Opinion: Do free markets still beat central planning?
Reportage prize for Yang Xifan
Dear reader,
Anyone who wants to visit the campus of the controversial offshoot of Fudan University in Budapest in the future may reach it via “Dalai Lama Street”. Or the “Free Hong Kong Street”. But you can also walk along the “Street of the Uyghur Martyrs” in the direction of the university. Because the Hungarian capital and its 9th district have renamed the streets around the as-yet undeveloped area – making it clear to Prime Minister Viktor Orbán’s government what they think of the project. A delicate manoeuvre: Hungary is dependent on Beijing’s goodwill in view of large Chinese loans. And when it comes to the Dalai Lama the leadership is known for its vindictive reactions.
But the People’s Republic also has debt problems of its own. During the Corona epidemic, the Chinese state provided record levels of credit to local governments in order to stimulate the economy. Frank Sieren now takes a look at Beijing’s debt burden and how it compares with that of the US. He concludes that China has a much better handle on its liabilities than the old superpower.
Finn Mayer-Kuckuk introduces Huawei’s new mobile operating system. HarmonyOS is supposed to be the Android killer and free the corporation from some of its US dependence. But has the Chinese tech giant really reprogrammed it from scratch? Experts smell a fraudulent label.
The US and China are both currently trying to boost their respective economic growth with major infrastructure programs and to make their economies more competitive again – even in competition with each other. But as much as the situation of the two heavyweights is similar, the differences are also great. For China, a growth economy, is building up its public debt from a completely different situation than the US.
The stocktake: In the Covid year 2020, the ratio of debt of the American central state to gross domestic product has risen significantly. This year, with the new budget, this important ratio exceeds the psychologically striking 100 percent mark, attracting appropriate media attention. In 2019, it was still at 79 percent. The debt to economic output ratio has thus gone up by more than 20 percentage points.
The comparison with China is not entirely easy, because the systems are different. First of all, there is a direct comparison with the national debt. In China, these have been rising steeply for years from a moderate starting level. Due to Covid, they are currently reaching the 46 percent mark. In Germany, the figure is 70 percent.
So the Chinese value sounds low, but in the communist system it is not the whole truth. Beijing can also order state-owned enterprises to take on more debt. And in many municipalities, debts are owed by local state-owned companies that would have been incurred elsewhere by the public sector. So it makes perfect sense to look at total debt here, which includes corporate debt (excluding the financial sector). They stood at 277 percent of GDP at the end of the first quarter, as reported by the central bank. That’s already down 2.6 percentage points from the same quarter a year earlier. Before the pandemic, it was 255 percent. Economists consider the increase during the pandemic to be standard international practice. However, bank debt in the order of 30 percent of GDP remains a cause for concern.
The US and China have both added 20 percentage points of new debt as a share of GDP as a result of the pandemic. But China has bought itself GDP growth of plus 2.3 percent, while the US has only managed to slow the fall to minus 3.5 percent. This can be explained by the different course of the pandemic, which, as we know, ended much earlier in China. But debt with growth is considered much healthier than debt with contraction.
Foreign debt makes Americans dependent
But US debt is viewed with greater concern for another reason. Unlike China, the US has massive foreign debt. Around a third of the debt is held by foreign creditors. Most notably by Japan and, of all places, China. Twenty years ago, it was less than 10 percent.
As long as the US has a kind of monopoly on the world’s currency, this is not such a big problem for lack of alternatives. But the strengthening yuan, which these days has reached its highest level against the dollar in three years, tells us that this will not last forever. For the US to cease to be the reserve currency, China would have to allow full convertibility. But the process in that direction is certainly moving forward.
No matter how quickly or slowly the yuan becomes more important internationally, one thing is clear: as far as debt is concerned, the US is much more dependent on international developments than China. Beijing can throw its US dollars onto the international market en masse at any time and send the US dollar plummeting – even if only at a loss to its own remaining US dollar reserves. But the damage would be greater for Washington in any case. The US does not have this leverage.
If Beijing manages to maintain social stability in the country and prevent the masses in China from suddenly emptying their accounts, rising debt can do little to harm the government for the time being. Moreover, strict capital controls prevent the outflow of liquid funds abroad. So, unlike economies like Italy, China cannot be bled dry, even if confidence would fade.
Debt reduction and transparency are given priority
Nevertheless, Beijing wants to play it safe. The central government has set an economic growth target of more than 6 percent for 2021, but has defined debt reduction as a key task. That’s because some of China’s companies borrowed more than they should have in the Covid year: Chinese onshore bond defaults rose 18 percent in the first quarter from a year earlier, according to figures from the National Institution for Finance & Development. The increase is high, but not yet worrisome. Overall, the total of all bad bank loans is less than two percent of all loans.
Even if bad loans have not been a major problem so far, corporate debt is still a cause for concern. At around 150 percent of GDP, it is unusually high. Last fall, Beijing let a number of state-owned enterprises go to the wall after they failed to get a grip on their debt problems.
However, the debts of provincial, district and municipal governments should not be underestimated. Many of these can be traced back to so-called Local Government Financing Vehicles (LGFV). What are they?
The central government relies on local governments to fund new infrastructure. In China, however, provincial and local governments lack comprehensive fiscal powers. For years, the establishment of LGFVs allowed local governments to borrow beyond their limited means.
However, in April this year, the State Council said LGFVs used by local governments to circumvent credit limits should be restructured or go bankrupt outright if they are unable to repay their debts. Much of the LFGV lending is unaccounted for, and there is little transparency about how the funds are being used. In 2018, Standard & Poor’s estimated the value of this “hidden debt” at ¥30 to ¥40 trillion (about $5 trillion).
Since April, the Shanghai and Shenzhen stock exchanges have also had to tighten corporate bond issuance guidelines to limit the ability of weak companies to access the onshore bond market and raise additional debt. These measures also affect LGFVs. Already since 2019, all provincial officials have been instructed to regularly report their borrowings in a centralized system. In addition, the government wants to curb granting bank loans. This marks the beginning of another round in the management of local debt, which on the one hand continues to rise, but at the same time is to be handled in an increasingly professional and transparent manner.
