The International Consortium of Investigative Journalists has once again composed a magnificent piece of research. The so-called Pandora Papers expose the financial machinations of influential politicians and corporations. Thousands of Chinese are among the profiteers. Nico Beckert took a closer look at the data package and explains why Chinese companies, in particular, set up shell companies in offshore centers. Something particularly juicy: While President Xi Jinping is leading a great campaign against corruption, it becomes clear that China’s princelings are also more than happy to take advantage of the haziness of tax havens.
Taiwan is currently on everyone’s lips in the West: Above all, the ongoing shortage of semiconductors is raising questions about the status of the small island. Amelie Richter shows in her analysis how the European Union is trying to find its own way in this relationship with Taiwan – and is getting tangled up between title disputes and loyalty among its members.
America is also in the process of reorganizing itself under Joe Biden. But those who had dreamed that tensions in China-US relations over the trade conflict would finally relent, are now in for a rude awakening. Biden’s trade representative Katherine Tai presented the new US trade strategy for China on Monday. The tenor: trade barriers between the two nations will probably not be lifted for the time being.
I hope our latest issue provides you with many new insights!
Nearly 2,000 Chinese citizens appear in the largest data leak on shell companies in tax havens to date, according to data compiled by the International Consortium of Investigative Journalists (ICIJ). The People’s Republic ranks among the countries with the most beneficiaries, with 1,892 owners of shell companies. According to the data, a current politician and a former politician of the People’s Republic also maintain secret companies in offshore financial centers.
A total of 336 names of current and former politicians appear in the data leak. The package, dubbed the “Pandora Papers,” includes 11.9 million documents from 14 legal and financial companies that set up and sell shell companies. While it is not illegal to maintain such companies, they often serve unlawful purposes, such as tax avoidance, money laundering, or evading financial laws of respective home countries. Shell companies can also be used to hide assets overseas.
China’s strict financial and foreign exchange laws are a significant cause of the high number of shell companies owned by the Chinese outside their country. The purpose of these companies is to circumvent restrictions on trade, capital flows abroad and foreign investment in Chinese companies, according to The Wire China, which is involved in the analysis of the data as a cooperation partner of the ICIJ.
A notorious example of shell companies is Chinese internet corporations. Foreign companies are prohibited from investing in Chinese internet and tech companies (China.Table reported). Many well-known Chinese internet corporations bypassed this ban by establishing shell companies in offshore financial centers. These solicited investment from foreign backers and funneled it back to Chinese owners through shell companies. Such constructs – known as variable interest entities (VIEs) – enabled Silicon Valley venture capitalists, for example, to take early stakes in Chinese internet giants such as Alibaba, Baidu, Tencent, and ByteDance.
Chinese companies also use shell companies in offshore financial centers to go public abroad without violating Chinese laws that would otherwise make such IPOs impossible. Alibaba used such a construct for its IPO in New York in September 2014.
For a long time, the government in Beijing tacitly accepted this measure. Most recently, however, it became known that authorities sought to change the rules. In the future, Chinese companies would have to obtain regulatory approval to go public with overseas VIE organizations, even though the VIEs are not registered in China.
The Pandora Papers show that Alibaba’s executives installed numerous shell companies in offshore centers to direct takeovers of other companies, The Wire further reports. An adviser to Meituan’s founder was allegedly paid $56 million in Meituan stocks held in an offshore financial center trust – far from Beijing’s grasp.
State-owned companies such as Sinopec and the conglomerate CITIC have also set up various shell companies in offshore financial centers such as the Cayman Islands, Bermuda’s, or Cyprus. These companies borrow US dollars via this detour and invest in foreign raw material deposits and energy projects, for example.
There is a particular risk in the use of shell companies to take over Western companies: By hiding Chinese ownership of the company, security checks by US and EU authorities could be eluded. Through this, foreign producers of sensitive goods such as dual-use goods could be secretly bought up by the Chinese, reports The Wire China.
Private individuals are using shell companies to circumvent China’s foreign exchange laws. Since 2017, cash transfers of more than 50,000 yuan (equivalent to 6,600 euros) must be reported to the central bank. This further expanded capital controls. Previously, transfers of only 200,000 yuan were subject to reporting.
Acquiring assets overseas with foreign currency is also severely restricted. The obscurity of offshore financial centers benefits wealthy Chinese. The name of National People’s Congress delegate Qiya Feng appears in the Pandora Papers. She owns a shell company in the British Virgin Islands, which she used to invest money in US stocks.
But strict regulations and laws are seemingly not the sole reason for the high number of Chinese names in the Pandora Papers. In previous data leaks on offshore financial centers, such as the Panama Papers or the Offshore Leaks, numerous members of China’s high-ranking political families appeared – notably, the so-called princelings, sons, and daughters of high-ranking politicians.
