Tag: China

From The Conversation.

Chinese President Xi Jinping’s appearance at last week’s World Economic Forum shows global leadership is shifting, not drifting, toward Beijing. The most vigorous defense of globalization and multilateral cooperation was mounted not by an American statesman, but by the president of the People’s Republic of China.

“The problems troubling the world are not caused by globalization,” Xi declared. “Countries should view their own interest in the broader context and refrain from pursuing their own interests at the expense of others.”

Speculation is mounting that the United States, with Donald Trump cast in the role of president, will ignore international challenges, renounce global responsibilities and abandon friends and allies.

As Washington greets a new administration disinclined to play a worldwide role, Beijing increasingly accepts opportunities to lead. Xi and his colleagues understand that their country’s domestic development and global ascendance require steady engagement and honest efforts abroad.

Yes, China has “done the right thing” before. It has restricted antibiotics in food-animal agriculture, created a new infrastructure-development bank for Asia, aided previously exploited African countries and promised to end its internal ivory trade.

But never before has China so forthrightly stepped up when the United States appears to be stepping away. As scholars of Chinese strategy and the intersection of science and politics, we see how Beijing’s ambitions and interests will affect its engagement on a range of important international issues.

The case of climate change

Climate change policy is one good example of this trend. Commentators warn that Trump’s pledge to withdraw the U.S. from the Paris climate agreement would let China “off the hook” for curbing carbon emissions. In fact, China put itself “on the hook” in Paris for reasons having little to do with the United States.

China’s most urgent atmospheric problem is not carbon dioxide. It’s combustion toxicity from burning coal, oil and biomass. The Chinese these days don’t look through their air; they look at it. And what they see, they breathe.

Combustion toxicity has degraded China’s air quality so much, by Chinese assessments, as to destroy 10 percent of GDP annually since the late 1980s and cause hundreds of thousands of premature deaths every year. And air pollution has become China’s single greatest cause of social unrest.

In response, China is closing its old coal-fired power plants, and the new ones it’s building are much farther away from its prosperous and politically influential eastern cities. Other fossil-fueled industries are being put farther away, too. China has also contracted with Russia to buy huge amounts of natural gas, whose combustion emits lots of CO2 but not a lot of toxic air pollutants.

These moves will expose fewer people, especially prosperous urban dwellers, to toxic air pollution. On their own, though, these moves will not do much to meet carbon targets and restrain warming.

In an even better bet to clear its air, China is moving to add more nuclear, hydroelectric, solar and wind turbine generating capacity. Greenpeace estimates that during every hour of every day in 2015, China on average installed more than one new wind turbine, and enough solar panels to cover a soccer field.

Solar panels in Jiangsu Province, China. REUTERS

China is already the world’s leading producer of renewable energy technologies. More remarkably, it is also the leading consumer. And in January, it announced plans to invest an additional US$360 billion in renewable power between now and 2020. That’s $120 billion a year.

These renewable power measures are being taken to fight China’s number one problem – air pollution – but they will also automatically cut China’s carbon emissions. If it can manage political rivalries among local power companies and upgrade its electrical grid to handle all that solar and wind capacity, then China is likely to meet its Paris commitments earlier than currently required.

Defecting from Paris would not help China address its air pollution problem. Defection would, however, reinforce the presumption that U.S. leadership is indispensable – a presumption Beijing is loath to perpetuate.

A savvier and more probable move is for China to assert – for the first time on a major global issue – moral authority. Chinese diplomats are already reassuring the world that China will keep and even expand its climate commitments. This message conveys Beijing’s resolve not to let to let multilateral greenhouse gas mitigation collapse, and show the way out of a crisis whose agreed solution is threatened by others’ malfeasance.

National interest in global leadership

If sustained, such action will mark a critical inflection point in China’s global role. It will become less a challenger to an established order, and more a champion of a common cause. The United States will risk being regarded as aloof and unreliable and, following its 2016 election, even politically unstable.

Likewise, Beijing is asserting greater leadership in other areas once led by Washington. With the demise of the Trans-Pacific Partnership, which Washington negotiated with 11 Asian countries excluding China, Beijing is promoting its own Pacific trade-and-investment framework excluding the United States.

