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The China challenge | Financial Times

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The biggest question in geoeconomics this year will be how the US and the EU develop their stances towards China. President-elect Joe Biden will need to shape a policy that accommodates growing and bipartisan US worries about China’s influence, while leaving Donald Trump’s brand of pugilism behind. The EU continues to juggle its recognition of China as a “systemic rival” requiring both “strategic autonomy” and working with allies, together with a desire to engage Beijing in rules-based economic exchange.

The EU’s investment agreement with China, agreed in principle at the end of last year, shows not only that these different political goals are a challenge to balance, but that they are also hard to communicate clearly. The Twitter exchange between trade expert Iana Dreyer and my colleague Alan Beattie is a good example of how differently well-informed observers judge the deal to contribute to the EU’s objectives. Sabine Weyand, the EU’s top civil servant for trade, has publicly endorsed Dreyer’s defence of the deal and given her own succinct argument for how signing the investment deal does further the EU’s goals.

Free Lunch is, for now, suspending judgment on the deal; we would very much like to see the full text published. But this and other ways the EU and the US relate to China will be one of the topics we will follow this year. In the meantime, let us share some analysis from last year that provides a useful basis to judge policy developments.

EU-China and US-China relations are obviously much broader than just economic. But the economic aspects are important in their own right and, what is more, they profoundly shape the politics. And Chinese economic policy is changing. To get one’s head around the change, a good place to start is my former colleague James Crabtree’s very accessible account of the new doctrine of “dual circulation”, promulgated by China’s autocrat Xi Jinping. The “dual” here refers to the international and domestic legs of economic growth, respectively, and the doctrine reflects an increased emphasis on the domestic side.

There are at least three dimensions of how Beijing’s new policy elevates the domestic. The first is to rely more on domestic demand, even including consumption demand, relative to external (export) demand. That has long been a sensible step, all the more so when China has put the pandemic behind it sooner than advanced countries, whose ability to fuel demand growth remains fragile. The second is more indigenous technological development, a trend whose successes and limits are already illustrated by 5G technology, where Huawei has stolen a march on western companies yet remains reliant on specialised chips produced in advanced economies. The third is heavier political control over this technological development and over the economy generally.

The doctrine is a defensive turn, in Crabtree’s reading, “a darkly pessimistic economic strategy, fit for a new Cold War” where China risks being cut off by the other global economic blocs. But it is a defensive strategy with offensive consequences on the foreign side. All the three shifts involved in the dual circulation doctrine have international implications, some more subtle than others.

For a sense of how Chinese thinkers see dual circulation, read the excellent Jingshan report published by the China Finance 40 Forum. Titled “Release China’s New Advantage of the Super-Large Market”, it makes very clear how developing the domestic economy is expected to bring global advantages because it creates incentives for technological progress, attracts capital and encourages pick-up of Chinese technology abroad.

The focus on domestic technological development is also linked to an interest in promoting the use of Chinese technology abroad. Beijing’s intense interest in international standard-setting often goes under the radar because of its highly technical nature. Yet as a Heinrich-Böll-Stiftung report from last year shows, it is an important element of the geoeconomics of China’s growth. It highlights a Chinese approach to using demanding technical standards at home as a way to force technological upgrading. It also points out that encouraging the use of Chinese standards in its Belt and Road infrastructure project can lock host countries into dependence on Chinese suppliers and generally help grow a Sinocentric network of economic relations. (Interestingly, the Jingshan report specifically mentions the spread of Chinese mobile payment technology.)

Finally, there is a sinister side to the intensification of political control of economic activity. At home, it has come to a head in, for example, the government’s crackdown on tycoon Jack Ma, who has disappeared from public view. But increased politicisation of the economy has a counterpart in international economic relations, too. In a report for the National Endowment for Democracy last year, Martin Hala describes the use of “corrosive capital” by Chinese state-directed companies abroad — a mix of commercial incentives and outright bribery to create a network of relations between companies, think-tanks and government officials promoting Chinese interests in other countries’ political debate and policymaking.

Deriving global economic heft from the size of the domestic market is, of course, something both the US and the EU have done. China is, however, more conscious and strategic about it: the US could take its influence for granted in the postwar era, and the EU has, to a large extent, enjoyed the “Brussels effect” without having to fight for it. China’s geoeconomic strategy means that both other blocs must update their stance. How they do so will do much to determine the global economy’s shape in the years to come.

Other readables

  • In my FT column this week, I argue that if Joe Biden really wants to emulate Franklin Roosevelt, he cannot content himself with “merely” rescuing the economy and ending the pandemic — he must use his short window of opportunity to enact policies that fundamentally reshape how the US economy works.

  • Bank of England rate-setting committee member Silvana Tenreyro wants to talk about negative interest rates. In a new speech, she argued that the evidence showed they were an effective tool to stimulate the economy.

