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A Note of Pause on Chinese Manufacturing Dreams in Indian Terrain

October 14, 2019June 3, 2020 ICSLeave a comment

P.K. Anand, Research Associate, ICS

Anticipation mixed caution prevails in the run up to the second informal summit between Chinese President Xi Jinping and Prime Minister Narendra Modi at the south Indian coastal town of Mamallapuram, in Tamil Nadu, this weekend. Given that the jury is still out on whether any substantive and tangible deliverables have been achieved from the first such exercise at Wuhan, in China, in May 2018, such an approach is understandable.

The optics of the meeting between the two leaders is expected to be political and strategic, even though economics looms as signifier for the relations of both countries in the background. Perhaps, it is a good time to analyse the economic capacity of China, especially the role of manufacturing sector, in powering the country and its positioning in the China-India dynamics.

The manufacturing base in China was largely the result of the invigoration of the economy after the 1978 reforms, with the focus on attracting foreign investments, especially in the coastal provinces. Along with the aim of getting foreign capital, the Chinese diaspora along with businesses based in Taiwan and Hong Kong, were also targeted of these investment policies.

Over the years, the rise of the Chinese economy was on the wings of the industrial production and development. While the bulk of heavy industry is under State-Owned Enterprises (SOEs), an increased proportion of manufacturing also falls in light and consumer-oriented firms, which are either private or joint ventures.

With deepening diversification, the industrial pace picked up in 1990s, with the development of automobile, electronics, and semiconductors, along with steel, cement, metallurgy and textiles. A cursory glance through the Indian market is enough to understand why the sobriquet ‘Factory of the World’ fits for China — such is the range of myriad consumer goods tagged as ‘Made in China’. Intricately connected with the global value chains, the manufacturing sector in China has often been considered robust.

This purportedly successful industrial development model has been offset with significant challenges. That the real essence of the Belt and Road Initiative (BRI) was to find a fix for industrial and infrastructural overcapacities, is a well-acknowledged fact. With the rise of labour costs in the mainland along with the increasing worker protests, mainly in south China — the industrial hub of the country — due to despotic labour regimes in workplaces, manufacturers are grappling with either automating labour-intensive industries or move them to newer locations like Southeast Asia.

Further, the US-China trade war over the last one year has compounded in the slowing of economic growthresulting in the shrinking of the manufacturing sector. In fact, the trade war has also impacted the Made in China 2025 project, at least in terms of its active pronouncements and projections. These need to be contextualised while probing the dynamics and possibilities for China’s manufacturing sector to make forays in India.

There has been a spike in investments by Chinese companies in electronics (mainly mobile phones), home appliances, and automobiles, along with the tech sectors. The lion’s share of Chinese investments in India are private companies, thereby highlighting the reticence towards big ticket SOEs, and dawning the realisation that a good amount of such partnerships take place outside the purview of government-to-government engagements. However, these partnerships and investments are not necessarily the markers for the whole manufacturing sector, as there exist multiple humps on the road for both countries.

The increasing clamour among sections of the Indian business and political elite —enamoured by the glitter of China’s advancement —to ‘transplant’ the Chinese model in Indian settings, is oblivious to the inherent problems on both sides. The avowed ‘win-win’ as often bandied by the Chinese doesn’t translate into reality when it comes to technological transfer or knowledge sharing. Doubts exist in the count on employment creation, as Chinese enterprises abroad mostly seek have technical and supervisory/managerial personnel only from the mainland, thereby hiring local workers only for other routine and auxiliary tasks. This is often justified in the name of ‘work culture’ and ‘efficiency’.

Further, they view the regulative environment, with complex labour laws, discouragingly. The suppression of labour rights, is an inherent part of the ‘Chinese model’, and is even visible in subcontracting firms, as illustrated by developments at this phone manufacturing facility Delhi NCR; the export of this exploitative model is well documented in Southeast Asia. Clearly, there are enough warts are always cheek by jowl with the gloss.

Even as speculations continue on the enduring nature of China-India relationship amidst the Mamallapuram pit stop, we can be pretty sure that there is still a long way to go and multiple hoops to climb before the Chinese manufacturing sector can both meaningfully and substantively, shake hands with India.

