Sonja Peterson and Malte Winkler: uniform CO2 prices in the EU and China
Dear reader,
“If we have to defend ourselves to the last day, we will defend ourselves to the last day,” Taiwan’s Foreign Minister Joseph Wu warned Beijing last week. Wu accused China of relying on both reconciliation attempts and military intimidation – sending “contradictory signals”.
The inhabitants of Taiwan are not only used to rhetorical saber-rattling around their homeland, China repeatedly sends jets into the airspace of the offshore island republic. However, the military aircraft the People’s Republic has recently sent towards Taiwan is making the people there nervous. Felix Lee analyses the situation and the reasons for Beijing’s aggressive actions, in which the US also plays a role.
Influences from the United States also have implications for Asia’s regional financial safety net: Frank Sieren explains the new changes within the Chiang Mai Initiative Multilateralisation (CMIM), which aims to deal with short-term regional liquidity problems without having to immediately call on the US-dominated International Monetary Fund (IMF) for help.
Gregor Koppenburg and Jörn Petring introduce Anta, a sportswear manufacturer that is still little known in the West. While the industry giants Nike and Adidas have to fight boycotts because of the debate about human rights violations in Xinjiang, Anta has a clear strategy: patriotism – and a clear commitment to cotton from the region.
The people of Taiwan are actually used toprovocations from mainland China. In recent years, military aircraft from the People’s Republic have repeatedly intruded into the airspace of the island with its 24 million inhabitants, and ships from the Chinese mainland have come strikingly close to islands that Taiwan controls. Apart from notes of protest, the government in Taipei remained calm.
But what military aircraft Beijing has sent toward the offshore island republic in recent days is now making it nervous after all. On Monday alone, a record 25 military aircraft violated Taiwan’s air surveillance zone, the Defense Ministry in Taipei reported. After a similar maneuver by at least ten fighter jets the week before, Taiwan’s Foreign Minister Joseph Wu warned that the island would defend itself “to the last day”. If necessary, war would be waged. And US Secretary of State Antony Blinken also warns of China’s “increasingly aggressive actions”.
Is it the usual saber-rattling? Or is the conflict over Taiwan, which the communist leadership in Beijing regards as an inseparable part of China, coming to a dangerous head? Is war possibly looming?
One reason for Beijing’s aggressive actions is the new guidelines that the US has issued for contacts with the government in Taiwan. It is part of the so-called Strategic Competition Act, a piece of legislation that explicitly opposes the leadership in Beijing and for which Democrats and Republicans in Congress plan to vote in rare bipartisan unity.
A provocation for China
This bill not only requires the US Secretary of State to publish annually a list of all Chinese state-owned enterprises that have profited from intellectual property theft and thus harmed the US. It also obliges the US government to investigate reports of human rights violations in the Chinese region of Xinjiang – and provides for greater US support for Taiwan.
For the People’s Republic, this is a provocation. The leadership in Beijing regards Taiwan as an inseparable part of China and does not recognize its democratically elected government. China’s President Xi Jinping has repeatedly stressed that a “unification” of the two sides cannot be postponed indefinitely. China’s leaders also angrily point out that when the US established diplomatic relations with Taiwan in 1979, it committed itself to maintaining only cultural, economic, and unofficial relations. This dogma is now being broken with the new law.
The US State Department, on the other hand, succinctly states that the new guidelines are a “liberalisation of the recommendations for action” for contacts between American government agencies and Taiwan. The new law does not represent a break with the one-China policy demanded by Beijing, according to which Taiwan remains part of China. The recommended actions would merely encourage dialogue “that reflects our growing unofficial relationship,” he said. “The guidance underscores that Taiwan isa vibrant democracy and an important security and economic partner that is also a force for good in the international community,” is the State Department‘s reading. In fact, the US pledged defensive assistance to Taiwan long ago but has so far left open how far it would go in the event of an attack by China.
At the same time, the rivalry between China and the US as a whole has become the central paradigm for both sides in recent years. Even in the trade conflict sparked by Donald Trump, the US was by no means only concerned with trade issues but also with geopolitical ones. This policy is now being continued by Trump’s successor, Joe Biden. In the course of the strategic rivalry, the Taiwan issue is also coming to the fore.
Recently, a senior US military official warned that China might accelerate its timetable for conquering Taiwan. There was evidence that the risks had increased, Admiral Philip Davidson, senior US commander in the Asia-Pacific region, told a Senate committee in March. “The threat is obvious in this decade – indeed, in the next six years.” Days later, Davidson’s likely successor, John Aquilino, would not commit to a specific time frame but told senators at a hearing for his confirmation process, “In my opinion, the problem is closer to us than most think.”
Beijing is arming – but so is Taipei
What worries them: Beijing has been vigorously rearming its military for years, and in 2021 the increase in the defense budget will again be nearly seven percent. China’s navy is already the largest in the world in terms of numbers. Nevertheless, the shipyards in Hainan in southern China continue to work non-stop in three shifts, seven days a week.
At the same time, however, Taiwan is also arming itself. The island republic already has a variety of anti-ship missiles, including the US-made Harpoon missile, rocket launchers, and small submarines, Sidharth Kaushal, a naval expert at the Royal United Services Institute (RUSI) in London, tells CNN. Together, these could make a People’s Liberation Army trip across the Taiwan Strait “very risky and thin out Chinese forces before any landing”.At the same time, Taiwan has begun building eight of its own state-of-the-art submarines.
While it ultimately depends on the US military to prevent an invasion of Taiwan by the People’s Liberation Army, Timothy Heath, a defense expert at the RAND Corp think tank in Washington, also said on CNN. “Without a US intervention, China will find a way to destroy the submarines,” Heath said. At the same time, he points out that China’s leader Xi is calculating and very cautious. Carl Schuster, an analyst at Hawaii Pacific University and a former Navy captain, goes even further, estimating that Taiwan’s new submarines could prevent China from attacking for the next 20 years.
