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Tag Archives | China

North Korean Nuclear Detonation: China’s Reaction

 

The recent thermonuclear detonation by North Korea has evoked a great concern amongst the international community and with no exception China has firmly opposed the nuclear test. This nuclear  explosion has brought the reclusive country to a diplomatic limelight whilst generating skepticism over the test. The fourth North Korean test after 2013, probably could be a modus operandi to showcase its ability to destabilize the region, and an effort to strengthen its nuclear status before the US Presidential election. Probably an impending demand for the withdrawal of US military alliance from South Korea which is envisioned as a threat to the sovereignty of the region. The North Korean test has not left anyone surprised but lots of speculations run high as there is no conclusive reason why this  test has been conducted despite Kim Jong-un’s assurance to stop the future testing.

Picture 1

Geographical proximity, cultural and ideological affinity have defined China-North Korea relations. Tracing the past history, China had signed a Treaty of Friendship and alliance with North Korea in 1961 which is intact even today. In 1990 the King Jong II regime adopted the so called first military policy driving the economy to shambles. China economically and diplomatically supported North Korea. For China, North Korea acted as a valuable buffer between South Korea where US soldiers were stationed. Thus almost for a decade survival of North Korea was in the imminent interest of China.  China apparently during Kim Jong Ils period was committed to safeguarding and protecting North Korea. Thus China waded Kim Jong-un of North Korea to consolidation of power.

During Hu Jintao’s leadership, China prioritized the survival of the new regime in North Korea.   The changing approach of Kim Jong-un’s regime and his defiant action such as testing of ballistic missiles created a lot of apprehension for China thus changing its friendly overtures towards North Korea. China is becoming more firm in its approach towards North Korea. The honeymoon retro no longer continues between the two countries.  China’s strong signal hs displeased North Korea. Tough stand by the UN followed by the UN Security Council Resolution 2087 which was well supported by United states and China. This resolution and action testified a strong signal to Pyongyang not to conduct another nuclear test. In spite of the brewing tension in the region, it looks like China is far from ready to abandon North Korea. China is committed to seeking a solution through dialogue probably an attempt to return to the Six Party talks rather than punishing North Korea.

Despite global opprobrium, North Korea continues its act of aggression. These events is making China slowly drift  from apart its one  time socialist ally North Korea.  The traditional ‘lip and teeth’ relation as pronounced by Mao is possibly loosing its relevance. However caution is restrained by China on its  approach towards North Korea, as there is an alluring fear that the collapse of the regime in North Korea could get US to China’s border, testifying US government’s foreign policy pivot to Asia.

China is sending a mixed signal on its stand on North Korea. China sometimes soft pedals North Korea while at other times it is very stern in its approach. At this juncture and the aftermath of the test, the Chinese Foreign Ministry is getting tougher and   in conjecture with United States, has refused to recognize North Korea as a nuclear armed state. North Korea’s provocative detonation of thermo nuclear weapon has increased the danger of a war in the Korean Peninsula. This probably can embroil China in an unwanted war with United States and its allies. A risk averse China now does not want to get entangled in any conflict that would deter its own interest. Is  Xi Jinping recalibrating China’s policy towards North Korea moving forward or does he see North Korea as an unnecessary albatross burdening China with its poor reputation.

Priya Suresh is a Research Scholar with the Takshashila Institution. She tweets @priyamanassa.

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The Chinese Debt Burden

By Anupam Manur

There is a bond market bubble brewing in China as investors seek a safe haven. 

The global financial markets did not enjoy a particularly happy new year. Most markets across the world tumbled on news of Chinese economic slowdown. The Chinese stock market led the way, experiencing 11.6 percent slump in the first week of 2016. It had two emergency stoppages, i.e., trading was halted as the circuit breaker was activated. This spread across the world with Dow, Nasdaq, and even the Sensex having bad days.

There is another interesting thing happening in parallel. Chinese investors are spooked and are retreating from the equity market. They are looking for safer investment options and usually, in times of stress, the flow of funds is usually directed towards the bond markets, especially government bonds. After a prolonged stock market bubble in China in the past few years, there is bond market bubble brewing and it may be headed for a major correction and this is not particularly good news. The Chinese bond market is worth RMB 47 trillion ($7.3 trillion), more than 50% of Chinese GDP.

It is not just China that is experiencing increasing debt. Asian debt has increased exponentially since the global financial crisis: from around 110 percent of GDP in Mar-2009 to 160 percent in Mar-2015. The non-financial private debt in Singapore and Hong Kong is as much as 200 percent of GDP. Normally, It is not uncommon in today’s financial world to see such high debt levels. However, the worrying aspect is that all of these Asian economies are also slowing down considerably, which implies that the ability to repay the debt is considerably reduced.