Information from the “Offshore Leaks” and the “Panama Papers” showed that:
According to the German newspaper Süddeutsche Zeitung, these “princelings”, as well as members of the Politburo Standing Committee and some members of the People’s Congress, hid parts of their assets in tax havens with the help of shell companies. More than 21,000 such companies could be attributed to the Chinese at the time.
How many of the shell companies in the latest leak belong to members of the Chinese political elite is not yet known. The People’s Republic strictly censored all mention of “Panama Papers” and “Offshore Leaks” even though Xi Jinping himself had already pushed the fight against corruption at that time.
Be it the Indo-Pacific strategy of the European Union or the diplomatic dispute between Lithuania and Beijing, Taiwan has been making the headlines recently and as an item on the agenda in Brussels in recent months. This month, the European Parliament wants to raise the pressure on the EU Commission to take actual measures: For the first time, the EU Parliament will vote on a stand-alone report on relations with Taipei. It is highly likely to receive a majority in the plenum – and that won’t go down particularly well in Beijing.
The European Parliament calls for a significant upgrading of relations with Taiwan: In addition to the demand for closer partnerships regarding electric vehicles and semiconductor technology as well as increased scientific collaboration within the framework of the EU’s Horizon Europe program, the report contains two subjects that will see China fuming: MEPs recommend the European Commission to prepare an impact assessment for a bilateral investment agreement with Taiwan. The report also suggests changing the name of the European Economic and Trade Office (EETO) in Taipei to the European Union Office in Taiwan.
The Taiwan Strait and the South China Sea are being viewed with growing concern, said Dietmar Köster, a member of the European Parliament for the Social Democratic Party (SPD), at a press briefing on Monday. A military confrontation there must be prevented urgently, said the foreign policy expert. CDU politician Michael Gahler was more explicit: China’s policy in the region does not seek to maintain the status quo but is revisionist. Gahler is the chairman of the European Parliament’s Taiwan friendship group. His demand: China’s behavior must be countered by “standing up to it and speaking out.”
The growing pressure in the European Parliament and among the public did not go unnoticed in the EU Commission, Green MEP Reinhard Bütikofer tells China.Table. The Trade Committee, too, was particularly displeased that the Brussels authority had not yet put preparations for a bilateral investment agreement with Taiwan on the agenda.
The European Parliament tends to position itself more radical than the EU Commission and the EU Council, in which the member countries are represented. In foreign and security policy, the Parliament has a more advisory role. However, if the report on Taiwan is adopted by the EU Parliament, the Commission is obliged to accept or reject it within three months. In the latter, the EU Commission would have to explain its reasoning – which would then be difficult to justify given the increasing mentioning of Taiwan, including in the official communication of the Brussels authority.
Taipei’s representation in Brussels is promoting an agreement: This could give European investors peace of mind and greater protections when investing in Taiwan, ambassador Ming-Yen Tsai told China.Table. It would also promote the diversification of European supply chains. Tsai expressed that the representation welcomes the commitment, especially from the European Parliament. “We believe it’s time to start the preparation for launching negotiations with Taiwan, including the scoping exercise, impact assessment, and public consultation,” Tsai stressed.
Before the EU Commission can draft an impact assessment for a bilateral agreement or the renaming of the EU office in Taiwan, it first needs to find substantial support among member nations – and this is where opinions are currently divided. While the small EU state of Lithuania has openly traded blows with Beijing, other countries are reacting more cautiously and only carefully discuss closer ties with Taiwan.
The background is a name dispute in Vilnius: Lithuania’s government had allowed the opening of a “Taiwanese representation” in its capital. Beijing reacted furiously (China.Table reported) withdrawing its ambassador from the Baltic country, expelling the Lithuanian ambassador from China, and most recently, the suspension of all cargo traffic to Lithuania via rail.
While the MEPs supported Lithuania’s position, the governments in the EU capitals had a somewhat different opinion: While they criticized China’s economic blackmail of Lithuania, they did not display clear support for the position of its fellow EU member. Something similar could already be observed in the dispute over the visit of the Czech Senate chairman, Miloš Vystrčil, to the Taiwanese parliament. At the time, Beijing threatened the Czech Republic with a “high price to pay” for the visit – but other EU members showed little support for Prague.
At the beginning of September, Slovenia’s Prime Minister Janez Janša wrote a letter to other EU leaders calling on them to back Vilnius in its feud with China. Slovenia currently holds the EU presidency. However, there wasn’t much response to his request. Lithuania at least received transatlantic encouragement: The US government’s National Security Advisor Jake Sullivan pledged Washington’s support for Lithuania’s Prime Minister Ingrida Šimonytė.
