China | News & Update

[space cadet]

Records Expose China’s Maritime Militia at Whitsun Reef

Beijing claims they are fishing vessels. The data shows otherwise.

foreignpolicy.com

Records Expose China’s Maritime Militia at Whitsun Reef​

Beijing claims they are fishing vessels. The data shows otherwise.​

BY ANDREW S. ERICKSON, RYAN D. MARTINSON | MARCH 29, 2021, 2:07 PM

Even as dozens of Chinese “fishing vessels” strongly resembling the People’s Armed Forces Maritime Militia (PAFMM) have been anchoring at the disputed Whitsun Reef—without doing any fishing—within the Philippines’ Exclusive Economic Zone in the South China Sea, Chinese officials have responded to formal Philippine and U.S. concerns about maritime militia activities with denial and obfuscation. When pressed on March 22, Foreign Ministry spokesperson Hua Chunying deflected: “Chinese fishing boats have been fishing in the waters near the reef all along. Recently, due to maritime situation, some fishing boats have been taking shelter from the wind near [Whitsun Reef], which is quite normal.” Her Chinese Embassy Manila counterpart issued a direct denial: “There is no Chinese maritime militia as alleged.”

These statements are provably untrue. At the very least, seven PAFMM vessels have been operating at the Spratly Islands’ Union Banks, including Whitsun Reef—both during the past month and multiple times over the past year.

Both in February and March this year, identified PAFMM vessels transmitting automatic identification system (AIS) signals were present in Whitsun’s lagoon. Openly available sources confirm our exposé from multiple angles. The only “paywalls” they lie behind are Chinese characters and vessel-tracking websites. [Click here to view an accompanying PDF with images and links.]

Among the massed “fishing vessels” at Union Banks are at least seven enormous trawlers owned by an obscure fishing company: Taishan Fancheng Fisheries Development. Established in October 2016, it is based in Taishan (population around 1 million), itself administered by Jiangmen, a city of 1.7 million in Guangdong Province. PAFMM units typically reflect their locality’s socioeconomic characteristics. It follows that this organization, based on populous, prosperous coastline, would support a leading unit—perhaps, in some respects, the most advanced PAFMM unit yet developed and deployed.

The seven trawlers currently at Union Banks were built by Guangxin Shipbuilding and Heavy Industry. On March 15, 2017, Fancheng Fisheries and Guangxin Shipbuilding signed a contract for nine 62.8-meter-long “backbone Spratly fishing vessels,” Guangdong’s thirteenth batch of such vessels approved by the Ministry of Agriculture. Guangxin had no experience building fishing vessels but completed the task in just nine months, with sea trials in October 2017 and delivery by December.


Nominally in charge of Fancheng Fisheries, General Manager Huang Jiang is far from the only key player. At the nine trawlers’ delivery ceremony on Dec. 5, 2017, the guests of honor included two Chinese military officers: Wan Liang’an, deputy commander of the Jiangmen military subdistrict, and Zhang Yuanfa, director of the War Readiness Construction Bureau, Jiangmen military subdistrict. The presence of Wan and Zhang indicates the Fancheng Nine were no ordinary fishing vessels but rather the newest additions to the Taishan PAFMM—subject to a People’s Liberation Army (PLA) chain of command.

Distinctively-numbered Yuetaiyu 18000, 18111, 18222, 18333, 18555, 18666, 18777, 18888, and 18999, the Fancheng Nine operate out of Shadi Bay on Shangchuan Island’s southern end. With this base of operations, 105 miles southwest of Hong Kong, they apparently constitute the core of a “Far Seas Militia Squadron.” Plans to establish a Far Seas Militia Squadron were discussed at a Taishan “Armed Forces Work Meeting” in March 2016—the same year Fancheng Fisheries was set up. In PAFMM terminology, “Far Seas” often designates remote waters within the first island chain, including the southern reaches of the South China Sea.

In April 2019, the director of Jiangmen’s Ministry of Veterans Affairs, Li Guangyi, visited the Far Seas Militia Squadron at Shadi Bay. He boarded one of the militia vessels and was photographed in its pilothouse with the rest of the delegation. Li called on the captain and the crew to serve as the “vanguard” in protecting China’s maritime claims in the South China Sea. His bureau has highlighted the squadron’s responsibility in providing preferred employment to PLA veterans. This all strongly suggests that the Far Seas Militia Squadron is manned by former PLA personnel, an established pattern for Sansha City’s Maritime Militia—Hainan Province’s leading unit.

