Monday, 17 October 2016

Despite new tax Chinese interest in Canada remains strong


Despite a new 15% tax on foreign property buyers in Vancouver, Canada will continue to attract Chinese investment, especially in agribusiness and tourism.

On August 2nd, the provincial government of British Columbia introduced a 15% property transfer tax on foreign buyers in an effort to quell the red-hot housing market. The levy only applies to Metro Vancouver, which sees 75% of the province’s foreign investment. The majority of said investment comes from China, with foreign money overheating the sector and causing instability. Opponents of the new tax say it contravenes NAFTA agreements, as well as deals with China and 27 other nations. The BC government in turn maintains that it is within its rights to correct an overvalued sector that threatens local sustainability.

Vancouver’s home prices have increased by 172% in fifteen years, while incomes have only increased by 10%. Indeed, prices have increased by 38% in the past twelve months alone, with average house prices rising to CAD $946,945. Local realtors, are unsurprisingly, hostile to the new tax, claiming that at least 427 deals worth around $404 million are likely to collapse as a result of the new levy.

The dilemma facing Canada is how to prevent the housing bubble from bursting, while continuing to encourage foreign investment. The housing sector is presently one of the main drivers (for better or for worse) of the Canadian economy. At 165%, Canada has the highest debt-to-income ratio in the G7 (80% of which are mortgages). The U.S at the height of the 2008 housing crisis only had 147%.

China is aware of this risk, and while it acknowledges the role Chinese investment is playing, it is also beginning to warn investors of the risk in the Canadian housing market. Coming just a few days after the implementation of the 15% tax, warnings in the Chinese media are no coincidence.

Local and national reservations regarding Chinese influence and investment have spurred the implementation of this new tax, yet Sino-Canadian relations remain strong and will be unaffected by these developments. Indeed, 19% of Vancouver’s population is of Chinese descent, many of whom expressed their support for the new law. Consequently, claims that this measure will torpedo Chinese investment are overblown, as investors will likely seek out other, cheaper housing markets across Canada. Moreover, Chinese demand for all things Canadian remains strong, with new opportunities in agribusiness and tourism.

Canadian product profiles continue to rise in China

Food safety and pollution scandals, combined with China’s growing middle and upper classes, has led Chinese consumers to value foreign foodstuffs. Canada’s ecological record and transparency benefit it when doing business in China. The fact that many Chinese associate blue skies, verdant forests, and clean water with Canada, gives Ottawa considerable soft power with which to promote its products.

Alongside Canadian staples like maple syrup and whiskey, China is developing a taste for Canadian ice wine, beef, and seafood. Canada controls 90% of the global ice wine market, and China accounts for 48% of global consumption. Demand from China has established Canadian ice wine as a sought after luxury, propelling Canadian wine exports from virtually zero to eight figure levels in a few short years. The wine is so popular that producers regularly run out of stock, and are having to contend with Chinese counterfeits as demand continues to rise.

Similarly, Chinese consumers are turning to Canadian fisheries, and lobster in particular; giving a boost to economically depressed Atlantic provinces. Peter Hall, chief economist at Export Development Canada notes that “the Chinese middle class is growing by the Canadian population every year. There is an exponential increase in demand for lobster in China.”

For instance, the province of Nova Scotia saw a 16% increase in the value of fish and farm products in Q1 2016, largely due to Chinese demand. Overall, sector growth is slated for 9% for 2016 and 5% in 2017. Hall goes on to note Nova Scotia’s rapid industry growth: “raw fishing products exported to China have gone from almost nothing ten years ago to a CAD $100 million business. When you add processing that’s another CAD $100 million.”

That said, not everything is smooth sailing for Canadian exports to China, as Beijing recently announced that it would be increasing inspection standards for canola. As the world’s largest canola producer, $1.5 billion worth of Canadian exports to China are at risk. Recent talks to resolve the issue have failed to produce any results, yet are slated to continue as Prime Minister Trudeau is expected to visit before the September G20 meeting. Trudeau has pledged to increase trade with China, a move aimed to repair the fraught relations seen during the previous China-skeptical Harper administration. 

Tourism is Canada’s brightest spot

Despite cool relations with the previous Canadian government, Beijing has boosted the Canadian tourism industry, a trend which has picked up steam in the last couple years. Canadian hospitality, combined with its natural beauty are key draws for Chinese tourists. Canada’s multicultural makeup also facilitates greater tourism from China, as Chinese Canadians constituted 4.53% of the population (2011 Census) – compared to 1.2% for the U.S. This simplifies language and cultural issues, builds on existing connections, decreases prejudice, and facilitates a greater understanding of the spending habits of Chinese tourists.

