The former de facto head of Shanghai’s fledgling free-trade zone is being investigated for graft as China's anti-corruption crackdown rolls on.

According to a short statement on the website of the Central Commission for Discipline Inspection (CCDI), Dai Haibo is being investigated for "serious disciplinary violations”.

In September, Mr Dai, who was vice-secretary of the Shanghai municipal government, stepped down as deputy director and party secretary of the FTZ.

The Shanghai free trade zone was set up in September 2013 with vows to implement a range of financial reforms, including full convertibility of the yuan currency and freer interest rates.

Those promises have yet to be fulfilled, but in September last year China launched a gold market in the FTZ and Microsoft launched its Xbox One in China - made possible by a new policy for the zone.

There are signs that parts of China's depressed property market might be starting to turn around, according to an article in today's 21st Century Business Herald.

The article says that property transactions in first- and second tier-cities picked up quickly in March.

This up-tick in transactions is also coinciding with what the paper refers to as a 'fourth round of housing stimulus policy'.

China's property market will experience a partial recovery in 2015, one that will be concentrated in particular regions, according to the article.

While the large oversupply of apartments in third- and fourth-tier cities means that major developers will still remain cautious when it comes to leasing new plots. 

Housing policies in 2015 are expected to continue to ease, according to analysts quoted in the article, but the impact of this policy easing will be largely limited to first- and second-tier cities.

The article refers to four rounds of housing policy:

Round one occurred in 2014 and was focused on the removal of purchase restrictions in many cities.

The second round was when the central bank moved to remove certain restrictions on lending and to lower lending rates.

The third round related to the announcement of various subsidies by local governments across the country and the PBoC's second rate cut.

The current round is focused on encouraging owner-occupiers in the residential property market.

The capital of Shandong province eased the rules that determine who is eligible for certain preferential deposit and lending conditions via the housing fund, according to an announcement made by Jinan's Housing Fund Management Centre yesterday.

On the same day, the central housing fund management centre also announced new measures.

Zhang Dawei, the chief analyst with Centaline Property Agency, told the paper that it was clear that housing market policies would continue to ease in 2015.

There was hope that business taxes could be lowered, that some first-tier cities would continue to loosen purchase restrictions and that local government would move to directly reduce taxes and provide subsidies in order to rescue the market. 

Chinese property developer Kaisa Group Holdings Ltd. said it expects a loss for 2014, a reversal from a net profit of 2.86 billion yuan (US$456 million) in the previous year.

Late Monday, the developer, which is listed in Hong Kong and based in Shenzhen, said its results for 2014 will be published by the end of March. It didn’t state the size of the projected loss, or elaborate on why it expects to be in the red.

Kaisa’s troubles started late last year, when authorities in Shenzhen blocked sales of properties in a number of its projects in the southern city, without providing a reason. Numerous senior people at the company later resigned, including Chairman Kwok Ying Shing.

Many creditors demanded early repayment of debt after his resignation. In response to litigation by the lenders, local courts in cities across China have blocked sales or frozen some of the firm’s projects and bank accounts.

Kaisa is in the midst of a rescue by Sunac China Holdings Ltd., another Chinese developer. It is seeking concessions from its creditors.

Asia’s cruise industry is booming as international companies such as Carnival Corp. and Royal Caribbean Cruises Ltd. ramp up their operations in response to surging demand from China’s emerging middle class.

The number of Asians taking cruises has risen by a compound annual growth rate of 34 per cent over the past two years to nearly 1.4 million in 2014, according to research released by Cruise Lines International Association. The expansion is being primarily driven by mainland China where the number of passengers surged 79 per cent per year during the same period to 697,000, almost as many passengers as all the other Asian markets combined.

China’s market is still in its infancy compared with the U.S., but it is the industry’s fastest-growing region, luring new and bigger ships as cruise companies strike deals with local enterprises to develop ports and start local cruise lines in China.

Based on scheduled sailings, CLIA’s 2014 Asia Cruise Trends study estimates passenger capacity in Asia will reach almost 2.2 million in 2015, after rising at a compound annual growth rate of 20 per cent from 2013, the fastest of all the regions.

Royal Caribbean President and Chief Operating Officer Adam Goldstein, who is also chairman of CLIA, expects growth in China and Asia to outpace the broader industry for the next several years.

“There is enormous room for growth. If you’d asked us 10 years ago or even five years ago, we would have said it’s science fiction to speculate that Asia could be a larger market someday than North America. I don’t think we would call that science fiction now,” Mr. Goldstein said in an interview.

The industry’s rapid expansion in the region has coincided with calls for ships to bring their fuel emissions at Asia-Pacific ports into line with stricter air quality standards in the U.S. and Europe.

