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Crisis in Hong Kong: Can China Sustain?

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By attempting to put on a brave front, China cannot mask the problems that it is currently mired with. Over the past year, the country has faced protests from various regions that it claims as its own territories. After the outbreak of the COVID-19 pandemic, China has also been experiencing a certain degree of indignation from the international community. In addition to that, nations like the United States and India have either had an economic fallout with the country or are steadily withdrawing their financial investments from China. Also considering that every move that China makes is being viewed with suspicion if not critically evaluated, sheds light on how the nation is struggling to keep its allies close.

However, in the midst of so many issues, one major concern for China should be its economy. And given the ways in which it is attempting to shelter its financial status from the world, just raises some questions about the wellbeing of the economic giant. China’s recent crackdowns on Hong Kong in the name of national security law, might have backfired. Even though the international financial hub, experienced a certain degree of autonomy, under the newly introduced law, its status will be no different from its mainland counterparts. This shift in the power balance might have some damaging implications on the Chinese economy.

Hong Kong’s previously enjoyed autonomy was what made it an able economic arm of China. Due to its low tax rates and favorable legal and financial systems, it was able to attract sufficient investments from various institutions. As per the Ministry of Commerce of China, over 58%  (USD 70 billion) of China’s nonfinancial Outbound Direct Investment (ODI) went to Hong Kong as of 2018. By the end of the same year, this volume plummeted and reached USD 622 billion. Over 60% of the Chinese Foreign Direct Investment (FDI) is channeled via Hong Kong. Not to mention, the USD 1.1 trillion worth of Chinese bank assets that the territory holds. As of 2019, Chinese companies raised $64 billion globally, out of which $35 billion came from Hong Kong alone. Apart from that, the territory also plays an important role in bolstering the Chinese currency. Even though Hong Kong has its own currency, the Hong Kong dollar, it is also the biggest market for foreign exchange including the Chinese Yuan or the Renminbi. This serves as one of the primary reasons why investors are attracted to Hong Kong. From 2016 to 2019, alone, the rate of such foreign exchange transactions has increased by 3.9%, which is $77.1 billion in April2016, to $107.6 billion by April of 2019. However, in light of the pro-democracy movements in Hong Kong, these numbers have significantly decreased, as investors no longer feel safe to carry out their transactions there.

The national security law imposed on Hong Kong, mainly criminalizes four types of offences- sedition, subversion, terrorism and collusion with foreign forces. Even though these laws pertain to aspects of security, they do have some impacts on the Chinese economy as well. The new national security law is not just limited to Hong Kongers, but also extends to every cooperation that has investments or business in the region. The requirement would need them to be wary of not toeing the line. This has naturally dissuaded investors, especially foreign investors who do not wish to be caught up in the political and legal crossfires. Considering that Chinese political advisor, Leung Chun-ying, has publicly called for the boycott of HSBC, on social media platforms and China has been pressurizing accounting firms like PwC, Deloitte, KPMG, and Ernst & Young to investigate and fire employees who were associated with Hong Kong’s pro-democracy protests. According to a survey carried out by the Hong Kong’s American Chamber of Commerce, over 60% of its members believed that the national security law would harm their business and 29% of them considered relocating. This clearly shows the fear among enterprises and investors operating in Hong Kong.

Taking into account that China’s new law diverges from its earlier policy of “one country, two systems”, there is a high probability that the tax rates in Hong Kong might mirror those of the mainland. In such a case, Hong Kong which was previously known as the tax haven, would experience a serious downfall in its number of investors.

The repercussions due to the national security law were soon felt after it was imposed. On May 22nd of this year, Hong Kong’s stock market plunged by 5%. This was considered to be one of the biggest falls since 2015. The property sector sub-index too fell by 7.7%, worse than the 2008 crisis. Companies like Sun Hung Kai Properties lost 7.1 percent and New World Development dropped 8.1 percent, while Wharf Real Estate Investment shed 8.7 percent. Hong Kong has also experienced a contraction of 8.9% , as a result of the combined effects of the COVID-19 pandemic, protests and U.S tensions. In response to the stock market plunge in May, the Hong Kong market saw an inflow of money from the mainland, as many Chinese state owned firms bought up the Hong Kong stocks. But this does not change the fact that ever since last year, the city has been experiencing major dips in its finances. One of the best indicators of its economic distress, is the fall in the Hong Kong’s FDI. FDI for 2019, was $53.17 billion which is a decline by 45.2% since 2018. Additionally, Hong Kong’s GDP in the second half of 2019, also fell by 1.2%. As per UNCTAD’s officials, the city was met with disinvestments worth  $48 billion. 