Diplomatic restraint on the part of the Europeans towards Taipei was also displayed in the matter of Covid vaccines: Only four Central and Eastern European EU (CEEC) countries – Lithuania, Poland, Slovakia, and the Czech Republic – donated vaccines to the island. In response, Taipei plans to send a 65-member delegation in October to promote its investment in CEEC. Poland donated about 400,000 doses, but immediately reaffirmed its commitment to the “One-China-Policy.”
When it comes to Taiwan, not only disputes over the names of trade missions require close attention. Brussels and Beijing use different names and have different views on the matter, as was recently made clear in a video call between EU Foreign Affairs Commissioner Josep Borrell and China’s Foreign Minister Wang Yi: Wang announced, according to state media, that Borrell had stated that the EU would adhere to the “One-China principle”. This considers Taiwan as a rogue province that legally belongs to China and must be reunified.
The EU, in turn, spoke in its statement of the continued application of the “One-China-Policy”. This does not consider any formal diplomatic contacts with Taiwan; the central government in Beijing is recognized as China’s sole government. However, nothing prevents the establishment of trade missions or bilateral trade agreements. After all, none of the offices is an embassy, nor does the opening of a representation imply recognition of Taiwan as a sovereign state.
Incidentally, a bilateral investment agreement would not be an act of charity on the part of the Europeans. Quite the opposite: Not least, the global chip shortage has made the EU’s dependence on Taiwan clear. The development of an investment partnership would open up important options. Last year, according to the Taipei office in Brussels, the volume of trade between the 27 EU states and Taiwan amounted to $51.9 billion, while the EU imported goods worth $22.9 billion from Taiwan in 2020, according to the data. The European Union currently is the largest investor in Taiwan.
The production of semiconductors in particular begins to become a highly political issue. China had deployed a record number of fighter jets to Taiwan’s Air Defense Identification Zone (ADIZ) over the weekend (China.Table reported). On Monday, Taipei now warned that peace in the Taiwan Strait was crucial to ensuring a steady supply of chips, according to a report by Bloomberg.
Taiwan’s Minister of Economic Affairs Wang Mei-Hua made it clear that Taiwan had helped foster a chip manufacturing ecosystem for more than three decades against the backdrop of globalization. “The global community should take Taiwan’s security more seriously, so Taiwan can continue to provide stable service to everyone and be a very good partner to everyone.” the minister warned.
According to Bloomberg, Taiwan Semiconductor Manufacturing Co (TSMC) has a 53 percent share of the contract chip market – fueling concerns that any instability in the Taiwan Strait could disrupt supplies. The high dependence on TSMC and its local suppliers has prompted the EU Commission and governments of the US, Japan, and also the People’s Republic to bolster their domestic chip industries. To this end, EU Commission President Ursula von der Leyen announced an own EU chip law in her State of the European Union speech, which, among other things, is intended to significantly increase semiconductor research and production capacities in the EU (China.Table reported).
The current state of relations between the EU and Taiwan thus offers plenty to talk about: The so-called “New European Chips Act” offers opportunities for cooperation – but it could also unleash new competitive dynamics. The Indo-Pacific Strategy also offers a solid framework for extending economic relations. However, overly vocal commitments to Taiwan by EU governments and the EU Commission are not to be expected.
According to Green politician Bütikofer, precisely such cooperation on semiconductors could now be used to “re-frame” relations with Taiwan. For example, one could talk about Taiwan’s contribution to resilient supply chains, Bütikofer told China.Table. This would also signal to Beijing that there was no intention of isolation, but that new approaches were being sought.
The European Parliament will in all likelihood vote on the Taiwan report during the part-session week in the second half of October. A reaction from Beijing is naturally expected not long after. The vote on the paper in the relevant Foreign Affairs Committee and, more recently, the publication of the EU’s Indo-Pacific strategy have already resulted in brisk warnings from party headquarters: the EU should not “play with fire on the Taiwan question”, state newspaper Global Times headlined in an opinion piece last week.
All eyes are fixed on the dark side of China. We have been here before. Starting with the Asian financial crisis of the late 1990s and continuing through the dot-com recession of the early 2000s and the global financial crisis of 2008-09, China was invariably portrayed as the next to fall. Yet time and again, the Chinese economy defied gloomy predictions with a resilience that took most observers by surprise.
Count me among the few who were not surprised that past alarms turned out to be false. But count me in when it comes to sensing that this time feels different.
Contrary to most, however, I do not think Evergrande Group is the problem, or even the catalytic tipping point. Yes, China’s second-largest property developer is in potentially fatal trouble. And yes, its debt overhang of some $300 billion poses broader risks to the Chinese financial system, with potential knock-on effects in global markets. But the magnitude of those ripple effects is likely to be far less than those who loudly proclaim that Evergrande is China’s Lehman Brothers, suggesting that another “Minsky Moment” may well be at hand.