China debt

Back to China, two major reports in the past week have highlighted the bond market bubble and the slight possibility of a correction – by UBS and Macquarie. Total Chinese debt – government + non-financial corporate + financial institutions + households – account for as high as 282 percent of GDP. In 2001, it was 121 percent of GDP and  158 percent in 2007. Again, the debt problem is compounded by the fact that the Chinese economy is slowing down. Another important aspect is the reduction in Chinese foreign exchange reserves. As the Fed raised interest rates in December, there has been an outflow of foreign currency reserves from China to the tune of $500 billion. A large part of the new bond issuance is coming from Chinese local governments. There has been an explosion in municipal borrowing in 2015 and much of it has been to refinance the previous debt burden.

Local (municipal) government debt in China has increased exponentially

Local (municipal) government debt in China has increased exponentially.

China’s debt numbers are not anywhere close to Japan or Greece or even the US. It is not an alarming figure yet. Growing debt is usually ignored in fast growing economies. However, now that China is slowing down, analysts have just begun to get the Chinese debt on their radar.

Anupam Manur is a Policy Analyst and macroeconomics enthusiast at the Takshashila Institution and tweets @anupammanur

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Brazilian Economy in the Doldrums

By Anupam Manur

Brazil is staring at a lost decade of economic output, with political upheavals, domestic economic crisis of falling output, debt and inflation and a stagnant external sector due to falling commodity prices internationally.

While the world is gripped with stories of Chinese slowdown, another economy is staring down the barrel of deep economic and political crisis and faces the possibility of a lost decade for economic growth. Brazil has had another contraction in the previous quarter and according to The Economist, by the end of 2016, the Brazilian economy may be 8% smaller than it was in the first quarter of 2014. The Economist’s GDP forecast for 2016 is particularly dire for Brazil, the largest economy in the downside projections, with over 2% contraction in real GDP.

The last time that the Brazilian economy saw positive growth was in the first quarter of 2014. So, Brazil is officially in a recession in 2015, going by the NBER definition of recession as contraction of output for two consecutive quarters.

 

Brazil's GDP growth rate has been negative for the past 7 quarters and is expected to fall further in 2016.

Brazil’s GDP growth rate has been negative for the past 7 quarters and is expected to fall further in 2016.

Amidst the economic downturn, Brazil is also facing a political upheaval. Dilma Rousseff  and many of her party members, who are part of parliament, face very serious corruption charges against them and are presently being investigated. They are alleged to have accepted billions of dollars in bribes in exchange for bloated contracts with Petrobras, the State controlled oil and gas company. Also, Joaquim Levy, the Finance Minister who was known to bat for greater fiscal austerity and structural reforms resigned last week. When the need of the hour is urgent economic reforms and a plan to kickstart the economy, the Parliament Is obsessed with the impeachment of President Rousseff. This implies that Rousseff does not enjoy the political capital to initiate any reform agenda, assuming she has one, to get the economy back on track.

Falling commodity prices have a big part to play in Brazil’s misfortunes. Brazil’s commodity exports, and with it, its GDP, had a spectacular rise along with China’s growth story. However, with China slowing down, demand for commodities has fallen and so have its prices. Oil, iron ore and soy beans account for more than half of the Brazil’s export basket and their prices have been depressed for quite some time now. Brazilian commodities index has slumped 41% since 2011, according to Credit Suisse. The average price that Brazil used to receive for a ton of iron ore has slumped from about $125 in 2011 at its peak to about $40 currently. Among the big commodities exporters of the world, Brazil has been hit the hardest.

While it may be convenient for Brazilian administration to blame global conditions for their weak economic performance, a closer look will establish Brazil’s home grown problems as the chief culprit. Australia is a bigger commodity exported and relies heavily on Chinese manufacturing industry for its GDP growth. The share of exports in Brazil’s GDP is 11.5 per cent while Australia’s is much higher at 21 per cent. Despite this, Australia is slated to grow at a 2 percent this year. Other major commodity exporters in Latin America such as Chile and Peru are also affected by the declining prices, but are yet slated to grow at 2-3 percent this year.

The reason for this is Brazil’s structural problems. While Australia handled the global 2008 recession with caution, Brazil followed an excessively loose monetary policy and uninhibited fiscal expansion. Brazil has been spending indiscriminately: the estimate of budgetary deficit for 2015 was 10 percent of GDP. The debt to GDP ratio in July 2015 was already 65 percent and was set to touch 70 percent by end 2015. Further, the government is running a primary deficit of $13.9 billion or roughly equivalent to 2.5 percent of GDP. Primary deficit is defined as the difference between current government spending on goods and services and total current revenue from all types of taxes net of transfer payments, and excludes interest payments. This implies that Brazil is adding to the total debt at a far greater rate than it can afford to do. Rating agencies such as S&P and Fitch have already downgraded Brazil’s debt instruments to junk bond status, which will translate into even higher costs of borrowing.

Corporate debt has been on the rise as well for the past decade. It is presently as much as 63 percent of GDP. It does not help the government that much of this is from either state owned companies such as Petrobras or other companies who have the implicit backing of the Brazilian government.

Quite unfortunately for Brazil, the usual routes for recovery from a recession are unavailable to them. As aforementioned, public debt is far too high to accommodate a fiscal push to the economy. The need of the hour is, in fact austerity, but that is bound to depress the economy further.

