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CPEC to help addressing Pakistan’s long term economic constraints: Moody’s

Source: Business Recorder

Author: Shoaib Ur Rehman

Date: 14 December 2018.

ISLAMABAD: In its annual credit report released on Thursday, Moody’s has said that infrastructure and power projects under China Pakistan Economic Corridor (CPEC) will address Pakistan’s long-term economic constraints an strengthen its growth potential.

“Pakistan’s longer-term economic prospects remain robust, in part because of improvements in power supply, infrastructure and national security that have raised the country’s growth prospects and hence business confidence,” said the report Moody’s-a credit rating agency.

It said institutional reforms planned by the new government, if effectively implemented, would also bolster institutional strength, which has increased in recent years with greater central bank autonomy and monetary policy effectiveness.

“However, the reforms will be challenging for any government to navigate because of the country’s large bureaucracy and complex federal-provincial politics and administrative arrangements,” it added.

Neverthless, Moody’s said in short time, it expects the country’s real GDP growth to slow down to 4.3-4.7 percent in fiscal 2019 and 2020, from 5.8 percent in fiscal 2018, in part due to policy measures taken to address the external imbalance.

It said that the credit profile of Pakistan (B3 negative) reflects the country’s high external vulnerability, weak debt affordability, and very low global competitiveness.

“Significant external pressures driven by wider current-account deficits have reduced foreign-currency reserves, which are unlikely to be replenished in the near term unless capital inflows increase substantially,” the report stated.

“While Pakistan’s public external debt repayments are modest, low reserve adequacy threatens the ability of the government to finance the balance of payments deficit and roll over external debt at affordable costs.”

Moody’s said its assessment of Pakistan’s susceptibility to event risk is driven by external vulnerability risk. Current-account deficits will remain wider relative to 2013-16 levels, with near-term prospects for a marked and sustained reversal unlikely unless goods imports contract sharply, it pointed out.

“Absent significant capital inflows, the coverage of foreign-exchange reserves for goods and services imports will remain below two months, below the minimum adequacy level of three months recommended by the International Monetary Fund,” the report stated.

The government’s narrow revenue base restricts fiscal flexibility and weighs on debt affordability, while its debt burden has increased in recent years, it observed.

“At around 72 percent of GDP as of the end of fiscal 2018, the government’s debt stock is higher than the 58% median for B-rated sovereigns, and Moody’s expects the burden to rise further and peak at around 76pc of GDP in fiscal 2020 — in part because of currency depreciation — before gradually declining as the twin deficits gradually narrow.

The moderate but rising level of external government debt also exposes the country’s finances to sharp currency depreciation.

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RCCI for expediting work on CPEC economic zones

Source: The Nation
Date: December 13, 2018

The Rawalpindi Chamber of Commerce and Industry (RCCI) has urged the government to expedite process and working on CPEC Special Economic Zones.

The Labour-intensive industry from China under China Pakistan Economic Corridor (CPEC) shall be relocated in Pakistan to boost the local employment.

President RCCI Malik Shahid Saleem on Wednesday in a statement also pointed out that the upcoming industrial framework agreement with China would help to move forward with relocation of Chinese industries and large scale investment in Pakistan, he added. However he urged upon ministry of planning that the industrial parks would be developed aligned with local available resources.

The RCCI president said, “We recognize CPEC as a game changer and we urge the government to focus on the 4th part of CPEC plan, which is Industrial Zones Development.” He further said that the CPEC is the flagship project of multi-billion dollar One belt one road (OBOR) and the success of this key mega project will bring the economic revolution in the country and the region. However, the agreements must be followed by the land of law and benefit of Pakistani trader, investors, and industrialists must be kept on priority.

The joint ventures between Chinese and Pakistani companies will increase the ownership of the key stakeholders, he added. The more we have local ownership in the projects the more it will be successful. Malik Shahid Saleem also referred that RCCI recently signed a memorandum of understanding with China Road and Bridge Corporation (CRBC) for exploring the investment opportunities existing in Rashakai Especial Industrial Zones aiming in promoting Rashakai SEZ among its members, strengthening the information through exchange of delegations and using RCCI platform in expansion of business in Rashakai SEZ by holding joint exhibitions, seminars and symposiums.

He said Pakistan’s economy offered great potential to Chinese investors for joint ventures and investments. He said CPEC would be mutually beneficial for Pakistan and China and would ensure level playing field for the businessmen and investors of both countries.

SEZ will help Pakistan to improve its GDP, poverty alleviation and unemployment, he added. RCCI Chief urged both Pakistani and Chinese governments to work hard in completing all projects within stipulated time frame.

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‘Agriculture framework under CPEC to focus on JVs’

Source: The News
Date: December 13, 2018

ISLAMABAD: Federal Minister for Planning Makhdum Khusro Bakhtyar has said agriculture framework under the China-Pakistan Economic Corridor (CPEC) focused on joint ventures, value-addition, cold chain management, and marketing and branding to overcome socioeconomic weaknesses.