More independence from the West through more regional financial aid – since last week, the changes that have been planned for a year within the Chiang Mai Initiative Multilateralisation(CMIM), part of the Chiang Mai Initiative (CMI), have been in force. This is a multilateral currency swap arrangement signed by the ten ASEAN countries plus the People’s Republic of China (including Hong Kong), Japan, and South Korea. Its goal is to deal with short-term regional liquidity problems without having to immediately seek help from the International Monetary Fund (IMF), in which the US dominates.
The new arrangements will further institutionalize the use of local currencies in addition to the US dollar. The CMIM will increase the amount of money not tied to the IMF that participating nations can borrow from 30 to 40 percent. The limit was originally set at 20 percent in 2014, according to the report, which could South Korea now, for example, claim up to $15.36 billion independent of IMF assistance, in a sense, as Asian Neighborhood Assistance.
Politically explosive: US-affiliated states Japan and Korea voted in favor
Analysts believe the update could weaken the use of the US dollar in Asia in the long run and reduce emerging Asia’s dependence on the US economy. “Given that the region is still heavily dependent on the US dollar, excessive dollar monetary easing policies could weaken local currencies, while economies whose foreign exchange reserves are mainly made up of US dollars could also experience depreciation,” said Xi Junyang, a professor at Shanghai University of Finance and Economics. By the latter, Xi meant China – because the People’s Republic, along with Japan, is the US’s largest creditor.
The countries concerned had already agreed last year to update the regional financial safety net. Among the reasons they gave was that the COVID-19 pandemic had increased the need for cooperation and that strengthening financial stability in the Asian economic area needed to be promoted.
Politically interesting is that even countries like South Korea and Japan, which are politically closest to the US in Asia and have large contingents of US troops in the country, agree to such a move just at the time when President Joe Biden’s administration wants to re-establish itself politically in Asia.
More power for the yuan
The update has another important significance for Beijing: The Chinese renminbi will be further strengthened in the region. The RCEP free trade agreement, which the ASEAN states signed last year under the leadership of the People’s Republic, was already a milestone in this regard. Trade agreements concluded within the RCEP – the world’s largest free trade zone – can designate the yuan as the transaction currency.
Beijing has long been angered by US dominance of the IMF, which China sees as distorting the global balance of power. At the height of the Asian financial crisis in 1997, Japanese authorities had already proposed an Asian Monetary Fund to serve as a regional version of the IMF. However, this idea has not been implemented to date after strong opposition from the United States due to cosmetic changes. To this day, the United States has by far the most voting rights in the IMF: 17.4 percent. China, with 6.41 percent, has less than Japan and only slightly more than Germany with 5.6 percent.
China already has a share in the world economy of 18.3 percent, while the US share is 24 percent – so China should actually have at least twice that share of voting rights.
Beijing creates alternatives
The Chiang Mai Initiative was launched in 2000 in response to the Asian financial crisis of 1997/98. At that time, Asian countries such as Thailand and South Korea had borrowed heavily internationally in US dollars but had almost only revenues in their national currencies.
Due to mismanagement in the countries and especially US hedge funds that started betting against the countries by dumping their local currency and their stocks, the economies of the Asian countries collapsed and almost dragged China into the abyss.
They were then forced by the IMF to open their markets to Western investors, who took advantage of their weakness to in turn make bargains and buy into Asian firms. This policy has been deeply etched into the collective memory in Asia – the CMIM self-help fund aims to prevent this from happening again.
Since its inception, the CMIM has undergone two major rounds of revisions. Following the 2008 global financial crisis, a pool of foreign exchange reserves totaling $120 billion was created in 2010. The pool was expanded to $240 billion in 2012 and is composed of commitments of $192 billion from China, Japan, and South Korea and $48 billion from the ten ASEAN countries. The amount available to countries is determined depending on the size of each country’s contribution.
China wants to establish Petroyuan
But the biggest push toward Asia’s financial emancipation from the US came a few years later: the creation of the Asian Infrastructure Investment Bank (AIIB) in June 2015. It was the first creation of a new World Bank-style global institution since World War II. And the first global institution to emanate from China. More than 100 countries are now members of the bank, including Germany.
Beijing knows that only if the yuan emancipatesitself from the US dollar it can become stronger internationally and perhaps one day establish itself as a new reserve currency in which, for example, the price of oil or gold is expressed, as is the case today with the US dollar.
Beijing wants to establish a Petroyuan in the next few years to allow oil transactions to be settled in its currency. Saudi Arabia’s oil company Saudi Aramco – the world’s most valuable listed company – has already announced that it is considering a bond issue in yuan.
However, the yuan still lacks full convertibility. The Chinese national currency is not freely and indefinitely exchangeable.Adalbert Winkler, an economist at the Frankfurt School of Finance and Management, explains that the fact that the Chinese central bank is one of the largest creditors of the USA also speaks against a rapid internationalization. “The strength of the Chinese currency depends precisely on the US dollar being strong, and the Chinese now face a similar problem in terms of financial policy as Germany did in the early 1970s, namely that they first have to break away from the dollar before they can even think of wanting to play an independent international role as a currency.” So it will be a long time before the yuan plays on a par with the US dollar. But strengthening the CMIM is an important step in that direction.
ASEAN
Finance
Geopolitics
Anta – the patriotic sports outfitter
Following the calls for boycotts by the Chinese media, Adidas and Nike are worried about their sales in China. There is much to suggest that the calls for boycotts will only last for a very short time, if at all, but the situation does show how thin the ice can be on which foreign companies operate in the Chinese market.
