Chinese Mining in the DRC: From Sicomines to Global Cobalt Monopoly

Halim Nazar, Research Intern, ICS

Image: The Tenke-Fungurume Mine in the DRC
Source: Reuters

The Democratic Republic of Congo (DRC) embodies the paradox of plenty. Despite having an untapped resource wealth worth an estimated $24 trillion, the country remains one of the poorest in the region and needs urgent reform. Sino-Congolese relations can be traced back to the mid-1960s when the Chinese Communist Party (CCP) supported the Congolese struggle against “American imperialism” and capitalism, but it was only after 2008 infrastructure-for-minerals deal that Chinese influence became more perceptible in the DRC. Chinese mining companies have been focusing on the DRC not only because it has high-grade mineral deposits but also because competition from other transnational companies is minimal as they are wary about operating in the DRC given its tinted track record, especially when it comes to the protection of human and labour rights, and its frequent episodes of social unrest.

Almost 70 percent of the Congolese mining portfolio is under Chinese control, and so the industry is affected whenever China is affected. Chinese investors like Minerals and Metals Group (MMG) and China Molybdenum’s Tenke Fugurume are prominent in the cobalt and copper-rich Lualaba and Haut Katanga areas along with global traders like Trafigura and Glencore, and Canada’s Ivanhoe Mines and Barrick Gold Corporation, but artisanal mining still accounts for 20%-40% of the cobalt production. Nevertheless, the success of their recent forays, as well as the predicted increase in demand for precious metals, particularly cobalt, have motivated Chinese companies to bolster mining operations and increase investments and lobby their government to renew negotiations for greater mining rights.

China strengthened its presence in the DRC with the infrastructure-for-minerals deal that provided substantial mining rights in exchange for developing the DRC’s war-torn infrastructure. In late 2007, China announced a $5 billion loan to the DRC for infrastructure development with substantial investments to follow and a joint venture was set up to execute the terms of the agreement. The joint venture was named Sino Congolaise des Mines (Sicomines) and was established with a Chinese majority shareholding of 68%. The initial Chinese investments were to be evenly divided between mining projects and the development of roads, railways, schools, hospitals and dams. China has described the deal as a mutually beneficial relationship, which is absent of any political conditionality wherein China would gain access to critical minerals essential for its energy products, and the DRC would gain from the development of its shattered infrastructure and the growth of its productive capacity. Over 10 years since its inception, the so-called “deal of the century” has improved the DRC’s macroeconomic performance while also bolstering infrastructure developments. Yet, the deal still has a lot to live up to and will depend on the DRC’s ability to consolidate the benefits and ensuring that promises are kept. Moreover, since the Sicomines deal are exempt from taxes until infrastructure and mining loans are fully repaid, the DRC won’t receive any substantial income from the agreement for the foreseeable future.

Despite a rocky start and reduction in scale after two sets of renegotiations as funding from China Eximbank became uncertain, mining operations finally began in 2014. Under the agreement, China would receive 10 million mt of copper and 600,000 mt of cobalt worth approximately $50 billion over 25 years. In 2016, Congolese sources estimated that $1.2 billion had been spent on infrastructure and mining credits combined. Mining activities smoothly progressed, and Congolese cobalt production crossed 100,000 mt/year in 2018 and copper production went above a million mt/year until the global COVID pandemic when cobalt mining rates slightly went below 100,000 mt/year in 2020. Resource-for-Infrastructure (RFI) deals like this all over Africa have helped China foster strong relations with several countries and consolidate its position as a great power. China draws support and exerts its influence on these nations in matters of dire importance at the UN and while staking the claim of “One China”, which is the People’s Republic of China (PRC) and calls for the isolation of Taiwan (Republic of China). The Sicomines agreement has been widely criticized as it is perceived to unfairly benefit the Chinese. The IMF publicly criticized the DRC for taking on too much debt.

Cobalt has become an intensively sought-after mineral as the blue element is crucial for lithium-ion batteries. Given the surge in demand for electric vehicles, Cobalt demand is predicted to grow fourfold by 2030. With reserves in the ballpark of 3.5 million mt, the DRC hosts over 51% of the global cobalt reserves, and it is estimated that in 2020, the DRC produced about 90,000-95,000 mt of cobalt representing nearly 70 percent of the total cobalt feedstock production globally. Several Chinese companies like Chengtun Mining, Wanbao and CNMC have bolstered their mining operations and have expressed their desire to acquire more cobalt mines. But the new Congolese president Felix Tshisekedi has been a vocal critic of the current deal and has called for renegotiations in the spirit of drafting win-win agreements. The Sicomines deal has been mired with secrecy and controversy from the very beginning, with even the Congolese Mines Minister being denied crucial information regarding the agreement. Corruption runs rampant in the DRC as a fifth of the country’s mining revenues – $750 million – was lost to corruption between 2013 and 2015, according to The Global Witness.

China has shown signs that it is ready to strengthen this strategic partnership and recently cancelled the DRC’s interest-free loans worth an estimated $28 million and promised to fund infrastructure projects and also give $17 million in other financial support as the Central African nation joined the Belt and Road Initiative (BRI) and to also help the country overcome the impact of Covid-19. China’s decision to write off debts and welcome the country as a new partner for the BRI would further drive cooperation between the two countries and incentivize more Chinese miners to invest further into the Congolese copper and cobalt industry, increasing their stake in local mines. Essentially improving access to proven cobalt and copper reserves worth billions by waiving off a paltry $28 million loan.

Cobalt is crucial for battery technologies and to facilitate the global transition to a fossil-free future. In the current global scramble to secure forward supplies and escape the eccentricities of the spot market, China holds all the cards. Control over crucial raw materials like cobalt, along with state-of-the-art processing and manufacturing capacity, will determine the balance of industrial power, particularly in automotive and energy storage. Presently, China is the frontrunner, and it seems likely to retain this control for at least the medium-term.

Zapad/Interaction-2021: A New Milestone in China-Russia Joint Military Exercises

R. M. V Pavan Raghavendra, Research Intern, ICS

Source: Ministry of National Defence of the People’s Republic of China

The People’s Republic of China (PRC) and the Russian Federation recently conducted the ‘West/Interaction-2021’ joint military Exercise (hereinafter called Exercise) from 9 to 13 August 2021.

Titled 西部·联合-2021 (xibu/lianhe-2021) in Chinese, and “Запад/Взаимодействие-2021” (Zapad/Vzaimodeystviye-2021) in Russian, the Exercise was unprecedented in terms of scope, level of participation by both sides and its conduct.

The theme of the Exercise was ‘safeguarding regional security and stability’ and it intended to ‘verify and improve joint reconnaissance, early warning, and electronic information attack and joint attack and elimination’. While Chinese media claimed that more than 10,000 troops from the PLA’s Western Theatre Command (WTC) and Russia’s Eastern Military District (EMD) participated in the Exercise, Janes Defence News reported 13,000 troops.

Russian troops operated PLA weapons and equipment during the Exercise, of which more than 80 per cent were modern, including a newly unveiled Type 95 ‘4-25’ integrated gun-missile air-defence system. The PLA’s J-20 fighters and Y-20 transport aircraft, and Russian Su-30 also participated in the Exercise.

It is interesting to consider the selection of troops participating in the Exercise from both sides and the location before looking at the conduct.

The WTC comprises 76 and 77 Group Armies and is responsible for China’s borders with India, South and Central Asia, and ‘counterterrorism’ in Xinjiang and Tibet. Tibet and Xinjiang Military districts (MD) located within WTC have sizeable troops and are directly under the CMC/PLA Ground Forces HQ.

As observed from CCTV 7 coverage, PLA troops* participating in the Exercise were drawn from the 181 Combined Arms Brigade, Artillery Brigade, and Special Operations Brigade of the WTC’s 77 Group Army (GA), 84 Army Aviation Brigade of Xinjiang MD, and the Airborne Corps. The choice of 77 GA over 76 GA is curious as it is based in Sichuan and is oriented to South West along the India-China Line of Actual Control (LAC) in Tibet. The 76 GA is based in Qinghai, Ningxia and Gansu, and is oriented towards the North West, i.e., the Western sector of the LAC in Xinjiang and South and Central Asia.

