Re: CHINA: Public frustration about the government’s denial of basic rights and freedoms, magnified by a lack of rule of law

Dear President of the European Council, Dear President of the European Commission,

I appreciate recent statements by the EU High Representative and the EU Ambassador to China expressing concerns about the deteriorating human rights environment in China, I believe that EU efforts to advance human rights will be compromised and effectively undermined if you fail to reiterate the EU’s human rights concerns and expectations with regards to remedies, both publicly and privately, during the forthcoming Summit.

The Chinese government continues to impose sharp curbs on freedom of expression, association, and religion; openly rejects the principle of judicial independence; and arbitrarily restricts and suppresses human rights defenders and organizations, often with extrajudicial measures. It systematically condones, with rare exceptions, abuses of power in the name of “social stability.” The security apparatus, which remains hostile to liberalization and legal reforms, appears to have steadily increased its power since the 2008 Beijing Olympics.

Since mid-February 2011, Human Rights Watch has documented a disturbing increase in the Chinese government’s use of enforced disappearances, arbitrary detention, intimidation, and house arrest to silence those exercising their right to the freedom of expression. In recent weeks, Chinese courts have handed down severe prison sentences to a quartet of writers prosecuted for writings critical of the ruling Chinese Communist Party. Chen Wei received a nine year prison term on December 23, 2011 on charges of “inciting subversion of state power” for publishing government criticism on-line. Three days later, a Guiyang court handed down a 10-year sentence on the same charge to Chen Xi, for similar on-line criticism of China’s one-party rule. Then on January 18, 2012 a Wuhan court sentenced Li Tie to a 10 year prison term for “subversion of state power” for writings which included reference to the official taboo topic of the June 1989 Tiananmen massacre. And on January 18, police charged veteran human rights activist Zhu Yufu with “inciting subversion of state power” for writings including a poem which police interpreted as a call for popular unrest against one-party rule.

Despite the Chinese government’s rhetorical commitments, the legal system in China does not protect the rights of activists and critics. In September 2011 the Chinese government announced proposed revisions to the criminal procedure code that would in effect legalize rather than prohibit disappearances; such a step runs counter to the government’s obligations not to deviate from the standards set out by international human rights covenants it has ratified, including the International Covenant on Civil and Political Rights. Six of the country’s most prominent human rights lawyers — Teng Biao, Tang Jitian, Jiang Tianyong, Liu Shihui, Tang Jingling, and Li Tiantian — were “disappeared” by the police for periods of time ranging from several weeks to several months. Following their releases, some have described having been tortured in custody, and few have resumed their outspoken advocacy.

Other human rights lawyers have been disbarred, or warned by judicial authorities not to take up particular cases. In another recent instance, government officials in Wenzhou ordered lawyers there not to represent civil compensation cases filed by families of victims of the July 23, 2011high-speed rail crash. They relented only after fierce on-line criticism of the move by Chinese netizens.

Despite the Chinese government’s well-documented attacks on human rights defenders and civil society activists in recent years, Chinese citizens are increasingly aware of their rights and more assertive in cases in which those rights are denied. Public frustration about the government’s denial of basic rights and freedoms, magnified by a lack of rule of law, contribute to the more than 100,000 “mass incidents” or protests are estimated to occur annually in China. Those protests heighten the Chinese Communist Party’s concerns about potential threats to its 61-year monopoly on power, which have already resulted in greater budgetary allocations for “social stability maintenance” than national defense.

In addition, we remain gravely concerned about the situation in Tibet, where heavy-handed security measures appear to have fueled tensions between Tibetans and Chinese authorities in the region, contributing to desperate acts of protest by individuals, including sixteen self-immolations. Since the protests of 2008 in the region, the Chinese government has imposed drastic restrictions on Tibetan monasteries in the Aba prefecture of Sichuan province and other parts of the Tibetan plateau. These measures include brutal security raids, arbitrary detentions of monks, increased surveillance within monasteries, and a permanent police presence inside monasteries to monitor religious activities.

While I note and appreciate EU public and private diplomacy about the human rights environment and individual cases in China, Human Rights Watch nevertheless believes that EU efforts in this regard are not sufficiently robust and consistent. These efforts have not been designed to seriously affect change in China’s appalling human rights record or support the forces for positive change inside China, including those courageous individuals who dare to challenge abusive government conduct and demand that their constitutional rights of free expression be respected by their government.

As the “Arab Spring” reminds us, the EU and others must take public opinion into account when formulating policies towards third countries. Significant numbers of people in China, too, are making known their complaints about issues ranging from public health to corruption, from land seizures to access to justice. In doing so, they face a range of possible retributive measures, including torture and imprisonment. The EU has quite visibly demonstrated support for efforts to ensure better respect for human rights around the 2011 public protests in North Africa and the Middle East. It should do no less in response to peaceful public protest and government crackdowns and abuses in China.