Addressing the PIDE conference on Wednesday, the minister said that the SME sector has been identified as one of the key sector of economic growth, and CPEC was an opportunity for Pakistan and China for growth and prosperity, both.

The minister said consumption in Pakistan was 93 percent of the GDP, highest among emerging economies, whereas in Bangladesh, consumption was about 74 percent. “The saving rate in Pakistan is less than half of other countries of the region,” he said, urging to increase saving, and to balance between direct and indirect taxes.

Khusro Bakhtyar said the service sector contributed 56 percent to domestic GDP, but its share in exports was very small. He pointed out that imports from China have reached $18 billion.

“The country needs import substitution policies, and the government is devising policy packages for this purpose,” he added. CPEC was an opportunity for Pakistan and China for growth and prosperity.

Shahid Hussain Assad, who discussed “Revenue Management, Issues and Challenges” at the conference, said Pakistan faced several issues in tax collection, including the narrow tax base and low tax to GDP ratio. “Large informal economy proves to be a reason in loss of taxable income,” he said.

He also pointed to political lobbying tax exemptions and concessions as reasons for low tax collection. He suggested simplification of tax procedures and harmonisation of federal and provincial taxation to broaden the tax base.

Riaz Riazuldin, former acting governor of State Bank of Pakistan discussed “Exchange Rate Management in Pakistan” and said the management regimes kept changing, and poor rate management was one of the reasons behind poor export performance. He said remittances had to be boosted to stabilise the exchange rate.

Dr Ashfaq Hasan Khan, member, Economic Advisory Council, argued that exchange was a very weak determinant of exports and exchange rate has very adverse impact on the external debt. He said any potential benefit of exchange rate was wiped out due to increase in external debt, and in addition the devaluation raises the costs of inputs for local production which hurts the economy badly.

Dr Khan emphasised on the need to control public debt and boost private investments.

Dr Asad Zaman, vice chancellor, PIDE, concluded the session, and argued that the exchange rate could only be managed at the cost of foreign reserves, which was rather bad for the economy.

A panel discussion on “Governance, Housing, Poverty and Employment” generated debate on pulsing issues of poverty, lack of employment opportunities, insufficient housing facilities, as well as the dearth of institutional capacity in Pakistan.

Dr Talat Anwar, professor of Public Policy at PIDE, said Pakistan should learn from China’s experiences by evaluating their experience on poverty reduction strategies. “Low rent houses for poor, targeted health reforms, education emergency, and emergency provision are the main lessons from China for Pakistan,” he added.

Abdul Wajid Rana, program leader, IFPRI, Pakistan, emphasised the civil service reforms in Pakistan.

“Civil service reforms are necessary for fiscal stability and for collaboration between politicians and civil servants,” he said.

Rana was of the view that the current reforms should be focused on emerging challenges and work towards increasing collaboration. He said that ineffectiveness of state institutions was undermining Pakistan’s economic, social, and political development.

Emerging challenges of civil service reforms should be centralisation to decentralisation, hierarchical to collaborative federation, top down to participative governance, and globalisation, as well as SDGs, technical advancement, accountability, vibrant judiciary, and active legislative committees, he added.

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China will likely speed up its Belt and Road projects amid US tensions: Citi

Source:CNBC
Writer:Kelly Olsen
Date: December 12, 2018

China will likely speed up infrastructure projects in its ambitious Belt and Road Initiative amid trade tensions with the United States, Citi said in a report Tuesday.

Several Chinese companies and various sectors, including mining and transportation, are poised to benefit from that development, the report said.

The Asian giant announced the BRI in 2013, aimed at recreating and modernizing ancient Silk Road trade routes. It has become the signature foreign policy program of Chinese President Xi Jinping’s government.

 The program is an ambitious infrastructure project aimed at connecting more than 60 countries in Asia, Europe, Africa and the Middle East through overland and maritime routes.

But it has been widely criticized, amid concerns that the high debt incurred for projects might become unsustainable for countries such as Sri Lanka, and others could face risks due to political changes, including those in Malaysia.

China has elevated the program to a top national strategy, Citi said, adding that tensions with the U.S. mean Beijing is prepared to take a different approach in the construction projects in order to expand its influence in countries that are part of the initiative.

 China will likely “escalate the loan and shorten the project approval” process to quicken the pace of infrastructure building “so as to diversify trade and economic activities there away from the U.S.,” Citi analysts said in the report.

“We believe the BRI will primarily benefit the railway sector, given China’s distinct advantages globally in terms of technology and cost in railway infrastructure,” they said, noting that building of power plants, telecommunications facilities and ports should also increase.

‘Kinder, gentler’

Some Chinese firms stand to benefit from this, the report said, stating the examples of China Railway Group and China Railway Construction.