EMD‘s Area of Responsibility covers Eastern Siberia up to the Pacific Ocean and includes Russia’s land borders with China and Mongolia. Russian troops participating included a motorised rifle unit located in the Trans-Baikal region, operational-tactical aviation units, and a combined army aviation detachment.

One of the two main Combined Arms Tactical Training Bases (CATTBs) in WTC, the Qingtongxia (青铜峡) CATTB, is located at the base of Helan mountain ranges at an altitude of 2000m. The terrain is semi-desert with an arid climate. The base contains an urban warfare training village, electromagnetic environment simulation, monitoring and control systems, and a 1:500 scale model of the Aksai Chin.

Conduct

Before the actual Exercise, both sides conducted extensive preparations, which included familiarisation and handling of PLA weapons and equipment followed by live firing. The joint tactical training which followed included long-range precision fire by artillery and airdropping of troops and Infantry Combat Vehicles (ICV).

The PLA established a three-tiered joint bilingual (Russian-Chinese) joint command centre to ensure smooth coordination between PLA personnel and their Russian counterparts at all levels. China’s Central Military Commission (CMC) set up a directing department under General Li Zuocheng, member of the CMC and Chief of the Joint Staff Department, while Lieutenant Generals Liu Xiaowu and Mikhail Nosulev, Deputy Theatre Commanders of WTC and EMD respectively, headed the Joint Command and were involved in joint planning.

An extensive communication network involving ten communication methods and multiple networking modes with information terminals was established to ensure real-time information sharing and passing of instructions between the Joint Command and troops.

The main Exercise was conducted in four stages involving joint confrontation, destruction of enemy defences, three-dimensional attack and pursuit and annihilation, involving extensive ground-air coordination.

Under cover of the J-20 and other fighter aircraft, H-6 bombers and JH-7As fighter bombers carried out the destruction of enemy defences in depth while artillery systems including multiple rocket systems and 155mm gun howitzers engaged enemy targets firing hundreds of tons of ammunition within forty minutes.

Y-20 and Y-9 aircraft were used to paradrop Airborne troops along with ZBL-03 to carry out long-range deep assaults to seize enemy defences and gaining battlefield initiative, while special forces along with Lynx were inserted using Mi-17 helicopters and escorted by Z-20 Attack Helicopters. The extensive use of drones for reconnaissance and surveillance, swarm attacks on ‘enemy’ positions, sniping of enemy targets and post-strike damage assessment was another unique feature of the exercise, while ground-based multi-layered air defences intercepted and destroyed enemy drones.

The Exercise’s Closing Ceremony was attended by the Defence Ministers of both countries who agreed to ‘enhance strategic communication, deepening cooperation in areas such as counterterrorism and working together to safeguard regional stability’.

The China-Russia Military Partnership: The Past and the Future

The PRC and erstwhile-USSR had a history of military cooperation from the pre-Liberation era till the deterioration of Sino-Soviet relations in the late-1950s. During the PRC’s initial years, much of PLA doctrine, organisation and equipment were borrowed from the Soviet model.

The current round of military cooperation commenced after the Sino-Russian boundary dispute was settled in 2005. Since then, the exercises have varied in scale and level of participation. These include the Peace Mission 2005 exercise and the Vostok-2018, Tsentr-2019, and Kavkaz-2020 drills.

At the military level, the Exercise is unprecedented in four aspects; first, is the level of jointness exhibited by the PLA in combining airborne and heliborne operations with ground operations in what the PLA claimed as a ‘three-dimensional’ operation. PLA sources also claimed that the vertical separation between lowest flying aircraft and the vertex of artillery shell was less than 200 metres, reflecting a high degree of coordination between the air and ground elements; second, there was near equal participation by both sides; third, unlike in the past, where both sides operated as distinct entities under an overall command, Russian troops were integrated into mixed formations; and lastly, PLA participated with its latest equipment including J-20 fighters and Electronic Warfare equipment.

The deployment of J-20 fighters, H-6K bombers, airborne and heliborne exercises and the level of degradation sought to be achieved also suggest that the Exercise was aimed at ‘regional stability’ rather than ‘counterterrorism’. The heightened interoperability between Russian armed forces and the PLA will definitely boost their capability to respond to regional threats.

The Exercise thus provides valuable experience to both sides and a foundational tool to institutionalise the bilateral defence relationship without formally entering into a military alliance.

On the diplomatic level, both Beijing and Moscow have claimed that the joint exercises are not targeted against third parties. The geopolitical signalling and intent behind the joint exercises, however, seems to involve multiple dimensions.

Firstly, the drills are being conducted in the context of increasing Western presence in China’s neighbourhood with the Quad deepening cooperation in the Indo-Pacific and Freedom of Navigation Operations in the South China Sea. Relations between Russia and the West have also sunk to a new low after the former’s annexation of Crimea. The deepening of China-Russia military ties indicates a strategic posturing on the part of both sides to contest the West.

Second, the withdrawal of US troops from Afghanistan has resulted in the Taliban taking control over the country, which threatens regional and domestic stability in neighbouring countries. Thus ‘counterterrorism’ is amongst the main agendas of the Exercise. Russia has decided to provide weapons, equipment, and training to Tajikistan’s armed forces.

Finally, the drills serve to signal India about the level of PLA’s operational preparedness as it comes against the backdrop of the ongoing crisis in Eastern Ladakh. On the Russian side, the Exercise signals Russia’s concern about India’s relations with the US despite India’s reassurance that its relations with the US were not at the expense of its relations with Russia. An interesting aspect was that the Joint India-Russia Exercise INDRA-2021, aimed at planning and conducting counterterrorism drills under UN mandate, was held at Volgograd around the same time. The deepening of the military partnership between Russia and China is thus of concern to India. * Special thanks to KK Venkatraman, Research Fellow at Institute of Chinese Studies, Delhi, for drawing attention to this.

China’s CBDC: Cross-border Prospects and Challenges

Raj Gupta, Research Intern, ICS

Image: Speculation is growing that the digital yuan will be launched soon.
Source: Shutterstock

The Central Bank Digital Currency (CBDC) race has begun to pick up pace and almost all the countries are getting into it. Around 86% of the world’s central banks are actively researching the potential of CBDC, which makes it evident that countries all over the world view it as an important development in the monetary domain which they need to be up to speed with. As of now, the Bahamas is the first as well as the only country to have launched a CBDC for nationwide use. Whereas among the major economies, China is at the forefront. China’s CBDC journey started early in 2016 when the Digital Currency Research Institute, the first official institution in the world engaging in research and development of digital currency was established.Early identification of potential, active research of the prospects of CBDC as well as successive pilot trials in major cities brought China to the forefront.

The official name of China’s CBDC is Digital Currency Electronic payment (DCEP), which is commonly known as e-yuan or digital yuan. During the pilot trials, it has so far received a positive response from the public, mostly because of the red packets containing DCEP which was distributed to the public on a lottery basis. It helped create the much-needed hype among the masses and kickstart China’s mission-CBDC. Platforms such as JD.com, Meituan and Didi Chuxing were roped in to participate in such trials as well in order to test the integration of CBDC into different apps. Since its first pilot trial to the integration into apps, the journey has been gradual and smooth. With the amount of control that the Chinese government yields over its institutions, integrating DCEP won’t be a challenge domestically. Getting people to use it instead of their WeChat or Alipay wallets can be a challenge but incentives similar to the red packets at early stages can help build that user base. Recent clampdown on internet giants in China might also soften the resistance from Tencent and Alibaba and make space for the digital yuan.

China also has its eyes fixed on the Beijing Winter Olympics 2022 to showcase its first major use case on a large scale and this may also serve as a gateway to wider use of CBDC in the country. Although the PBOC officials claim that they are looking more into the domestic use of e-yuan, many initiatives reflect otherwise.

