Previous Quarterly Editions
Expropriation Risk: 50 53 58 60 Political Violence Risk: 36 36 36 38 Terrorism Risk: 39 35 32 32 Exchange Transfer and Trade Sanction Risk: 45 48 48 49 Sovereign Default Risk: 42 40 40 40
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In May, China announced that it would raise tariffs on 60 billion dollars of goods imported from the United States, with many agricultural and consumer products now facing tariffs of 25%. The move was a swift response to the Trump administration’s decision to raise tariffs on 200 billion dollars of imports from China to 25%, coupled with a threat to extend tariffs to goods that are currently untaxed. While the White House would like to see a resolution of the dispute so as to present the president with an important victory as he campaigns for re-election, Beijing would also like to de-escalate the situation to end the additional pressure that tariffs are placing on its economy. Moreover, both sides are aware that the tariff dispute is less of a threat to their economies than the pre-existing slowdown in global trade, especially in the manufacturing sector. However, the US Congress looks increasingly likely to complicate any bilateral agreement by adding amendments that neither Beijing nor the Trump administration would find easy to accept. In particular, Beijing will not sway from its position that the state sector is the backbone of the national economy and plays a vital role in preserving stability by providing employment. Under the Trump administration, US tariffs have suppressed Chinese exports, regulatory scrutiny has derailed Chinese acquisitions of US firms, and diplomatic lobbying has made US allies wary of procuring from Chinese technology firms. A central question for Beijing is whether this hardline position has become entrenched for the longer term or would change relatively quickly under a new administration. The second Belt and Road Initiative (BRI) forum took place in Beijing in April with 37 foreign leaders attending, up from 29 at the first meeting in 2017. They included President Putin and the prime ministers of Pakistan, Malaysia and Italy, which is the first G7 member to formally endorse the BRI. Even Washington sent a delegation, albeit of lower-ranking officials. However, domestic media coverage of the forum was more subdued than in 2017 amid deepening international criticism of the debt trap associated with the BRI and its opaque approach to environmental standards. Although Beijing is taking steps to address these concerns, and private sector participation in BRI projects will be encouraged in line with a new emphasis on commercial viability, Beijing will ensure that it maintains firm control of the initiative.
The technology sector, which together with agriculture has been most disrupted by the ongoing US-China trade dispute, must now contend with Beijing’s new requirements on the operators of critical information infrastructure to review the national security risks associated with using foreign products and services. While clearly a response to Washington’s moves against Chinese tech companies, which have now forced Google to prevent Huawei from accessing updates to the Android operating system, these measures arrive in tandem with new powers for the National Development and Reform Commission, China's top economic planning body. This will now screen foreign investments not only on national security grounds but also for 'economic security' concerns, identifying any foreign investments that could pose a threat to China's economic development. The new measures, due to come into force soon, increase the risk that foreign technology investment will be blocked for political or for protectionist reasons.
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Plans to make it easier for the Hong Kong government to extradite suspects to mainland China have produced a serious political controversy. The business community is concerned that the threat of extradition could be used to harass commercial activities, while local activists are worried that the move would enable the authorities to punish activities that are not actually crimes in Hong Kong. An impromptu anti-extradition demonstration at the end of April attracted tens of thousands of people and became the largest protest since the 2014 'umbrella' movement, with the protesters managing to derail the legislation. However, China’s climate of ideological repression shows no sign of slackening, not just in the media but in academia and think tanks, where contact with foreign counterparts or researchers is becoming more restricted.
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Although more details have emerged about the treatment of Muslim ethnic groups in Xinjiang, it is increasingly clear that governments in most Muslim-majority countries will prioritise the economic benefits of good relations with Beijing over condemning its treatment of minorities. 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 indicate that inmates in these compounds are forced to work at unskilled manufacturing tasks in harsh conditions for little or no pay. Use of this labour resource will help the new detention camps pay for themselves, creating new constituencies in favour of continuing the policy despite international criticism.
As part of an effort to encourage lending to the private sector, the central bank cut its reserve requirement in January in the hope of encouraging both higher wages and greater consumption. Banks responded by making some 500 billion dollars in new loans. In May, US Congress proposed placing new sanctions on Chinese entities acting in disputed areas of the South China and East China Seas. A similar bill failed in 2017 but looks much more likely to pass now that hostility to China has grown on Capitol Hill, even though it will do little to alter Chinese actions in the region.
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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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