May 26, 2017

China’s silent debt bomb for Pakistan

Pakistani PM Nawaz Sharif meets Chinese President Xi Jinping ahead of the Belt and Road Forum in Beijing, China, on May 13, 2017. (Reuters)


 MINHAZ MERCHANT | Thu, 25 May 2017-08:05am , DNA

Excessive liquidity making its way from Chinese banks to Pakistan does not bode well for its modest economy

History shows that when a country’s debt-to-GDP ratio climbs above 200 per cent, a red flag goes up. China’s total debt at $27 trillion is now 277 per cent of its GDP. At first glance, the principal worry for China is its over-leveraged state sector. Local governments have used cheap credit for years to fuel infrastructure growth. Many gleaming new Chinese cities built during the boom period are today ghost towns with unoccupied residential towers and empty streets.

Chinese GDP has slowed significantly from its breakneck speed of 10 per cent a year in the mid-2000s. China’s economic statistics are not entirely reliable and the official GDP growth rate of 6.8 per cent for fiscal 2017 can be discounted to around 5.5 per cent.

State and local government debt is a concern because most state enterprises have borrowed heavily from banks. Defaults could set off a banking crisis that will be difficult to contain. Li Yang, a senior researcher with the leading government think-tank, the China Academy of Social Sciences (CASS), said: “The gravity of China’s non-financial corporate debt is that if problems occur with it, China’s financial system will have problems immediately. It’s a fatal issue in China. Because of such a link, it is probably more urgent for China than other countries to resolve the debt problem.”

China’s debt bomb has not yet exploded and is not about to explode any time soon, for two reasons. One, the government is cash-rich and stands guarantee for most of the non-financial corporate debt owned by state enterprises who might default to banks — which again are state-owned and can, therefore, be bailed out. Two, China’s debt is largely funded by its high rate of domestic savings. This tends to make debt more stable than debt in countries whose borrowing is in foreign currencies.

And yet, China’s ballooning debt could have geopolitical consequences. Following last week’s Belt and Road Initiative (BRI) Summit in Beijing, China is preparing to widen its arc of influence well beyond Asia. Some of its grandiose projects in the China-Pakistan Economic Corridor (CPEC), a key part of the BRI, have begun to cause uneasiness even in Pakistan.

The Pakistani newspaper Dawn last week published ‘secret’ details of what China intends to do in the CPEC: “The main thrust of the plan actually lies in agriculture, contrary to the image of CPEC as a massive industrial and transport undertaking, involving power plants and highways. The plan acquires its greatest specificity, and lays out the largest number of projects and plans for their facilitation, in agriculture. In any plan, the question of financial resources is always crucial. The long-term plan drawn up by the China Development Bank is at its sharpest when discussing Pakistan’s financial sector, government debt market, depth of commercial banking, and the overall health of the financial system. It is at its most unsentimental when drawing up the risks faced by long-term investments in Pakistan’s economy. The chief risk the plan identifies is politics and security. ‘There are various factors affecting Pakistani politics, such as competing parties, religion, tribes, terrorists, and Western intervention,’ the authors write. ‘The security situation is the worst in recent years.’”

Thoughtful Pakistani commentators have started to question the CPEC on three grounds. First, that it focuses on agriculture rather than infrastructure and industry. Second, that it is based on high levels of debt that could be difficult for Pakistan to repay. And third, that it will use cheap Pakistani labour and raw materials for China’s benefit.

As the Dawn wrote: “Relying on the assessments of the IMF, World Bank, and the Asian Development Bank (ADB), Pakistan’s economy cannot absorb FDI much above $2 billion per year without giving rise to stresses in its economy. ‘It is recommended that China’s maximum annual direct investment in Pakistan should be around US$1 billion.’ Likewise, it concludes that Pakistan’s ceiling for preferential loans should be $1 billion, and for non-preferential loans no more than $1.5 billion per year.”

For India, the CPEC is an egregious violation of sovereignty. Prime Minister Narendra Modi is slated to meet Chinese President Xi Jinping at the Shanghai Cooperation Organisation (SCO) summit in Kazakhstan on June 8-9. Knowing your adversaries’ weaknesses, financial or otherwise, in advance is crucial, as the ancient Chinese military strategist Sun Tzu would have advised. Modi will be well prepared.

