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Author: Maria Repnikova, Asan Institute for Policy Studies and Georgetown University

From the outset of the Russia–Ukraine escalation, Russian official sources claimed to have secured China’s support. Most recently, following Russia’s official annexation of Crimea, President Vladimir Putin thanked China and India, which abstained from the UN Security Council vote condemning Russia.

In reality, however, Russia’s projection of China’s stance in this crisis has been misconstrued, as China consistently favoured strategic ambiguity instead of directly championing Russia’s cause. In March 2014 Wang Yi, China’s foreign minister, stated that China would not consider taking sides in this conflict. China’s abstention in the Security Council vote validated this statement. Most recently, during his visit to Europe, President Xi stressed that China is in favour of ‘political solutions to the crisis’ that would benefit all parties involved, voicing strong support for international coordination mechanisms.

As the crisis unfolded Chinese media expressed some implicit support for Russia by criticising the West for its hypocrisy in fighting for Ukraine’s sovereignty while having partaken in an anti-democratic revolt against President Yanukovych. A popular article wrote that while the Chinese government wants to maintain a diplomatic equilibrium, Chinese public opinion strongly supports Russia, regarding its actions as legitimate in light of Western containment policies. Neither the official press nor popular nationalistic outlets, however, have directly praised Russia’s invasion of Crimea. The latest tensions in Eastern Ukraine have been widely reported in Chinese press, but largely relying on Western news sources and abstaining from sharp commentary.

China has skilfully balanced its official support for a diplomatic solution to the crisis with projecting some affinity towards Russia’s position. This ambiguity benefits China’s foreign policy in many ways.

First, by staying in the middle China has managed to prevent significant rifts in its relations with the United States and Russia — two important partners. Both parties have used China’s ambivalence to advance their objectives in the crisis. The United States has used China’s abstention to stress Russia’s isolated position, while Russia presented it as a sign of support.

Second, China stands to gain in energy diplomacy as a result of closer ties with Russia. Being forced to look for gas export markets outside of Europe, it is increasingly more likely that Russia will sign the China Gas Deal, which has been stalled for many years. The 30-year deal to supply pipeline gas is timely as Chinese authorities are working to rebalance its national economy and establish reliable energy supplies. Signing the gas deal will also place China in a more confident negotiating position vis-à-vis other energy suppliers.

Third, the Crimea crisis is likely to increase China’s growing assertiveness in the Asia Pacific region. The Ukraine events distracted the United States from its pivot towards Asia, which is already perceived with wariness by Chinese officials and experts, and interpreted as largely reactive to China’s growing influence in the region. The Crimea crisis further highlights the weakness of the United States in managing multiple global objectives along with domestic challenges, giving more leverage to China in managing regional affairs.

Most importantly, the Crimea events taught China that unilateral actions could succeed. This has important implications for its potential confrontation with Japan, and also with Taiwan in the future. The inability of the West to stop Russia’s annexation of Ukraine demonstrates the weakness of the international community. The already vocal public opinion in China is further fuelled by Russia’s defiance of Western pressure. In future crises, the Chinese public will look to Russia as an example of leadership, making it harder for Chinese leaders to uphold a more diplomatic position. As the media attention focused on Ukraine, China has persisted in upholding its stance on contentious issues in the Asia Pacific. It gave stern warnings to the Philippines over disputed shoal, and continued to defend its ‘undisputable sovereignty’ over the Diaoyu/Senkaku islands.

The events in Crimea demonstrated to China that it pays off maintaining neutrality in international conflicts for as long as possible and to treat such crises as strategic lessons. China learned that assertiveness can yield effective results, and the costs of international retribution remain relatively low. How it incorporates these lessons into its foreign policy is something to watch closely in the future.

Maria Repnikova is a post-doctoral fellow at the Asan Institute for Policy Studies and a visiting scholar at the Government Department, Georgetown University. You can follow her on Twitter @MariaRepnikova

Excerpt from:
Why China stands to benefit from ambiguity on Crimea

Author: Daniel K. Gardner, Smith College

China’s polluted air — so much in the news these days — has been 30 years in the making.

