The tale of Wu Ying, and what it means for China

Posted by conorbjorn on 12/03/12
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First arrested in 2007, the story of Wu Ying, a millionaire Chinese businesswoman sentenced to death for financial fraud has captivated the nation. The rejection of her final appeal earlier this year led to an outpouring of sympathy among the Chinese public and angered the business community and legal academics.

At first this may seem a little odd. After all, China is a country which recently lamented it own cold-hearted nature, after a child was repeatedly run-over by a car and left for dead while observers casually strolled by. So what has caused this outpouring of sympathy for a high-rolling businesswoman, whose personal assets in 2006 totalled over 3 billion Yuan?

Ultimately there is more to the case than meets the eye. Although there are serious allegations that Wu was running a glorified pyramid scheme, this is not a routine case of fraud and corruption within China’s business and government elite – of which there are many. Rather, as a special Caixin report reveals, it is a case which not only has huge implications for China’s huge array of private financing networks but also for China’s approach towards entrepreneurs and the private sector as a whole, amid criticisms that its state-owned behemoths are taking over the economy and stifling growth and innovation

Wu hailed from a rural family in Dongyang. She famously dropped out of school as a youngster, when she spotted an opportunity to sell lamb placentas for use in high-priced cosmetics. She became rich after investing in several real estate projects and later expanded into trade, financial services and hotels. She consolidated her interests, which included her own private financing network, under her Bense Group and in 2006 was named China’s sixth richest woman.

Private lending networks play a key role the Chinese economy. They provide crucial funding for individuals and business, starved of credit from government-owned banks. They also operate in a high-risk, high-reward environment. When creditors can no longer pay back their loans, whole networks become threatened. This became evident in Wenzhou earlier this year, when a spate of businessmen disappeared as their debts fell due. The Chinese government, worried about the impact on the economy,  stepped in to loosen financing conditions in official channels.

One of the reasons for the surge in private lending in recent years was the government-dictated tightening of credit among China’s banks. While this tightening was advised by many economists – given China’s large monetary stimulus in 2008- the result was that state-owned companies hovered up all of the remaining credit while individuals and the private sector were left to fend for themselves. This led to a flourishing private lending system, which today provides trillions of lending to individuals and companies across the country.

As Caixin makes clear, “private lending”, as an expression, does not exist in China’s legal system. Nor however is it illegal, unless it can be proven that lending was “harmful to society”. It was this very charge that led Wu’s death sentence.

As Caixin reports, Wu’s alleged crime was to lure 11 individual investors to contribute 770 million yuan to an investment fund. According to the government, these funds were then diverted towards paying off creditors of Wu’s Bense Group as well as funding her own extravagant lifestyle.  It is further alleged that Wu illegally tapped up to 14 million Yuan in public loans which she then re-lent at interest rates of up to 80%. Originally charged with fund-raising fraud, which comes with a maximum sentence of 15 years, the charges were later elevated to financial fraud, a much more serious charge, which carries the death sentence.

Wu’s defense, including the prominent activist lawyer Zhang Sizhi, vehemently denied the charges and alleged that the 11 investors were family members who were perfectly aware of how the money was being handled and argued that all money borrowed by Wu was used to build up her business empire.

The trial, which lasted 5 months, ended with a guilty conviction, the death penalty and all of Wu’s property being confiscated. Wu appealed however, and when the case was referred to the local high court many supporters hoped that the judgement would be overturned. However on January 18 this year, the high court upheld the judgement and the execution order. The case has now gone before the Supreme Court of China for its final review.

Both scholars and bloggers have criticised the decision and many family and supporters allege that the trial amounted to little more than an asset grab. During the trial itself, and amid huge media scrutiny, Wu tabled detailed corruption charges against a dozen bank and government officials. The officials were later found guilty and are now in jail. Some observers believe that Wu’s death penalty is a response to this whistle blowing while other argue that the conviction is a government warning shot, meant to deter future money lending networks.

The sentence continues an ominous pattern in China where 10 people involved in private lending networks have been sentenced to death since 2004. While the conviction itself is not overly controversial, and Wu has accepted several of the charges, it is the severity of the punishment that has raised the most ire, especially considering the ubiquity of private lending in China. As Chen Jun, the vice-chairman of the Zhejiang Chamber of Commerce in Beijing summed up on his microblog, “If Wu Ying should die for what she has done, then you can set a machine gun anywhere in Zhejiang and go on rampaging. I can guarantee that every single one who gets shot would be a lender.” Ultimately the question about where the line is drawn between a successful business tycoon and an enemy of the people has become decidedly muddy.

The sentence also ties into an ongoing debate about the death penalty in China. Although China continues to execute thousands of people a year, according to Amnesty International, capital punishment is now the subject of much debate, particularly among legal scholars. Many Chinese scholars now advocate an abolishment, or at least a gradual phase out of capital punishment. Continuing in this vein, recent legal reforms removed several economic crimes from the death penalty list (but not financial fraud). In addition, all death penalty convictions must now go before the Supreme Court for a final review.

It is this review that may provide some hope for Wu. Amid an outpouring of public sympathy, the Supreme Court has promised to review the sentence “cautiously.” For the business community however, the sentence signals another nail in the coffin for entrepreneurs and the private sector. As Zhang Weiyang, former dean at Peiking University’s Guanghua School of Management lamented to Caixin, the country remains “300 years” away from a market economy.

Opposition to EU Fiscal Compact unites unlikely bedfellows

Posted by conorbjorn on 15/02/12
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At the end of January, European heads of state gathered for a European Council meeting to discuss the latest draft of the new fiscal compact, the treaty initiated by Angela Merkel and Nicolas Sarkozy at the previous summit in December 2011. With the exception of the UK, all member states have voiced their support of the fledgling agreement. As negotiations continue however, criticism of the new treaty (or inter-governmental  agreement, as it more correctly termed) has poured in from all angles. The European Parliament has passed a resolution opposing it, while European trade unions have called for a European day of protest on February 29th, the day before the negotiations are set to be concluded.