The beneficiary of the debate would like to be Anta Sports. The sportswear manufacturer is little known in the West. This is not surprising, because Anta Sports makes its main profit in China. For 2020, the group reported annual sales of the equivalent of about €4.5 billion. This puts Anta behind Puma and far from industry giants Nike and Adidas, which dominate the sector with €31.5 billion (Nike) and just under €20 billion (Adidas).
Although both Adidas and Nike recorded sales declines for 2020, the major exception in both cases was China, where both groups enjoyed double-digit growth rates. Anta also lags behind Nike and Adidas in terms of sales on the domestic market.
Anta Sports strategy is patriotism
When it comes to the issue of camps and human rights in Xinjiang, Anta Sports has a clear strategy: patriotism. First came a message on the Chinese service Weibo: “We have bought and processed cotton from China, including the Xinjiang region, and we will continue to do so,” it reported. The Fila brand, whose China business is run by Anta, said similar things.
Action followed shortly after. Anta Sports announced that it wouldwithdraw from the Better Cotton Initiative, the institution that had previously revoked the license of cotton from Xinjiang because of possible human rights violations. The result could not have been better for Anta: Its own stock price rose, while those of Nike and Adidas fell.
This is not the first time that Anta Sports has enjoyed advantages due to its proximity to Beijing. It is particularly noticeable when State and Party leader Xi Jinping inspects the sites for the 2022 Winter Olympics. On one such site visit in 2017, Xi wore a down jacket with an Anta insignia. Then in January this year, he wore a parka from Anta subsidiary Arc’teryx, while his delegation largely flaunted Anta-branded coats. This change is both a symbol of Beijing’s support for Anta and of the fact that China’s largest sports manufacturer is in the process of internationalizing.
Arc’teryx has been part of Anta Group since 2019. The purchase of the Canadian manufacturer of winter clothing was part of the takeover of the Finnish sports outfitter Amer Sports, to which Arc’teryx belonged, and also brought Anta some other well-known international brands such as the tennis outfitter Wilson. It is commonly seen as an attempt to challenge the dominance of Nike and Adidas internationally as well.
Internationalization difficult for Anta Sports
Celebrating international success is not easy for Chinese sports brands. Anta Sports was only founded in 1991 and spent the longest period of its existence undercutting the competition from abroad in terms of price. Consequently, shifting to a premium and lifestyle brand is difficult. Attempting to simply open stores directly internationally, Chinese industry competitor Li-Ning had already failed badly.
But Anta celebrates strategic successes time and again. For example, the brand has succeeded in attracting international stars. Among others, basketball star Klay Thompsonwas won over to represent the brand in the American professional basketball league NBA. It could have been a breakthrough on the international market.
But Anta has also previously made it clear where his priorities lie when it comes to working with the NBA. When the Houston Rockets’ general manager took to Twitter in 2019 to approve of the protests in Hong Kong, the company immediately responded by terminating the contract. The response on Weibo at the time was that Anta rejected any actions that went against Chinese interests and could have come directly from party headquarters.
Official supplier of the Olympic Games
Also in 2019, Anta signed a deal with the International Olympic Committee to become the official supplier of the Olympics. It was a move Anta had hoped would bring positive PR. But the IOC faces criticism over the human rights situation in Xinjiang. Calls for a boycott of the 2022 Winter Olympics in Beijing are growing louder, and the IOC is desperately trying to maintain its political neutrality. “We are not an overarching world government that can solve or even address problems for which the UN Security Council, the G7, or the G20 have no solution either,” says IOC President Thomas Bach.
Anta’s strategy of fully toeing the party line could therefore become a major problem for the brand on the international market because Western buyers are also known to be not at a loss for boycotts. And if Anta pulls out of every contract because someone said something critical about China, the attack on Adidas and Nike will be difficult. Gregor Koppenburg/Jörn Petring
On Tuesday, Beijing warned34 internet platform companies against continuing to engage in prohibited practices that restrict competition. The State Administration for Market Regulation (SAMR) met with the companies, including Tencent, ByteDance, and JD.com, and ordered them to conduct internal inspections within a month. Practices such as excluding merchants who also offer their goods on other platforms are to be stopped. Persistent violations of competition practices could face severe penalties, Bloomberg reports. Only on Saturday, the competition authority had imposed a record fine of €2.3 billion against Alibaba.
The agency also cited abuses such as acquisitions that drive smaller competitors out of the market, as well as the massive use of financial resources to secure market share. Likewise, companies have to deal with product counterfeiting, data protection issues and leaks, and tax evasion through trading platforms, Bloomberg reports referring to the competition authority. nib
ByteDance
Domestic policy of the CP China
FDP: deepening relations with China
The FDP wants to deepeneconomic and civil society relations with China. At the same time, the People’s Republic “exposes itself to accusations of genocide through the internment and forced sterilization of members of ethnic minorities”, writes the FDP in its draft program for the Bundestag elections in September 2021, which was presented yesterday. The party is striving for closer exchange with China, which must, however, be based on international rules. The EU-China Investment Agreement (CAI) is a first step towards market opening but should be supplemented with further assurances on mutual market access and legal certainty “before the agreement can be ratified”. The FDP also sees the lifting of Beijing’s counter-sanctions against European individuals and organizations as necessary for this (China.Table reported).
The FDP wants to address human rights violations “emphatically within the framework of the EU-China dialogue”. The integration of Taiwan into international organizations is supported by the party “as far as this can be done below the threshold of a state recognition”. A “unification of China and Taiwan can only take place in peaceful consensus”, writes the FDP. The Hong Kong Security Law (China.Table reported) “condemns” the FDP and demands “person-related sanctions against those responsible”. Germany must demand together with international partners the adherence to the principle “one country, two systems“. The FDP wants to “strategically develop” NATO and emphasizes here, above all, the handling of China and the cooperation with the “democratic partner states” of the Indo-Pacific region. China is to be involved in negotiations on nuclear disarmament.