Chinese tourists wear facemasks during a visit to Tiananmen Square as heavy air pollution shrouds Beijing.(Photo: AAP)

When Deng Xiaoping introduced market reforms in the late 1970s, the country started its steady rise from the economic doldrums, largely through investment in heavy industrialisation. Since then, its GDP has grown about 10 per cent annually, and its economy has displaced Japan’s as the world’s second largest. 

Industrialisation, the foundation of China’s economic upsurge, has relied on tremendous energy reserves — and most of this energy, about 70 per cent, comes from coal. Today, China consumes slightly more coal than all other countries in the world combined. And each ton of coal that is burnt there produces more than one ton of pollutants, including carbon dioxide, particulate matter, sulfur dioxide and mercury.

The economic prosperity generated by China’s industrialisation has given rise to a burgeoning middle class, which is consuming, heavily — buying televisions, washers, refrigerators, air-conditioners, heaters, larger homes and cars (all significantly increasing the demand for energy resources). In 1978 there wasn’t a single privately owned car in China; today, China is the world’s largest car market, purchasing about 20 million units in 2013 alone. Emissions from these cars spew toxins of all variety into the air.

Coal and cars are the culprits largely responsible for the thick, soupy air that frequently envelops cities like Beijing, Harbin and Shanghai — rendering their skylines invisible and turning day into night. Not surprisingly, this air is dangerous to breathe.

Scientific studies released just this past year show:  1) that pollutants in the outdoor air led to 1.2 million premature deaths in China in 2010; 2) that between 1981 and 2001 average life expectancy in north China was a full 5.5 years shorter than in south China, owing simply to the higher burden of particulate matter there (55 per cent higher) — a result of the region’s heavier dependence on coal for heating; and 3) that while China’s rate of tobacco smoking has remained level over the past three decades the rate of lung cancer has increased 465 per cent, because fine particles (PM2.5) suspended in the country’s air can make their way deep into lungs and lodge there.

These astonishing figures point to a simple fact: China’s air is wreaking havoc on the health and wellbeing of the people there.

The economic costs of air pollution are considerable too. As mortality and morbidity rates rise, so obviously do medical costs and the number of missed working days, leading to lost productivity. In addition, polluted air results in resource depletion: soil acidification from acid rain reduces the amount of China’s arable land and crop productivity; mercury emitted by coal combustion enters the water systems, contaminating water and affecting fish, rice, vegetables and fruits; and airborne pollutants kill off trees and forests.

Chinese citizens are making their displeasure known. In the past few years they have increasingly taken to the streets to express their opposition to the building of coal-fired power plants, waste incinerators, chemical plants, oil refineries, battery factories and the like that pollute the atmosphere, water and soil, and endanger people’s lives and livelihoods. Indeed, just this week hundreds took to the streets to protest a paraxylene plant in Maoming city in Guangdong.

The Communist Party now finds itself caught in an irony of its own making: the economic prosperity it has fostered for the people over the past 30 years is a powerful source of its ongoing legitimacy; but the polluted environment spawned by that prosperity is putting the people’s support for the party — the party’s legitimacy — at some risk. The challenge the leaders in Beijing face is finding the right balance between economic development and environmental protection. They must curb environmental pollution without putting a halt to the country’s economic progress.

Taking this challenge on, the Chinese government has recently promoted a range of policies and measures intended to protect the environment and clean up the pollution. These include shutting down small and inefficient coal plants, banning the building of new coal-fired power plants in key economic zones, putting caps on coal consumption, introducing trial carbon-trading programs in four major regions, and placing a limit on the growth of emission-intensive industries. And recently it was announced that the legislature is considering the implementation of an environmental pollution tax.

To offset the reduced dependence on coal, the government is also looking to expand the energy reserves coming from other fuel sources, namely, natural gas, wind, solar, hydroelectric, and nuclear power (each of which presents its own set of challenges). And to cut vehicle emissions it plans to remove from the roads all cars registered prior to 2005, require the use of the much cleaner China V gasoline, promote the development and use of green vehicles, and expand the public transit systems.

But such plans and measures, in the end, are not likely to count for much unless Beijing confronts what has proved to be the biggest obstacle in its battle against pollution: ineffective implementation and enforcement of environmental laws and regulations.