Long overdue infrastructure injection in the USA
Washington’s back is not against the wall either. The US Congress has passed emergency aid of around $5.4 trillion since the outbreak of the pandemic. With the coronavirus still posing a threat to the US economy, the Biden administration has now requested a massively increased federal budget, totaling more than $6 trillion in spending. With the long-term increase, the government intends to fund investments in roads, bridges, electric vehicles, airports, urban transportation systems, energy-efficient housing, modern water pipes, power grids, broadband, a green energy transition, and other innovations.
The plans are to be financed not only by raising new debt but also by higher taxes on companies and the rich. Congressional approval of the plan is still required, so details may change from its current form, but it is overdue. The United States has failed to invest in infrastructure for years, spending an average of about 2.4 percent of gross domestic product (GDP) on it since 2010 – far below China’s 8 percent. The long-term goal of the measures is also to make the US less dependent on China. Observers see China as a role model for Biden’s infrastructure policy.
Different starting points
Here too, however, there are differences in what are currently similar spending policies. China and the US are at different stages of their economic development and accordingly have different targets for their infrastructure spending.
Rural areas and smaller towns still have a lot of catching up to do. This has the advantage that many projects are not created as an end in themselves, such as the new train lines, which accounted for the largest share of spending last year. They contribute to long-term economic growth. The same applies to the expansion of telecommunications networks or the supply of electricity from renewable energy sources.
In the USA, on the other hand, these are often necessary renovation measures. According to the American Society of Civil Engineers (ASCE), the condition of the American infrastructure is desolate. Leaky pipes cause more than 22 billion liters of water to seep away every day, according to their report. 43 percent of American roads are in poor or just average condition. Currently, no American destination ranks on the list of the 25 best airports in the world. 45 percent of the U.S. population has no access to buses and trains at all, according to the evaluation, which means Americansare primarily fixing what’s there. The Chinese are expanding.
As a rule of thumb, one can state: If there is room for growth, and there is in China with a per capita GDP that is about six times smaller than that of the US, then expansion usually creates more growth than repair.
Or put even more generally: It is much more difficult to translate stimulus into economic growth when GDP per capita is high than for countries with low GDP per capita. It is therefore likely that China will catch up with the US even faster in the aftermath of the Covid crisis.
Debt
Finance
Loans
USA
HarmonyOS: Huawei introduces its own mobile phone operating system
Tech giant Huawei officially unveiled its new smartphone operating system in a major presentation on Tuesday: HarmonyOS is expected to enable “new product lines for the Internet of Everything era,” Richard Yu, board member for consumer business, said in Shenzhen. More than 200 million devices in China are expected to ship with the new operating system by 2022. The first to be upgraded to the new operating system will be a number of established models. After that, brand new phones will be released with it. A sales start for Europe has not yet been determined.
Thesuccessful launch of a truly new operating system for smartphones would be a minor sensation. So far, only two providers have really anchored themselves in the market: Apple and Google. Both have had plenty of time to divide the cake between them. iOS has been on the market since 2007, Android since 2008. Since then, there have been attempts by Microsoft and other providers to put something on the side of the top dogs. But the new competition failed due to their market power, while established providers like Nokia and Blackberry simply disappeared.
There are two specific reasons for focusing on two players in the market.
1. It’s hard as hell to redevelop a mature computer operating system from the ground up. Even Google didn’t do that with Android, but started with the core of the free Linux operating system. Hundreds of thousands of hours of programming are needed before everything fits together seamlessly and all the functions that the customer expects are available. It can take years to eradicate the errors of the first versions.
The variety of programs is the greatest treasure of every IT platform. In terms of smartphones, it is the selection in the app store that makes the device attractive in the first place. Apple has two million apps here, Google even three million. Technically speaking, anyone who is really new starts with 0 apps.
Without coercion, Huawei would never have had the idea to say goodbye to Android for exactly these reasons, because the effort for a new development is high, while the buyers are initially left with only a few apps. However, the US government has practically forced this move on the Chinese vendor. Donald Trump has banned American companies from supplying Huawei with goods and services (China.Table reported). This includes licenses for Android from Google.
Android in a new guise?
So far, however, it looks like Huawei has used a little trick to get around both problems at once. At least, that’s what programmers who have already gained access to the development environment for the apps under the new system believe. “HarmonyOS is essentially derived from Android,” according to operating system expert Ron Amadeo from the portal Arstechnica. It is a “fork”, i.e., the splitting off of a software version into a new development branch.
The technology world is not bothered by the fact that Huawei is using a proven model. After all, Google’s product is explicitly open for its own further developments. Rather, it is the communication that is seen as disturbing. “HarmonyOS will be something completely new,” Yu had said in 2019 during the first announcements. Now comes a great new product, but under the hood, the technicians find yet again Android. “You should be honest about something like this,” commented tech journalist Amadeo. The thing smells a bit like plagiarism because of the intransparency. After all, Huawei claims to have developed its own software, which is based on Google’s work.
It is noticeable that the usual popular apps that Huawei has offered for its official Android variant are to be found in the Huawei store for HarmonyOS from the first day. The person responsible for the product, Wang Chenlu, did not talk much about the technology behind the scenes during the presentation and talked a lot about the ideas and advantages for the user.
App gives tips on organizing the fridge
In fact, HarmonyOS has a lot to offer here. The product becomes most powerful in combination with many other smart Huawei devices. The Huawei Control Panel contains all the connected devices that also run the new operating system, such as drones, TVs, watches, or headphones. If you’re watching a series on your tablet on the balcony and play the sound through a speaker, you can redirect the image and sound to the living room with a swipe when a dark cloud rolls in. Then, when the kids have to go to bed, the transition to headphones should be just as seamless. The technical feat behind it: Everything has to run in sync, otherwise sound and picture no longer match.
However, Wang also presented many supposed solutions to problems that probably no one has. The apps on Harmony devices are supposed to help the user sort the groceries into the right cold zone in the smart fridge after shopping. Perhaps mankind will one day be so dependent that it will need a manual for this – hopefully, not just yet.
In any case, a smart move
What’s more striking about all these concrete announcements, however, is that they have little to do with the operating system. Fridge apps are typically applications, apps that run under-or on-the operating system. It basically just provides the framework in which they work. Wang’s presentation was generally a lot about such user-level features, and not at all about things that would really only be possible with a fundamentally new operating system. He touted, for example, the clever arrangement of app icons into thematic groups. However, every Android provider also has a visual trick up its sleeve.
