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.

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.

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 and the Effectiveness of Economic Sanctions on North Korea

Sudarshan Gupta, Research Intern, ICS

Economic sanctions are imposed to coerce the target country to alter its policies or change its behavior. If the cost of sanctions to the target country is not substantial or if the threat is not credible, then there is a high chance that sanctions will fail to alter the behavior of the target country. This is what seems to be happening in the North Korean case. In October 2020, during a military parade, North Korea unveiled what experts believe to be one of the world’s largest road-mobile, liquid-fueled Inter Continental Ballistic Missile (ICBM), possibly with a capability of carrying multiple nuclear warheads. International economic sanctions have failed to produce the desired result of denuclearization of North Korea, and instead, have increased politico-military instabilities in the region.

The United Nations Security Council passed resolution 2397 in December 2017 in response to North Korea’s launch of ICBM Hwasong-15, imposing wide-ranging economic sanctions on the country. In addition to multilateral sanctions by the UN,  the US has imposed unilateral sanctions on North Korea to impede the development of missile and nuclear technology. Given North Korea’s high economic dependence on China, for sanctions to be effective, China’s active and honest participation and cooperation are extremely crucial. China has asserted time and again that the North Korean issue should be resolved through dialogue and has supported a step-by-step process in which sanctions relief and security guarantees are provided in exchange for denuclearization. Most of the Chinese scholars argue that the improvement of geo-economic conditions and closer economic ties between North Korea and China is the only way to gradually induce North Korea to give up its nuclear program and open up to the world.

Following UN sanctions on North Korea after the 2016 nuclear test, China released a comprehensive list of sanctions imposed by it. Many items were allowed to be traded for “public welfare purposes,” while other items whose trade benefitted “livelihood purposes” and did not support the nuclear or missile program were also allowed. Importantly, there has been no clear definition given out by the Chinese as to what exactly constitutes such items, making the enforcement of UN sanctions difficult, if not impossible.

China is the largest trading partner of North Korea, and its continued economic engagement (both overt and covert) with North Korea has ensured the survival of the Kim regime. The relationship between the two countries is symbiotic and beneficial to both of them. For North Korea, illicit coal exports (banned since 2017) to China are a huge source of foreign currency, generating about a third of its exports by value. Apart from coal, in a blatant disregard to UN sanctions, Chinese companies are trading with North Korea in a wide spectrum of goods such as sand, seafood, textiles, iron and steel, industrial machinery, vehicles, and gravel. In December 2020, Deputy Assistant Secretary for North Korea, Alex Wong, accused China of subverting the UN sanctions regime aimed at achieving denuclearization of North Korea, warning sanctions against China-based individuals and entities in response. Wong further added that the US had identified 555 separate occasions in the past year alone of ships transporting coal, sand, and other sanctioned goods from North Korea to China. According to one estimate, in just the first five months of 2020, North Korea imported more than 1.6 million barrels of refined petroleum through numerous ship-to-ship transfers of oil at sea (the 2017 sanctions imposed a limit of 500,000 barrels per year). China has repeatedly turned a blind eye to such illicit activities in its neighbourhood.

Over the years, North Korea has developed a sophisticated web of illicit financial networks to launder money in order to circumvent sanctions. The International Consortium of Investigative Journalists and NBC highlighted in their report of September 2020 that Chinese firms played a prominent role in laundering large sums of money through several American banks to shell companies in other countries like Cambodia between 2008 and 2017. The money then finally reached North Korea.  According to a US Army report, China is possibly supporting North Korean illicit cyber activity through training and academic support, as there are hundreds of North Korean students who study in China and have access to advanced technology.          

A report submitted to the UN Security Council by a Panel of Experts highlights the prohibited transfer by North Korea of its fishing rights to third countries, thus acting as a source of income for the country. The report further claims that hundreds of Chinese boats can be observed in North Korea’s fishing zones, indicating that the country has circumvented sanctions by selling permits to Chinese fishermen. Remittances from North Korean migrant workers in China and Russia also constitute an important source of foreign currency for Pyongyang. The 2017 UN sanctions banned all such migrant workers and set a deadline for December 2019 for their repatriation. China, which employs more than 60,000 migrant workers, mostly in provinces adjacent to North Korea, has conveniently disregarded the deadline set by the UN.       

