Aurelia Butler

A year ago, Xi Jinping bestrode the Communist party congress, having banished his rivals. Now, puzzlingly, he has started banishing his allies too. China’s defence minister and former foreign minister have disappeared from public view. Two generals from the country’s nuclear rocket force have been removed from their posts.For veteran China watchers, the country’s elite politics are largely impenetrable. “The system is a black box,” says Matt Pottinger, a Mandarin speaker who served as Donald Trump’s deputy national security adviser between 2019 and 2021.Pottinger’s best guess is that upheaval is a feature, not a bug, of Xi’s rule. In 11 years in power, the Chinese president has removed “six politburo members, 35 central committee members, 60 generals and the best estimate I’ve seen is that he’s purged around 3.5mn people in the party”. The latest turnover may be “a proactive set of moves designed to keep the party off balance in a way that deepens his primacy”.Pottinger notes that “Joseph Stalin was purging his military right up until they were at war. He personally did not suffer any negative consequences of that. He died in office. My best guess is that Xi Jinping will die in office too.”Along with abrupt personnel changes, the centralisation of power in Xi is likely to create both “miscalculations” and “oscillations”, argues Pottinger: “Policy paralysis followed by overcorrection in another direction and policy paralysis and overcorrection again.” That was exemplified by the rapid unwinding of zero-Covid policies last year. It may yet manifest in Xi’s response to the continuing property crisis.Understanding the Chinese leadership involves holding “several very different ideas in mind at the same time”. Xi dominates the political system yet presides over a stumbling economy and a public that is “increasingly upset with his leadership”.“A handful of years ago, people would never even utter his name. Now people refer to ‘you know who’. People will say things like, ‘He’s taking out his childhood trauma on our whole economy now.’ Or they will complain they have to do study sessions during working hours to learn Xi Jinping Thought. This doesn’t mean Xi Jinping is about to topple.”Joe Biden has claimed Xi’s predicament is such that no world leader would be happy to swap places with the Chinese president. More recently, the US president suggested this could make China more dangerous. Pottinger agrees. China’s economic slowdown — the World Bank now forecasts gross domestic product growth of just 4.4 per cent next year — could mean “Xi Jinping can have a greater appetite for risk . . . to try to lock in gains geopolitically while he enjoys a number of advantages”.Pottinger, a 50-year-old former journalist in China and former major in the US Marines, has long been on the hardline end of China policy debates. The heart of his analysis is that the best way to deal with Beijing, and prevent war over Taiwan, is through strength. “Hard power is the prerequisite for peace . . . You can call me a hawk, and maybe I am, but I’m not someone who wants war.”Courting China — as the Biden administration has done recently by sending senior officials to visit — gives “the wrong signal”. More to the point, Pottinger says, “[Beijing] treated them not all that well. [Treasury secretary] Janet Yellen was fed psychedelic mushrooms at a lunch. [Commerce secretary] Gina Raimondo — the moment she was leaving, [Huawei released a phone that] managed to subvert the export controls she’d put in place. [Climate envoy] John Kerry could barely even get a meeting. While John Kerry was in China [in July], Xi Jinping hosted Henry Kissinger for an intimate chat, but would have nothing to do with President Biden’s emissary. China is giving every indication that they view us as weak right now.” Pottinger believes that is a “miscalculation” by Beijing (“if Xi does roll the dice, and attempt something over Taiwan, I think he’ll be inviting cataclysmic war”), but it should not be encouraged.The foreign policy mainstream has welcomed signs of increased communication between the world’s two major powers. Pottinger’s response is that China, like Vladimir Putin’s Russia before 2022, may respond to dovishness with aggression. “Right now is not the time for detente. Beijing is not feeling constrained enough that it has no choice but to start making concessions. Even with a weak economy, I think Xi Jinping’s feeling emboldened.”The husband of a virologist, the brother of an infectious-diseases doctor, Pottinger was one of the Trump officials most alarmed by the outbreak of Covid-19. He saw China’s response to the virus as dishonest, even malicious. He has argued that it is most likely the virus emerged from a Wuhan laboratory. “I haven’t dismissed any theory, but I can’t even find circumstantial evidence at this point that supports the natural outbreak [theory]. More and more circumstantial evidence mounts that supports an accidental lab leak.”In May 2020, Pottinger delivered a speech in Mandarin, aimed at the Chinese public. He argued that Chinese history had a democratic tradition of brave protest, which had been continued by a doctor who had warned about Covid. US officials reported it had received “millions of downloads” in China