In their political resolution[1], the Members of the European Parliament (MEPs) expressed their doubts on the necessity of such an intergovernmental agreement.  Criticising the method behind the agreement, as well as its content, MEPS also blasted hypocritical European leaders who today support the enshrining of new rules on fiscal discipline, but who flaunted similar rules all to easily in the past. The fact that the new treaty simply reiterates measures that are already part of EU law, since the passing of the new economic governance package in September 2011, was also criticised.

Both the Parliament and the trade unions expressed their concern at the focus on continued austerity, and the lack of a complementary plan for growth, with the Parliament calling instead for a “Union of both stability and sustainable growth.” While the MEPs praised the use of the community method and the inclusion of the Parliament in the negotiations, they claimed that their suggestions to date have been largely ignored, putting the treaty’s democratic legitimacy at risk.

In their opposition to the treaty, the Parliament and trade unions have acquired an unnatural ally, with the rating agency Standard & Poors, fresh from downgrading several European countries in January, claiming that the new treaty’s sole focus on austerity could be largely self-defeating. According to their report, the new treaty will cause “domestic demand to fall in line with consumers’ rising concerns about job security and disposable incomes, eroding national tax revenues.” Instead of negotiating tighter rules on fiscal discipline, S&P believes that European leaders should be focussing their attentions on “a strong and consistent program to raise the growth potential of the economies in the eurozone.”

To date, this diverse opposition against the treaty has yet to impact on the pace of its negotiations. If nothing else however, it will cause European leaders, some of whom face the prospect of a referendum on this treaty, to sit nervously.

The original version of this article appeared on http://en.generation112.eu/

 

Can Egypt follow Turkey’s lead?

Posted by conorbjorn on 29/01/12
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With the final results from Egypt’s six week parliamentary elections tricking in, all talk is about the strong election performance of the two main Islamic parties. With 43.7% of the vote, the Freedom and Justice Party (the political wing of the Muslim Brotherhood) was the clear winner, although the ultra-conservative Nour party surprised many by taking home 22%.

As the gains of the Islamic parties became evident over the past few weeks, more and more Western analysts and policy makers have started to become anxious. How exactly will these parties perform in government? Many hope that they will try to follow Turkey’s model, which is seen as the first real successful marriage of an Islamic society and secular democracy. Despite its critics, Turkey’s ruling Justice and Development Party (AKP) is credited by many in the West, and the East, with clean electoral victories, sound economic management and legal reform.

However in a recent article, Sebnem Gumuscu argues against a simple assumption that Egypt will be able to embrace Turkey’s model. As he explains, in Turkey’s case, the AKP has flourished because it has embraced the secular-democratic framework of the Turkish state. Gumuscu argues that the main reason for this was the neo-liberal transformation that Turkey began in the 1980s. This transformation led to the flourishing of a new group of devout businessmen who argued in favour of ideological moderation, stronger relations with the EU and political pragmatism. Together these moderate Islamists formed the AKP.

Gumuscu argues that Islamism and democracy have become compatible in Turkey, under neo-liberalism. The result has been a downsized state, greater economic and political stability and better relations with neighbouring countries. The AKP has been rewarded with greater support from secular business folk and the middle classes. For Gumuscu, the embrace of neo-liberalism was the main cause of the transformation, rather than Turkey’s culture of secularism, its relations with the EU or pressures from the military, all of which had been resisted for decades by organized political Islam in Turkey.

The comparison with Egypt is striking. As Gumuscu explains, neoliberalism in Egypt has largely benefited cronies of Mubarak’s regime and no Turkish-style business class has emerged within Egypt’s main Islamic parties. Rather these parties are made up of individuals from the professional sectors who prefer a strong and expansive state. It is this large state presence which was picked up on by The Economist as Egypt’s main economic challenge.

According to Gumuscu, the Freedom and Justice Party (FJP) supports private enterprise but its desired economic system is closer to Corporatism, with the promotion of import substitution and exports, rather than a small state and free trade.

Gumuscu is also dubious about the ability of economic reform in Egypt to develop the sort of pragmatism that Turkish-model advocates are seeking. If a new Islamist class wishes to emulate the success of the AKP then they will first have to become fully-fledged political parties.  At present however, the Muslim Brotherhood remains primarily a religious society, with political, economic and cultural objectives being secondary.

The FJP relies on the brotherhood rank and file for support in elections and thus the botherhood casts a large shadow over the party. According to Gumuscu the decision of the brotherhood not to nominate a Presidential candidate under the FJP already shows that political objectives are being superseded by religious ones.

As Gumuscu summarises, there is no Turkish model. Rather there are Muslims in a secular-democratic state working within a neo-liberal framework.  Gumuscu feels that the first task of Egypt’s Islamic movements is to  separate their political and religious functions. Then they must also shed deeply ingrained habits of hierarchy and proselytization to build a democratic system with unique institutions.

It’s now or never!

Posted by conorbjorn on 03/11/11
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The following post was contributed by Charles Baillieu. It can also be found at http://en.generation112.eu/It-s-now-or-n….

When Jankélévitch was trying to define the philosophical aspects of morality, he came up with a variation of the maxim: “It’s now or never.” Recently this maxim has been again embraced by another philosopher, Cynthia Fleury, who applauds as a courageous act, one that makes us move urgently, overcome our fears and provoke destiny.

It would be welcome if the European heads of states could take such ideas on board. What Europe needs now is courage and morality in its public policy.  Europe must question the viability of a monetary policy disconnected from any coherent economic and social policy. We are ready for a radical change, with the only question being the direction. 

A change borne out of contempt, annoyance and short-termism will likely lead to a “more” integrated Europe but also one that is more authoritarian, with an enhanced economic governance that would remain unresponsive to a democratically elected assembly. A shift in the opposite direction would mean that Europe would stand to give up some of its most fundamental achievements. Neither scenario should be welcomed and both ultimately spell a future dissolution of the European project.

However another solution is still possible. To implement it, we would have to fight against the tides above and and head in a different direction. This new direction would refute any renunciation and instead herald a new form of deeper and more democratic integration that would combine long-term reflection with a new openness to risk-taking and inventiveness in policy making.

Observers are quick to compare the current crisis facing Europe with that facing the United States in 1929. They should also remember that the latter crisis led the US to federalize their budget.

For Europe the mantra remains: “It’s now or never.”

Is federalism really back in vogue?

