China: 2014 Year in Review

With over 1.3 billion people and increasingly tied to the global order, China through 2014 remained a gripping story for any audience. “Chinese characteristics,” whether on issues of regional security, territorial disputes, one-party rule, media censorship, or sustained high-speed growth in global trade and market share, require us to understand China better. China: 2014 Year in Review provides a broad sketch of key trends and events in foreign relations, economy, party affairs, media and censorship, state-society relations, energy and environment as well as Taiwanese politics. What emerges is the image of a country undeniably “on the rise,” but one which nevertheless remains beset by a daunting array of social, political, and economic challenges – none of which bear simple solutions and any of which seem to threaten China’s long-term “rise” and one-party rule at home.

Foreign Relations: Great Power, Great Expectations

Yao Wen and Bowen Yu, University of Toronto

The year 2014 saw China move closer to great power status as part of the “great rejuvenation of the Chinese nation” (中华民族伟大复兴). Whereas for decades this was done by “hiding one’s capabilities and biding time” (韬光养晦), it now seems clear that, under President Xi Jinping, China already considers itself a great power – and so brings its own “big diplomacy with Chinese characteristics” (中国特色的大国外交). And being a great power has also meant finding a new modus vivendi with the United States – a “new type of great power relations” (新型大国关系) – which seems to imply that China already sees itself as America’s peer.

But Chinese foreign relations were focused on more than just America in 2014. Aside from its leaders visiting virtually every continent on earth, bearing gifts and signing agreements, China also hosted the Conference on Interaction and Confidence-Building Measures in Asia (CICA) in May and the Asia-Pacific Economic Cooperation (APEC) summit in November as part of its “host diplomacy” (主场外交). CICA, once a forgettable talkshop for security issues, has been accorded a key position in China’s pursuit of a “new Asian security concept” – one in which Asian security relies on Asians, with China at the center and the U.S. as a guest, if not outsider.

On the front of bearing gifts and signing agreements, China’s economic “charm offensive” seemed to enter a new phase with the unveiling of a series of high-profile initiatives: the “one belt and one road” (一带一路) (the Silk Road Economic Belt and the 21st Century Maritime Silk Road) project, which funds infrastructure construction across Asia and seeks to tie Central and Southeast Asia economically more closer to China; establishing the Asian Infrastructure Investment Bank and the New Development Bank; and making headway on free trade talks with Australia and South Korea.

But carrots were only part of the story. The past year also witnessed a series of prolonged standoffs with the Philippines, Vietnam, and Japan, the latter culminating in the world’s most awkward handshake. It is clearer than ever that China is determined to defend its perceived “core national interests” (核心利益), regardless of the potential costs.

And this is the conundrum China faces: a munificent China funding projects and building institutions is good – as any great power should do; but when China grows its economy, spends on its military, or takes hardline stances on issues it deems important, apprehension of Chinese intentions quickly gathers, and China increasingly gets labeled as “assertive,” if not “revisionist.” No matter which way China tries to make its great power status known, the problem of managing relations with anxious neighbors – much less the American giant – a remains. 

Financial & Economic Reform: A Wobbly Soft Landing But the Show Must Go On

Asif Farooq, University of Toronto
Anton Malkin, Wilfrid Laurier University
Linting Zhang, University of British Columbia

Despite a number of recalcitrant, albeit not unforeseeable obstacles, China’s much-vaunted economic reforms began – and maintained momentum – in 2014. China’s investment-driven economy witnessed a year of long-anticipated adjustment, with policymakers increasingly treading rough waters as economic growth gradually trends downward. Quarterly growth has been consistently below the government target of 7.5 percent. The government is expected to set a GDP target of about 7 percent for the year 2015, what President Xi Jinping calls the “new normal.”

However, maintaining a steady growth rate without a hard landing while undertaking necessary economic and financial reforms has proved to be a dilemma for Chinese policymakers. The government’s reluctance to inject massive liquidity or undertake broad monetary and fiscal easing during 2014 was part of a structural effort to change the pattern of investment-driven growth, which could further aggravate China’s local non-performing loan problem. Unfortunately, the government’s alternative measures, such as targeted investments (RMB 769.5 billion in Sept-Oct), have been ineffective as banks remain reluctant to lend. Possible causes are a lack of market demand due to an existing production surplus, or risk-averse banks concerned about a poor global economic outlook. Despite measures taken to lower borrowing costs and increase credit access for small- and medium-sized enterprises (SMEs), which employ the majority of China’s labor force, it corresponds to less than 30 percent of the total outstanding corporate loans.