Others include Chinese train manufacturer CRRC — which produces rolling stock such as railroad cars, wagons and coaches — as well as equipment maker China Railway Signal & Communication, Citi said in its report. All are listed in Hong Kong.

Some industries are also set to make inroads.

“We see near-term opportunities for sectors such as commodity and mining, transportation and logistics, as well as finance,” Citi said, citing specific firms such as Chinese oil and gas company PetroChina and the Bank of China, both listed in Hong Kong. Shanghai-listed Conch Cement is also “well positioned to benefit from the initiative,” it said.

In a separate Citi report assessing the progress of the Belt and Road Initiative after its first five years, the U.S. bank suggested that China may be forced to modify the BRI into a “kinder, gentler” version that would sit better with its critics.

Some challenges include the heavy reliance on the U.S. dollar in order to fund the infrastructure projects, Citi said. Other pressures China continues to face include criticisms from recipient countries that projects are too favorable to China and “explicit opposition” from the U.S., the report said.

However, all that could contribute to Beijing becoming more open to changes, as seen in China’s “growing interest” in working with multilateral development banks to jointly finance projects, the report said.

But whatever modifications are made, the program is here to stay.

“Though it might change shape, the BRI is certainly not going away,” Citi noted.

 

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Chinese investors given another extension for two CPEC projects

SOURCE: DAWN

ISLAMABAD: The government on Tuesday gave another extension to Chinese investors for achieving financial close of two major power sector projects worth $2.2 billion under the China-Pakistan Economic Corridor (CPEC).

The projects given extensions include 4000MW Matiari-Lahore Transmission Line and 300MW Gwadar Coal Power Project.

At a meeting of the Private Power & Infrastructure Board (PPIB) presided over by Power Minister Omar Ayub Khan, the $1.7bn Matiari-Lahore line was given a three-month extension to achieve financial close with a fresh deadline of Feb 28, 2019.

The contractors were earlier given a six-month extension in financial close in March this year which ended on Dec 1. The new deadline was approved on assurance that commercial operation date (COD) of the project would remain unchanged at Mar 31, 2021. The delay was caused in firming up transmission line service agreement, finalisation of loan-related matters with the State Bank of Pakistan and problems in land leases.

“Keeping in view the importance of much needed +660kV High Voltage Direct Current (HVDC) Matiari-Lahore Transmission Line Project which is specifically designed to provide power evacuation for Thar coal-based power projects, the board has agreed to allow extension in letter of support (LoS) for achieving financial close,” said an official statement.

It was explained that it was the first HVDC line in the country and also the first private sector transmission project under CPEC which had achieved substantial progress. “Such extensions would not compromise the completion date of the project which is March 2021,” the statement said.

A special purpose vehicle (SPV) — Pak Matiari-Lahore Transmission Company Ltd (PMLTCPL) owned by three Chinese firms — was given a 25-year licence for the construction of 878-kilometre line by the power regulator in February this year.

The SPV is owned by two Hong Kong-based companies: Zhong Cheng Xin International Ltd holding with a stake of 69.98 per cent and Zhong Zhuo Ye International Ltd 30pc. Both the entities are wholly owned by State Grid International Engineering Ltd, a 100pc subsidiary of China Electric Power Equipment and Technical Company, which in turn is 100pc owned by State Grid Cooperation of China.

The SPV is required under the licence to achieve COD of the line by Mar 1, 2021 and will be empowered under the licence to run it for 25 years. The project is expected to be completed at a cost of $1.7bn and the government is extending a series of tax concessions for it.

Likewise, the 300MW Gwadar coal-based power project was given a nine-month extension to achieve financial close until August 2019. The project has seen repeated delays in the past and saw changing investor portfolio.

Informed sources say the project still had many issues to resolve: contractors faced difficulties in land acquisition which has mostly been settled now but would require cost adjustments in the tariff while some delays were also caused due to environmental issues and internal management.

They added that there were still uncertainties over the project even though Pakistani authorities have been pushing for its completion to ensure uninterrupted power supply to Gwadar port and allied establishments. The board allowed a nine-month extension in its letter of intent until August 2019.

The PPIB said these extensions will enable sponsors to obtain tariff from the power regulator and LoS from PPIB, leading to financial close and help start construction to ensure much needed electricity to Gwadar to promote business for newly developed port, boost socio-economic activities and start the Special Economic Zones and Export Processing Zones in Gwadar.

These activities will create employment opportunities and develop social facilities under Corporate Social Responsibility, the PPIB stated.

Ayub told board members that his ministry has taken the challenge of controlling theft and losses as well as overhauling transmission and distribution systems to remove bottlenecks in the supply of electricity to consumers.

He said sustainability in the system was only possible by bringing transparency in power system, induction of indigenous and renewable energy and introduction of new technology in transmission and distribution systems.