Posted by conorbjorn on 18/10/11

(This article is also available in French, on the website: http://www.generation112.eu/index.php)

In recent times there has been a rather surprising resurgence in federalist sentiments in the pronouncements of several European leaders. Since the financial crisis took hold in 2008, several European leaders have bellowed for “more Europe”.  Their actions however have often moved in the opposite direction. This was never clearer than when several member states openly challenged the Schengen agreement and reactivated border controls. Such “national retrenchment” proved popular among Europe-fatigued electorates.

So what has led the resurgence of federalism (in words a least) among European leaders? Observers are unsure. It may be the growing fear that Europe is entering an economic abyss or it could be due to pressure from worried stakeholders, such as the United States?  Either way, despite choppy financial waters, the European project has gained a new lease of life in the proposals of several national and EU leaders.

Barroso: A converted man, apparently

The most striking example has come from José-Manuel Barroso. This year’s “State of the Union” speech was drenched in federalist language and called for, amongst other things, the establishment of a financial transactions tax, and new far-reaching powers for the Commission. Noting that there can be no union if citizens are ignored and condemning interference against the free movement of people across Europe, Barroso delivered a riposte to federalist enthusiasts who argued that he had been found wanting since the financial crisis took hold.

And Barroso is not the only one showing a new lease of life. The European Parliament, following the initiative of the MEP Andrew Duff , is looking at creating transnational lists for its next election. The French, German and Italian governments (forgetting the ills caused by Lisbon) have backed calls for a new EU treaty “that can lay the foundations for a new prosperous and politically robust Europe”. Barroso seems ready to accept this, even though he has continued to stress that a lot can be achieved within the current institutional framework.

An illusion?

So does this really herald the beginning of a new chapter for European federalism? Caution is advised. Most EU observers have been around too long to be excited by promises and rhetoric alone. With the Euro’s problems showing no sign of abating, national governments continue to be prisoners of their own immediate interests and those of their increasingly euro-sceptic electorates. With this in mind, member states must surely learn how to avoid the misunderstandings and apathy caused by the Lisbon treaty, before a new treaty cannot be seriously considered.

On this there remains much to be done. Recent rhetoric has returned to familiar buzzwords and objectives such as “solidarity”, “growth” , “discipline” and “green economy” while remaining worryingly short on policy detail. Federalists, for their part, are demanding that the EU become more than a mere marketplace and instead adopt a new social element, if member states are serious about creating a more federal union.

This is the challenge that awaits. To make a decisive step it is crucial that national and European parties, civil society and citizens take up this debate.  Upcoming elections in Spain, France, Germany, Italy and those for the new Parliament in 2014 provide an ample opportunity. As Barroso recently commented, it will soon be a full century since the outbreak of World War I. This provides a perfect opportunity to promote the kind of deep integration that was originally designed to forestall such conflict. If electorates can be brought on board, then an opportunity for decisive action beckons.

Frontex: Where do human rights concerns fit in?

Posted by conorbjorn on 06/10/11
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The following post was contributed by Serena Garelli. Serena holds a Bachelor degree in international relations from the University of Turin and Masters degrees from the Université Libre de Bruxelles and the College of Europe. She is currently working at the European Central Bank.  

Introduction

Is external border control undermining one of the basic principles of the European Union – the protection of human rights? As border control has become crucial to the EU’s overall strategy in recent years, this question seems increasingly pertinent.

Since its founding in 2004, the Frontex agency has attempted to coordinate border management control among member states, though the latter retain responsibility for the majority of surveillance that is carried out. As Frontex’s prominence has grown, it has increasingly found itself in the spotlight, with several NGOs raising questions about its impact on migrants’ human rights.

Academia has proffered the term “securitization” to describe how ‘security’ has been invoked to legitimize the EU’s sometimes contentious migration and asylum policy. So what role has Frontex played in this “securitization”? Academia is inconclusive. Leonard argues that Frontex has played a key role while Neal argues that Frontex is a “failure of securitization” and instead has turned out to be an “uncontroversial” actor, albeit one that might have a resurgence through the Rapid Response Border Intervention Teams (RAPID).

As Frontex is a regulatory agency with no executive power it cannot directly implement human rights protection measures. Rather it is the absence of legal provisions for the protection of human rights within Frontex’s regulations, that is a source of concer

The general context: migration and border control

Frontex’s main task is the coordination of border control among member states. According to Guild, a ‘border’ is the place in which the ‘control’ of the flow of people is carried out. The “human rights” implications relate to Frontex’s impact on potential asylum seekers, who are entitled under international law to the principle of non refoulement, as guaranteed by instruments such as the European Convention of Human Rights and the 1951 United Nations Geneva Convention.

 The EU’s strategy for external border control started to gather pace after the launch of the Tampere Program in 1999 and the subsequent Commission communication: “Towards integrated management of the external border of the Member States of the European Union” in 2002.  This paved the way for the development of Frontex, which was established two years later. The Commission later issued another communication which called for the reinforcement of the southern border’s management and stated the crucial role which Frontex should play in “Europeanising the migration policies of member states”.

Transit Migration has demonstrated that, since the 1990s, the EU has been increasingly using the threat of “illegal migrants” to justify the employment of security personnel in border management control. As Carrera has pointed out, a ‘securitizing’ link is being created between border control and migration strategies and Frontex has been presented as the actor in charge of concretising the connection. However this emphasis on security appears to have had consequences on human rights protection

Frontex: legal issues and practice

Frontex’s founding regulations clearly show the securitization process at work. While human rights protection only earns one citation in the preamble (paragraph 22), cooperation with Europol is explicitly mentioned in article 13. Although Frontex has started to cooperate with the United Nations High Commissioner for Refugees and the EU Fundamental Rights Agency, there is no mention of this in the founding regulations.  

In 2006 a new regulation was passed that called for the formation of the Rapid Border Intervention Team (RABIT) which would act temporarily in the event of an “exceptional and urgent situation”, where there is large scale illegal immigration. The securitization process was again invoked with provision being made for RABIT to take ‘extraordinary measures’ to combat this threat.