But the introduction of HarmonyOS is definitely a smart move after the US government first put Huawei in checkmate. Whether the code is newly programmed or based on an existing product is irrelevant. Customers in China, where it is called HongmengOS, will hardly notice any difference from the conventional Huawei Android anyway. They have always been in a different app world than customers in the West. In China, it was already common that every manufacturer had its own app store with typical Chinese programs.
HarmonyOS
Huawei
Smartphone
News
German government does not want to provoke Beijing
The German government rejects turning away from China despite increasing conflicts with the communist leadership in Beijing. “In view of the strong, worldwide interdependence of national economies and the complexity of global challenges such as climate change, peacekeeping and fragile statehood”, the Federal Government considers “containment and disengagement strategies vis-à-vis China as an emerging world power not to be expedient”, according to a Federal Government response to a question from the Left Party in the Bundestag.
At the same time, the German government stressed that it would “in future, however, increasingly participate in measures to protect and safeguard the rule-based order in the Indo-Pacific”, such as compliance with the United Nations Convention on the Law of the Sea or monitoring UN sanctions against North Korea. The deployment of the Bundeswehr frigate “Bayern” to the Indo-Pacific for the second half of 2021 should also be understood in this context.
In September 2020, the German government adopted guidelines for Germany’s future foreign policy in Asia. They envisage not only becoming involved in the region, as has been the case up to now, primarily in economic terms, but also increasingly in geopolitical terms. The Federal Government left open whether Germany would thereby also oppose China’s growing influence. In mid-April, Federal Foreign Minister Heiko Maas (SPD) and Federal Defence Minister Annegret Kramp-Karrenbauer (CDU) had confirmed in a video link-up with their Japanese counterparts that Germany would further strengthen its security policy engagement in Asia and wanted to “coordinate more closely” above all with Western-oriented and democratic countries such as Japan.
“In order for Germany and Europe to continue to play an active role in shaping the world in the future, we must also become more involved in Asia in particular, where important global decisions are being made in this century,” Maas had stressed after the talks. “If we don’t become more active, others will write the rules of the future – not only economically, but also politically and in terms of security policy.” Defense Minister Kramp-Karrenbauer added: “The situation in the Indo-Pacific concerns us all. Respecting the rules on free trade routes and territorial integrity, as well as strengthening our democratic partners, are in both German and European interests.” Unlike Maas, she addressed the territorial conflict in the South China Sea and also named China.
Beijing claims 80 percent of the sea through which some of the world’s major shipping lanes pass. The International Court of Arbitration in The Hague rejected China’s claims in 2016. Beijing ignores this ruling.flee
Federal Government
Heiko Maas
Indo-Pacific
South China Sea
Trade
Report: G7 plan green alternative to BRI
The G7 countries plan to announce plans for a sustainable alternative to China’s BRI at their summit next week, according to a media report. The strategy, called the Clean Green Initiative, will provide a framework to support sustainable and climate-friendly developments in developing countries, Bloomberg reported, citing two unnamed sources. The initiative will also be on the summit agenda of leaders meeting in Cornwall, UK, next week (June 11-13), they said.
According to the report, the infrastructure strategy of the G7 states, which was primarily driven by the US, had already been a topic of discussion among diplomats in preparation for the summit. It was not yet clear whether new financial resources were to be injected into the project. It was primarily a matter of creating a “strategic framework”, according to the report.
In the run-up to the summit, however, there had also been disagreements about where the new initiative should have its geographical focus, according to a person familiar with the proceedings: Germany, France, and Italy want to support activities in Africa, while the US is pushing for measures in Latin America and Asia. Japan, on the other hand, is arguing for a stronger focus on the Indo-Pacific region. However, all nations are largely in agreement that there must be a transparent alternative to China’s BRI, Bloomberg quotes a source as saying. ari
G7
New Silk Road
Hong Kong allows entry without quarantine for high-ranking bankers
Senior financial executives in Hong Kong can apply for a suspension of the otherwise mandatory quarantine on entry. Hong Kong’s Financial Markets Authority informed about 500 listed banks and other financial service providers about the new exemption options last week, reports the South China Morning Post (SCMP). Many of the Hong Kong representative offices are an important component for global or regional setups of financial institutions, a government spokeswoman told the newspaper. “We consider it necessary to facilitate their effective operation during the Covid-19 pandemic to maintain Hong Kong’s financial stability and our status as an international financial center,” SCMP quoted the spokeswomanas saying.
However, only a certain number of leading employees can sign up for the exemptions. There are prerequisites: For example, only fully vaccinated individuals who hold the position of director, global or regional head of a financial group, or listed company can apply for a possible quarantine waiver. The exemption rule would then apply to expats and Hong Kong residents returning from overseas trips. A negative Covid test must also be presented upon entry to be exempt from quarantine, the report added. The Hong Kong government had previously exempted flight and ship crews, as well as auditors of listed companies, from the mandatory quarantine. ari
Coronavirus
Health
Hongkong
Society
Apple supplier: Taiwan now only number two
China has displaced Taiwan as the top supplier to US tech giant Apple for the first time. Of the top 200 Apple suppliers, 51 were based in the People’s Republic and Hong Kong last year, according to an analysis of Apple’s supplier list by the Japanese news platform Nikkei Asia. That compares with 42 suppliers in 2018, it said.
Taiwan, which topped the list for more than a decade, slipped to second place with 48 suppliers. Important suppliers such as Foxconn and Pegatron still have their headquarters there. But they also produce most of their products in the People’s Republic.
Apple’s supplier list covers 98 percent of the company’s spending on materials and manufacturing for the previous fiscal year, according to the report. The individual order values for each company are not disclosed, according to the report. However, the supplier list is considered a barometer of Apple’s dependence on suppliers from different parts of the world. The report has been published almost every year since 2013.