The trawlers’ operations are the most striking illustration of their PAFMM role. Reviewing the Fancheng Nine’s tracks reveals striking patterns that no normal fishing vessels would ever exhibit. Gregory Poling and his colleagues at the Center for Strategic and International Studies’ Asia Maritime Transparency Initiative pioneered such tracking of these $100 million-plus trawlers in January 2019. To this, we now add our own observations based on the last 12 months of AIS data.

Since March 2020, the Fancheng Nine have systematically made the 800-mile journey from Taishan to Union Banks, patrolled there and near Subi and Mischief Reefs, and returned directly home to Guangdong. They have engaged in extensive operations throughout Union Banks. Beyond Union Banks, in December 2020, they conducted pressuring presence operations at Sandy Cay, just west of the Philippine-occupied Thitu Island. None of this behavior would make any sense for fishing vessels, which have strong economic incentives to fish frequently, not linger offshore.

The current deployment began when eight of the nine Fancheng trawlers departed Guangdong on Feb. 16, arriving several days later at China’s military installation on Subi Reef. Since then, AIS transmissions indicate that at least seven have patrolled Union Banks, including Whitsun Reef’s lagoon. (The eighth turned off AIS soon after departing Guangdong.) There is no evidence of fishing whatsoever during these laser-focused operations, but every indication of trolling for territorial claims—as likewise witnessed with some of Sansha City’s 84 frontline PAFMM vessels since 2017, are in similar rotational forward deployments to Scarborough Shoal and Fiery Cross, Mischief, and Subi Reefs in the Spratlys.

In conclusion, everything fits—except China’s own implausible denials. Since at least the 1974 Battle of the Paracel Islands, Beijing has employed PAFMM units to advance its disputed sovereignty claims in the South China Sea. Atop a large pyramid of part-time PAFMM personnel and vessels that can be activated for national missions, China has been adding professional, militarized full-time elite units crewing purpose-built vessels, recruited in part from former PLA personnel, who are paid generous salaries and benefits to pursue China’s claims constantly—with no apparent fishing responsibilities whatsoever.

Several implications follow. First, the U.S. and Philippine governments, and researchers and reporters alike, must shine a spotlight on the Fancheng Nine and call out Beijing’s destructive duplicity. To the extent that PRC officials refuse to answer questions, foreign researchers and governments can increasingly answer them ourselves—and reveal PRC policy in these troubled waters for what it truly is.

As Ely Ratner, special assistant to the secretary of defense, and others have cogently advocated, the U.S. government ought to share more information about what Chinese forces are doing at sea. This is especially important for tracking PAFMM activities. Something as simple as clear photos of hull numbers of vessels at Whitsun would allow researchers to run revealing “Vehicle Identification Number checks.” With their extreme cleanliness and loitering to a degree that makes no sense for even the most heavily subsidized fishing vessels, many—if not most of these—are likely PAFMM. Wherever they go from here, they should be followed closely.

At a minimum, the goal should be to deter still-worse behavior and thereby ring-fence disputed-but-vacant South Sea features like Whitsun Reef from unacceptable contingencies. This includes permanent “fishing vessel” occupation long after sheltering from bad weather claims cease to hold water; exclusion of Philippine vessels from approaching and accessing resources associated with a feature within Manila’s own jurisdictional waters; and China dredging, occupying, and fortifying yet another outpost in contravention of the United Nations Convention on the Law of the Sea. Specifically, this involves the 2016 arbitral tribunal’s ruling; customary international law; and the principles embodied in the embattled China-Association of Southeast Asian Nations’s Declaration of Conduct and Code of Conduct negotiations.

Per documented PAFMM development patterns, Fancheng Fisheries appears to be a “model unit”—perhaps the most advanced in Guangdong—or even, in some respects, in the South China Sea. Other units can be expected to visit, study, and emulate this exemplar. By demonstrating maximum knowledge of this and related units, together with coordinated government messaging and countermeasures, the global community can prevent Beijing from succeeding at its damaging game of “capture the flag” in the South China Sea.

Beijing has been exhibiting unprecedented vitriol and aggression these days over everything from territorial claims to denials of its atrocities in Xinjiang. At some point, reputation and public opinion matter—the United States and its allies have a panoply of policy tools at their disposal. Next year, the Winter Olympics and a Philippine presidential election will give even those lacking China’s power a chance to vote against it. And, whatever Manila, Washington, and other allies and partners ultimately decide to do about Whitsun Reef itself, there is considerable room for imposing costs elsewhere at a time and place of their choosing. The fact that China got away with reneging on the 2012 Scarborough Shoal deal continues to undermine U.S. credibility—a debacle that must never be repeated. Indeed, it is for reasons such as these that Beijing has attempted to pursue its aims with gray zone operations under the radar in the first place.