The first is the Multiple CBDC (m-CBDC) Bridge which the PBOC joined recently. It aims to develop a prototype for cross-border payments with the Central Bank of the United Arab Emirates, BIS Innovation Hub, the Hong Kong Monetary Authority, and the Bank of Thailand.The main objective is to study the feasibility of cross-border payments using CBDCs and distributed ledger technology. Being the first-of-its-kind initiative, this has huge potential to solve issues related to cross-border fund transfers. Given the scale and timing, the results of the Proof-of-concept work can perhaps contribute to setting international standards around CBDCs.

The second is, Finance Gateway Information Services Co, a joint venture established by China National Clearing Centre of the PBOC and the SWIFT, which aims to establish and operate local network of financial messaging services to process cross-border Yuan payments through China’s own settlement system. Both, m-CBDC bridge and Finance Gateway Information Services Co. aim to challenge and change the current USD-dominated payments system in the coming future.

There is no doubt that both these initiatives aim to provide solutions and develop the current cross border payment infrastructure but these will also make the currently followed arrangement of Society for Worldwide Interbank Financial Telecommunication (SWIFT) less relevant. Currently, international payments are facilitated by the SWIFT. The dominant role played by the USD in SWIFT’s payment system is arguably one of the major reasons for the USD’s status as a global reserve currency. China is aiming to change that by trying to build a parallel system. And when that parallel system gets up and running, internationalization of the RMB could get easier by incorporating DCEP into various forms of economic activity in which it participates through multilateral and bilateral arrangements.

There are many avenues through which China would want its CBDC to flow and gain a grip over cross-border payments. From providing financial aid to BRI countries to waiving off transaction fees on repayment of loans, there are a plethora of options China has because of its trade links that make it the largest trading nation in the world. China’s growing integration with the developing world can help China rally countries behind it to follow Chinese standards of CBDC.

DCEP’s success internationally can tend to affect the dominance enjoyed by USD in global payments. The brunt inflicted by U.S sanctions is largely because of the USD’s dominance in international payments architecture. Hence, a parallel network system based on m-CBDC holds the potential to soften that brunt of U.S sanction policies which have increasingly been used against Chinese entities and individuals. Even Hong Kong’s chief executive Carie Lam was left with a pile of cash because banks did not want to deposit her money and expose themselves to the risk of U.S sanctions. This is an example of how strong and effective the U.S sanctions are against companies and individuals. If China can circumvent the sanctions through its system, it is likely to reduce the U.S hard power and will allow China to act with much more flexibility without having to worry about the aftermath of U.S sanctions. It can have far-reaching effects on how China deals with the nations facing sanctions by the U.S.

But all of this won’t be easy for China to accomplish. Cross-border usage of DCEP will likely face headwinds because the U.S and its allies may see the increasing acceptability of China’s DCEP as against their interests. On June 5, a communique issued by the G7 iterated the benefits and potential of a CBDC and underlined its commitments towards transparency and rule of law. It further stated that the G7 will work together towards common principles and will publish conclusions later this year. This communique reflects that the U.S and its western allies have perhaps woken up to the potential threat of e-yuan and are now pooling efforts to study its implications and ensure appropriate frameworks are in place.

There are issues such as interoperability among CBDCs of different countries which can prove to impede the goal of easier cross-border transactions. Another major issue is the lack of digital infrastructure in other countries to transact in digital currencies even if interoperability is achieved. But the single biggest impediment could be the privacy issues related to the DCEP. DCEP follows what has been termed as ‘Controllable Anonymity’ which allows the People’s Bank of China (PBOC) to have complete oversight of the data collected from its CBDC. The idea of data collection by a foreign government won’t go down well with democratic nations that have strict privacy laws. Besides, it will likely lead to an increase in scepticism and reluctance in foreign entities. There are rapid developments taking place in the CBDC domain with different countries moving up the ladder. DCEP, clubbed with China’s trade links, growing influence and strategic long-term thinking has the potential to counter Dollar weaponization but that will be a very long and difficult road ahead. China is hoping that someday e-yuan can play a key role in supplanting the U.S Dollar. But for that, there must be a system in place that can be used to gradually increase the tempo when needed. With the consistent pace at which China is developing and testing its CBDC, that system will likely be in place in the near future.

Cross-border e-commerce in China: Past, Present & Future

Raj Trikkha, Research Intern, ICS

Image: CBE in China started to grow remarkably from 2013 due to the vast acceptance and usage of smartphones
Source: MarketingFuture

The rise in globalization and internationalization of trade has paved the way for e-commerce to expand from within nations to across the globe. This type of e-commerce is called cross-border e-commerce (CBE), wherein, products or services are sold to buyers overseas through e-commerce websites. The extent of globalization is such that the annual growth rate of CBE, which is 17%, has surpassed the growth rate of overall B2C e-commerce, which stands at 12%

Cross-border e-commerce in China began in 1998 with a few foreign trading companies tapping into the latest internet technology to carry out their sale activities. The year 1999 marked the birth of the company which changed the face of Chinese e-commerce. Alibaba.com, established by Jack Ma started out as a B2B portal that facilitated between local factories and overseas companies. In the mid-2000s, as more Chinese people went to foreign nations for work or studies, a new profession emerged, called DaiGou (代购). DaiGou refers to transactions where Chinese nationals who reside abroad sell foreign products to people in China with a little markup. They used various platforms like Taobao.com and WeChat. DaiGous for a long time filled the demand gap and still continue to conduct purchases online.

Since these types of transactions started to gain popularity and demand, companies like YMatou.com entered this market in 2009. CBE in China started to grow remarkably from 2013. This happened due to the vast acceptance and usage of smartphones. This made it easier for companies to reach consumers and for the consumers to avail their services. Between 2014 and 2015, over 5000 CBE startups were established in China involving Kaola.com and Vip.com. Today, the biggest e-commerce market in the world, China, has $34 billion worth of purchases in the CBE market (as of 2020). Though, in comparison with the U.S. (34 percent) and U.K. (45 percent), it consists of a mere 1.53 percent of its total e-commerce sales. This implies that there is still a lot of potential for the CBE market to grow in China. 

Image: Today, the biggest e-commerce market in the world, China, has $34 billion worth of purchases in the CBE market
Source: Practical E-Commerce

Although the market was growing and becoming an essential part of the technology-driven economy, the sustainable development of the industry required the supervision of laws and support of policies. Thus, starting from 2007, various government agencies released policies and recommendations to promote CBE in China. Subsequently, in 2014, China through the General Administration of Customs issued a new set of regulations pertaining to CBE. This was the first time that China officially accepted the CBE model. This opened up many opportunities for foreign firms wanting to sell their goods in China. As a result of increasing online sales by retailers, recent modifications in the CBE regulations were introduced on 1 January, 2019, to make them more robust. 

These schemes eased the process to a huge extent. Among many things, they lowered down the labour and logistics costs, streamlined the product return process, and announced the establishment of 46 additional cross-border e-commerce comprehensive pilot zones. Streamlining the return process enabled companies to ship goods in bulk to Chinese warehouses even before selling them to the customers, while more pilot zones meant that companies will have more areas where favourable tax rates are levied. 

Image: The General Administration of Customs announced the establishment of 46 additional cross-border e-commerce comprehensive pilot zones
Source: China-Briefing

The new policies have had a positive impact on the industry. The first three quarters of 2020, show an increase in CBE retail imports by more than 17 percent year-on-year, according to customs data. Cross-border e-commerce in China is growing at a fast pace. Even during the pandemic era, the CBE sector in China brought 31.1 percent of its foreign trade. CBE has become an essential aspect of China’s foreign trade. In 2020, over 10,000 traditional foreign firms went online for the first time. Many experts believe that CBE will continue to thrust the foreign trade in China as the market is still less-tapped and the policy incentives are yet to be yielded.

Ecological Civilisation/ Shengtai Wenming: Towards a New Wave of Resilience Thinking?

