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The Snow Dragon: China in the Arctic

 4 min read / 

Earlier this year China’s Xi Jinping announced plans to invest an estimated $900bn in transport infrastructure connecting the Asian, African and European continents. The Belt and Road Initiative will run from mainland China to the East African coast and heart of European trade hubs as it aims to usher in a “new golden age of globalisation”. The initiative, which has been dubbed the New Silk Road, promises to secure this oriental nation at the centre of the future global economy. Beijing’s strategy, however, does not stop at the Belt and Road. Chinese trade infrastructure ambitions suggest the possibility of an Arctic Silk Road as its next step to complement the proposed current land and water routes.

 China’s Arctic Exploration

Beyond the vast untapped energy potential of the Arctic, opening as a result of the receding ice-caps, the melting Northern Sea Route along the Russian Arctic coast promises significantly faster intercontinental shipping routes between Europe and Asia. The previously frozen and unpassable routes have begun opening as a result of the rapid climate change the Arctic is undergoing. Once fully established, the route could cut the distance from Rotterdam to Shanghai by 24 percent when compared to current mainline shipping routes currently in use.

On July 20th of this year China’s ice breaker, the Xuelong or “Snow Dragon”, set sail for the country’s first circumnavigation of the Arctic rim. The 83-day expedition is another “milestone in the country’s polar exploration efforts,” said Lin Shanqing, deputy director of the State Oceanic Administration. In a move to expand the nation’s Arctic navy, the Chinese government has also commissioned the first ever domestically built civilian icebreaker. The vessel, which is set to join the Xuelong in Chinese exploration of the Arctic by 2019, will be another step towards Chinese expeditionary efforts in the region.

With mainline navigability predicted to be only decades away due to infrastructural deficiencies and current rates of Arctic ice recession, China has sought to place itself within the governance of the Arctic in order to secure its interests in the region’s future.

China’s Arctic Politics

Despite not being situated geographically in the Arctic Circle, in 2013 China secured permanent observer status in the Arctic Council, which granted Beijing a direct platform of input into the region’s politics. Chinese Rear Admiral Yin Zhuo upholds that “the Arctic belongs to all the people around the world as no nation has sovereignty over it”. This statement comes at a time when a number of Arctic littoral nations are currently in competition for economic control over the Arctic by asserting their Exclusive Economic Zones in the area. Here China can be seen emphasising an internationalism inclusive of their involvement in the region, similar to the internationalist trade policy currently proposed in the Belt and Road Initiative.

Though China is not permitted under international law to claim any physical territory in the Arctic Circle, the nation recently made efforts to strengthen diplomatic ties with those who do. En route to the United States for his summit with US President Donald Trump this April, Chinese President Xi Jinping stopped off in Finland to muster greater support for Chinese involvement in the Arctic. The President said that China and Finland would “seize the opportunity of Finland’s rotating chairmanship of the Arctic Council to enhance cooperation in Arctic affairs and promote environmental protection and sustainable development of the Arctic”.

This may, however, not be as well received by other emerging economic superpowers with stakes in the region. Just as India condemned the Belt and Road Initiative as “little more than a colonial enterprise”, Chinese interest in the Arctic may face similar suspicions as the commercial and strategic value of the region becomes ever more tangible.

Conclusion

With a growing policy towards intercontinental trade and the international importance of the Arctic in global relations, Chinese involvement in the region is only set to increase. How the Arctic littoral nations will receive this raises many questions about the nature of Arctic diplomacy in the future.

 

 

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Asia

Google to Open Artificial Intelligence Centre in China

 2 min read / 

Google AI China

Google will be opening its first artificial intelligence (AI) research centre in China, despite many of its services being blocked there.

Fei-Fei Li, Chief Scientist of Google Cloud, said:

“I believe AI and its benefits have no borders. Whether a breakthrough occurs in Silicon Valley, Beijing or anywhere else, it has the potential to make everyone’s life better for the entire world. As an AI first company, this is an important part of our collective mission. And we want to work with the best AI talent, wherever that talent is, to achieve it.”

The research centre will focus on basic AI research, and will consist of a team in Beijing, who will be supported by Google China’s engineering teams.