Originally Published as Entry of Chinese manufacturing in India is a bridge too far in Moneycontrol.com, 9 October 2019

The dance of dualities in the Chinese Social Credit

Unlike the conflicting nature of dual forces in western philosophy, traditional Chinese philosophy manifests this duality in the form of complementary and balancing forces exemplified in the Yin-Yang.

July 1, 2019July 12, 2019 ICSLeave a comment

Nishant Dilip Sharma, Research Intern, Institute of Chinese Studies, Delhi

Dualities have always held a prominent place in traditional Chinese philosophy. Unlike the conflicting nature of dual forces in western philosophy, traditional Chinese philosophy manifests this duality in the form of complementary and balancing forces exemplified in the Yin-Yang. The way in which the Chinese government has gone about experimenting and implementing the infamous Social Credit System in China is another duality at play.

What is being seen as the emergence of an Orwellian “Big Brother” age in China, is being carried out in several cities through a number of pilot projects running on a dual ‘carrots & sticks’ model. Just like any other ‘reward-punishment’ scheme, this programme offers certain incentives (carrots) to people complying with the expectations of the governing body and at the same time, has punitive sanctions (sticks) in place for non-compliance. Interestingly, the quality of the carrots and the size of the sticks has not been uniform across all pilots.

This arises from the fact that the implementation of pilot programmes is being undertaken in a two-pronged approach. At one end are the Government run mandatory SCS programmes that are operational in more than 43 Chinese cities. At the other end, there are the corporate-run Social credit systems. Unlike the Government SCS programmes (GSCS), the corporate ones (CSCS) are not mandatory. The CSC pilots do offer virtual and monetary rewards to their customers, however the real intent is to eventually become incorporated with the government’s plans. This way the corporate in question remains in the forefront when SCS is rolled out in a more comprehensive measure. Speaking of the sticks, punishments are harsher in GSCS than under CSCS. The carrots and sticks in the GSCS are in the form of ‘red-lists’ and ‘black-lists’ respectively. While one’s name in the ‘red-list’ would mean a special honor and privileged/subsidized access to public services, a name in the ‘black-list’ would mean lesser privileges or denial of certain privileges. This could mean low internet speed, ban from traveling, denial of bank loans, public naming and shaming, etc. In short, one’s social credit scores could have a great impact on his/her routine life and social reputation.

In a country which bears the tag of the most populous nation on Earth, such measurement of reputation scores for each individual is no small undertaking. This is accomplished through the creation of a systematic surveillance state where big data and artificial intelligence play a major role. Each camera captures the movement of every face and small offenses like jaywalking or walking your dog without a leash could result in an immediate fine from the government. Thus, surveillance in the eastern industrialized towns is associated more with governance and has helped bring down law enforcement costs and many governance issues.

In contrast, state surveillance in Xinjiang and Tibet is employed to address security concerns. Surveillance cameras here snoop into the personal lives of the inhabitants to stamp out any cultural expression. Any sign of resistance opens up the gates of re-education camps, the insides of which many have seen but few have come out to tell the story. Here state security is a priority while separatism is viewed as evil and surveillance becomes a tool. This dual nature of surveillance, that of governance in the eastern region and that of security in the western region, is another duality present in the Chinese system. This duality, however, begs to question the coherence of what China plans to achieve with a full-scale rollout of the SCS model in the entire Mainland China, which could be up and running as early as 2021.

These dual objectives, dual implementation models, dual outcome conditioning, raise multiple questions: Will China be successful at creating a reputation state amidst the incongruities that exist in China? The answer seems to be hooked to a second question: Will China be willing to respect the socio-geographic disparity present between the historically separatist western regions and the presently thriving eastern industrial hubs?

One way of doing so would be to prevent any punitive sanctions and credit reductions on the grounds of cultural suppression. A conundrum in the eastern region could be credit rating reductions caused due to systemic failures, human errors, or corrupt bureaucracy. As remediation mechanisms, legislations are being put in place to prevent such reputation harms. Shanghai’s local credit legislation passed in 2017 on the “right to be forgotten” provides a much-needed right to credit restoration and a reasonable requirement on administrative agencies’ query over citizens’ social credit information.