Ineffective implementation results in part from contradictory messages Beijing sends the country’s lower officials.  The government in Beijing determines environmental policies and measures, and then places the responsibility for their implementation on local officials.  But, these local officials, at the same time, are pressed by Beijing to pursue economic growth above all else; in assessing official performance, in deciding promotions and demotions, the Beijing government gives heaviest weight to success — or failure — in developing the local economy.  As a consequence, local officials are naturally far more dedicated to “growing” the economy than to protecting the environment. Thus, if Beijing is genuinely committed to cleaning up the country’s polluted air, water, and soil, it must refine its calculus for grading and rewarding the performance of local officials. Yes, the leadership routinely proclaims its intention to give greater weight to stewardship of the environment, but, in practice, environmental protection continues to count for relatively little.

A closely related problem is enforcement of environmental policy and law. The government can propose, legislate and talk of a ‘war on pollution’ all it wants, but if there is no central supervisory body or mechanism with real authority, power and resources to monitor and enforce compliance, and to press for the resolution of environmental problems that arise, the war will not easily be won.

Bold structural reform is needed. Today, responsibility for environmental monitoring is divided among at least six state ministries and agencies, with often competing agendas and goals. Environmental authority is simply too disparate, too weak. It is time for Beijing’s leaders to give the Ministry of Environmental Protection (MEP) the sort of comprehensive supervisory power that would transform it into a forceful national environmental protection agency. As the youngest ministry of the 25 in the State Council (elevated from state agency status only in 2008), with a meagre staff of 300 (the US EPA has more than 17,000), the MEP presently has little real capacity to take command of the nation’s environmental challenges.  Nor, it might be added, can it do much to enforce local compliance with environmental regulations.

If the Chinese government is genuinely committed to winning the war on pollution, it is time to endow the state ministry responsible for environmental protection with the level of staffing, funding and authority that reflects that commitment.

Daniel K. Gardner is the Dwight W. Morrow Professor in the Department of History and Program in East Asian Studies at Smith College, Northampton.

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Can China win the war on air pollution?

Author: Sarah Milne, ANU

At the beginning of this year it emerged that ANZ, Australia’s banking giant, had helped to finance a 20,000-hectare sugar plantation in Cambodia that involved military-backed land grabs, forced eviction of local farmers, food shortages and child labour, allegedly affecting more than 1000 families.

The agri-business project in question, led by a well-known and well-connected Cambodian tycoon and ruling party senator, is just one of hundreds of Economic Land Concessions that have transformed Cambodia’s countryside over the past decade. Such privately held concessions, for agriculture and mining, are now said to cover 22 per cent of the Cambodia’s surface area. At first glance, the concessions appear to offer a much needed win-win for business and human development in one of Southeast Asia’s poorest countries: investors are virtually guaranteed double-digit growth rates; concessions are held in the long-term, on vast tracts of apparently empty state land; and local people are promised vital employment.

But this development vision is illusory, and even harbours the potential for political unrest, because it is built on the shaky foundation of contested resource ownership, or unresolved property rights.

For agri-business to take root in rural Cambodia’s patchwork landscapes, from which around 80 per cent of the population still derives its livelihood, a great deal of practical and discursive work is required. At a fundamental level, this entails the reorganisation and reworking of property, including clarification of its categories and forms, as well as its rules of access and ownership.

Inevitably, this task of property formation is contested and political in nature. Sprawled beyond the easily mapped paddy lands of Cambodia’s rice-belt is the other two-thirds of the country: a relatively sparsely populated and unruly landscape of savannah, flooded forest, mixed agriculture, fallow and jungle. This poorly understood expanse of ‘forested land’ is largely anthropogenic and has sustained Khmer and indigenous people for centuries, including through the upheavals of Cambodia’s 30-year civil war.

In this setting, customary property rights derive from traditional livelihood activities like shifting agriculture and the collection of non-timber forest products. But these rights are also infused with the complex and dynamic ‘property effects’ of Cambodia’s past, which involved massive human displacement, protracted territorial struggles and a radical socialist abolition of private property. How then does a nascent post-conflict state, seeking growth and stability, make sense of this melting pot of overlapping and evolving resource claims?

Answering this question is not easy. There are multiple possible ‘right’ ways to approach it, each with its own complications.