 

[Khafee]

China criticizes passage of USS John S. McCain through Taiwan Strait
April 7, 2021
By Ed Adamczyk

The destroyer USS John S. McCain transited the Taiwan Strait on Wednesday, the U.S. Navy announced. Photo by MCS1 Jeremy Graham/U.S. Navy

April 7 (UPI) -- The transit of the guided-missile destroyer USS John S. McCain through the Taiwan Strait on Wednesday drew swift condemnation from the Chinese military.

The ship sailed through the strait separating Tainan and China, in a "routine exercise" demonstrating the "U.S. commitment to a free and open Indo-Pacific [Ocean]," a Navy statement on Wednesday said.

In a statement, Col. Zhang Chunhui, spokesman for China's People's Liberation Army Eastern Theater Command, said the action sent an erroneous signal to forces supporting Taiwan's independence from China.

He added that the appearance of the ship undermined the regional status and jeopardized stability in the 110-mile strait, regarded as an international waterway.

"China is firmly opposed to it," he said, noting that the PLA remains on high alert and ready to respond to threats.

While the independence of the island nation has been globally recognized since 1949, China regards Taiwan as a breakaway province to eventually be reunited with the mainland country.

The United States has affirmed its interest in protecting Taiwan's independence, and Taiwan has been a regular purchaser of U.S. military equipment since 2015.

The U.S. Navy routinely sends ships through the strait in a show of force, as well as solidarity with Taiwan, and China was critical of the March 30 visit to the island by U.S. Ambassador to Palau John Hennessey-Niland.

The visit suggests an era of greater coordination in the areas of security and defense between Taiwan and the United States, Lin Ting-hui of the Taiwan Society of International Law told the Taipei Times.

This week, China's navy conducted exercises, involving one of its two aircraft carriers, in waters near the strait.

A U.S. Navy carrier strike group, led by the aircraft carrier USS Theodore Roosevelt, is also in the vicinity, in the South China Sea.

Earlier in March, Congressional testimony by the United States' two most senior admirals in Asia cited the growing threat of China in the Indo-Pacific region.

Adm. Philip Davidson of the Indo-Pacific Command and Adm. John Aquilino of the Pacific Fleet both mentioned its effect on Taiwan, and Aquilino contended that a Chinese "military takeover" of Taiwan was one of his greatest concerns.

 

[Khafee]

China drills deep in disputed South China Sea​

By Reuters Staff
April 8, 2021
Updated 2 hours ago

FILE PHOTO: The Chinese national flag is seen in Beijing, China April 29, 2020. REUTERS/Thomas Peter/File Photo

BEIJING (Reuters) - China has drilled deep in the South China Sea to retrieve sediment core from the seabed, state media reported on Thursday, amid tensions over disputed waters with rival claimants Taiwan and the Philippines, as well as with the United States.

Chinese scientists on a marine research vessel used China’s home-made “Sea Bull II” drilling system to obtain a sediment core 231 metres (253 yards)long at a depth of 2,060 metres (6,760 feet), the official Xinhua news agency said.

The system can help explore natural gas hydrate resources in the seabed, Xinhua added, referring to the solid ice-like crystals formed from a mixture of methane and water that are touted as a promising source of energy.

It was unclear exactly where the drilling took place in the South China Sea, around 90% of which is claimed by Beijing as its territorial waters. Malaysia, the Philippines, Taiwan, Vietnam and Brunei also lay claim to parts of the sea, which has vast oil and gas potential.

Tensions in the region have escalated since a U.S. Navy strike group entered the South China Sea on Sunday. That came after the president of the Philippines, a U.S. ally, voiced concern about Chinese vessels massing in Manila’s 200-mile (320-km) exclusive economic zone.

Self-ruled Taiwan, which China also claims as its own territory, has threatened to shoot down Chinese drones spotted circling the Taipei-controlled Pratas Islands in the South China Sea.

China’s oil and gas exploration activities in the South China Sea have stoked tensions before, notably when state-run China National Offshore Oil Corp (CNOOC) deployed a deepwater drilling rig in Vietnam-claimed waters in 2014.

Reporting by Ryan Woo; writing by Tom Daly; editing by Jonathan Oatis

 

[Khafee]

U.S. Senate moves ahead with sweeping effort to counter China​

April 8, 2021
Updated 2 hours ago
By Patricia Zengerle, David Brunnstrom

FILE PHOTO: Chinese and U.S. flags flutter outside the building of an American company in Beijing, China, January 21, 2021. REUTERS/Tingshu Wang

WASHINGTON (Reuters) - The U.S. Senate Foreign Relations Committee has scheduled a meeting on April 14 to consider major bipartisan legislation to boost the country’s ability to push back against China’s expanding global influence, Senate sources said on Thursday.