Such remediation mechanisms are also extended to cover data protection and norms for safe collection, processing and storage of personal data. These measures are limited to eastern cities like Hubei, Shanghai, and Hangzhou. The lack of such legal remedies in the GSCS pilots being run in the western region calls for a systemic shift in the way the pilots are being conducted. More polarized developments in the way the pilots are conducted could likely leave the western inhabitants estranged and brew discontent if the policy is applied without systemic planning and West-specific trials. Perhaps it’s time for the policymakers to take a hint from their traditional philosophies and create more balancing dualities than conflicting ones.

Limitations of the New Intellectual Property Reforms

Though reforms in IP remain a strong demand of the Trump administration, there exists a significant gap in the Chinese understanding of US requirements and the actual reforms being undertaken by the Chinese government towards that end.

June 20, 2019July 12, 2019 ICS1 Comment

Kuldeep Saini, Research Intern, Institute of Chinese Studies, Delhi

One of the major catalyst for the ongoing trade war between China and the United States is the question of Intellectual Property rights (IPR) protection to foreign firms in China. Even after months of discussions and negotiations, an agreement seems elusive. China recently imposed tariffs worth US$60 billion in retaliation to the tariff hike that had been imposed on Chinese goods by the US. The investigation report submitted by United States Trade Representative (USTR) Robert Lighthizer on 22nd March 2018 cited Section 301 of the US Trade Act of 1974[1] to discuss China’s engagement in policy of transfer and theft of Intellectual Property (IP) technology from foreign firms. Ever since, China has committed to enhance its IP protocols by 2020 through the attainment of high levels of IP regulations on utilisation, administration, protection and creation.

The latest step in this regard are the amendments made to the Trademark Law of the People’s Republic of China (PRC) on 23 April 2019 at the 10th session of the Standing Committee of the 13th National People’s Congress (NPC). Though reforms in IP remain a strong demand of the Trump administration, there exists a significant gap in the Chinese understanding of US requirements and the actual reforms being undertaken by the Chinese government towards that end.

This article discusses the constraints faced by the Chinese Government in deescalating the ongoing trade war with the US despite the it having undertaken three major intellectual property reforms. A discussion of the three reforms undertaken by the Chinese government follows.

First, the measures governing the transfer of intellectual property rights overseas were issued on 18 March 2018 by the State Council’s General Office. These reforms state the complete opposite of what the world understood by Trump’s claim of IP theft by China. The changes mandate the reduction in IP related theft by putting the onus on US firms that are in a merger with domestic Chinese companies. They fulfil the purpose of implementing the regulations and setting forth the procedures for overseas transfer of intellectual property for the foreign companies having mergers with the domestic companies. However, while China’s State Intellectual Property Office (SIPO) claims transfer of more than USD 4 billion intellectual properties from China, the numbers fail to reflect the home conditions for foreign companies. These structural changes fail to focus on the internal regulations of IP in China while considering the export of technology as a priority concern for the Chinese government.

The significant change is the involvement of relevant governmental departments like Forestry and Ministry of Commerce (MOFCOM) and departments looking at technology and agriculture in a more orderly and legal manner. This increases the processing time in receiving the patent rights. As of 2017, the total numbers of patent applications received in China were 1.2 million out of which only 3,26,000 were approved. These reforms further discourage the trade incentives of foreign companies to establish themselves in the Chinese market.

Second, the establishment of the appellate-level intellectual property tribunal on 1 January 2019 by the Supreme People’s Court of China (SPC) reflects the concrete structural steps undertaken to strengthen the IP protection laws. According to Zhou Qiang (Chief Justice of SPC) there has been an increase of 41.8 per cent in the IP cases resolved in 2018 and the new IP court will add to these numbers. The major point of contention in the first quarter of the year highlights the lack of resources, enlisting of powers, persistence and professionalism in handling the IP cases of foreign companies. Another concern with the new IP court as stated is the unknown statistics about the IP cases of foreign firms that are currently under review. This creates an asymmetry of information for scholars and other countries attempting to analyse the efficiency of China’s IP Court.

The verdict of the first case in IP Court came out in just two trials embodying the idea of “protecting innovation innovatively”. However, the speed at which the decision was made led the foreign companies to fear that the verdict was pre-decided. This also raises the question of which court’s verdict has the final say in the IP matters as these cases are still being directed to the earlier SPC and not to the new IP Court. The development of a national level appeals court might prove to be insufficient to tackle the current situation for international businesses fear that their proprietary technology could be stolen at a regional level.