before censors expunged it. Beijing responded: in January 2021, it imposed sanctions on Pottinger, along with other Trump White House figures such as Mike Pompeo, accusing them of “crazy moves” and banning them from entering the country.By then the pandemic, together with China’s aggression on the border with India and crackdown in Hong Kong, had swayed those in the administration who had favoured a softer line on Beijing. “Xi Jinping began to make my arguments for me.” How did Pottinger learn to exert influence in the chaotic Trump White House? “Like President Reagan used to say, you can really get a lot done in Washington DC if you’re willing to give someone else the credit.”Some Trump-era initiatives on China fell apart. TikTok, which is owned by the Chinese technology firm ByteDance, was never banned, nor were its US operations sold to a US company. Pottinger still sees the site, which claims to have 150mn users in the US, as one of the Communist party’s greatest weapons. “This thing is designed to destroy the fabric of democracies . . . Based on the type of content that is flowing, their aim is really to divide us against ourselves and cause us to lose faith in our form of government.” The US should ban it and could do under existing laws, he argues, “it’s just that we don’t have the will right now”.In response, TikTok pointed to research by Milton Mueller, a professor at the Georgia Institute of Technology, that found no evidence the platform constituted a national security threat.Pottinger resigned from the Trump administration after the January 6 Capitol riots, and moved to Utah. He is now a distinguished visiting fellow at the Hoover Institution.But Trump-era protectionism has endured. Last year the Biden administration announced sweeping controls on high-end semiconductors: the “small yard, high fence” policy. Pottinger would like it to go further and encompass legacy semiconductors too: a bigger yard, a higher fence.Other analysts are sceptical whether the west can maintain its technological supremacy given the resources China has at its disposal. A smartphone that Huawei released this year contained a 7-nanometre chip that had previously been beyond the capabilities of Chinese chipmakers.Pottinger warns against overestimating China. When Trump closed China’s consulate in Houston in 2020, alleging industrial espionage, Beijing “barely retaliated . . . because they knew they had far more to lose in a tit-for-tat closure of consulates than the United States has to lose. They still need access to US capital, access to our labs and universities, access to our markets.“China depends on us far more than we depend on it. That’s even truer now under Xi Jinping. He’s interested in making China basically Germany, except bigger. He just wants to be the exporting factory floor for high technology for the whole world. We can foil those plans pretty easily.”How would US policy to China differ after 2024, under the various possible presidents? Pottinger’s overall panorama is bleak: “Sometimes people like to use the word de-risking because it sounds more polite, but let’s face it, we’re talking about an orderly decoupling, with things like new restrictions on outbound American capital into Chinese high tech.”Trump “would resume the tariff war . . . You would not see any chance of a Chinese electric vehicle getting exported to the United States under a Trump administration.” But the most significant variation between Republican candidates, and compared with Biden, would be a consequence of their stance on Ukraine and how strong a line they would take with Russia, a key Beijing ally.So would the Communist party prefer Biden or Trump? “China was really rattled by President Trump’s administration. The thing that would make China most fearful of a second Trump term is if they believed Trump was going to have Ukraine’s back, have Nato’s back and have Taiwan’s back. If any candidate shows weakness on Nato, on Ukraine and on Taiwan, that will be the preferred candidate for China, even if it means they have to stomach more tariffs.”Even if the trade war drags on, some hope China and the US can cauterise a small number of policy areas, such as climate, in which to co-operate. Pottinger cites his experience of trying to do something similar. In his telling, Beijing responded by demanding concessions on other issues. “A Leninist system isn’t looking to advance common interests! Any time you seek co-operation, they will view that as an opportunity to gain leverage against you in wholly unrelated areas.” More