  • Peter Orszag, Robert Rubin and Joseph Stiglitz have published a joint contribution to the debate about the future of fiscal policy, arguing that deep long-term uncertainty about the economy requires more automatic adjustments to budgets, leaving policymakers to make discretionary decisions where they are really needed.

Numbers news





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Pakistan’s prime minister survives confidence vote

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Pakistan’s prime minister survived a vote of confidence on Saturday after the shock defeat of his finance minister earlier in the week underscored the fragility of the ruling coalition.

Imran Khan took 178 of the 172 votes needed to win after the former cricket captain was forced to seek a vote to prove he had a majority to govern after his finance minister lost his senate seat in a tightly contested race.

The prime minister alleged that around 15 of his lawmakers had been “bought” to vote against Abdul Hafeez Shaikh, who led government negotiations with the IMF, after opposition-backed former prime minister Yusuf Raza Gilani took his Senate seat.

“Imran Khan is not going down in the near-term, but he stands politically weakened by the events of this week,” said Asfandyar Mir, a South-Asia analyst at Stanford University, “he will be playing defence from here on”.

Khan said after the vote he would continue to battle corruption and pledged the economy was on the right track. “We are on the way to economic recovery,” he said.

The vote of confidence was seen as a test of Khan’s popularity at a time the opposition is ramping up pressure on him.

The Pakistan Democratic Movement (PDM), a coalition of opposition parties including the Pakistan People’s Party (PPP) and the Pakistan Muslim League-Nawaz (PML-N), has since late 2020 intensified its campaign for Khan’s removal by banding together and holding rallies across the country.

Leaders of the PDM have accused Khan and Khan’s Pakistan Tehreek-e-Insaf party (PTI) of securing its 2018 victory with the backing of the powerful military. Leaders of the PTI and the army deny the claim.

Analysts said that the vote was unlikely to end Khan’s problems. “Imran Khan remains the prime minister but his government’s agony is not about to end,” said Ayaz Amir, a former member of parliament and commentator. “Increasingly the initiative has gone to the hands of the opposition and Imran Khan is left to react.”

Khan’s election as prime minister was widely seen as marking a new chapter in Pakistan’s politics. His anti-corruption platform was popular among middle class and youth voters, who saw him as a break from politics dominated by the country’s wealthy elite.

But he has faced criticism for his failure to lift the economy — Pakistan is under a U$6bn IMF loan programme — and to deliver on his promise to create an Islamic welfare state.

“The poorer segment of Pakistan’s population have been hit the hardest. The prices of food items have risen sharply under this government and that’s a big issue for our people,” said Shaista Pervaiz Malik, an MP for the opposition PML-N.



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White House warns of ‘large number’ of victims in Microsoft hack

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The White House has warned that hackers may have compromised a “large number of victims” in the US by exploiting recently disclosed vulnerabilities in Microsoft software. 

Jen Psaki, White House press secretary, said on Friday that there was currently an “active threat” from hackers exploiting four flaws in Microsoft’s Exchange email application, which the tech group disclosed earlier this week. Microsoft has blamed a Chinese state-backed hacking group for the attacks.

“This is a significant vulnerability that could have far-reaching impacts,” Psaki said. “We are concerned that there are a large number of victims and are working with our partners to understand the scope.” 

Brian Krebs, a cyber security researcher, claimed in a blog post on Friday that at least 30,000 organisations “including a significant number of small businesses, towns, cities and local governments” had been hacked in the past few days following Microsoft’s disclosure, citing multiple sources briefed on the matter. 

On Tuesday, Microsoft published a blog post in which it said a group of hackers had launched “limited and targeted attacks” to gain access to emails. It also said the hackers had tried to go deeper into victims’ computer systems in order to lurk there unnoticed for a long period of time.

Microsoft has attributed the campaign to a group of Chinese state-sponsored hackers called Hafnium. China on Wednesday denied responsibility, according to a Reuters report. The White House did not link the campaign to any particular country.

It is unclear who has fallen victim to the attacks. Microsoft said that Hafnium has tended to target “infectious disease researchers, law firms, higher education institutions, defence contractors, policy think tanks, and NGOs” in the past.

Late on Thursday, Jake Sullivan, National Security Adviser, said in a tweet that the White House was “tracking . . . reports of potential compromises of US think tanks and defence industrial base entities”. 

He and Psaki urged the government, private sector companies and academic institutions to patch their systems after Microsoft issued fixes for the vulnerabilities. 

The concerns come after revelations in December that a sprawling cyber espionage campaign, likely backed by Russia, had been targeting US government agencies and businesses unnoticed for at least a year.