Canada even has – despite being farther away – a higher proportion of Chinese residents than Australia (4%) – a testament to Canadian openness and cosmopolitanism. This number will be markedly higher for the 2016 census, and these ethno-cultural links, combined with a low Canadian dollar, provide many opportunities to strengthen tourism links.

China granted Canada approved destination status in 2010, and China is on track to overtake France as Canada’s third largest tourist source country, (after the U.S and UK). Canada already has ten visa offices in China, and on August 10th Canada expressed its interest to increase this number, with new offices in Nanjing, Chengdu, Wuhan, Jinan, and Shenyang.

Canada’s immigration minister John McCallum has also expressed Ottawa’s wish to increase immigration from China; citing Canada’s interest in skilled workers, as well as more international students.
Since it gained approved destination status, Canada has seen a sharp increase in the number of multiple entry visas issued: from 27,709 in 2010 to 390,290 in 2015. 2015 also saw a record 594,897 temporary resident visa applications from China, an indication of Chinese interest in Canada, as well as a 95% increase in Chinese international students in Canada between 2010 and 2015.

With regards to general tourism, the numbers are also pointing to encouraging trends, something especially important in an otherwise sluggish economy. The latest tourism numbers (Jan – May) show 169,774 visitors from China, 26,261 from Taiwan, and 47,333 from Hong Kong. While the year-on-year rate for Hong Kong is essentially flat at -0.5%, Chinese and Taiwanese tourists numbers have increased 16.2% and 27.9% respectively.

Overall, 2014 saw 661,759 tourists from the three sources listed above, while 2015 saw a substantial increase to 716,279. Growing tourist numbers from China have helped propel the Canadian tourism sector to 1.94% of GDP, surpassing more traditional industries such as mining, agriculture, forestry, telecom, and motor vehicle / parts manufacturing.

Canada has the demographic, economic, cultural, and environmental assets to become a leading destination for Chinese investment and tourism. The relationship has come full circle as China is now enlisting Canadian help in its own efforts to welcome the world for the 2022 Winter Games. Beijing has called on Canadian expertise to provide it with rinks and equipment, as well as training for China’s nascent hockey scene.

China’s men’s hockey team is currently ranked 37th, and Beijing is seeking help from the homeland of hockey to improve its chances. Indeed, several Chinese youngsters are on their way to play in Canadian junior leagues: Canada’s first tourism campaign in China in 2011 was called “Say hello to Canada” – a greeting that garnered an enthusiastic reply.

Originally written for Global Risk Insights

Monday, 25 January 2016

The Politics Behind China’s Anti-Corruption Drive


The number one motivation behind China’s anti-corruption efforts is domestic stability. Whenever corruption has seeped into a dynasty, be it the Han (220 AD) – as vividly detailed in the Romance of the Three Kingdoms – or the Qing (1911) with its scheming mandarins, the ruling regime lost the mandate of heaven and fell. This not merely a colourful aside: historical memory deeply informs the thinking of the Chinese Communist Party (CCP).

Targeting corrupt actors falls perfectly in line with previous CCP rhetoric regarding the need to root out land owners, saboteurs, hoarders of rice, and other leeches on national productivity. These sentiments were in turn informed by the harsh attitudes against extortionate land lords and officials, as well as bandits; the twin plagues of internal discord during imperial China. Thus anti-corruption efforts and language find ample precedence in Chinese history and national memory. 

Maintaining public support is paramount for the CCP, especially as it has shed it ideological trappings, and is in certain ways looking for new meaning. Moreover, the CCP needs to stave off the doubts of the Chinese public which question the CCP’s relevance in the 21st century. Consequently, the CCP has to bill itself as the most effective public administrator. If the CCP can instill confidence in the public, then they can dissuade them from considering untested alternative governing options.

The way the CCP maintains this legitimacy is by demonstrating the economic bounty that its stewardship has bestowed upon the people. By placating the population’s materialistic needs, the CCP has in the decades since Mao’s death diverted public attention and energy into economic, and away from political matters. Following Deng Xiaoping’s mantra that “[t]o get rich is glorious” and more recently Xi Jinping’s “Chinese Dream”, the CCP has focused on improving quality of life. Having lifted hundreds of millions out of subsistence level poverty, Beijing has directed the population’s efforts into national building.