Oxfam’s report, released at the start of the IMF-World Bank meetings in Marrakech and drawing on IMF outlooks, also found that on current terms, low- and lower-middle income countries face nearly half a billion dollars a day in interest and debt repayments through 2029.A record number of developing nations are in debt distress as rising global interest rates, soaring inflation and a series of economic shocks following the COVID-19 pandemic hammer state finances. Ratings agency Fitch said that as of March, there have been 14 separate default events since 2020 across nine different sovereigns. Oxfam called on the IMF and the World Bank to use the crisis to create a fairer system – rather than focusing on debt restructure and spending cuts. “Their answer to the debt crisis is more austerity, and their answer to the financing gulf is more loans,” Oxfam International interim Executive Director Amitabh Behar said in a statement. “True win-wins, like fairly taxing the rich, are being left on the table.”The IMF did immediately respond to a request for comment.Oxfam and other aid and campaign groups have previously called on international creditors to cancel the debts of developing countries facing economic crisis.The report also said that debt servicing payments for the poorest countries is outstripping healthcare spending by four to one. Debt reworks for some of the defaulted nations, including Zambia and Ghana, are expected to make progress during in-person meetings in Marrakech, while the IMF will continue conversations with Tunisia, Pakistan, Egypt and other over the terms of proposed bailout loans. More

TOKYO (Reuters) – Japan likely won’t seek to reverse the yen’s downtrend with exchange-rate intervention as recent falls reflect economic fundamentals, former top currency diplomat Naoyuki Shinohara told Reuters.There is no set rule or shared agreement among G7 advanced nations on what kind of currency moves are defined as “excess volatility” that justify intervention, Shinohara said.”But usually, when you talk about excess volatility you have in mind a timeframe of several days or weeks,” rather than several months, he said in an interview on Friday.The remarks contrast with those of incumbent top currency diplomat Masato Kanda, who said on Wednesday that steady yen falls over a protracted period could also warrant intervention.”Japanese authorities are well aware that they can’t reverse the market’s tide when the yen’s decline is driven by economic fundamentals,” said Shinohara, who retains close ties with incumbent policymakers.”When you have steady yen falls over a protracted period, that’s usually a trend driven by fundamentals,” he said on the yen’s recent declines.G7 and G20 major economies have a shared understanding that currency moves ought to reflect economic fundamentals, and that excess volatility was undesirable. Japan has used to justify this agreement to justify past forays into the currency market.Tokyo is facing renewed pressure to combat sustained yen depreciation as investors eye prospects of higher-for-longer U.S. interest rates while the Bank of Japan remains wedded to its ultra-low interest rate policy.Markets are on alert over the chance Tokyo may step into the market to prop up the yen, which briefly breached the 150 line against the dollar last week – a level seen by traders as authorities’ line-in-the-sand for currency intervention.The dollar fetched 149.20 yen in Asia on Monday.”If the recent weak yen is indeed a source of concern for Japan, the best way to deal with it would be for the BOJ to normalise its ultra-loose monetary policy,” Shinohara said.”The finance ministry ought to focus on responding to abrupt yen moves that are out of line with the broad trend,” he said.In Japan, the finance ministry has jurisdiction over currency policy and decides whether and when to intervene. The BOJ executes the order as the ministry’s agent.Tokyo last intervened to buy yen in September and October last year, when the currency eventually slumped to a 32-year low of 151.94 per dollar.Following his role as Japan’s vice finance minister for international affairs until 2009, Shinohara was deputy managing director of the International Monetary Fund until 2015. More

(Reuters) – A look at the day ahead in Asian markets from Jamie McGeever, financial markets columnist.Asian markets on Monday will have their first opportunity to react to Friday’s blowout U.S. jobs data and strong rise on Wall Street, although sentiment and direction could be skittish following developments in Israel and Gaza at the weekend.The eruption of violence could increase flows into traditional safe-haven assets like U.S. Treasuries and other highly-rated government bonds, gold and the Swiss franc, at the expense of riskier assets like emerging markets. Oil prices could pop higher too.If the market impact of events in the Middle East is limited, however, Wall Street’s rally on Friday should set the tone for trading in Asia on Monday, with China also open for business again after the Golden Week Holiday.To recap, the S&P 500 and Nasdaq on Friday registered their biggest gains since late August, and the S&P 500 snapped a four-week losing streak, after data showed that showed U.S. job growth in September smashed forecasts. U.S. bond yields rose and the yield curve steepened, but the fact Wall Street rallied too suggests investors may be adjusting their view of the U.S. economy – perhaps it is strong enough to withstand higher borrowing costs, and the natural rate of interest is higher than currently priced.If the U.S. economy is managing to stay strong while the rest of the world struggles, Asian markets could come under pressure as investment flows into U.S. assets. Good news for the dollar, not so good news for emerging market currencies.In that sense, a deluge of top-tier Chinese economic data and events this week including consumer and producer inflation, trade, credit and lending growth, and money supply will cast further light