What does China gain from its South Pacific Engagement?

Wonchibeni Patton, Research Intern, ICS

Image: President Xi Jinping with eight Pacific island countries’ leaders at the 26th APEC Economic Leaders Meeting
Source: Getty Images

The People’s Republic of China (PRC) is the third-largest aid donor to the Pacific Island Countries (PICs), spending around US$1.76 billion in aid towards the region. In its aid programme, the PRC emphasises on equality, mutual benefit and win-win cooperation. On this note, the following paragraphs examine the benefits that the PRC gains from its engagement with the PICs.

Scholars have identified the PRC’s two main interests in the PICs as political and economic. Political or diplomatic interests include decreasing Taiwan’s diplomatic clout and gaining the support of the PICs at multilateral forums, mainly the United Nations (UN). The PRC and Taiwan rigorously engaged in “chequebook diplomacy” in the 1990s, competing for diplomatic recognition from the PICs until 2008 when President Ma Ying-Jeou of the Kuomintang government came to power in Taiwan and led to a diplomatic truce. Before 2019, Taiwan had six diplomatic allies in the region, but this was reduced to four when the Solomon Islands, followed by Kiribati, switched to the PRC in September of 2019. There were several reports that the PRC had baited both countries with promised aid: US$500 million for the Solomon Islands and funds for aeroplanes and commercial ferries for Kiribati

Although the PICs occupy only 15 per cent of the world’s surface, with a cumulative population of around 13 million, they hold about 7 per cent of UN votes. The PRC’s membership in the UN Human Rights Council (UNHRC) has often been questioned, and the PRC is often targeted at the UN for its human rights record. The Xinjiang issue has been raised twice at the UNHRC in the recent past-2019 and 2021. Both were led by countries from the West. However, both times the PRC responded with greater support from its “Like-Minded Group”- a term used to describe a loose coalition of developing states often led by the PRC, Russia and Egypt . In 2020, when the issue of China’s new national security law in Hong Kong was raised at the 44th session of the UNHRC by 27 countries, Papua New Guinea was amongst the 53 countries that backed the PRC. In 2021, when the human rights situation in Xinjiang was raised at the 47th UNHRC session by Canada with the support of 44 countries, a coalition of 69 countries led by Belarus responded in China’s support. The PICs Kiribati, Papua New Guinea and the Solomon Islands were included in the 69. Thus, the PRC has been successful at garnering increasing support from the PICs on issues concerning its interests in international fora.

The PRC’s economic interests in the region include the promotion of China’s Belt and Road Initiative (BRI) and the hunt for raw materials. All the ten diplomatic partners of the PRC in the region have signed up for the BRI. The PICs’ total exclusive economic zones (EEZs) extend across nearly 7.7 million square miles of ocean. This can be beneficial to China’s endeavours in exploring and extracting natural resources. Some of the PICs are blessed with abundant natural resources and raw materials in terms of minerals, metals, fossil fuels, fisheries and wood. A global audit of Pacific resource extraction undertaken by the Guardian’s Pacific Project revealed that China is the largest importer of the region’s natural resources, importing resources worth US$3.3 billion in 2019. In the mining industry, the PRC has invested in seven mining projects across the region, with the largest one being the US$1.4 billion Ramu nickel and cobalt mine in PNG. PNG and Fiji have been the main focus of investments in this field. Other major operations include the Porgera gold mine and the Frieda River Copper project in PNG, the Nawailevu Bauxite mining project and the Vatukoula gold mine in Fiji, and so on. These operations are partly owned and run by Chinese SOEs such as Zijin Mining Group, Xinfa Aurum Exploration and Zhongrun International Mining. In 2019, PNG exported US$2.3 billion worth of oil, metals and minerals to China while Fiji exported US$4.8 million of the same.

The Pacific region is the world’s most fertile fishing ground. China imported US$100 million worth of seafood products from the region in 2019. However, Chinese vessels have also been involved in illegal, unreported and unregulated (IUU) fishing, which has been threatening the region’s revenue sources and food security. Even though the Western and Central Pacific Fisheries Commission (WCPFC) states that China has around 600 licensed vessels fishing in the area, various estimates of the Chinese fleet range between 1,600 and 3,400 vessels. The major exporters of tropical logs in the region are PNG and Solomon Islands, where forestry is a major industry. According to the US Department of Agriculture report, in 2020, Papua New Guinea was the largest hardwood log exporter to China, accounting for 21 per cent of China’s total imports, followed by the Solomon Islands. The Pacific region’s emerging potential as the ‘blue economy’ has also caught Chinese interest. China has started looking into Deep Sea Mining by conducting research projects through the China Ocean Mineral Resources Research and Development Association (COMRA). They have identified polymetallic and cobalt nodules, hydrothermal sulfide deposits and have also produced several deep-sea mining maps in the Pacific. Furthermore, in 2017, China signed a 15-year exploration contract for polymetallic nodules in the Clarion-Clipperton Fracture Zone in the Pacific Ocean with the International Seabed Authority. Although the gains from the Sino-Pacific engagement may not be equal in quantity, Sino-Pacific engagement can be considered a qualitative ‘win-win’. Certainly, China’s primary goals in the region are being met to some degree on both the political and economic fronts.

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.