But China is not unaware of Hong Kong’s troubling finances, and is desperately  yet subtly trying to grapple with the issue. To understand how China is dealing with a possible economic and legal recoil, one needs to take a look at its recent policies and actions. Soon after the declaration of the national security law, China launched the “Wealth Management Connect” on June 29, 2020, as a response to the flailing economy of Hong Kong. This was done with the intention of creating a better integration among all of China’s territories together and also to turn the Greater Bay Area including Hong Kong, Macau and nine cities in Southern Guangdong province into a financial hub by 2030. According to this initiative, residents in the area will be allowed to buy wealth management products that are available in each other’s markets. This will allow for better investments with the regions, under the PRC’s supervision. However, the success rate of this initiative is highly debatable as a global recession might be in order due to the pandemic.

The Wealth Management Concept was just one aspect of the deal, Beijing now seeks to tax its diaspora to make up for its tax revenues. The income tax regulations were amended in January 2019, however, expatriates are feeling the burden of its enforcement  since the past two months. The ones that are severely affected due to this change are the Chinese mainlanders who reside in Hong Kong. Many SOE’s are informing their employees to declare their 2019 income, so that they can start paying taxes that contribute to their homeland. The tax rate that was previously 15% has been significantly increased to 45%. While the Chinese diaspora cope with this higher tax rate and the living expenses of Hong Kong, many analysts speculate that the city might experience a brain drain. As of 2019, around 29,200 people have been reported to leave the territory. Even though Hong Kong does not publish high frequency immigration reports, there has been a 50% increase in the applications for good citizenship cards, which are averaged to be around 2,935 as of June, 2019. The increasing taxes clubbed with the fear of protests, might lead to a wave of emigration from the region, thereby reducing the lucrativeness of Hong Kong and negatively affecting China’s economy.

Despite the actions and regulations that China seems to have posed in the past year over its so- called territories, its actions in the international domain do not seem to fit in their own narratives. Trump and Xi Jinping have been engaged in a trade war for the most part of their presidencies. However, in light of the pandemic and the upcoming US presidential elections, this war seems to have been heated more than ever. As of February 2020, the US debt was estimated to be around $22 trillion. Out of which China owned $1.1 trillion, this amounted up to 21% of the US debt held overseas and 7.2% of the US’s total debt load. These figures, however, have changed in the past three months alone, as China has increased its holdings of US treasury securities by USD 10.9 billion. This sudden spike in buying US debt amidst a trade war, appears to be suspicious to say the least. Buying of treasury bonds is a common practice in the global market among nations, as it enables a country to anchor their currency at a certain amount. China’s sudden purchase of treasury bonds, could possibly mean that it is attempting to peg its currency to that of the US dollars. Another possible outcome could be that China might sell off these bonds at a higher rate in the future, so as to significantly damage the US economy. However, as per some Chinese sources, this shall be a “nuclear move”  on the part of the Chinese. As per another Chinese source, China Power, the nation bought these treasury bonds in order to manage the exchange rate of the ChineseYuan, and such a trade does not give the nation an edge over the US. Despite whatever narrative that China wishes to bring to the table, it cannot be denied that its sudden interest in purchasing its rival’s treasury bonds and taxing its own diaspora might be an indication of a bigger issue.

As of today, China is running out of economic allies. The US- China trade war had significant repercussions for the global market as is. But its recent conflict with India might affect China to a certain degree as well. In light of the recent border dispute between India and China, the notion of boycotting Chinese products in India has been increasingly popularized. India shares a trade deficit of $57 billion as of last year. If India, one of the largest consumers of the Chinese market were to boycott its products, this could have serious ramifications for the Chinese economy.

It is no secret that China has been met with criticisms on various fronts by the international community. But considering the recent events and the consequences of the coronavirus pandemic, China could be attempting to cover up a major economic breakdown within its system. Earlier this year, a Chinese company was accused of depositing a “ghost collateral”. A private owned Chinese company, Wuhan Kingold Jewelry Inc., which owed many Chinese financial institutions and trust companies a loan of 20 billion Yuan ($2.8 billion) in the form of pure gold as a collateral, turned out to be fake. This company’s Chairman is Jia Zhihong, an ex- military man who defaulted on paying his investors. When 83 tonnes of Chinese gold turns out to be gilded copper, it does not paint a very good picture for the Chinese economy. Many could pass this incident off as the default of Kingold, but there is more than what meets the eye. China’s hasty enforcement of policies over its own territories and its apparently stable economy after suffering a major pandemic; whilst battling over issues of commerce with multiple nations, simply does not add up. In all probability, China could be heading towards an economic downfall and is still choosing to keep a tightlipped approach about it.