China-based suppliers are also helping Apple increase production outside the country, according to the report, with the number of Apple suppliers in Vietnam growing from 14 in 2018 to 21 last year, according to the analysis. However, seven of the 21 suppliers were owned by companies based in China or Hong Kong, it said. They included AirPods manufacturers Luxshare Precision Industry and GoerTek, both of which began manufacturing in Vietnam in early 2020. ari
Technology
Opinion
Do free markets still beat central planning?
By Andrew Sheng and Xiao Geng
In 1944, Friedrich A. Hayek suggested that the spontaneous order of markets was inherently superior to the supposedly dynamism-draining totalitarian order of communist or fascist regimes. The ensuing decades – when free-market economies thrived, and the Soviet Union’s centrally planned economy imploded – seemed to vindicate him. Then along came China.
The metrics of China’s phenomenal economic rise are well known: three decades of double-digit GDP growth; some 700 million people lifted out of poverty; an infrastructure boom; the emergence of innovative tech giants; and a comprehensive blueprint for continued (sustainable) growth and development.
China’s success has undermined the belief that free markets are the best development strategy for all, so much so that even the International Monetary Fund-long a leading proponent of free-market ideology-has reconsidered its own orthodoxy. But Chinese-style central planning still meets with disdain in the West, where observers disparage it for its alleged opacity and repressive nature.
But is China’s system really diametrically opposed to that of, say, the United States? In a word: no.
Economic recovery through subsidies
Despite its vocal support for free markets, the US government’s spending has risen steadily since 1970. In 2019, it stood at 35.7 percent of GDP, compared to 34.8 percent of GDP in China.
The COVID-19 crisis has accelerated this trend. Indeed, America owes its economic recovery largely to massive government intervention. Moreover, President Joe Biden’s administration is now pushing forward legislation – the American Jobs Plan and the American Families Plan – that would significantly increase the government’s economic role.
With both China and the US moving toward greater centralization of power over the economy, it is clear that common dichotomies like “state versus market” and “capitalism versus socialism” are overly simplistic. The two countries face many of the same challenges, beginning with ensuring that plutocratic elites are not making decisions at the expense of the masses.
Both the state and the market are social constructs. If markets order themselves spontaneously, based on self-interest, as Hayek observed, it may be that the growing bureaucracies in both socialist and capitalist countries order themselves according to vested interests. If this is true, it becomes vital to constrain those interests, in order to ensure that the state remains focused on delivering social goods.
As long as the US clings to its identity as a free-market system, it will struggle to address this challenge. Instead, what President Dwight Eisenhower warned against in his farewell address – the “acquisition of unwarranted influence” by the “military-industrial complex” – could continue unabated (though today it might be renamed the “military-industrial-tech-financial-media complex”).
Declining confidence in US institutions
This might go some way toward explaining why trust in US institutions is so low today. Of the 26 countries ranked in the 2020 Edelman Trust Barometer, the US ranked 18th for trust in NGOs, business, government, and media among the general population. In 2021, it ranked 21st.
By contrast, Chinese NGOs, business, government, and media together enjoyed the highest level of trust in 2020. While that level fell by ten percentage points (from 82 percent to 72 percent) in 2021, China remains in second place.
This probably reflects the fact that China has proven its ability to translate policy goals into concrete projects and programs, with visible benefits for the entire population, not just the elites. According to a recent study based on survey data from 2003 to 2016, “China’s poorer residents feel that government is increasingly effective at delivering basic health care, welfare, and other public services.”
To the German political scientist Sebastian Heilmann, China’s “unorthodox” policymaking – together with the Communist Party’s resilience – makes the country a “red swan”: a “deviant and unpredicted” challenge to the Western model of development. We would argue that China is not an aberration at all, and its success should not be shocking.
Bureaucracy hinders Beijing’s reforms
China has made the most of central planning to pursue an adaptive and experimental policymaking process, by which institutional structures are constantly updated to reflect new ideas and best practices, adapted to local conditions. As Jiang Xiaojuan recently pointed out, the “will at the top” is vital to progress, as it prevents deadlock on complex issues like climate change, where vested interests can easily block progress.
But this does not mean that policymaking in China is not collaborative. On the contrary, before making a major policy decision, China’s leaders consult with think tanks and academics to gain theoretical insight and visit local communities to learn about the situation on the ground. They then launch pilot programs to reveal and resolve practical implementation issues, thereby devising reforms and programs that can be adapted to more contexts.
To be sure, China’s approach is not immune to rent-seeking or the entrenchment of special privileges. The targeted application of policies and programs can engender fragmentation, waste, and excessive competition – all of which can undermine China’s quest to build an open, complex, and vibrant market economy.
Furthermore, as Jieun Kim and Kevin J. O’Brien have shown, the bureaucracy can actively resist progress, with local officials fearing, for example, that greater transparency could undermine their operational flexibility and prospects for promotion. But the same thing can happen if particular market actors gain too much influence. Overcoming such challenges requires agility, creativity, and political will.
Develop combinations
So, are free markets still superior to central planning? Well, it’s probably the wrong question.
Institutional arrangements are complex systems, shaped by history, geography, and culture. The objective should not be to identify a one-size-fits-all approach, but rather to devise the combination of characteristics that would deliver the greatest good for the greatest number of people, with the right checks and balances, in a particular country.
Here, China’s system of policy experimentation, implementation, and institutionalization of reform “algorithms” to support constant adaptation in a constantly changing environment has been a game changer for the country’s development. The proof is in the results.
Andrew Sheng, a distinguished fellow of the Asia Global Institute at the University of Hong Kong and a member of the UNEP Advisory Council on Sustainable Finance. Xiao Geng, Chairman of the Hong Kong Institution for International Finance, is a professor and Director of the Institute of Policy and Practice at the Shenzhen Finance Institute at The Chinese University of Hong Kong, Shenzhen.
China’s southwestern province of Yunnan is becoming increasingly popular among elephants. While the population declined to 193 in the 1980s, according to China’s official news agency, there are now around 300 again. Most of them live in a national park set up by the provincial government, especially for the pachyderms. However, one herd has now escaped and is causing trouble: 15 of them are said to have drunk a water tank dry, gorged themselves in a corn field and a barn, and trampled around 50 hectares of grain fields. The damage already amounts to ¥6.8 million (€872,000). Now, according to the authorities, the pachyderms are on their way to the provincial capital Kunming.
