• Increase the efficiency of the financial sector

• Strive for a level playing field across the financial sector

• Promote the wider financial reforms being introduced in China

• Increase systemic safety

• Increase consumer opportunity and safety

• Help ensure the PBOC can exercise appropriate monetary policy tools

Seven Reform Strategies are recommended -

• Free the banks of most policy obligations and constraints that are not about safety

• When using the financial sector for social policy, work through all relevant financial institutions, not just banks

• Clearly define the nature of the safety net for the different financial institutions

• Heighten the regulation of shadow banks and increase their transparency

• Move monetary policy away from an overreliance on banks

• Focus on building the corporate bond markets and the institutional investor base

• Focus on cleaning up equity markets and corporate governance"

The Brookings Paper resonates with other more-balanced recent research into China's shadow banking problems. See my recent summary  entitled "Shedding light on China's shadow banking". 

 

US-China 21- The Future of US-China Relations under Xi Jinping

An April 2015 report for the Belfer Centre of the Harvard Kennedy School for Science and International Affairs prepared by the Honorable Kevin Rudd, former Prime Minister of Australia, argues the following -

(a) For the first time in history, global military and economic powers no longer reside in one single superpower but are separated between a (historically-speaking) relatively young Western superpower democracy and a rising non-liberal Eastern challenger with millennia of culture and history. 

(b) China's political and economic model is not about to collapse as David Shambaugh  recently suggests but is likely to sustain and grow in gravitas at least in the coming decade. 

(c) There is considerable "mutual assured misconception" in the strategic thinking of both the United States as the extant global superpower and China as a rising global power.

(d) China sees America as deeply opposed to China’s rise (not to say the legitimacy of the Communist Party), and driven to do whatever it takes to prevent China usurping American regional and global power. In particular, American geopolitical manoeuvres in the region seem in China's eyes to support the conclusion that the United States is secretly out to isolate, contain, diminish, and internationally divide China and to sabotage China's Communist Party leadership. The U.S. rejects that it is undermining or containing China. and instead sees China as seeking to push the U.S. out of Asia (following the "Monroe Doctrine" - Click here )

(e) Nevertheless, realism dictates that armed conflict between the U.S. and China is highly unlikely in the coming decade. 

(f) But Chinese political, economic and foreign policy influence in Asia will continue to grow significantly, while China will also become a more active participant in the reform of the global rules-based order. 

(g) To keep the global order on an even keel, there is a critical need for "Constructive Realism for a Common Purpose". Both countries should manage their mutual relations by developing a common strategic narrative for U.S.-China relations and by gradually building mutual strategic trust in working step by step on selected global issues of common, though dissimilar, interests, in such areas as crafting a non-mutually-exclusive and cooperative "Asia-Pacific Community". 

Download US-China 21- The Future of US-China Relations under Xi Jinping 

Following on (e) above, distinguished Yale historian Paul Kennedy remarked in 2010, that “history, unfortunately, has a habit of wandering off all on its own.” A review in The Diplomat  of The Improbable War: China, The United States and Logic of Great Power Conflict by London School of Economics international relations professor Christopher Coker, 2015, points out that avoiding the "Thucydides Trap" of inevitable rivalry between an extant superpower and a rising challenger spiraling out of control requires more than relying on the law of probability.

In the coming decades, therefore, much will be demanded of the vision, courage and ingenuity of the leaders of both the United States an China in managing their relations and in crafting a new global power consensus if the path is followed to peace instead of war. 

Meanwhile, in the light of rising tensions  between the two Great Powers over the South China Sea and China's geopolitical intentions, it is becoming more and more pressing to find a more sustainable approach to manage the situation to avoid unwanted and potentially uncontrollable escalations. China's time-honored suggestion of  "Shelving Disputes, Joint Development 搁置争议，共同开发" may well offer a decisive first step in the right direction. Click here 

Why China's consumers will continue to surprise the world

Fears about China’s slowing economy are overblown, according to Jeffrey Towson, Managing partner of the investment firm Towson Capital, and Jonathan Woetzel, director in McKinsey’s Shanghai office in a May 2015 excerpt from their The One Hour China Book.