Monetary policy does not have too much wiggle room either and the central bank is in a real fix. The SELIC rate, Brazil’s policy interest rate is at 15%. With 150,000 jobs being shed in the formal sector every month, there is a real clamour for reducing the rates. However, this might fuel inflationary pressures, which are already quite high and high inflation will drive away the investors further. The consumer price inflation is hovering around 10 percent and the real has been steadily depreciating.

Raising taxes is also going to be extremely difficult, as Mr Levy  found out. Part of the reason for him quitting the cabinet as Finance Minister was the political opposition both from the opposition and within his own party to raising taxes, cutting federal spending and general fiscal adjustment.

The only way out is unlikely to be popular. Ms. Rousseff needs to come out with a credible new plan for restructuring the economy. This will involve painful cuts to pensions and other social security measures along with slight increases in the tax rates. Finally, Brazil also has to look at improving its business environment. It is currently placed at 120th out of 189 countries in the Ease of Doing Business Report by the World Bank. Though it is definitely going to be a tough period for Brazil in the next few years, it must aim to reduce the duration and severity of the problem by following sound economic policies.

Anupam Manur is a Policy Analyst at the Takshashila Institution and tweets @anupammanur

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Rare Earth Elements: A Primer

By Arjun Govind

Everything you need to know about the rare earth elements industry

What are rare earth elements?

Rare earth elements (REEs) are a set of 17 elements: the fifteen lanthanide elements as well as two others – scandium and yttrium. The phrase “rare earth” might be a bit of a misnomer. REEs are fairly abundant in the earth’s crust; some are more prevalent than gold and platinum, and a select few more than copper and lead. That being said, the reason that the prices of REEs like lutetium and europium far surpass that of precious metals like gold and platinum is because of the former’s difficulty to mine. Despite their abundance in the earth’s crust, the low concentration of REEs in rock deposits and the tedious refinement process required made them, until recently, economically unviable. However, with REEs becoming increasingly associated with a range of industries from security to renewable energy, studies estimate that the demand for REEs will increase by an average of 5.6% annually. But endeavours into this sector require prudence. Molycorp, for instance, was a venture founded in 2010 that sold rare earth oxides – the most common way for REEs to be traded – and other rare earth concentrates. Despite its initial success and skyrocketing stock price in 2011, Molycorp filed for Chapter 11 bankruptcy about a month ago, with its stock being valued at a mere $0.35 a share.

Rare Earth Metals in pictures. Click to expand

Rare Earth Metals in pictures. Click to expand

REEs in Industry
Needless to say, the demand for REEs is based largely on the demand for their derivative products. Among the myriad applications of REEs, there are two industries that stand out in particular: defense and renewable energy. Scientific organisations in the United States, have found that certain rare earth metals are vital to national security. Estimates indicate that the Department of Defense’s consumption of rare earth metals comprises approximately 5% of the domestic consumption in the USA. In particular, magnets formed by alloys of REEs hold particular promise. Samarium cobalt magnets, for instance, retain their magnetic strength at high temperatures and are used in a variety of technologies from precision-guided missiles to aircrafts. Notwithstanding that, with the exception of small amounts of yttrium, rare earth metals are not a part of the United States’ strategic materials stockpile for national security purposes.. The United States Magnet Materials Association, a coalition of companies spanning medical, aerospace and electronic industries, have recently begun focusing on the supply chain of rare earth elements; they even made a six-point plan to address an “impending rare earth crisis” in 2010.

Uses of Rare Earth Elements in Industry. Source: AFP, phys.org

Uses of Rare Earth Elements in Industry. Source: AFP, phys.org

REE magnets play a crucial role with regard to the renewable energy sector too, especially in the field of wind energy. Fang Junshi, the head of the coal department of the National Energy Administration in China, is hopeful that China will have 100 gigawatts of wind power by 2020. Mark Smith, the former CEO of Molycorp, estimates that, in some applications, around two tons of rare earth magnets (specifically neodymium iron boron or NdFeB magnets) are present in the permanent magnet generator on the top of the turbine. Neodymium, an REE, makes up 28% of NdFeB magnets.

Distribution and Market for REEs
Rare earth metals are distributed unevenly across the world. China has, by far, the largest reserve of REEs; they have accounted for at least 90% of the world’s REE supply since the 1980s. Interestingly, China is also the leading consumer of these elements, accounting for around 65% of the total demand. Prices in this market are particularly volatile owing to supply restrictions from China. As such, manufacturers dependent on a constant supply of REEs are currently looking for resources outside China, such as firms like Molycorp. Assuming continued rates of growth, the total demand for REEs is projected to be around 5.6% per year. Under such assumptions, demand for Rare Earth Oxides is set to rise to around 210,000 tons in 2025, which is double the demand of 105,000 tonnes in 2011.Considering the variety of applications of these elements in industries, the prospect of possessing a reserve of such metals certainly merits consideration at the very least. Given that REEs are becoming an integral part of industries as crucial as defense and energy, it is important to ensure a steady and streamlined supply chain. This requirement is made all the more necessary in the light of price fluctuations caused by variances in supply from China.