Kim Jong-un’s rare acknowledgment of the mistakes in the government’s five-year economic strategy from 2016 to 2020 at the eighth congress of the Worker’s Party of Korea indicates the gravity of economic problems that North Korea is facing. The disruptions in economic activities caused by the COVID-19 pandemic and devastation of the country’s infrastructure by typhoons have much more seriously impacted North Korea’s economy in 2020 than the economic sanctions. However, the regime in North Korea remains pretty safe, stable, and unchallenged. Multilateral and unilateral sanctions by the US and its allies have been ineffective and miserably failed to achieve their goal of denuclearization. China has made sure that North Korea remains stable and has continued to undermine the sanctions regime, making the so-called US policy of “maximum pressure” an utter failure. US President-elect Joe Biden’s administration is expected to be tougher on human rights issues and will cooperate more closely with allies, including South Korea, in the context of increasing tensions with China. It is unlikely that North Korea will get sanctions relief anytime soon. However, cooperation with China in enforcing these sanctions will be quite difficult, and Beijing will continue to undermine them.            

For undoing New Delhi’s US-backed ‘world power’ fantasy, Beijing must rethink on India’s SCO, BRICS membership: Chinese Scholars

Hemant Adlakha, Honorary Fellow, ICS and Associate Professor, JNU

“Japan is manageable, Australia will soon fall in line; that leaves India, which is already feeling jittery with Trump certain to never return to the White House,” according to a recent Chinese commentary. Moreover, how can New Delhi ride in two boats at the same time, i. e. be part of anti-China Quad and/or “mini Asian NATO” and also remain in SCO and BRICS, some Chinese analysts are already asking.


Shanghai Cooperation organization  
 

With the United States currently in a state of limbo, thanks to soon to be “removed” President Trump, China’s strategic affairs commentariat, it seems is having a field day throwing pins at their new found object of ridicule – India. To understand what is being suggested, a mere glance is enough at the numerous op-ed pieces in the mainstream Chinese media in the past few weeks – not even suggesting you look at the loose cannon The Global Times. The news and current affairs platform Guancha.cn alone, influential and widely read App among China’s urban, upward mobile nouveau riche, carried almost two commentaries-a-day on average on India since the signing of the much coveted Asian regional trade pact, RCEP. Recall India’s last minute dropping out of the world’s largest 15-nation Free Trade Agreement.

Interestingly, following the sudden Indian decision to stay away from the RCEP deal, announced last year by Prime Minister Modi in Bangkok during his 3-day visit to Thailand, the authorities in Beijing, though surprised, but reacted suspecting India’s intentions. Some Chinese analysts later on did draw a connection between the Bangkok announcement and the India provoked escalation of tensions along the Line of Actual Control (LAC) – de facto international border between India and China – in eastern Ladakh region a few months afterwards, i.e. in April 2020. Unlike in the similar border standoffs on several occasions in recent past, the border skirmishes in the Galwan Valley region soon snowballed into potential heavy military confrontation. As a result, amid accusations of belligerent aggression into each other’s territory by both countries, India started deploying massive military build-up along the LAC in the region.

As tensions with China along the border remained high, some Chinese experts began to describe the deployment of additional 35,000 more troops by India in the region as what is generally referred by scholars of international relations a “security dilemma.” Citing Robert Jervis, the world renowned IR theorist and former president of the American Political Science Association (APSA), who popularized the “security dilemma” theoretical concept whereby “actions meant to increase a state’s security can be perceived as hostile,” the Shanghai Institute of International Studies (SIIS) researcher Li Hongmei wrote in a widely debated article: “For quite some time now, India has been implementing a policy of ‘encroachment’ and ‘nibbling’ toward the Chinese side of the LAC.” Li went on to say: “India’s purpose is to unilaterally alter the status quo of the border by blurring the LAC.”

Source: insightsonindia.com

Most other Chinese commentators have attributed India’s this new-found audacity to militarily challenge China in the increasing defence and political backing India has been “offered” from the US, Japan and Australia. Moreover, the Chinese analysts believe the so-called US-led Western seducing of New Delhi (against China) will remain unabated under the president-elect Joe Biden.

Will India continue to get a “free ride” under President Biden? Will Biden aggressively push Indo Pacific strategy? Will Biden administration lead or promote a comprehensive US-led Western anti-China “united front”? Will US continue to “seduce” India? In geostrategic terms, India needs the United States more in order to thwart off China threat, but will India “retreat” if Sino-US relations show signs of easing up under Biden? These and many more “ifs” and “buts” are currently confronting both China’s US experts and India specialists respectively. Apparently, a “determined” India is becoming a dilemma to most Chinese experts.