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How A Growing U.S.-China Rivalry Is Reshaping The Global Tech Landscape

Source: Forbes
Writer: Alex Capri
Date: December 09, 2018

For observers of the U.S.-China geopolitical rivalry, the arrest of Huawei’s CFO, Meng Wanzhou, in Canada, should serve as a wakeup call for the rest of the tech sector. The allegations against China’s telecom giant for breaching U.S. sanctions highlights the escalating technology race and hybrid cold war between the world’s two superpowers.

Washington and Beijing are now at a historical tipping point, and national security priorities are driving policies that will lead to further decoupling of American and Chinese interests. This, in turn, will lead to further fragmentation of global value chains in the tech sector.

Tech companies—or any firms that depend on cutting edge technology—will need to gauge their risk environment around two key factors: First, how to react to a wave of disruptive policy measures such as export controls, sanctions, blocked acquisitions and blocked technology transfers. Second, how to minimize the damage that will come as a result of disentanglement from existing technology ecosystems.

 Beijing’s provocative tech agenda

At the heart of this competition is the Made in China 2025 plan, Beijing’s strategy to lead the world in AI, robotics, aerospace and other industries.

China’s rapid advancement in technological capability has in many ways caught Washington and its allies flatfooted. Since 2017, For example, Beijing has been creating a navigational satellite constellation to rival America’s GPS. In 2018 alone, it launched 11 BeiDou satellites, some as few as 17 days apart.

 Beijing can now offer its partners an alternate version of America’s GPS, thereby undermining Washington’s geopolitical monopoly in this area, and it can  leverage the BeiDou program to extract concessions from its client states, such as agreements to buy more Chinese digital infrastructure and equipment.In the competition to win the battle of 5G standards— the technology that provides lightning-fast connectivity and better bandwidth in the internet of things (IOT)—China is leveraging its 650 million mobile internet users and its planned infrastructure along the digital Belt and Road to expand its global influence.

In a bid to become self-sufficient and cut its reliance on foreign semiconductor technology, Beijing is reportedly investing $31.5 billion in a National Integrated Circuit Industry Investment Fund, among other funds.

Lately, Beijing’s focus has increasingly turned to what it calls “civil-military fusion.” Recently, a series of state-backed venture capital funds have brought together tech startups and other private companies with the Peoples Liberation Army. In 2017, for example, the Foshan Civil-Military Innovation Industries Fund was launched to the tune of $28.75 billion.

Washington’s technology counter-offensive

The U.S. Department of Defence (DOD) now officially lists China as an “adversary.” A recent DOD report list key areas of strategic focus including Beijing’s efforts to leverage technology to modernize its military, and its plans to harness the Belt and Road Initiative to further enhance its economic clout. This has fed a popular narrative in Washington and beyond that China’s strategic ambitions need to be confronted and contained. Thus, firms should expect to see fewer technology transfers to Chinese companies, the blocking of deals (such as Huawei getting locked out of the U.S., Australia and possibly the U.K. and Japan) and the placement of targeted individuals and firms on sanctions lists. Whether all of this will produce the desired outcome by Washington and its allies is, of course, debatable.

The U.S. Export Control Reform Act, passed in August, will lead to the expansion of an export controls list. There will be new export licensing requirements for a broad range of so-called dual-use technologies–defined as technologies that can be use for commercial and military purposes. In the digital economy, this will impact a wide range of industries: robotics, AI, autonomous vehicles, even facial recognition technology. The effects could be widespread, with collateral damage to foreign firms.

Chinese smartphone maker ZTE serves as a cautionary tale. Its reliance on U.S. technology for both components like microchips and software from the Android operating system highlights China’s dependence on foreign suppliers.

Hikvision, China’s largest maker of facial recognition surveillance equipment, may suffer a fate similar to ZTE, as the U.S. government is threatening to ban Silicon Valley chipmakers from selling it American technology. Unlike ZTE, however, which avoided a likely collapse when Washington agreed to waive the technology ban, Hikvision may not be so lucky.

China’s major Achilles heel continues to be its dependence on foreign semiconductor technology. Every area of Beijing’s Made in China 2025 plan relies on foreign-owned integrated circuit technology, with much of it coming from five American manufacturers: AMD, Intel, Micron, Nvidia and Qualcomm.

Even Yangtze Memory, Beijing’s state-funded national champion, which recently announced that it had developed a state-of-the-art 64-layer 3D NAND flash memory chip, will depend entirely on critical early-stage equipment—needed for mass production—from foreign firms. Primary partners are Applied Materials and KLA-Tencor, both American companies.

The Scale of disentanglement

All of this leaves the global tech sector in a highly vulnerable position. Increasing U.S. export controls that restrict or block access to American technology could cause major damage to Beijing’s geopolitical aims. But foreign firms will suffer collateral damage as well, as they will be penalized for being imbedded with denied parties.

Over the past three decades, for example, the American companies named above have invested billions of dollars in collaborative ventures and production facilities in China. For all the world’s leading semiconductor firms, China will soon become their largest market.

