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China's busy year in the Arctic

A report in The Diplomat of 30 January, 2019 points out that "as an Arctic stakeholder, China’s position has evolved from being a “passive rule-follower” to becoming a regional “rule-maker.” Since release of its Arctic White Paper in January, 2018, China has steadily moved to becoming a "near Arctic state", as an "indispensable force in Arctic affairs".

Administratively, the Chinese Arctic and Antarctic Administration (CAA) is now placed directly under the new Ministry of Natural Resources (MNR), aided by its Department of Maritime Economy and Strategic Planning and the Department of International Cooperation. 

China mounted its ninth Arctic expedition in 2018, laying down an expanding network of scientific monitoring devices across the Arctic. In September, China launched its first domestically-built state-of-the-art icebreaker, Xuelong 2. A tender for the construction of a nuclear-powered icebreaker was issued last summer. In October, the China-Iceland Arctic Science Observatory was opened in northern Iceland. In December, the “Arctic Environment Satellite and Numerical Weather Forecasting” project was launched, slated to “deepen China’s participation in the governance of the Arctic, and help build the Polar Silk Road." 

The Russian Yamal LNG project remains the centerpiece of China’s nascent Polar Silk Road, carrying Russian LNG to a Chinese port. This will be served by a fleet of 15 polar-capable LNG carriers, of which six have been delivered. 

The global economy's second sun

According to the above-titled report in the Financial Times (Aphaville) dated 29 January, 2019, using proprietory algorithms, Stephen Jen and Joana Freire of Eurizon SLJ Asset Management find that the global influence of China's economy is as powerful as those of the United States and the European Union combined. 

The above finding tallies with Arvind Subramanian's earlier work Eclipse - Living in the Shadow of China's Economic Dominance, Petersen Institute for International Economics, Washington DC, September 2011. The book finds that more currencies move in tandem with the renminbi, the Chinese currency, than with the US dollar. 

McKinsey Global Institute- Value chains, China included, have become less trade dependent and more digitally driven

A MGI Report released in January 2019 -  Globalization in transition: The future of trade and value chains - points out the following- 

Global value chains are undergoing five structural shifts 

• Goods-producing value chains have grown less trade-intensive
• Services play a growing and undervalued role in global value chains
• Trade based on labor-cost arbitrage is declining in some value chains
• Global value chains are growing more knowledge-intensive
• Value chains are becoming more regional and less global

There is a sea change in the geography of global demand

• Emerging markets will consume almost two-thirds of the world’s manufactured goods by 2025, with products such as cars, building products, and machinery leading the way. By 2030, developing countries are projected to account for more than half of all global consumption. These nations continue to deepen their participation in global flows of goods, services, finance, people, and data
• More of what gets made in China is now sold in China. By 2030, China is projected to account for 12 cents of every $1 of worldwide urban consumption. This trend is contributing to the decline in trade intensity. China exported 17% of what it produced in 2007. By 2017, the share of exports was down to 9%. This is on a par with the share in the United States but is far lower than the shares in Germany (34 %), South Korea (28%), and Japan (14 %). Exports from advanced economies to China has increased from 3% in 1995 to 12% by 2017.
• The rise of domestic supply chains in China and other emerging economies has decreased global trade intensity.

Digital platforms, logistics technologies, and data-processing advances will continue to reduce cross-border transaction costs and enable all types of flows.

• Automation and additive manufacturing change production processes and the relative importance of inputs
• New goods and services enabled by technology will impact trade flows

Given the shifts in value chains, companies need to reevaluate their strategies for operating globally.

As pointed out by David Dodwell in the South China Moring Post, Trump’s tariffs are targeting yesterday’s challenges, not today’s.  

Impact of artificial intelligence on international trade - Brookings Institution

The above Brookings Institution report by Joshua P. Meltzer released in December 2018 focuses on AI's potential and impact on international trade, both in goods and services, including economic growth, digital platforms, trade negotiations, big data, trade rules, protection of privacy, intellectual property, and source codes.

It is evident that AI will transform not only international trade, but how businesses compete, how cities are managed, how people conduct their daily lives, and how a nation's competitiveness is gauged. All these dimensions mutually interact in an "Internet of Things" (IoT) across the board and national boundaries in a Fourth Industrial Revolution or "Globalization.4.0". 

As AI is still developing, its full potential and impact have yet to be explored, not to mention science and the military, fields outside the scope of this report.

Download Brookings - Meltzer - AI-and-Trade_Report Dec 2018 

Next year, US expected to lose top spot to China as world's largest economy, to be overtaken by India as no.2 by 2030

According to a Standard Chartered Bank report (10 January, 2019), the United States will lose its top spot as the world's largest economy as early as next year and will fall behind India by 2030. By then, China's economy is expected to be double the US economy, while India's will be one and a half times larger. Japan, and Germany, in that order, are forecast to trail behind Russia to no. 9 and 10 while the United Kingdom is slated to drop out of the top ten.