Opinion: Do free markets still beat central planning?
Reportage prize for Yang Xifan
Dear reader,
Anyone who wants to visit the campus of the controversial offshoot of Fudan University in Budapest in the future may reach it via “Dalai Lama Street”. Or the “Free Hong Kong Street”. But you can also walk along the “Street of the Uyghur Martyrs” in the direction of the university. Because the Hungarian capital and its 9th district have renamed the streets around the as-yet undeveloped area – making it clear to Prime Minister Viktor Orbán’s government what they think of the project. A delicate manoeuvre: Hungary is dependent on Beijing’s goodwill in view of large Chinese loans. And when it comes to the Dalai Lama the leadership is known for its vindictive reactions.
But the People’s Republic also has debt problems of its own. During the Corona epidemic, the Chinese state provided record levels of credit to local governments in order to stimulate the economy. Frank Sieren now takes a look at Beijing’s debt burden and how it compares with that of the US. He concludes that China has a much better handle on its liabilities than the old superpower.
Finn Mayer-Kuckuk introduces Huawei’s new mobile operating system. HarmonyOS is supposed to be the Android killer and free the corporation from some of its US dependence. But has the Chinese tech giant really reprogrammed it from scratch? Experts smell a fraudulent label.
The US and China are both currently trying to boost their respective economic growth with major infrastructure programs and to make their economies more competitive again – even in competition with each other. But as much as the situation of the two heavyweights is similar, the differences are also great. For China, a growth economy, is building up its public debt from a completely different situation than the US.
The stocktake: In the Covid year 2020, the ratio of debt of the American central state to gross domestic product has risen significantly. This year, with the new budget, this important ratio exceeds the psychologically striking 100 percent mark, attracting appropriate media attention. In 2019, it was still at 79 percent. The debt to economic output ratio has thus gone up by more than 20 percentage points.
The comparison with China is not entirely easy, because the systems are different. First of all, there is a direct comparison with the national debt. In China, these have been rising steeply for years from a moderate starting level. Due to Covid, they are currently reaching the 46 percent mark. In Germany, the figure is 70 percent.
So the Chinese value sounds low, but in the communist system it is not the whole truth. Beijing can also order state-owned enterprises to take on more debt. And in many municipalities, debts are owed by local state-owned companies that would have been incurred elsewhere by the public sector. So it makes perfect sense to look at total debt here, which includes corporate debt (excluding the financial sector). They stood at 277 percent of GDP at the end of the first quarter, as reported by the central bank. That’s already down 2.6 percentage points from the same quarter a year earlier. Before the pandemic, it was 255 percent. Economists consider the increase during the pandemic to be standard international practice. However, bank debt in the order of 30 percent of GDP remains a cause for concern.
The US and China have both added 20 percentage points of new debt as a share of GDP as a result of the pandemic. But China has bought itself GDP growth of plus 2.3 percent, while the US has only managed to slow the fall to minus 3.5 percent. This can be explained by the different course of the pandemic, which, as we know, ended much earlier in China. But debt with growth is considered much healthier than debt with contraction.
Foreign debt makes Americans dependent
But US debt is viewed with greater concern for another reason. Unlike China, the US has massive foreign debt. Around a third of the debt is held by foreign creditors. Most notably by Japan and, of all places, China. Twenty years ago, it was less than 10 percent.
As long as the US has a kind of monopoly on the world’s currency, this is not such a big problem for lack of alternatives. But the strengthening yuan, which these days has reached its highest level against the dollar in three years, tells us that this will not last forever. For the US to cease to be the reserve currency, China would have to allow full convertibility. But the process in that direction is certainly moving forward.
No matter how quickly or slowly the yuan becomes more important internationally, one thing is clear: as far as debt is concerned, the US is much more dependent on international developments than China. Beijing can throw its US dollars onto the international market en masse at any time and send the US dollar plummeting – even if only at a loss to its own remaining US dollar reserves. But the damage would be greater for Washington in any case. The US does not have this leverage.
If Beijing manages to maintain social stability in the country and prevent the masses in China from suddenly emptying their accounts, rising debt can do little to harm the government for the time being. Moreover, strict capital controls prevent the outflow of liquid funds abroad. So, unlike economies like Italy, China cannot be bled dry, even if confidence would fade.
Debt reduction and transparency are given priority
Nevertheless, Beijing wants to play it safe. The central government has set an economic growth target of more than 6 percent for 2021, but has defined debt reduction as a key task. That’s because some of China’s companies borrowed more than they should have in the Covid year: Chinese onshore bond defaults rose 18 percent in the first quarter from a year earlier, according to figures from the National Institution for Finance & Development. The increase is high, but not yet worrisome. Overall, the total of all bad bank loans is less than two percent of all loans.
Even if bad loans have not been a major problem so far, corporate debt is still a cause for concern. At around 150 percent of GDP, it is unusually high. Last fall, Beijing let a number of state-owned enterprises go to the wall after they failed to get a grip on their debt problems.
However, the debts of provincial, district and municipal governments should not be underestimated. Many of these can be traced back to so-called Local Government Financing Vehicles (LGFV). What are they?
The central government relies on local governments to fund new infrastructure. In China, however, provincial and local governments lack comprehensive fiscal powers. For years, the establishment of LGFVs allowed local governments to borrow beyond their limited means.
However, in April this year, the State Council said LGFVs used by local governments to circumvent credit limits should be restructured or go bankrupt outright if they are unable to repay their debts. Much of the LFGV lending is unaccounted for, and there is little transparency about how the funds are being used. In 2018, Standard & Poor’s estimated the value of this “hidden debt” at ¥30 to ¥40 trillion (about $5 trillion).
Since April, the Shanghai and Shenzhen stock exchanges have also had to tighten corporate bond issuance guidelines to limit the ability of weak companies to access the onshore bond market and raise additional debt. These measures also affect LGFVs. Already since 2019, all provincial officials have been instructed to regularly report their borrowings in a centralized system. In addition, the government wants to curb granting bank loans. This marks the beginning of another round in the management of local debt, which on the one hand continues to rise, but at the same time is to be handled in an increasingly professional and transparent manner.