Authorities are still struggling to understand the scope of the fallout from the SolarWinds hack, which has prompted calls for President Joe Biden to prioritise US cyber security. The Biden administration is now preparing sanctions and other executive orders in response to the hack. 

James Lewis, a cyber expert at the Center for Strategic and International Studies, said it appeared that Microsoft and the US government had uncovered the Chinese attack while “poking about looking for SolarWinds”.

“This is the downside of a big hack by somebody else as it increases the chance that you’ll be found out,” Lewis said. “The Chinese should send the Russians a bill.”



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Polish women count cost of tough abortion curbs

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Even before Poland all but outlawed abortion, Zofia has been thinking about moving abroad. But the near-ban that took effect earlier this year helped her make up her mind: this autumn she plans to move to Prague in the Czech Republic.

“I feel better there, freer, and being a woman there doesn’t make me feel weaker or worse,” she said. “I love my life in Warsaw. But when the [abortion ban was mooted], I thought, I don’t want to live here any more . . . And I don’t want my kids to live here.”

The 31-year-old artist is one of thousands of Polish women outraged by the tightening of the country’s abortion laws which, even before the overhaul, were among the strictest in the EU. Their anger centres on a ruling by the Constitutional Tribunal in October last year, which declared that a 1993 law allowing abortions in the case of severe foetal abnormalities was unconstitutional.

The ruling came into force in January, leaving only two grounds for an abortion in Poland: a threat to the mother’s health or if the pregnancy is a result of rape or incest. Such cases made up just 2.4 per cent of the 1,100 legal abortions in Poland in 2019.

Hundreds of thousands of Poles took to the streets when the ruling was announced in October, and activists have called for another round of protests on International Women’s Day this Monday. Polling suggests that a majority of Poles back some form of liberalisation.

Anti-abortion campaigners, often guided by their religion in what remains one of Europe’s most strongly Catholic countries, say the change was needed to protect the rights of unborn children.

“An unborn child is a separate person, which has its own body and its own rights. A child must not be deprived of the fundamental right of every human being — the right to life,” Kaja Godek, one of Poland’s most prominent anti-abortion campaigners, wrote on Facebook last month.

A pro-life poster in Krakow. Many Polish opponents of abortion are guided by faith in one of Europe’s most strongly Catholic countries
A pro-life poster in Krakow. Many Polish opponents of abortion are guided by religion in one of Europe’s most strongly Catholic countries © Omar Marques/Getty Images

But activists say the ruling will force women to give birth to babies with such severe abnormalities that they have no chance of survival. They also say the government has done too little to help the families of children born with disabilities, who receive only limited support.

“I’m terrified because for me as a woman in reproductive age, it means getting pregnant in Poland became dangerous. And I’m afraid for my sister, for my colleagues and friends, for my relatives and for many other women I meet every day as clients,” said Kamila Ferenc, a lawyer from the Federation for Women and Family Planning, a women’s rights group.

“They will be in a horrible position . . . they have lost the possibility to decide freely on their own, because it’s not so easy to have an abortion outside the system.”

In the past, Polish women who could afford it were able to seek abortions in neighbouring countries with more liberal laws, such as the Czech Republic or Slovakia. But with the pandemic limiting travel, experts say women are likely to turn to the internet to buy drugs from overseas that would allow them to carry out abortions at home. Women are not prosecuted for self-managed abortions carried out before the 22nd week of pregnancy.

“It used to be the case that illegal abortions were through surgical procedures by doctors and back-alley providers. Then abortion tourism rose in the early 2000s after Poland joined the EU. Now we are seeing an increase in self-managed abortions, which can be less of a financial and emotional burden,” said Maria Lewandowska, a researcher into reproductive health at the London School of Hygiene and Tropical Medicine.

Justyna Wydrzynska, from Abortion Dream Team, a group that helps women who want to terminate their pregnancies, said that since the abortion rules were tightened in January, the organisation had received three times the normal number of calls from women seeking help.

“We get around 600 to 700 phone calls a month. Around 100 of them need to go abroad [for an abortion], and for the rest, . . . these are mostly people in need of pills, assistance in taking pills or post-abortion care,” she said.

“Often they are human dramas. Some people approach it in a task-oriented way, others very emotionally. Sometimes it is very difficult.”

Despite the huge protests last year, women’s rights groups acknowledge that as long as Poland’s conservative-nationalist Law and Justice party remains in power, the prospect of the laws being loosened is minimal. But they hope that in the long run, the debate sparked by the ruling will lead to greater support for liberalisation.

“The factual situation of pregnant women is worse. But on the other hand I think we are now on a better track to change the situation than when [the previous government led by the centre-right] Civic Platform ruled and everybody thought everything was all right,” said Ferenc.

“There is more courage in society to speak about abortion. People educate themselves and each other. I think that we now have more solidarity and strength in society to fight for reproductive rights. ”



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