Three considerations argue to the contrary. First, the Chinese government has ample resources to backstop Evergrande loan defaults and ring-fence potential spillovers to other assets and markets. With some $7.5 trillion in domestic saving and another $3 trillion in foreign exchange reserves, China has more than enough capacity to absorb a worst-case Evergrande implosion; recent large liquidity injections by the People’s Bank of China underscore the point.
Second, Evergrande is not a classic “black swan” crisis, but rather a conscious and deliberate consequence of Chinese policy aimed at deleveraging, de-risking, and preserving financial stability. In particular, China has made good progress reducing shadow banking activity in recent years, thereby limiting the potential for deleveraging contagion to infect other segments of its financial markets. Unlike Lehman and its devastating collateral damage, the Evergrande problem hasn’t blindsided Chinese policymakers.
Third, risks to the real economy, which has entered a temporary soft patch, are limited. The demand side of the Chinese property market is well-supported by the ongoing migration of rural workers to cities. This is very different from the collapse of speculative housing bubbles in other countries, like Japan and the United States, where supply overhangs were unsupported by demand. While the urban share of the Chinese population has now risen slightly above 60%, there is still plenty of upside until it reaches the 80-85% threshold typical of more advanced economies. Notwithstanding recent accounts of shrinking cities – reminiscent of earlier false alarms over a profusion of ghost cities – underlying demand for urban shelter remains firm, limiting downside risks to the overall economy, even in the face of an Evergrande failure
China’s most serious problems are less about Evergrande and more about a major rethinking of its growth model. Initially, I worried about a regulatory clampdown, writing in late July that the new measures took dead aim at China’s internet platform companies, threatening to stifle the “animal spirits” in some of the economy’s most dynamic sectors, such as fintech, video gaming, online music, ridesharing, private tutoring, and takeaway, delivery, and lifestyle services.
That was then. Now, the Chinese government has doubled down, with President Xi Jinping throwing the full force of his power into a “common prosperity” campaign aimed at addressing inequalities of income and wealth. Moreover, the regulatory net has been broadened, not just to ban cryptocurrencies, but also to become an instrument of social engineering, with the government adding e-cigarettes, business drinking, and celebrity fan culture to its ever-lengthening list of bad social habits.
All this only compounds the concerns I raised two months ago. The new dual thrust of Chinese policy – redistribution plus re-regulation – strikes at the heart of the market-based “reform and opening up” that have underpinned China’s growth miracle since the days of Deng Xiaoping in the 1980s. It will subdue the entrepreneurial activity that has been so important in powering China’s dynamic private sector, with lasting consequences for the next, innovations-driven, phase of Chinese economic development. Without animal spirits, the case for indigenous innovation is in tatters
With Evergrande blowing up in the aftermath of this sea change in Chinese policy, financial markets, understandably, have reacted sharply. The government has been quick to counter the backlash. Vice Premier Liu He, China’s leading architect of economic strategy and a truly outstanding macro thinker, was quick to reaffirm the government’s unwavering support for private enterprise. Capital markets regulators have likewise stressed further “opening up” via new connectivity initiatives between onshore and offshore markets. Other regulators have reaffirmed China’s steadfast intention to stay the course. Perhaps they doth protest too much?
Of course, on one level, who wouldn’t want common prosperity? US President Joe Biden’s $3.5 trillion “Build Back Better” agenda smacks of many of the same objectives. Tackling inequality and a social agenda at the same time is a big deal for any country. It is not only the subject of intense debate in Washington but also bears critically on China’s prospects.
The problem for China is that its new approach runs counter to the thrust of many of its most powerful economic trends of the past four decades: entrepreneurial activity, a thriving start-up culture, private-sector dynamism, and innovation. What I hear now from China is denial – siloed arguments that address each issue in isolation. Redistribution is discussed separately from the impact of new regulations. And there is also a siloed approach to defending regulatory actions themselves – case-by-case arguments for strengthening oversight of internet platform companies, reducing social anxiety among stressed-out young people, and ensuring data security
As a macro practitioner, I was always taught to consider the combined effects of major developments. Evergrande will pass. Common prosperity is here to stay. A regulatory clampdown, in conjunction with a push to redistribute income and wealth, rewinds the movie of the Chinese miracle. By failing to connect the dots, China’s leaders risk a dangerous miscalculation.
Stephen S. Roach, a faculty member at Yale University and former chairman of Morgan Stanley Asia, is the author of Unbalanced: The Codependency of America and China
Copyright: Project Syndicate, 2021.
www.project-syndicate.org
Heavy is the head that wears the crown. This boy has to decide: The obligatory flags for the national holiday, or rather a colorful wooden slingshot? The Golden Week holidays have just begun – so he still has some time left to decide.