Annesha Bhattacharjee, Research Intern, ICS

China’s resilience has been typically observed from a civilizational and culturist perspective, so far. Resilience as an organized indigenous systemic concept has yet to be defined by China from an ecological slant. Being an ancient civilisation, the idea of nature was restricted to romantic and spiritual ideation – in literature, philosophy and art, as found in the recorded history of cultural resilience. Often invested in learning the ways of nature, Tao(天) is the dreaded god that cradles human life.  China jumped from being an agricultural civilisation into the Anthropocene, spearheaded by industrial revolution. After learning the ways to ‘exploit nature’, it went on to narrowly focus on accumulating ‘economic resilience’. China, by then had realized that it had reaped economic well-being at the cost of nature’s ‘collateral’ devastation leading to continuous events of natural calamities which became evident with the passage of time. As a result of this, modern China initiates a vision of constructing a civilization that promotes ‘harmony’ between ‘man’ and ‘nature’.

“弹性”(Tánxìng) or elasticity, “韧性”(Rènxìng) or toughness, or “恢复力”(Huīfù lì) or the power to recover. These are the direct translations for the word ’resilience’ in Chinese which however lacks any conceptual rendition or indigenous scientific framing, unlike the West. The president of China, Xi Jinping, earlier this year in the 2021 Earth Summit, reiterated the vision of Shengtai Wenming or Ecological civilisation. China’s ‘economic resilience’ during the pandemic has led to several scholarly appraisals. In 2017, the withdrawal of the US from the Paris Agreement increased China’s willingness to lead global environmental governance. Being one of the biggest polluters in a climate hostile world and an economic power has put China in a tight space for international scrutiny. Thus, achieving ‘ecological resilience’ might be the next big thing for China to prevent any major risk of regime shift that will hurt the developmental state of the nation.

The conceptualisation of resilience in IR discourse began in the West during the cold war period, emerging in various social and natural science fields. As a consequence of rising environmentalism after industrial revolution. Ecological resilience, got popularly defined at the time by ecologists such as C.S. Holling as, “the time required for an ecosystem to return to an equilibrium or steady-state following a perturbation.” Around 1980s, environmentalists in Soviet Union were the first to propose the term ‘ecological civilization’ which was later incorporated by China’s CPC party. Scholars in the West were conceptualising resilience around the same time. The 1972, the Stockholm conference resulted in political effectiveness against environmental issues in China. China’s evolution of political ecology has been marked since then. Repercussions of Deng Xiaoping’s reforms and economic liberalism was already showing signs of enviornmental issues. Leading Hu Jintao’s regime, to push forth the idea of ‘Beautiful China’, specifically stressing on the ecological degradation factor irrespective of significant industrial growth in the sustainable sector. This unfolded the imbalanced socio-ecological systems that was systematically observed after President Zemin’s leadership who maneuvered China into becoming a major global producer and user of clean and renewable energy technology. China, a developing nation has largely been a reform and transformation-based society than just being induced by any strong ideological standards. Especially after the cultural revolution in the post-Mao phase where the focus was to ‘grow’ in the neocolonialist world, curating a strong labor force with little to no tolerance for traditionalism. Hence, the ‘laws of nature’ that were once preserved in traditional Chinese literature were significantly discouraged until then. As a rectification, Xi Jinping initiated the party’s intention to build a ‘community life’ together that allows man and nature to co-exist based on the political foundation of modern socialism with a brush of Chinese characteristics. This had been surfacing reluctantly in the party’s political agenda for the past two decades.

Remembering as David Easton once quoted that ‘scientism’ is good, but the ‘mad craze’ for the same is bad that should be avoided. In the past four decades, China had similar bout of lessons  from impelling an intensive industry built on the foundations of capitalism and growth-based sustainability. Thus, choking the boundaries of the biosphere and opening alternatives for energy-based industries. The Western  resilience system has been ‘empirically’ based on typical rational consciousness and minimal ‘value’ inclusiveness. China recognized it’s failure to balance the ecological sphere along with its economic growth despite taking the best developmental lessons from the West. Coercing them to think about creating a balance between being less ‘yang’ and more ‘yin’ until a state of equilibrium is reached, referring to an anti-waste-based society caused by intense globalisation. The Chinese scholars thus, argues that the situation can be altered by imbibing a socialist modern culture coupled with Chinese characteristics while acknowledging the fall of communism in Soviet Russia. China has been striving to defend its integration of a constantly transforming domestic socio-ecological system against the West-inspired, ‘universalism’. Their value system is predominantly based on Confusion philosophy. It promotes the idea of ‘relational self’ in a way where one does not limit oneself to evolve just as an individual entity but transcend that very evolving-self to the extended  virtues of the community. “What you do not wish for yourself, do not do to others?”, quoted Confucius. Only then one can achieve a harmonious community life together. Thus, trying to align with the traits of socialism by building communal responsibility along with the self.  This ideation of China’s ‘harmony’ towards establishing a political nation based on eco-socialism certainly signals a new wave of resilience thinking that diverges from the existing trends of liberal environmentalism governmentality.

Internationally many critics are however, skeptical of how China is likely to achieve the ambitious dream of stable economic growth as well as an Eco-civilization, simultaneously. As they argue that continuous growth is detrimental to the ecological crisis.  To which, Xi remains hopeful especially after observing its ‘triumphant’ pandemic situation in comparison to the rest of the world, further encouraging growth over 6%, in the post-pandemic phase. Green development (one of Xi’s 6 developmental policies), is likely to induce a possible alternative including green economic reform that shall be introduced along with several other structural changes to suit the 2050 vision of ‘ecological civilization’. Chinese scholars, meanwhile are speculating about the possible challenges the government will have to tackle with the emergence of the upcoming reforms.  Uncertain outcomes might spark social contestations and disruptions – to which, however, the government prefers authority and not democracy.  Successive transformation in the past couple of decades has been slowed down and stalled due to various challenges of such kind. The risks looming around in the post pandemic world will thwart China’s growth in the long term if it does not adapt to the situation and take control while it can. Especially as the industries experience a paradigm shift. Irrespective of Xi’s ability to achieve the ambitious political agenda, it will be refreshing to see how China brings about a new holistic system of green transformation that might stimulate a lot of other developing countries in the future while adhering to the international and domestic standards and stresses.

Did Lavrov-Blinken tête-à-tête in Reykjavik Stir the Pot between Beijing and Moscow?

Hemant Adlakha, Associate Professor, Jawaharlal Nehru University, and Honorary Fellow, Institute of Chinese Studies

Image: Lavrov-Blinken summit: A test of US-Russia ties ahead
Source: gulftoday.ae

For more than seven decades Russia, China and Iran have successfully denied being reduced to becoming the US vassalage. During the US-Soviet Union Cold War years, the geostrategic coming together of Washington and Beijing, isolated and weakened Moscow. However, under the prevailing new Cold War conditions the US must induct the “barbarians” into neoliberal global financialization orbit. Or else, the recent Blinken-Lavrov smiling images from Reykjavik may just end up as only good optics and to Beijing’s great relief. 

On 20 May, the Moscow Times (MT) website carried one photograph and one news headline, both must have caused huge anxiety if not concern among Beijing’s foreign ministry mandarins responsible for China-Russia relations. While the headline read as “US, Russia seek to ease tensions in first meeting under Biden”, the accompanying picture of the two countries’ foreign minister was perhaps the best ‘smiling’ image since the Obama days, to say the least. The MT further quoted the Russian foreign minister saying, perhaps causing more discomfort in Beijing, that he was ready to “plough through the rubble left behind by previous US administration.” The next day, Russia Today television news website rt.com in an op-ed commented: “Despite recent rock-bottom relations and growing tensions, Russia is willing to end hostilities and strive for better relations with the West, its top diplomat Lavrov announced after meeting with his US counterpart.”

Strangely, or perhaps expectedly, China’s usually “bellicose” foreign ministry spokespersons maintained an uncharacteristic low tone on the issue. Likewise, Beijing’s generally proactive strategic and security affairs commentariat too was found wanting and hiding. However, it is quite obvious to anyone who closely follows Beijing’s statements and actions, what is concealed behind the “indifferent” pretense is “disbelief” and “worries” caused by the sudden Biden administration “expediency” to “bear hug” Russia and Putin. Did China’s IR experts and specialists on US-Russia relations err by failing to gauge Biden’s initiative to reset US-Russia ties? Perhaps yes. Or is it that Beijing took for granted that Biden’s “America is back” diplomacy is only aimed at winning back the US allies? Maybe true.