Download Why Chinas consumers will continue to surprise the world

They argue that China's household income is massive and growing, dwarfing the rest of the BRICS countries. Moreover, there is a sharp rise in discretionary expenditure towards such categories as travel, communications, recreation, education, culture, and personal items. This has grown from 25% of household income in 2005 to 34% by 2013, expected to rise further to 40% by 2020 and 44% by 2030, with recreation, education and culture registering the highest gain. 

They point out that the common worry about consumption still remaining a lower percentage of GDP compared with advanced countries is misplaced in the context of a growing China still driven by investment. 

"First, from 2000 to 2010, the size of the Chinese economy more than doubled. So consumption grew from around $650 billion to almost $1.4 trillion. Regardless of its relative percentage of GDP, China’s consumption has been growing faster than just about any other country’s in absolute terms. Second, just getting consumer spending back to 43 percent of GDP, the level in 1995, would have a huge impact on “rebalancing.” It would also create the largest consumer market in the world."

While China is likely to retain a high savings rate for various cultural and socioeconomic reasons, the authors argue, the sheer scale and dynamics of China's surging consumer market is not to be under-estimated. 

These authors' findings tend to support the conclusion that China is making a robust "consumption transition" from over-reliance on manufacturing and investment as the country continues to re-structure steadily towards a more balanced economy.  

Is China about to crack up?

Notwithstanding President Xi Jinping’s growing power at home and influence abroad, some top American academics are signalling China’s imminent collapse. 

The quorus is led by Dr David Shambaugh, Professor of International Affairs, Director of the China Policy Program at George Washington University and Senior Fellow at the Brookings Institution, Washington D.C., in The Coming Chinese Crackup, The Saturday Essay, Wall Street Journal, 6 March, 2015.

Similar sentiments were expressed by Michael Auslin, a scholar at the American Enterprise Institute, Washington, D.C. and a columnist for WSJ.com in The Twilight of China’s Communist Party, Wall Street Journal, 29 January, 2015.

Like arguments were advanced by Peter Mattis, Fellow with the Jamestown Foundation, Washington D.C., and Visiting Scholar at National Cheng-chi University’s Institute of International Relations in Taipei, in Doomsday: Preparing for China's Collapse The National Interest, 2 March, 2015.

Their prognosis has recently been rebutted by Kevin Rudd, former Prime Minister of Australia, in an April 2015 report US-China 21- The Future of US-China Relations under Xi Jinping for the Belfer Center for Science and International Affairs, Harvard Kennedy School.

Rudd dismisses Shambaugh's contention of an imminent China collapse as not sufficiently evidenced. Instead he alludes to the inevitable rise of China as an unprecedented historic development where a non-Western, non-liberal global power is seen to be challenging a West-dominated global order led by the United States as the world's extant democratic superpower. To manage this historic conundrum, Rudd advances the concept of "Constructive Realism for a Common Purpose". 

China collapse predictions are not new, but the prognosis by some of the world’s most respected experts on China carries traction. In Hong Kong, for example, some politicians quietly hope for China’s regime change rather than accept the government’s current reform proposals for universal suffrage.

It is therefore opportune to examine the collapse theorists’ contentions. They are largely as follows.

First, the elite seem to be voting with their feet. 64% of rich Chinese are emigrating or intending to emigrate, according to a 2014 Hurun Research report. More are sending their children to study abroad and buying overseas properties at record levels.

Second, Xi is clamping down on dissent and “universal values”—including constitutional democracy, civil society, free press and neoliberal economics. This manifests insecurity.

Third, lip service is being paid to Xi’s mantra of following “the mass line” (serving people first) and of building the “China Dream”.

Fourth, Xi’s anti-corruption campaign is unlikely to succeed as corruption is stubbornly rooted in single-party patron-client networks, a non-transparent economy, a state-controlled media and absence of rule of law. Moreover, the campaign is mainly targeting former President Jiang Zemin’s network and seems to spare the unpopular princeling camp, of which Xi is the chief patron.

Fifth, the Party’s much-needed Third Plenum reforms are spluttering as powerful vested interests continue to block implementation.