The International Consortium of Investigative Journalists has once again composed a magnificent piece of research. The so-called Pandora Papers expose the financial machinations of influential politicians and corporations. Thousands of Chinese are among the profiteers. Nico Beckert took a closer look at the data package and explains why Chinese companies, in particular, set up shell companies in offshore centers. Something particularly juicy: While President Xi Jinping is leading a great campaign against corruption, it becomes clear that China’s princelings are also more than happy to take advantage of the haziness of tax havens.
Taiwan is currently on everyone’s lips in the West: Above all, the ongoing shortage of semiconductors is raising questions about the status of the small island. Amelie Richter shows in her analysis how the European Union is trying to find its own way in this relationship with Taiwan – and is getting tangled up between title disputes and loyalty among its members.
America is also in the process of reorganizing itself under Joe Biden. But those who had dreamed that tensions in China-US relations over the trade conflict would finally relent, are now in for a rude awakening. Biden’s trade representative Katherine Tai presented the new US trade strategy for China on Monday. The tenor: trade barriers between the two nations will probably not be lifted for the time being.
I hope our latest issue provides you with many new insights!
Nearly 2,000 Chinese citizens appear in the largest data leak on shell companies in tax havens to date, according to data compiled by the International Consortium of Investigative Journalists (ICIJ). The People’s Republic ranks among the countries with the most beneficiaries, with 1,892 owners of shell companies. According to the data, a current politician and a former politician of the People’s Republic also maintain secret companies in offshore financial centers.
A total of 336 names of current and former politicians appear in the data leak. The package, dubbed the “Pandora Papers,” includes 11.9 million documents from 14 legal and financial companies that set up and sell shell companies. While it is not illegal to maintain such companies, they often serve unlawful purposes, such as tax avoidance, money laundering, or evading financial laws of respective home countries. Shell companies can also be used to hide assets overseas.
China’s strict financial and foreign exchange laws are a significant cause of the high number of shell companies owned by the Chinese outside their country. The purpose of these companies is to circumvent restrictions on trade, capital flows abroad and foreign investment in Chinese companies, according to The Wire China, which is involved in the analysis of the data as a cooperation partner of the ICIJ.
A notorious example of shell companies is Chinese internet corporations. Foreign companies are prohibited from investing in Chinese internet and tech companies (China.Table reported). Many well-known Chinese internet corporations bypassed this ban by establishing shell companies in offshore financial centers. These solicited investment from foreign backers and funneled it back to Chinese owners through shell companies. Such constructs – known as variable interest entities (VIEs) – enabled Silicon Valley venture capitalists, for example, to take early stakes in Chinese internet giants such as Alibaba, Baidu, Tencent, and ByteDance.
Chinese companies also use shell companies in offshore financial centers to go public abroad without violating Chinese laws that would otherwise make such IPOs impossible. Alibaba used such a construct for its IPO in New York in September 2014.
For a long time, the government in Beijing tacitly accepted this measure. Most recently, however, it became known that authorities sought to change the rules. In the future, Chinese companies would have to obtain regulatory approval to go public with overseas VIE organizations, even though the VIEs are not registered in China.
The Pandora Papers show that Alibaba’s executives installed numerous shell companies in offshore centers to direct takeovers of other companies, The Wire further reports. An adviser to Meituan’s founder was allegedly paid $56 million in Meituan stocks held in an offshore financial center trust – far from Beijing’s grasp.
State-owned companies such as Sinopec and the conglomerate CITIC have also set up various shell companies in offshore financial centers such as the Cayman Islands, Bermuda’s, or Cyprus. These companies borrow US dollars via this detour and invest in foreign raw material deposits and energy projects, for example.
There is a particular risk in the use of shell companies to take over Western companies: By hiding Chinese ownership of the company, security checks by US and EU authorities could be eluded. Through this, foreign producers of sensitive goods such as dual-use goods could be secretly bought up by the Chinese, reports The Wire China.
Private individuals are using shell companies to circumvent China’s foreign exchange laws. Since 2017, cash transfers of more than 50,000 yuan (equivalent to 6,600 euros) must be reported to the central bank. This further expanded capital controls. Previously, transfers of only 200,000 yuan were subject to reporting.
Acquiring assets overseas with foreign currency is also severely restricted. The obscurity of offshore financial centers benefits wealthy Chinese. The name of National People’s Congress delegate Qiya Feng appears in the Pandora Papers. She owns a shell company in the British Virgin Islands, which she used to invest money in US stocks.
But strict regulations and laws are seemingly not the sole reason for the high number of Chinese names in the Pandora Papers. In previous data leaks on offshore financial centers, such as the Panama Papers or the Offshore Leaks, numerous members of China’s high-ranking political families appeared – notably, the so-called princelings, sons, and daughters of high-ranking politicians.