I urge you :

• Express the EU’s support for and solidarity with independent Chinese voices by meeting with human rights defenders and civil society activists inside and outside China, such as the writer Liao Yiwu, who is fled to Germany to see refuge from Chinese government persecution;
• Articulate concrete benchmarks for human rights progress prior to holding future rounds of the EU-China Human Rights Dialogues;
  Call for the unconditional release of all those imprisoned and detained solely for the peaceful exercise of basic rights, such as the freedoms of expression, assembly, association, and religion. In particular we also urge that you publicly reiterate the EU’s call for the release of Liu Xiaobo, co-drafter of Charter ’08 and recipient of the 2010 Nobel Peace Prize.
• Call for the end of extralegal detention or other extralegal limitations on the rights of activists and their families, such as Liu Xia; blind legal activist Chen Guangcheng and his family; and public health activist Hu Jia and his family;
• Call for the Chinese government to reinstate those lawyers disbarred in recent years for their engagement in public interest and human rights cases, and remove other barriers on their ability to practice law;
• Publicly commit that EU member states should not forcibly return asylum-seekers from China who have reason to fear persecution;
  Urge the Chinese government to ensure that respect for internationally recognized human rights is not compromised in the name of public or national security and;
• Urge the immediate establishment of meaningful dialogue between the Chinese government and representatives of Tibetans to address the underlying grievances in the region.

Syria

I also urge you to encourage your Chinese counterparts to support efforts at the United Nations Security Council to exert pressure on the Syrian government to cease the serious human rights abuses that the United Nations High Commissioner for Human Rights says may amount to crimes against humanity. We believe that the shift in the position of the League of Arab States and its recent decision to seek the support of the Security Council for its proposed plan to end the crisis creates an opportunity to overcome China’s initial reluctance to support Security Council efforts to end the crackdown. We urge you to:

• Express concerns about China’s failure to respond to the crimes documented in Syria and the fact that what may amount to crimes against humanity is allowed to continue with utter impunity; and
• Seek China’s support for efforts to advance the protection of civilians, including through a UN Security Council resolution that would help advance international pressure on the Syrian government to halt serious human rights abuses, curb impunity for the atrocities, ban arms transfers to forces engaged in possible crimes against humanity

Making publicly known both the EU’s concerns about human rights violations in China and your expectations of China internationally is important. Public statements demonstrate the EU’s commitment to the issues, and, more important, provide critical support to all those in China and elsewhere struggling to exercise and protect their human rights. I look forward to discussing these issues at your convenience.

Yours sincerely,

AUTHOR: William Nicholas Gomes
URL: www.williamgomes.org
E-MAIL: williamgomes.org [at] gmail.com

Overall, in 2011 China assumed a more assertive role on the global stage.  China’s new posture was reflected in an aggressive trade agenda, a push for a larger role in international institutions, and provocative moves in the South and East China Seas.  These actions were both a reflection and a consequence of China’s growing economic prominence and resource needs, as well as China’s view that the United States is in decline while China is ascendant.

China continued the backsliding from market reforms in favor of an increased role of the state in the economy.  China continues to subsidize its state-owned enterprises to the detriment of both private Chinese firms and international competitors.  Despite promises by President Hu Jintao and other Chinese officials to ease a policy of discriminating against foreign companies in government procurement decisions; however, real change remains elusive, particularly among the provincial and local governments.

Currency Liberalization

China continued its aggressive capital controls during 2011, a policy which pegs the renminbi (RMB) to the dollar, restricts the flow of foreign capital in the domestic market, and investing foreign reserves in U.S. Treasury bonds.

By the end of 2011, China’s foreign exchange reserves are projected to be over $3.2 trillion, up nearly one trillion from $2.4 trillion back in January of 2010.  China’s foreign exchange reserves are now roughly three times greater than that of Japan, which has the second-highest foreign exchange reserves in the world.  Roughly two-thirds of China’s foreign exchange reserves are generally thought to be denominated in U.S. dollars, although the exact makeup of the reserves is unknown, because the Chinese government considers it to be a state secret.

Somewhat better known is the volume of China’s foreign exchange reserves that are made up of U.S. Treasury securities.  As of July 2011, the official estimate by the U.S. Treasury Department

stood at $1.2 trillion, up slightly from the same period one year before.  The real amount is considerably higher, since the $1.2 trillion does not take into account any purchases made on the secondary market nor does it factor in purchases made by intermediaries or made through tax havens, such as the Cayman Islands.

On the positive side, the Chinese government allowed the RMB to rise by roughly 6% in nominal terms over the last year, from 6.641 RMB per dollar at the beginning of the year, to 6.30 RMB per dollar by the end of December 2011.  This is the second-fastest rate of appreciation since the Chinese government eliminated its hard peg to the dollar in 2005.