Further, even if the President-elect’s top six foreign policy picks are those who served in Obama administration and when Biden was the Vice President, at least some Chinese observers are unwilling to dismiss Joe Biden as mere “old oil fritter.” “Biden was elected as a Senator at the age of 30. He has been in Washington politics for almost 50 years. He has served as the Chairman of the Senate Judiciary Committee and Chairman of Committee on Foreign Relations respectively. He was the US vice president for two consecutive terms in the Obama administration. He is aware of the bipartisan consensus in the US Congress on China policy. Unlike Trump, Biden is too sophisticated and elegant to be unrealistic in completely reversing the previous administrations’ “anti-China policy,” is how Wu Zhifeng characterized Joe Biden in an article on the day the US media declared the vice president as the US president-elect.

Wu, a lead researcher at the China’s National Development Bank, pitched for Biden adopting a concerted policy to “tame” China, in a special column he wrote for China’s financial daily, 21st Century Business Herald (Ershiyi sheji jingji). “The Biden government will gradually return to organizations that the US withdrew from. This, in order to strengthen the US leadership position in the international organizations on one hand, and to repair the damaged relationship with the US allies caused by the Trump administration on the other,” Wu wrote. According to Wu, on the trade front, while the new US administration will quickly return to the erstwhile TPP, or now Japan-led CPTPP, at the same time it will also strive to revive the TTIP with Europe.


Source: affairscloud.com

Echoing similar sentiments, another Chinese analyst’s view led to a new debate among China’s strategic community circles, that is, the Biden administration will strive hard to convince Japan, Australia, South Korea and other staunch US allies to delay the implementation of the recently signed the world’s largest free-trade agreement RCEP. “If successful,” the scholar observed, “this move combined with twin revival of the trans-Pacific TPP and trans Western Pacific TTIP, is sure to achieve the ultimate goal of squeezing from all sides China’s economic and trade relations with the world.”

No wonder, following the success of India-initiated Malabar joint military exercise with participation from the other three QUAD members – the US, Japan and Australia, several IR scholars in China have now realistically acknowledged the existence of the Quadrilateral Security Dialogue, at least militarily if not politically. A recent article in the Chinese language Chongqing Morning Post, entitled “Has anti-China ‘mini Asian NATO’ really arrived? An essential move in US-Japan-Australia-India military cooperation,” seems to suggest likewise.

Moreover, it is quite evident from several commentaries in the Chinese media, especially in past few weeks, that Biden administration is generally expected to continue with Trump’s China policy; that Biden administration aims to put China under mounting political as well as economic pressure; that Biden administration is not going to reverse or dilute the previous US administration’s efforts in seeking the emergence of a “mini Asian NATO” directed against China; that Biden administration will pursue allies in the Pacific Rim region to carry out a concerted “contain” China policy by combining together “TTP-TTIP-Pivot to Asia Policy-Indo Pacific Strategy.”

To sum up, perhaps it is this never-seen-before Indian “resolve” to risk enter “anti-China” US-led political and military alliances which is touching a nerve in the Chinese psyche. Or, it may well be that Beijing is feeling rattled by the near consensus arrived at by the Indian political elite in the wake of last year in mid-June Galwan “massacre” leaving 20 Indian soldiers brutally killed.  Add to this China’s stubborn refusal to return to status quo ante in Ladakh which led India to admit, relations with “expansionist” China have reached an inflection point and that India must teach its northern neighbour “a good lesson.”

    BRICS leaders            
    Source: globalriskinsights.com

This year China will be celebrating the CPC centenary. Beijing would not like to see military conflict with India, or with any other country, escalate amid the Party’s hundredth birthday celebrations. It is no surprise some scholars in China are already advocating “desperate measures” to prevent India from joining QUAD or “mini Asian NATO,” i.e., Beijing should seriously consider expelling India from either SCO or BRICS, or from both.

The article was originally published as Beijing must rethink on India’s SCO, BRICS membershipon January 4, 2021 by NIICE.

A Critical Outlook on PLA’s AI Development Philosophy

Megha Shrivastava, Research Intern, ICS

People’s Liberation Army (PLA) strategists have recognized Artificial Intelligence (AI) as part of the ongoing military revolution, which has immense potential to change the metrics of military power balance in the future and makes AI central to its military modernization plan. Lieutenant General Liu Gouzhi (刘国治), Director of Central Military Commission’s Science and Technology Commission, recognized the disruptive nature of the technology and warned that whosoever does not disrupt will be disrupted. Recently, the fifth plenum of the CCP released its Communique (October 2020), which has emphasized completing informatization and intelligentization by 2027, highlighting the applications of AI in its military modernization plan.

