Despite debt woes, Africa still sees China as best bet for financing


Joe Bavier, Christian Shepherd August 31, 2018

JOHANNESBURG/BEIJING (Reuters) – A wave of African nations looking to restructure debt with China on the eve of a major Beijing summit provides a reality check for the continent, where most countries still view Chinese lending as the best bet to develop their economies.

China has denied engaging in “debt trap” diplomacy, but President Xi Jinping is likely to use next week’s gathering of African leaders to offer a new round of financing, following a pledge of $60 billion at the last summit three years ago.

Ethiopia and Zambia, heavy borrowers from China, have expressed desire to restructure that debt, while bankers believe Angola and Congo Republic have already done so, though details of such deals are sparse.

The International Monetary Fund says Cameroon, Ghana and others face a high risk of debt distress, as does Djibouti, whose main source of foreign loans is China, the Fund says, and which holds the majority of external debt.

But many countries, even those heavily indebted to China, still say Beijing offers far better terms than Western banks, and that European nations and the United States fail to match its generosity.

“Especially when you go to multilaterals, it takes such a long time,” Aboubakar Omar Hadi, chairman of the Djibouti Ports and Free Zones Authority, told Reuters.

To develop its Doral Container Terminal, Djibouti borrowed $268 million from seven banks at 9 percent over nine years, he said.

By comparison, its first Chinese loan was $620 million over 20 years at 2.85 percent, and it came with a seven-year grace period.

“Where is America?” he asked. “Where is the investment from Europe? We are ready. Why are they leaving the whole continent for China? They have themselves to blame if here they are out of the game.”

MORE LOANS BUT NOT “FREE MONEY”

Chinese officials have vowed to be more cautious to ensure projects are sustainable.

China’s push to cut debt at home, and the cooling of its economy, will affect “non-urgent projects”, said Yang Baorong, an expert on African debt at the Chinese Academy of Social Sciences.

“The overall trend will not change, but the scale will certainly be different under the current circumstances.”

Chinese-backed infrastructure has not always translated into the kind of economic growth that makes rising debt sustainable and resource-based economies are reeling from a slump in global commodities, said Martyn Davies, managing director of emerging markets and Africa at Deloitte.

“The African states have this naïveté at times that this is somehow free money,” Davies said.

From 2000 to 2016, China loaned around $125 billion to the continent, data from the China-Africa Research Initiative (CARI) at Washington’s Johns Hopkins University School of Advanced International Studies shows.

It is the most significant contributor to high debt risks in three African countries, Congo Republic, Djibouti, and Zambia, CARI said this week.

In most other nations, traditional donors, multilateral agencies and private creditors held significantly higher portions of debt, it added. The last decade has seen a boom in African Eurobond issuance.

Chinese officials say this year’s summit will strengthen Africa’s role in Xi’s “Belt and Road” initiative to link China by sea and land through an infrastructure network with southeast and central Asia, the Middle East, Europe and Africa.

Beijing has pledged $126 billion for the plan.

“DEBT SUSTAINABILITY” DISAGREEMENT

China defends continued lending to Africa on the grounds that the continent still needs debt-fueled infrastructure development.

Much of the concern over Chinese debt stems from the different measures of “debt sustainability” used by Beijing and African nations versus Western governments and institutions such as the IMF, said Cheng Cheng, a researcher at the Chongyang Institute of Financial Studies at Beijing’s Renmin University.

“If you are trying to increase your GDP, a 25 percent debt-to-GDP ratio is not enough for any country,” he said.

But the debt problem is driving a push to transform financing to more investment over loans, he said.

“New instruments are being used to leverage finance from elsewhere, because the Chinese government has long realized that there is generally the debt problem everywhere.”

China’s attraction stems from its ability to offer financing from state-owned enterprises or funds such as the China-Africa Development Fund or its Silk Road fund, besides special purpose vehicles that avoid sovereign debt on balance sheets.

Lubinda Habazoka, president of the Economics Association of Zambia, said that after becoming eligible for heavily-indebted poor country debt forgiveness under the IMF, multilateral agencies advised it to go to the capital markets in future.

“Today, we have found we are spending so much for this debt on capital markets,” he said. “The result is it has become very difficult for countries like Zambia to meet payments for interest.”