Under the heading of academic freedom, the FDP criticizes the political influence of the Chinese government on the work of the Confucius Institutes. It should be dealt with, and state co-financing of the institutes should be ended. nib
Domestic policy of the CP China
Geopolitics
Opinion
Uniform CO2 prices in the EU and China
By Malte Winkler
A broad and uniform pricing of greenhouse gas (GHG) emissions is a core element of an effective and efficient global climate policy. A major step has now been taken in this direction: After a long planning phase, a national emissions trading system (ETS) will be launched in China on February 1, 2021. Although it will initially only cover the electricity sector, it will put a price on 3500 million tons of CO2, replacing the EU ETS, under which just under 2000 million tons of CO2Eq are regulated, as the largest ETS in the world. The share of GHG emissions that are priced globally makes a jump from about 16 percent to 22 percent. In the future, the Chinese system will be expanded to include other sectors.
Great opportunities of the Chinese ETS
Therefore, the launch of the Chinese ETS is an important step for international efforts to combat climate change. It holds an even greater opportunity: If a common market for emission certificates between the Chinese and European ETS could be established, about ten percent of global GHG emissionswould already bepriced uniformly. An as yet unpublished study with IfW participation shows that under the given national emission targets (NDCs) in the framework of the Paris Agreement, such a link would already realize about two-thirds of the potential global efficiency gains that would be possible through a global CO2 price compared to purely national CO2price.
Such a link would be particularly attractive for Europe. Emission reductions are significantly cheaper in China, so the purchase of Chinese certificateswould leadto a lower certificate price and thus to savings for European companies in the ETS. According to IfW estimates, the EU allowance price in 2030 could be about 80 percent lower through a link to the Chinese ETS, and the economic costs of the EU ETS would be reduced by about 35 percent. In addition, the border adjustment for Chinese productscurrently under discussion in the EU Green Deal, which is intended to compensate for the shifting of emissions in the case of different strict climate policies, would become obsolete.
However, a number of hurdles would have to be overcome before such a link could be established. The road to a national Chinese ETS was already long: seven smaller pilot systems were announced in 2011, in which certificates were traded from 2013. The official launch of the national ETS in China took place at the end of 2017, but still without actual emissions trading. Now, on 01.02.2021, the system will come into force, the first trading period has been running since the beginning of this year.
Two similar systems in China and the EU
The design of the Chinese ETS is similar to that of the EU ETS, but there are also differences. Both ETSs cover the power sector and refineries, as well as emission-intensive industries (although the latter are added later in the Chinese ETS). Offsets, i.e., the crediting of emission reductions from sectors outside the ETS, are no longer provided for in the EU ETS from 2021, while installations in China can credit up to five percent of their emissions from so-called CCERs (China certified emissions reductions). While the EU sets an absolute amount as a cap, China aims to improve emissions intensity. This makes a link more difficult but does not rule it out.
Advantages and disadvantages for China
The EU is open to a common ETS. The aim of linking the EU ETS with other systems is set out in the relevant directive. A functioning link between the EU and Swiss ETS has been in place since 2020. The potential efficiency gains for the EU have already been mentioned. On the other hand, China could generate profits by selling allowances to the EU. However, there is a second counter-effect: The link to the EU ETS would result in a higher allowance price in China (in the IfW calculations, this rises by almost 30 percent in 2030), which would make Chinese products more expensive and thus worsen their international competitiveness. The advantage that China would have from a joint ETS would be significantly diminished or even turned into a negative one by this effect.
But there are solutions that make the common allowance market interesting for China as well: Limiting the amount of allowances traded between the two ETSs can increase the welfare gain in China compared to an unrestricted link. According to IfW calculations, halving the number of allowances traded between China and the EU doubles the welfare gain in China compared to an unrestricted allowance trade. The positive effects for the EU would be smaller (the EU ETS price would only fall by about 50 percent, the economic costs by just under 15 percent) but still significant.
Disadvantage of compensation payments
As a further option, compensation payments from the EU to China could be used to guarantee China additional profits. In this case, too, both partners benefit from the linking of the systems, even with relatively high payments. However, this raises a conflict of interest between the EU and China: While the EU would prefer unrestricted emissions trading (regardless of any compensation payments), China benefits more from a limitation of traded allowances than from compensation payments. However, a limited link implies overall efficiency losses, so that compensation payments would be preferable.
A unified position could also be difficult to find at the EU level: Individual member states benefit to a greater or lesser extent from the cheap certificates from China. While Germany, as a major exporting country, would clearly benefit from a common system, the situation is less tempting for many Eastern European states, for example. Intra-European compensation mechanisms are therefore likely to be necessary to develop a common European position.
Better than border adjustment
In addition to these conflicts of interest, numerous technical (such as the different handling of offsets and reduction targets) and political (such as the “circumvention” of national targets in the EU through “indulgence trade” with China) hurdles would also have to be overcome. It is to be hoped that this will succeed. For not only would the efficiency gains of a common market be enormous in the aggregate, it would also be a valuable stimulus for international efforts to reduce GHGs. For the EU, a harmonized climate policy with one of its most important trading partners would also significantly reduce the risk of carbon leakage. Studies have shown that this risk can be reduced by the border mechanisms now under discussion, but at a massive cost to the countries concerned; a common CO2price is always preferable. Moreover, it is becoming apparent that the practical problems of border adjustment dwarf those of linking ETSs. At best, the EU’s discussions on this will be a further incentive for China to come out in favor of the linking option. Either way, the EU should invest at least as much in linking the EU and China ETS as in border adjustment.
Sonja Peterson and Malte Winkler conduct research on climate economics at the Kiel Institute for the World Economy (IfW Kiel) and regularly advise national and international institutions.
Climate
EU
Sustainability
Dessert
Thick fog made for some beautiful photo moments yesterday in Nanchang, Jiangxi province.