According to PWC’s Global Strategy group, 80% of the corporate research and development (R&D) money spent in China in 2017 came from non-Chinese multinationals. Disentangling these ecosystems will require dismantling complex, intertwined relationships, with potentially heavy economic and financial consequences across global value chains.

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Besides infrastructure, manufacturing industry needs big investment

Source: The Express Tribune
Writer: Umer Khayyam
Date: December 10, 2018

The mega Belt and Road Initiative (BRI), launched by China, comprises one axis and two wings. The axis is composed of 15 countries mostly neighbouring China and aids Chinese influence across continents. The two wings are spread over 24 countries across continents.

The BRI is aimed at connecting countries in the region and beyond through trade facilitation and other measures. However, the development of a broad-based transport network is the sine qua non for such connectivity.

Hence, a new array of highways attracted $11 billion out of the $46 billion initially promised by Beijing for China-Pakistan Economic Corridor (CPEC) projects. The transport infrastructure development accounts for 24% of the CPEC investment, covering roads, highways and railways from the Khunjerab Pass to Gwadar Port.

This long transport passage has been designed to also facilitate energy projects through coal transportation, but the transportation network is mainly targeted at markets of the Middle East and Europe. It will ensure a smooth flow of Chinese goods to international markets. In the meantime, Pakistan is trying to persuade other neighbouring countries including Saudi Arabia, Iran and Turkey to join CEPC. Simultaneously, the eastern part of the BRI is being facilitated by Malaysia.

Likewise CPEC and other major investments in Pakistan, China has made huge capital injection into Malaysia. Till 2008, China’s investment accounted for just 0.08% of the total foreign direct investment (FDI) in Malaysia.

However, in 2016, the Chinese investment rose massively and touched the level of 14.4%. Most of the investment from China went to infrastructure development like the East Coast Rail Link and the Kuantan Port. The investment will help provide easy market access across Malaysia.

Non-manufacturing sector

The huge investment in the non-manufacturing sector comes in the wake of developing countries’ heavy reliance on the strong economies. As the developing countries are short of resources, they open their economies for the FDI but with little say in such investment plans.

Although the investing economies target neglected sectors of the recipient economies, still in this process they improve their supply chain to the world market.

These pose a great challenge to goods and services producers of the developing countries both in local and international markets. Malaysia has already experienced difficulties as demand for its goods and services has gone down because imported goods are cheaper and are easily available.

In the same way, Pakistan could face the challenge of competing with goods and services of China.

Apart from this, though infrastructure investment provides employment to locals with handsome remunerations, it is not known what will happen to these jobs when projects are completed. Also, all such investments are non-productive and are based on loans with guarantees from the state.

If the state fails to return the loans, the consequences may be difficult to bear. An example is Sri Lanka’s Hambantota Port, where the state could not return Chinese loans and then the port was handed over to Beijing on a 99-year lease.

However, there is no doubt that CPEC is a game changer. It addresses core problems of Pakistan like energy shortage, dearth of infrastructure and financing as well as underdeveloped areas. It will lead to the promotion of small and medium enterprises and uninterrupted energy supply will help large-scale manufacturing companies to compete at the global level.

Also, the road and railway infrastructure will support the development of backward areas and bridge the rural-urban divide. CPEC will create an environment for regional integration, help build trust among regional emerging economies and provide Pakistan with a platform to improve its image in the international arena.

However, there is a strong need to revise plans in order to invest more, without any impact on infrastructure investment, in the manufacturing sector, which will create more employment opportunities and promote emerging industries. This way, Pakistan’s economy will strengthen and a strong neighbouring country is in the interest of China as well.

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China’s real endgame in the trade war runs through Europe

Source: CNBC
Date: December 08, 2018

SCHLOSS ELMAU, GERMANY – Hungarian Prime Minister Viktor Orban recently shared some history with a friend, explaining why he reached out to China’s then-Premier Wen Jiabao in 2011, seeking urgent financial support and providing Beijing one of several European inroads in the wake of the 2008 financial crisis.

Orban’s reason was a simple one: survival. Facing a potential debt crisis and unwilling to accept austere loan conditions from Western institutions, Beijing offered a lifeline. For his part, Orban convened some Central European leaders with Beijing, and they laid the groundwork for the “16-plus-one” initiative based in Budapest that since then has provided China unprecedented regional influence.

It didn’t take long for China’s investment to bear fruit. In March 2017, Hungary took the rare step to break European Union consensus on human rights violations, refusing to sign a joint letter denouncing the alleged torture of detailed lawyers. In July of the same year, Hungary joined Greece – another distressed European target of Chinese largesse – in blocking reference to Beijing in a Brussels statement on the illegality of Chinese claims in the South China Sea.