The draft measure, seen by Reuters and titled the Strategic Competition Act of 2021, mandates diplomatic and strategic initiatives to counteract Beijing, reflecting hard-line sentiment on dealings with China from both Democrats and Republicans in Congress.

The bill is intended to address economic competition with China, but also humanitarian and democratic values, such as imposing sanctions over the treatment of the minority Muslim Uighurs and supporting democracy in Hong Kong.

It stressed the need to “prioritize the military investments necessary to achieve United States political objectives in the Indo-Pacific.” It called for spending to do so, saying Congress must ensure the federal budget is “properly aligned” with the strategic imperative to compete with China.

It would expand the scope of the Committee on Foreign Investment in the United States (CFIUS), which scrutinizes financial transactions for potential national security risks. However, like many provisions of the bill, this clause could be changed as it moves through the committee and full Senate.

The draft legislation calls for an enhanced partnership with Taiwan, calling the democratic self-governed island “a vital part of the United States Indo-Pacific strategy” and saying there should be no restrictions on U.S. officials’ interaction with Taiwanese counterparts. China considers Taiwan a breakaway province.

The bill also says Washington must encourage allies to do more about Beijing’s “aggressive and assertive behavior.” And it calls on every federal department and agency to designate a senior official to coordinate policies with respect to strategic competition with China.

“The United States must ensure that all Federal departments and agencies are organized to reflect the fact that strategic competition with the PRC is the United States top foreign policy priority,” the draft said, using the acronym for the People’s Republic of China.

Another clause would limit assistance to countries hosting Chinese military installations, saying Beijing uses its so-called Belt and Road Initiative to advance its security interests and facilitate greater military access.

Introduced by Senators Bob Menendez, the committee’s Democratic chairman, and Jim Risch, its ranking Republican, the draft bill was released to committee members overnight to allow a markup, a meeting during which the panel will discuss amendments and vote, in a week.

The measure is Foreign Relations’ contribution to a fast-track effort in the Senate announced in February by Democratic Senate Majority Leader Chuck Schumer to pass legislation to counter China.

“Congress is extremely focused on the various challenges that China poses to American interests and is trying to develop effective responses that are within its purview,” said Center for Strategic and International Studies Asia expert Bonnie Glaser.

The Senate Commerce Committee will hold a hearing on April 14 on its bipartisan measure, titled the Endless Frontier Act, to bolster the U.S. semiconductor industry.

Reporting by David Brunnstrom and Patricia Zengerle; Editing by Toby Chopra, Jonathan Oatis and David Gregorio

 

[space cadet]

China Is a Paper Dragon

U.S. policy makers should look to the future with a little more confidence and a lot more trust in trade, markets, and the superior potential of a free people.

www.theatlantic.com

IDEAS

China Is a Paper Dragon​

U.S. policy makers should look to the future with a little more confidence and a lot more trust in trade, markets, and the superior potential of a free people.

China was mentioned only four times in Joe Biden’s first address to a joint session of Congress, but it shadowed almost every line of the speech. “We’re in a competition with China and other countries to win the 21st Century,” Biden said. His aides describe the president as preoccupied with the challenge from China. “It informs his approach to most major topics and the president regularly raises it in meetings, whether he is discussing foreign policy or electric bus batteries,” CNN’s Jeremy Diamond reported. “And aides say Biden believes it is a key test by which historians will judge his presidency.”

As Biden said to the nation from the well of the House of Representatives, the authoritarian President Xi Jinping is “deadly earnest” about China “becoming the most significant, consequential nation in the world. He and others—autocrats—think that democracy can’t compete in the 21st century with autocracies.”

So this might be a useful moment to hear a contrary voice. In 2018, the Tufts University professor Michael Beckley published a richly detailed study of Chinese military and economic weaknesses. The book is titled Unrivaled: Why America Will Remain the World’s Sole Superpower.

The book argues that China’s economic, financial, technological, and military strength is hugely exaggerated by crude and inaccurate statistics. Meanwhile, U.S. advantages are persistently underestimated. The claim that China will “overtake” the U.S. in any meaningful way is polemical and wrong—and wrong in ways that may mislead Americans into serious self-harming mistakes. Above all, Beckley pleads with readers not to focus on the headline numbers of gross domestic product. China may well surpass the United States as the largest economy on Earth by the 2030s. China was also almost certainly the largest economy on Earth in the 1830s. A big GDP did not make China a superpower then—and it will not make China a superpower now, or so Beckley contends.