Sonja Peterson and Malte Winkler: uniform CO2 prices in the EU and China
Dear reader,
“If we have to defend ourselves to the last day, we will defend ourselves to the last day,” Taiwan’s Foreign Minister Joseph Wu warned Beijing last week. Wu accused China of relying on both reconciliation attempts and military intimidation – sending “contradictory signals”.
The inhabitants of Taiwan are not only used to rhetorical saber-rattling around their homeland, China repeatedly sends jets into the airspace of the offshore island republic. However, the military aircraft the People’s Republic has recently sent towards Taiwan is making the people there nervous. Felix Lee analyses the situation and the reasons for Beijing’s aggressive actions, in which the US also plays a role.
Influences from the United States also have implications for Asia’s regional financial safety net: Frank Sieren explains the new changes within the Chiang Mai Initiative Multilateralisation (CMIM), which aims to deal with short-term regional liquidity problems without having to immediately call on the US-dominated International Monetary Fund (IMF) for help.
Gregor Koppenburg and Jörn Petring introduce Anta, a sportswear manufacturer that is still little known in the West. While the industry giants Nike and Adidas have to fight boycotts because of the debate about human rights violations in Xinjiang, Anta has a clear strategy: patriotism – and a clear commitment to cotton from the region.
The people of Taiwan are actually used toprovocations from mainland China. In recent years, military aircraft from the People’s Republic have repeatedly intruded into the airspace of the island with its 24 million inhabitants, and ships from the Chinese mainland have come strikingly close to islands that Taiwan controls. Apart from notes of protest, the government in Taipei remained calm.
But what military aircraft Beijing has sent toward the offshore island republic in recent days is now making it nervous after all. On Monday alone, a record 25 military aircraft violated Taiwan’s air surveillance zone, the Defense Ministry in Taipei reported. After a similar maneuver by at least ten fighter jets the week before, Taiwan’s Foreign Minister Joseph Wu warned that the island would defend itself “to the last day”. If necessary, war would be waged. And US Secretary of State Antony Blinken also warns of China’s “increasingly aggressive actions”.
Is it the usual saber-rattling? Or is the conflict over Taiwan, which the communist leadership in Beijing regards as an inseparable part of China, coming to a dangerous head? Is war possibly looming?
One reason for Beijing’s aggressive actions is the new guidelines that the US has issued for contacts with the government in Taiwan. It is part of the so-called Strategic Competition Act, a piece of legislation that explicitly opposes the leadership in Beijing and for which Democrats and Republicans in Congress plan to vote in rare bipartisan unity.
A provocation for China
This bill not only requires the US Secretary of State to publish annually a list of all Chinese state-owned enterprises that have profited from intellectual property theft and thus harmed the US. It also obliges the US government to investigate reports of human rights violations in the Chinese region of Xinjiang – and provides for greater US support for Taiwan.
For the People’s Republic, this is a provocation. The leadership in Beijing regards Taiwan as an inseparable part of China and does not recognize its democratically elected government. China’s President Xi Jinping has repeatedly stressed that a “unification” of the two sides cannot be postponed indefinitely. China’s leaders also angrily point out that when the US established diplomatic relations with Taiwan in 1979, it committed itself to maintaining only cultural, economic, and unofficial relations. This dogma is now being broken with the new law.
The US State Department, on the other hand, succinctly states that the new guidelines are a “liberalisation of the recommendations for action” for contacts between American government agencies and Taiwan. The new law does not represent a break with the one-China policy demanded by Beijing, according to which Taiwan remains part of China. The recommended actions would merely encourage dialogue “that reflects our growing unofficial relationship,” he said. “The guidance underscores that Taiwan isa vibrant democracy and an important security and economic partner that is also a force for good in the international community,” is the State Department‘s reading. In fact, the US pledged defensive assistance to Taiwan long ago but has so far left open how far it would go in the event of an attack by China.
At the same time, the rivalry between China and the US as a whole has become the central paradigm for both sides in recent years. Even in the trade conflict sparked by Donald Trump, the US was by no means only concerned with trade issues but also with geopolitical ones. This policy is now being continued by Trump’s successor, Joe Biden. In the course of the strategic rivalry, the Taiwan issue is also coming to the fore.
Recently, a senior US military official warned that China might accelerate its timetable for conquering Taiwan. There was evidence that the risks had increased, Admiral Philip Davidson, senior US commander in the Asia-Pacific region, told a Senate committee in March. “The threat is obvious in this decade – indeed, in the next six years.” Days later, Davidson’s likely successor, John Aquilino, would not commit to a specific time frame but told senators at a hearing for his confirmation process, “In my opinion, the problem is closer to us than most think.”
Beijing is arming – but so is Taipei
What worries them: Beijing has been vigorously rearming its military for years, and in 2021 the increase in the defense budget will again be nearly seven percent. China’s navy is already the largest in the world in terms of numbers. Nevertheless, the shipyards in Hainan in southern China continue to work non-stop in three shifts, seven days a week.
At the same time, however, Taiwan is also arming itself. The island republic already has a variety of anti-ship missiles, including the US-made Harpoon missile, rocket launchers, and small submarines, Sidharth Kaushal, a naval expert at the Royal United Services Institute (RUSI) in London, tells CNN. Together, these could make a People’s Liberation Army trip across the Taiwan Strait “very risky and thin out Chinese forces before any landing”.At the same time, Taiwan has begun building eight of its own state-of-the-art submarines.
While it ultimately depends on the US military to prevent an invasion of Taiwan by the People’s Liberation Army, Timothy Heath, a defense expert at the RAND Corp think tank in Washington, also said on CNN. “Without a US intervention, China will find a way to destroy the submarines,” Heath said. At the same time, he points out that China’s leader Xi is calculating and very cautious. Carl Schuster, an analyst at Hawaii Pacific University and a former Navy captain, goes even further, estimating that Taiwan’s new submarines could prevent China from attacking for the next 20 years.