Google’s search engine and its Gmail are banned in China. However, the country has 730 million internet users, making the market too large to ignore.

Google is not the only tech giant facing restrictions in China. Facebook is also banned, while Apple’ App Store has been subject to censorship. In order to comply with government requests, Apple removed many popular messaging and virtual private network (VPN) apps from its App Store in China earlier on this year.

China has recently announced plans to develop artificial intelligence, and wants to catch up with the US. However, human rights groups are concerned by China’s use of artificial intelligence to monitor its own citizens.

Keep reading |  2 min read

China

Jack Ma Backs China’s Government

 1 min read / 

Jack Ma

The Alibaba founder said that China’s one-party system benefitted the nation.

Speaking onstage at Fortune magazine’s Guangzhou conference, the Chinese billionaire contrasted the Chinese one-party system with the relative instability of the US political system. Ma said that the Chinese system is one of the reasons that he is optimistic about his nation’s prospects for economic growth, commenting that in America the Democrats and Republicans are polarised on many major issues. Earlier last week, Ma also said that foreign companies seeking to do business in China must “follow the rules”, which was interpreted as meaning western tech giants must comply with local censorship laws

Keep reading |  1 min read

China

Chinese Yuan Bear Market: Is It Coming?

 3 min read / 

Chinese Yuan

As pessimism towards the Chinese economy reached bearish extremes last year, shorting the Chinese yuan became a favourite trade for many notable hedge funds.

The most famous bear, Kyle Bass, famously predicted that the yuan was set to fall by at least 30% as China’s credit problems kept ‘metastasizing’. His fund, Hayman Capital Management, raised a dedicated vehicle in order to take advantage of a slowdown in China.

Given that Chinese stock markets remain fairly underdeveloped, buying or selling Chinese equities is a poor way to express a view towards the country’s economy. Instead, hedge funds zeroed in on the currency as capital flight began accelerating in 2014. Yet, few noticed that the country had launched a new cycle of credit growth in early 2016.

Given China’s reliance on debt funding and investments to drive economic growth, looking at aggregate new financing is one of the best leading indicators for economic conditions.

Another good way of measuring onshore sentiment is to look at national house prices in rate-of-change terms. Given the huge gains in real estate over the past decade, local Chinese investors are watching house prices carefully. This is illustrated by the graph below:

Source: CEIC data

This marked the bottom for many assets with a high sensitivity to Chinese demand such as industrial metals and commodity currencies.

As house prices took off across China in 2016, Chinese residents regained confidence in the economy, and capital flight fell as a result. As of Q1 2017, Chinese house price growth has peaked and is now on a decelerating trend. Given the sharp rise of credit growth in 2016 and 2017, new credit growth is also likely to slow in 2018.

Another Bear Market on the Horizon

While the bull market that began in early 2016 has been great for assets that benefit from accelerating Chinese growth, the future outlook looks considerably cloudier. Our favourite indicator of the health of China’s economy is the Australian dollar.

Since the conclusion of China’s 19th Party Congress in October, the Australian dollar has been selling off sharply. Trending indicators for both the short-term and medium-term time frames on the Australian dollar have been bearish since that time.

This week, the currency has experienced another significant bout of weakness following poor GDP growth data. Earlier today, the currency sold off after export volumes missed expectations due to a sharp fall in iron ore exports (primarily destined for China). As the Australian dollar has historically served as a reliable front-runner to the Chinese yuan, the growing divergence between the two currencies is important to watch. This is shown below:

Source: TradingView.com, MarketsNow. (Note: CNH/USD inversed in blue).

As can be seen from a recent history of AUD/USD versus CNH/USD (inversed), the Australian dollar tends to foreshadow the future of the Chinese yuan.

While AUD weakened materially in late 2014 and 2015, the Chinese yuan did not follow suit until mid-2015. Similarly, once the Australian dollar began strengthening in 2016, the yuan eventually followed in 2017.

Conclusion

Lately, the Australian dollar has been far weaker relative to the Chinese yuan. Given slowing credit growth and decelerating new house prices, there are reasons to be concerned about the outlook for China’s economy. As the Australian dollar is now also falling, all signs suggest a weaker Chinese yuan in the near future.

Keep reading |  3 min read

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