China’s lower and longer-term rates make it more attractive for debt refinancing, but the debt pressure has spurred Zambia to seek renegotiation with Beijing, he said.

“We thought no, no, China was going to be soft on us. But unfortunately, that’s not the case.”

Additional reporting by by Ben Blanchard in Beijing, Brenda Goh in Shanghai and Maggie Fick in Nairobi; Editing by Clarence Fernandez

Source: Reuters “Despite debt woes, Africa still sees China as best bet for financing”

Note: This is Reuters’ report I post here for readers’ information. It does not mean that I agree or disagree with the report’ views.

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Trump to Intensify Trade War in Vain as Early as Next Week


SCMP says in its report “Donald Trump to back tariffs on US$200 billion in Chinese imports ‘as early as next week’” today that due to success in dealing with trade disputes with Mexico, trade hawks prevail now in White House so that Trump believes heightening pressure on China may bring China down to its knees.

He is committing the same mistake of underestimating China when the US fought China in Korean War. Now the US is powerful enough to bully Mexico but it could not bully China. China defeated the US when the US was the strongest and most advanced in the world while China was among the poorest and most backward nations in the world. However, now Chinese economy is as strong as or stronger than the US that is heavily in debt.

Trump is even ignorant that one can begin a war but to end a war he must overwhelm his enemy or obtain his enemy’s consent to end the war. Now, Trump simply lacks the strength to overwhelm China. Nor can he be sure of China’s consent to end the war, even less on his terms. What if he cannot fight on but China would not stop fighting as China is winning the war by 2020? He even may not be reelected!

I feel sorry for Trump and, therefore, for the US. Why is the US unable to elect a wiser president? Trump is wise enough to be a successful businessman but the art to govern a nation is entirely different from that in running a business.

Comment by Chan Kai Yee on SCMP’s report, full text of which can be viewed at https://www.scmp.com/news/china/article/2162107/trump-back-tariffs-us200-billion-chinese-imports-early-next-week.


Future US versus China Navy Sizes


brian wang | August 28, 2018

The US Navy’s newest 30-year shipbuilding plan gets to 308 ships by 2020, a year faster than the previous administration’s goal of 2021. The target is 326 ships by the end 2023. The US Navy will not reach the goal of 355 ships until the 2050s.

The US Navy will refurbish six of the older cruisers. This will mean 17 cruisers will go past their 35-year service life. The Navy is currently upgrading its newest 11 cruisers through a phased modernization plan.

China plans to get to a 351 ship Navy by 2020.

The DOD expects China to build five more aircraft carriers by 2033. This will go along with the old Ukrainian carrier that is currently in operation.

China is also working on a new Type 055 cruiser equipped with land-attack missiles, lasers and rail-gun weapons.

By the mid-2020s, China likely will build the Type 093B guided-missile nuclear attack submarine. This new SHANG-class variant would enhance the PLAN’s anti-surface warfare capability and could also provide a more clandestine land-attack option.

The Type 093 is estimated to be roughly 7,000 t displacement when submerged, 110 metres (360 ft) long with a beam of 11 metres (36 ft). Commercial imagery suggests the Type 093G is longer. The sonar suite includes H/SQC-207 flank-mounted sonar. The boat may also use a seven-blade asymmetric propeller.

The Type 095 is a class of third generation nuclear-powered attack submarines for the People’s Liberation Army Navy (PLAN) of China. The first unit entered service in November 2017 and there are two more under construction out of 5 units planned as of April 2018.

It was anticipated that Type 095 submarines have a substantially reduced acoustic signature, within an improved hull type. Compared to the Type 093, the Type 095 will have a more advanced nuclear reactor, VLS tubes and greater number of advanced sensors such as new active/passive flank array sonar and low and high frequency towed sonar array. Additionally, it is also speculated that Type 095 submarines may act as a potential undersea escort for any future PLAN aircraft carrier task forces.

China’s Navy will have a larger number of ships and submarines than the US Navy in 2030.

In 2017, CNAS forecasted that China would have 500 ships and those ships would mostly be comparable to US technology levels.

By 2030, many forecasts suggest that China will be quantitatively on par with the United States, while others suggest Beijing may even have a significantly larger naval order of battle than the United States.