Information from the “Offshore Leaks” and the “Panama Papers” showed that:
According to the German newspaper Süddeutsche Zeitung, these “princelings”, as well as members of the Politburo Standing Committee and some members of the People’s Congress, hid parts of their assets in tax havens with the help of shell companies. More than 21,000 such companies could be attributed to the Chinese at the time.
How many of the shell companies in the latest leak belong to members of the Chinese political elite is not yet known. The People’s Republic strictly censored all mention of “Panama Papers” and “Offshore Leaks” even though Xi Jinping himself had already pushed the fight against corruption at that time.
Be it the Indo-Pacific strategy of the European Union or the diplomatic dispute between Lithuania and Beijing, Taiwan has been making the headlines recently and as an item on the agenda in Brussels in recent months. This month, the European Parliament wants to raise the pressure on the EU Commission to take actual measures: For the first time, the EU Parliament will vote on a stand-alone report on relations with Taipei. It is highly likely to receive a majority in the plenum – and that won’t go down particularly well in Beijing.
The European Parliament calls for a significant upgrading of relations with Taiwan: In addition to the demand for closer partnerships regarding electric vehicles and semiconductor technology as well as increased scientific collaboration within the framework of the EU’s Horizon Europe program, the report contains two subjects that will see China fuming: MEPs recommend the European Commission to prepare an impact assessment for a bilateral investment agreement with Taiwan. The report also suggests changing the name of the European Economic and Trade Office (EETO) in Taipei to the European Union Office in Taiwan.
The Taiwan Strait and the South China Sea are being viewed with growing concern, said Dietmar Köster, a member of the European Parliament for the Social Democratic Party (SPD), at a press briefing on Monday. A military confrontation there must be prevented urgently, said the foreign policy expert. CDU politician Michael Gahler was more explicit: China’s policy in the region does not seek to maintain the status quo but is revisionist. Gahler is the chairman of the European Parliament’s Taiwan friendship group. His demand: China’s behavior must be countered by “standing up to it and speaking out.”
The growing pressure in the European Parliament and among the public did not go unnoticed in the EU Commission, Green MEP Reinhard Bütikofer tells China.Table. The Trade Committee, too, was particularly displeased that the Brussels authority had not yet put preparations for a bilateral investment agreement with Taiwan on the agenda.
The European Parliament tends to position itself more radical than the EU Commission and the EU Council, in which the member countries are represented. In foreign and security policy, the Parliament has a more advisory role. However, if the report on Taiwan is adopted by the EU Parliament, the Commission is obliged to accept or reject it within three months. In the latter, the EU Commission would have to explain its reasoning – which would then be difficult to justify given the increasing mentioning of Taiwan, including in the official communication of the Brussels authority.
Taipei’s representation in Brussels is promoting an agreement: This could give European investors peace of mind and greater protections when investing in Taiwan, ambassador Ming-Yen Tsai told China.Table. It would also promote the diversification of European supply chains. Tsai expressed that the representation welcomes the commitment, especially from the European Parliament. “We believe it’s time to start the preparation for launching negotiations with Taiwan, including the scoping exercise, impact assessment, and public consultation,” Tsai stressed.
Before the EU Commission can draft an impact assessment for a bilateral agreement or the renaming of the EU office in Taiwan, it first needs to find substantial support among member nations – and this is where opinions are currently divided. While the small EU state of Lithuania has openly traded blows with Beijing, other countries are reacting more cautiously and only carefully discuss closer ties with Taiwan.
The background is a name dispute in Vilnius: Lithuania’s government had allowed the opening of a “Taiwanese representation” in its capital. Beijing reacted furiously (China.Table reported) withdrawing its ambassador from the Baltic country, expelling the Lithuanian ambassador from China, and most recently, the suspension of all cargo traffic to Lithuania via rail.
While the MEPs supported Lithuania’s position, the governments in the EU capitals had a somewhat different opinion: While they criticized China’s economic blackmail of Lithuania, they did not display clear support for the position of its fellow EU member. Something similar could already be observed in the dispute over the visit of the Czech Senate chairman, Miloš Vystrčil, to the Taiwanese parliament. At the time, Beijing threatened the Czech Republic with a “high price to pay” for the visit – but other EU members showed little support for Prague.
At the beginning of September, Slovenia’s Prime Minister Janez Janša wrote a letter to other EU leaders calling on them to back Vilnius in its feud with China. Slovenia currently holds the EU presidency. However, there wasn’t much response to his request. Lithuania at least received transatlantic encouragement: The US government’s National Security Advisor Jake Sullivan pledged Washington’s support for Lithuania’s Prime Minister Ingrida Šimonytė.