Research Analyst at Centre for Security Studies at O.P Jindal Global University, India.

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East Asia

Bushido Spirit Resurrected? Japan publicly bared its swords against China

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Recently, Japan’s Deputy Prime Minister Taro Aso declared that Japan will join forces with the US to “protect Taiwan.” There has been a lot of turmoil, but even though the US directly announced that it will follow the “One China policy,” Japan has not given up its secret intentions. Japan’s new “Defense White Paper,” which was just approved, not only continued to link the US, but also displayed greater animosity toward China.

The Japanese government just finished the 2021 version of the “Defense White Paper,” according to the Global Times, but both the cover and the substance of the white paper are full of “provocative” meaning. The first is the front cover. According to the image released by Japanese media, the cover of Japan’s new “Defense White Paper” is an ink drawing of a warrior on horseback. According to a spokesperson for Japan’s Ministry of Defense, the horse samurai on the cover represents the Japanese Self-Defense Force’s commitment to defend Japan. However, after seeing it, some Japanese netizens said that it was “extremely powerful in fighting spirit.”

From a content standpoint, the white paper keeps the substance of advocating “China menace,” talking about China’s military might, aircraft carriers, Diaoyu Islands, and so on, and also includes the significance of “Taiwan stability” for the first time. A new chapter on Sino-US ties is also included in the white paper. According to the Associated Press, the United States is expanding its assistance for the Taiwan region, while China is increasing its military actions in the region. This necessitates Japan paying attention to it with a “crisis mindset.”

Japan has recently grown more daring and rampant, thanks to a warlike cover and material that provokes China and is linked to the US. Japan has recently bared its swords against China on several occasions.

Not only did Japanese Prime Minister Yoshihide Suga take the lead in referring to the Taiwan region as a “country,” but after meeting US President Biden, he issued a joint statement referring to the Taiwan region, and tried his best to exaggerate maritime issues such as the East China Sea and the South China Sea, and Japanese Deputy Prime Minister Taro Aso, Defense Minister Nobuo Kishi, Deputy Defense Mizuho, and Deputy Defense Mizuho. It has all made inappropriate statements on Taiwan and publicly attacked the “One China Principle.”

After China clearly voiced its disapproval, Japan not only refused to be constrained, but actively increased its antagonism toward China. Do they truly believe China is simple to provoke? The tensions between China and Japan will undoubtedly worsen as a result of Japan’s publishing of this white paper. Although Japan has the bravery to provoke, it lacks the guts to initiate an armed war with China. After all, even the United States, on which they have traditionally counted, would not dare.

It is simple to employ force against China, and if the Japanese Self-Defense Force want to fight the People’s Liberation Army, it is preferable for them to be prepared for any catastrophic outcomes. Furthermore, China has long been Japan’s most important commercial partner. Even with Japan’s sluggish economy, they should be wary of challenging China. If they refuse to examine this, China may let them face the consequences of economics and trade.

Furthermore, the US has declared unequivocally that it will pursue the “One China Policy” and has intimated that it will not “protect Taiwan” with Japan. The stance of the United States demonstrates that, despite Japan’s determination to constrain China on the Taiwan problem and invitation to the United States to join in “safeguarding Taiwan and defending Japan,” the United States is hesitant to offer such refuge to Japan. As a result, Japan should be clear about its own place in the heart of the United States and attach itself to the United States, although it may be beaten by the United States again in the end.

In reaction to this event, the Hong Kong media stated that Japan should focus on making friends and generating money rather than intervening in Taiwan’s affairs, saying that “provoking Beijing is a fool’s errand.” As a result, if Japan continues to challenge China, they will be exposed as a total fool. And how good will a fool do in a game between countries?

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East Asia

Hong Kong Issues & the Impact on China’s Domestic Politics

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Hong Kong after years under British colony was handed over to China after the leash period was over and China being the governing state swore that it will protect the uniqueness of Hong Kong and let it function under its established capitalist system under “one state, two system” policy for the period of 50 years. These 50 years ensure Hong Kong to enjoy the freedom under the China security Umbrella. In contrast to China, the Hong Kong political system consist of multiple parties. Some of these political parties fall under the Pro-democratic camp as they supports the positive reforms in democracy. The other camp is of Pro-establishment, they are known for their support for the mainland China as they consist of basically people from the business sector. In the Hong Kong the Pro-Business supporter or pro establishment are known to be more of the dominant group because of their relation with the China but they have less support of the voter in contrast to the Pro-democratic camp.