Source: nextbigfuture.com “Future US versus China Navy Sizes”

Note: This is nextbigfuture.com’s article I post here for readers’ information. It does not mean that I agree or disagree with the article’s views.


Media Articles after Articles to Mobilize People’s Trade War with the US


SCMP’s report “Expect ‘deep structural change’ in ties between China and US, senior adviser says” today with the subtitle “State media commentary calling for ‘strategic confidence’ to deal with trade war pressure a clear sign Beijing expects fight to intensify, according to analysts” tells us Beijing’s determination to fight its trade war to the bitter end, but fail to indicate that CCP mouthpiece People’s Daily’s commentaries after commentaries and articles after articles aim at national mobilization of people to fight a people’s trade war with the US.

You could precisely found such commentaries and articles for mass mobilization at the beginning of Korean War, in which lots of civilians kept watching US warplanes’ destruction of the roads on hills at very cold nights to send signal to trucks to hide in caverns when US aircrafts came and lots of civilians on duty at night in caverns came out to repair road destructed and remove time bombs and obstacles dropped by US air force. CCP’s people’s war ensured the supplies for Chinese troops long away in the front to defeat much better equipped US troops.

Why did the most advanced and riches nation in the world was defeated by very poor and backward China? China had popular support that the US lacked.

Will the US repeat its failure due to sad lack of popular support? Let’s wait and see.

All analysis about economies etc. are irrelevant. As Mencius teaches us, popular support is the key factor in a war.

Comment by Chan Kai Yee on SCMP’s report, full text of which can be viewed at https://www.scmp.com/news/china/diplomacy-defence/article/2161889/expect-deep-structural-change-ties-between-china-and-us.


Why the US Trade War on China Is Doomed to Fail


U.S. punitive tariffs are based on a grave misdiagnosis of Chinese economic fundamentals.

By Vasilis Trigkas and Qian Feng
August 28, 2018

The fourth round of Sino-U.S. trade negotiations held recently in Washington, DC ended with a whimper, and so the largest trade war in post-World War II economic history continues unabated while a nascent crisis in emerging markets has alarmed investors worldwide. Motivated by the misperception that China’s economy is in critical condition, an emboldened U.S. President Donald Trump looks determined to escalate the war.

The president’s senior economic adviser, Larry Kudlow, during a recent cabinet meeting, asserted that China’s economy “looks terrible, it is heading south.” The United States, he further declared “is crushing it, having a genuine boom.”

Kudlow’s averment seconds the views of other American prognosticators who have subscribed to the old myth of an imminent Chinese economic meltdown, most famously pushed by the inveterate “doomsday prophet” Gordon Chang. Their linear reasoning is the epitome of conventional economics and goes as follows: The debt levels of local governments and state-owned enterprises (SOEs) can only be maintained at a sustainable level while the economy is soundly growing, meaning Chinese GDP is expanding by over 6 percent. As a trade shock will drag growth to levels below 6 percent, highly indebted organizations will be unable to grow their way out of pressing liabilities. This will spark a massive debt crisis, loss of confidence, and eventual economic meltdown. Meanwhile, pressure on the renminbi (RMB) will increase and China’s $3.2 trillion currency “war chest” will be unable to prevent a collapse of the exchange rate even with draconian capital controls fully applied. With economic trust shattered, the property bubble bursting, and inflation rising abruptly due to the RMB’s free fall, the Chinese Communist Party’s very legitimacy would be questioned. To avoid such an ominous scenario, the CCP would have to capitulate early and offer Washington sufficient trade concessions — or so the argument goes.

American prophesies that a trade war will provoke a Chinese economic meltdown are incentivizing Trump to be hawkish rather than conciliatory. However, as Yukon Huang of the Carnegie Endowment for International Peace has contended, “China defies typical classifications.” Linear thinking and conventional economics will only have minor success in evaluating the impact of a trade war on the world’s second largest economy; an economy also shaped by many unconventional factors with singular Chinese characteristics. As Huang retorts:

China’s financial and fiscal metrics simply do not point to a looming “Lehman moment,” despite all the periodic warnings to the contrary. China’s debt problem differs from previous crisis cases in that its debt is concentrated in the state sector rather than among private agents, and sourced domestically rather than externally. China’s current challenges may be more complex, but the financial situation in the late 1990s was more severe, and even then the difficulties proved manageable.