Long overdue infrastructure injection in the USA
Washington’s back is not against the wall either. The US Congress has passed emergency aid of around $5.4 trillion since the outbreak of the pandemic. With the coronavirus still posing a threat to the US economy, the Biden administration has now requested a massively increased federal budget, totaling more than $6 trillion in spending. With the long-term increase, the government intends to fund investments in roads, bridges, electric vehicles, airports, urban transportation systems, energy-efficient housing, modern water pipes, power grids, broadband, a green energy transition, and other innovations.
The plans are to be financed not only by raising new debt but also by higher taxes on companies and the rich. Congressional approval of the plan is still required, so details may change from its current form, but it is overdue. The United States has failed to invest in infrastructure for years, spending an average of about 2.4 percent of gross domestic product (GDP) on it since 2010 – far below China’s 8 percent. The long-term goal of the measures is also to make the US less dependent on China. Observers see China as a role model for Biden’s infrastructure policy.
Different starting points
Here too, however, there are differences in what are currently similar spending policies. China and the US are at different stages of their economic development and accordingly have different targets for their infrastructure spending.
Rural areas and smaller towns still have a lot of catching up to do. This has the advantage that many projects are not created as an end in themselves, such as the new train lines, which accounted for the largest share of spending last year. They contribute to long-term economic growth. The same applies to the expansion of telecommunications networks or the supply of electricity from renewable energy sources.
In the USA, on the other hand, these are often necessary renovation measures. According to the American Society of Civil Engineers (ASCE), the condition of the American infrastructure is desolate. Leaky pipes cause more than 22 billion liters of water to seep away every day, according to their report. 43 percent of American roads are in poor or just average condition. Currently, no American destination ranks on the list of the 25 best airports in the world. 45 percent of the U.S. population has no access to buses and trains at all, according to the evaluation, which means Americansare primarily fixing what’s there. The Chinese are expanding.
As a rule of thumb, one can state: If there is room for growth, and there is in China with a per capita GDP that is about six times smaller than that of the US, then expansion usually creates more growth than repair.
Or put even more generally: It is much more difficult to translate stimulus into economic growth when GDP per capita is high than for countries with low GDP per capita. It is therefore likely that China will catch up with the US even faster in the aftermath of the Covid crisis.
Debt
Finance
Loans
USA
HarmonyOS: Huawei introduces its own mobile phone operating system
Tech giant Huawei officially unveiled its new smartphone operating system in a major presentation on Tuesday: HarmonyOS is expected to enable “new product lines for the Internet of Everything era,” Richard Yu, board member for consumer business, said in Shenzhen. More than 200 million devices in China are expected to ship with the new operating system by 2022. The first to be upgraded to the new operating system will be a number of established models. After that, brand new phones will be released with it. A sales start for Europe has not yet been determined.
Thesuccessful launch of a truly new operating system for smartphones would be a minor sensation. So far, only two providers have really anchored themselves in the market: Apple and Google. Both have had plenty of time to divide the cake between them. iOS has been on the market since 2007, Android since 2008. Since then, there have been attempts by Microsoft and other providers to put something on the side of the top dogs. But the new competition failed due to their market power, while established providers like Nokia and Blackberry simply disappeared.
There are two specific reasons for focusing on two players in the market.
1. It’s hard as hell to redevelop a mature computer operating system from the ground up. Even Google didn’t do that with Android, but started with the core of the free Linux operating system. Hundreds of thousands of hours of programming are needed before everything fits together seamlessly and all the functions that the customer expects are available. It can take years to eradicate the errors of the first versions.
The variety of programs is the greatest treasure of every IT platform. In terms of smartphones, it is the selection in the app store that makes the device attractive in the first place. Apple has two million apps here, Google even three million. Technically speaking, anyone who is really new starts with 0 apps.
Without coercion, Huawei would never have had the idea to say goodbye to Android for exactly these reasons, because the effort for a new development is high, while the buyers are initially left with only a few apps. However, the US government has practically forced this move on the Chinese vendor. Donald Trump has banned American companies from supplying Huawei with goods and services (China.Table reported). This includes licenses for Android from Google.
Android in a new guise?
So far, however, it looks like Huawei has used a little trick to get around both problems at once. At least, that’s what programmers who have already gained access to the development environment for the apps under the new system believe. “HarmonyOS is essentially derived from Android,” according to operating system expert Ron Amadeo from the portal Arstechnica. It is a “fork”, i.e., the splitting off of a software version into a new development branch.
The technology world is not bothered by the fact that Huawei is using a proven model. After all, Google’s product is explicitly open for its own further developments. Rather, it is the communication that is seen as disturbing. “HarmonyOS will be something completely new,” Yu had said in 2019 during the first announcements. Now comes a great new product, but under the hood, the technicians find yet again Android. “You should be honest about something like this,” commented tech journalist Amadeo. The thing smells a bit like plagiarism because of the intransparency. After all, Huawei claims to have developed its own software, which is based on Google’s work.
It is noticeable that the usual popular apps that Huawei has offered for its official Android variant are to be found in the Huawei store for HarmonyOS from the first day. The person responsible for the product, Wang Chenlu, did not talk much about the technology behind the scenes during the presentation and talked a lot about the ideas and advantages for the user.
App gives tips on organizing the fridge
In fact, HarmonyOS has a lot to offer here. The product becomes most powerful in combination with many other smart Huawei devices. The Huawei Control Panel contains all the connected devices that also run the new operating system, such as drones, TVs, watches, or headphones. If you’re watching a series on your tablet on the balcony and play the sound through a speaker, you can redirect the image and sound to the living room with a swipe when a dark cloud rolls in. Then, when the kids have to go to bed, the transition to headphones should be just as seamless. The technical feat behind it: Everything has to run in sync, otherwise sound and picture no longer match.
However, Wang also presented many supposed solutions to problems that probably no one has. The apps on Harmony devices are supposed to help the user sort the groceries into the right cold zone in the smart fridge after shopping. Perhaps mankind will one day be so dependent that it will need a manual for this – hopefully, not just yet.
In any case, a smart move
What’s more striking about all these concrete announcements, however, is that they have little to do with the operating system. Fridge apps are typically applications, apps that run under-or on-the operating system. It basically just provides the framework in which they work. Wang’s presentation was generally a lot about such user-level features, and not at all about things that would really only be possible with a fundamentally new operating system. He touted, for example, the clever arrangement of app icons into thematic groups. However, every Android provider also has a visual trick up its sleeve.