The 12^th Five-Year-Plan

In March 2011, China ratified its 12th Five-Year Plan (2011– 2015), a government-directed industrial policy that focuses on the development and expansion of seven ‘‘strategic emerging industries.’’  The central and local governments will likely continue to combine targeted investment with preferential tax and procurement policies to ensure that Chinese firms emerge as global leaders, or ‘‘national champions,’’ in these industries within the next five years.

One of the main objectives of the 12th Five-Year Plan is to redirect China’s economy to one more focused on domestic consumption and less on exports and investment.  The plan assumes that China’s growth would therefore be more balanced and sustainable.  The plan also emphasizes higher value-added production and increased government support for domestic high-tech industries.

Increasing household consumption, a major goal of the 12^th Five-Year Plan, and the subsequent emergence of a more assertive consumer class, may be in direct contradiction to the Chinese government’s policy of keeping economic power firmly in the hands of the state and may compromise lending to many vested interests, including SOEs and the export sector.

Analysts and foreign business leaders fear that the emphasis on industrial upgrading will lead to the introduction of new government subsidies, which in turn will disadvantage foreign competitors.

In particular, the government’s new growth model includes such goals as:

• Setting a GDP growth target of 7% (down from the current actual GDP growth rate of 10%).  To do that, the government will have to divert money away from construction and corporate subsidies, and instead use public funds to increase household incomes.
• Cutting import tariffs to reduce input-costs, while boosting consumer demand and reducing China’s reliance for growth on exports which generates trade surpluses and contributes to the global trade imbalance.
• Improving the income of farmers and migrant workers, who have benefited the least from China’s phenomenal economic growth, by increasing minimum wages.  In particular, provinces across China have announced a string of double-digit wage increases this year as part of the government desire to increase incomes among the rural regions and migrant workers in the cities.
• Increasing spending on healthcare and full nationwide social welfare insurance to reduce the need for “precautionary savings” and encourage more Chinese consumer spending.
• Raising the minimum threshold for personal income tax.  This could exempt hundreds of millions of people from having to pay taxes, and boost household spending.

The most important short-term priority for the government is to address increases in food price, which Beijing intends to do through price controls.  In order to control inflation, the government intends to keep using the tools and methods that it has been employing thus far: manage liquidity, use price controls, curb real-estate speculation, and “adjust and improve” property tax policies.  Furthermore, the budget for this year shows a 35% increase in spending on low-income housing.

(For more, read: China’s 12th Five-Year-Plan – Will It Help With the Global Trade Imbalance?)

Inflation

While China has taken an externally assertive posture, it faces many internal challenges. The Chinese Communist Party (CCP) relies on economic growth, combined with strict authoritarian rule, to maintain control over a factious and geographically vast nation.  Sharp increases in consumer prices, a pivotal factor in the early days of the student protests in Tiananmen Square in 1989, are once again a problem for the Chinese economy.

Inflation is the Achilles heal of the CCP; inflation is what precipitated the Tiananmen Square demonstrations back in 1989, is what fueled the Arab youth discontent for the status quo, and is what is caused by China’s undervalued currency and current account restrictions.  What was but a prospect of inflation in 2010, turned to a serious threat to the longevity of the Chinese economy in 2011, forcing the government to impose price controls to a number of goods.  The rise in property values during the year, led to fears of a bubble market, and a significant drop of values by the end of 2011.  In the middle of the year, inflation was as high as 6.5%; the second highest level in the past 10 years.

Property Bubble

Following a decade-long boom and nearly two years of attempts by the central government to cool the overheated sector, the housing market in China appears to have turned.  In order to cool the overheating residential-property market, the central government has restricted purchases of multiple homes, demanded larger down-payments and curtailed opportunities for speculators to “flip”, or quickly sell on, properties.  It has curbed developers’ access to bank lending and cut off credit from new trust companies.  It is also encouraging the use of property taxes like those introduced in Shanghai and Chongqing last year.

Taken together, these measures have certainly slowed down the market.  Price growth has been slowing since early 2010.  Analysts suggest that prices fell during December 2011 in 60 of the 100 cities it monitors.  Land prices are falling fast, too.

In 2010, property construction accounted for 13% of Chinas GDP, and for more than 25% of all investment in what is the most investment-dependent economy of the world.  Property directly accounts for 40% of Chinese steel use; the country itself produces more steel than the next 10 producing countries combined, making it by far the most important buyer of inputs such as iron ore.  Construction in China is also important for a host of other industries, from copper, cement and coal to power generation equipment.  Most analysts agree that the sector matters to an extraordinary degree for the overall Chinese growth, for commodity demand, household expenditures, external trade and underlying heavy industrial profitability.