Biden alone cannot stop China

Last Friday, China’s widely read and influential online platform specializing in international politics and diplomacy, huayuzhiku.com carried an exclusive commentary entitled “US hand-shake with Russia aimed at Beijing.” The commentary observed: “Under Trump presidency, American diplomacy was regarded by the world as ‘unreliable’ and ‘unpredictable.’ Since the change of guard in the White House this January, Biden administration has been vigorously amending Trumpian foreign policy by trying to win over traditional allies and declared ‘America is back’. In its treatment of Russia, it seems Biden is continuing to endure the previous administration’s legacy. It is not difficult for anyone to see the Trumpian ghost guiding the White House.” (Emphasis added)

It is indeed puzzling as a quick Google search on the internet did not show up in the top ten pages a single news story on the two foreign ministers’ meeting from the English language media outlets in the PRC. Every other Asian news channel or media website reported the important event but not the Xinhua or CGTN or China Daily or not even the Global Times. Though not surprisingly, a week prior to the Reykjavik tête-à-tête, China’s English and Mandarin language media extensively reported the scheduled meeting along with editorial comments. On May 13, China’s official Xinhua news agency carried a report headlined “Lavrov, Blinken discuss upcoming Russia-US summit over phone.” The next day, global.chinadaily.com.cn published a similar report filed by its Moscow correspondent highlighting that the proposed foreign minister’s meeting was being held “amid the biggest crisis in ties between Russia and the United States in years.” 

Chinese Media underreports Reykjavik Meet

On the other hand, the semi-official media in China, especially in Chinese and English languages, has published op-ed articles and commentaries following the Reykjavik meeting between Lavrov and Blinken. The English language Shanghai Daily was the first to report the Lavrov-Blinken meeting held at the famous Harpa Concert Hall in the Iceland capital. The newspaper showed conspicuous urgency and without waiting for China’s official media went ahead and relied on foreign news agencies’ reports. But in contrast with the positive sounding Russian and global media headlines, Shanghai Daily was quite circumspect in its title: “Lavrov, Blinken spar politely in their first face-to-face meeting.”   

Within twenty-four hours of the meeting, an opinion piece on the haiwainet.cn website, which essentially caters to the Mandarin speakers in North America and is an important arm of the party’s official newspaper Renmin Ribao or People’s Daily, described the meeting as the result of “temptation to meet” on both sides.  Lavrov-Blinken met in order to “confirm to each other to carry on with their mutual friction short of a full-scale fighting in the face of hosts of hostilities and contradictions,” the website stated. The website further cited Li Yonghui, a senior researcher with the Centre for Russian, Eastern Europe and Eurasian Studies of Beijing-based China Academy of Social Sciences as saying “Given many deep-rooted contradictions and complexities between the two countries, there is not much room for a turnaround in the Russia-US relations.”

Interestingly, while most Chinese commentaries focused on highlighting the outstanding issues between the two countries, there have been few and far between writings so far which look at the implications for China should the Reykjavik meeting become a thaw in the frozen ties between Washington and Moscow. A key element absent in the Chinese op-ed columns so far has been “no reaction” on the timing and on the venue for the Reykjavik diplomatic rendezvous between the two foreign ministers. As according to Nikolas K. Gvosdev, a senior fellow at the Foreign Policy Research Institute, “the Arctic is one of the few remaining issues where Washington and Moscow do tend collaborate and share interest in beating back any efforts by states like China to insist that a category of ‘near-Arctic’ states should also have a say in the regional infrastructure of governance.” 

Biden Eager to Meet Putin: Deal within Deal

Now, as already mentioned, since the state-controlled mainstream media in China has been “censored” from commenting on the Reykjavik meet, a few select party-backed “leftist” and the state-sponsored foreign policy online platforms have more than revealed the mood in Beijing on the possible implications of the two foreign ministers’ in-person elbow bumping each other. Based on the commentaries, the early reactions in Beijing may be broadly summed up as follows: first, temporary breathing space. Some commentators see the sudden US move to “kiss and make up” with Moscow as a temporary step in order to 铺垫 Pūdiàn (literally meaning to “make bed”) for Biden-Putin meeting scheduled to be held in Geneva next month.

The second reason is the quick short-term diplomatic gain. Following the confirmation last Monday both in Washington and in Moscow that the maiden in-person Biden-Putin summit will be held during Biden’s first foreign trip to Europe as president, several opinion write ups referred back to the Biden-Putin first post-inauguration telephone call held in mid-April, in which Biden reportedly expressed his desire for an early meeting with the Russian counterpart. It is pertinent to recall that the Chinese commentators did not miss to notice that Biden had proposed to meet with Putin amid heavy Russian military building up at the Ukrainian border. At least one Chinese scholar also pointed out Biden was in tearing hurry to meet Putin and “hinted that resolution of the continuing differences between the two military superpowers is not a prerequisite for the summit.”

Third, last but not least, deal within deal. An unsigned commentary on the Xinhua news agency blog last Wednesday, entitled “Shocking how for petty gains Biden can’t wait meeting Putin” claimed to have deconstructed the raison d’être for why Biden is eager to meet Putin. Referring to the secretary of state Antony Blinken’s 19 May announcement of lifting of sanctions on the companies involved in the Nord Stream 2 gas pipeline project, the commentary termed it as the first of the two deals towards realizing the goal of a summit meeting with Putin. Five days later, the meeting in Geneva between the NSA Jake Sullivan and his Russian counterpart Nikolai Patrushev was described by the Xinhua blog post as specifically called to strike a deal for the early Biden-Putin summit.

Biden will do anything to not let China ‘ride the tiger’

To conclude, it is beyond doubt that Beijing is convinced China is the reason why Washington is more than desperate to “humor” Putin. Since taking office Biden and his foreign policy team has been relentlessly subjecting China under mounting pressure to “give in” but in vain as China continues骑虎难 Qíhǔnánxià or in English “to ride the tiger”. Explaining further, a Chinese scholar said: “Maybe, the Biden administration is softening its policy towards Russia. This is because in recent years the focus of US foreign policy has been shifting from Europe and the Middle East towards Indo-Pacific. There the main target is not Russia but China. In order to defeat China, Biden coerced and lured Western allies to join together. However, due to the difficult situation of fighting China and Russia on the two fronts, it is showing unsustainable fatigue. Besides, the EU too is unwilling to get involved against both Russia and China at the same time.”

Just like Beijing miserably failed in concealing its worries with regards to the recent US success in forging together Quad alliance, the Chinese experts must be in a quandary and under great pressure in telling the party leadership to relax even as reports from Moscow suggest Putin is equally eager, if not more, in shaking hands with Biden instead of a mere elbow bump!                                                                                          

This article was earlier published in under the same title in Modern Diplomacy on 1 June 2021.

Of Western Prejudice and Chinese Victimhood

Hemant Adlakha, Honorary Fellow, ICS

Image: The forgotten history of the campaign to purge the Chinese from America
Source: newyorker.com

Much before Trump-Pompeo combined “assault” on China and its ruling communist party, an article penned by a Singapore-based US researcher in Asia Times five years ago accused the communist party leadership of China of taking “victimhood” card to dizzying heights. Richard A. Bitzinger, the author, further claimed “every nation in the Asia-Pacific can claim, with some justification, to be a victim. Even Japan can declare its victimhood, as it was the first (and so far, only) target of nuclear weapons.” A well-known and globally respected scholar in South Korea wrote a decade ago: “the global community must speak with one voice and send China a clear message that it no longer views China as a victim of modern history.”

To most Chinese, including of course the ruling communist party, the above Western narrative demonstrates “the ignorance and prejudice its creators” have long held towards China. However, what Bitzinger and the South Korean professor Jongsoo Lee have been emphatically pointing out over the past decade or so is something new: it’s time China must shed a “victim” mentality. The Western “irritation”, as well as “impatience” with China playing victimhood or “century of humiliation” card, had started following China’s unprecedented economic rise a couple of decades ago. More recently, the worldwide anti-Chinese victim mentality buzz, which was re-launched half a decade ago with China’s “aggression” and “assertiveness” in the South China Sea, reached a crescendo with the global spread of the Covid19 pandemic.