Many Asian countries apply international maritime guidelines restricting ships’ emissions of sulfur—a pollutant associated with acid rain—to 3.5 per cent of fuel volume, but that is 35 times the U.S. and European limit. Some ships have signed up to voluntary emissions-reductions programs and the Hong Kong government has said it plans to mandate the use of the more expensive low sulfur fuel for ships close to its shores.

In a short period of time, Asia has grown to 6 per cent of the global cruise market, catching up with the Australia, New Zealand and Pacific region in terms of capacity to be the fourth biggest market behind the Caribbean, Mediterranean and Europe, according to the CLIA report.

Miami-based Royal Caribbean plans to bring its newest ship, Quantum of the Seas, to Shanghai from New York in June, joining the company’s three ships in China. The ship, which has 16 decks and features attractions such as simulated sky diving, can carry 4,180 guests and will sail from Shanghai to destinations in Japan and South Korea. Royal Caribbean said in November it had entered into a joint venture with Chinese online travel agency Ctrip to form a local cruise line SkySea Cruises operating out of Shanghai.

Carnival is also betting on China after relocating its chief operating officer to Shanghai from Miami in September and moving part of its fleet to Asian routes. In January, Carnival said it was in talks with state-owned China Merchants Group to form two joint ventures in China that will build cruise ports and ships. The company signed last year a memorandum of understanding with China State Shipbuilding Corp. to convert one of its yards to build cruise ships in partnership with Italy’s Fincantieri SpA, one of the world’s biggest cruise-ship builders.

Back in early 1800s Europe, only aristocrats and rich merchants typically had access to banks. Artisans, farmers and domestic servants stashed money away under the pillow, if they saved at all.

Then, over the following few decades, a savings revolution took place. Fearful of poverty and social insurrection, governments used state finances to back savings banks, offering ordinary people a safe way to sock money away and earn interest.

Around 200 years later, the transformation that began in Europe remains incomplete. Some 2.5 billion adults didn’t have a bank account in 2011, from a global population of around 7 billion, according to the World Bank’s most recent estimates. Some 60 per cent of adults in developing countries didn’t have accounts, compared with only 11 per cent in high-income economies, according to the bank.

Despite Asia’s economic rise, many of the globe’s “unbanked” citizens, residing in countries including India, China and Myanmar, make do without access to savings, insurance and pensions. The reasons for financial exclusion aren’t dissimilar to Europe’s situation in the early 19th century.

Commercial banks reject small deposits, citing high transaction costs. Poor customers complain it is too expensive to maintain an account, often live too far from a bank branch and lack collateral for loans. Many people don’t understand financial products.

Across Asia, governments are experimenting with novel ways to widen access to financial services, from using mobile technology for transfers to allowing retail stores to take deposits in remote areas. In August, India’s Prime Minister Narendra Modiordered state banks to open 125 million new bank accounts for poor people.

No wonder: Leaving billions of people out of mainstream finance is economically costly. As Princeton professor Sheldon Garon asks in “Beyond Our Means,” a book-length study of savings: “Can a society—or economy—be strong if the majority of households lack adequate savings for emergencies, retirement, and renewed consumption?”

Households without bank accounts typically save less, hurting their ability to make larger purchases or invest in health care and education. In many parts of Asia, people are left to scrape together funds at usurious rates from informal moneylenders. As for businesses, small firms without access to formal credit have a hard time expanding, limiting their ability to provide employment with good wages. A recent study found that districts in India with more government bank branches have greater levels of employment in the formal sector, higher wages and better productivity.

There is a macroeconomic impact, too. Formal banking helps channel idle savings to more productive investments. It was this link that made savings and thrift a popular goal in the late 18th century, promoted by such figures as Adam Smith and Benjamin Franklin.

Some parts of Asia have made strides in financial inclusion. About two-thirds of adults in China now have bank accounts, a larger portion than in many other developing nations. This owes in part to Beijing’s use of no-frills accounts, often spearheaded by the kind of postal savings banks that played a big role in 1800s Europe, to drive people to put their money into the formal banking system.

Yet hundreds of millions of Asians remain locked outside the financial mainstream. “Branchless banking” could well hold the key.

In China, pilot projects are using agents to reach customers who live too far from physical bank branches, as well as electronic payments over the Internet or mobile networks. In Bangladesh, the use of mobile phones to make simple financial payments is booming, while in India, the country’s largest cellphone companies are applying for licenses to operate “payment banks” that can accept deposits and handle payments but can’t make loans.

The fundamental issue remains, however: commercial banks still find it hard to offer banking services to poor people and still turn a profit.