According to government figures, which most analysts believe understate the reality, average housing prices more than doubled in the last four years nationwide, while in Beijing and some other regions the price increase was more like 150%.  Data are incomplete but analysts say the price of an average apartment in a Chinese city is now about 8-10 times the average annual income nationwide; in cities like Beijing and Shanghai the ratio is closer to 30 times.  Now, by some estimates, property prices might fall by as much as 25% in the near future, and by another similar amount in the following two to three years.

However, its impost to remember that before 1998 China did not have a residential real estate market to speak of.  In urban areas, all housing was built and allocated by the state through the ubiquitous “work unit”.  In the countryside, peasant farmers built their own homes on land allotted to them by the state or the collective.

The real estate market that now plays such an important part in China’s overall economy was born when the Communist party decided in the late 1990s to begin transferring ownership of the vast majority of housing to individuals.  It is easy to forget that the market is just over a decade old and, apart from a brief dip in the midst of the 2008 financial crisis when transactions dried up, most Chinese have only seen prices double every couple of years and never seen them fall.  Besides, China is a country where speculative bubbles have been a constant phenomenon since market-based reforms picked up pace in the 1980s.

(For more, read: China Property – A lofty ceiling reached)

WTO – 10 Year Anniversary

In December of 2011, China celebrated 10 years since its entry into the World Trade Organization (WTO).  Last year also marks the end of China’s probationary period, under the terms of its Accession Agreement to the WTO.  The probationary period required China to lower its tariffs to levels below those of many other developing countries.  But compared with most industrialized countries, China was allowed to impose considerably higher tariffs (on average around 25%, while U.S. tariffs are mostly under 5%) — tariffs China has retained even as its economy has subsequently grown to No. 2 in the world.

Practices such as forced technology transfer and the creation of joint venture companies as a condition to obtaining access to the Chinese market; the adoption of unique, Chinese-specific standards for high-tech equipment; and extensive intellectual property rights violations are among the faulty policies designed to help China achieve its economic and development goal, while blatantly violating the spirit and often the letter of WTO law.

In the ten years since China joined the World Trade Organization (WTO), China has maintained a steep growth trajectory, outpacing both Germany and Japan to become the second largest economy in the world. China’s gross domestic product (GDP) has grown from $1.32 trillion in 2001 to a projected $5.87 trillion in 2011 (an increase of more than 400%).  Concurrently, China has lifted 400 million of its citizens out of poverty and has experienced the largest rural-to-urban migration in history.

However, 2011 has been a particularly confrontation year in terms of trade disputes with the U.S., China’s most important trade partner.  The U.S. initiated consultations with the Chinese government on a number of cases (chicken products, subsidies, and internet restrictions), and China followed suite in the case of imports of U.S. cars.  Currently, three previous WTO cases involving U.S.-China trade are both open and active.  The Raw Materials case, which resulted in a decision favorable to the United States, is under appeal as of August 31, 2011.  The Flat-rolled Electrical Steel case and the Electronic Payments case have both advanced to formal dispute settlement, though no decision has been reached.

(For more, read: Sino-American Trade Relations – A heated exchange)

Soft Power – Climate Change

In December 2011, the World Climate Change Summit in Durban, South Africa, was considered a (at least very promising) success, thanks in part to the new found commitment of China to the cause.  More specifically, for the first time since the Kyoto agreement back in 1997, large emerging economic powers such as China, India and Brazil agreed to legal constraints on their emissions (unlike their previous resistance in 2007 and 2009, which clearly doomed past climate change efforts).

In the past, a familiar stalling point has been the refusal by emerging powerhouses such as China to agree to legal targets.  That has prompted others – most notably the US – to insist that they could not sign up to such pledges.  China, which in 2007 overtook the US to become the globe’s largest emitter, was one of the largest obstacles. However, China is still classed as a developing country under UN climate conventions and therefore not subject to legally binding constraints.

Having been blamed for wrecking the 2009 Copenhagen talks, Beijing went to Durban eager to promote its green credentials.  In a series of side events, its delegates boasted of China’s rising dominance of renewable energy markets and a five-year plan that for the first time includes plans for emissions trading and carbon intensity reduction targets.

There is still a lot of follow-up needed to make these new commitments real, but it seems that climate change (and the profitable side of this issue: development and marketing of green energy sources) is one area where China is willing to ‘play ball’ with the rest of the world and stretch its ‘soft power’ muscles.

(For more, read: Climate Change – The great regrouping)

Taiwan Strait

Despite the continuing improvement in economic and diplomatic relations across the Taiwan Strait, China deploys some 1,200 short-range ballistic missiles against the island.  In 2011 we saw the sale by the U.S. to Taiwan of a new $5.8 billion package of upgrades to its aging fleet of F–16 fighter jets.  In response to that, China indicated that it might suspend a series of military-to-military engagements.