Additionally, the banks’ response to the increase in the upper ceiling of the deposit interest rate (the upper limit has been set at 120 percent of the benchmark rate, up from a previous limit of 110 percent) has been slow. As interest rate liberalization takes hold, lenders must adjust to new market conditions and compete more intensely for deposits. This, in confluence with a decline in banks’ deposit – fuelled in part by banks using kickbacks and other means to evade these upper limits in deposit rates – has taken a bite out of their balance sheets, further discouraging lending. At the same time, the People’s Bank of China’s (PBOC) first interest rate cut since 2012 is more likely to help the big borrowers than the expanding array of smaller, private lenders. Thus, the government’s effort to stimulate growth without undermining its reform agenda fell short of achieving its target in 2014.

On capital account liberalization – one of the more ambitious reform programs – the central government has been cautious but steadfast. Two important measures in 2014 are worth mentioning. First, the Shanghai Free Trade Zone, a multifaceted and localized pilot program for market-oriented trade, struggled to meet the investor expectations in 2014 due to slow regulatory changes in allowing large corporations to transfer capital in and out of the country. Despite initial pitfalls, the government announced plans to set up three new trade zones in Tianjin, Guangdong and Fujian. Meanwhile, China’s central bank recently announced to expand Shanghai FTZ’s open capital flow nationwide, albeit with more stringent conditions (10 percent cap on inbound capital with no limits on outbound capital transfer). Second, the government also launched the Shanghai-Hong Kong Stock Connect, which allows brokers in Hong Kong to purchase equities in the mainland stock exchange in Shanghai.

Capital markets reforms are also on the agenda for the leadership. On may 9^th the State Council will update a set of guidelines for “deepening capital market reform.” The new measures aim to ease corporate bond issuance; improve supervision and streamline IPOs; integrate regional equity exchanges into a more centralized, “multilevel” system of exchanges; encourage the proliferation of securities firms; and more carefully supervise internet finance. The internationalization of China’s currency has also continued to make progress, as Canada, Germany and South Korea join Singapore, Malaysia, the UK, Russia, Switzerland, Tokyo, Hong Kong and Macau providing offshore RMB clearance, financing and equities.

China’s banking system is also seeing a number of important changes. The government has issued new draft rules on deposit insurance. The CBRC’s Guidelines on Internal Control of Commercial Banks address a broad range of issues covering management, organizational responsibility and supervision of internal risk management. In addition, at the G20 meeting in Brisbane, Australia in November of this year, President Xi announced that China would adopt the IMF Special Data Dissemination Standard (SDDS). These regulatory reform initiatives suggest that the government is keen on structural reform in the banking sector. Further reforms in banking sector include relaxing entry barrier for foreign banks and allowing more private banks in China’s domestic market.

On fiscal policy, the Standing Committee of the National People’s Congress passed an amendment to the Budget Law on August 31, 2014. One of the most notable changes is that local governments will be permitted to issue bonds to raise funds, on the condition that the State Council will issue a “cap” on borrowing amount. In addition, the central government made it clear that it will not step in if local governments default on their debts. Such measures are expected to reduce local government’s heavy reliance on land finance and various unregulated local financing vehicles, and should improve their fiscal transparency and accountability, therefore alleviating the “soft budget” problem—at least to some degree.

Privatization has also been picking up pace. A key development is the opening of traditionally state-monopolized sectors, such as energy and banking, to greater private participation. This reform has centered on granting market access to private investors and expanding mixed ownership in state-owned enterprises (SOEs). However, as the case of Sinopec’s recent restructuring demonstrates, the government prefers to move incrementally in privatization agenda with many caveats still in place.

However, some of these long-term reform measures present risk for short and medium-term political stability. On the one hand, the CBRC’s draft proposal for phasing in higher leverage ratios for banks to meet the Basel III standard clashes with liquidity needs that must be met to achieve the government’s yearly growth target. On the other hand, China’s recent relaxed rules for calculating deposits, giving banks more leeway to re-lend and extend loans, and the PBOC’s reported increase of the annual new loan target to 10 trillion RMB, up from 9.5 trillion, demonstrates that the government is wary about economic growth. Needless to say, despite Beijing’s uneasy juggling between reform and political stability, both uncertainties as well as opportunities abound for the year to come. 

Party Affairs: The Year of Xi

Scott McKnight, University of Toronto

If 2013 was a prolonged baptism by fire for Chairman Xi Jinping, then 2014 was one for modest celebration. Back in late 2012 when Xi Jinping assumed power, the CCP’s future was uncertain; Xi had inherited a Party facing a restive society, a scourge of corruption, blowback from the Bo Xilai scandal, and an ideology that was failing to convince the masses of the need for one-party rule. Through 2013 and 2014, dealing with this set of problems became the focus of Xi’s attention.