Image: “They thought Jesus and Confucius were
Source: Cambridge.org

This explains why according to the Western narrative, in recent years China’s acute sense of “victimhood” has been more pronounced in the international political arena. In June 2016, as the legal verdict was being awaited on China’s sweeping claims to SCS, the WSJ published a story entitled “The Danger of China’s Victim Mentality” and warned the international community of “Beijing lashing out if a ruling on SCS claims goes against it.” Suddenly, the global media was filled with similar “China against the world” op-ed commentaries. While some genuinely advised China to stop its obsession of playing the victim if the country seriously wished to advance as a society. Others were less charitable and warned China must shed a “victim” mentality. 

At another level, as according to Mark Tischler, a researcher at the Department of East Asian Studies, Tel Aviv University, the fundamental flaw in the Western narrative is, it often overlooks the fact that “China is the first power to challenge the United States” that truly rose from its post-colonial past. (Emphasis added) Perhaps oblivious of how much of China’s modern-day policy is driven by the collective trauma of “victimhood,” a former Indian foreign secretary opined recently “to avenge the ‘Century of Humiliation’ that China endured in the hands of western imperial powers from roughly 1839-1840 to 1949,” the Chinese are pursuing unilateralism instead of compromise in SCS. Moreover, their new brand of “wolf warrior” arrogance is replacing diplomacy of humility of the Zhou Enlai-Deng Xiaoping style, observed the veteran Indian diplomat who also served as ambassador in Beijing. In contrast, Tischler argues the major difference between Beijing’s and Western narrative on “century of humiliation” is the following. For China, it (century of humiliation) means “not just a grim lesson of the past, but also a warning about a possible future.” Hence, the (Chinese) narrative has created “a never again mentality.”

Image: “China and Japan” Source:  factsanddetails.com

Much has been written and published in both Chinese and in English, on China’s victim mentality. Yet the issue has not only not whittled away over the decades since the foundation of New China, instead under Xi Jinping “century of humiliation” has acquired the new meaning of “Chinese rejuvenation” or “Chinese dream,” as it were. Interestingly, in an attempt to twist the “one hundred years of humiliation” narrative into post-Mao or post-Tiananmen Chinese nationalism, some scholars in the West are calling it anti-Western or anti-US Chinese nationalism. Applauding Zheng Wang’s highly acclaimed (Columbia University Press, 2014) Never Forget National Humiliation: Historical Memory in Chinese Politics and Foreign Relations, Edward Friedman described the work as “a vivid and well-informed study of post-Mao nationalism and Chinese foreign policy…” 

Furthermore, it is not incorrect to say scholarly claims of “victimhood” being described as the new Chinese fig leaf for anti-West nationalism and to create post-Mao/pre-Mao “victimhood” dichotomy – as the current Western narrative wants us to believe, are fundamentally flawed. A recent article, for example, accuses the Communist Party of China (CPC) of manipulating the so-called victimhood as nothing less than a cynical ploy to exploit Chinese history and the feelings of Chinese people. It is pertinent to mention, though intangible, such a narrative has been receiving a lot of traction in the international media recently. Consider for example some of the following popular writings: “China doesn’t have to keep playing the victim” in Foreign Policy (2018), “China playing victim after attacking Indian soldiers in Galwan” in theprint.in (2020), “The Danger of China’s Victim Mentality” in TWSJ (2016), “China’s dangerous sense of entitled victimhood” in Asia Times (2016), “China’s New Diplomacy: Victim No More” in Foreign Affairs (2003) and so on.

Image: The Victim politics
Source: openthemagazine.com

Though perhaps understudied in the West, like most intellectuals in the late Qing and Republican eras, Mao Zedong too was not only deeply disturbed by the Chinese “century of humiliation,” several of his foreign policy decisions in the early to mid-1950s were heavily influenced by the “victim” mentality. In a seminal paper jointly authored by China’s widely respected historian, professor Yang Kuisong, and his young protégé and a Ph.D. candidate in Chinese history at the Pennsylvania University, Sheng Mao, have highlighted how Mao’s victim mentality impacted his decision which led to two Taiwan Strait crises in 1954-1955 and 1958 respectively. From both crises, according to Yang and Sheng, Mao’s gains were remarkably rewarding and psychologically productive. The first Taiwan Strait crisis – the shelling of Jinmen in 1954 – resulted in Mao succeeding in “forcing the United States to begin ambassador-level talks with China.” The outcome of the second Taiwan crisis in 1958 enabled Mao to declare: “The United States has put itself into our noose.” “The other thing Mao claimed to have achieved from the crises was confirmation of America’s nature as ‘paper tiger’,” Yang and Sheng pointed out

Finally, as we talk of prejudice and victimhood, and as the scholars in the West have firmed up their resolve to force Beijing to “give up” playing “victim” card, one thing is crystal clear in the minds of the current party leadership, i.e., riding on the past success of Mao’s playing “victim” mentality, the current Chinese leadership is too aware of how well the victimhood narrative has been serving China in its diplomatic strategies to put it aside anytime soon. Analyzing how China’s victimhood strategy was on full display at the Anchorage summit in Alaska two months ago, Drew Thompson, a visiting senior research fellow at the National University of Singapore, views the Chinese “victim” mentality narrative aimed more at the domestic audience than at the world populace at large. 

Image: China must shed ‘victim’ mentality
Source: South China Morning Post

Well, speaking of prejudices and biases, Michael Barr, author of Who’s Afraid of China (2011) argued a decade ago that “fears of China often say as much about those who hold them as they do about the rising power itself.” The book has been described as holding a mirror to Sino-Western relations in order to better understand ideas about modernity, history, and international relations. It is indeed true the Western bias against China predates the “century of humiliation.” What is also historically undeniable is “on no other major civilization do self-regard, self-congratulation and denigration of the ‘Other’ run as deep, as they have in Western Europe and its overseas extensions,” observed a professor of economic history in a recent article “A Eurocentric Problem.” Not at all a surprise, historian Jeffery Wasserstrom wrote in his review of the book above: “This short book provides a clear-eyed critique of the latest versions of Sinomania and Sinophobia.”

In conclusion, as mentioned above, not only China is not going to stop playing victim and behave like a “normal country” as was recently on display during the first top level bilateral summit between the world’s two largest, hostile economies since President Biden took office. On the contrary, as many in the West fear, and as Beijing perceives the US power as well as dominance continuously declining, China is likely to pursue expansionist policies unchecked. Unlike what many in the West see as the nature of Chinese diplomacy is changing, China knows it is pursuing the same Maoist strategy to trap the US in the Chinese noose. As regards the “wolf warriors,” a seasoned Chinese ambassador Liu Xiaoming, flaunting “victimhood,” recently offered a tongue-in-cheek explanation: where there is a “wolf”, there is a “warrior”.

*This is a slightly edited version of the article published under the title Of Prejudice and Victimhood. https://moderndiplomacy.eu/2021/05/18/of-prejudice-and-victimhood/

Shadow Banking and the Real Estate Bubble: Is Financial Crisis a Real Possibility in China?

Anushka Maheshwari, Research Intern ICS

Image: Property-hungry Chinese millennials and shadow banking could fuel a financial crisis
                    Source: South China Morning Post

The Chinese economy, due to the strict measures adopted by the government to curb the spread of the Covid-19 virus,  is back on track, with output back to pre-pandemic levels and a surge in credit activity. China’s financial regulators are having a hard time containing risks at home while limiting disruptions from abroad as the economy is opening to foreign investment. The fear of missing out has stoked the investors’ expectations and many people are now buying property for investment or speculative purposes, which Guo Shuqing, chairman of the China Banking and Insurance Regulatory Commission, termed as “very dangerous”. The household debt in China had reached 150 percent of its disposable income in December 2020 driven by a rise in property prices and seems to be concentrated among the millennials. The youth of China is clearly banking upon the government to sustain this growth in real estate prices, but a major portion of this debt is financed by shadow banking. People’s Bank of China (PBOC) defines China’s shadow banking as “credit intermediation involving entities and activities outside the regular banking system”.Since this sector is outside the formal banking sector, it lacks a safety net that comes from being financially backed by the government through deposit insurance publicly guaranteed or ‘lender of last resort’ facilities by China’s central bank. This raises an important question: Is China on the verge of a financial crisis like the one faced by the US in 2008-09?