However, as much as military build-up and confrontation across the Taiwan Strait will always define the China-Taiwan relationship, the upcoming Taiwanese Presidential election overshadowed developments at the end of last year.  China’s strategic planners are very alarmed by the uncertainty over the outcome of this month’s presidential election in Taiwan.

President Ma Ying-jeou, the Beijing government’s preferred candidate who has steered a path of warmer ties and direct economic links with the mainland, is suddenly in a tough race for reelection.  Ma’s chief opponent is Tsai Ing-wen, chairwoman of the Democratic Progressive Party, which officially backs the independence of Taiwan.  Tsai has raised the Beijing government’s ire for her refusal to publicly support an informal, unwritten, 20-year-old agreement between the two sides stipulating that there is just “one China.”

For months, the election was expected to hand an easy reelection victory to Ma, from the ­Kuomintang, or Nationalist Party, after he steered the island through the worst of the global recession and secured a new trade deal with China.  But the race became more unpredictable with the entry of a third candidate, James Soong, a former Nationalist Party stalwart who founded the People First Party.

For China, a victory by the DPP will be considered a setback to cross-strait relations, and could lead to an military escalation as China is preparing for its own leadership transition.

China in South-East Asia

To the consternation of its neighbors, China asserts its expansive territorial claims in the South and East China Seas.  China is increasingly capable of pursuing its own interests at the expense of regional, perhaps even global, stability.  David Gordon of the Eurasia Group recently argued that China has overplayed its hand in Asia, and its rapid growth and aggressive posturing (both economic and military) “is inadvertently driving Asian states to build closer economic and strategic ties with the U.S. and each other.”

Over the past 18 months China has taken a very aggressive tone towards territorial disputes in the South China Sea and elsewhere.  Mr. Gordon further argues that Beijing has miscalculated its ability to cater to nationalist feelings domestically without alarming its neighbors, and is now (inadvertently) driving Asian nations to build closer economic and strategic ties with the U.S. and each other.

The Chinese leadership is very concerned with developments with the Trans-Pacific Partnership, a U.S. led effort for freer trade among Pacific economies which the Chinese press often casts it as an aggressive U.S.-led ploy to squeeze China out of South East Asia.  During the fall, the U.S. formally accede to the East Asia Summit (the ASEAN+3 – just like China did back in 2005), a move that the other SE Asian nations welcome, as they hope that the U.S. could provide a counterweight to China in the region.

Last but not Least – Domestic Unrest

Every year, China experiences some kind of public unrest, be it because of food product contamination that was not handled properly by the authorities, or some natural disaster that was not remedies properly afterword’s, or some transportation accident that could have been averted.  Last year was no different.  However, what happened during the fall in a couple of rural places could have greater ramifications for this year.

In the Southern village of Wukan, protests began on 21–23 September 2011 after officials sold land to real estate developers without properly compensating the villagers.  Several hundred to several thousand people protested in front of and then attacked a Chinese Communist Party building, a police station and an industrial park.  Residents of Wukan had previously petitioned the national government in 2009 and 2010 over the land disputes.

In an apparent attempt to ease tensions, authorities allowed villagers to select 13 representatives to engage in negotiations.  Security agents abducted five of the representatives and took them into custody in early December.  The protests strengthened after one of the village representatives, Xue Jinbo, died in police custody in suspicious circumstances.  The villagers forced all Communist Party officials and police to flee the village, which came back with reinforcements and laid siege to the village, preventing food and goods from entering the village.

Eventually, the village representatives and provincial officials reached a peaceful agreement, satisfying the villager’s immediate requests.

During December, protests in the town of Haimen, of Guangdong province, which drew thousands of participants were ignited over plans to expand a coal-fired power plant in the town—a plan that residents opposed, arguing that existing coal-fired plants had caused environmental and health damage.  Demonstrations began on 20 December when thousands of residents barricaded a freeway and surrounded government offices in an attempt to block the project.

Riot police fired tear gas into the crowd and beat protesters with riot sticks.  Tensions cooled by 23 December, after Communist Party officials declared that the plant expansion plans would be temporarily suspended, and authorities agreed to release detained protesters.  Although the protests in Haimen were unrelated to demonstrations in nearby Wukan, Haimen residents told Reuters that they had followed developments in Wukan closely, regarding it as a good model of how citizens might negotiate with authorities.

This is not the beginning of China’s ‘Arab Spring’ moment.  China is a very large and very diverse country.  But when the people at the bottom of the ‘food chain’ can justify physical confrontation with the authority as the only viable way of ‘negotiating’ with the government, then everyone should be paying very close attention!

I wonder, what will the year of the Dragon bring…  more assertiveness by local people, or more resolve by the government in Beijing?