The UN High Commissioner for Refugees has pointed out that Frontex activities, and in particular RABIT, should always respect human rights and in particular, should comply  with the principle of non reofoulement. The latter is mentioned in the RABIT Regulation (Article) and members of the team must comply with human dignity concerns.  In addition, human rights protection was also mentioned at a recent Council decision which provided guidelines for surveillance at sea.

However, according to Klepp, “the fact that Frontex is operating without an elaborated legal background is worrying”. Since actions lacking a proper legal background can easily take on a securitization context, it seems even more relevant to assess the implications of this weak legal basis in reality.

Article 2 of the founding Regulation describes the mission of the Frontex as: “the coordination of Member States’ operations and technical and operational assistance when needed, as well as support in joint return operations; training of border guards; follow up on the relevant research and risk analysis.”  Research by Klepp on Frontex operations in Malta shows that this weak legal basis is often exceeded in the heat of operations. Methods to intercept migrants, for example, are often decided by military personnel on a case by case basis.

There is also legal uncertainty about the responsibility for determining the presence of potential asylum seekers on vessels. This nebulous and vague situation leaves Frontex personnel with considerable room for manoeuvre and they can potentially undermine the basic human rights principles such as non refoulement.

A phenomenon currently taking place during Frontex operations is the “off-shoring of the border” and an “extra-territorialisation of control”. This refers to how the control of the flow of people is being transferred far away from where the physical border actually is. Carrera’s work on the Hera operation shows that Frontext often intercepts vessels in the territorial water of a third country and forces them to go back. The Frontex website proudly shows the number of migrants that they stopped from reaching the EU’s territory. However, these intercepted vessels may have contained potential asylum seekers. If a potential asylum seeker is sent back to a country such as Libya, who is not part of the Geneva Convention and where an asylum program is not in place, there could be a significant danger to that person’s life. This action is also potentially contrary to the Geneva Convention and prevents Community law itself from being applied.

It is also important to consider the assistance provided by Frontex to Member States in the training of their border guards. Given their large room for manoeuvre, it is crucial that security personnel are trained to properly respect human rights. To this end, RABIT’s  regulations mandates the respect of human dignity by the personnel participating in operations. Frontex has also launched the Common Core Curriculum project which aims to establish a more uniform system of training for national border personnel. The Cowi Report, a very comprehensive audit document prepared in 2009, underlines the high level of satisfaction of Member States with these training activities. However the report failed to mention the importance of human rights knowledge among border guards. A more positive sign is the Commission’s proposal to revise the (CE) 2004/2007 Regulation, which foresees “appropriate training in fundamental rights” for border guards participating in operations.

Another Frontex activity listed in Regulation (CE) 2004/2007 is the risk analysis that it carries out, based on the research of Member States. The securitization logic again comes in to pay here with ‘risk’ being defined as the potential arrival of migrants wishing to cross the EU’s border. However, as the UNHCR points out, not every migrant is a ‘risk’ and some could be potential asylum seekers. The risk analysis carried out by Frontex is kept secret. Although the Commission has access to the findings, the Parliament does not, which raises questions over transparency and accountability.

It is clear that this Fontex risk analysis contains sensitive material and cannot be made public as it could be misused by smugglers. However this lack of transparency and accountability is a real point of concern. The European Parliament decides on the budget of Frontex but the latter is not accountable to the EP. This is quite prescient when one considers the Parliament’s traditional sensitivity to human rights concerns.

The role of the Parliament has again surfaced as the revision of the original Frontex regulation, initiated by the Commission in February 2010, will be decided through the ordinary legislative procedure. Included in the current proposed amendments is a requirement that a proper training in human rights is compulsory for the participants of a given operation.

Conclusion

EU migration and asylum policies have become increasingly securitized. This has lead to the building up of a global strategy for migration and border control where Frontex has a big role to play. However Frontex remains framed within a weak and unclear legal context, which gives its security personnel considerable room for maneuver. This emphasis on security leads the EU to push its control beyond the physical border and it creates a situation where the protection of human rights is at risk.

This problem should be solved before enhancing Frontex’s role in the coordination of border management control to avoid any “institutionalization” of informal practices. Indeed, the actions undertaken in the Mediterranean Sea might in the long term change the paradigm of the EU’s asylum and migration system beyond recognition. The Commission proposal for a revision of the Frontex Regulation thus seems like a good place to start.

The Scramble For Europe

A recent paper by François Godement and Jona Parello-Plesner describes in rather startling terms how China is “buying” up Europe. According to the authors, the main components of this new wave of Chinese activity are:

1) China’s purchases of European countries’ sovereign debt

2) The acquisition of European companies by their technology-hungry Chinese counterparts

3) The exploitation of Europe’s open procurement policies, by low-cost and/or subsidised Chinese competitors

The authors argue that these factors are leading to new fault lines in Europe and making it much harder to implement a coordinated EU approach to China.

China‘s bond diplomacy

Bond markets have dominated the news in Europe for the past two years. With its vast trove of foreign reserves, China has often being mentioned as a possible white knight for stricken European countries. Never one to miss a trick, Wen Jiabao and Chinese diplomats have incorporated this development into their diplomacy and have dangled future bond purchases as a carrot in front of European countries, often encouraging them to shun human rights concerns in the process.

Of the three strands mentioned above however, this appears to be the weakest. As the authors acknowledge, the actual substance of these bond purchases was probably overestimated. They point to a chronic lack of information in both Europe and China as the major cause.  Although there are estimates, China’s keeps the exact composition of its own foreign reserves a secret. Europe, unlike the US, publishes no coordinated data on foreign purchasers of public debt in the 27 member states. Very few member states reveal this information either. However this opacity has not stopped many Europeans observers and politicians from hoping out loud that China will move its attention away from US bonds to those of Europe.

However, as economists like Patric Chovanec and Michael Pettis have described, Chinese bond buying, and its viability as a political tool, is a perennially misunderstood topic, particularly by attention-grabbing media outlets. The Chinese purchase of US treasuries is not dictated by a political whim, but rather by the economic realities of China’s trade and exchange rate system. In a nutshell, if China continues to run a large current account deficit with the US, and if it wants to avoid a sharp appreciation of its currency, then it has no option but to continue buying US bonds, no matter what Chinese diplomats may say about switching their attention to Europe.