Warnings of regime collapse and national demise were in fact clearly sounded by both Xi and his predecessor Hu Jintao, along with former Premier Wen Jiabao, if the Party fails to rid itself of widespread corruption and abuse of power. See a BBC report on remarks by former President Hu Jintao in a Party Congress in November 2012, before he was succeeded by President Xi in 2013.

Shortly before Xi was installed, soon-to-be anti-corruption supremo Wang Qishan was known to have circulated Alexi de Tocqueville’s Ancien Regime and the French Revolution among top colleagues on the Politburo Standing Committee. Click here So a sense of existential crisis already permeated even before Xi took over.  

The crisis mood turned critical following disclosure of criminal evidence surrounding the saga of Bo Xilai, a blue-blooded princeling. This involved not only corruption and power abuse on a wide scale but also a rumoured “palace plot” in collusion with Zhou Yongkang, then powerful public security czar and influential Politburo Standing Committee member. This is implicating many vested interests across the country and must have deeply shaken the entire Party leadership, regardless of any faction. The fear is that if not resolutely treated, the cancer of corruption would threaten the Party’s very survival, bringing down everybody. Click here

That is why the anti-corruption campaign has been so vigorous and wide-ranging, catching many “tigers” as well as “flies”. This is also why Xi had to be given sweeping powers across the board. Zhou is now formally being tried, breaking an unspoken rule that criminal charges are never laid against a former Politburo Standing Committee member.

It is understandable that there is a pervasive sense of fear and unease among many party officials who have feathered their nests in the corrupt system for decades. Some are quietly moving their assets abroad or trying to seek overseas bolt-holes for themselves or their children.

Xi’s anti-corruption drive, however, enjoys robust public support. There is no broad-based clamour for regime change. Indeed, according to PEW Research Centre’s 2014 Global Attitudes data, China (and Malaysia) citizens were the world’s most satisfied with their countries' directions. China's rating of 87% answering positively was up two percentage points compared with the year before. Click here. 

At the Fourth  Plenum in November last year, the Party put the Rule of Law (or Rule by Law) at the forefront. There are moves to gradually improve judicial independence by establishing circuit high courts and by elevating the powers of judicial appointments and judiciary funding from local to provincial or regional levels. Allegiance to China's Constitution is to be upheld. That means that China’s One Party model cannot be questioned under China's laws. But that doesn't mean that Party leaders are above the law, as the current anti-corruption campaign tries to show. Click here

Xi’s call to follow “the mass line” may sound confusingly Maoist. In fact, it underscores the realization that years of unbridled economic growth has created an extremely unequal and unstable society. It is now necessary to get back to revolutionary basics – power legitimacy comes from looking after the masses’ basic livelihood and well-being. Click here

Premier Li Keqiang’s work report at the March 2015 National People’s Congress registered some tangible progress, despite slower economic growth.  2014 saw 13.22 million new urban jobs created, more than the year before. Newly created businesses increased by 45.9% or 12.93 million units. Energy intensity dropped by 4.8%, the largest in several years. Contribution by consumption and services to GDP increased slightly from 50% to 51.2% and from 46.1% to 48.2% respectively. China's economic model is beginning to shift towards more moderate but more sustainable growth. Click here

Ever mindful of former USSR’s collapse, a degree of political repression is likely to stay while the Party treads into “deep waters” of reform. To China’s top leaders, Singapore’s model of gradual and orderly development often comes to mind. Click here

Xi displays remarkable confidence in steering China towards greater heights by launching a One Belt, One Road – New Silk Road grand strategy. This aims to link China by maritime and rail infrastructure to the rest of Asia, the Indian Ocean, East Africa, the Red Sea, continental Europe and Central Asia. The creation of a related China-led but inclusive Asian Infrastructure Investment Bank has attracted support from many countries in four continents, including key US allies. Nothing less than China’s historical renaissance in the realization of the “China Dream” is at stake.

Amid uncertainties of China’s trajectory, it is only natural that some may choose to take out an insurance policy of settling their offspring or assets abroad, as in the case of Hong Kong before 1997. But all the evidence seems to show that instead of imminent regime collapse, under President Xi, China may well witness around the corner a new Asian Century with China at its very centre.  

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The above is the original version of my Op-ed article  Warnings of China's imminent collapse are - once again - greatly exaggerated published in the South China Morning Post of 18 May, 2015.