PLA defines AI weapon in its official dictionary as “a weapon that utilizes AI to pursue, distinguish, and destroy enemy targets automatically; often composed of information collection and management systems, knowledge base systems, decision assistance systems, mission implementation systems, etc.” Some PLA thinkers anticipate that future warfare may be fought fully with unmanned autonomous and intelligent weapons systems, including robotic weapons.

PLA’s Initial Trajectory and Long-Term Plan

PLA’s careful study and analysis of the USA’s Third Military Offset Strategy has guided its approach towards AI. It has focused on developing advanced capabilities like unmanned swarms to gain a strategic advantage over the Pentagon’s military potential. Having a competing vision with the US, it is actively planning on accelerating and advancing its technological development with the strong support of the civilian sector through its ambitious Military-Civil Integration (军民融合) program to narrow the gap with US defense capabilities.

While the goals of both countries endeavour to reach the ‘Commanding Heights’ ((制高点), their paths are not the same. Rather, the PLA has adopted the strategy of ‘Overtaking on the Curve’ to catch up and bypass the US and Russia. Beijing will strive towards prioritizing defence innovation through military intelligentization (智能化) and Chinese ‘Superintelligence’ (Brain-inspired intelligence), which creates the fear of shaping an entirely new domain of cognitive warfare.

To catch up with its overwhelming aspirations, China’s 2019 Defence White Paper emphasizes early informatization (信息化), which will facilitate intelligentization in warfare (智能化作战). The PLA strategists visualize military applications of AI from intelligentized command and control or support to decision making. Some PLA strategists believe that in the future, the intelligentization of warfare may result in battlefield singularity (奇异), which will help in making the best use of human and machine capability.

Leveraging AI for Warfare

PLA defines war as a scientific concept that can be deconstructed, and AI is more suited to predict calculated outcomes or to identify the adversary’s vulnerable systems. Thus, the asymmetric thinking of targeting adversary’s vulnerability will remain a central theme in leveraging AI applications.

It is likely to leverage AI to strengthen its military capability not only towards intelligentization but also to gradually develop advanced autonomous and unmanned vehicles, war-gaming, and data fusion. Further, it will leverage the potential of associated technologies like 5G, Quantum computing, the internet of things, etc. to assist its strategies related to warfare in general and Information Warfare (cyber and electronic warfare) in particular. It can support and enhance PLA’s psychological warfare capabilities to target combatant’s behaviours and emotions.

PLA thinkers argue that AI should be used both kinetically and non-kinetically to dominate the information domain and target the enemy’s information networks. They believe that a ‘system of systems’ warfare will occur as a result of ubiquitous networks. These networks will diminish the distance between action, decision-making, and perception. With PLA recognizing that modern warfare is “system’s confrontation” (系统浓度) (a system versus system conflict) and information dominance is essential to achieve dominance in other domains, the emphasis on the application of AI to achieve information dominance can be understood. With such an edge, PLA seeks to pursue the style of mosaic warfare with Chinese characteristics. Its ultimate goal of leveraging AI is directed toward achieving a cognitive advantage over its adversaries while being able to defend its system of systems.

AI in Decision Making

On the question of keeping humans ‘in the loop’(在循环) of decision making, it is quite uncertain and may be too early to predict. However, strategic thinking towards AI predicts that PLA might increasingly favour intelligible and cognitive decision making rather than human judgments. They believe that PLA is likely to integrate command-and-control systems into built-in systems by designing and operationalizing plans in advance. Also, the PLA’s historical analysis of warfare is based on its study of military science that is focused upon war-gaming and simulation to arrive at critical military concepts. It will thus incorporate AI to formulate appropriate military theories and tactical decisions. This may also disrupt the OODA (Observe, Orient, Decide, and Act) loop given by Col. John Boyd, and that is also frequently discussed by PLA thinkers. Former US Deputy Secretary of Defence Bob Work believes the authoritarian regimes and those who believe in the weaknesses of humans and rely heavily on machines are more inclined to move toward fully autonomous weapons and to keep humans out of the loop. It is likely that the decision to put human ‘in the loop’, ‘on the loop’ or ‘out of the loop’ shall rather be determined based on the lethality and criticality of the system, and PLA may adopt a combination of all three to meet the perceived threat.