And Xi soon made it clear that goals to restore Party legitimacy and consolidate his own personal power need not be mutually exclusive. As a result, Xi has helped regain a degree of popular support for the CCP while effectively halting the Party’s drift toward collective leadership. Instead, by assuming top posts in the Party, state and military, as well as filling key high-level positions with protégés, allies, and friends, Xi has established himself as the paramount leader in all but name at the apex of the Chinese party-state.

Part of this process of power consolidation related to the defeat of political rivals. The year 2014 saw the final scenes of the takedowns of three high-level officials on charges of corruption. For Xu Caihou (徐才厚), his case built on earlier investigations into charges of taking bribes for officer promotions in the PLA against Gu Junshan, as well as other crimes. For Yuan Chunqing (袁纯清), the Shanxi party leadership had been under assault from the anti-corruption campaign since early 2014, with a rash of corruption cases tied together and a staggering number of high-level provincial leaders coming under investigation. But no takedown was more shocking—or crucial for Xi’s political future—than that of Zhou Yongkang, retired Politburo Standing Committee member and former domestic spy chief. And while the climax of the far-sweeping anti-corruption drive was in 2013, the arrests of these three heavyweights signal the denouement of what has been an anti-corruption campaign for the ages. For Zhou Yongkang, his case was part of a year-long series of investigations into protégés in China’s oil giant CNPC (中石油) as well as provincial leaders in Sichuan province, where Zhou had spent time as a party chief, as well as the public security apparatus, mishu (秘书) (assistants), and his family. Xi spent the year – and parts of 2013 – plucking at Zhou’s power network piece by piece.

And some think this anti-corruption campaign hasn’t yet ended. The petering out of spending on lavish parties, gluttonous feasts and gaudy luxury goods indicates that Party officials continue to look over their shoulders, paying heed to the Chinese idiom of “killing the chicken to scare the monkey.” (Whether Party officials are simply making these purchases abroad is another question). 

Xi’s crusade against corruption has raised questions about his family’s wealth. According to The New York Times, whose website was blocked in China since its expose on the wealth of former premier Wen Jiabao, Xi has told relatives to dump their assets, presumably in the hope of making him less susceptible to attack. In general, Xi has resisted calls for greater transparency into the assets of Party members, and instead arrested activists who have pushed for officials to reveal their assets while censoring Western media outlets that have investigated Chinese leaders, like Bloomberg.org and The Guardian (for pieces like this and this).

Hopes that Xi’s ambitious reform agenda would extend beyond anti-corruption and into the realm of greater Party transparency and political reform were dismally put to rest in 2014. The silencing of political dissent, which has taken place online and even at some of China’s prestigious think tanks, confirms skeptics’ earlier doubts that Xi’s “Chinese Dream” also included a political opening. 

Ultimately, it’s hard to say whether 2014 was a year in which the CCP actually strengthened its hold over an increasingly diverse Chinese society. What is clear, however, is that Xi Jinping is stronger now than he was a year earlier – and there’s no sign of him relenting in 2015.

State-Society Relations: Attacks, Protests and Stability

Karl Yan, University of Toronto

The year 2014 showed just how wary the Chinese Communist Party is on issues of domestic security. The gristly Kunming attack in early March resulted in bulked up police patrolling of public areas and heightened security measures in transportation hubs across the entire country. As tensions between Han Chinese and Muslim Uighurs reached new and frightening heights, acts of terrorism continued throughout the year, especially in Xinjiang, the province where most Uighurs live.

But terrorism and ethnic tensions weren’t the only questions besetting Chinese society – and the security-minded Party – in 2014. The nagging urban-rural divide, uneasy state-peasant relations, appalling income disparity, and a general resentment of the rich and public officials – the two which are sometimes difficult to distinguish – saw no significant easing of tension in 2014.

The Chinese party-state was able to move further in terms of government accountability, transparency, and rule by law. These were all done under a sense of entrenched authoritarianism (see Party Affairs) and deeper reform (see Financial & Economic Reform). The capture and arrest of Zhou Yongkang showed the Party’s determination in its anti-corruption campaign, and showing the degree of government accountability to the people. Ending the dreaded, Orwelllian “re-education through labor program” (劳动教养) was a welcome and concrete step toward rule by law. In addition, the central government also moved towards getting local governments out of the market through its legislation on local government’s debt management.