More independence from the West through more regional financial aid – since last week, the changes that have been planned for a year within the Chiang Mai Initiative Multilateralisation(CMIM), part of the Chiang Mai Initiative (CMI), have been in force. This is a multilateral currency swap arrangement signed by the ten ASEAN countries plus the People’s Republic of China (including Hong Kong), Japan, and South Korea. Its goal is to deal with short-term regional liquidity problems without having to immediately seek help from the International Monetary Fund (IMF), in which the US dominates.
The new arrangements will further institutionalize the use of local currencies in addition to the US dollar. The CMIM will increase the amount of money not tied to the IMF that participating nations can borrow from 30 to 40 percent. The limit was originally set at 20 percent in 2014, according to the report, which could South Korea now, for example, claim up to $15.36 billion independent of IMF assistance, in a sense, as Asian Neighborhood Assistance.
Politically explosive: US-affiliated states Japan and Korea voted in favor
Analysts believe the update could weaken the use of the US dollar in Asia in the long run and reduce emerging Asia’s dependence on the US economy. “Given that the region is still heavily dependent on the US dollar, excessive dollar monetary easing policies could weaken local currencies, while economies whose foreign exchange reserves are mainly made up of US dollars could also experience depreciation,” said Xi Junyang, a professor at Shanghai University of Finance and Economics. By the latter, Xi meant China – because the People’s Republic, along with Japan, is the US’s largest creditor.
The countries concerned had already agreed last year to update the regional financial safety net. Among the reasons they gave was that the COVID-19 pandemic had increased the need for cooperation and that strengthening financial stability in the Asian economic area needed to be promoted.
Politically interesting is that even countries like South Korea and Japan, which are politically closest to the US in Asia and have large contingents of US troops in the country, agree to such a move just at the time when President Joe Biden’s administration wants to re-establish itself politically in Asia.
More power for the yuan
The update has another important significance for Beijing: The Chinese renminbi will be further strengthened in the region. The RCEP free trade agreement, which the ASEAN states signed last year under the leadership of the People’s Republic, was already a milestone in this regard. Trade agreements concluded within the RCEP – the world’s largest free trade zone – can designate the yuan as the transaction currency.
Beijing has long been angered by US dominance of the IMF, which China sees as distorting the global balance of power. At the height of the Asian financial crisis in 1997, Japanese authorities had already proposed an Asian Monetary Fund to serve as a regional version of the IMF. However, this idea has not been implemented to date after strong opposition from the United States due to cosmetic changes. To this day, the United States has by far the most voting rights in the IMF: 17.4 percent. China, with 6.41 percent, has less than Japan and only slightly more than Germany with 5.6 percent.
China already has a share in the world economy of 18.3 percent, while the US share is 24 percent – so China should actually have at least twice that share of voting rights.
Beijing creates alternatives
The Chiang Mai Initiative was launched in 2000 in response to the Asian financial crisis of 1997/98. At that time, Asian countries such as Thailand and South Korea had borrowed heavily internationally in US dollars but had almost only revenues in their national currencies.
Due to mismanagement in the countries and especially US hedge funds that started betting against the countries by dumping their local currency and their stocks, the economies of the Asian countries collapsed and almost dragged China into the abyss.
They were then forced by the IMF to open their markets to Western investors, who took advantage of their weakness to in turn make bargains and buy into Asian firms. This policy has been deeply etched into the collective memory in Asia – the CMIM self-help fund aims to prevent this from happening again.
Since its inception, the CMIM has undergone two major rounds of revisions. Following the 2008 global financial crisis, a pool of foreign exchange reserves totaling $120 billion was created in 2010. The pool was expanded to $240 billion in 2012 and is composed of commitments of $192 billion from China, Japan, and South Korea and $48 billion from the ten ASEAN countries. The amount available to countries is determined depending on the size of each country’s contribution.
China wants to establish Petroyuan
But the biggest push toward Asia’s financial emancipation from the US came a few years later: the creation of the Asian Infrastructure Investment Bank (AIIB) in June 2015. It was the first creation of a new World Bank-style global institution since World War II. And the first global institution to emanate from China. More than 100 countries are now members of the bank, including Germany.
Beijing knows that only if the yuan emancipatesitself from the US dollar it can become stronger internationally and perhaps one day establish itself as a new reserve currency in which, for example, the price of oil or gold is expressed, as is the case today with the US dollar.
Beijing wants to establish a Petroyuan in the next few years to allow oil transactions to be settled in its currency. Saudi Arabia’s oil company Saudi Aramco – the world’s most valuable listed company – has already announced that it is considering a bond issue in yuan.
However, the yuan still lacks full convertibility. The Chinese national currency is not freely and indefinitely exchangeable.Adalbert Winkler, an economist at the Frankfurt School of Finance and Management, explains that the fact that the Chinese central bank is one of the largest creditors of the USA also speaks against a rapid internationalization. “The strength of the Chinese currency depends precisely on the US dollar being strong, and the Chinese now face a similar problem in terms of financial policy as Germany did in the early 1970s, namely that they first have to break away from the dollar before they can even think of wanting to play an independent international role as a currency.” So it will be a long time before the yuan plays on a par with the US dollar. But strengthening the CMIM is an important step in that direction.
ASEAN
Finance
Geopolitics
Anta – the patriotic sports outfitter
Following the calls for boycotts by the Chinese media, Adidas and Nike are worried about their sales in China. There is much to suggest that the calls for boycotts will only last for a very short time, if at all, but the situation does show how thin the ice can be on which foreign companies operate in the Chinese market.