The Bigger Picture

At this stage, the extent to which militaries will be able to harness the potential of AI in decision making is difficult to predict. However, the ongoing military modernization process suggests that PLA will emphasize integrating AI in its reconnaissance and surveillance system, weapons systems and, command, control, and communication structures apart from training and supervision of personnel under its efforts to make PLA truly modernized by 2027. The High-End Laboratory for Military Intelligence (HELMI), which was set up at Tsinghua University in 2018, is serving as a breakthrough point for developing what China calls “AI superpower strategy”. Today, China is behind in AI and semiconductors, and present trends suggest that the gap will narrow soon in the future. These are the key government priorities, receiving enormous attention and investment.

Disruptions led by militarized AI will be decisive for the future of warfare. AI is here to stay and develop to surprising levels in times to come shaping military innovation, nature of the conflict, and warfare in the 21st century. Only time will tell whether the disruption will be China-led or American. If the PLA succeeds well in materializing the potential of AI, it will turn out to be a game-changer, thereby placing greater challenges for future military power balance, peace, and stability.

Civil Code 2020- Implications for women

Shruti Jargad, Research Intern, ICS

2020 has been a big year for Chinese politics, and not just because of COVID-19 and China’s great power entanglements. After four unsuccessful attempts in 1950s and 1960s, 1979 and in early 2000s, the National People’s Congress’ Standing Committee (NPCSC), on May 28 adopted the Civil Code with 2879 votes in favour. Before this code, several standalone laws like the 1989 Marriage Law, 1985 Inheritance Law, 1995 Security law, etc. were enacted.

A civil code is a codification of private laws that regulate property and personal rights including laws on contracts, property, marriage and torts. It is a highly consequential document as it affects the lives of the general population in the most direct and intimate manner. No wonder then it led to intense public engagement with 900,000 public comments during the process. Further as a fist such code, it shows the maturity of China’s legal system. It would also reduce inconsistencies between standalone civil statutes. Finally, it is being lauded as an achievement for the Party which has brought China’s institutions to this level of sophistication and promulgated a set of laws uniquely Chinese in nature.

While much of the code is based on previous laws and pertinent judicial interpretation, there are two provisions that are of special relevance to women in China. These are – Part on Personality Rights and Part on Marriages and Family. While the first sails on the headwinds of the MeToo movement in China, the latter is a throwback to state manipulation in private lives.

The Part on Personality rights which generated a fair amount of controversy among legal scholars does not have corresponding standalone statute but builds on the 1986 General Principles of Civil Law. It consists of 5 sets of rights including rights to life, body and health (Chapter II). It protects the “security and dignity” of individuals’ lives (article 1002), individuals’ “physical and psychological integrity”, and their freedom of action; right to health protects individuals “physical and psychological health”

Importantly, it creates a cause of action for sexual harassment, requiring employers (including government agencies, businesses and schools) to adopt measures to prevent, accept complaints of, and investigate workplace harassment (art 1010) Further the code clarifies that written text or images alone, in addition to spoken words or conduct, may also amount to sexual harassment.

This is indeed a big moment for the nascent MeToo movement in China, currently at a critical point with the ongoing case against prominent television host Zhu Jun on the charges of harassing an intern at the state broad caster CCTV. Youth, especially University students have come out in support of the victim, known as Xianzi on internet platforms as the case is being heard in the Haidian District Court in Beijing. Inspired by the MeToo movement in the West in 2018, Xianzi has posted her experience on WeChat account, which became viral and generated intense debate on platforms like Weibo. However, women are still reluctant to come forward and it is rare for cases like this to make it to court. Further, in the conservative society, women often end up shouldering the blame.

Before the new provisions, Chinese law had long prohibited sexual harassment, but its legislation was generally confusing about what behaviour constituted harassment, and the absence of a clear liability framework had sometimes left victims and employers uncertain about whether a legal violation had occurred making it difficult for  victims to report harassment and employers to respond to it. Further, BBC reports that in a 2018 survey, 81 percent of the 100 companies surveyed did not have anti-sexual harassment policies on the books.

As employment terminations are subject to high standards under China’s Labor Contract Law (misconduct giving rise to an employment termination must be both egregious and demonstrated though a fair process and clear evidence, with unfairly dismissed employees able to claim reinstatement through a simple labor arbitration process), employers faced with credible claims of harassment had to choose between paying substantial settlements or facing the risk of forced reinstatement.

The new laws acknowledge explicitly the role that abuse of power and influence plays in enabling sexual harassment which is a remarkable development, particularly given the extent to which guanxi is embedded in Chinese culture. Affirmative institutional effort will indeed be powerful symbols for the harassment victims.