In international relations, accurate strategic perceptions are essential for deal making. If one side overestimates its capacity to influence the strategic environment of its adversary, then undue conflict would persist, whereas a mutually beneficial accord would have otherwise been attainable. The repeated failure of U.S. and Chinese negotiators to reach a mutually beneficial trade deal reflects mostly this wrong diagnosis, which has led to an underestimation particularly from the American side of China’s economic resilience, and an overestimation of America’s perpetual economic pre-eminence.

As Robert Jervis, one of the fathers of modern political psychology put it:

Although the story about the drunkard looking for his keys under the lamp post because the light is better there is a joke, we find it funny because it is all too true. Biases lead to looking at information that is most readily available, easiest to process, and most understandable rather than to probing more deeply for what is more illuminating and diagnostic.

American economists have thus focused mostly on China’s stock market valuations and the debt-to-GDP ratio for this information is all too readily available and easy to process – particularly when the commander-in-chief has populist inclinations. It is thus essential that American strategists “probe more deeply for what is more illuminating and diagnostic” and objectively evaluate China’s economic fundamentals before drawing easy conclusions on the fragility of the Chinese economy and consequent propensity of the CCP to submit.

Three key “China specific economic facts” should be considered in some detail: the total information management of the Chinese government concerning state owned assets, emergency nationalization overruling property rights, and China’s capacity for fiscal expansion as the cashless revolution is boosting national tax revenues. These are all compounded by China’s ability to still draw on its substantial rural labor pool as its urbanization rate remains below those of South Korea, Taiwan, and Japan had when their growth rates slowed down. China’s cities could continue to expand boosting national productivity by mega-agglomeration effects.

As research from some of the world’s leading economists has attested, information is a key input shaping the behavior of economic agents, influencing the viability of credit networks and the overall aggregate direction of the market. A major difference between the West and China is that financial information is proactively screened by the government. In the case of a large state-owned enterprise or local government facing pressing liquidity constraints, Beijing can limit this news from dispersing, hence slowing down an “information cascade.” As most highly indebted institutions are within the state sector (SOEs and local governments) this would provide essential time for regulators to act with the suitable regulatory, monetary, or fiscal remedies to prevent the crisis from contaminating other actors and becoming systemic.

Western capitalism cannot emulate this, as the press will immediately report a liquidity crisis or even sensationalize the threat, making the government only a post-hoc actor with limited capacity to contain a nascent crisis. When Lehman Brothers collapsed in September 2008, interbank lending – a very important function of the global financial system – rapidly declined as economic agents started to sensationalize the risk of insolvency. Accurate and inaccurate information about the liquidity of systemic financial institutions mixed with toxic securities lead to an informational cascade, which further exacerbated the crisis while policymakers struggled to find a remedy within very tight time margins and for a crisis that they had never predicted. Trust — the invisible hand that keeps the financial system afloat — collapsed.

In China, the national interest stands supreme; when the stability of the national economy is at stake, a big financial corporation or a systemic market actor can be nationalized and liquidity fixed by an adequate capital injection under emergency procedures. The recent case of Anbang is a prime example. The company was taken under national trusteeship rapidly and its chairman arrested on the spot. In the United States, Congress, the White House, and the Treasury would have had to fight a months-long legal war with armies of lawyers and lobbyists to achieve a similar result, losing essential time. One may again consider the 2008 financial crisis, Solyndra’s insolvency, or the bailout of the U.S. auto industry and the time it took Congress and the Executive Branch to act.

As Nobel Laureate Joseph Stiglitz has declared, “with too big to fail, too interconnected to fail, too correlated to fail,” the success of banks or large systemic corporations “may not be based on relative efficiency [of their business model]” but on relative size, linkages and ability to distort the market mechanism to their benefit. Government intervention is essential to normalize the system both during ordinary conditions but most importantly when in crisis.

In the West, the powerful financial lobby has shaped a regulatory structure that entails unacceptable levels of public risk bearing. The Chinese government, however, has remained insensitive to the interests of big finance. It imposes capital controls and directs financial capital toward long-term investments. This has been one of the key reasons why its financial system remained robust when the markets of Wall Street and London collapsed in 2008. Similarly, during the 1997 East Asia financial crisis, China’s economic prescriptions proved more advanced than IMF’s dogmatic support for open capital accounts and draconian austerity.