AUTHOR: Nasos Mihalakas
URL: http://mihalakas.wordpress.com and http://chinatrade.foreignpolicyblogs.com/
E-MAIL: nasos.mihalakas [at] gmail.com

The U.S. and the EU have repeatedly tried to put pressure on China to let the RMB appreciate, or at least trade freely.  So far, China has not been very responsive to any demands for currency appreciation or a meaningful increase in domestic (Chinese) consumption.  On the contrary, instead of letting the RMB float freely, Beijing is actively pursuing the ‘internationalization’ of its currency.

Many Chinese leaders and experts seem to believe that one of the major causes of the global financial crisis was the deregulation of the international monetary system and the dominance of the dollar since the Bretton Woods agreement.  Therefore, if the international economic environment is to be stabilized, the international monetary system needs to be reformed and the power of the U.S. dollar must be reduced.  Beijing is hoping to achieve this by advancing the goal of a supranational reserve currency (IMF’s Special Drawing Right’s), and by promoting the internationalization of the RMB.  This strategy has come to clearer focus recently, on both fronts.

Multilateral Internationalization through the IMF –

China has been pushing for some time for further integration of the RMB into the basket of currencies that fix the value of the IMF’s Special Drawing Rights (SDR’s) – a ‘paper gold’ created by the IMF back in the 1960’s that could replace the U.S. dollar as a reserve currency if the dollar should ever fail.  Every five years the nature and relative weighting of the component currencies that make up the SDR is revised.  The next revision is due in 2015, and Beijing intends to demand that its currency be included in the basket of currencies.

However, under IMF rules and regulations, including the RMB in the SDR basket is technically inappropriate.  The RMB does not meet the two criteria for including a currency in the SDR basket.  The RMB is not a ‘traded currency’, meaning it is not a currency that is being used for international trade, and it is not a ‘freely usable currency’ that is available on the exchange markets.  To overcome these obstacles, Beijing is reaching out to individual countries and making bilateral deals.

Bilateral Internationalization through Offshore Centers –

Recently, Beijing has been accelerating efforts to push the RMB deeper into world markets by allowing for the establishment of offshore trading center besides Hong Kong.  China’s central bank is moving ahead with new rules that make it easier to bring RMB funds raised offshore back onto the Chinese mainland, in an effort to create a new financial ecosystem with the RMB at its center.

Currently, Chinese officials have to approve bringing any sizeable amount of currency (foreign or domestic) into the country.  This has been Beijing’s policy ever since the Asian Financial Crisis of 1997, to closely manage the exchange rate and prevent speculation on the RMB.  The new rules make it easier and more attractive for global companies to access cheap funding in Hong Kong’s RMB-bond markets and then use that money to boost their Chinese business.

Now Beijing is expanding the use of the RMB in other financial centers, to allow for foreign holdings of the currency to be used for direct investment in China.  According to Arvin Subramanian of the Financial Times, “the process is micro-managed, interventionist, and enclave-based – not a day seems to pass without some foreign entity, or country being granted greater but selective access to the renminbi.”  Last week, the Financial Times reported that “China is for the first time to give formal backing to moves by British banks to turn the City of London into an offshore trading center for the renminbi.”  Furthermore, the Economist reports that “in Singapore, banks now offer yuan deposits and bond funds.  Its central bank is one of a dozen that have agreements with the Peoples Bank of China to swap their currencies for yuan.”

The RMB as a Reserve Currency –

Another step in internationalizing the RMB is by allowing more central banks to hold RMB as part of their reserves.  Central banks around the world are making plans to start buying RMB now that China is allowing the limited conversion of its currency for investment.  According to Bloomberg, Nigeria’s government will shift 10% of its $35 billion of foreign-exchange reserves in the RMB, and the central bank is hoping to establish the same kind of swap-line like Singapore.  The Bank of Thailand was approved by China to invest 7 billion RMB in the onshore interbank bond market.  A couple of years ago, the Peoples Bank of China signed a bilateral currency swap agreement worth 70 billion RMB with the Argentine Central Bank, and similar deals are under negotiation with Brazil, Russia, and many African banks.

Finally, in terms of trade, this gradual relaxation by Beijing of the rules on the use of the RMB in international transactions means that 7% of China’s external trade is now settled in their national currency (up from 1%, 12 months ago).  The RMB is already widely welcome in ASEAN countries and has been regarded as a hard currency there.  All this international recognition and legitimacy while Beijing is still maintaining a peg on the dollar and is enforcing strong capital controls domestically.

Understanding China’s Currency Manipulation and Capital Controls –

To appreciate China’s obsession with an undervalued currency and strict capital controls, one must first understand the implications of these policies.  When a Chinese company sells to the U.S. or any other foreign consumer, it gets paid in dollars (and other foreign currencies).  The regime in Beijing does not want all these dollars in circulation, because of fears of inflation.  Therefore, the Peoples Bank of China exchanges dollars and other foreign currencies for RMB before they can go into circulation in China.  Then, in a process designed to fight the inflation in China that otherwise would occur from so much RMB being added to the economy, the central bank issues RMB-denominated bonds.