The beneficiary of the debate would like to be Anta Sports. The sportswear manufacturer is little known in the West. This is not surprising, because Anta Sports makes its main profit in China. For 2020, the group reported annual sales of the equivalent of about €4.5 billion. This puts Anta behind Puma and far from industry giants Nike and Adidas, which dominate the sector with €31.5 billion (Nike) and just under €20 billion (Adidas).
Although both Adidas and Nike recorded sales declines for 2020, the major exception in both cases was China, where both groups enjoyed double-digit growth rates. Anta also lags behind Nike and Adidas in terms of sales on the domestic market.
Anta Sports strategy is patriotism
When it comes to the issue of camps and human rights in Xinjiang, Anta Sports has a clear strategy: patriotism. First came a message on the Chinese service Weibo: “We have bought and processed cotton from China, including the Xinjiang region, and we will continue to do so,” it reported. The Fila brand, whose China business is run by Anta, said similar things.
Action followed shortly after. Anta Sports announced that it wouldwithdraw from the Better Cotton Initiative, the institution that had previously revoked the license of cotton from Xinjiang because of possible human rights violations. The result could not have been better for Anta: Its own stock price rose, while those of Nike and Adidas fell.
This is not the first time that Anta Sports has enjoyed advantages due to its proximity to Beijing. It is particularly noticeable when State and Party leader Xi Jinping inspects the sites for the 2022 Winter Olympics. On one such site visit in 2017, Xi wore a down jacket with an Anta insignia. Then in January this year, he wore a parka from Anta subsidiary Arc’teryx, while his delegation largely flaunted Anta-branded coats. This change is both a symbol of Beijing’s support for Anta and of the fact that China’s largest sports manufacturer is in the process of internationalizing.
Arc’teryx has been part of Anta Group since 2019. The purchase of the Canadian manufacturer of winter clothing was part of the takeover of the Finnish sports outfitter Amer Sports, to which Arc’teryx belonged, and also brought Anta some other well-known international brands such as the tennis outfitter Wilson. It is commonly seen as an attempt to challenge the dominance of Nike and Adidas internationally as well.
Internationalization difficult for Anta Sports
Celebrating international success is not easy for Chinese sports brands. Anta Sports was only founded in 1991 and spent the longest period of its existence undercutting the competition from abroad in terms of price. Consequently, shifting to a premium and lifestyle brand is difficult. Attempting to simply open stores directly internationally, Chinese industry competitor Li-Ning had already failed badly.
But Anta celebrates strategic successes time and again. For example, the brand has succeeded in attracting international stars. Among others, basketball star Klay Thompsonwas won over to represent the brand in the American professional basketball league NBA. It could have been a breakthrough on the international market.
But Anta has also previously made it clear where his priorities lie when it comes to working with the NBA. When the Houston Rockets’ general manager took to Twitter in 2019 to approve of the protests in Hong Kong, the company immediately responded by terminating the contract. The response on Weibo at the time was that Anta rejected any actions that went against Chinese interests and could have come directly from party headquarters.
Official supplier of the Olympic Games
Also in 2019, Anta signed a deal with the International Olympic Committee to become the official supplier of the Olympics. It was a move Anta had hoped would bring positive PR. But the IOC faces criticism over the human rights situation in Xinjiang. Calls for a boycott of the 2022 Winter Olympics in Beijing are growing louder, and the IOC is desperately trying to maintain its political neutrality. “We are not an overarching world government that can solve or even address problems for which the UN Security Council, the G7, or the G20 have no solution either,” says IOC President Thomas Bach.
Anta’s strategy of fully toeing the party line could therefore become a major problem for the brand on the international market because Western buyers are also known to be not at a loss for boycotts. And if Anta pulls out of every contract because someone said something critical about China, the attack on Adidas and Nike will be difficult. Gregor Koppenburg/Jörn Petring
On Tuesday, Beijing warned34 internet platform companies against continuing to engage in prohibited practices that restrict competition. The State Administration for Market Regulation (SAMR) met with the companies, including Tencent, ByteDance, and JD.com, and ordered them to conduct internal inspections within a month. Practices such as excluding merchants who also offer their goods on other platforms are to be stopped. Persistent violations of competition practices could face severe penalties, Bloomberg reports. Only on Saturday, the competition authority had imposed a record fine of €2.3 billion against Alibaba.
The agency also cited abuses such as acquisitions that drive smaller competitors out of the market, as well as the massive use of financial resources to secure market share. Likewise, companies have to deal with product counterfeiting, data protection issues and leaks, and tax evasion through trading platforms, Bloomberg reports referring to the competition authority. nib
ByteDance
Domestic policy of the CP China
FDP: deepening relations with China
The FDP wants to deepeneconomic and civil society relations with China. At the same time, the People’s Republic “exposes itself to accusations of genocide through the internment and forced sterilization of members of ethnic minorities”, writes the FDP in its draft program for the Bundestag elections in September 2021, which was presented yesterday. The party is striving for closer exchange with China, which must, however, be based on international rules. The EU-China Investment Agreement (CAI) is a first step towards market opening but should be supplemented with further assurances on mutual market access and legal certainty “before the agreement can be ratified”. The FDP also sees the lifting of Beijing’s counter-sanctions against European individuals and organizations as necessary for this (China.Table reported).
The FDP wants to address human rights violations “emphatically within the framework of the EU-China dialogue”. The integration of Taiwan into international organizations is supported by the party “as far as this can be done below the threshold of a state recognition”. A “unification of China and Taiwan can only take place in peaceful consensus”, writes the FDP. The Hong Kong Security Law (China.Table reported) “condemns” the FDP and demands “person-related sanctions against those responsible”. Germany must demand together with international partners the adherence to the principle “one country, two systems“. The FDP wants to “strategically develop” NATO and emphasizes here, above all, the handling of China and the cooperation with the “democratic partner states” of the Indo-Pacific region. China is to be involved in negotiations on nuclear disarmament.