Arjun Govind is an Intern at the Takshashila Institution. He is in 11th grade at The International School,  Bangalore.

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India & the One Belt One Road paradigm

On how OBOR is likely to interact with India’s foreign policy

by Hemant Chandak (@HemantChandak)

One Belt One Road (OBOR) is an initiative the Chinese envisioned in 2013 and are taking progressive steps to bring it to fruition. Execution of the plan will depend on how China is able to engage the countries involved in this perimeter, mainly in what it calls the Silk Road Initiatives. The OBOR has following two key components:

  1. New Silk Road Economic Belt that links China and Europe, through Central and Western Asia
  2. Maritime Silk Road (MSR) that will connect China and Southeast Asian countries, Africa and Europe.

OBOR’s grand vision seems to cover every continent except the Americas. It is aimed at further strengthening the Chinese role in economic integration with these nations and playing a larger role in global political affairs. As and when the infrastructure is ready, the Chinese are not only looking to push its indigenous technologies but also find means to export its surplus manufacturing.

As per the Chinese, OBOR initiative is in line with purposes and principles of UN Charter and is not restricted to the ancient Silk Route but open to other countries for wider benefits for all involved. President Xi Jinping and Premier Li Keqiang have visited more than few dozen countries promoting OBOR, and throwing their weight behind by bringing domestic ministries together to facilitate the project, providing policy support and funding billions of dollars to partner countries, such as $1.4 Billion funding to Sri Lanka to build Colombo Port City.

The strategy is long term and seems to have been in motion for not years, but decades. The Chinese have invested in several African countries over decades, and these countries are now expected to be part of its Maritime Silk Road. On other hand, many of the Asian countries that are going to be connected through New Silk Road Economic Belt are already part of Asian Infrastructure Investment Bank (AIIB) — another Chinese initiative, to invest in infrastructure in these countries. AIIB already has 56 member countries as signatories.

China’s economic power allows it to play it king size on the geopolitical game board. Recently, the Chinese have committed $40 Billion to Silk Road Fund that will go towards creating infrastructure in Asia for above projects, and building ties with the countries involved. Chinese have proven their capability with mega infrastructure projects before, the freight train connectivity to Spain or looking to build a tunnel system under the Mount Everest are a few examples. China also signed its first ever MoU with Hungary last month around OBOR. Hungary could become an integral logistics hub in Europe and Hungary-Siberia rail network is an opportunity for both countries in near future.

What’s in it for India?

China extended an invitation to India to join Maritime Silk Route during the 17th round of border talks between the Special Representatives of the two countries in New Delhi.

OBOR project will have a connected mix of not only developed European countries but also the bustling East Asian nations. India needs to be careful how China progresses on this. China-Pakistan Economic Corridor as well as the Bangladesh-China-India-Myanmar Economic Corridor are also closely related to this Initiative. Besides economic integration, these initiatives are also meant to showcase Chinese military might to the larger world and how it plans to use these sensitive corridors for its military mobilisation. The buildup of roads, highways, ports, tunnels and bridges over such a large unchartered terrain across all these countries will have a tacit approval from each one, who owns that particular stretch of land, air space or sea. One has to be thoughtful about an unseen future before falling into what could possibly be a trap.

Once all key players have undergone their own validation to become participants, these initiative led by the Chinese could augur well for the rising Asian century. The economic prosperity that the ancient Silk Route brought to the regions sitting on its path, could well be repeated in a much more impactful manner. The Indian government is progressive and looking to connect internally with initiatives such as Digital India, and it can marry gracefully with “Information Silk Route” where telecom connectivity between the countries through fiber, trunk line and under-sea cables is also a key component. This will expand the bandwidth capabilities for India significantly, without which offering eGovernance and delivering public services in an efficient manner will remain a pipe dream and a good marketing campaign.

Being a key participant to such a global infrastructural initiative would mean we will have excellent connectivity of various transport modes, and a great facilitator to Make In India initiative. Success for us depends on how we efficiently use these channels to find and grow new export markets for our products and enable efficient trade routes. The benefits to India while participating in a globally challenging project such as OBOR are immense. For one, the technical know-how they will bring back could be used to develop or iron out issues facing domestic infrastructure sector or for envisioning projects that we never had audacity to pursue before. An increased trust between the countries involved will not only increase opportunities for extended trade across their respective industries, but sharing the know-how, co-operating in research & development and improving mutual security through co-operation in areas such as customs, are just a beginning of immense possibilities.

Hemant Chandak is a GCPP10 graduate. He tweets @HemantChandak.

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What’s up in China?

Here is attempt to collate a bunch of links to know everything about what is happening in the Chinese Stock Market right now

This is a bubble of epic proportions. In 12 months, Chinese stock markets rose enough to create $6.5 trillion of value. It’s hard to picture, but that’s a stunning amount of money. It’s the equivalent of about 70 percent of China’s GDP in 2013, and about 40 percent of the total value of the New York Stock Exchange. It’s enough to pay off Greece’s debt 20 times over, circle the Earth250 times with $100 bills, or build 43 International Space Stations.