Third, the reforms in the Trademark Law and Anti-Unfair Competition Law issued on 23 April 2019 did not follow the usual process for public comments. The primary concern regarding these positive changes is whether they will be followed by the necessary laws on transparency of the enforcing and implementing agencies like National Intellectual Property Administration (CNIPA) that still awaits additional clarifications related to administrative procedure regulations. This concern arises due to the inability of IP related cases that involve technical, confidential or business information that are not reported on public databases. It is hard for foreign companies to comply with the requirements raised by the new NPC reforms resulting in the current slowdown of foreign related cases. The reforms further fail to restrict the fraudulent activities such as claims of trademarks (TM) with bad faith and no commercial usage. The use of language in the recent reform of Article 4 highlights the need for commercial use of the trademark while applying. Thus, the US government and firms see these reforms as a state encouragement for violating international intellectual property rights.

Overall, it can be accepted that China is firmly aiming to be the hub of technological innovation. But with the escalation of trade war with US (increasing tariffs to 25 per cent) has added heavy pressure on the Chinese government to negotiate the opening of the Chinese economy with effective protection to foreign technology. However, one has to agree that the current reforms fail to address the major US concern with respect to forceful technology transfers. The Chinese government needs to accommodate the international guidelines of relaxing contractual norms with respect to foreign companies in order to prevent the slowdown of its economy due to trade war.

[1] Section 301 authorizes the US President to take all appropriate action, including retaliation, to obtain the removal of any act, policy, or practice of a foreign government that violates an international trade agreement. Section 301 cases can be self-initiated by the (USTR). Thus, Trump initiated the tariff imposition on China.

Agricultural Industry amidst the 2018 US-China Trade War

This article discusses the current scenario of the two markets, with a particular focus on soybeans and associated businesses.

June 16, 2019July 11, 2019 ICS1 Comment

VIDUSHI R SINGH, Research Intern, Institute of Chinese Studies

The US-China trade war of 2018 began with tariffs being imposed on core sectors, such as industry inputs (steel, aluminium tariffs by the US) and agriculture (grain and seed tariffs by China). These attacks on primary industries have led to huge outcries on both sides, with several calls for the hurrying up of ongoing trade negotiations so that the political agendas of the leaders do not hurt the ordinary people.

This article discusses the current scenario of the two markets, with a particular focus on soybeans and associated businesses. Both countries have faced losses and market instability as a result of tariffs being put on agricultural commodities this manoeuvre, but while neither of the countries have ‘won’ in this particular sector, China seems to have incurred a lesser loss than the US.

US Agricultural Industry

The first round of the trade war saw China putting a 25 per cent retaliatory tariff on several US goods. One of the most critical commodities in the Chinese list was soybean – produced in regions that were majority supporters of Trump in 2016. The cleverly targeted tariffs have wreaked havoc on the US soybean market, with prices falling by over 13.4 per cent (based on the author’s calculations and data from United States Department of Agriculture) since May 2018. The fall in prices has further been caused by an approximate 78.6 per cent fall in demand from Chinese importers as of April 2019, based on a year on year comparison. The trade negotiations between President Trump and President Xi have included promises by the Chinese government regarding buying of over 5 million tonnes of soybean from the US, but no deadline has been set. It is possible that the unreliability of the US as a supplier of essential commodities to China has encouraged the Chinese populace to look for substitutes elsewhere, and US farmers are unlikely to have the same access to the Chinese market as they once enjoyed. As of now, there has been an almost complete crowding out of US soybean from the Chinese market, due to its inability to compete with local and Brazilian substitutes on prices. If the Chinese tariffs stay in place, the USDA projections have concluded that US soybean exports will not be able to reach pre-trade war levels even by 2024.

Another factor creating problems for the US agriculture industry is the increased costs of farm equipment and machinery. The tariffs on steel and aluminium imposed by Trump have led to a rise in the production costs of farm machinery. This, combined with the low expectations farmers have for the coming planting seasons, has resulted in a situation where farmer bankruptcies are on the rise, and US agricultural trade surplus has hit an unprecedented low, the lowest it has been since 2007. The plantation of soybean has fallen by 5 per cent in the last one year and is anticipated to reduce further, as farmers move away from soybean to other, more profitable crops. While the US Department of Agriculture has promised aid to farmers adding up to USD 12 billion, they have also asserted that this will only be a one-time assistance to help farmers regain control of farm operations.