China escaped the 2008 financial crisis primarily because of its booming domestic market and little exposure to the overseas market for wholesale funding. But the contraction in capital inputs through foreign direct investment during the crisis and fall in exports made the government announce a $586 billion stimulus package to provide a boost to the economy. Major infrastructural activity, constituting 72 percent of the package was undertaken, and only 30% percent of this was financed by the central government. The rest had to be funded by the local governments, and since they couldn’t borrow funds themselves, local government financing vehicles had to take on debt on their behalf from banks. But banks had severe restrictions in terms of lending such as caps on lending volumes imposed by the PBOC, mandatory bank loans to deposits ratio, restrictions on lending to certain industries, reserve requirements, among others. Due to this, shadow banking activities grew along with an increase in fixed investment, driving economic growth but at a high cost, so much so that the corporate debt to GDP ratio reached a record 160 percent in 2017 as compared to 101 percent 10 years prior to it. 

The Chinese leadership claimed that it had successfully defused the housing bubble that had formed in China by the end of 2014 due to these shadow banking activities. So, in order to uplift the dampening economy in 2015, it eased restrictions on second-hand home purchases and the property market since then has been booming, with more households buying houses and property developers borrowing more to engage in construction activities. There are many factors causing an increase in shadow banking activities, which in turn contribute to the growing real estate bubble. Firstly, Chinese authorities are trying to sustain high GDP growth rates through credit borrowing which puts strain on financial institutions of the country. Secondly, zombie companies that have little to no productive use, are borrowing more and more simply to meet their current obligations. Thirdly, many state-owned and private companies in China have property subsidiaries, and property loans made to these subsidiaries are sometimes presented in the books as going to the parent company. This results in the share of property-related debt being much higher than what is available in the official data. The overall impact was that the amount invested in Chinese housing hit $1.4 trillion in June 2020, while the total value of houses and developers’ inventory, according to a Goldman Sachs report, had reached $52 trillion in 2019.

Image: Shadow banking in China has ballooned into a $10 trillion ecosystem that connects thousands of financial institutions with companies, local governments and hundreds of millions of households.
Source: Bloomberg Quint

The shadow banking system in China works independently of its monetary policy, amplifying increases in the money supply but working opposite when the restrictive interest-based policy is imposed. Thus, it can be inferred that in spite of the Chinese policy changes to curb the real estate sector, the negative role of shadow banking is why the bubble continues to build. President Xi Jinping’s statement in 2017 that “houses are built to be lived in, not for speculation”  clearly indicates that the PLA government is sensitive to this issue. The government in China has adopted stringent measures to stop the rise in property prices over the past few years, and the latest mandate in August 2020, restricted credit supply to both developers and investors. These new regulations that mandate all lending institutions to decrease the quantity of loans given to this sector are going to stay in place until the real estate cools off. There are two forms of shadow banking in China, one is the channel business of Chinese banks that hide some of their lending activities to keep them outside the purview of the auditors and regulatory bodies. The other is P2P(Peer-to-Peer) lending platforms like trust companies, factoring companies, etc. In order to contract both these forms, the Supreme Court in China has lowered the interest rates on microlending, which will make it unprofitable for lenders while the CBIRC(Chinese Banking and Insurance Regulatory Commission) has forbidden trust companies to finance developers that do not meet the necessary requirements of shareholders and capital or lack necessary licenses.

The PBOC has significant control over lending activity in China as compared to the independent decision-making possible in the U.S. markets, which implies that the situation in China is more stable. There are many structural differences between the shadow banking systems in China and the United States, such as in China, market-based financial instruments do not play as significant a role as they do in the USA. Also, in China, smaller banks went off-balance sheet as they were constrained by liquidity requirements as compared to the larger banks in the US that were constrained by capital requirements. All these factors considerably lessen the chances of a financial crisis like that of 2008-09. Also, the Chinese real estate market has higher-than-normal down payments, sometimes as high as 40-50 percent of the transactions as compared to the 10-20 percent in most western markets. This implies that the debt to transaction price ratio is low, which discourages people from the lower socioeconomic strata of Chinese society to purchase high-priced properties, thereby reducing the risk of defaults. The PBOC and the CBIRC stepped in to take over the Baoshang bank when it collapsed in 2019, whichhas both positive and negative implications.  On one hand, it indicated that the Chinese government may intervene in case of any crisis-related situations caused by defaults in the shadow banking sector, but on the other hand, it may also encourage risk-seeking behaviour from creditors depending on the government to back the financial system. The Chinese government is caught between trying to curb shadow banking activity in order to reduce system risk in the country due to the real estate bubble and ensuring liquidity in the economy. Thus, although the possibility of a financial crisis is low, China does need to reduce risks posed by its shadow banking sector and ensure financial stability.

How Nepal’s Immediate Neighbour Takes Opposite Approaches to its Political Crisis

Shreha Gupta, Research Intern ICS

Source: Myrepublica

On 20 May 2021, the Supreme Court of Nepal intervened and overturned the decision of dissolving the Parliament in another landmark verdict. The verdict ordered the appointment of Sher Bahadur Deuba, Nepali Congress President, as Prime Minister.  Deuba was sworn in as Prime Minister on 13 July, 2021. Earlier, on 21 May, President Bidya Devi Bhandari, on the recommendation of the then Prime Minister K.P. Sharma Oli had dissolved the Parliament and announced mid-term polls on 12 and 19 November, 2021.

Nepal had plunged into political turmoil twice after Oli’s contentious recommendation to dissolve the Parliament on 20 December, 2020 and again on 21 May, 2021. In February, Nepal’s Supreme Court intervened and ordered the reinstatement of the Parliament that was dissolved on 20 December, 2020. This came as a setback to Oli who was already preparing for snap polls. Nepal’s highest court reinstated the Parliament for a second time in just five months.

The political crisis in Nepal has created a measure of uncertainty in the Indian and Chinese policies towards Nepal. The two countries have followed different trajectories in their response to Nepal’s domestic developments in the recent past. China, despite their claim of non-interference in domestic affairs have shown a keen interest in Nepal’s political crisis, whereas India, despite having been accused of interfering in Nepal’s internal matters in the past, has decided to step back and wait for the situation to unfold.

In December last year, Hou Yanqi, Chinese Ambassador to Nepal met with Nepalese President, party chair Pushpa Kamal Dahal and Standing Committee member, Barsha Man Pun after dissolution of the House of Representatives.  Earlier in May and July, she had held a series of meetings with top party leaders including Oli and Dahal in a failed attempt to reunite the Nepal Communist Party (NCP).

On 27 December 2020, China had sent Guo Yezhou, a vice-minister of the International Department of the Chinese Communist Party to Kathmandu to take stock of the political situation. The visit came at a time when China was concerned over the political stability in Nepal and the unity of the NCP. China was also concerned that the political crisis in Nepal could threaten to reverse the gains made after President Xi Jinping’s visit in October 2019 as it was instrumental in taking China-Nepal bilateral relations to a new height.

The Guo-led delegation had met with President Bhandari, Prime Minister Oli, Nepali Congress President Deuba and chair of the other faction of the NCP, Pushpa Kamal Dahal. The Chinese delegation reportedly wanted to explore the possibility of a reunion between the two warring factions of the NCP, the reasons behind its spilt, its impact on Nepal-China relations and the possible road ahead for the future political course in Nepal. The Chinese team had to return empty-handed after the NCP factions failed to bury the hatchet.

While China sent a high-level delegation to Nepal to persuade the rival factions of the NCP to stay together, India stated that Nepal’s political developments are its internal matter and it is for the country to deal with them under its domestic framework and democratic processes.