 The Bavarian Alps might seem an unusual place to reflect on China’s growing global influence, in a week that begin with U.S. President Donald Trump and Chinese President Xi Jinping working to avoid a trade war in Argentina and advanced to Canadian authorities arrest of Chinese tech company Huawei’s CFO in Vancouver, at US request on suspicion of Iran sanctions violations.

Transatlantic strategy experts – convened at this breath-taking resort by the Munich Security Conference – were left to reflect on Europe’s unique vulnerability to this major power conflict in a world where they are absorbing the unanticipated shocks of greater US unpredictability, greater Chinese assertiveness and deeper European divisions about how to navigate it all.

“China already has shown it can have a veto power over European Union policy,” said Wolfgang Ischinger, chairman of the Munich Security Conference, on the margins of the off-record gathering he convened. He notes that while West European companies are driven by profit, their Chinese counterparts invariably also represent Chinese state interests. “That doesn’t have to be malign, but it can also be malign.”

European Union officials concede that China already has exercised veto power it has over policies that require unanimity, and because some officials are pushing privately for a change to majority voting. Concerns are growing as Beijing’s influence has grown more rapidly than anyone anticipated. Chinese foreign direct investment in the EU has risen to $30 billion in 2017 from 700 million before 2008.

That influence has grown more rapidly than anyone anticipated. Since the 2008 financial crisis, Chinese foreign direct investment in the EU has risen from 700 million Euro to 30 billion Euro in 2017.

A report by two German think tanks, the GPPI and Mercator Institute for China Studies, found that Beijing has taken full advantage of Europe’s openness and has been “rapidly increasing political influencing efforts in Europe.”

Political warfare

Some call it political warfare, using a nonmilitary toolbox of overt and covert means to exert its influence on political and economic elites, academia and public opinion. With these efforts, it weakens Western unity (and US attraction) and improves its image as an alternative to liberal democracy, the report concluded.

Growing Sino-US tensions have brought Europe new export chances in China but at the same time China has shifted considerable export and foreign investment efforts to Europe to replace lost American markets. In the first six months of this year, newly announced Chinese mergers and acquisitions into Europe were nine-fold the North America number at $20 billion compared to $2.5 billion and completed investments were six times higher at $12 billion compare to $2 billion.

At the same time, a new Trump-Xi trade deal could shake Europe as well, as China’s state driven economy could decide overnight to replace European products with US goods for political purposes.

The potential for an escalated Beijing-US struggle has left European experts scratching their heads over how they would choose sides or navigate the perils, particularly in the case where some countries and industries have much more at stake in China.

Some European officials speak of the need for “strategic autonomy” in the face of US sanctions extraterritorial reach on Iran and Secretary of State Mike Pompeo’s speech in Brussels this week where he questioned multilateralism and the European Union. At the same time, they worry more about what some call China’s “political warfare” of gathering economic, financial and thus also diplomatic influence.

The European Union hasn’t yet applied anything as restrictive on foreign investment as the US Committee on Foreign Investment in the United States (CFIUS), an interagency committee that reviews the impact of foreign investments on US national security. However, the EU this month passed a bill creating an unprecedented, if non-binding, screening scheme aimed at predatory Chinese investments.

Germans this week increased their focus on questions regarding a company called KUKA Robotics, which has become the poster child for the perils of high tech sales to the Chinese. With its industrial robotics production, KUKA was one of the nation’s greatest innovators for the 21st century economy until it was taken over by the Chinese company Midea in 2016.

Just last month, Midea was reversing previous assurances that it would not remove KUKA’s highly respected and long-time CEO, underscoring China’s ultimate control over cutting-edge robotics technology.

Despite facing new scrutiny, China is undeterred in its European strategy, taking advantage of European divisions, America’s trade strains with Europe and the urgent investment needs of particularly Southern and Eastern European countries.

Xi’s first state visits Spain and Portugal

Tellingly, President Xi made a stop in Spain on his way to Argentina and then again in Portugal for a two-day stint on his way back from the G-20 meeting, his first state visits to both countries.

Even before Xi’s visit, China had invested $12 billion in Portuguese projects ranging from energy, to transport, to insurance, financial services and media. During Xi’s visit, China and Portugal further deepened their economic partnership, with Lisbon agreeing to cooperate in China’s Belt and Road Initiative as it hopes to garner increased Chinese infrastructure and energy investments. China is also poised to take over a majority stake in EDP, Portugal’s largest business and a major EU energy provider.

In short, global markets and news reports miss the real story with their single-minded focus on whether or not President Trump and President Xi can reduce tensions and close a trade deal over the next 90 days. The bigger game, increasingly apparent in Europe, is whether China can replace the United States over time or at the very least significantly reduce its influence.

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One Belt, One Road, One Big Mistake

Source: Foreign Policy
Author: 
Date:  

The headlines coming out of this year’s APEC conference in Papua New Guinea focused on the conflict between America and China that kept the forum from issuing a joint communiqué. Less noticed were two short memorandums released on the sidelines of the conference by the island nations of Vanuatu and Tonga. In return for renegotiating existing debt, both agreed to become the newest participants—following other Pacific nations like Papua New Guinea and Fiji—in Chinese President Xi Jinping’s signature foreign-policy venture, the Belt and Road Initiative (BRI).