While the above discussion shows a progressive leaning, the Part on Marriage and Family is another section that was debated upon greatly. The two most controversial aspects of this provision are that under Chinese law, only men and women can marry i.e. same sex partnerships are not allowed. Second it stipulated a ‘cooling off’ period of 30 days after filing for divorce. While this seems like a harmless provision that is applied in many other countries like US, Germany etc. there is a need to understand the larger context behind this law.

The socio-economic landscape in China has changed tremendously in the last few decades. The divorce rate in China has been rising, reaching up to 3.2 (per 1000 persons) in 2018. In 2019 more than 4 million couples parted ways. According to lawmakers the above provision will help reverse this trend by preventing divorces on a whim. Opponents argue that it will threaten lives of victims of domestic abuse, largely women. Falling marriage rates (7.7 percent decline in 2019), ageing population, skewed child birth rates have all exacerbated the looming labour shortage. Further, more women in the workforce is not sitting well with the Party goal of promoting ‘family values’, good social order and higher birth rates. Thus from a progressive stance on gender equality, Party leaders have moved on to advocating more conservative and traditional virtues for women like getting married and raising children, from ‘women holding up half the sky’ to promoting ‘strong family values for a harmonious society’.

This kind of policy disincentive is also being derided for greater state intrusion in private lives and manipulation of peoples’ lives for achievement of national goals.  However, according to lawmakers, the new marriage act is an embodiment of the integration of socialist core values into the civil code. The above discussion about two specific aspects of the Civil Code indicate the churning in Chinese society with aspects of both top-down and bottom-up reforms in the wider context of changing state-society relations in a state led market economy.

Following RCEP “victory,” China’s CPTPP challenge to Biden

Hemant Adlakha, Honorary Fellow, ICS and Associate Professor, JNU

Straight from celebrating the signing of the world’s largest trade pact, the 15-nation Regional Comprehensive Economic Partnership (RCEP), Chinese President Xi Jinping surprised everyone when he announced at the virtual Asia-Pacific Economic Cooperation summit five days later that China will actively consider joining the Comprehensive and Progressive Trans-Pacific Partnership (CPTPP) trade agreement.

Why is Beijing suddenly interested in joining a trade bloc that was initially pitched as anti-China? China’s state-controlled media has been very candid in stating that Beijing’s desire to join the CPTPP is strategically timed and aimed at a possible reconciliation with the United States under President-elect Biden. In a commentary released just a day after Xi made the announcement, the state-owned CCTV’s English language news and current affairs channel, CGTN, said: “With the incoming Biden administration now on the horizon, China has decided the ‘strategic time’ is now right to actively consider joining the CPTPP.”

CGTN acknowledged that the agreement, first orchestrated as the Trans-Pacific Partnership four years ago under the Obama administration, was framed as a trade counterweight to China. Now, however, CGTN pronounced the biggest takeaway from Xi’s interest in the CPTPP is that China is serious about expanding multilateral free trade and that, ultimately, does not view the trading system as a zero-sum game, as it has been depicted by the Trump administration.

On the other hand, a report on November 21 in the “hawkish” pro-establishment Global Times was far more forthcoming on the political motives. The Global Times’ story, entitled “China’s interest in CPTPP membership seen as a chance to ease Sino-U.S. tensions,” posited that Beijing is gauging the headwinds in Washington by signaling to the incoming Biden administration that China is ready to evolve away from the tense standoffs of the Trump era. Citing Wang Huiyao, the pro-U.S. and influential president of the Beijing-based Centre for China and Globalization, the Global Times article emphasized that unlike RCEP, the “CPTPP represents the world’s highest-level free trade agreement, and China’s interest in joining it shows the country’s desire and determination for deeper, higher-level opening up.”

Xi’s comments were not the first time China’s top leadership has expressed a desire to join the 11-country trade pact. In May of this year, Premier Li Keqiang became the first top-ranking Chinese leader to publicly confirm China’s interest in the CPTPP. At a press conference at the end of the 13th National People’s Congress, in reply to a specific question by the Japanese newspaper Asahi Shimbun as to whether China had a plan to join, the Chinese premier said: “China has a positive and open attitude toward joining CPTPP.”

Although Li’s remark was widely picked up by the international press, official Chinese media, including the Global Times, were conspicuously silent about the premier’s reply. However, the semi-official authoritative financial Caixin prominently headlined Li’s statement as “Premier Sends ‘Powerful’ Signal for China to Join Asia-Pacific’s Largest Trade Pact.”

Interestingly, the second influential Chinese figure to publicly advocate for China to join the CPTPP trade pact was none other than the senior financial commentator Hu Shuli, who is also the chief editor of Caixin. Charles Finny, an international trade expert and a senior official in New Zealand’s Ministry of Foreign Affairs and Trade, cited Hu’s comment in an article he wrote for the Auckland-based Asia Media Centre in July.