The stock market weakness, should it spread to the Chinese economy over the long term, could prompt Beijing to reassess its overseas loans and investments. Many countries, industries and companies have come to depend on Chinese money to fund their own growth. But Chinese outbound investment could still increase if companies and individuals seek safety overseas.

There are a few other interesting, potential casualties of the latest market drop. Some analysts say that the Chinese government’s repeated pledges to boost the market and subsequent failures to do so could damage its credibility and lead to a crisis of confidence. Even if that doesn’t happen, the government’s latest measures are definitely calling into question its 2013 pledge to let the market play a “decisive” role in governance — the central promise of its economic reform agenda.”

 it is (easy) to frame market data in a way that sounds either scary or benign, depending on your inclination. “The Chinese stock market has dropped 32 percent in a month” is scary. “The Chinese stock market is up 70 percent over the last year” sounds great. Both are true

Those market dynamics can create a chain reaction of selling. China’s major exchanges prevent a stock from falling more than 10 percent on any given day. When that happens, analysts say, many investors opt for selling other shares, broadening the sell-off. Then when the market opens the next day, they continue selling down the stock that was previously halted, effectively prolonging the turmoil.

But the boy was not of the timid kind. “Oh yeah,” he yelled back at Kennedy, “well, I got a tip for you too: buy Hindenburg!” Intrigued, Kennedy turned around and walked back. “What did you say?” – “Buy Hindenburg, they are a fine company,” said the boy. “How do you know that?” –- “A guy before you said he was gonna buy a bunch of their stocks, that’s how.” – “I see,” said Kennedy. “That’s a fine tip. I suppose, I was a little harsh on you earlier,” he said, pulling off a glove and reaching in his side pocket for some change. “Here, you’ve earned it.”

Little did the boy know that Kennedy, a cunning investor, thought to himself: “You know it’s time to sell when shoeshine boys give you stock tips. This bull market is over.

Update:

But that calculus would change if China’s economy crashes along with its markets. Now it’s important to remember that “crash” is a relative term for China. Its economy is supposed to grow around 7 percent this year, so anything less than 5 percent would push unemployment up enough to feel like a recession. This kind of “hard landing” would hit the commodity countries like Russia or Australia that have been feeding China’s insatiable appetite for raw materials, well, the hardest—although the ripple effects would also reach rich countries like the U.S. that actually sell $100 billion of goods to China each year. That really isn’t all that much in the context of our $16 trillion economy, but if you added up how much other countries being hurt would hurt us as well, it wouldn’t be nothing.

Update 2:

There are several reasons for this unusual behaviour: firstly, when I teach stock market investment to my Chinese students, I always remind them that the Shanghai stock exchange should be thought of more as a casino, rather than as a proper stock market. In normal stock markets, share prices are – or, at least, should be – linked to the economic performance of the underlying companies. Not so in China, where the popularity of the stock market directly correlated with the fall in casino popularity.

Varun Ramachandra is a policy analyst at Takshashila Institution and tweets@_quale

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China-Zimbabwe Relations

In addition to trade, aid, and diplomatic ties, China – Zimbabwe relations are strengthened by a mutual desire for development

By Fraderick MujuruChina-Zimbabwe

Zimbabwe is located in the southern part of the African continent, immediately north of South Africa. The country has a population of 13 million and an area of 151,000 square miles. Zimbabwe gained independence from British colonial rule on April 18, 1980. Zimbabwe’s government is ostensibly a Presidential Republic, with Robert Mugabe being its President since independence. In 2014, Zimbabwe’s economy recorded a GDP of US$ 12.8 billion and an annual growth rate of 3.1%. However, this paints a misleading picture; the economy witnessed negative growth of about 16% during the hyperinflation years (see Figure 1). Though it has recovered since then to post positive growth rates, it must be noted that having a range of over 27% in the growth rate (-16% to 11%) is an indication of macroeconomic instability. There is no better proof of this instability than the episode of hyperinflation where the inflation rate rose to a whopping 231 million percent in July-August 2008.

Figure 1: Showing the real GDP growth of Zimbabwe from 2005-2014. The numbers for 2012-14 are IMF Staff estimates.

Zimbabwe Fig 1

Source: IMF World Economic Outlook Database.

However, Zimbabwe has stabilized since then and there are encouraging signs of growth in the near future. A part of this revival has to do with Zimbabwe’s immense mineral wealth, as it is a source of economic returns. One major factor is the political and economic relationships that Zimbabwe has managed to develop with the fast growing East Asian countries, the biggest of which is the People’s Republic of China.

China has a web of alliances across Africa: there is even a popular mantra to describe the Chinese presence and investments in Africa – “the Chinese are coming”. China’s relationship with Africa has historical roots; in 1971 many African nations supported the claim of the government of the People’s Republic of China to represent China’s seat in the Security Council of the United Nations. This may be because Beijing spent the early part of the 1960s establishing relations with left leaning states such as Ghana, Angola, Zimbabwe, Sudan, etc.