As Xi’s trillion-dollar development strategy has snaked away from the Eurasian heartland and into the South Pacific, western Africa, and Latin America, concern has grown. Many Americans fear that the Belt and Road Initiative is an extension of efforts by the Chinese Communist Party (CCP) to undermine the security and economic architecture of the international order. China’s growing largesse, they worry, comes largely at the expense of international institutions and American influence.

This angst lies behind another announcement made at last month’s APEC gathering: Australia, Japan, and the United States declared that they had formed their own trilateral investment initiative to help meet infrastructure needs in the Indo-Pacific. For some this is not enough: In its most recent report to the United States Congress, the bipartisan U.S.-China Economic and Security Review Commission recommended that Congress create an additional fund “to provide additional bilateral assistance for countries that are a target of or vulnerable to Chinese economic or diplomatic pressure.”

This is the wrong response to the Belt and Road Initiative. Ignore the hype: For the Chinese, this initiative has been a strategic blunder. By buying into the flawed idea that barrels of money are all that is needed to solve complex geopolitical problems, China has committed a colossal error. Xi’s dictatorship makes it almost impossible for the country to admit this mistake or abandon his pet project. The United States and its allies gain nothing from making China’s blunders their own.

In Xi’s speeches, the phrase most closely associated with the Belt and Road Initiative is “community of common destiny.” Xi’s use of this term is meant to link the BRI to the deeper purpose party leaders have articulated for the CCP over the last three decades. China’s leaders believe that not only is it their “historic mission” to bring about China’s “national rejuvenation” as the world’s most prestigious power, but that China has a unique role to play in the development of “political civilization” writ large.

It is the Chinese, Xi maintains (as Hu and Jiang did before him), who have adapted socialism to modern conditions, and in so doing have created a unique Chinese answer to “the problems facing mankind.” Though this answer began in China, Xi is clear that the time has come for “Chinese wisdom and a Chinese approach” to benefit those outside of China. The Belt and Road Initiative is intended to do just that. By using the Chinese model of socialism to develop the world’s poorer regions, the initiative justifies Xi’s grandiose claims about the party’s historic mission on the international stage.

To match these lofty aims, Chinese academics and policy analysts at prestigious party think tanks have articulated more down-to-earth goals for the initiative. According to them, the BRI promises to integrate China’s internal markets with those of its neighbours. Doing so will bring its neighbours closer to China geopolitically and bring stability to the region. By increasing economic activity in China’s border regions, such as Xinjiang and Tibet, the Belt and Road Initiative will lessen the appeal that separatist ideology might have to the residents. Another projected benefit is the energy security that will come through the construction of BRI-funded transport routes. Finally, by articulating and then following through on an initiative that puts common development over power politics, China will gain an advantage over other major countries (read: Japan and the United States) who present the world as a black-and-white competition for hegemony. The community of common destiny, these analysts have claimed, is a community that will immensely benefit China.

As the Belt and Road Initiative is only five years old (and many of its main members have been involved for a far shorter time) its full results cannot yet be judged. However, a preliminary assessment can be offered for BRI projects in South and Southeast Asia, the region described by Chinese leaders as the “main axis” of the Belt and Road Initiative. It is here that BRI investment is strongest and has been around longest. The picture is not promising. The hundreds of billions spent in these countries has not produced returns for investors, nor political returns for the party. Whether Chinese leaders actually seek a financial return from the Belt and Road Initiative has always been questionable—the sovereign debt of 27 BRI countries is regarded as “junk” by the three main ratings agencies, while another 14 have no rating at all.

Investment decisions often seem to be driven by geopolitical needs instead of sound financial sense. In South and Southeast Asia expensive port development is an excellent case study. A 2016 CSIS report judged that none of the Indian Ocean port projects funded through the BRI have much hope of financial success. They were likely prioritized for their geopolitical utility. Projects less clearly connected to China’s security needs have more difficulty getting off the ground: the research firm RWR Advisory Group notes that 270 BRI infrastructure projects in the region (or 32 per cent of the total value of the whole) have been put on hold because of problems with practicality or financial viability. There is a vast gap between what the Chinese have declared they will spend and what they have actually spent.

There is also a gap between how BRI projects are supposed to be chosen and how they actually have been selected. Xi and other party leaders have characterized BRI investment in Eurasia as following along defined “economic corridors” that would directly connect China to markets and peoples in other parts of the continent. By these means the party hopes to channel capital into areas where it will have the largest long-term benefit and will make cumulative infrastructure improvements possible.