On 6 February 2021, the Chinese Foreign Ministry issued a press statement in the context of a telephonic conversation between Nepalese Foreign Minister, Pradeep Gyawali and Chinese Foreign Minister, Wang Yi. According to the statement, Wang Yi said that China adheres to the principle of non-interference in the internal affairs of other countries and respects the path towards development chosen by the people of Nepal.  “As a friendly neighbour, China hopes that all parties and factions in Nepal will bear in mind the fundamental and long-term interests of the country and its people, seek common ground while shelving differences, and maintain unity and stability, so as to create favourable conditions and environment for its own development and prosperity,” the statement added.

Although Wang Yi claims China’s adherence to the principle of non-interference in the internal matters of other countries, observers in Nepal don’t agree with it. Political analyst Uddhab Pyakurel criticised China for meddling in Nepal’s internal matter. “No matter what the Chinese side say to justify their visit to Nepal, we all know that they are trying to interfere in Nepal’s internal affairs. For this, NCP leaders and Nepali media, which helped build the narrative that Chinese leaders had played a role in unifying the erstwhile CPN-UML and CPN-Maoist Centre, are responsible,” he said. He was concerned that Chinese activities would turn Nepal into a strategic playground in its tiff with India and other western powers including the United States of America.

Analysing China’s recent actions, Political scientist, Dev Raj Dahal stated that China is using its soft power by sending CPC leaders to influence Nepal. He added that China was alarmed about the security and stability in Nepal as Nepal shares its border with the Tibetan Autonomous region, ‘the geopolitical loophole of China’. He said that China is concerned about stability in Nepal also because it is interested in doing business with India’s vast market through Nepal. This would be possible only if Nepal remains politically stable.

China’s meddling in Nepal’s domestic politics has drawn international attention. Some foreign diplomats in Kathmandu viewed China’s brazen interference as a demonstration of its growing influence in Nepal’s internal matters while India’s decision to steer clear has been appreciated by former diplomats. “India, which is usually the whipping boy of their politics is correctly staying out of the picture, while China attempts to involve itself in their politics,” said Manjeev Singh Puri, former Indian Ambassador to Nepal.

There could be several reasons why India preferred to keep a low profile and refused to take sides in a political tug of war between different parties in Nepal. In the past, India has been seen as trying to meddle in Nepalese politics which hasn’t been received well by people in Nepal.

To reiterate, China had invested in buttressing the Oli government which has now been ousted. In the short term, recent developments in Nepal could result in a limited setback for the Chinese policy towards Nepal. However, these developments have not fundamentally undermined China’s position in Nepal. China’s ambitious Belt and Road Initiative (BRI) and its ongoing and proposed involvement in hard infrastructures, including highways, bridges, airports, hydroelectric projects have significantly helped China entrench its presence in Nepal. China has also built up its soft and sharp power in Nepal in recent years. The latest change in government is unlikely to have a major impact on China’s position in Nepal.

India’s present policy of non-interference with regard to Nepal’s political crisis is serving India well. The change in government will help India to some extent in developing its equities in Nepal as it has been given credit for not interfering in Nepal’s domestic affairs. Durable political stability in Nepal augurs well for India whereas, instability will only pave way for inimical external influences. India must encourage the strengthening of a people-driven polity, invest in reinforcing its considerable linkages and synergies in Nepal and work towards improving its image that has been hampered in recent years. It is important for India to avoid being perceived as partisan and adopt the strategy of detached pragmatism rather than proactive involvement.

China’s e-commerce boom: How do Indian policies compare?

Raj Trikkha, Research Intern, ICS

Image: China, in spite of gaining access to the internet after India has managed to have a 50.4% share of the global e-commerce market, while India’s share is at 1.29%
Source: Businessworld

China has been dominating the world in e-commerce since 2013, when it overtook the US to become the world’s largest market. Ever since the growth in this sector has been on a double-digit spree. According to a report by eMarketer, the revenue accrued to Chinese companies from their e-commerce sector in 2020 stood at 2296.95 billion dollars, almost triple that of the US. 

Now, the first question that pops in our head is, ‘Is it because of the huge population of China?’. If it were so, then India, which has a population almost equal to China’s, should also be topping the list or at least be close to topping the list, which it is not. Hence the more important question arises, ‘What holds back India from leading the world in the e-commerce sector?’. 

Several factors, like demographics and consumer trust, might be taken into consideration while answering the question. To narrow down our focus, we will only look into the government policies and regulations of the two countries and compare their effectiveness. The policies will pertain to two domains, namely, internet development and domestic e-commerce. 

China embraced the internet in 1994, and quickly realizing its importance, began developing the internet sector at an incredible speed. While only 6000 computers and 40,000 users were connected to the internet in 1995, by mid-2001, 10.2 million computers and 26.5 million users were online. The credit for this achievement goes to the initiative taken by China’s government in the promotion of the internet. They launched 13 “Golden Projects” in order to build the information infrastructure of the country and developed their internet in three phases – Asteroids (1996-2003), Bees (2004-2010), Coliseums (2010-present). Along with this, the Chinese also focused on growing their technological infrastructure which led to an expansion of telephone networks, PC manufacturing, and internet awareness. 

While the internet came to India in 1986, much before China, it could not climb the stairs of development as quickly. Its first action towards internet development, the IT Action Plan 1998, was several years after the introduction of the internet. It also eventually laid down new laws, the IT Act 2000, to deal with cybercrime and e-commerce. While India was still formulating policies and laws, China worked on building infrastructure for e-commerce under the Golden Projects. The strategy followed by India was thought to be better in the long run, while China’s strategy paid off instantly. It is 2021, and the anticipated success from India’s long-term strategy is yet to be gained, as China enjoys an internet penetration of 70.4%, while India is only at 45%

The vast differences in their approaches to regulating the market affected the market and its players to a large extent and thus, became an essential factor in determining the growth of the market. 

Image: While India remains far behind China in e-commerce sales, it is growing at a rate faster than any other country on this chart
Source: eMarketer

For instance, China’s e-commerce policies aim at strengthening the construction of an e-commerce credit system that includes the credit information of all stakeholders. The government monitors companies with poor credit ratings, which helps avoid counterfeiting and other malpractices. Along with this, the government ensures that all e-commerce enterprises operate in accordance with information security protection regulations and technical standards. To increase security, the government has promoted the use of digital certificates and their verification among electronic certification authorities. Of course, it might be argued that such progress has occurred at the cost of citizens’ privacy. 

China has promoted tax and financial incentive programs for high-tech SMEs by replacing business tax with a value-added tax and nurturing a multi-channel financing mechanism to support e-commerce companies. The government also motivates banks and other financial bodies to launch security over intangible assets, real estate pledges, and other financing services for e-commerce SMEs. This makes it easier for SMEs to raise finance, as Intangible Asset–Based Lending leverages a portfolio of Intellectual Property or other intangible assets to secure a loan. It also guides investment funds to strengthen support for E-commerce startups.

The Indian government, on the other hand, is working towards integrating traditionally offline markets, like vegetable markets, into digital e-commerce platforms. The government has also launched flagship initiatives like Digital India, Make in India, Start-up India, and Skill India, which are responsible for the growth of the sector. 

Although India is making considerable efforts in developing its e-commerce market, there are many areas with scope for improvement. Integration of stakeholders is a key shortcoming. Government stakeholders like policymakers, taxation authorities, and the Registrar of Companies should be woven into a single system to increase efficiency and transparency for the players in the Indian e-commerce market. The absence of a centralized mechanism to provide rating or accreditation to the numerous e-commerce sites adds up to the inefficiency. This makes it difficult for people to trust such websites. If a standardized procedure for the same is developed, it will positively impact the quality of online services.

On comparing the policy approaches of the two countries, it is evident why China holds 53.64% (as of 2020) of the global e-commerce market, and India is at 1.29%. It is also clear that a large population by itself cannot translate into a thriving e-commerce market in the absence of supportive policy. Hence a more careful dissection of China’s experience can be instrumental in realizing the full potential of the Indian e-commerce market.