 China’s direct investment in Europe

As the authors point out, China’s direct investment in European companies is growing at a brisk rate. Back in 2006, China’s total direct investment in Europe was $1.3 billion. So far in 2011, there have been three acquisitions of European companies by Chinese firms that have exceeded that amount by themselves.  The authors suggest that Europe, and the US are becoming the major new targets of China’s “Going Out” policy, taking over from countries in Africa and Asia.

China’s recent five year plan has the explicit goal of moving China’s manufacturing up the value chain, away from low-end manufacturing. As a result China’s acquisitions focus on sectors that are rich in patents and where China’s own technological prowess is lacking. These ventures are often supported by the China Development Bank, a remarkable organisation whose original remit to invest in China’s interior has changed beyond all recognition.

Such moves are not without their problems. Again transparency is an issue. It is often incredibly hard to distinguish a private Chinese company from a public one. The corporate structure of Chinese companies is often opaque.  Huawei is a common example. Officially the Chinese telecommunications giant is owned by 150 employees. However the alleged links of its founder Ren Zhengfei to the People’s Liberation Army has seen a deal to acquire a US company, 3Leafs, stopped dead in it tracks. The deal was stopped by the US Committee on Foreign Investments in the United States (CIFUS) and many in Europe are questioning whether Europe needs a similar body, perhaps involving the European parliament. Huawei seems unperturbed and is currently building a nationwide network with Telecom Italia.

On the whole it appears that China’s overseas direct investment to Europe is increasing as part of a broader diversification of China’s ODI. Officially, the data is hard to follow as China’s overseas direct investment largely flows to three areas: Hong Kong, the Cayman Islands and the Virgin Islands. In reality these funds are channelled to locations around the world.  Derek Scissors of the Heritage Foundation publishes regular maps of Chinese ODI that show truly global activity, with China active in every corner of the world.

As the authors note, the problem presented by China’s direct investment in Europe becomes clearer when one considers the limited access of European companies to similar markets in China. Any sector which China deems “strategic” remains locked out to foreign competition, as agreed during China’s entry into the WTO in 2001. As a result European firms struggle to gain any traction in sectors such as air transport, finance and alternative energy.  Such difficulties have heightened in recent times, despite the watering down of China’s “indigenous innovation” policies. According to the EU Chamber of Commerce’s 2011 survey, the sentiment among European firms is that China’s   government policies have become increasingly less fair for foreign companies over the past two years.

Europe‘s open market for procurement

As the authors note, the past decade has seen the rise of Chinese infrastructure companies abroad – building everything from railways in Saudi Arabia, to ports in Africa. Now they are “taking” on Europe.

Spurred by on by austerity, European governments are casting their attention eastwards. Chinese diplomats, for their part, are asking for shopping lists of infrastructure projects that they can bid on. Worryingly there are political implications to some deals. When Serbia acquired a bridge over the Danube with financing from the China Development Bank, they initially acquiesced to China’s demands not to show up at the Nobel Peace Prize ceremony for Chinese activist Liu Xiaobo (they later relented).

The authors point to a failed contract between a Chinese stated owned enterprise COVEC and the Polish government to build the A2 highway in Poland as an example of what the future may look like: Chinese companies winning European infrastructure deals by offering unbeatable low prices – based on the use of Chinese employees working below European labour and environmental standards.

However although the authors touch on some of the difficulties that Chinese firms have experienced, they appear to underestimate the huge challenges that the Chinese model faces in Europe. In a recent searing editorial, Caixin, the Chinese investigative magazine, looked in depth at the failed project by COVEC to build the new Polish motorway.  According to Caixin, the project involved a litany of mistakes from day one.

Initially Covec’s winning bid was “so low it shocked the European construction industry”. According to Caixin’s sources, COVEC allegedly planned to gradually jack up the prices – “a standard China method”.  However while this worked in Africa in the past, it didn’t fly in Europe.  COVEC was also forced to handle increased raw material costs and legal issues (the contract was only in Polish).

Due to skimping on feasibility studies, Covec under-estimated the technical difficulties of the project. As a final insult, when a special species of frog was discovered on the grounds, outraged COVEC officials were forced by environmental regulations to build a special passageway for the frogs, at a significant cost.  The whole project ended in acrimony with COVEC walking away, the Polish government demanding 741 million zlotys in compensation and two Chinese working dying in a fatal crash on the road itself. 

The long-term question, particularly in the wake of China’s recent high-peed rail crash, is whether China’s infrastructure companies can build a reputation for competence that will be a pre-requisite for growing their business in Europe.

Europe‘s new fault lines

According to the authors, the three factors above are leading to new fault lines in the relationships between European countries and China.  Increasingly countries like France, Germany and the UK are banding together as “frustrated market-openers”. While not advocating protectionism, these countries increasingly resent China’s highly subsidised competition and is closed domestic markets.

On the other side is a growing band of “cash-strapped deal-seekers”, including countries such as Portugal, Greece, Spain and Hungary, who now see China as an increasingly attractive alternative to European or IMF loans.

So what to do?

As ever Europe needs to coordinate. The authors advocate for a new system to monitor and track government debt purchases, a system for vetting direct investment and attempts to promote fair competition in public procurement.

The first would follow the example of the US treasury and develop a unified statistical system to account for foreign holders of public debt. This is a smart move as it would deflate the publicity bubble that follows China’s buying, or alleged buying, of member states’ bonds.

The second proposal would bring a new layer of European supervision to foreign investment, particularly in sectors such as defence, critical technologies, media and education. As the authors point out, this would simply follow the huge degree of regulatory and administrative oversight in China (and even in the US). However protectionism, without good cause, is rarely the answer.

 In public procurement the authors acknowledge that the EU cannot block member states from accepting bids from Chinese companies who are backed by soft loans.  However it could deny EU subsidies to public projects involving companies from countries that do not grant access to their own public markets. This is a controversial suggestion and would likely raise considerable ire in China, where infrastructure companies are keenly aware of how and where EU funds are distributed.  However it deserves to be discussed.  

 Finally the authors also propose building an index of the foreign share of public markets in both developed and developing markets. This would not just put pressure on China but also countries such as Japan, where procurement is closed to outsiders. The authors also argue that this could be incorporated into the upcoming EU-Japan FTA negotiations.