The writer is the author of The New Clash of Civilizations: How The Contest Between America, China, India, and Islam Will Shape Our Century

Three years of Modi Sarkar: Bureaucrats now have hotline to Prime Minister

By Sidhartha & Dipak K. Dash, TNN | May 26, 2017, 10.57 AM IST

Junior officials too can send ideas to the PM through the mygov portal.

The NDA government appears to have made a dent in the working of the bureaucracy that seemed plagued by compartmentalisation, which turned ministries and departments into silos, stalling the smooth exchange of ideas. 

Under PM Modi's system of secretary-level panels, ideas that may have remained on paper don't just find traction but are even getting implemented. "If I can convince committee members, there's every chance the PM will give his go-ahead to implement a scheme," said a secretary . 

Junior officials too can send ideas to the PM through the mygov portal. "At times we hesitate, wondering if there'll be an adverse impact. But there've been cases when ideas submitted have received a positive response," said an officer. 

Secretaries make presentations directly to the PM to ensure that they have command over the subject, they have to go alone to meet Modi. In many cases, the PM communicates directly with officers instead of going through ministers. 

The Prime Minister's Office under Modi has become one of the most powerful in recent years, with some secretaries accused of spending more time there than in their respective ministries -raising concerns that the Cabinet secretary is being relegated to the background. 

Soon after taking charge, Modi met all secretaries and made it clear they figure prominently in his scheme of things. But a series of transfers had shaken up the bureaucracy . Initial appointments did not instil confidence, with officers entrusted with departments where they had little or no experience, but with time and knowledge, that concern has largely been addressed. 

The other change has been the deployment of officers from all services other than the IAS across ministries. When it came to the post of Central Vigilance Commissioner -monopolised by retired IAS officers -thegovernment opted for K V Chowdary, a former income tax chief. 

"The difference is we do what we're asked to. In Manmohan Singh's time, we'd ask the minister if we had to do what the PMO had asked us," said a secretary. 

When occasion demands, the PM shows bureaucrats he cannot be taken for a ride. At a video-conference with senior officials, Modi showed a picture of the little progress made on the construction of a bridge on the Ganga in Bihar to counter officials' claims. 

Another time, he ticked off officials from Sikkim for tardy progress in the building of an airport. Non-performers invite the PM's ire. In the past year, 129 officers have been shown the door. 

Areas where Modi's administration needs to do more include the railway bureaucracy. Despite repeated promises to revamp the state transporter, the Railway Board continues to operate as before. There is also the complaint of an administration's favourite being appointed to key jobs. "That's any government's prerogative. Disruption is good, but too much disruption does not instil confidence in your people who deliver," said a bureaucrat. 

But the PM is clear that he needs bureaucrats he can trust -both in terms of integrity and performance -to deliver on his government's agenda

May 25, 2017

Ahead of 'Modern Silk Road' build, China credit downgrade worrisome


The recent announcement that Moody’s Investors Service, one of the leading global credit ratings agencies, downgraded China’s credit rating, contradicts the official narrative promoted by China that things are great, and its economy is on solid footing. Chinese policymakers have consistently justified the high debt-to-GDP level arguing that its economic model can both safely and reliably service such large amounts of debt, so long as the economy continues growing at a healthy pace.

For Moody’s, the assumptions on which China is predicating its growth has it most concerned. For roughly the past 10 years, China’s growth has come by way of two areas — investment in infrastructure, commercial and residential real estate and exports of manufactured goods.

With regard to the former, since 2008, China has embarked on a building spree unlike anything witnessed in world history. In fact, more concrete was poured in China from 2011 to 2013 than all concrete poured in the United States during the 20th Century. The building of roads, tunnels, bridges and high-rise buildings has put a lot of people to work and kept factories humming with construction-related materials.


Regarding exports, it is apparent that China has been very successful in manufacturing products of all kinds and selling them in the world’s most important consumer markets, such as the United States and the EU.

The challenge China is confronting is the sustainability of its growth model and its ability to continue its reliance on investment- and construction-driven growth, as well as diminishing competitiveness in its manufacturing sector.

On the construction side, all funding came by way of debt. Chinese corporations and local governments borrowed heavily to construct state-of-the-art highways, transportation facilities, shopping malls and residential towers. The problem is, what if the projects fail to meet revenue expectations and, if so, how will the debt be repaid? 

On the export side, China is also getting squeezed — the cost of manufacturing in China is going up. The cost of labor and inputs have all risen, making it increasingly difficult to compete against places like Vietnam and Sri Lanka. To address this, Chinese factories have been heavily investing in automation and robotics to offset the rising cost of labor. 