Without the dollar purchases by the central bank, the supply of dollars in circulation in China would rise rapidly and quickly lose value relative to the RMB.  In a standard macroeconomic model, exchange rate intervention should also lead to monetary expansion, which in turn drives up domestic prices, nullifying the real effect of intervention.  China’s financial system, however, is owned and managed by the government.  Capital controls are in place for most domestic capital flows (and all large FDI has to be approved by the government).  Capital controls and bank lending policies are governed by decree, so that the government can force banks to buy trillions of low-yielding RMB bonds or alter their reserve ratios.  Deposit and lending rates are also set by the government.  This has allowed China to intervene in the foreign exchange market while retaining total control over domestic monetary aggregates.

Although this policy has worked well for both China and the United States (export growth for China and cheap imports and public debt financing for the United States), the unintended consequence of sustained currency intervention was a vast accumulation of dollar-denominated securities in the reserves of the People’s Bank of China and the State Agency for Foreign Exchange (SAFE).  At 2000 China had currency reserves of $165 billion, slightly above 10 per cent of GDP.  By the end of 2010 currency reserves had reached $2.84 trillion, equivalent to almost 50% of China’s 2010 GDP.

In the depressed conditions caused by the financial crisis, China’s dollar peg poses a major threat to the Chinese economy.  The inflows of hot money is straining the capital controls system to breaking point, the RMB-dollar peg is now contributing to a dangerous overheating of China’s economy, with inflation reaching a three year high of 6.5%.  However, since June 2010, the RMB has appreciated only 6.5% (from 6.83 to 6.38 RMB/dollar).

Inflation is the number one concern of the regime in Beijing, fearing that the only thing that could turn people against them is high prices and luck of jobs.  The recent events of the Arab Spring, where inflation and a spike in food prices played a significant role in the peoples uprising, have further focuses Beijing’s attention on inflation.  If the Chinese leadership was ones concerned about the effect of inflation on the peoples mood, after seeing the role that inflation and unemployment played in the Arab Sprig they are now ten times concerned!

Conclusion –

The Chinese government pegs the RMB to the dollar so the powerful and wealthy export sector can continue selling in Europe and America (and thus employment stays high).  The government also maintains strict capital controls in order to prevent inflation from hurting the vast lower and middle class.  China’s currency has become a modern-day opium, and the authorities have been searching for a way out of their current economic model which relies on growth from an undervalued currency and capital controls.  Internationalizing the RMB offers one such exit.

Eventually, wider use of the RMB outside China could redefine the balance of power in global currency markets, as the rest of the world begins trading more RMB-based assets and settling its bills with China in RMB instead of the U.S. dollar.  Beijing gets to keep its currency system, while gaining economic leverage and diplomatic legitimacy around the world.

AUTHOR: Nasos Mihalakas
URL: http://mihalakas.wordpress.com and http://chinatrade.foreignpolicyblogs.com/
E-MAIL: nasos.mihalakas [at] gmail.com

How and why has China accumulated such enormous stocks of US securities? It is widely accepted among economists worldwide that China’s currency has been deliberately kept undervalued by the Chinese government for years. The rationale behind this decision is multi-faceted but put simply goes something like this. Keeping its currency low boosts the export sector of the Chinese economy and it is this sector that has been largely responsible for the dynamic growth of the Chinese economy over the past three decades. Basically, if 1 Dollar buys 7 Yuan, and a exporter sells a Chinese Shirt for 10 dollars – he pockets 70 yuan. But if one Dollar was worth only 5 Yuans, the exporter would only be able to pocket 50 yuans. Conversely by keeping its currency undervalued imports from other countries (i.e. US exports) are kept more expensive. This has naturally resulted in a massive trade surplus.

In a free currency market China’s surplus would indicate an excess demand for Yuan by foreign buyers of Chinese goods which would lead the Chinese currency to appreciate in value against for example the US $ until the surplus was eliminated. However because China manipulates its currency the government itself prints billions of Yuan in order to buy US dollars to boost international demand for the dollar and keep it artificially high. One way of doing this is to buy US treasuries since the products a) are considered safe investments and b) deliver a fixed rate of return (interest) to the Chinese government. In practice what this means is that for years the recycling of trillions of dollars by the Chinese government has effectively meant that poor Chinese peasants have been subsidizing overconsumption by the US government and US consumers!