Chinese Agricultural Industry

As for the Chinese side of the agriculture industry, the scenario seems to be mixed, as opposed to the blatantly negative situation that the US agricultural industry is facing.

The Central Committee of the Communist Party of China and the State Council unveiled its Number 1 Agricultural Document on 19 February 2019. The document focused on agricultural and rural issues and outlined policy goals for 2019 and 2020. Its focus on the “profound changes in the external environment” and ways to mitigate the same highlights China’s wariness with regards to the rising tensions in the trade war. This announcement falls in line with China’s 2015 mission to achieve absolute food security by balancing production and environmental concerns. While the agricultural reforms and the shift to the household responsibility system have helped increase productivity of land, China’s reliability on foreign markets for soybean has become a cause of concern, bringing down the agricultural trade balance, which would otherwise have been positive.

The government has, however, acted commendably fast in the past year to shift all soybean imports from the US to Brazil, which has allowed Chinese consumers some protection from the increased prices of US soybean. This has been followed by government encouragement of increased domestic production of soybean and other feed grains. However, the lower profitability of cultivation of soybean over rice or wheat has created a new need for subsidy and minimum procurement schemes.

Another factor cushioning Chinese soybean market has been the outbreak of African swine fever in various parts of the country since August 2018. The hog population in China has fallen by an estimated 13 per cent, and this has created a consequential fall in demand for feed grains and seeds. Since swine feed in China is 20 per cent composed of soybeans, this fall in demand has allowed for market prices to stabilize at a lower level than previously anticipated.

These steps have also been accompanied by reduced quality restrictions on imports and increased incentivisation for agricultural investment, as announced in the latest Number 1 document. So while there has been an undeniable fall in supply and increased uncertainty in the market, the government’s response has been able to prevent the need for total abstention from the consumption of soybean and several other vital parts of people’s diets as well as livestock feed.

Conclusion

The attempts by the two countries to regain equilibrium in their respective agricultural markets have provided some comfort to the consumers and producers of the tariffed products. The Chinese government, however, seems to have leveraged its position better to create changes very quickly to shield its populace from the worst impacts of the trade war. The US government, on the other hand, has only implemented superficial steps to manage the impact of the trade war in its borders, instead choosing to leave the outcome to market forces.

Irrespective of these safeguarding attempts by the governments, the agricultural markets in both countries are doing worse than previous financial years. Falling demands and accumulating stocks have created an imbalance in the global market. In the absence of intervention, this may result in an economic crash, as US farmers find themselves unable to repay loans and Chinese livestock producers fall short of sufficiently nutritious feed. Relaxing quality controls and giving out aids are sure to help in the short run; however, given the inconsistencies in the market, long-term solutions are necessary.

The State of China’s Automobile Sector

Amidst the uncertainty regarding the trade war’s impact on Chinese industry, the automobile sector in China will remain profitable

May 24, 2019July 11, 2019 ICSLeave a comment

Bhavana Giri, Research Intern, Institute of Chinese Studies

Automobile sector in China is the largest in the world when measured by the number of units produced. Apart from domestic production, people’s demands for all kinds of vehicles in China are met by Joint Ventures (JV). For a foreign company to establish a JV, it is required to enter into a 50-50 partnership with a Chinese company in order to start production in China; a similar arrangement is required for foreign companies to export automobiles to China.

Automobiles from the US are one of the most significant exports to China, ranking just behind aircraft and agricultural output. With a trade value of more than $10 billion, this sector is of great significance to the ongoing trade war. Currently, the automobile sector in China is witnessing a downfall in output growth when taken as whole which is driven by a drop in the production of gasoline based automobiles. However, in the long run, China’s drive to lead in global production of new energy vehicles (NEVs) is slated to offset this downturn, even if the trade war continues. Additionally, the upper hand China has in the automobile joint ventures will also help to recover from the downfall. In contrast, the resilience of China’s NEV sector will adversely impact the competitiveness of its American counterpart.