To be sure, economic policy is the art of managing trade-offs by utilizing the appropriate levers of economic management. While centralized control of information and emergency nationalization can be beneficial, if overly applied, it exacerbates moral hazard and do not contribute to the long-term efficiency of the price signaling mechanism. It could even hinder long-term economic growth. As Emilios Avgouleas, chair professor of global banking regulation and finance at the University of Edinburgh, put it in a discussion with one of the authors, China’s economic exceptionalism is based on the premise that extreme tools could forcefully be applied when national economic stability is at risk. Yet once overly exercised these could actually push the economy further off-balance and lose their credibility.

The upshot is that with pervasive market and information asymmetry, forceful yet prudent interventions can typically increase efficiency and equity. When information management and emergency nationalization is applied strategically only as instrument of last resort then its impact upon economic activity could be positive. In doing so nonetheless, accountability is pivotal so that moral hazards do not become endemic as SOEs that are too big to fail would otherwise engage in riskier and less productive activities.

The Cashless Revolution: a Bonanza for Tax Revenues

China is a global leader on cashless transactions, with its fintech outmatching the United States’ by a factor of 10. For instance, Alibaba’s Ant Financial, “which controls the world’s largest money-market fund, has… handled more payments in 2017 than MasterCard, and completed over $8 trillion of transactions via its online payments platform last year alone.” Cashless provides an enormous amount of data to Alipay and WeChat Pay, allowing them to create complete credit rating profiles for over 800 million users. This is a massive efficiency boost to private capital allocation as both moral hazard and adverse selection – financial capital allocation’s two endemic problems – are minimized by credit profiling.

Certainly, this does not resolve the meteoric indebtedness of local governments, but it can alleviate pressure on the national government budget, because cashless transactions make taxes easier to collect. Moreover, if China pivots toward a cashless economy, the shadow economy would immediately be included in national statistics and the debt-to-GDP ratio would decline. The transition to cashless would also lead to a future cash-flow effect (as tax revenues would continue growing well into the future), boost trust in the central government’s ability to undertake a fiscal expansion, and bail out insolvent institutions without a national debt overshoot. The ongoing effort of Beijing toward deleveraging could thus be achieved by a gradual boost in state revenues able to smoothen the process of sustainable debt reduction without constraining short-term fiscal expansion. This becomes even more essential, as local governments have seen their revenues declining from curbing land sales and thus need alternative revenue sources.

Peking University professor Michael Pettis has foreseen the beneficial impact of an emergency fiscal expansion on China’s growth amidst the trade war. Pettis has rightfully asserted that the trade war will not slow down the Chinese economy substantially because the central government will provide a fiscal stimulus to make up for falling exports to the United States. Pettis also argued that under such a scenario deleveraging would slow down if not be totally aborted and the national debt-to-GDP ratio would increase, thus undermining long term Chinese growth. Yet our hypothesis is that as China is transitioning toward cashless, total tax revenues will increase. Therefore, an emergency fiscal expansion will not significantly aggravate national debt.

The People’s Bank of China (PBoC) has gone to great lengths to estimate the impact of going cashless on monetary policy and national product. Macroeconomic modeling and the so-called Macroeconomic DSGE modeling can be complex and it often misleads; however, transitioning toward cashless is a strategic decision that China could easily implement as it already has the tactical technology platforms — the cashless ecosystem — on the ground through Alipay and WePay. For instance, if the government imposes an ad valorem tax on ATM transactions, then people will be incentivized to increase the use of cashless platforms. This would make value added tax (VAT) immediately collected and registered to the national account, thus boosting tax revenues. In addition, transaction data analytics would make income tax easier to estimate and limit tax evasion. Even in the case of a highly indebted country like Greece, as a report by the Foundation for Economic & Industrial Research has attested, a partial transition toward going cashless since July 2015 has done miracles boosting fiscal revenues.

China’s Economic Stability Will Be Determined At Home

Worries about the impact of a trade war on the Chinese economy have also been recited even within China, with an unusual recent verbal confrontation between the PBoC and the Finance Ministry concerning the pace of deleveraging that China should be pursuing amidst a trade war. PBoC officials have supported a wide fiscal stimulus while Ministry of Finance officials have opted for targeted fiscal easing through SOEs. In mid-August, the Chinese government directed banks to ease liquidity toward companies that will be negatively affected by the trade war.