It has also had inflationary consequences for the Chinese government contributing to a dangerous property bubble that potentially could be as catastrophic for the Chinese economy as the collapse of the US housing market in 2007-08. In 2010 construction accounted for 13 per cent of the Chinese economy, twice the level of the 1990s. Beijing is one of the most expensive real estate markets in the world relative to the average income of its population. Between 2006-2011 the price for an average apartment in Beijing in rose from $100,000 to $250,000, or put another way from the equivalent of 32 years disposable income for the average resident to 57 years. During this property boom China’s middle classes have bought record numbers of second homes, simply as speculative investments, and are reluctant to sell, or indeed rent. The opacity of the banking system means economists have no idea how much of the borrowing extended was easy credit, but already prices in Beijing and Shanghai have begun to fall.

2) China’s own debt mountain

The other great quandary is just how big is China’s own national debt. Again the problem is simply that economists cannot trust the official government figures because of the lack of transparency in national statistics in China and indeed the deliberate manipulation of those figures by the Communist government. Officially China’s budget deficit is a little over 3 per cent of GDP compared to the US figure of 12.3 per cent. Its official national debt is 10.3 trillion yuan which equals $1.5 trillion or 17-20% of its GDP (depending on estimates). America’s current $14 trillion national debt is equivalent to about 72 per cent of the national income. So no problem then?

“A paper tiger cannot bear close scrutiny”

Well not quite… following a report from China’s state auditor that local governments had run up 10.7 trillion yuan of debt Moody’s has calculated that the local government debt burden in China could be 3.5 trillion yuan ($500 bn) higher than previously estimated. Furthermore Beijing based research firm Dragonomics argues that because of local government debts and the lack of separation of the country’s Central Bank from the government the figure could be much higher. How much higher? Another 23 trillion higher! At this level China’s national debt would be equivalent to 89 per cent of GDP or in other words worse than the United States.

The problem is we simply don’t know how big China’s debt is, but increasingly analysts are starting to examine Chinese economic figures and statistics ever more closely. From ghost cities such as Ordos and Manzhouli, with the capacity for 5 million inhabitants but populations of just 150,000, to prices in some Shanghai and Beijing bars in excess of London or Paris the Chinese economy just doesn’t seem to make sense. As a result the bears are starting to gather and fund managers are getting more and more concerned that the Chinese economy might be built on a house of cards.

AUTHOR: Dr. Jason Abbott
URL: http://profjabbott.blogspot.com
E-MAIL: jason.abbott [at] louisville.edu

Not only have non-continental corporations (European, Chinese, Japanese, US, and others) invaded Africa to exploit its natural resources, everything from oil to precious metals and rich agricultural land, but it is now apparent that Europeans are literally stealing the fish stock from African waters. Considering that Africa has historically survived on subsistence agriculture, animal husbandry and subsistence fishing, any external intrusion to deprive Africa of its land and sea natural resources entails forcing the people into even lower living standards.

Overfishing in the Mediterranean Sea and tight enforcement has forced large corporate fishing companies using trawlers to invade Africa’s waters from the Ivory Coast to Guinea. In what amounts to a multi-billion dollar business, large European and Chinese vessels are capable of catching as much fish in a single day (15 million meals) as the small coastal African fishing boats in a year, thus depleting the fish stock and doing so illegally. African countries do not have the money to patrol the seas, but the US is the one that has blown the whistle on EU and China stealing Africa’s fish stock.

The gross losses owing to illegal fishing in the world are estimated at $24 billion, which entails 11-26 million tons of fish, or 10-20% of the world’s stock. The majority of illegal fishing takes place in waters of Third World countries, especially in West Africa where fish catches are 40 percent higher than reported.

Besides stealing fish, there are reports that the EU has been using African waters to dump various toxic substances. And the situation is not much better in East Africa, and it is also the case that besides EU and China, Russia, Japan and other countries have been involved in illegal fishing in Africa that is deemed the worst maritime violation in the world.

The irony of illegal fishing in Africa, is that the EU subsidizes the corporations, mostly French ans Spanish, carrying out.The additional irony of all this is that European Parliament has decided that fishing in Western Saharan waters by vessels flying European flags is illegal. Not only does EU and Chinese illegal fishing violate international agreements, but it is detrimental to the natural balance of seas and oceans. Environmental groups have brought this issue to world headlines, but mainstream media will not give it the attention it merits. Moreover, many of the vessels use cheap labor from Third World countries, including child labor.

The ultimate irony in the chronic stealing of Africa’s natural resources is that the EU and US are constantly exercised about piracy in East Africa, while the EU and China subsidize fishing companies to engage in fishing piracy in African waters. This is not to excuse piracy, but illegal fishing is a far more serious threat to the people of Africa and the ecosystem than Somali pirates. After all, piracy started because legal activities such as fishing were undercut by foreign illegal activities that advanced countries carried out in Africa.

AUTHOR: Jon Kofas
URL: http://jonkofas.blogspot.com
E-MAIL: jonkofas [at] yahoo.com