Previous Quarterly Editions
Expropriation Risk: 48 50 53 58 Political Violence Risk: 39 36 36 36 Terrorism Risk: 39 35 34 32 Exchange Transfer and Trade Sanction Risk: 43 45 48 48 Sovereign Default Risk: 45 42 40 40
TREND ▲ OUTLOOK ▲
Trade talks in Washington at the end of January produced a Chinese pledge to buy more soybeans and both sides spoke of good progress. A week ahead of the March 1 deadline for raising US tariffs from 10% to 25% on Chinese exports worth 200 billion dollars, President Trump announced that he was postponing the move and proposed a meeting with President Xi to sign a final deal on trade issues. Beijing is likely to agree, providing him with a bundle of new and expected concessions that would allow Trump to claim victory and permanently cancel the tariff increase. However, in late January, the US Justice Department filed several criminal charges against Huawei, the leading Chinese technology company whose CFO had earlier been arrested in Canada at Washington’s request. The escalating dispute over Huawei, ostensibly about its contravention of sanctions on Iran, is essentially about the company’s relationship with the Chinese state; Western intelligence services regard Huawei as a significant security threat, especially if its equipment were to be used in next-generation 5G mobile communications networks around the world. The charges against Huawei raise the prospect of retaliation by Beijing, which is already incensed at US restrictions on technology exports and investment.
Much depends on the extent to which talks on trade in general can be kept separate from issues involving the Chinese hi-tech sector.
The new government in Brazil has made clear that it would welcome greater Chinese investment, which could prove useful if relations with North America continue to deteriorate. At 6.6%, growth in 2018 was just above the official target of 6.5%. The monetary and fiscal stimulus the authorities have rolled out reflects the importance the Communist Party attaches to keeping growth at 6.0-6.5% in 2019 and 2020. Beyond this, weaker investment and workforce growth will take GDP growth towards 4.0-5.0%. As the economy cools, local authorities are less likely to enforce safety legislation that places a burden on struggling businesses.
Chinese authorities finally got serious about data privacy in 2018, with both Alibaba and Baidu facing lawsuits and official warnings over data privacy violations. Recent and forthcoming regulations will in theory make China a global leader in data privacy and protection, although enforcement will be hampered by widespread corruption and the weak supervisory power of government agencies. It will provide no protection from government surveillance.
After an extended period of drafting, new foreign investment legislation will be put to the National People's Congress in March for undoubted approval. The law, which Beijing is presenting as part of its long-running 'reform and opening' efforts, will replace three existing laws on Chinese-foreign equity joint ventures, contractual joint ventures, and wholly foreign-owned enterprises. In principle, it will strengthen intellectual property protection, ensure equal treatment for foreign and domestic firms, and prevent 'forced technology transfer', thereby addressing the major grievances expressed by US businesses and Trump administration officials. However, while the new legislation should probably improve conditions for foreign firms, its impact will be less than the text of the law might suggest as enforcement is likely to be inconsistent and arbitrary. Meanwhile, if international tensions continue to grow, North American companies operating in China may find day-to-day operations interrupted by inspections, audits and other bureaucratic demands, as well as by the selective application of Chinese civil, administrative, and criminal law. However, a greater problem may be state-directed action by Chinese companies that are part of Western value and supply chains, resulting in delayed deliveries, unexpected shortages, or lower quality workmanship.
TREND ► OUTLOOK ►
Industrial disputes tend to be handled at the local level, but there are increasing incidents of student activists and others intervening with the stated aim of protecting and enhancing the rights of workers. For its legitimacy, the Communist Party needs to show that it alone can improve the lives of ordinary workers, but this means cracking down on a new wave of left-wing activists who are trying to do the same thing but outside the Party structure. It can be difficult to label them as dissidents, even as the country’s official unions remain toothless.
TREND ▼ OUTLOOK ►
Hundreds of thousands of members of majority-Muslim ethnic groups have been detained in what the government describes as centres for de-radicalising religious extremists, teaching the Chinese language and providing training in vocational skills. However, reports in December show that new factories have been built near or within these detention compounds, in which inmates are forced to work at unskilled manufacturing tasks in harsh conditions for low pay. Use of forced labour will help the new detention camps pay for themselves, reducing what must be a heavy fiscal burden and creating new constituencies in favour of continuing the policy despite international criticism.
TREND ► OUTLOOK ▼
The central bank cut its reserve requirement for the banking sector by 50 basis points in January as growth slowed further in the fourth quarter of 2018. The move is part of an effort to encourage bank lending to the private sector, and the bank expects it to add 220 billion dollars to the economy. The aim is to increase lending around the lunar New Year when credit demand typically rises. One result should be higher wages and consumption, which could also help China reduce its trade surpluses by making exports more expensive and imports more accessible.
With the renminbi depreciating by almost 5% against the dollar during 2018 and imports from the US falling, the political aspects of the trade surplus are an increasing concern.
China will eventually have to sacrifice a portion of its growth if it wants to reduce its debt burden, but the government does not yet feel the need to do so. The banking system is increasingly well funded, government buffers are high, and the debt is largely held domestically. Although the central bank has imposed some of the toughest rules in the world on cryptocurrencies, China sees the underlying blockchain technology as an opportunity to gain global economic and technological leadership in an area at present unaffected by sanctions.
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