India-Taiwan Trade Relations in COVID-19 Era: Opportunities and Challenges

Kannan R Nair, Research Intern, ICS

Image Source: Reuters

Recent skirmishes between China and India at Galwan Valley ignited debates in policy circles across New Delhi about growing importance of Taiwan in positioning India’s stance towards Beijing. Currently, Taiwan is India’s 35th largest trading partner, and for Taiwan, India is 17th largest trading partner. In 2019-20, trade accounted for US$ 5.7 billion, which is a decline of 17.54% as compared to the previous year. However, in the current strategic context, India’s appointment of seasoned diplomat Gauranglal Das as an envoy to Taiwan and virtual participation of two parliamentarians in Taiwan president Tsai Ing-Wen’s swearing-in ceremony indicates a shift in policy towards China.

Since the 1990s, there have been efforts to diversify Taiwan’s trade beyond mainland China. In 1994, Taiwan president Lee Teng-hui officially announced the ‘Go South Policy’ aimed to improve its trade and investment relations with ASEAN countries. India was also included in the policies owing to its growing economic importance after the DPP (Democratic Progressive Party) won the presidential election for the first time under the leadership of Chen Shui-Bian in 2000. The DPP government signed a Bilateral Investment Agreement (BIA) with India in 2002, which came into force in 2005. The agreement stressed on the need for protection and promotion of investments.

In 2011, China Steel Corporation (CSC), the largest integrated steel maker in Taiwan invested $178 million in Bharuch district of Gujarat. A rapport existed between the Indian state of Gujarat and its then Chief Minister Narendra Modi with Taiwanese firms. Informal deliberations for a FTA (Free Trade Agreement) between Taiwan and India were held when he later became Prime Minister of India in 2014,  the discussions for which are ongoing and not finalized and. India also signed a Double Taxation Avoidance Agreement (DTAA) and a Customs Cooperation Agreement with Taiwan in 2011. The BIA was updated by both of the countries in 2018 to ensure that Taiwanese businessmen’s investments are treated in synchrony with international standards. The COVID-19 spread raises generous challenges and opportunities to furthering India-Taiwan relations together.

Opportunities

China is Taiwan’s largest trading partner accounting for 30% of total trade. Tsai Ing-wen’s reelection exhibits the changing perception in Taiwanese people against Mainland China. According to a survey conducted by the Pew Research Center in 2019 among Taiwanese youth shows that about 85% of the participants supported close economic relations with the United States, at the same time, support for Beijing was limited to 52%. The New Southbound Policy (NSP) initiated in 2016, reoriented the prime focus of Taiwanese firms from China. Apart from NSP, there are several reasons substantiating the migration of firms from Mainland China. First, increasing intense competition from Mainland companies in the manufacturing sector. This adduced as the primary reason for the firms shifting their business to huge markets with similar traits. Second, rising labour costs and lastly the instability in markets caused by the US-China trade war.

According to Sana Hashmi, a Taiwan Fellow at the Institute of International Relations, National Chengchi University in Taipei, there was a dip in the trade figure last year. More than trade, Taiwanese companies see India as a vast market for investment. Foxconn is already investing US$ 1 billion in the Apple plant at Chennai. Therefore, the focus should be on attracting investment in the post COVID-19 period.

Keeping the market potential aside, the cheap labour cost in India, as compared to PRC, invited more attention. Soon after Foxconn’s announcement regarding their $1 billion investment to set up a factory in India, Pegatron, the second-largest assembler of Apple iPhones based in Taipei announced their interest to set up a plant in India. The availability of skilled labour, massive mobile user base and Indian government’s policy initiatives like Make in India and by latest ‘Atma Nirbhar Bharat’ has attracted foreign investments from Taiwan.

During the pandemic, China’s expansionism yielded more investments to India from Taiwan. Policymakers should endorse the role of Taiwan in addressing India’s technology deficits. Under the aegis of Make in India and Atma Nirbhar Bharat, India should work towards attracting more investment which will have an impact on the rising unemployment rates. As Taiwanese exports to India majorly concentrated on heavy machinery and engineering tools, India must make use of the current geopolitical/geoeconomic environment by inviting more firms.

Challenges

The first challenge is regarding the long-standing talks on FTA between India and Taiwan. To address this, both sides need to fast track talks and finalize an agreement by sidelining political difficulties. A two-year joint feasibility study was conducted by the Indian Council for Research on International Economic Relations and Chung Hua Institution for Economic Research in Taiwan during the 2011-13 period. The study suggested an Economic Cooperation Agreement (ECA) for promoting trade relations.  As stated by Taiwanese officials, India and Taiwan are also in the negotiations regarding allowing Special Economic Zones (SEZs) for Taiwanese firms. Currently, India has SEZs with Chinese and Japanese firms.

Source: Taiwan Ministry of Economic Affairs

The trade figures also affirm the fact that India is way back in terms of trade, as compared to other dominant countries. Here a contradiction in China’s actions is it’s exponential growth in trade with Taipei on one hand and restricting India to do the same on the other hand.

Source: Taiwan Ministry of Economic Affairs

The second challenge is regarding the unbalanced tax system. Recently Taiwan and Japan approached the World Trade Organisation (WTO) to set up dispute settlement panels against India owing to lopsided tariff structures on Information and Communication Technology (ICT) devices and mobile phones imported from them. Imbalance in this tariff structure restricts the prospective inflow of investments towards India.

Transparency in the legal system and effective utilization of decentralized governance can also trigger foreign direct investments. Open-ended support from local governments to a business-friendly environment can also help in this regard.

India and Taiwan share many commonalities such as belief in democratic values and similar economic potentials. In the current geopolitical scenario, India’s best option would be to enhance trade and people to people interactions with Taiwan. Both are gradually strengthening their bilateral ties. Tapping into Taiwan’s Taiwan’s expertise in healthcare, education and agriculture would help India in the future.