Facing this challenge 20 years ago, Cambodia entered its post-conflict land reform process. A daunting range of actors, along with their ideas and agendas, were thrown into the mix: well-intended donors, the World Bank, NGOs, international advisors, and an array of variously motivated government officials including decision-makers, law-makers, map-makers, village chiefs and provincial governors. Most of these actors subscribed to the conventional logic that clear private property rights were essential for the efficient functioning of markets, and must therefore underpin Cambodia’s modernisation and economic development. Thus the ambitious multi-million-dollar Land Mapping and Administration Project was born in 2002. Hosted by the Ministry of Land Management Urban Planning and Construction, with lead roles being played by German advisors and the World Bank, this project initiated the massive task of systematic land titling for the millions of Cambodians whose land occupation and ownership was not officially registered.

As the land reform process unfolded, however, it became subject to political manipulation by the government and its increasingly self-confident rulers. For example, by 2007, it was clear that the land titling initiative had taken on a particular geography whereby some property claims were privileged over others, and the presence of ‘inconveniently’ located people was rendered invisible or simply overlooked in official map-making processes.

Thus, through partial and selective implementation, the titling program was used by the state to achieve its own more self-interested goals, namely: legitimisation and reinforcement of the government’s hold over vast areas of valuable but as-yet-untitled land, including millions of hectares of forest estate, national parks and a range of urban slums.

By virtue of the classification ‘State Land’ these areas became available to investors and elites. Some acquired long-term concessions after paying handsome ‘fees’ to government and ruling party members; others, often government officials themselves, simply grabbed land because they had the power and connections to do so. This deft manoeuvring, conducted under the purview of international donors and advisors, highlights the predatory nature of Cambodia’s current regime. In particular, it shows how state power and authority have been used to facilitate the private accumulation of land and resources by elites.

The fundamental problem here is that the millions of hectares of Cambodian land now appropriated for private interests were not necessarily unoccupied or empty. Just as the peasants of Europe were dispossessed from their land to make way for the market economy, Cambodia is witnessing the alienation of tens of thousands of people from their land and livelihoods to make way for ‘development’, often involving state-sanctioned violence.

Initially, villagers stood by in shock and fear as they lost their land and resources. But in recent years their responses have galvanised into resistance, giving rise to a looming political discontent that was reflected in the dramatic and still-unresolved national election results of July 2013 — perhaps the greatest challenge yet to the ruling party.

Protests over land are now almost a daily occurrence. Some resistance efforts have garnered international attention, for example when indigenous villagers dressed up as ‘avatars’ in Phnom Penh. But most resistance is of the everyday kind: blocking off of provincial roads to create disturbance, delivery of thumb-printed letters to local government officials, formation of village networks to share information and defend land. These dynamics are the visible ‘edge’ of social change in Cambodia, and they will continue so long as the property contests remain unsolved.

Today, ANZ is learning the hard way about the violent and messy underpinnings of property in Cambodia. Donors have also suffered over land issues in recent years: both the Australian aid program and the World Bank have been accused of financing forced evictions through their provision of aid to the Cambodian government. Given this unpredictable environment, where outsiders tend to get their fingers burnt, how should international investors and donors proceed? So far, their actions have involved a fickle mixture of risk-aversion and public relations — strategies that ultimately reinforce the status quo in Cambodia. But what would happen if international leverage and resources were brought to bear differently, for example by nurturing local people’s desire for justice and change? This would be fiendishly complicated; but as a matter of moral obligation, it is well worth the risk.

Sarah Milne is a Research Fellow at the Crawford School of Public Policy, The Australian National University.

This article appeared in the most recent edition of the East Asia Forum Quarterly, ‘On the edge in Asia’.

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Can Cambodia’s sites of struggle become sources of hope?

Author: Tuvshintugs Batdelger, National University of Mongolia

In recent years Mongolia has become one of the most rapidly expanding economies in the world. According to the Economist Intelligence Unit, it was one of the top performers in 2013, with economic growth of 11.7 per cent, and it is projected to be the second top-performing economy in 2014, only after South Sudan (about 15 per cent).

Mongolia is a sparsely populated country with a total population of 2.9 million. Because of the economy’s rapid expansion over the last few years, the World Bank now classifies Mongolia as a mid-low income country for per capita income, and it is expected to enter mid-high income in the near future according to Mongolia’s Ministry of Economic Development.