 China has always been more comfortable focusing on bilateral relationships. As the authors note, China needs Europe and the European market for business. However they may also relish a divided Europe, for its own purposes.

The three trends outlined in their paper differ in their weight and it is unclear whether all of them will be sustained. However they all raise very real questions for European leaders. In deciding what to do, they will need to keep a cool head and propose practical, business-friendly solutions. The suggestions in this paper provide a useful starting point.

China’s challenges

Despite its enviable growth rates, China faces a raft of well-publicised economic and societal challenges. It recent 5-year plan did a good job of acknowledging these concerns but was less clear on how it would overcome them. With a leadership change in 2012, it will likely be some time before we see any significant policy changes.

Inflation dominates

Inflation, which rose to 6% last month, remains the primary concern among China’s policy makers at present.  Keenly aware of its political implications, China has combined short-term measures such as price controls with a tightening of monetary policy. However China must walk a tight rope as its squeeze on credit may unduly hit small and medium sized enterprises (SME)s. Already faced with rising raw material and labour costs, SMEs also come a distant second to giant State Owned Enterprises (SOE)s when it comes to accessing  loans.  

Rebalancing a behemoth

The five-year plan is explicit about moving China away from its current export- and investment-dominated growth model to one that is increasingly driven by domestic consumption. Under its current model private consumption and employment growth have stagnated with the latter being exacerbated by China’s focus on capital-intensive industries and the sluggish growth of its services sector.

This imbalance was made worse during the recent financial crisis. Faced with declining exports, China instructed its state-owned banks to fund a lending spree of $1.5 trillion, much of which ended up in the hands of SOEs. Bolstered by subsidises for land and energy, this facilitated a massive investment boom, which accounted for 90% of GDP growth in 2009.

What is the danger of such a model? China is still a poor country and so in many cases large investment projects may yield considerable long-term benefits. However with so much capital being allocated so quickly, waste is likely. In addition there is the danger of excess capacity in industries such as steel and aluminium. Banks also fear a rash of non-performing loans, particularly among local governments.

So how can China rebalance its economy towards domestic consumption? Recent wage increases are a key step in making this happen. However to change consumption patterns, fundamental reforms in the areas of social security, healthcare and education are also crucial. Finally China must overcome its bête noire and allow a significant appreciation of its currency.

RMB appreciation

The RMB has appreciated by about 8% against the dollar, in inflation-adjusted terms, since June 2010. While this has helped to diffuse some political tensions, most analysts argue that the RMB is still hugely undervalued. For evidence, they point to China’s continuing rapid accumulation of foreign reserves. Allowing its currency to appreciate would help spur private consumption in China and free up its central bank to pursue a more conventional monetary policy, where it could focus on tackling inflation while maintaining stable economic growth.

However the benefits of currency appreciation have long been clear to Chinese officials, especially those in the People’s Bank of China (PBOC). The reason for their timidity has been the staunch political opposition of China’s Ministry of Commerce (MOFCOM), who rightly expect any major appreciation to hit China’s export industry. 

Banks, real estate and bad loans

China’s 5 year plan also acknowledged that it must continue to modernise a repressed financial system, where savers face negative real interest rates. When you add to the fray a volatile stock market, tough capital controls and an anemic corporate bond market, this has left individuals and companies with limited investment options. One result of this has been a persistent boom in real estate prices.

In the housing market, cash-rich and choice-poor investors have fuelled a massive increase in luxury property sales. As a result developers no longer focus on building homes for customers who are looking to live in them. Rather, they build more and more luxury apartments. These apartments are sold to investors and often lie empty.  This is not a conventional bubble and is not backed by leverage. Rather, as Patrick Chovanec has pointed out, it is an inefficient allocation of capital, with housing being used as a store of wealth. Beijing is well aware of this issue and has recently introduced property taxes in selected cities, to dissuade investors.

 In commercial real estate, cash-rich SOEs have also been piling into real estate investments. Contrary to the housing market there is a leverage concern here, as many of these investments rely on loans from China’s state-owned banks. In addition many commercial loans in China use real estate as collateral and companies could suffer refinancing difficulties if real estate prices took a hit.

So is China’s banking system in trouble? The five major banks are well-capitalised on paper and recently enjoyed record profits. However there is growing concern among analysts that these banks are under-estimating their potential non-performing loans. While most analysts expect the government to mitigate any future crisis, a rash of bad loans could act as a drag on future lending and hold down Chinese growth.

Industrial Policy

The five year plan shows China’s clear ambition to upgrade its traditional strategic industries, such as shipbuilding and automobiles, and to establish new industrial giants in fields such as bio-tech, new-generation IT, and energy conservation.  Foreign companies are both excited and worried about this move. While China will clearly be a huge growth market for the latter industries, there are also concerns about how intellectual property can be protected.

 Will China’s ambitious goals be matched equally ambitious policies?

The goals of the plan are lofty and far-reaching. But then China has never had a problem in setting itself lofty goals. The real question is whether the political will exists to tackle vested interests and end the “growth at all costs” model. Most onlookers expect that key reforms will not take place until after the leadership transition in 2012. With Xi Jinping and Li Keqiang likely to enter the fray, they will need to quickly shore up the confidence and support of party elites if they are to tackle China’s challenges head-on.

The EU’s struggles in Kazakhstan

Posted by conorbjorn on 21/06/11
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Kazakhstan is a partner that we can work with, even if not necessarily an easy one

(EU Commission Official – 2010).

The EU’s operations in Kazakhstan try to be both pragmatic and values-based. Like the US and China, Brussels has been keen to bolster economic and energy cooperation with a fast-growing regional giant. On the other hand, the EU also tries to promote its traditional objectives of good governance, human rights and the rule of law. The results to date have been decidedly mixed and leave much for the EU to mull over as they negotiate a new Partnership and Cooperation Agreement (PCA) with Astana.

Soap opera politics

Similar to its activities in other neighboring countries, the EU has sought to help Kazakhstan improve its electoral process and respect for human rights, rule of law and civil society. It has done so by initiating various bilateral dialogues and by implementing small-scale technical assistance projects.