on whether the world’s second largest economy is back on track. Or not.Figures on Saturday showed that China’s foreign exchange reserves fell $45 billion in September to $3.115 trillion from $3.16 trillion in August. Analysts had expected a decline to $3.115 trillion.These figures do not take into account valuation effects of exchange rate and bond price moves in the month, so it is not necessarily the case that Beijing dumped $45 billion of U.S. bonds. But given the extent of the selloff at the back end of the U.S. bond curve, the issue of foreign central banks potentially offloading some of their Treasuries is once again a red-hot issue.China’s official stash of U.S. Treasuries has declined consistently and substantially in recent years, but much of that is due to valuation effects and the reality is much more nuanced – some observers say China is not selling its dollar assets, and if anything, is actually adding to them.Here are key developments that could provide more direction to markets on Monday:- Unfolding events in Israel, Gaza- Fed’s Barr, Logan, Jefferson all speak- Indonesia retail sales (September) (By Jamie McGeever; Editing by Diane Craft) More

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DALLAS (Reuters) – The outbreak of military conflict in the Middle East may leave central bankers battling new inflationary trends as well as deal a blow to economic confidence at a time when they had expressed growing hope about containing the price surge sparked by the pandemic and Russia’s 2022 invasion of Ukraine.The stunning violence in Israel, with hundreds killed as fighters from the Hamas movement invaded from their Gaza enclave and Israel responded in force, added the possibility of a broader Middle East conflict to the sense of global instability sparked by Russian military actions almost 20 months ago.The impact may take time to become clear, and would depend on how long the conflict lasts, how intense it becomes, and whether it spreads to other parts of the region. “It’s too early to say” what the implications may be, though oil and equity markets may see immediate fallout, Agustin Carstens, general manager of the Bank for International Settlements, said in a presentation to the National Association for Business Economics. But the war has the potential at least to add an unpredictable set of forces to a global economy that was already slowing and to U.S. markets still adapting to the likelihood that the Federal Reserve will maintain high interest rates longer than many investors had expected.”Any source of economic uncertainty delays decision-making, increases risk premia, and especially given that region…there is an apprehension about where oil is going to open,” said Carl Tannenbaum, chief economist with Northern Trust (NASDAQ:NTRS).”The markets will also be following what the scenarios are looking like,” he said, and whether, after decades of instability in the Middle East, this outbreak of violence evolves differently.”The question will be is this iteration something that will throw the long-term equilibrium out of balance?” BLOW TO CONFIDENCEThat and related issues will likely vault high on the agenda of global financial leaders gathering this week in Morocco for meetings of the International Monetary Fund and World Bank to take stock of a global economy that remains in a deep state of flux from the pandemic and rising trade tensions.For central banks it poses the dilemma of whether it is likely to lead to new inflation pressures – the region is not just home to major oil producers like Iran and Saudi Arabia, but also to major shipping lanes through the Gulf of Suez – or deal such a blow to confidence that the economy stutters. Federal Reserve officials have cited recent high energy prices as a possible risk to their outlook of gradually easing inflation, and also said that they felt the U.S. economy was likely to avoid a recession – absent some sort of unexpected, outside shock. With conflict now raging in a major oil-producing region, the reaction among traders and major players like Iran and Saudi Arabia will be watched closely to see if another price surge is coming, while trading on bond and stock markets in coming days will show how markets anticipate the likely fallout.”The conflict poses a risk of higher oil prices, and risks to both inflation and the growth outlook,” said Karim Basta, chief economist at III Capital Management, leaving the Fed to sort out whether higher prices or slower growth is the greater concern. Fed officials were already watching a recent rise in U.S. Treasury bond yields for signs investors may have pushed financial conditions beyond what was needed to cool inflation, and raised the risk of a too-stark economic slowing.To the extent the Israeli war with Hamas heightens concerns about the global economy it could reverse that trend if capital rushes towards the relative safety of U.S. Treasury bonds, as often happens at times of potential crisis.While falling market interest rates might under other circumstances be seen as a possible source of renewed inflation, encouraging consumers and businesses to borrow and spend, the context might lead to a different conclusion with emphasis on the perceived risks to the economy of a new regional war. More