Beckley is a voracious reader of specialist Chinese military journals and economic reports. And, he argues, many of the advances cited as Chinese strengths don’t hold up to close scrutiny. American analysts often publish worries about China’s growing navy, and especially its two aircraft carriers. But, Beckley writes, “Chinese pilots fly 100 to 150 fewer hours than U.S. pilots and only began training on aircraft carriers in 2012,” and he adds that “Chinese troops spend 20 to 30 percent of their time studying communist ideology.”


When Chinese forces do train, Beckley argues, the exercises bear little resemblance to the challenges the People’s Liberation Army would face in a great-power conflict:

PLA exercises remain heavily scripted (the red team almost always wins) … Most exercises involve a single service or branch, so troops lack the ability to conduct joint operations, and assessments are often nothing more than “subjective judgments based on visual observation rather than on detailed quantitative data” and are scored “based simply on whether a training program has been implemented rather than on whether the goals of the program have been achieved.”

Worried about Chinese students’ high scores on comparative math tests? You’re looking at the curated outputs of highly selective groups of students.

Whereas public school is free through high school in the United States, China’s government only covers the costs of elementary and middle school. At many Chinese high schools, families have to pay tuition and other expenses, and these outlays are among the highest in the world. Consequently, 76 percent of China’s working-age population has not completed high school.

Things don’t improve at the college level.

Many Chinese college students describe their universities as “diploma factories,” where student-teacher ratios are double the average in U.S. universities, cheating is rampant, students spend a quarter of their time studying “Mao Zedong thought,” and students and professors are denied access to basic sources of information, such as Google Scholar and certain academic journal repositories.

Surely China is winning the industries of the future? Not really.

Chinese firms’ total spending on R&D as a percentage of sales revenue stalled at levels four times below the average for American firms. … Chinese firms remain dependent on foreign technologies and manual labor and have a rudimentary level of automation and digitization: on average Chinese enterprises have just nineteen robots per ten thousand employees; U.S. firms, by contrast, use an average of 176 robots per ten thousand employees.

But isn’t China sprinting to overtake the United States? Yes, but it’s stumbling badly in that pursuit.

China now leads the world in retractions of scientific studies due to fraud; one-third of Chinese scientists have admitted to plagiarizing or falsifying results (versus 2 percent of U.S. scientists); and two-thirds of China’s R&D spending has been lost to corruption.

Undergirding these examples and dozens more like them is Beckley’s clarifying theoretical insight: Repression is expensive.

Comparing China’s military spending to that of the United States, for example, doesn’t make much sense. The Chinese military’s first and paramount mission is preserving the power of the Chinese Communist Party against China’s own people. The U.S. military can focus entirely on external threats.

The lines that plot the comparative GDP of the United States and China distort the real balance of power between the two societies, Beckley argues, because China must devote such a large share of its resources to basic subsistence needs to avert the overthrow of the state.

From the May 2020 issue: How China sees the world

Beckley dramatizes this point with historical context. The concept of GDP did not exist in the 19th century, but economists have retrospectively reconstructed those figures backward into time. They have found that in the 1800s, the Chinese empire had a GDP much larger than that of Great Britain. The Chinese army of 800,000 men also enormously exceeded Britain’s troop numbers. Yet when the two states clashed in the two Opium Wars, from 1839 to 1842 and again in 1858, China was crushingly defeated. Why?

A great part of the answer, then as now, was the cost of repression.
Nineteenth-century China faced an average of 25 local uprisings a year. Most of its troops had to be deployed to suppress rebellions and control banditry, leaving few available for war-fighting.

The next part of the answer is that mass is not power.

Although China’s resources were enormous in the aggregate, most were consumed by the basics of subsistence. In the 19th-century, Britain produced only half as much as China, but it did so with one-thirteenth the population—making more wealth available for more purposes.

A final piece of the answer is that technological copycats face huge disadvantages against technological innovators. They will always lag behind the more creative rival, not only in the factory, but on the battlefield. “Repeatedly during the Opium Wars … Chinese armies of thousands were routed in minutes by a few hundred, or even a few dozen, British troops,” Beckley notes.

Beckley does not suggest that the lopsided outcome of the Opium Wars would repeat itself in the 21st century. Anyway, nuclear powers do not fight expeditionary wars on each other’s territory. Instead, Beckley seeks to highlight the immense defects of gross GDP as a measure of national strength—factoring in the costs of repression—and the strategic predicament of China’s location, barred from the open ocean by a ring of potential enemies on its eastern front, extending from Russia, through Korea, past Japan, to the Philippines, and then to Vietnam.

I spoke with Beckley shortly before Biden’s address to ask whether he had revisited any of his assessments since finishing his book early in Donald Trump’s presidency. He said that he had become more alarmed by China’s aggressive and repressive intentions, but remained as dubious as ever about Chinese capacities.