But the introduction of HarmonyOS is definitely a smart move after the US government first put Huawei in checkmate. Whether the code is newly programmed or based on an existing product is irrelevant. Customers in China, where it is called HongmengOS, will hardly notice any difference from the conventional Huawei Android anyway. They have always been in a different app world than customers in the West. In China, it was already common that every manufacturer had its own app store with typical Chinese programs.
HarmonyOS
Huawei
Smartphone
News
German government does not want to provoke Beijing
The German government rejects turning away from China despite increasing conflicts with the communist leadership in Beijing. “In view of the strong, worldwide interdependence of national economies and the complexity of global challenges such as climate change, peacekeeping and fragile statehood”, the Federal Government considers “containment and disengagement strategies vis-à-vis China as an emerging world power not to be expedient”, according to a Federal Government response to a question from the Left Party in the Bundestag.
At the same time, the German government stressed that it would “in future, however, increasingly participate in measures to protect and safeguard the rule-based order in the Indo-Pacific”, such as compliance with the United Nations Convention on the Law of the Sea or monitoring UN sanctions against North Korea. The deployment of the Bundeswehr frigate “Bayern” to the Indo-Pacific for the second half of 2021 should also be understood in this context.
In September 2020, the German government adopted guidelines for Germany’s future foreign policy in Asia. They envisage not only becoming involved in the region, as has been the case up to now, primarily in economic terms, but also increasingly in geopolitical terms. The Federal Government left open whether Germany would thereby also oppose China’s growing influence. In mid-April, Federal Foreign Minister Heiko Maas (SPD) and Federal Defence Minister Annegret Kramp-Karrenbauer (CDU) had confirmed in a video link-up with their Japanese counterparts that Germany would further strengthen its security policy engagement in Asia and wanted to “coordinate more closely” above all with Western-oriented and democratic countries such as Japan.
“In order for Germany and Europe to continue to play an active role in shaping the world in the future, we must also become more involved in Asia in particular, where important global decisions are being made in this century,” Maas had stressed after the talks. “If we don’t become more active, others will write the rules of the future – not only economically, but also politically and in terms of security policy.” Defense Minister Kramp-Karrenbauer added: “The situation in the Indo-Pacific concerns us all. Respecting the rules on free trade routes and territorial integrity, as well as strengthening our democratic partners, are in both German and European interests.” Unlike Maas, she addressed the territorial conflict in the South China Sea and also named China.
Beijing claims 80 percent of the sea through which some of the world’s major shipping lanes pass. The International Court of Arbitration in The Hague rejected China’s claims in 2016. Beijing ignores this ruling.flee
Federal Government
Heiko Maas
Indo-Pacific
South China Sea
Trade
Report: G7 plan green alternative to BRI
The G7 countries plan to announce plans for a sustainable alternative to China’s BRI at their summit next week, according to a media report. The strategy, called the Clean Green Initiative, will provide a framework to support sustainable and climate-friendly developments in developing countries, Bloomberg reported, citing two unnamed sources. The initiative will also be on the summit agenda of leaders meeting in Cornwall, UK, next week (June 11-13), they said.
According to the report, the infrastructure strategy of the G7 states, which was primarily driven by the US, had already been a topic of discussion among diplomats in preparation for the summit. It was not yet clear whether new financial resources were to be injected into the project. It was primarily a matter of creating a “strategic framework”, according to the report.
In the run-up to the summit, however, there had also been disagreements about where the new initiative should have its geographical focus, according to a person familiar with the proceedings: Germany, France, and Italy want to support activities in Africa, while the US is pushing for measures in Latin America and Asia. Japan, on the other hand, is arguing for a stronger focus on the Indo-Pacific region. However, all nations are largely in agreement that there must be a transparent alternative to China’s BRI, Bloomberg quotes a source as saying. ari
G7
New Silk Road
Hong Kong allows entry without quarantine for high-ranking bankers
Senior financial executives in Hong Kong can apply for a suspension of the otherwise mandatory quarantine on entry. Hong Kong’s Financial Markets Authority informed about 500 listed banks and other financial service providers about the new exemption options last week, reports the South China Morning Post (SCMP). Many of the Hong Kong representative offices are an important component for global or regional setups of financial institutions, a government spokeswoman told the newspaper. “We consider it necessary to facilitate their effective operation during the Covid-19 pandemic to maintain Hong Kong’s financial stability and our status as an international financial center,” SCMP quoted the spokeswomanas saying.
However, only a certain number of leading employees can sign up for the exemptions. There are prerequisites: For example, only fully vaccinated individuals who hold the position of director, global or regional head of a financial group, or listed company can apply for a possible quarantine waiver. The exemption rule would then apply to expats and Hong Kong residents returning from overseas trips. A negative Covid test must also be presented upon entry to be exempt from quarantine, the report added. The Hong Kong government had previously exempted flight and ship crews, as well as auditors of listed companies, from the mandatory quarantine. ari
Coronavirus
Health
Hongkong
Society
Apple supplier: Taiwan now only number two
China has displaced Taiwan as the top supplier to US tech giant Apple for the first time. Of the top 200 Apple suppliers, 51 were based in the People’s Republic and Hong Kong last year, according to an analysis of Apple’s supplier list by the Japanese news platform Nikkei Asia. That compares with 42 suppliers in 2018, it said.
Taiwan, which topped the list for more than a decade, slipped to second place with 48 suppliers. Important suppliers such as Foxconn and Pegatron still have their headquarters there. But they also produce most of their products in the People’s Republic.
Apple’s supplier list covers 98 percent of the company’s spending on materials and manufacturing for the previous fiscal year, according to the report. The individual order values for each company are not disclosed, according to the report. However, the supplier list is considered a barometer of Apple’s dependence on suppliers from different parts of the world. The report has been published almost every year since 2013.