In terms of the urban-rural dual structure economy, the central government pushed to eliminate dual registration of the profoundly unfair Household Registration System (户口体系); peasant and urban dwellers are now under one registration system. Furthermore, the state will gradually guide the transition from its dual economic structure – small agrarian in the countryside and socialized production in the cities – to a more modern industrialized economy. In terms of urbanization, small-scale cities will fully integrate migrant communities; integration in medium-scale cities will take place gradually; integration in large cities will be managed; and integration in large metropolises will be strictly controlled. Further, the country has moved towards real estate registration to curb rising real estate prices as well as a precursor to property taxes in the future. In addition, China has reopened the controversial “one child policy” (计划生育) debate and is now consider postponing the retirement age to combat problems of an aging population.

Three major social movements took place in 2014: Maoming’s protest against the city’s PX project in March, Hong Kong’s “Umbrella Revolution” in September, and Jining’s “Violent Incident” in October. The state handled all three cases differently: Maoming’s protesters were repressed; Jining’s peasant revolt caught the attention of Kunming Party Secretary, who promised speedy resolution of the issue; Hong Kong student’s democratic aspirations were met with silence from the central government, who largely saw this as a local issue and should be best dealt with locally. This diversity of responses shows that the Chinese government, although always bearing a hammer, need not always use it. 

Media & Censorship: Watch What You Say

Emile Dirks, University of Toronto

Last year saw increased censorship and intimidation of the Chinese press in what has become a hallmark Xi Jinping’s presidency. Beginning in 2013, Chinese journalists have been required to attend ideological seminars on the importance of Marxist thought. Web-based censorship also kept apace as the Chinese party-state attempted to limit netizen access to information related to Hong Kong’s Umbrella Revolution.

Perhaps the most pernicious expression of this crackdown has been the broadcasting on state television of “confessions” by journalists accused of a variety of offences. Examples include journalists Gao Yu (高瑜), detained a few weeks prior to the 25th anniversary of the Tiananmen Square “Incident,” and who was forced to confess to the leaking of state secrets. In October, Chen Yongzhou (陈永洲), a reporter for the Guangdong-based New Express (新快报) newspaper, confessed on national television to accepting bribes in exchange for writing articles defaming a large equipment manufacturer.

There is a natural tendency to connect this crackdown on journalists with Xi’s heavy-duty anti-corruption campaign. It’s not immediately clear how discrete these campaigns are, nor how they can be separated from Xi’s drive to consolidate power for himself and his backers (see Party Affairs).

More interesting will be seeing how the Chinese public attempts to work within these restrictions in the coming year. The Chinese party-state may succeed in intimidating the mainstream press into silence, but China’s famously dexterous netizens (网民) are already savvy enough to seek out information and news through a variety of domestic and international sources. And CCTV, the state-owned television/propaganda arm of the party-state, has lost much of the respect it once enjoyed.  In any respect, the Chinese party-state recognizes that an educated, informed population is essential for China’s continuing growth.

But Western analysts should also be wary of conflating popular frustration at government censorship with broad sympathies for liberal-democratic principles. While the targets of web censorship are often journalists interested in challenging state power, the Chinese-party state is also adept at using media censorship to keep at bay the views of extreme nationalists who criticize the Chinese party-state from a decidedly anti-liberal line. Whether or not the recent media crackdown reduces spaces for these hyper-nationalist voices as well remains to be seen.

Taiwan: Return of the Green Machine

Charles Wharton, National Taiwan University

Upstarts, infighting, a villainous “princeling,” and the crumbling of an old lion’s legacy: there was no shortage of drama – or dramatic change – in Taiwanese politics in 2014. The spring of 2014 in Taiwan brought the “Sunflower Movement” to full bloom, as from March to April, social activists, mainly university students led by Lin Fei-fan and Chen Wei-ting, took to the streets and even occupied the Taiwanese Legislature to protest the Cross-Strait Service Trade Agreement (CSSTA), The CSSTA had been a high priority of President Ma Ying-jeou and the Kuomintang (KMT) Party. Ma and the KMT had argued that the agreement would enrich the island economically by gaining better access to mainland markets and capital. But the Sunflowers and their supporters felt the CSSTA would have turned Taiwan into an economic vassal of the PRC and jeopardized the island’s hard-earned liberties.

In stark contrast to Hong Kong’s “Umbrella” movement, Taiwanese students proved extraordinarily successful in achieving their most significant policy goal – the pact was shelved. On top of that, the KMT suffered a stark drop in popularity, due in part to the public perception that the government came down too harshly against the younger protestors.