Demand side conditions are highly favourable and will continue to be so. Three decades ago bicycles were the most popular mode of transport in China and most cars needed to be imported. Today, however, Chinese car makers are producing more cars than any other country in absolute terms. As can be seen from the data, the production of automobile in China increased from 9 million units in 2007 to 23 million in 2018. To be sure, economic conditions are currently turbulent in China.

Observers predict that China’s GDP will decelerate in the near future and its leaders have urged precaution in this regard. The automobile sector, however is poised to remain buoyant, despite macroeconomic woes. The Chinese government intends to prioritise the preservation of automobile demand and supply by providing subsidies and exempting consumers from purchase tax on electric vehicles. These subsidies will ensure that there will be no significant shock to the automobile sector.

China has become the biggest giant in the production of electric cars and bikes. With Domestic Value Addition (DVA) of more than 80 per cent, and a strong grip over the production of essential inputs such as batteries, the sector enjoys a substantially strong footing. Recent falls in automobile stock prices should not obscure this fact.

To the rest of the world, it may appear that China has struggled to make progress in automobile manufacturing. However, the situation has changed drastically with recent developments. China now possesses massive potential for substituting imported automobiles with electric vehicles. With trade talks in a state of disarray and the heightened possibility that China will reapply auto tariffs, it is also likely that automakers will be incentivised further to produce in China. With the exception of the luxury segment, which is less easily substituted, China’s automobile sector is likely to withstand the headwinds it currently faces. Moreover, with the Chinese government establishing stricter norms for controlling carbon emissions and attempting to reduce pollution in cities, the scope for domestic companies to defeat automobile giants such as Toyota, BMW, etc has escalated. The Chinese government is also granting special manufacturing permits to companies which are working to develop NEVs.

The electric vehicle world sales database shows that in 2018, 2.1 million units of electric vehicles were sold which is almost 64 per cent higher than that of 2017. China has advanced its position in this particular segment and has a share of almost 56 per cent of the total sales. Although companies like Tesla, Toyota, etc. are also developing electric vehicles they lack the cost advantage China has, and are, thus unable to capture the market. Several subsidies and tax cuts provided on purchases of electric vehicles further boost demand in the highly populated cities of China. This is illustrated by the fact that profits for BYD jumped 632 per cent jump in 2019. On the other hand Tesla, which is exporting to China in an increasingly hostile trade environment, lost nearly $700 million in the first quarter in 2019, despite robust demand.

Another factor that will support China’s automobile sector is technology transfer. Most automobile production in China happens by way of Joint Ventures (JV) between Chinese and foreign companies, which allows local companies to acquire know-how. The Chinese have also acquired automobile technology by heavily investing in foreign-based automobile companies. Therefore, China’s automobile sector is unlikely to reel in the long-run. Moreover, China is less dependent on foreign value addition than it used to be – its contribution to processing and non-processing value addition process in the production of automobiles is uninterruptedly increasing.

The optimism expressed above does not apply to the American automobile industry, however. To a large extent, US-based automobile companies are dependent on revenues from the Chinese market that their JVs enjoy and are, thus, highly vulnerable to disruptions in bilateral relationship between two nations. For example, automobile giant BMW, is not introducing a new model because of the environment of uncertainty created by the trade war. US automobile companies are experiencing sluggish production while on the other hand Chinese NEV start-ups and companies are scaling up their production.

Unlike others, the automobile sector in China will likely remain profitable irrespective of ongoing trade contestations and tensions, due to the Chinese government’s encouragement to develop NEVs. China’s NEV companies are poised to emerge as leaders in markets all around the world, as they race ahead their counterparts from the US, Japan, and Germany.

SME Financing: The need for Concrete Reforms in China’s Financial Sector

“As China plans loan boost for small companies, technology firms could be the answer”

May 23, 2019July 11, 2019 ICSLeave a comment

The annual meeting of China’s legislative body, the National People’s Congress (NPC) came to an end on 15 March 2019 with Premier Li Keqiang expressing commitment towards several reforms in China’s banking and financial sector. Apropos the reforms, the large state-owned commercial banks have been instructed to increase their lending by 30 per cent to micro, small and medium enterprises (MSMEs). Economists, analysts and bankers remain sceptical however, owing to the vague character of the declarations. Detailed and clarified reforms are required in order to encourage truly productive lending.