China-based suppliers are also helping Apple increase production outside the country, according to the report, with the number of Apple suppliers in Vietnam growing from 14 in 2018 to 21 last year, according to the analysis. However, seven of the 21 suppliers were owned by companies based in China or Hong Kong, it said. They included AirPods manufacturers Luxshare Precision Industry and GoerTek, both of which began manufacturing in Vietnam in early 2020. ari
Technology
Opinion
Do free markets still beat central planning?
By Andrew Sheng and Xiao Geng
In 1944, Friedrich A. Hayek suggested that the spontaneous order of markets was inherently superior to the supposedly dynamism-draining totalitarian order of communist or fascist regimes. The ensuing decades – when free-market economies thrived, and the Soviet Union’s centrally planned economy imploded – seemed to vindicate him. Then along came China.
The metrics of China’s phenomenal economic rise are well known: three decades of double-digit GDP growth; some 700 million people lifted out of poverty; an infrastructure boom; the emergence of innovative tech giants; and a comprehensive blueprint for continued (sustainable) growth and development.
China’s success has undermined the belief that free markets are the best development strategy for all, so much so that even the International Monetary Fund-long a leading proponent of free-market ideology-has reconsidered its own orthodoxy. But Chinese-style central planning still meets with disdain in the West, where observers disparage it for its alleged opacity and repressive nature.
But is China’s system really diametrically opposed to that of, say, the United States? In a word: no.
Economic recovery through subsidies
Despite its vocal support for free markets, the US government’s spending has risen steadily since 1970. In 2019, it stood at 35.7 percent of GDP, compared to 34.8 percent of GDP in China.
The COVID-19 crisis has accelerated this trend. Indeed, America owes its economic recovery largely to massive government intervention. Moreover, President Joe Biden’s administration is now pushing forward legislation – the American Jobs Plan and the American Families Plan – that would significantly increase the government’s economic role.
With both China and the US moving toward greater centralization of power over the economy, it is clear that common dichotomies like “state versus market” and “capitalism versus socialism” are overly simplistic. The two countries face many of the same challenges, beginning with ensuring that plutocratic elites are not making decisions at the expense of the masses.
Both the state and the market are social constructs. If markets order themselves spontaneously, based on self-interest, as Hayek observed, it may be that the growing bureaucracies in both socialist and capitalist countries order themselves according to vested interests. If this is true, it becomes vital to constrain those interests, in order to ensure that the state remains focused on delivering social goods.
As long as the US clings to its identity as a free-market system, it will struggle to address this challenge. Instead, what President Dwight Eisenhower warned against in his farewell address – the “acquisition of unwarranted influence” by the “military-industrial complex” – could continue unabated (though today it might be renamed the “military-industrial-tech-financial-media complex”).
Declining confidence in US institutions
This might go some way toward explaining why trust in US institutions is so low today. Of the 26 countries ranked in the 2020 Edelman Trust Barometer, the US ranked 18th for trust in NGOs, business, government, and media among the general population. In 2021, it ranked 21st.
By contrast, Chinese NGOs, business, government, and media together enjoyed the highest level of trust in 2020. While that level fell by ten percentage points (from 82 percent to 72 percent) in 2021, China remains in second place.
This probably reflects the fact that China has proven its ability to translate policy goals into concrete projects and programs, with visible benefits for the entire population, not just the elites. According to a recent study based on survey data from 2003 to 2016, “China’s poorer residents feel that government is increasingly effective at delivering basic health care, welfare, and other public services.”
To the German political scientist Sebastian Heilmann, China’s “unorthodox” policymaking – together with the Communist Party’s resilience – makes the country a “red swan”: a “deviant and unpredicted” challenge to the Western model of development. We would argue that China is not an aberration at all, and its success should not be shocking.
Bureaucracy hinders Beijing’s reforms
China has made the most of central planning to pursue an adaptive and experimental policymaking process, by which institutional structures are constantly updated to reflect new ideas and best practices, adapted to local conditions. As Jiang Xiaojuan recently pointed out, the “will at the top” is vital to progress, as it prevents deadlock on complex issues like climate change, where vested interests can easily block progress.
But this does not mean that policymaking in China is not collaborative. On the contrary, before making a major policy decision, China’s leaders consult with think tanks and academics to gain theoretical insight and visit local communities to learn about the situation on the ground. They then launch pilot programs to reveal and resolve practical implementation issues, thereby devising reforms and programs that can be adapted to more contexts.
To be sure, China’s approach is not immune to rent-seeking or the entrenchment of special privileges. The targeted application of policies and programs can engender fragmentation, waste, and excessive competition – all of which can undermine China’s quest to build an open, complex, and vibrant market economy.
Furthermore, as Jieun Kim and Kevin J. O’Brien have shown, the bureaucracy can actively resist progress, with local officials fearing, for example, that greater transparency could undermine their operational flexibility and prospects for promotion. But the same thing can happen if particular market actors gain too much influence. Overcoming such challenges requires agility, creativity, and political will.
Develop combinations
So, are free markets still superior to central planning? Well, it’s probably the wrong question.
Institutional arrangements are complex systems, shaped by history, geography, and culture. The objective should not be to identify a one-size-fits-all approach, but rather to devise the combination of characteristics that would deliver the greatest good for the greatest number of people, with the right checks and balances, in a particular country.
Here, China’s system of policy experimentation, implementation, and institutionalization of reform “algorithms” to support constant adaptation in a constantly changing environment has been a game changer for the country’s development. The proof is in the results.
Andrew Sheng, a distinguished fellow of the Asia Global Institute at the University of Hong Kong and a member of the UNEP Advisory Council on Sustainable Finance. Xiao Geng, Chairman of the Hong Kong Institution for International Finance, is a professor and Director of the Institute of Policy and Practice at the Shenzhen Finance Institute at The Chinese University of Hong Kong, Shenzhen.
China’s southwestern province of Yunnan is becoming increasingly popular among elephants. While the population declined to 193 in the 1980s, according to China’s official news agency, there are now around 300 again. Most of them live in a national park set up by the provincial government, especially for the pachyderms. However, one herd has now escaped and is causing trouble: 15 of them are said to have drunk a water tank dry, gorged themselves in a corn field and a barn, and trampled around 50 hectares of grain fields. The damage already amounts to ¥6.8 million (€872,000). Now, according to the authorities, the pachyderms are on their way to the provincial capital Kunming.