The main driver of this rapid economic expansion has been the mining industry’s development. Mongolia is richly endowed with natural resources. With increasing commodities prices in the world market for the past 15 years, the mining sector’s share in GDP increased from 14 to 25 per cent. Mongolia’s main export commodities are copper, gold and coal, and Mongolia is now one of the major coal exporters to China, briefly overtaking Australia in 2011 and 2012.

Moreover, it is expected that during the next five years major mining projects of copper (Oyu Tolgoi project) and coal (Tavan Tolgoi project) will reach their full potential, likely further increasing economic expansion. By some estimates, Mongolia’s GDP will reach US$25 billion by 2020, which is 2.5 times the size of today’s economy.

These developments haven’t gone unnoticed in the world market. Mongolia has become one of the most attractive economies for investors. In 2013 alone the Mongolian government sold US$1.8 billion of bonds in world markets, which is a testament to the strong upside expectation of the economy.

However, the Mongolian economy faces serious challenges to reach its full potential and take advantage of the mining boom’s opportunities.

Since Mongolia is becoming increasingly dependent on the export of raw minerals, world price fluctuations for commodities have destabilising effects on the nation’s economy.

Therefore a major policy question is whether Mongolia has enough safeguards in place to protect itself from drastic fluctuations in its terms of trade. Inside Mongolia there is broad agreement about the need to conduct countercyclical macroeconomic policies — especially that the government should be saving during good times to be able to maintain the level of expenditure during economic troughs and stimulate the economy when needed. However, looking at the past 10 years of policymaking, Mongolian governments have found it hard to implement these policies in practice.

During and after the 2008–09 world economic crisis the difficulties of implementing and maintaining these policies were on full display. One problem was that, in order to win elections, political parties had great incentives to promote and execute populist policies, such as cash distributions to citizens. To stop these kinds of policies, which greatly hurt macroeconomic stability, major political parties agreed to control this practice and the parliament passed the Fiscal Stability Law in 2010, putting limits on government debt, increases in expenditure and the budget deficit. However, even this law was not enough to discipline the government.

Since the country desperately needs to develop and expand its infrastructure to promote economic diversification, the government has found it hard to resist spending more. Its efforts in raising capital by issuing bonds in foreign and domestic markets, and spending it through the newly established Development Bank of Mongolia (DBM), have undermined the spirit of the Fiscal Stability Law. At the end of 2013, budget deficit was at 8 per cent of GDP (including the DBM’s loans) and the overall debt level already exceeded the limit of 40 per cent of GDP set out by the law.

While the Mongolian government finds itself maintaining increasingly expansionary fiscal policies, the Bank of Mongolia (the central bank) is simultaneously undertaking expansionary monetary policy by extending more credit to government and commercial banks. As a result, in 2013, inflation reached 12 per cent and the exchange rate depreciated more than 20 per cent.

It should be noted that the exchange rate’s sharp depreciation was also exacerbated by a decrease in the country’s terms of trade. In contrast to previous years, the terms of trade depreciated by 15 per cent in 2013. Subsequently, the current account deficit for the year reached US$3 billion, or 28 per cent of GDP, and foreign direct investment decreased by 48 per cent (Mongol Bank – Balance of Payment statistics).

This sudden reversal in foreign direct investment also reflects another great challenge for the country. It is evident from the experiences of resource-abundant countries that the quality of institutions is a key ingredient in successfully taking advantage of the opportunities presented by the mining boom. That is, if a country’s institutional quality remains weak, the country will not be able to attract foreign investment, which is of paramount importance to reaching full economic potential.

Mongolian institutional quality is still lagging behind its stellar economic growth numbers. Institutional qualities can be partly measured by rankings, including: corruption perception, where Mongolia is ranked 83 out of 177 countries (Corruption Perceptions Index 2013); economic freedom, 97 out of 178 (2014 Index of Economic Freedom — The Heritage foundation); doing business, 76 out of 189 (The World Bank 2013); and global competitiveness, 107 out of 148 (The Global Competitiveness Report 2013–2014 — World Economic Forum).

Perhaps the most disturbing of all is the corruption index. Government’s increasing role in the economy (government expenditure, including the DBM, is estimated to be around 47 per cent of GDP) makes it an attractive breeding ground for rent-seeking by government officials. Although Mongolia is making some progress in tackling corruption at state and regional levels, with some high-profile cases having been through the Mongolian justice system, it could be that these cases are just the tip of the iceberg.