Americans need to hear this perspective of confidence. The self-doubt that afflicts so many Americans is pushing this country to wrongheaded policies, most especially trade protectionism, and even outright trade war. Biden had it closer to right back in 2019, when he dismissed overwrought fears of China: “China’s going to eat our lunch? C’mon, man.” Since then, Biden has been pushed by political necessity to a more confrontational approach—pushed not only by a Trumpified Republican Party, but also by his own party’s turn against trade and markets. One of the swiftest critics of Biden’s “C’mon, man” comment was his then-rival Bernie Sanders, who tweeted that same day:

Since the China trade deal I voted against, America has lost over 3 million manufacturing jobs. It’s wrong to pretend that China isn’t one of our major economic competitors. When we are in the White House we will win that competition by fixing our trade policies.

Sanders lost the nomination, but he won the debate within the Democratic Party over trade policy. In his address, Biden committed to extending and enlarging “Buy American” favoritism in government procurement. His administration is maintaining Trump’s anti-China tariffs and is “reviewing”—not yet removing—tariffs against the European Union and other trade partners. Biden economic advisers warned during his campaign that trade expansion would rank low on their list of priorities, and so it is proving.

You often hear the criticism that Americans terribly miscalculated when they opened the door to freer trade with China, and received in return only a richer and more dangerous enemy. Disappointment and disillusionment are then invoked to justify more aggressive policies of confrontation. The Trump administration raised the defense budget by more than $100 billion a year, and the spending increases have continued even after the campaign against ISIS came to an end. More and more of the money is being directed to preparations for a conflict with China.
From the December 2016 issue: China’s great leap backward
China’s language and behavior is assertive and provocative, for sure. China’s power is rising, yes. Its behavior at home and abroad is becoming more oppressive and more brutal; that’s also tragically true. But as Americans muster the courage and will to face Chinese realities, that reckoning needs also to appreciate the tremendous capabilities of this country, and the very real limits besetting China: a fast-aging population, massive internal indebtedness, and a regime whose worsening repression suggests its declining popularity.

On April 28, the Financial Times reported that the suspiciously delayed Chinese census would reveal a population decline from 2010 to 2020, the first since the state-caused famines of the 1960s. The FT report was hastily disavowed by Chinese authorities, but in a strangely ambiguous way. Whatever the census ultimately claims, and regardless of whether it is believed, the story points to two deep truths about Chinese society: It’s about to be home to a lot of old people, and trust in the state is very low, and for good reason.

 

[space cadet]

As China’s population ages, it will deplete its savings. Chinese people save a lot to compensate for the state’s meager social-security provision. For three decades, the savings of ordinary people financed the spectacular borrowing of China’s state-owned enterprises. How much was borrowed? Nobody knows, because everybody lies. What happens as the savings are withdrawn to finance hundreds of millions of retirements? Again—who knows?

China misallocates capital on a massive scale. More than a fifth of China’s housing stock is empty—the detritus of a frenzied construction boom that built too many apartments in the wrong places. China overcapitalizes at home because Chinese investors are prohibited from doing what they most want to do: get their money out of China. Strict and complex foreign-exchange controls block the flow of capital. More than one-third of the richest Chinese would emigrate if they could, according to research by one of the country’s leading wealth-management firms. The next best alternative: sending their children out. Pre-pandemic, almost 1 million young Chinese attended Western universities. Pre-pandemic, only about 10,000 Americans were studying in China; single thousands were from other Western countries—and almost all of them were in the country to study language, not any academic specialty.

This is merely a sample of the gathering troubles facing America’s designated strategic competitor and economic adversary. The United States is hardly trouble-free, but if you had to choose either set of troubles, you’d surely rather face the American list than the Chinese. That’s why Biden said, “C’mon, man,” and why U.S. policy makers should look to the future with a little more confidence and a lot more trust in trade, markets, and the superior potential of a free people under an elected government.

 

[space cadet]

Inside the Race to Avert Disaster at China’s Biggest ‘Bad Bank’

(Bloomberg) -- It was past 9 p.m. on Financial Street in Beijing by the time the figure inside Huarong Tower there picked up an inkbrush and, with practiced strokes, began to set characters to paper.Another trying workday was ending for Wang Zhanfeng, corporate chairman, Chinese Communist Party...

finance.yahoo.com

Huarong drama: Inside the race to avert disaster at China’s biggest ‘bad bank’​

(Bloomberg) -- It was past 9 p.m. on Financial Street in Beijing by the time the figure inside Huarong Tower there picked up an inkbrush and, with practiced strokes, began to set characters to paper.

Another trying workday was ending for Wang Zhanfeng, corporate chairman, Chinese Communist Party functionary—and, less happily, replacement for a man who very recently had been executed.