Asia will account for roughly 35% of global GDP, up from 20% in 2010, while seven of the world's 10 largest economies will be Asian. Click here A pictorial illustration is here. View this photo

Another global tipping point already happens as reported at the Brookings Institution (27 September, 2018). Over half of the world is now middle class or wealthier. By 2030, the middle-class markets in China and India ($14.1 trillion and $12.3 trillion respectively) will be drawing close to the U.S. middle-class market at that time of $15.9 trillion. Click here While in terms of per capita GDP, both China and India will remain miles behind the United States and other Western countries, in terms of aggregate standards of living, Asia and other emerging markets are fast catching up. 

In terms of aggregate economic power, size matters. GDP per capita hardly counts. For example, according to the International Monetary Fund, Macao is expected to surpass Qatar in 2020 with the highest GDP per capita on a purchasing power parity basis. Click here

In any case, save America's enduring military and dollar dominance, the above tipping points are expected to tilt the world's economic and geopolitical gravitas towards Asia, particularly China and India. An "Asian Century" appears to be just around the corner. 

US Defense Intelligence Agency (DIA) 2019 China Military Power report

Released on 16 January, the above over-100-page Report stresses that over recent years, China's military modernization has advanced by leaps and bounds, creating “a robust, lethal force with capabilities spanning the air, maritime, space and information domains which will enable China to impose its will in the region". Click here

Examples include China's first independently developed aircraft carrier in 2019, the Hong-20 nuclear-capable bomber, new cyber warfare capabilities and professionalized armed forces.

There are some areas where China threatens to surpass America — "and may have already done so", according to the Report. The first is with hypersonic weaponry — delivery vehicles capable of going Mach 5 or faster, singling out hypersonic glide vehicles with ballistic missiles. Additionally, China has probably made progress on kinetic energy weapons, including the anti-satellite missile system tested in July 2014.

More broadly, China remains a leader in precision-strike capabilities, especially with medium- and intermediate-range ballistic missiles — while the U.S. and Russia were barred from developing such systems under the Intermediate-Range Nuclear Forces Treaty, which President Trump recently vows to pull out of against Russia.

The DIA concluded that Chinese military modernization was not undertaken with a major global war in mind, but rather in preparation for further challenges to its regional efforts, potentially leading to a local war, particularly over Taiwan, which remains an overarching national interest. 

National Plan for structural re-alignment of industries in North East, East, Central, and West regions, November 2018

The above National Plan (2018 国家产业调整布局) is a detailed guide for the re-alignment of exisitng and new industries between various provinces, cities, prefectures and counties in the North East, East, Central and West regions. It aims at the orderly phasing-out, upgrading and regional, provincial, and locational postioning of exisitng and new industries, including new materials, new energies, digital and information technologies, intelligent manufacturing, aerospace, transportation, shipping, pharmaceuticals, food and other consumer products, as well as a variety of light industries. 

Somewhat reminiscent of a planned economy, the above Plan is a good example of how China's reformed development model manages to achieve rapid growth by combing national planning, state direction, the private sector, and free market dynamics. 

As between various provinces and localities, competition is very keen. Competition with foreign enterprises both in China and overseas is expected to redouble following current trade war accommodations and adjustments

As for the perceived fatal flaw of State-Owned Enterprises predominance, let's not forget that the private sector in China remains very much alive and kicking. All it takes is a stroll along some of the many busy shopping and recreational districts throughout China. Indeed, as part of a relief package in response to the trade war, a substantial Mid-Term Lending Facility (TMLF) is designed to support the private sector. Click here (PowerPoint presentation Slide 11).

Singapore is a shining example of how state-backed conglomerates can co-exist synergistically with a vibrant private sector. (China's Crisis of Success, William Overholt, Cambridge University Press, 2018, pp. 246-7). Although the author doesn't think that this could apply to China on account of Singapore's much smaller size, there is no convincing argument why size alone would make this inapplicable.  

Download 2018 国家产业调整布局  

China to step up its basic research

China ranks second in the world in number of scientific papers produced, and is the world's second-most-cited source, behind only the United States. However, a popular criticism of China's technological advancement is that the country falls far short in basic research. All the achievements being trumpeted about, such as quantum satellite launch and the probe landing on the far side of the moon, are largely the fruits of applied research. This is exemplified by the dearth of Chinese Nobel laureates in pure science. This critical deficiency is an important barrier to China's advancement as a great power.

The nettle is finally being grasped. China is launching a Science Plan 2021-35, with a road map to beef up the nation's basic research capabilities and governing ecosystem. Early details are contained in a China Daily article of 11 January, 2016.