Even more grandly, Xi is articulating an alternativevision for global economic growth. The model focuses on physical investment, especially in transportation and IT infrastructure. In this, it is linked to the new Silk Road project, through which China is expanding linkages across Eurasia by integrating railways, ports and information networks into transnational corridors. The Chinese approach also does not rely on portfolio investment and central banks exertions to drive growth – a sharp contrast to Western policies.

Ceding global moral authority to China would be a high price for America to pay for the pleasures of political posturing. Yet a China leading by example would have a greater stake in its own reputation, and the greater that stake becomes the more engaged China becomes. Such a China, we believe, could profoundly benefit the world.

 

Authors: Flynt L. Leverett, Professor of International Affairs and Asian Studies, Pennsylvania State University; RH Sprinkle, Associate Professor, University of Maryland

 

From The Conversation.

China’s debt is beyond worrying. It’s credit-to-GDP gap, a measure employed by the Bank of International Settlements (BIS) as a way to gauge debt levels, stands at 30%. This is the highest of any country going back to 1995 and is three times the threshold the BIS uses as an early sign of unsustainable debt.

The government has a plan to help ailing companies burdened by heavy debt levels. They will be allowed to give their creditors equity stakes in their companies in return for reducing debt. But while this may seem like a solution to the growing debt crisis, it is no more than a temporary lifeline.

China needs real market reform to avoid a debt crisis. Companies undergoing difficulties need to be restructured, hard budget constraints imposed, and losses and unprofitability revealed.

Buying time for zombies

The problem is China’s “zombie companies” – state owned corporations (SOEs) that operate in industries that are over capacity and have poor growth prospects, such as steel. For political reasons these companies can’t be shut or allowed to fail. The zombies are only kept afloat through loans (often at below market rates) from the state-owned banks. They have no prospect of repaying these.

This is where the plan comes in.

China is attempting to restructure some of the zombies by allowing them to swap their bank debt for an equity stake in the company. But this loan-relief plan is only designed to alleviate pressure on the companies, by lowering the cost of servicing debt for those undergoing temporary hardship.

The guidelines for the swap emphasise they would be market orientated. But there is no clear reason for a bank to want an equity stake in a company facing difficulties, nor for an SOE with only temporary cash flow issues to part with valuable ownership stakes.

These kinds of swaps have been done before, but not like this

Converting debt to equity is a technique that has worked in other countries but could deepen the debt problem if used by China’s zombies. In its current form it is little more than buying some breathing room for the SOE and transferring the risk to the bank.

It is essential that the new equity comes with some control by the entity receiving equity, so they can reform the zombies. The proposed debt for equity swap appears to be a temporary measure only, and there is little detail on whether the asset managers gain any control or can push through a reform agenda.

Further, the debt for equity swap will be facilitated through asset management companies which are predominantly subsidiaries of the state owned banks. It is unlikely that they would have any more skill in managing these assets than the banks do. Unless there is a clear change in the corporate governance and transparency of the SOEs then there is little likelihood of change.

There needs to be real reform

This is some hope that China is moving ahead with some reform measures. A number of planned debt to equity swap plans have been successfully rejected by creditors. Dongbei Special Steel, for example, was forced into bankruptcy by creditors. And there has also been a sharp rise in the number of SOE defaults. But the heart of the debt problem needs to be addressed.

Chinese debt is now closing in on 300% of GDP and a recent Reuters survey found a quarter of Chinese companies generated insufficient profits to cover the interest payments on their debt.

The International Monetary Fund has suggested a comprehensive reform strategy involving identifying companies with difficulties, recognising losses and burden sharing. They specifically note that restructuring SOEs and imposing hard budget constraints is vital to the reform.

However this reform will be expensive both politically and economically and will likely result in slower growth and great volatility in the financial markets. The debt-for-equity swap program is a temporary measure where a real solution is needed. Unless China undergoes tough reforms it is heading for a hard landing.

Author: Kathleen Walsh, Associate Professor of Finance, Australian National University