Diplomatic restraint on the part of the Europeans towards Taipei was also displayed in the matter of Covid vaccines: Only four Central and Eastern European EU (CEEC) countries – Lithuania, Poland, Slovakia, and the Czech Republic – donated vaccines to the island. In response, Taipei plans to send a 65-member delegation in October to promote its investment in CEEC. Poland donated about 400,000 doses, but immediately reaffirmed its commitment to the “One-China-Policy.”
When it comes to Taiwan, not only disputes over the names of trade missions require close attention. Brussels and Beijing use different names and have different views on the matter, as was recently made clear in a video call between EU Foreign Affairs Commissioner Josep Borrell and China’s Foreign Minister Wang Yi: Wang announced, according to state media, that Borrell had stated that the EU would adhere to the “One-China principle”. This considers Taiwan as a rogue province that legally belongs to China and must be reunified.
The EU, in turn, spoke in its statement of the continued application of the “One-China-Policy”. This does not consider any formal diplomatic contacts with Taiwan; the central government in Beijing is recognized as China’s sole government. However, nothing prevents the establishment of trade missions or bilateral trade agreements. After all, none of the offices is an embassy, nor does the opening of a representation imply recognition of Taiwan as a sovereign state.
Incidentally, a bilateral investment agreement would not be an act of charity on the part of the Europeans. Quite the opposite: Not least, the global chip shortage has made the EU’s dependence on Taiwan clear. The development of an investment partnership would open up important options. Last year, according to the Taipei office in Brussels, the volume of trade between the 27 EU states and Taiwan amounted to $51.9 billion, while the EU imported goods worth $22.9 billion from Taiwan in 2020, according to the data. The European Union currently is the largest investor in Taiwan.
The production of semiconductors in particular begins to become a highly political issue. China had deployed a record number of fighter jets to Taiwan’s Air Defense Identification Zone (ADIZ) over the weekend (China.Table reported). On Monday, Taipei now warned that peace in the Taiwan Strait was crucial to ensuring a steady supply of chips, according to a report by Bloomberg.
Taiwan’s Minister of Economic Affairs Wang Mei-Hua made it clear that Taiwan had helped foster a chip manufacturing ecosystem for more than three decades against the backdrop of globalization. “The global community should take Taiwan’s security more seriously, so Taiwan can continue to provide stable service to everyone and be a very good partner to everyone.” the minister warned.
According to Bloomberg, Taiwan Semiconductor Manufacturing Co (TSMC) has a 53 percent share of the contract chip market – fueling concerns that any instability in the Taiwan Strait could disrupt supplies. The high dependence on TSMC and its local suppliers has prompted the EU Commission and governments of the US, Japan, and also the People’s Republic to bolster their domestic chip industries. To this end, EU Commission President Ursula von der Leyen announced an own EU chip law in her State of the European Union speech, which, among other things, is intended to significantly increase semiconductor research and production capacities in the EU (China.Table reported).
The current state of relations between the EU and Taiwan thus offers plenty to talk about: The so-called “New European Chips Act” offers opportunities for cooperation – but it could also unleash new competitive dynamics. The Indo-Pacific Strategy also offers a solid framework for extending economic relations. However, overly vocal commitments to Taiwan by EU governments and the EU Commission are not to be expected.
According to Green politician Bütikofer, precisely such cooperation on semiconductors could now be used to “re-frame” relations with Taiwan. For example, one could talk about Taiwan’s contribution to resilient supply chains, Bütikofer told China.Table. This would also signal to Beijing that there was no intention of isolation, but that new approaches were being sought.
The European Parliament will in all likelihood vote on the Taiwan report during the part-session week in the second half of October. A reaction from Beijing is naturally expected not long after. The vote on the paper in the relevant Foreign Affairs Committee and, more recently, the publication of the EU’s Indo-Pacific strategy have already resulted in brisk warnings from party headquarters: the EU should not “play with fire on the Taiwan question”, state newspaper Global Times headlined in an opinion piece last week.
All eyes are fixed on the dark side of China. We have been here before. Starting with the Asian financial crisis of the late 1990s and continuing through the dot-com recession of the early 2000s and the global financial crisis of 2008-09, China was invariably portrayed as the next to fall. Yet time and again, the Chinese economy defied gloomy predictions with a resilience that took most observers by surprise.
Count me among the few who were not surprised that past alarms turned out to be false. But count me in when it comes to sensing that this time feels different.
Contrary to most, however, I do not think Evergrande Group is the problem, or even the catalytic tipping point. Yes, China’s second-largest property developer is in potentially fatal trouble. And yes, its debt overhang of some $300 billion poses broader risks to the Chinese financial system, with potential knock-on effects in global markets. But the magnitude of those ripple effects is likely to be far less than those who loudly proclaim that Evergrande is China’s Lehman Brothers, suggesting that another “Minsky Moment” may well be at hand.