At present, there are 38.82 million MSMEs in China. MSMEs in China are defined as firms with less than 300 employees, an average revenue of RMB 30 million and RMB 40 million in assets. Market liberalisation and reform policies in various sectors and industries have been beneficial for MSMEs. MSMEs have emerged as a crucial component of China’s economy as they account for 75 per cent of total jobs, alleviate poverty and facilitate rural development. However, vulnerabilities remain due to poor execution of reforms.

For example, reforms have been inadequate with respect to the property rights of the SMEs, leading to the discouragement of private investors. Investors face problems in administrative procedures like taxation due to vague definitions. In particular, firms find it difficult to predict the level of tax they will face owing to the ambiguity regarding whether they qualify as a state-owned or collective owned enterprise. Raising lending targets of banks without addressing this ambiguity, therefore, is not adequate to empower MSMEs.

While the Chinese government expects total loans made to MSMEs to increase by RMB 300 billion on account of the raised lending requirements, this may not materialise due to lack of clarity in the NPC report. Although it instructs banks to lend to “small companies,” it is uncertain whether this term is defined the same as MSMEs or whether it refers to a subset of these. These will exacerbate existing confusions – only 63.1 per cent of the total SMEs in China applied for loans from the institutions as of 2018. Moreover, the creation of too many administrative stages in lending procedures for Township and Village Enterprises (TVEs) has made the entire affair more time-consuming.

Nor has the recently expressed reform commitment adequately addressed shortcomings in the Credit Guarantee System (CGS) – an institutionalised service offered by specialised agencies that help SMEs obtain loans from non-banking financial institutions. The CGS is intended to solve the problem of high financing cost for SMEs, reducing the bank’s management and operational risks, while developing the credit rating agency market in the country. It suffers from notable shortfalls that are in need of resolution. Firstly, the seven thousand credit guarantee subsidiaries that currently exist are still not catering to the problem of asymmetric information between the banks and enterprises. Enterprises are not adequately aware of collateral management, ways of repaying previous loans and other finance related technical details (like credit score) that the banks can mentor to the SMEs.

Secondly, there are no specific changes in the collateral requirements by the government, which is of significant concern for the banks. Even though the CGS Policy is well defined in official papers, it is not very efficient at the grass root level as the bank managers are still reluctant to invest in SMEs. This is also owing to the rising non-performing loan ratio – banks are, thus, resorting to fulfilling their annual loan targets by lending largely to small State-owned enterprises (SOEs) on the grounds that the state guarantees repayment. For example, the famous InnoFund government program that supports R&D activities does not fund the MSMEs at opening stages as the preference is for state-backed companies.

Chinese Steel Industry: How Did the World’s Largest Steel Producer Protect Itself from Global Slowdown and a Trade War?

The US-China trade war and rising environmental concerns have led to a slowdown in global infrastructural projects in 2018. The objective of this short piece is to understand the impact of these global phenomena on the Chinese steel industry.

April 29, 2019 ICSLeave a comment

Vidushi R Singh, Research Intern, Institute of Chinese Studies

engineering-2868901_960_720 — How Did the World’s Largest Steel Producer Protect Itself from Global Slowdown and a Trade War?

China has been the world leader in steel production since 2008, with about half of the total world steel exports originating in China. The US-China trade war and rising environmental concerns have led to a slowdown in global infrastructural projects in 2018. The objective of this short piece is to understand the impact of these global phenomena on the Chinese steel industry.

Economic logic follows that excess supply and reduced demand, as have been observed in recent times, would lead to falling prices. The inelasticity of supply should have meant low prices for the Chinese steel market. As can be observed in the following graph, prices dipped following the first steel tariff announcement from the United States Trade Representative’s (USTR) office on 1 March 2018. However, while prices did fall, they also rebounded much sooner than initially predicted. This trend can also be observed in the graph, with prices rising back up April 2018 onwards. However, the prices crashed again in November 2018, due to falling demand in downstream sectors, such as infrastructure and manufacturing industries, as a speculative response to rising tariffs between the US and China. Chinese steel manufacturers also registered losses for the first time in the last three years, in November 2018. Despite this, the Chinese steel economy remained largely immune to economic shocks.