At the same time, global demand for manufactured goods has been less than the global increase in manufacturing productivity, leading to a glut of supply and not enough demand to absorb all of the built-up capacity within China.

Realizing that China’s go-go days of growth may be behind it and that it’s mountain of debt casts a shadow on its future prospects, its policymakers are looking to revive its fortunes through the One Belt One Road (OBOR) initiative. In fact, OBOR is the centerpiece of President Xi Jinping’s blueprint for China’s economic future. 

In a nutshell, under OBOR, China wishes to link the entire Eurasian continent by way of an extensive land (rail) and sea (sea ports) network that will represent the modern recreation of the ancient Silk Road connecting East with West. The intended benefit would be to facilitate long-term multilateral trade between China and all of the nations that OBOR will traverse.

China envisions the unification of the Eurasian continent, from Western Europe, through Central Asia and Russia, all the way to China and South Asia. It represents one of the most ambitious and massive infrastructure projects ever conceived, covering a distance equivalent to three United States, end-to-end. 

To fund this undertaking, China has created its own policy bank, the Asian Infrastructure Investment Bank, and bankrolled it with an initial capital worth $50 billion. It has been estimated that the total cost of building OBOR may exceed $3 trillion, meaning China will have to rely on global capital markets to answer the need.

Given the staggering amount of capital to build out OBOR, the $50 billion allocated is but a drop in the bucket. China is particularly incensed that the United States has stayed on the sidelines regarding OBOR.

Given the massive infrastructure needs within the United States, capital providers would have a hard time justifying investing in OBOR and funding China’s ambitions when there is such glaring need at home. The OBOR is more than just an “If we build it, they will come” project. The OBOR entails a multitude of risks — security, operational, geopolitical and economic.

The risks call into question whether or not OBOR will be economically viable and whether or not the intended benefits of OBOR will materialize as assumed. Moreover, Moody’s downgrade will only make borrowing costs in China rise as the perceived risks become more apparent. 

Arthur Dong is a professor of strategy and economics at Georgetown University’s McDonough School of Business. He specializes in legal and business engagements between China and the United States

Pakistan operationalises Naval Station in Balochistan

KARACHI:  Pakistan  Thursday operationalised a Naval Air Station which will provide the navy with the much needed depth, flexibility and reach to counter emerging challenges of deterring terrorism at sea, curbing piracy and carrying out maritime security operations, according to a statement

Defence Minister Khawaja Muhammad Asif was the chief guest of the ceremony that was also attended by Chief of the Naval Staff Admiral Muhammad Zakaullah and other officials.  

Speaking on the occasion, Khawaja  Asif highlighted that this major Naval facility will boost Pakistan Navy’s capability for the defence of motherland, enhancing the Naval power over the Arabian Sea and especially its strategic reach westwards.

He said that the dual utilization of Naval Air Station Turbat will accrue dividends both for the maritime defence and in the economic sector by yielding best value for money.

The defence minister said the development of Naval Air Station Turbat would definitely provide a vital link for air transportation and as a Base for Naval Operations besides providing required support to CPEC project.

“ With the realization of intra-regional connectivity, Balochistan will act as a gateway to Pakistan,” he said.

The Chief Guest also lauded strenuous efforts of Paksitan Navy for operational pursuits and for contribution towards socio-economic uplift of the area by providing quality education, healthcare facilities and employment opportunities for the local populace.

“He also assured all out support  from government  to strengthen Pakistan Navy – “the Guardian of the Sea” to discharge onerous responsibilities in the most befitting and efficient manner,” the statement read.


Earlier in his welcome address, Commander Coast Rear Admiral Abdul Aleem highlighted strategic and economic importance of Naval Air Station. He also underlined Pakistan Navy’s efforts in providing quality education, healthcare and employment to the people of Balochistan in general and the people of Turbat in particular.

Commander Coast extended his felicitations to all PN officers who remained associated with this mega project and made untiring efforts in turning this dream into reality.

 He also thanked the ministry of defence for providing all out support towards completion of this state of the art Air Station.

According to the statement, the new runway at the Naval Station has been constructed as per modern standard and it will also have the capability to handle heavier aircraft, not only for Pakistan Navy but also of Sister Services and Civil Airlines.

Pakistan Navy P3C Aircraft, Z9EC and Sea King helicopters participated in an impressive fly past During the ceremony