But not everyone outside China is willing to yet take at face value what CGTN and the Global Times would want us to believe – that China’s keenness in joining the Asia Pacific trade pact “is a kind of ‘Chinese vow’ on promoting Asia-Pacific cooperation and globalization.” Earlier on, when Li first indicated in his low-key tone some interest in joining the CPTPP, skeptics outside of China had read Li’s remark as a slap in the face for the U.S., as both the Trump administration and the Democrats were generally opposed to Washington (re-)joining the trade pact. That was made apparent from the headline of one article published within days of Li’s remarks: “Trumping the U.S.; China could join CPTPP.” The author claimed that China’s membership in the CPTPP would also underline its growing position as the pre-eminent superpower in the West Pacific.

As the “repository” nation among the CPTPP members, New Zealand has denied receiving from China a formal expression of interest in joining the pact. This indicates that, riding on the success of the recent signing of RCEP, China is fully aware of the potential opponents to its entry among the CPTPP’s 11 member nations. For example, even if true that Japan’s newly elected Prime Minister Suga Yoshihide has clearly indicated interest in expanding CPTPP membership next year, when it is Japan’s turn to host the CPTPP leaders’ summit, it is not hidden from anyone that Japan is highly suspicious on trade matters. Remember, Japan has been negotiating a three-way free trade agreement with South Korea and China since 2002.

Besides, most of the Japanese business and political elite is convinced that China will never join the CPTPP, at least not in the near future. Miyake Kuni, in a recent article in Japan Today, argued that by announcing China’s willingness to consider joining the CPTPP, Xi is indulging in pure propaganda. Miyake is a former career diplomat and currently serves as special adviser to Suga’s Cabinet. Miyake, critical of Beijing’s role in negotiating RCEP, feels that the leaders of the Chinese Communist Party (CCP) might have been emboldened after RCEP to believe that China can join, change, and remake the rules of regional trade under a new TPP. “Based on my experience as Japan’s chief negotiator for trade in services at the World Trade Organization from 1994 to 1996, I don’t expect China to abide by the ordinary rules or regulations for joining the free trade agreement,” Miyaki opined.

Digging deeper into China’s real purpose behind indicating a desire to join CPTPP, a recent commentary in the Chinese-language version of the Financial Times claims that pushing for more globalization is Beijing’s latest mantra to tackle the U.S.-led China containment strategy. Written by Beijing-based scholar Cao Xin, secretary general of the International Opinion Research Center, Charhar Institute – an influential “liberal” think tank in Beijing – the article tried to explain China’s sudden interest in joining CPTPP, almost like a twin declaration following the RCEP, as exclusively aimed at the U.S. “China very well knows that developing closer economic and trade relations with other countries in the world is the most effective way to hit back at the ‘contain China’ policy being carried out by the United States and its allies,” Cao wrote.

Finally, in the two months before Biden the oath of office as U.S. president, China is going to be more and more aggressive in forging as many as multilateral and bilateral economic and trade agreements as possible. Chinese Foreign Minister Wang Yi recently visited Seoul after spending two days in Tokyo, trying to expedite the signing of the China-Japan-South Korea FTA. Recently, Chinese Ambassador to Germany Wu Ken assured business leaders and political elites that Germany and the EU stand to gain momentum from China’s “dual circulation” policy as China pushes an end-of-year goal for the China-EU bilateral investment pact.

But even Cao’s special column in FT Chinese notes the reconciliatory mood toward Washington that is currently prevalent in Beijing. With the prospect of Biden moving into the White House next month, the CCP leadership, it seems, is working out a two-pronged strategy. On the one hand, Beijing will seek to put the new U.S. administration under pressure from the very start by openly extending an olive branch. On the other hand, it will look to “encircle” the U.S. by developing economic and trade relationships with more and more countries that are American partners and allies.

Originally published as With RCEP Complete, China Eyes CTPTT in The Diplomat on December 1, 2020

North Korea’s Strategic Significance to China

Pritish Gupta, Research Intern, ICS

The Chinese saying ‘if the lips are gone, the teeth will be cold’ has often underscored the relationship between China and the Democratic People’s Republic of Korea. The standard perception that China has been North Korea’s natural ally and strategic asset never lost resonance. Geographical proximity and ideological similarities also played a significant role in the bilateral relationship. However, as Kim Jong-un came to power in December 2011 and North Korea’s nuclear ambitions began to be purposefully pursued, China’s North Korea policy evolved with a strategic orientation.