Guilty vs. Guilty by Association

There are two broad categories of corruption in China: a) corruption directly related to CCP policies and party organs, and b) corruption which comes about in due course in countries which experience rapid growth and demonstrate insufficient civil society and public accountability.

With regards to the first category, as long as Chinese citizens are experiencing on-going improvements in their lives, they are willing to tolerate Beijing’s heavy handed social and political policies. Yet with slowing growth, both Beijing and the populace are seeking scapegoats. Admittedly, there is widespread corruption in China, especially surrounding government programs such as the one-child policy, urban-rural residency permits, underground churches, and black market medical care. 

All these sources of corruption, with which the public are forced to deal with on a daily basis, stem from government policies. Reluctance to criticize the regime in economic boom times is a common phenomenon, yet as growth slows and discontent increases, this reluctance disappears. While China does not broadcast the fact to the greater world, or even to its own citizens, there are tens of thousands of protests in China every year. These protests overwhelmingly concern corruption and pollution. 

China’s massive party apparatus and state-supported economic development put not just the government, but the CCP itself in the firing line. In the two areas mentioned previously, the CCP is having to deal with decades of unaddressed dissatisfaction stemming from China’s ‘growth over everything’ policies. Reforming the policies which cause this systemic corruption takes time, and while Beijing is pragmatic and willing, it cannot openly admit fault: enter anti-corruption scapegoatism. By publicly announcing its anti-corruption efforts, the CCP distances itself from the issue as well as engages in a witch-hunt of lower and mid-tier party officials.

This tactic often does expose real sources of corruption, thus allowing Beijing to blame ‘a few bad apples‘ for local or provincial corruption; while ignoring the national lack of accountability and civil society under CCP rule, which created said systemic corruption in the first place. Highly public anti-corruption efforts and trials also allow the government to implement reforms as remedies against corrupt officials, as opposed as solutions to past CCP failures, thus saving face.

Xi Jinping’s recent anti-corruption drive embodies many of these elements, although it does represent a concerted, and I believe genuine, effort to stamp out corruption. While there are show-trial elements inherent in the program, Xi recognizes that championing this cause boosts his domestic image and support, as well as solidifies his control over government. Would-be opponents may think twice, as corruption within their departments or mandates may see their heads on the block in the name of accountability.

With regards to the second type of corruption mentioned above, here the CCP is – in the eyes of the public – in many cases guilty by association. Given the widespread integration of party organs in various social organizations, as well as the predominance of state-run institutions and companies, corruption in these areas indirectly tarnishes the government’s image. The public is aware of the connections these entities have to the government, so any failure by stamp out corruption ultimately directs discontent back at the regime.

Given that growth has absolute priority, the government has been more proactive in its anti-corruption efforts here. This is largely due to the fact that foreign firms, investors, and governments come into contact with the above mentioned CCP-linked entities. If China’s economic actors, and by extension the government is seen as corrupt and unwilling to tackle those who wrong foreign actors, business confidence will sink. Beijing cannot allow this to occur, and this fear drives its anti-corruption efforts. Lower business confidence mean less investment and trade which means lower growth, and hence greater discontent.

Anti-Corruption Efforts in China Going Forward

As for an anti-corruption time line, I would argue that China will continue apace with its efforts. Since China’s opening in the 1980s its main focus has been stamping out corruption in the economy, specifically the elements that deal with foreign economic activity. This area will continue to be China’s main immediate focus. This will be trickier as more economic activity is conducted by non-state corporations. Consequently, China will need to increase efforts to enshrine a culture of corporate responsibility as well create efficient regulatory mechanisms.

With regards to the first category of corruption, this ties into China’s larger domestic stability efforts. Any egregious sources of public discontent will be dealt with post-haste, while the government will continue to slowly implement systemic reforms to even longstanding policies, as seen with its recent alterations to the one-child policy, itself a major source of corruption.

The government walks a fine line in that it seeks to increase accountability and transparency in select areas, while attempting to prevent public curiosity and calls for openness penetrating where Beijing benefits from obfuscation. Ideally, Beijing looks to states such as Singapore which enjoy ultra-low levels of corruption, high transparency, and efficiency ratings, yet still maintain social and political control via a firm hand on the reins of government.

Originally written for Freedom Observatory