On this April night, Wang was spotted unwinding as he often does in his office: practicing the art of Chinese calligraphy, a form that expresses the beauty of classical characters and, it is said, the nature of the person who writes them.


Its mastery requires patience, resolve, skill, calm—and Wang, 54, needs all that and more. Because here on Financial Street, a brisk walk from the hulking headquarters of the People’s Bank of China, a dark drama is playing out behind the mirrored façade of Huarong Tower. How it unfolds will test China’s vast, debt-ridden financial system, the technocrats working to fix it, and the foreign banks and investors caught in the middle.

Welcome to the headquarters of China Huarong Asset Management Co., the troubled state-owned ‘bad bank’ that has set teeth on edge around the financial world.

For months now Wang and others have been trying to clean up the mess here at Huarong, an institution that sits—quite literally—at the center of China’s financial power structure. To the south is the central bank, steward of the world’s second-largest economy; to the southwest, the Ministry of Finance, Huarong’s principal shareholder; less than 300 meters to the west, the China Banking and Insurance Regulatory Commission, entrusted with safeguarding the financial system and, of late, ensuring Huarong has a funding backstop from state-owned banks until at least August.

The patch though doesn’t settle the question of how Huarong makes good on some $41 billion borrowed on the bond markets, most incurred under Wang’s predecessor before he was ensnared in a sweeping crackdown on corruption. That long-time executive, Lai Xiaomin, was put to death in January—his formal presence expunged from Huarong right down to the signature on its stock certificates.

The bigger issue is what all this might portend for the nation’s financial system and efforts by China’s leader, Xi Jinping, to centralize control, rein in years of risky borrowing and set the nation’s financial house in order.

“They’re damned if they do and damned if they don’t,” said Michael Pettis, a Beijing-based professor of finance at Peking University and author of Avoiding the Fall: China’s Economic Restructuring. Bailing out Huarong would reinforce the behavior of investors who ignore risk, he said, while a default endangers financial stability if a “chaotic” repricing of the bond market ensues.

Just what is going on inside Huarong Tower? Given the stakes, few are willing to discuss that question publicly. But interviews with people who work there, as well as at various Chinese regulators, provide a glimpse into the eye of this storm.

Huarong, simply put, has been in full crisis mode ever since it delayed its 2020 earnings results, eroding investor confidence. Executives have come to expect to be summoned by government authorities at a moment’s notice whenever market sentiment sours and the price of Huarong debt sinks anew. Wang and his team must provide weekly written updates on Huarong’s operations and liquidity. They have turned to state-owned banks, pleading for support, and reached out to bond traders to try to calm nerves, with little lasting success.

In public statements, Huarong has insisted repeatedly that its position is ultimately sound and that it will honor its obligations. Banking regulators have had to sign off on the wording of those statements—another sign of how serious the situation is considered and, ultimately, who’s in charge.

Then there are regular audiences with the finance ministry and the other powerful financial bureaucracies nearby. Among items usually on the agenda: possible plans to hive off various Huarong businesses.

Huarong executives are often kept waiting and, people familiar with the meetings say, tend to gain only limited access to top officials at the CBIRC, the banking overseer.

The country’s apex financial watchdog—chaired by Liu He, Xi’s right-hand man in overseeing the economy and financial system—has asked for briefings on the Huarong situation and coordinated meetings between regulators, according to regulatory officials. But it has yet to communicate to them a long-term solution, including whether to impose losses on bondholders, the officials said.

Representatives at the People’s Bank of China, the CBIRC, Huarong and the Ministry of Finance didn’t respond to requests for comment.

Focus on Basics

A mid-level party functionary with a PhD in finance from China’s reputed Southwestern University of Finance and Economics, Wang arrived at Huarong Tower in early 2018, just as the corruption scandal was consuming the giant asset management company. He is regarded inside Huarong as low-key and down-to-earth, particularly in comparison to the company’s previous leader, Lai, a man once known as the God of Wealth.

Hundreds of Huarong staff, from Beijing division chiefs to branch employees in faraway outposts, listened in on April 16 as Wang reviewed the quarterly numbers. He stressed that the company’s fundamentals had improved since he took over, a view shared by some analysts though insufficient to pacify investors. But he had little to say about what is on so many minds: plans to restructure and shore up the giant company, which he’d pledged to clean up within three years of taking over.

His main message to the troops: focus on the basics, like collecting on iffy assets and improving risk management. The employees were silent. No one asked a question.

One employee characterized the mood in his area as business as usual. Another said co-workers at a Huarong subsidiary were worried the company might not be able to pay their salaries. There’s a widening gulf between the old guard and new, said a third staffer. Those who outlasted Lai and have seen their compensation cut year after year have little confidence in the turnaround, while new joiners are more hopeful about the opportunities the change of direction offers.