Such challenges are not unique to Mongolia, and were experienced by many countries with abundant natural resources. Countries that have been able to put in place good institutional arrangements have overcome these obstacles, and the so-called ‘resource curse’, whereas countries struggling with corruption, governance and accountability have not.

Most importantly, the outcome of these challenges will greatly affect the livelihood of Mongolians. As of 2013, the poverty rate is 28 per cent. Whether the country can translate the mining boom into a better livelihood for all citizens remains to be seen.

Tuvshintugs Datdelger is an associate professor at the National University of Mongolia and Director of the Economic Research Institute based at the university.

This article appeared in the most recent edition of the East Asia Forum Quarterly, ‘On the Edge in Asia’.

Mongolia’s economic prospects and challenges

Authors: Pham Thu Huong and Dao Ngoc Tien, FTU

Vietnam is now one of the largest coffee producers and exporters in the world — with a 20 per cent global market share. It exports coffee beans to more than 70 countries all over the world, and the US, Germany and Spain are its main importers. Although roasted and instant coffee exports have increased steadily year on year,the industry faces risks due to its low capacity to deal with world price fluctuations.

The coffee industry is a very important part of Vietnam’s agricultural sector. It contributes to Vietnam’s GDP, creates more jobs and helps socio-economic development in the Tay Nguyen area.

But Vietnam’s coffee bean price fluctuates depending on crops, weather, quantity and supply and demand. Export and domestic prices also follow international market fluctuations. Vietnam’s export price is lower than that of other exporting countries because the quality of Vietnamese coffee beans is neither high nor stable, and green coffee beans are exported without a trademark. The main reason for the lower quality is that farmers often pluck all the coffee berries from the branches when harvesting, so there are more green berries than ripe berries. Still, the gap between Vietnamese export prices and international export prices is narrowing.

Vietnam’s production for 2013/14 is forecast at a record 28.5 million bags, up two million on the previous year. And coffee bean exports are forecast to increase by 900,000 bags to 24.5 million.

Vietnam’s export product range includes green coffee beans, roasted coffee and instant coffee. 90 per cent of Vietnamese coffee produced is Robusta and 10 percent Arabica. As Arabica is more difficult to grow in Vietnam than Robusta because of unsuitable altitudes, it is not planted on a large scale, although it is twice the price of Robusta. Robusta coffee is popular in Vietnam’s southern provinces, while Arabica coffee is mainly planted in the mountainous areas of northern Vietnam.

The government has implemented various policies to encourage the export of coffee. These include value added tax refunds on coffee exports, extending export credit repayment and the establishment of a price stability fund operated by the Vietnam Coffee-Cocoa Association (VICOFA). But these activities seem to be ineffective at dealing with the negative fluctuations in world price. According to Mr Do Ha Nam, CEO of Vietnam’s biggest coffee exporter Intimex, the pertinent weakness of the coffee industry is its inability to deal with price fluctuation. A shortage of financial resources and a low level of processing cause this weakness. Currently, the coffee industry’s total outstanding debt is US$1.2 million.

VICOFA is an association of Vietnam’s main coffee exporters and is an important player in Vietnam’s coffee industry. It operates a price stability fund and provides a market information system for its members. Also, the association has annual coffee festivals either in Tay Nguyen provinces or Hanoi to promote domestic consumption. These activities have contributed to the achievements of the coffee industry in recent years. But there are concerns that VICOFA aims only to protect its members — domestic enterprises rather than the 60,000 coffee growers that account for 1.83 per cent of the national workforce.

In 2013, the government established Vietnam’s Coffee Coordinating Board. The board comprises representatives from governmental agencies, VICOFA, processors and farmers. Including farmers is a good signal that the government is paying attention to them. But among 15 members, only two are growers, four from processing enterprises and eight from the government (ministries and provinces).

The presence of foreign enterprises on the board is expected to bring about new developments in coffee marketing and price determination. Still, the development of Vietnam’s coffee industry will depend on the balance of benefits between processing enterprises — especially foreign enterprises such as Nestle — and small coffee growers. But whether the new Coffee Coordinating Board will contribute to this objective is still a big question.