Starting from as early as the 1950s, Africa has seen several large projects spearheaded by the Chinese government that have set the tone of engagement between the two areas. Major projects include the construction of the Tanzam railway joining Tanzania and Zambia. China’s trade with the African continent has increased from US$10 billion to US$120 billion between 2000 and 2014. It has given as much as US$ 5 billion towards at least 800 projects in Africa, an amount higher than the World Bank’s contribution since 2005 (US$3.2 billion).

China-Zimbabwe Political relationship

China and Zimbabwe have cooperated politically in the past. In 2005 the European Union and the USA imposed economic sanctions on Zimbabwe for alleged human rights violations. In response, Zimbabwe crafted its ‘Look East Policy’ which targeted Asian economic giants like Singapore, China, and Malaysia. China responded quite quickly and the communist Chinese government supported Zimbabwe in its ‘Land Reform Program’ which sought to address the predominantly white minority ownership of property.

The pinnacle of China-Zimbabwe political relations was likely China’s use of its veto to axe the 2008 United Nations Security Council resolution that sought to apply additional sanctions on Zimbabwe. The resolution was also vetoed by Russia and they both justified their stance with the argument that the alleged incidents were an internal matter and not a threat to international security.

From Politics to Economics

The economic relationship between the two countries has recently been the source of deepening ties between China and Zimbabwe. In 2010, both countries celebrated 30 years of their relation with over US$ 560 million generated on bilateral trade.

The trade relationship between the two countries is obviously dominated by China; Zimbabwean exports to China are exceeded by Chinese imports in Zimbabwe. Major imports from China include telecommunication equipment, and manufactured goods such as soap, plastics, shoes, etc. Exports by Zimbabwe to China are mainly raw materials such as tobacco, platinum, chrome, steel, and diamonds.

Fig 2: Exports and Imports of Zimbabwe to and from China (US$ thousands)

Zimbabwe Fig 2Courtesy: World Integrated Trade Solution (WITS) 2015

Apart from trade, China has also provided aid to Zimbabwe to help the latter in its developmental efforts. For instance, it provided US$103 million in official development aid to Zimbabwe from 2004-2010, through grants and concessional loans (see Table 1).

Table 1: Summarizing some of the Zimbabwe-China economic deals and aid agreements.

Year Amount (millions) Types Description
2000 $5.8 Concessional loans Used to invest in Cement production plant
2004 $240 Sale 12 jet fighters and 100 military vehicles’
2006 $25 Preferential loans  –                –                 –                   –
2007 $200 Export credit Farming Inputs
2007 $200 Sale SINOSTEEL purchased ZINASCO
2010 $700 Loan Rejuvenating Agriculture sector
2012 $180 Loan Airport Upgrade, neonatal equipment, economic and technological cooperation

 

Extraction: Ministry of Finance and Economic Development of Zimbabwe (2014)

China also funds many infrastructure projects in Zimbabwe. It recently invested US$ 98 million in a military complex entitled the Robert Mugabe School of Intelligence. The trade relationship is not limited to the Chinese government; Chinese companies have invested in Air Zimbabwe, the Zimbabwe Broadcasting Corporation (ZBC) and Zimbabwe Electricity Supply Authority.

Though the China-Zimbabwe relationship may have been more political in its early years, the two countries are currently bound more by economics and diplomatic ties. China has offered loans, grants, concessions, and preferential loans to Zimbabwe. To increase their engagement, Zimbabwe allowed Beijing investors to have a share and invest freely in Zimbabwe. The relation between China-Zimbabwe has been branded ‘all weather friendship’.

China still lags behind other countries in terms of humanitarian and economic engagement with Zimbabwe. The USA remains Zimbabwe’s biggest provider of aid – its contribution (above US$ 2 billion since 1980) is substantially more than other countries; China does not make it to the top ten list of donors. However, China has emerged as Zimbabwe’s fourth biggest trade partner and there is still potential to further strengthen what are already robust economic ties between the two countries.

Fraderick Mujuru is an intern at Takshashila Institution and is presently doing his Masters in International Relations at Christ University, Bangalore

 

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Deflationary trend in the world economy

Falling prices and declining growth in China and Europe is adding further uncertainty in the fragile economic landscape.

China’s Consumer Price inflation figure rose to a measly 1.5 percent for December 2014, nearing a five year low. This was considerably lesser than the 3.5 percent rise expected by the government. Elsewhere, official inflation figure for the Eurozone was hovering in the negative at minus 0.2 percent, slipping the large economic area into a deflation. These, along with the falling oil prices, triggered a market collapse across the world.

Wait, falling prices are good right? Well, not quite and not for everyone. Signs of falling prices in India would indeed be greeted by great cheer, but that is because we have had an average CPI inflation rate of over 9 percent for three years running. However, falling prices in China or Europe is not necessarily a good sign.