Others joke that Huarong Tower must suffer from bad feng shui: after Lai was arrested, a bank that had a branch in the building had to be bailed out to the tune of $14 billion.

Dark humor aside, a rough consensus has begun to emerge among senior management and mid-level regulators: like other key state-owned enterprises, Huarong still appears to be considered too big to fail. Many have come away with the impression—and it is that, an impression—that for now, at least, the Chinese government will stand behind Huarong.

At the very least, these people say, no serious financial tumult, such as a default by Huarong, is likely to be permitted while the Chinese Communist Party is planning a nationwide spectacle to celebrate the 100th anniversary of its founding on July 1. Those festivities will give Xi—who has been positioning to stay in power indefinitely—an opportunity to cement his place among China’s most powerful leaders including Mao Zedong and Deng Xiaoping.

Huarong is “nowhere near” defaulting, the managing editor of Caixin Media wrote in an opinion piece on Saturday. Neither the Ministry of Finance nor Chinese regulators would allow it, Ling Huawei wrote.

What will come after that patriotic outpouring on July 1 is uncertain, even to many inside Huarong Tower. Liu He, China’s vice premier and chair of the powerful Financial Stability and Development Committee, appears in no hurry to force a difficult solution. Silence from Beijing has started to rattle local debt investors, who until about a week ago had seemed unmoved by the sell-off in Huarong’s offshore bonds.

Competing Interests

Huarong’s role in absorbing and disposing of lenders’ soured debt is worth preserving to support the banking sector cleanup, but requires government intervention, according to Dinny McMahon, an economic analyst for Beijing-based consultancy Trivium China and author of China’s Great Wall of Debt.

“We anticipate that foreign bondholders will be required to take a haircut, but it will be relatively small,” he said. “It will be designed to signal that investors should not assume government backing translates into carte blanche support.”

For now, in the absence of direct orders from the top, Huarong has been caught in the middle of the competing interests among various state-owned enterprises and government bureaucracies.

China Investment Corp., the $1 trillion sovereign fund, for instance, has turned down the idea of taking a controlling stake from the finance ministry. CIC officials have argued they don’t have the bandwidth or capability to fix Huarong’s problems, according to people familiar with the matter.

The People’s Bank of China, meantime, is still trying to decide whether to proceed with a proposal that would see it assume more than 100 billion yuan ($15.5 billion) of bad assets from Huarong, those people said.

And the Ministry of Finance, which owns 57% of Huarong on behalf of the Chinese government, hasn’t committed to recapitalizing the company, though it hasn’t ruled it out, either, one person said.

CIC didn’t respond to requests for comment.

The banking regulator has bought Huarong some time, brokering an agreement with state-owned lenders including Industrial & Commercial Bank of China Ltd. that would cover any funding needed to repay the equivalent of $2.5 billion coming due by the end of August. By then, the company aims to have completed its 2020 financial statements after spooking investors by missing deadlines in March and April.

“How China deals with Huarong will have wide ramifications on global investors’ perception of and confidence in Chinese SOEs,” said Wu Qiong, a Hong Kong-based executive director at BOC International Holdings. “Should any defaults trigger a reassessment of the level of government support assumed in rating SOE credits, it would have deep repercussions for the offshore market.”

The announcement of a new addition to Wang’s team underscores the stakes and, to some insiders, provides a measure of hope. Liang Qiang is a standing member of the All-China Financial Youth Federation, widely seen as a pipeline to groom future leaders for financial SOEs. Liang, who arrived at Huarong last week and will soon take on the role of president, has worked for the three other big state asset managers that were established, like Huarong, to help clean up bad debts at the nation’s banks. Some speculate this points to a wider plan: that Huarong might be used as a blueprint for how authorities approach these other sprawling, debt-ridden institutions.

Meantime, inside Huarong Tower, a key item remains fixed in the busy schedules of top executives and rank-and-file employees alike. It is a monthly meeting, the topic of which is considered vital to Huarong’s rebirth: studying the doctrines of the Chinese Communist Party and speeches of President Xi Jinping.

(Updates to mention Caixin managing editor’s opinion piece on the matter. )

More stories like this are available on bloomberg.com

Subscribe now to stay ahead with the most trusted business news source.

©2021 Bloomberg L.P.

 

[A123]

Wang Yi: As long as China and Russia stand together, international order will not collapse​

 

[A123]

China’s $5.5-billion offshore wind farm starts operation, to cut 4mln tons of CO2 emissions annually​

 

[A123]

China's aerospace milestones in 2021​