Pham Thu Huong is Associate Professor and Vice Dean of the Postgraduate Faculty at Foreign Trade University, Vietnam.

Dao Ngoc Tien is Manager of Academic and Research Affairs, Foreign Trade University, Vietnam.

Continued here:
Bitter taste brewing in Vietnamese coffee

Author: Ed Griffith, University of Leeds

The Sino–Japanese relationship has been in something of a tailspin for some time now. Since the Noda administration nationalised three of the Senkaku/Diaoyu Islands in September 2012, China and Japan have been at each other’s throats. The nationalisation sparked angry — sometimes violent — protests across China, while the political response was only slightly more measured. Increased activity of Chinese vessels and aircraft around the islands raised fears that a miscalculation could spark a conflict that nobody really wanted. This was underlined when a Chinese military vessel locked its radar onto a Japanese destroyer in the area in January 2013.

Thankfully, cool heads prevailed.

But this was not the end of the mutual provocations and recent months have witnessed a depressingly predictable reopening of old wounds. This has included a denial of the Nanjing Massacre by a board member of Japan’s national broadcaster. Most notably, Prime Minister Shinzo Abe visited Yasukuni Shrine on 26 December 2013 — becoming the first serving prime minister to do so in more than seven years. The last prime minister to visit during his tenure was Junichiro Koizumi who paid six visits to the shrine in five years. This brought Sino–Japanese political relations at the highest level to a virtual halt.

These events are taking place against the backdrop of Japan’s increasingly assertive foreign policy discussion that inevitably raises concerns in China.

To seasoned observers of Sino–Japanese relations, this could easily feel like déjà vu. Abe was an ardent supporter of Koizumi’s visits to the shrine and perhaps the biggest surprise is that he did not visit during his first spell in office after succeeding Koizumi in 2006. Similarly, the other historical slights are nothing new; diplomatic ‘slips of the tongue’ have dogged Japan’s relations with its neighbours for decades. The latest round of the Senkaku/Diaoyu dispute certainly looks serious, but so did many of the other incarnations of this thorn in the side of bilateral relations. From the fleet of armed Chinese fishing ships that approached the islands in 1978, to the lighthouse incident of 1996, and the more recent boat ‘collision’ of 2010, this issue has never gone away.

If the issues are not new, then neither is the pessimistic and occasionally hysterical tone of much of the commentary that has accompanied them. Predictions that the two countries were preparing for war in 2013 plainly did not come to pass. Still, just weeks into 2014 there are similar warnings circulating, including from a senior figure in the US Navy. Such predictions are understandable — they fit much of the short-term evidence and the academic discipline of international relations is so preoccupied with military conflict that it looks for it wherever relationships do not run smoothly — but they are consistently wide of the mark. The resilience of the Sino–Japanese relationship and its ability to withstand seemingly intolerable levels of discord should not be underestimated. It is easy to find possible causes of a conflict between China and Japan, but it is substantially more difficult to find evidence that senior decision-makers on either side would allow that to come to pass.

China’s increasingly assertive activity in the East China Sea and its declaration of the Air Defence Identification Zone are clearly matters of concern for anyone who cares about regional stability. Similarly, the increased willingness of leading Japanese figures to engage in insensitive acts and undiplomatic language over the thorny issue of history while continuing to push for constitutional reform can only further antagonise a sensitive China. So we should not dismiss recent events as just another round of Sino–Japanese cyclical tension.

China’s reaction to Abe’s Yasukuni visit might have appeared relatively restrained, but China reacted in much the way that it always has on this issue: with rhetorical indignation from relatively low level foreign ministry spokespeople and critical commentary in official media. The real cost to Abe of his shrine visit was to break what appeared to have become an institutionalisation of prime ministers staying away from the shrine. This certainly will harm his ability to conduct relations with Japan’s neighbours — in particular China — in any worthwhile manner for the remainder of his tenure.

Still, one of the most remarkable aspects of the damage done to the bilateral relationship by the Yasukuni issue under Koizumi was just how quickly it was repaired once he was out of office.

It certainly feels like Japan and China have been here before, but that is because they have. We should not casually dismiss the current situation as a storm in a teacup, but it benefits nobody — least of all China and Japan — to overplay the potential for the situation to spiral further.