Though in the wake of the recent Issues and the conflict with the mainland China it seems that the promises that were made at the time of handover are just fading away. Recently China decided to take some bold steps as it decided to intrude and intervene in the political system practiced In the Hong Kong which seems to a crackdown by Mainland China against its opposition. These audacious step of China triggered the massive protest in the Hong Kong driving international attention and Condemnation. What prompted and highlighted the situation more was when China in 2020 passed a national security bill and implemented an extremely comprehensive definitions for crimes such as terrorism, subversion, secession, and collusion with external powers. This bill was said to be controversial as it was a strain for the Hong Kong to establish itself as a full democracy. China also further accelerated the situation by arresting many pro-democracy activist and lawmakers which were protesting against the bill. What factors lead China take such steps was when the political groups in Hong Kong became more radical and formed Anti-Beijing parties threating the China Position and its control over the Hong Kong?  Student and youngster took the street to protest for the establishment of the political system that is more democratic in nature, starting to call themselves Hong Kong Nationals rather than identifying themselves as Chinese National.  Several of these groups separated in 2020, as Beijing cracked down on political opposition. This all threaten the Chinese position and control over the Hong Kong and its political setup. These steps by Mainland China have hushed many Hong Kong citizens who was fighting for democracy and encouraged others to abandon their lifestyle and escape the city.

If we see the motivation of the China Communist Party after consolidating power was to ensure and invest on the stability, CCP does everything and take every measure they have to in order to preserve the Stability of the Country so for this purpose most of the spending by the party was for the stability that is on the police system, training centers and national defense system that ensure the preservance of stability internally. If we study the CCP history, the power tenure of Xi Jinxing was clearly marked with the same preservance of stability as well as consolidation of power. He did it by benefitting those who were loyal to his leadership for example the pro-business man group in Hong Kong or Pro establishment camp. He sidelined those who were in the opposition as he did with the Pro-democratic wing that were protesting in the Hong Kong. China while introducing the National Security bill right after the massive protest did fuel the situation but it is also clear that China was somehow successful in inflaming the nationalism among people and pitting it against those who ever criticizing in and out of the country. China used the coincidental and the inflamed nationalism for its own benefit. Xi Jinxing handling of situation by doing massive arrest and crack downs on the opposition clearly reflects that regardless CCP and the XI jinxing knowing that such move will prove to be disastrous either seen from the diplomatic, geopolitical of economic lenses still go for it. It shows that the leaders only cared about the political requirements and reinforce inner control ignoring the damages it can have on the geopolitical or the economic situation of the country. All over in the history it had been debated that one day Chinese leadership might implement an aggressive foreign policy or even go for a war just for the sake to distract the public and international attention from their domestic issues. Hong Kong offered that very opportunity that could benefit the Chinese leadership, but without the risks and costs of a war. So I must say the situation handled by the Xi Jinxing was merely motivation but the thirst for consolidating power over Hong Kong rather than benefitting either of the mainland China or Hong Kong.

This situation had also impacted the internal politics of the China both diplomatically as well as economically. Diplomatic in a sense that the world had witnessed the massive protest in Hong Kong and a little later China decided to implement the National security Bill just gathered the Attention of the supranational actors and countries. Due to the Pandemic and its origination from China, it was exposed to the world and all the things happening in China was keenly observed. In such a scenario taking such rigid steps brought the world Attention not in the favor of the Country. Admits the Pandemic as well as the crackdown many countries including USA start to reinvent their policies for China. It was a great chance for the Rivals of China to hit it where it hurts. As Hong Kong served as a great technological hub for the China, deteriorating situation and implementation of such broad definition of terrorism compel many business to close down or relocate themselves thus negatively impacting the already crumbling economy due to pandemic. For example the head office of New York Times announced its relocation to Seoul amidst the deteriorating situation in the Hong Kong. Other than that many technological firms relocated themselves as there were facing restriction and censorship in their activities from China.  This happened due to the constant threat of arrest if they did not comply with the demands and the instruction given by the authorities. So Hong Kong issue and the handling of it by the Chinese Government did have many repercussion for the domestic politics of the China. If China keep following on this step and keep seeing Hong through thorough the Nationalist perspective it will Sabotage China Fight for freedom at the larger scale and Hong Kong will time to time rise up again to mold the domestic narrative build by the China and to break its monopoly, which will be a constant threat to China.