Under President Xi Jinping, as Beijing began to increasingly identify itself as a great power, it adopted a more pragmatic approach towards the Korean peninsula. With a sharp strategic competition with the United States over the years, North Korea has become an important vector in China’s evolving foreign policy in pursuit of Xi’s Chinese dream.

The 2017-18 crisis on the Korean peninsula sparked a debate in Beijing’s questioning its continued support to Pyongyang, though Beijing continued with its North Korea policy, which is based on the geopolitical calculus.

The question of stability on the Korean Peninsula

In terms of China’s interests in the Korean peninsula, North Korea acts as a variable in regional competition with the United States. It maintains cordial relations with the Democratic People’s Republic of Korea (DPRK) while maintaining its strategic influence in the region. Beijing is apprehensive about any conflict in its backyard as it may jeopardize its strategic advantage on the Korean peninsula. In case of an imminent threat to its regime, North Korea may resort to a conflict with South Korea, which would lead to instability and uncertainty in the region. Clearly, Beijing prioritizes a peaceful and stable Korean peninsula over the denuclearization of the DPRK. The collapse of the regime may invite all the stakeholders, the United States, South Korea, and China, to intervene militarily to stabilize the peninsula, which might prove to be detrimental to the Chinese interests.

Beijing opposes Pyongyang’s nuclear program but prefers peace and stability over a full-blown conflict. Beijing fears that a direct intervention from the United States and South Korea over DPRK’s nuclear program may result in a unified Korean peninsula. The challenges of a unified peninsula could also pose concerns for Beijing. China has stuck to its principle of ‘no war, no instability, and no nukes’ to avoid any conflict on its borders. North Korea acts as a buffer state for China against South Korea as well as the presence of US troops. It plays well for Beijing that the North Korean regime remains intact where it acts as leverage on the backdrop of US rebalancing to Asia.

Avoiding a refugee crisis

One of the main concerns for China will be dealing with a refugee crisis if there is a potential conflict across the China-North Korea border. Both countries share an 880-mile border. Given any escalation of economic stress in North Korea, there would be a significant number of North Koreans seeking refuge in China, which could result in a humanitarian crisis. It would be a herculean task for the People’s Liberation Army to prevent North Koreans from crossing the border. China’s northeast provinces would always remain vulnerable with the development of any future events on the Korean peninsula.

Economic Aid

Beijing’s potential leverage over Pyongyang is also important for the survival of the North Korean regime. China has been the source of continued assistance to the hermit kingdom. Beijing has always found ways to skirt the sanctions imposed by the United States in the wake of the nuclear program. China has been cautious in dealing with North Korea over denuclearization, which might instigate instability. It understands that any response from Pyongyang may have an adverse effect on the bilateral relationship, Chinese interests and may diminish Beijing’s influence.

US-China equation

The Korean peninsula is a strategic theatre for great power competition between the United States and China. China’s strategic priority has been to contain the US influence in the region. Talks between the United States and North Korea have stalled after the failure of the Hanoi summit between President Trump and Kim Jong-un. The Biden administration would vary in the fact that its foreign policy approach should push for normalizing relations with North Korea. The withering of the US’s multilateral trade framework in Asia favors China’s interests. North Korean leader Kim Jong-un visited China twice before the proposed US-North Korea summits, which strengthened Beijing’s position with respect to the negotiations between both the countries. Also, the possibility of a trilateral alliance between the United States, Japan, and South Korea against China is never ruled out.

Way forward

The global pandemic and fraught relations between the United States and China may impede the prospects of a resolution of the crisis on the peninsula. Though, China has expressed its willingness to play a productive role in the political solution of the issue along with other stakeholders. The targeted sanctions on North Korea have done little to contain its nuclear program. The resumption of the Six-Party Talks could lead to a breakthrough in the negotiations. The new US administration would have its hands full after taking charge with the issue of the Korean peninsula still unresolved and US-China relations at an all-time low. The coronavirus pandemic has led to North Korea being more dependent on Beijing as well. The normalization of relations would give an opening to the American policymakers to work towards the reduction of troops in South Korea, thus reducing the tensions in the region, but if denuclearization of North Korea continues to be a precondition by the Biden administration for normalization of relations and easing of crippling economic sanctions on North Korea, then chances of any forward movement towards peace are rather slim. Though, it is understandable that Beijing’s support for Pyongyang would continue for the foreseeable future, and Beijing’s role would be central in the resolution of the crisis.