Three considerations argue to the contrary. First, the Chinese government has ample resources to backstop Evergrande loan defaults and ring-fence potential spillovers to other assets and markets. With some $7.5 trillion in domestic saving and another $3 trillion in foreign exchange reserves, China has more than enough capacity to absorb a worst-case Evergrande implosion; recent large liquidity injections by the People’s Bank of China underscore the point.
Second, Evergrande is not a classic “black swan” crisis, but rather a conscious and deliberate consequence of Chinese policy aimed at deleveraging, de-risking, and preserving financial stability. In particular, China has made good progress reducing shadow banking activity in recent years, thereby limiting the potential for deleveraging contagion to infect other segments of its financial markets. Unlike Lehman and its devastating collateral damage, the Evergrande problem hasn’t blindsided Chinese policymakers.
Third, risks to the real economy, which has entered a temporary soft patch, are limited. The demand side of the Chinese property market is well-supported by the ongoing migration of rural workers to cities. This is very different from the collapse of speculative housing bubbles in other countries, like Japan and the United States, where supply overhangs were unsupported by demand. While the urban share of the Chinese population has now risen slightly above 60%, there is still plenty of upside until it reaches the 80-85% threshold typical of more advanced economies. Notwithstanding recent accounts of shrinking cities – reminiscent of earlier false alarms over a profusion of ghost cities – underlying demand for urban shelter remains firm, limiting downside risks to the overall economy, even in the face of an Evergrande failure
China’s most serious problems are less about Evergrande and more about a major rethinking of its growth model. Initially, I worried about a regulatory clampdown, writing in late July that the new measures took dead aim at China’s internet platform companies, threatening to stifle the “animal spirits” in some of the economy’s most dynamic sectors, such as fintech, video gaming, online music, ridesharing, private tutoring, and takeaway, delivery, and lifestyle services.
That was then. Now, the Chinese government has doubled down, with President Xi Jinping throwing the full force of his power into a “common prosperity” campaign aimed at addressing inequalities of income and wealth. Moreover, the regulatory net has been broadened, not just to ban cryptocurrencies, but also to become an instrument of social engineering, with the government adding e-cigarettes, business drinking, and celebrity fan culture to its ever-lengthening list of bad social habits.
All this only compounds the concerns I raised two months ago. The new dual thrust of Chinese policy – redistribution plus re-regulation – strikes at the heart of the market-based “reform and opening up” that have underpinned China’s growth miracle since the days of Deng Xiaoping in the 1980s. It will subdue the entrepreneurial activity that has been so important in powering China’s dynamic private sector, with lasting consequences for the next, innovations-driven, phase of Chinese economic development. Without animal spirits, the case for indigenous innovation is in tatters
With Evergrande blowing up in the aftermath of this sea change in Chinese policy, financial markets, understandably, have reacted sharply. The government has been quick to counter the backlash. Vice Premier Liu He, China’s leading architect of economic strategy and a truly outstanding macro thinker, was quick to reaffirm the government’s unwavering support for private enterprise. Capital markets regulators have likewise stressed further “opening up” via new connectivity initiatives between onshore and offshore markets. Other regulators have reaffirmed China’s steadfast intention to stay the course. Perhaps they doth protest too much?
Of course, on one level, who wouldn’t want common prosperity? US President Joe Biden’s $3.5 trillion “Build Back Better” agenda smacks of many of the same objectives. Tackling inequality and a social agenda at the same time is a big deal for any country. It is not only the subject of intense debate in Washington but also bears critically on China’s prospects.
The problem for China is that its new approach runs counter to the thrust of many of its most powerful economic trends of the past four decades: entrepreneurial activity, a thriving start-up culture, private-sector dynamism, and innovation. What I hear now from China is denial – siloed arguments that address each issue in isolation. Redistribution is discussed separately from the impact of new regulations. And there is also a siloed approach to defending regulatory actions themselves – case-by-case arguments for strengthening oversight of internet platform companies, reducing social anxiety among stressed-out young people, and ensuring data security
As a macro practitioner, I was always taught to consider the combined effects of major developments. Evergrande will pass. Common prosperity is here to stay. A regulatory clampdown, in conjunction with a push to redistribute income and wealth, rewinds the movie of the Chinese miracle. By failing to connect the dots, China’s leaders risk a dangerous miscalculation.
Stephen S. Roach, a faculty member at Yale University and former chairman of Morgan Stanley Asia, is the author of Unbalanced: The Codependency of America and China
Copyright: Project Syndicate, 2021.
www.project-syndicate.org
Heavy is the head that wears the crown. This boy has to decide: The obligatory flags for the national holiday, or rather a colorful wooden slingshot? The Golden Week holidays have just begun – so he still has some time left to decide.