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100 Years of the Communist Party of China: A Glorious Journey

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As the Communist Party of China (CPC) marks its centenary, it gives a very strong message to the whole world. The message is: an alternative system is not only possible; it exists, it is working and it is thriving.

During past 100 years of its existence as a political force, CPC has achieved marvels on all the fronts that it had to deal with. The journey started, in my view, by giving Chinese people a confidence that ‘we can do it; we can deal with internal and external challenges successfully.’ That is how the CPC got itself established in the minds and hearts of Chinese people in its foundational decades – 1920s. Through 1930s and 1940s, the party – though young and fragile at that time – registered a phenomenal role against the Japanese aggression.

The proclamation of the People’s Republic of China (PRC) on October 1, 1949 indeed was the most important feat in the history of the CPC and Chinese people at large. Yet, as is globally realized, the tough task starts after the establishment of the state – its preservation, its development and making it a nation known globally for its mettle. CPC performed exceptionally well on all these counts.

Through initial decades of founding of PRC, the Party worked very hard to ensure well-being of Chinese people – the world’s most populous nation – and meet their needs of livelihoods, food, education, health and other amenities. The journey was slow, but steady. Through this pre-reform and opening up period, dealing with calamities like famine as well as negative fallouts of the ‘Cultural Revolution’ was not easy; yet, CPC showed that the Party and its leadership can steer the country through these difficult times.

Obtaining the rightful place for PRC at global fora such as the United Nations, strengthening the country’s defence including making it a nuclear power, and establishing a leadership role for the country among the developing world were momentous achievements of that time.

The post-reform and opening up period started a whole new chapter in the history of CPC and China – one that the world knows today as miracle. Today, the People’s Republic is one of the strongest and most important nations on the face of the earth. Be it economic growth and development; poverty reduction and social uplift; scientific advances and innovation, as well as a potent role for global development, China is visible as a force to be reckoned with.

This has been possible with sincere, well-thought-out, responsive and forward looking strategies and policies of CPC’s central leadership, implemented through its provincial and lower local cadres, across the country.

Lifting more than 800 million people out of absolute poverty and now being a country free of absolute poverty, having achieved a level of modest prosperity – and that too within given timeframe despite the challenges posed by globally-threatening pandemic – is a feat that humanity, not only China, should write with golden words in its history. CPC has made it clear that with dedication to people, engaging them constructively in the process of national development, and giving them confidence, everything is possible.

The advent and successful moving forward of the Belt and Road Initiative (BRI) now becomes the most promising feather in the cap for CPC, today led by visionary Xi Jinping and his able comrades.

My study of China in general and the Communist Party of China (CPC) in particular, over past about two decades, makes me say with conviction that the whole edifice of the Party and its work are truly people centric. Its selection of the cadres, from bottom to the top, is based on qualification, dedication, integrity and capacity to deliver. You get what you deserve. You have to deliver, or else, pave the way for others to do the same better than you. This is a system that brings the cream of the society to the top.

A distinctive feature of CPC’s strategic planning, functioning and deliverance is adaption to changing ground realities and trends. Thus, the Party – as I have observed – beautifully blends change and continuity it its system and structure of the governance of the country.

As an international observer, the way CPC has ensured equitable distribution of the benefits of growth and development, amongst it regions as well as ethnic groups, is profoundly impressive, for me. It is inclusive. The beauty of it is that no one feels left behind. Even in case of selection and promotion of its cadres, CPC ensures inclusiveness and representation. Not only all the regions of the country but its various ethnic groups are duly represented and become part of the decision-making for the nation.

CPC, the world needs to know, also follows a constructive consultative mechanisms with eight other political parties of the country – it is not a one way traffic or a one party show. Input and feedback from other parties is incorporated, where so needed and feasible. The Party is now fostering linkages and collaboration with political parties across the globe, sharing experiences mutually.

The notion that western democracy is the only workable political model for the world holds no ground. 100 successful years of CPC become one of the strongest reminders for the world that alternatives not only exist but have proven feasible; much more successful than disruptive, destabilizing, distorted ‘democracy’ that the west continues to experiment with and wishes to impose upon the rest of the world.

With close to 91 million members, CPC becomes that largest political party on the planet. Yet, my exposure of China gives me reasons to say that every single citizen of China has immense confidence in CPC – believing that the Party is taking their nation in the right direction, in a glorious manner.

It is time for the CPC experience to be showcased to the world, prominently. In coming years and decades, CPC is all set to take China towards unprecedented heights – domestically and internationally.

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