For China, which has been showing sluggish growth in the past few quarters, reduced inflation rate means weak demand in the domestic economy. The phenomenon of a long-term decline in prices can cause consumers to sit on their money in the hope of lower prices to come, depressing the dynamism of consumption, investment and consequently, economic growth. Consumers are not willing to spend their money on goods and services, which will affect the sales and thus, profitability of the manufacturing sector. They will, in turn, reduce investment and job creation. This will ultimately lead to further reduction in growth. It is not as dire as this for China yet, but the low inflation number has sparked concerns in this direction.

Back in Europe, falling energy prices and a slight decline in Germany’s manufacturing sector has started a deflationary trend and correspondingly, a falling Euro. Deflation in Europe (along with massive debts) brings back nightmarish visions of Japan’s debt deflationary period in the 1990s and 2000s, which is often referred to as the ‘lost decades’.

Declining prices and a falling currency is bad news for the debtors. While prices and incomes might be falling, the debt does not. With the amount owed remaining the same, a household with falling income feels the burden of the debt much more. In the same vein, governments can fall prey to the same trap. If the prices and incomes are falling, so is the tax revenue, with which it was hoping to repay the debt.

Without resorting to stating the plain obvious, there is a lot of debt going around in Europe.

Add to that the fact that deflation brings along currency depreciation along with it. For countries with large international debt (debt denominated in foreign currency), such as Greece, the debt burden increases further. Greek’s foreign debt is 252 percent of its GDP (or a staggering € 400 billion). The government debt to GDP ratio is 166 percent. It is fair to say that Greece is in a soup and it will only worsen if the deflationary trend continues. Now, Greece has to pay a higher amount of Euros to convert them to, say, dollars to repay the debt.

What’s to be done? The People’s Bank of China has an easier solution than the European Central Bank. Current policy interest rate in China is hovering around 5 percent, which gives it ample flexibility to lower rates. Apart from that, the central bank is aiming to play a more proactive role in the economy by influencing lending rates by banks to businesses and by credit rationing into selective channels. It has also repeatedly made short term injections into the money market at the slightest hint of liquidity tightening.

The ECB on the other hand cannot possibly lower rates any more as real rates are already in the negative territory. The only viable medium term solution is to follow the footsteps of the Federal Reserve and have a go at Quantitative Easing (QE). QE refers to a process where the central bank of a country buys certain financial assets from the commercial banks in order to increase the monetary base and decrease the interest rates in the banking system. The Federal Reserve, after lowering the policy rate to zero percent, resorted to buying Treasury Notes and Mortgage Backed Securities from the commercial banks in the aftermath of the 2007 recession. With no significant impact on the economy, the Fed was forced to increase its monthly purchases of assets from $30 billion to $85 billion, until it had accumulated around $4.5 trillion in assets.

I shall reserve my thoughts regarding the effectiveness of QE as a policy instrument to another day. For now, good luck to the Greeks.

Anupam Manur is a Research Associate at the Takshashila Institution. 

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The state, religion and civil society

India’s inclination to resist unification
by Apoorva Tadepalli

Francis Fukuyama in his lecture at the American Enterprise Institute on “The Origins of Political Order” said that one of the most important political institutions is rule of law, to govern not only the members of a society, but also its rulers, and keep their powers in check. In this way, it is an institution always in conflict and negotiation with the state, which is about concentration and use of power. Fukuyama says that one of the major factors that enables rule of law and resists totalitarianism is religion. In the history of many societies, like “Ancient Israel, the Christian West, the Muslim world, and Hindu India”, religion was a very powerful governor of societies and had a strong relationship with the law.

In contrast, China did not experience the rise of religion to the same extent and therefore had – and still has – a state that was not fully bound by rule of law. As a result, the state-society balance in China is heavily in favour of the state – it has a strong state and a weak civil society. The same understanding can be extrapolated to the Indian context. India has a state-society balance in favour of society because of the myriad of religious, caste, and community identities that have managed to co-exist in the same geographical and political space. Since many of the communities that exist in India are much older than the Constitution, they establish an alternate framework of judging citizens which the State is constantly negotiating with. In this sense, Indian society is strong and does not give itself to being subject to totalitarian control.

This is exemplified by the space given to personal laws in an Indian’s right to freedom of religion. The state attempts to place the same laws on every citizen, homogenising the population. This has been relatively successful in China: the nation is treated and governed as having a common interest, explaining why strong state centralisation has survived, and also why huge national-level infrastructure projects are carried out with efficiency. However, given the nature of Indian society, community specific interests have to be represented, and the presence of personal laws increases the strength of society in relation to the state. In this way, the presence of religion and other sub-communities in India, questions the autonomous power of the state, something that Chinese society is unable to do.

Fukuyama gives the example of how the Chinese political system, though peppered with periods of rivaling rulers, has always defaulted back to that of a centralised state. This is because, as he says, it is in the Chinese nature to prefer to share power in order to ensure control. This is the exact opposite of India, whose history has been dominated by multiple rulers punctuated with a unified state only a few times before the British. This is still indicative of Indian politics today, considering the myriad of political parties.