Under the heading of academic freedom, the FDP criticizes the political influence of the Chinese government on the work of the Confucius Institutes. It should be dealt with, and state co-financing of the institutes should be ended. nib
Domestic policy of the CP China
Geopolitics
Opinion
Uniform CO2 prices in the EU and China
By Malte Winkler
A broad and uniform pricing of greenhouse gas (GHG) emissions is a core element of an effective and efficient global climate policy. A major step has now been taken in this direction: After a long planning phase, a national emissions trading system (ETS) will be launched in China on February 1, 2021. Although it will initially only cover the electricity sector, it will put a price on 3500 million tons of CO2, replacing the EU ETS, under which just under 2000 million tons of CO2Eq are regulated, as the largest ETS in the world. The share of GHG emissions that are priced globally makes a jump from about 16 percent to 22 percent. In the future, the Chinese system will be expanded to include other sectors.
Great opportunities of the Chinese ETS
Therefore, the launch of the Chinese ETS is an important step for international efforts to combat climate change. It holds an even greater opportunity: If a common market for emission certificates between the Chinese and European ETS could be established, about ten percent of global GHG emissionswould already bepriced uniformly. An as yet unpublished study with IfW participation shows that under the given national emission targets (NDCs) in the framework of the Paris Agreement, such a link would already realize about two-thirds of the potential global efficiency gains that would be possible through a global CO2 price compared to purely national CO2price.
Such a link would be particularly attractive for Europe. Emission reductions are significantly cheaper in China, so the purchase of Chinese certificateswould leadto a lower certificate price and thus to savings for European companies in the ETS. According to IfW estimates, the EU allowance price in 2030 could be about 80 percent lower through a link to the Chinese ETS, and the economic costs of the EU ETS would be reduced by about 35 percent. In addition, the border adjustment for Chinese productscurrently under discussion in the EU Green Deal, which is intended to compensate for the shifting of emissions in the case of different strict climate policies, would become obsolete.
However, a number of hurdles would have to be overcome before such a link could be established. The road to a national Chinese ETS was already long: seven smaller pilot systems were announced in 2011, in which certificates were traded from 2013. The official launch of the national ETS in China took place at the end of 2017, but still without actual emissions trading. Now, on 01.02.2021, the system will come into force, the first trading period has been running since the beginning of this year.
Two similar systems in China and the EU
The design of the Chinese ETS is similar to that of the EU ETS, but there are also differences. Both ETSs cover the power sector and refineries, as well as emission-intensive industries (although the latter are added later in the Chinese ETS). Offsets, i.e., the crediting of emission reductions from sectors outside the ETS, are no longer provided for in the EU ETS from 2021, while installations in China can credit up to five percent of their emissions from so-called CCERs (China certified emissions reductions). While the EU sets an absolute amount as a cap, China aims to improve emissions intensity. This makes a link more difficult but does not rule it out.
Advantages and disadvantages for China
The EU is open to a common ETS. The aim of linking the EU ETS with other systems is set out in the relevant directive. A functioning link between the EU and Swiss ETS has been in place since 2020. The potential efficiency gains for the EU have already been mentioned. On the other hand, China could generate profits by selling allowances to the EU. However, there is a second counter-effect: The link to the EU ETS would result in a higher allowance price in China (in the IfW calculations, this rises by almost 30 percent in 2030), which would make Chinese products more expensive and thus worsen their international competitiveness. The advantage that China would have from a joint ETS would be significantly diminished or even turned into a negative one by this effect.
But there are solutions that make the common allowance market interesting for China as well: Limiting the amount of allowances traded between the two ETSs can increase the welfare gain in China compared to an unrestricted link. According to IfW calculations, halving the number of allowances traded between China and the EU doubles the welfare gain in China compared to an unrestricted allowance trade. The positive effects for the EU would be smaller (the EU ETS price would only fall by about 50 percent, the economic costs by just under 15 percent) but still significant.
Disadvantage of compensation payments
As a further option, compensation payments from the EU to China could be used to guarantee China additional profits. In this case, too, both partners benefit from the linking of the systems, even with relatively high payments. However, this raises a conflict of interest between the EU and China: While the EU would prefer unrestricted emissions trading (regardless of any compensation payments), China benefits more from a limitation of traded allowances than from compensation payments. However, a limited link implies overall efficiency losses, so that compensation payments would be preferable.
A unified position could also be difficult to find at the EU level: Individual member states benefit to a greater or lesser extent from the cheap certificates from China. While Germany, as a major exporting country, would clearly benefit from a common system, the situation is less tempting for many Eastern European states, for example. Intra-European compensation mechanisms are therefore likely to be necessary to develop a common European position.
Better than border adjustment
In addition to these conflicts of interest, numerous technical (such as the different handling of offsets and reduction targets) and political (such as the “circumvention” of national targets in the EU through “indulgence trade” with China) hurdles would also have to be overcome. It is to be hoped that this will succeed. For not only would the efficiency gains of a common market be enormous in the aggregate, it would also be a valuable stimulus for international efforts to reduce GHGs. For the EU, a harmonized climate policy with one of its most important trading partners would also significantly reduce the risk of carbon leakage. Studies have shown that this risk can be reduced by the border mechanisms now under discussion, but at a massive cost to the countries concerned; a common CO2price is always preferable. Moreover, it is becoming apparent that the practical problems of border adjustment dwarf those of linking ETSs. At best, the EU’s discussions on this will be a further incentive for China to come out in favor of the linking option. Either way, the EU should invest at least as much in linking the EU and China ETS as in border adjustment.
Sonja Peterson and Malte Winkler conduct research on climate economics at the Kiel Institute for the World Economy (IfW Kiel) and regularly advise national and international institutions.
Climate
EU
Sustainability
Dessert
Thick fog made for some beautiful photo moments yesterday in Nanchang, Jiangxi province.