Source: Trading Economics

The Chinese conduit to coming out unscathed lies in the supply side reforms, initiated by the government in 2015. The end of the Chinese construction boom in 2014 had instigated the government to carry out reforms to cut down on steel production. As the growth rate of the construction industry fell from 10% in 2014 to just 2% in 2015, steel production was reigned in, with the growth rate actually falling to a negative value in 2015 (National Bureau of Statistics of China). The government decided to intervene at this point so as to ensure the survival of the steel industry and avoid mass layoffs that would have resulted from a slowdown in the industry. The goal decided in 2015 was to reduce capacity by 45 million tonnes, a target that was attained by the latter half of 2017, much before the set deadline of 2020.

Thus, when the demand growth rate fell, the Chinese steel industry had already moved on to capacity optimization and did not face grave overutilization. This allowed for the industry to shift supply rapidly, and safeguard itself from future tariffs as well. This success of the Chinese steel industry is evident in the fact that since 1 January 2019, Chinese steel prices have increased consistently. The shift from high-grade iron ore to lower grades has also allowed manufacturers to increase margins by cutting costs.

One interesting factor in this situation is the ability of the Chinese steel manufacturers to divert inventory to Chinese infrastructural projects under the ‘Made in China 2025’ initiative and the Belt and Road initiative. While it is hard to ascertain the exact amount of steel inventory being fed into these initiatives, they do provide the steel industry with a reliable sink to use up inventory, while cutting down on any overutilization, thus stabilizing prices in the short run. The government’s plans to expand on infrastructure development in the coming years also provides support to investor speculations and have played a role in stabilizing the Chinese steel economy.

The 25 per cent tariffs imposed on steel imports by President Trump, thus, fall short of having a real impact on the Chinese steel industry, in part due to China’s relatively unimportant position in US steel imports (China is the 25^th largest exporter of steel to the USA), and in part because of the foresight of the Chinese government.

So while the Chinese steel industry did face multiple shocks over the course of the 2018 trade war and global infrastructural slowdown, the government’s preemptive measures of securing a strategic sector allowed it to come out of the tussle relatively unharmed. While the opacity of government and industrial operations make it tough to analyze the situation in greater depth, one can say that the Chinese steel industry has been able to cope with the changing world geopolitical scenario with ease.

A China Gazer’s Random Musings – No. 2

January 30, 2018 ICSLeave a comment

Kishan S. Rana (IFS Retd.), Emeritus Fellow, Institute of Chinese Studies, Delhi

China in Africa

As a second secretary at the Indian Embassy in 1963-65, I occasionally visited Peking University (Beida), always in the company of African diplomats, who went to meet students from their countries at that great institution. I sometimes accompanied a friend from the Egyptian Embassy, circumventing the tight surveillance that we as Indian Embassy officials faced. That first indirect exposure sparked my interest in Africa. Little did I anticipate that I would spend nearly ten years in Africa (Algeria, Kenya and Mauritius and, later Namibia).

How is China seen in Africa? Given that in 2016 China committed itself to US$100 billion by way of credits and loans for African states – significantly more than the World Bank – what has been the impact? Glib talk about neo-colonial actions aside, the reality is rather complex. Continue reading “A China Gazer’s Random Musings – No. 2” →

Work and Workplaces in the ‘New Era’: Labour Issues at the 19th Party Congress

November 7, 2017 ICSLeave a comment

P. K. Anand, PhD, Research Associate, ICS

In the week preceding the beginning of the 19^th Party Congress of the Communist Party of China (CPC), state-run media trumpeted the increase in minimum wage levels in 17 regions & cities in China in 2017. Out of these, four major cities namely, Beijing, Shanghai, Shenzhen and Tianjin, have set the minimum wage levels at 2,000 RMB per month. The increase in the minimum wage levels does not carry a linear narrative, however. Some provinces have expressed reluctance to implement minimum wages, wages are also not commensurate with rising house rents, increasing costs of travel from home to the workplace, etc. On the other hand, the increase in wages also adds to the rising labour costs for investors and enterprise managements. In this scenario, the Party-state has the task of striking a fine balance between maintaining economic growth and encouraging investments, while also increasing the material wealth and ensuring the well-being of the workforce.

Xi Jinping’s political report to the 19^th Party Congress is reflective of the apprehensions and disquiet of the Party-state in the need to undertake this balancing act Continue reading “Work and Workplaces in the ‘New Era’: Labour Issues at the 19th Party Congress” →