Throughout the rest of 2014, the Taiwanese public generally kept an independent (but not necessarily independence)-minded stance against what were seen as excessive secrecy and safety failings on the part of the big business establishment. Nuclear power was opposed in further protests, and food safety became a huge issue late in the year after a cooking oil scandal at Ting Hsin International Group.

The anti-establishment mood culminated in dramatic fashion, as news at the end of 2014 was dominated by Taiwan’s “9-in-1” local elections. By late November, it was clear that a shocking “green wave” was sweeping across the island’s politics. Democratic Progressive Party (“green” in local parlance, abbreviated DPP) candidates and sympathizers won most major elections, with the “blue” Kuomintang candidates suffering numerous surprising and even blistering defeats, including in areas they had traditionally dominated.

No race was more coveted or closely followed than that for mayor of Taipei city, in which retired physician and medical professor Ko Wen-je was pitted against Lien Sheng-wen (Sean Lien), the latter a scion of one of the KMT’s wealthiest and most prestigious families. The campaign was exceptional in part because Ko belonged to neither KMT nor DPP, choosing instead to run as an independent hoping to unify the populace above party lines. The DPP smartly recused itself from the race, as Ko’s popularity took on a life of its own. In response, Lien took to what many throughout the island regarded as negative mudslinging against Ko, but this strategy backfired, as voters were drawn to the positive-values approach from the Ko camp.

DPP and other non-KMT candidates also performed extremely well in most of the other 9-in-1 elections, winning key races in places ranging from Taoyuan and Hsinchu in the north, to Taichung in the center, and in traditional green strongholds Tainan and Kaohsiung in the south, both of the latter with margins of victory surpassing 67-33.

Looking ahead, Taiwanese politics in 2015 will likely be dominated by three key questions:

1)    How will the campaign proceed for the presidential election in early 2016? Tsai Ing-wen, chairwoman of the DPP, will almost certainly be nominated again and is looking to recover from her loss to President Ma in the 2012 election. The mainland has traditionally fought fiercely against DPP influence, and questions linger as to how relations with the PRC would proceed were she elected.

2)    What are the political futures of President Ma and the KMT? Ma has been almost completely discredited by Taiwanese voters over the past couple of years, and he was even coerced into resigning as party chairman of the KMT following its humiliating defeats. He had been replaced by Chu Li-luan (Eric Chu), who eked out a razor-thin victory to become mayor of New Taipei City, winning the KMT’s only major seat in the 9-in-1 elections. Will Chu run for president? It’s thought unlikely. And will the old guard of the KMT, including Ma, make way for new leadership to emerge in a party deeply torn between its traditional ways and the will of many Taiwanese voters, especially young people?

3)    Finally, some leading Taiwanese politicians, including Chu, have pushed for constitutional reform. Whether this will lead to another heated political debate or if bipartisan support can be secured to improve the functioning of a government system that is thought to divide power ineffectively between the president and legislature remains to be seen. 

Energy & Environment: Betting on All of the Horses

Daniel Pomerants, University of Toronto

Chinese energy diplomacy has had an interesting 12 months, particularly as it concerns two major competing agreements with two major international powers: Russia and the United States. In May, China signed a gigantic $400 billion deal with Russia that would send Russian liquefied natural gas (LNG) to China over the course of thirty years starting in 2018. LNG is widely seen by Chinese policymakers as an additional source of energy to a country dominated by coal production and consumption. This agreement was followed by a number of smaller arrangements that will see Russian gas producers selling their company stakes to state-owned giant China National Petroleum Corporation (CNPC). These deals are important because not only does Russia secure a trading partner in, and markets to, Asia, but it also moves away from a reliance on European partners. For the Chinese, they secure access to a natural resource from a geographically-contiguous “reliable friend” – to use Putin’s description of China – to ensure LNG is supplied to an energy-hungry nation that is also seeking sources of energy that are less environmentally unfriendly than coal.

China also signed a groundbreaking climate change deal with the United States that aims to reduce greenhouse gas emissions substantially. Under the terms of this agreement, China will get about 20 percent of its energy from non-fossil fuel energy sources by 2030 while the United States will reduce emissions by 26 percent of 2005 levels by 2025. Recent legal amendments made to Chinese environmental protection law, which will increase fines for polluting corporations, would further help China meet its emission cut promises.

Both agreements took the world by surprise, but come at a time when environmental matters have became policy priorities for the Obama and Xi administrations. A commitment to reduce greenhouse gas emissions, while investing heavily in renewable, clean energy sources, and simultaneously agreeing to import sources of greenhouse gas emissions like natural gas (instead of relying on coal), demonstrate Beijing’s delicate balance between fulfilling its international obligations for safeguarding the environment and meeting its domestic energy needs.