A quick glance at the results does not paint a pretty picture. Regarding electoral process, President Nursultan Nazarbayev, now enjoying his third decade in charge, was recently reelected with a rather embarrassing “Soviet score” of 95%. To date he has twice altered the constitution to remove age and term limits. Parliamentary elections are worse still. In 2007 every single seat was won by the president’s Nur Oltan party – a situation that made Kazakhstan’s presidency of the OSCE in 2010 look pretty farcical. 

Behind the scenes, lurid tales are aplenty. Rakhat Aliyev, Nazarbayev’s son in-law was previously tipped to succeed him. However after claiming that he had information implicating Nazarbayev in both the murder of a political opponent and the ‘Kashgate’ scandal (see below), Aliev fled Kazakhstan and successfully sought asylum in Austria. He remains there to this day, despite huge Kazakh pressure on Austria to extradite him. In 2009, Aliev released a book, “The God Father-in-Law” which featured an array of allegations against Nazararbayev.

Corruption in Kazakhstan is endemic. According to Dosym Satpaev, the country is no more than a “functioning kleptocracy” where practically all major companies are controlled by the president’s immediate family. In the “Kazakhgate” bribery scandal, James Giffen, an American advisor to Nazarbayev, was alleged to have paid over $80 million in bribes, on behalf of western oil companies,  to Nazarbayev and members of the Kazakh elite, in order to gain access to the to the huge Tengiz oil field.

For human rights and the rule of law the story is no less grim. Kazakh human rights campaigners bemoan the regular locking up of campaigners such as Yevgeny Zhovtis on trumped up charges. The media is run by close-knit supporters and family of Nazarbayev and was recently ranked 131 out of 167 on the Worldwide Press Freedom Index. The fact that Kazakhstan is “not as bad” as its neighbours Uzbekistan or Kygrystan, seems to have stymied much international criticism.

The EU, for its part, likes to talk about its role in encouraging Kazakhstan to sign international agreements such as the International Covenant on Civil and Political Rights. It is particularly pleased about Kazakhstan’s 2009 decision to repeal a new law that the EU saw as curtailing religious freedom. Under its EIDHR umbrella, Brussels has dispensed some EUR 8 million on over 100 projects in Kazakhstan, with progress being claimed in areas such as disability rights.

However in private EU officials readily acknowledge their limited impact. With no EU membership or even entry to the European Neighborhood Policy (ENP) to offer, the EU’s normal leverage is severely curtailed.  Their cause is further weakened by a chronic lack off funds and a lack of focus among member states who regularly put democratic concerns to one side when chasing bilateral energy deals with Astana (see below). Even the  EU’s special representative to Central Asia, Pierre Morel, has clearly taken on energy cooperation as his raison d’etre in the region.

However the EU’s biggest challenge remains convincing Nazarbayev and his coterie of the need for reforms. As Nazarbayev argues, neighboring countries such as Kyrgyzstan, who have dallied with democracy, have floundered in repeated instability while Kazakhstan has remained remarkably stable

Pipeline Fever

The Southern Corridor is our Mantra

(EU Commission Official 2010)

Kazakhstan’s oil reserves are its main energy resources and EU companies have been active here since the early ’90s. However with Kazakh oil available on the spot market, and easily shipped by tanker,  there has been little need for the EU to get involved. Gas, on the other hand, has been the dominant topic in the EU’s energy dialogue with Kazakhstan.

Although it has relatively limited gas reserves itself, Kazakhstan fits into the EU’s “Southern Corridor” initiative, a mesh of pipelines designed to ease the EU’s current reliance on Russian gas. Kazakhstan has been targeted by the EU mainly because of its potential role as a conduit and mediator with neighboring Turkmenistan (where gas reserves are considerably larger).

The first element is the beleaguered, EU-backed, Nabucco pipeline that is set to run from Turkey to Austria. Although the initial gas for Nabucco will come from Azerbaijan, it does not have the capacity to provide the full 30 bcm required. Given its sour relations with Iran, EU attention has turned across the Caspian. The idea is that Kazakh and Turkmenistan gas will be transported via a new trans-Caspian pipeline to Azerbaijan where it can hook into the Nabucco pipeline.

However progress on Nabucco has been painfully slow and was recently delayed for a further year.  Kazakh Foreign Minister Kanat Saudabayev (like many others)  remains unconvinced that Nabucco “makes sense financially”. Meanwhile a trans–Caspian pipeline remains largely an academic discussion.  While Kazakhstan wants to diversify its delivery channels for gas away from Russia it also recognises that Russia will continue to be its dominant transport channel for the  near and medium future.  

Critics argue that the EU should stay away from pipelines and focus on what it does best in the energy sector, namely offering market experience, mediation and assistance with technology and infrastructure and. Here the EU has helped to modernise Kazakhstan’s energy infrastructure as part of its INOGATE program. Projects to date have included the training of Kazakh personnel, a project to update the Aqtau port and cooperation on sustainable development and clean energy mechanisms.  Kazakhstan has also benefited from the EU’s Emissions Trading Scheme with European companies offsetting carbon emissions by launching emissions reduction projects in Kazakhstan.

Unbalanced Economic Cooperation

“Kazakhstan realise that they need to modernise their economy and they know that Europe is here for them, with experience”.

(EU Commission official – 2010)

This EU’s efforts to expand trade and investment with Kazakhstan began in earnest after the signing of its PCA in ’95. Today Kazakhstan benefits from the EU’s Generalised System of Preferences and Brussels has repeatedly supported its application to joint the WTO.  The EU also has a stated goal of trying to help Kazakhstan to diversify and modernize its economy through the development of its SME sector. In addition, under its TRANCEA initiative, the EU has attempted to integrate Kazakhstan’s transport infrastructure into the EU’s existing Trans-European-Networks.

At first glance the EU’s objectives seem to been a roaring success. Since independence, Kazakhstan has carried out large-scale privatisation, financial liberalisation and labour market reforms. After a difficult adjustment period the Kazakh economy has flourished and between 1999 and 2008 enjoyed an unprecedented economic boon. GDP rose from $25 billion in 1991 to over $130 billion in 2008.  Bilateral trade cooperation between the EU and Kazakhstan has increased exponentially. The EU is now the premier trading partner of Kazakhstan accounting for about 45% of its exports and 25% if its imports..