To be sure, the Chinese economy is not impenetrable to global shocks but having already amassed an enormous amount of national wealth and driven by mass grassroots entrepreneurship, China’s economic vibrancy and debt deleveraging will mostly be determined by domestic politics, smart supply-side reform, and sustained opening up. China’s 2013 Third Plenum reforms provide the basis for moving forward albeit calibrated to deal with the ongoing stress from the trade war. As the Financial Times put it, since 2013, “China has significantly slimmed its shadow finance sector, launched initiatives to securitize lending, worked to shore up risks in regional banks and reined in runaway credit creation.” Recently Beijing has also worked to tackle hidden debt and upgrade the quality of its national statistics.

Overall, it is mostly by reform at home that productivity can sufficiently rise, thus boosting China’s national product and normalizing the long-term debt-to-GDP ratio.

Tariffing Cannot Win: Give Trade Peace a Chance

A protracted trade war is not inevitable. But it is essential for American strategists to make an accurate diagnosis of the health of the Chinese economy and to not overestimate the adverse impact of the United States’ punitive trade tariffs on China’s debt sustainability. This would wrongly motivate Trump to escalate the trade war and push China and the U.S. down the path of an otherwise mitigated geoeconomic conflict with grave repercussions for the global trade order.

Even in the 1960s when China was much weaker and its economy only a tiny fraction of the United States’, Beijing pushed back decisively against foreign coercion and simultaneously confronted the Soviet Union and America – the world’s superpowers. After almost three decades of economic growth China is neither doomed to collapse nor poised to take over the world. However successful, China’s economic system is too sui generis to serve as a model for others to emulate while the country’s per capita wealth remains below any Western nation. China is thus not a threat to U.S. democracy and the ongoing trade conflict should not be caricatured as an “existential clash of systems.” In this uncharted geoeconomic territory, intellectually validated, accurate, and calculated evaluation of China’s economy could help bridge differences and bring some trade peace with dignity for both sides.

Source: The Diplomat “Why the US Trade War on China Is Doomed to Fail”

Note: This is The Diplomat’s article I post here for readers’ information. It does not mean that I agree or disagree with the article’s views.


China Will Triumph in Trade War with the US: Chinese Think Tank


SCMP says in its report today titled “‘Time is on Beijing’s side’: China, not Trump, will triumph in trade war, former top Chinese officials say” that according to Wei Jiangguo a member of China Centre for International Economic Exchanges, a think tank affiliated with the Chinese government, China’s annual sales to Africa might exceed $500 billion in five years enough to replace US market so that China will win in the long run as China has been making long-term preparations for the trade war.

The report quotes Chen Wenling the think tank’s chief economist as saying, “[The trade war initiated by the US was intended] to contain China’s continuous development, to stop China’s socialist modernisation, to curtail China from rising to become a socialist modern power … and to thwart China’s plan of becoming a powerful country by the middle of this century,” Chen said.

“Once we realised that all you intend is to contain China … it’s clear we’ll never bow to you.”

They reflect the Chinese think tank’s view that China will never yield to US pressure and will be the final winner of the trade war.

Comment by Chan Kai Yee on SCMP’s report, full text of which can be viewed at https://www.scmp.com/news/china/economy/article/2161726/time-beijings-side-china-not-trump-will-triumph-trade-war-former


China’s New Aircraft Carrier Begins Long Sea Trial for Comissioning


In its report “Type 001A: China’s first home-grown aircraft carrier on final sea run to combat readiness” today, SCMP says that China’s first homegrown aircraft carrier has set out from Dalian for its second sea trial for 6 to 12 months.

It quotes Hong Kong-based military expert Song Zhongping as saying,“This time the focus will be on testing the endurance of the new aircraft carrier’s propulsion system. The communications, command, damage control, lift operations and weapon systems will also be examinated.”

According to Song, the carrier will be handed over to Chinese Navy soon after it completed the second trial.

Comment by Chan Kai Yee on SCMP’s report, full text of which can be viewed at https://www.scmp.com/news/china/diplomacy-defence/article/2161567/chinas-first-home-grown-aircraft-carrier-final-sea-run