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Huawei arrest of Meng Wangzhou: A ‘hostage’ in a new US-China tech war

Source: BBC
Writer: Karishma Vaswani
Date: December 6, 2018

It is hard to overstate the symbolism and significance of the arrest of Meng Wangzhou, Huawei’s chief financial officer and daughter of its founder. Huawei is the crown jewel of Chinese tech and Ms Meng is effectively its princess.

On December 1, the same day as President Trump and President Xi sat down at the G20 over grilled sirloin and caramel pancakes, to work on easing the trade war, Ms Meng was arrested in Canada and is now facing extradition to the US.

Although it’s still not clear what the charges against her are – we know that the US has been investigating Huawei for possible violations of US sanctions on Iran – this is not simply a case about the arrest of one woman, or just one company.

This arrest could materially damage the relationship between the US and China at possibly one of the most sensitive times between the two countries in their long and torrid history.

“It could not come at a worse time and it is probably going to put a cloud over any upcoming negotiations,” Vinesh Motwani of Silk Road Research told me. “The market had already turned more sceptical over the G20 agreement in recent days. This is only going to make the market more sceptical any deal can be reached.

Rapprochement averted

Tensions have been rising between Washington and Beijing, not just on trade. But at that G20 meeting in Buenos Aires, it looked like the two sides had at least decided to talk, and thrash things out over a 90-day period.

Amongst those issues are technology concerns, which are front and centre of this trade war. Even if it wasn’t clear how united China and the US may have been on the objectives, the very fact that discussions were taking place were seen as a semi-positive for the global economy.

‘Hostage taking’

But this arrest is likely to be seen by China as an attack and “hostage taking”, says Elliott Zaagman, who has covered the Chinese firm for the better part of the last two decades.

“China has a reputation for making agreements and not keeping them, not following through,” he told me on the phone from Boston. “There’s a theory that this could be a way for the US to hold Beijing to its word on the trade war.”

If so, it is a move the Chinese media has not taken well.

Meng Wanzhou, file picture 2 October 2014Image copyrightEPA
Image captionMeng Wanzhou, Huawei’s CFO, was detained while transferring between flights in Vancouver

“The US is trying to find a way to attack Huawei,” says Hu Xijin, editor in chief of the Chinese and English editions of the Global Times – a publication often seen as a mouthpiece of the Chinese government.

“It is trying to keep Huawei down. That’s why it has pressured its allies not to use Huawei’s products. It is trying to destroy Huawei’s reputation.”

What Mr Hu is referring to is the recent rejection of Huawei’s services by a number of US allies, including Australia, New Zealand and most recently the UK’s BTwhich says it won’t be using Huawei equipment in the heart of its 5G mobile network when it is rolled out in the UK (although it does still plan to use Huawei’s mast antennas and other products).

There’s no evidence of Huawei having ever been engaged in any spying or handing over of data to the Chinese government. In fact, whenever I talk to Huawei executives privately they tell me how frustrated they are because of how the US government and Western media unfairly paints them as a Chinese state-owned company that does Beijing’s bidding.

Company sources tell me that Huawei should be seen as the modern, dynamic and law-abiding global firm that it is, and that the US’s narrative is flawed and unfounded.

Still, Huawei’s founder, the father of Ms Meng, is Ren Zhengfei – a former military officer in the Chinese army. And the fact remains, as Mr Zaagman points out in a recent piece for The Lowy Institute, “the firm’s relationship with the Chinese People’s Liberation Army remains an issue of concern and opacity”.

Which is why the US says countries must be wary of Chinese companies like Huawei. Under China’s laws, private companies and individuals may be obliged to hand over information or data to the government if they are indeed asked.

It’s that possibility, government sources say, that is scaring them off doing business with Huawei.

Huawei has told me this is completely untrue, and other Chinese academics and business people have also rejected this notion.

Huawei logoImage copyrightGETTY IMAGES
Image captionHuawei is one of the largest telecommunications equipment and services providers in the world

Mr Hu of the Global Times agrees: “The Chinese government would not do this. China would not hurt its own enterprises. If it hurts its own companies, how would it benefit the country? Even if a middling or low-level official were to ask it, Huawei will have the power to refuse any kind of government request.”

Many in China will see this as yet another attempt to contain the country’s rise, by limiting its most global firms’ access to international markets.

“This could further endanger Huawei’s 5G aspirations outside of emerging markets,” says Tony Nash of Complete Intelligence, on the line from the US.

“If Huawei is being investigated it could put both Huawei and ZTE on the back foot as other equipment makers gain a lead in North America, and potentially other developed markets.”

Other countries

It’s not just developed markets where Huawei may be losing ground. The scrutiny is building in emerging markets too. Industry sources tell me that the US has been putting pressure on Asian allies to stop them from using Huawei’s equipment. The Solomon Islands and Papua New Guinea were the latest recipients of this pressure, and India is thought to be next.

So what does this mean? The gloves are off. You should be under no illusion what this latest move by the US means for the relationship between the world’s two largest economies: things have taken a dramatic turn for the worse.