However these figures disguise a murkier reality. The EU-Kazakh trade relationship is considerably unbalanced with Kazakh exports to the EU totaling over EUR 17 billion in 2008 while Kazakh imports from the EU mustered just under EUR 5.5 billion.  Kazakhstan’s entry into the WTO suffered a setback in 2010 when it decided to enter into a customs union with Russia and Belarus.  Its membership of the EU’s GSP may also expire under purported new EU  rules.

In addition despite EU attempts to develop Kazakhstan’s SME sector, Kazakh exports remain dominated by state energy and raw materials giants who provided over 80% of exports in 2008.  A raw materials boom also fuelled a construction and real estate bubble whose implosion left Kazakh banks unable to meet their debt obligations.

Where to next for the EU?

It’s hard to be overly positive about the future of the EU’s strategy in Kazakhstan. It’s hard to escape the conclusion that Brussels has thrown the majority of its attention and resources at energy cooperation while human rights and good governance have gone out the window. However although Kazakh membership of the European Neighborhood Policy, or even the EU itself, remains off the table, relations remain cordial and Kazakhstan is vocal in its desire for closer cooperation. With negotiations on a new PCA ongoing, the EU needs to remember what it is best at and focus its attention there.

This is part 3 of a five part blog series that compares the strategies of the EU and China in Kazakhstan.
Part 1 and part 2 can be found here.
     

 

The debacle over Danish border controls and the intermingling of domestic and European politics

Posted by conorbjorn on 17/06/11
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The following post was contributed by Malthe Mikkel Munkøe.

The current debacle over Danish plans to step up customs checks on its borders to Sweden and Germany highlights the fact that European integration has blurred the traditional divide between domestic politics and international politics. Gone is the time when affairs between states was “high politics”, a domain that was played out in insulated secrecy and in accordance with the interest of the state rather than popular sentiments and desires. What originated as a purely domestic political issue, building support for a pension reform, soon arose massive international attention as well as the ire of the Commission and the other EU countries with Germany being particularly vocal.

Domestic politics turning international
Some background is necessary to understand the predicament of the Danish government. In the late spring of 2011 the Danish government brokered an ambitious deal on pension reforms with its coalition partner, the Danish Peoples Party (DPP) and the social-liberal centrist party, Radikale Venstre. Danish politics had been dominated by economic issues for some time, and the government was eager to prove its ability to carry out reforms to consolidate the national budget. Also, the government was trailing the Social-Democratic led opposition in the polls, and the general election, due in November at the latest (snap elections are allowed and common in Danish politics), was drawing close. An ambitious pension reform was seen as possible opportunity to turn the tide. The move was particularly appealing for the government since it would divide the opposition and thus cast doubt on its credibility in relation to economic policy-making. This was the case because the Radikale Venstre, long a proponent of pension reforms, decided to back the government’s policy despite its support for a Social Democrat-led government.

As attractive as the reform was for the government equally unattractive it looked for the DPP, since its voter base consists in large part of blue-collar workers and other segments of society that would stand to lose most from the reforms. The support of the Eurosceptic and right-of-centre party was necessary for the reform to be passed, and furthermore the government had long maintained an informal alliance with the DPP in order to maintain a majority in parliament. A concession of great symbolic value was therefore needed in order to compensate the DPP. It would have to be something that could get the party leaders much good publicity in Danish media and appeal to the voters to make up for the unpopular reform package. 

A perilous balancing act
Reinstating border controls had long been an important policy objective for the DPP. This would be a very visible political concession, and could also help address rising concerns over an increased influx of illicit goods, drugs, weapons as well as criminal gangs from Eastern Europe operating in Denmark. However, the Danish government did not intend to renege on its obligations under the Schengen Agreement. The Danish government therefore found itself in a dangerous balancing act. On the one hand it needed to honour its international commitments. On the other hand it also had to get a deal that would allow the DPP to recuperate from supporting the pension reform. Domestic policy, in other words, had to be conducted with proper consideration of potential international reactions.

The Danish government tried its best, of course, to give its international partners the impression that the steps to be taken were light and in full compliance with the Schengen Agreement. But at the same time, the DPP was busy rejoicing that they had ensured the reinstatement of border controls. This, DPP leader Pia Kjærsgaard stressed, would help shield Denmark from crime and protect Danish national identity.

Danish EU expert, Professor Marlene Wind, has argued that the government had thought it could let DPP to take the scene and explain the deal to the Danes without it being noticed abroad. However, the Danish government learned the hard way that it is not possible to say one thing to a domestic audience to appease them whilst professing another course of action at the international level. “In a global world one can no longer control what is a national agenda, and what is the message to Brussels”, professor Wind has observed. 

An ill-fated attempt to do just that was ostensibly a press briefing written in English that summed up the agreement on border controls. However, Danish media later revealed that the original Danish agreement was written in a tone and with certain phrases not reported in the international press brief that suggested a much more wide-ranging approach.  For example, the original title of the agreement reads “solid upgrade and permanent and visible border control at Danish border crossings”, while the English press briefing is simply titled “the Danish agreement on customs control”. The first line of the Danish policy text reads “In recent years there has been a substantial increase in cross-border crime”, while the English briefing begins by noting that “the agreement aims first and foremost at enhancing customs control and implies increased controls in relation to the smuggling into Denmark of mainly goods and items”, and does not mention cross-border crime. Whether or not the government deliberately chose to portray the matter differently to international audiences and the Danish population, as professor Wind and opposition spokespersons have suggested, or simply abstained from correcting how the DPP depicted the agreement in national media, the result has been predictable international criticism from the Commission and other EU countries.

It is highly impractical to present one message to a domestic audience and another on the international scene. Despite the Danish government’s guarantee that it would fulfill its international obligations, the rhetoric used when the agreement was presented to the Danish electorate has cast these assurances in a dubious light. European-level and domestic-level politics are no longer easily separable because national issues increasingly pertain to matters regulated at the EU level or otherwise of interest to European counterparts. This illustrates how European integration gradually leads to the contravention of the traditionally sharp divide between domestic and European-level foreign policy.

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