Ed Griffith is a postgraduate research student at the University of Leeds, UK and a fellow of the White Rose East Asia Centre. 

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Abe’s Chinese diplomacy déjà vu

Author: Paul Gillis, Peking University

The US Securities and Exchange Commission’s (SEC) administrative trial judge banned the Chinese member firms of the Big Four accounting firms from practice before the SEC in a bold ruling on 22 January. This move could lead to significant difficulties for US-listed Chinese companies and multinational corporations with operations in China.

Chinese companies have flooded US stock markets over the past decade, as China’s immature financial markets were unable to meet the capital needs of its rapidly growing entrepreneurial sector. Many of these companies faced allegations of fraud and malfeasance, leading to numerous attacks by short-selling research firms. The SEC’s efforts to investigate alleged frauds and the Public Company Accounting Oversight Board’s (PCAOB) move to inspect the work of auditors met resistance from Chinese regulators who considered allowing foreign regulators to enforce foreign law against Chinese persons on Chinese soil to be an unacceptable impingement on its national sovereignty.

Stymied in its efforts to obtain access to the people and records of alleged frauds, the SEC turned to the auditors. The Sarbanes-Oxley Act required auditors to cooperate with the SEC, and the SEC requested that they turn over the working papers that were created as part of the audit process. The auditors refused, citing Chinese regulations they said forbid them from sharing working papers with foreign regulators. The restrictions on sharing working papers with foreign regulators were rooted in China’s vague — but expansive — restrictions on disclosure of state secrets. In December 2012, the SEC brought administrative charges against the Chinese members of the Big Four firms, together with a local member firm of BDO. In a strongly worded 112-page decision, the judge imposed a six-month ban on the Big Four practicing before the SEC. BDO’s member firm was only admonished, mainly because it has withdrawn from the market.

The PCAOB was formed by the Sarbanes-Oxley Act to regulate auditors of US-listed companies. Central to the PCOAB’s function is the inspection of auditors to ascertain whether they are following the auditing standards that the PCAOB have set. China has blocked the PCAOB from conducting inspections of Chinese accounting firms, including the Chinese member firms of the Big Four, on grounds of national sovereignty. Instead, China wants the US to follow the practice of the EU and grant regulatory equivalency, which would allow US regulators to treat the work of Chinese regulators as if it were their own. The SEC and PCAOB do not recognise regulatory equivalency. The PCAOB offered to conduct inspections jointly with Chinese regulators, which the Chinese have rejected.

There was a breakthrough in US–China regulatory relations in May 2013 when the PCAOB reached a memorandum of understanding (MOU) with Chinese regulators to share documents in connection with the PCAOB’s investigations. Investigations are a small part of the work of the PCAOB, which focuses primarily on inspections. No progress was made in allowing the PCAOB to commence its core function of inspections. The MOU also restricted the PCAOB’s ability to share documents it obtained with the SEC. Audit documents began to flow to the PCAOB and the SEC following the MOU, although they were subject to an extensive redaction process to make certain that no state secrets were disclosed. The PCAOB has continued negotiations to obtain access for inspections. For the SEC, the MOU did not fill its need for unfettered access to source documents in order to enforce US securities laws.

The Big Four have announced their intent to appeal the decision, which is likely to indefinitely delay its implementation. Meanwhile, members of the PCAOB have indicated they cannot negotiate forever on access for inspections. Absent a breakthrough, there is a risk that Chinese auditors, including the Chinese member firms of the Big Four will be banned from auditing US-listed companies. That would likely lead to Chinese companies being kicked off of US exchanges and could cause serious difficulties for multinational corporations with significant Chinese operations.

A solution to this crisis is only likely through diplomacy. Regulators on both the US and Chinese sides have probably made all of the concessions they are able to make. China’s leaders need to decide whether they wish that Chinese companies could continue to access US capital markets. Longer term, China’s own domestic capital markets will be best suited to meet the capital needs of China’s private sector. But those markets need another decade to develop before they will have the depth and expertise to do this, and in the interim Chinese companies will need to continue to tap foreign capital markets. Agreeing to foreign regulation as a condition of access to foreign markets should not be considered an affront to national sovereignty.

Paul Gillis is Professor of Accounting at the Guanghua School of Management, Peking University.

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The US and China square off over cross-border listings