Fukuyama proposed that because of the presence of religion in several regions around the world, ruling powers were faced with other authorities that had to be negotiated with and that they were accountable to, enabling rule of law. In the contemporary Indian context, these other authorities can also be understood as local communities and their representatives who do not identify primarily as Indians, and therefore render the need for the state to justify its actions in the name of national interest.

Apoorva Tadepalli is a Communications Associate at the Takshashila Institution.

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Why is the economic power still with the west?

Economic activity has certainly shifted from the west to the east. However, it is a long road ahead before the economic power so to say shifts.

The West is rich; the East remains comparatively poor, in spite of all the great recent economic achievements”. Asia has gained significant importance in the wider world economy today. Enormous growth of two major Asian economies – China and India in the past decade coupled with the slowdown of a number of advanced economies in the west only hints towards economic power shifting from the west to east. However, it is a long road ahead before the global economic order faces such a radical change. This is simply because developed countries have accumulated immense wealth and socio-economic infrastructure over the centuries which continue to give them an advantage in capacity as well as influence over the east.

The downward spiral of the west started with the global financial crisis of 2008. This was followed by notable failures of the European Union. Crisis in independent debt management, fragility in financial sector and problems due to weaknesses in their institutional design were the main characteristics of the advanced economies of the west. The downturn of United States coupled with the crisis in the European Union only acted as catalysts in the decline of the west.

At the same time, the east emerged in a number of areas. This emergence is attributed mainly to the demographics, rapid urbanisation, growing middle class and potential for increasing productivity. 60 percent of the world lives in emerging markets of Asia, however, only 20 percent fall under the consumption bracket. When this consumption increases, these emerging markets are going to become mega markets of the world. Growing trade among developing countries is regarded as one of the major driving force of these markets in Asia. Another interesting aspect to note is that for the first time, Asian economies are investing across the globe. This is in stark contrast to the fact that Asia has been the hub for global investment for many decades now. It is encouraging and worthy to observe the change in this trend.

Government, financial institutions and households are robust, healthy and growing in the emerging economies of Asia. However, they seem to have weakened greatly in the West. Asia has experienced commendable and significant structural changes in the past few years which have contributed towards the rapid growth of this region. It has grown faster than any other region around the world. This phenomenal growth has been termed as a super-cycle which is characterized by rising trade, high rates of investment, rapid urbanisation and technological innovation.

Among the emerging economies of Asia, China and India are regarded as the front runners that are experiencing massive expansion. While China had been the center of global manufacturing, India has become the international hub for global services industry. 60 percent of the GDP of Asia comes from just these two economies. The economic resurgence of the two economies has also made way for the emergence of a number of other Asian economies such as Thailand, Indonesia, Pakistan and Vietnam.

However, on the flipside, this excessive growth and improved structural transformation has been very uneven. A number of economies still need to come a long way to reach the standards of the front runners. Several countries have moved out of agricultural sector to industrial and service sector. Despite this, agriculture continues to employ a large portion of the workforce in Asia. There has been a shift from agriculture to low productive sub service sector. The exports basket has also become more diversified and refined, but only in the advanced economies of Asia.

Asian economies need to engage in inclusive growth and oppose all forms of trade protectionism to fuel economic growth. They must come together collectively and work towards policies which will further boost economic activity within Asia. Increasing importance is given to emerging economies by global organizations in order to consider their requirements towards integrating the global economy.

The emerging economies of Asia must take this to their advantage and ensure maximum assistance is received from global institutions.

Innovation is one major area where the west still dominates and the east has to catch up. They must also focus on structural transformation and direct labor towards highly productive sectors. Agriculture needs to be developed specifically in the low income economies by making modern and sophisticated methods available and implementing policies to increase productivity of this sector. These are some of the key areas that will drive employment and thereby contribute towards increasing wages in the sector which will thereby lead to increase in investments.

Emerging Asia has immense competitive advantage in manufacturing and service sector. Hence, looking forward, Asia most definitely appears to be better placed than the rest of the Global Economy. They must, however, work towards ensuring continuous innovations and build deep intellectual and institutional capital to have an edge over the already established west.

The Director General of World Trade Organization (WTO), Pascal Lamy, in September 2012, said “The rise of emerging economies was set in motion by the changes in technology, transportation costs and regulatory environment”. This swing in economic power has profound geopolitical consequences that will hardly be reversed in the foreseeable future.

However, while new economic and political trends have emerged, the rules and institutions governing multilateral cooperation have not kept pace with these changes. The difficulty in finding a new balance between advanced and emerging economies in a muted context has certainly played an important role in holding back meaningful progress.”

Asia has weathered the Global Financial crisis better than any other region. It has not only shown resilience and prompt recovery, but has also contributed largely towards the global economic recovery. However, despite the fact that the rapid economic growth of the developing countries has led to a more balanced distribution of economic power, they do not have much say in the global political and economic affairs. Many emerging countries are still way behind the developed countries in overall capacity, international outreach, institutional building and economic and social growth.

Economic activity has certainly shifted from the west to the east. However, it is a long road ahead before the economic power so to say shifts.

Varsha Ramachadran is a Research Associate at the Takshashila Institution.

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