China’s government can finance these steps as a social goal, much as Europe did in the past, but there are risks to such a strategy. In India, the big push to open bank accounts is akin to a massive public subsidy, and could add to financial stress at state-run lenders that already are dealing with high levels of nonperforming loans. “The economics of these accounts are not good for commercial banks,” says Eric Savage, CEO of Unitus Capital, an India-based investment bank that lends to microfinance organizations.

Gagan Bihari Bhuyan, who runs financial inclusion projects for India’s state-owned Bank of Baroda, says it often makes no economic sense to open branches. “It’s a matter of viability,” Mr. Bhuyan said. “Maybe these branches won’t survive without a profit.” Bank of Baroda is relying on local people in remote areas to act as agents to reach communities up to 40 kilometers (25 miles) from a branch, he said.

There also are concerns that India’s new accounts, which come with an overdraft facility equivalent to US$80, could lead to excessive indebtedness among the poor if not matched with financial education. The World Bank, in a report last year, warned that issues of financial inclusion can’t be solved “purely with an infusion of credit.”

That was the lesson of an earlier focus on microcredit. Pioneered byMuhammad Yunus, the Bangladeshi economist who founded Grameen Bank, the microcredit sector makes loans of less than US$100 to fund small businesses. The sector was lauded as a market-based solution to rural poverty by channeling small loans at high interest rates to seed self-sustaining businesses. In 2006, Mr. Yunus was awarded the Nobel Peace Prize.

But an emphasis on microcredit also brought indebtedness and repayment problems, such as during the microfinance crisis in the southern Indian state of Andhra Pradesh in 2010. Jonathan Morduch, a New York University economics professor and co-founder of the Financial Access Initiative, notes that microfinance’s impact on poverty “has so far been disappointing.”

Still, there is room for optimism.

Earlier efforts at financial inclusion in India, including a nationalization of banks in the 1960s, and a push in the 1990s to open no-frills accounts, did little to bring more people into the formal banking sector. Many of the new accounts were never used. The government is now taking a new approach, for instance linking accident insurance to bank accounts and paying state subsidies through them, says Vishnu Prasad of the IFMR Finance Foundation, an Indian organization that runs financial-inclusion programs. A third of the new accounts already have deposits.

Mr. Prasad says Asia has one advantage over Europe in the 1800s: technology. He points to hundreds of millions of mobile phone subscribers who could use the handsets to make simple banking transactions.

“It might even be possible,” he said, “that poor historic progress on financial inclusion has presented India with the opportunity to leapfrog over the rest of the world.”

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East Asia Forum

Australia’s foreign policy has been a mix of positives and negatives under the Liberal-National Coalition government, as was true of the previous Labor government. Former prime ministers Gough Whitlam and Bob Hawke recognised the need for Australia to think strategically about future regional developments, and John Howard’s thinking gradually moved in that direction. Such long-term strategic thinking, centred on Australia’s geographic realities and its evolving regional relationships, is more urgently needed today.

Asia’s regional dynamics are changing. While the US is a Pacific power, it’s an outsider in Asia. To complicate the picture, the region features a China that is the largest trading partner of all Asian nations, including Australia. Australia’s future relations with the region, in Northeast Asia and with ASEAN particularly, will depend upon its relations with China as well as with the US.

A coherent strategy must reflect the reality that Australia is linked to Asia from within the region. It needs to reflect the growing importance of China globally and to Australia, and to develop a political depth with that country similar to that with the US. And it will be increasingly difficult to continue separating the economic and strategic issues of this engagement.

As a result, Australia needs a greater understanding of China’s environment, history, and culture, including its political system. Australia need not like that system, but it must be able to work effectively with it.

The dominant and often one-sided Western perspective is not always helpful when judging whether China will be aggressive and expansionist or whether it will live more or less peaceably with the rest of the world. Westerners often assume that terms like ‘international rules’, ‘global order’ and what constitutes ‘responsible behaviour’ are understood and accepted by all others. Yet for China, these terms have emerged from a different culture and historical experience. These differences in vision affect China’s foreign policy.

Yet, despite obvious exceptions, such as human rights, China is well integrated into the international system and largely complies with international rules — probably at least as well as other major powers. China’s reluctance to lead internationally might suggest not just free-riding but a reluctance to challenge the existing global order.

When China opened up, it joined an international order that reflected a pluralistic view of the international community, that acknowledged differences in political and domestic value systems, and that pursued mutually acceptable global rules and geopolitical equilibrium. Then the common vision shifted and the membership bar was raised.

Ultimately, a US-led international system emerged that involved an agenda of good governance, ‘free’ markets and ‘democracy’ (usually just elections). These aimed to advance US security and its other interests. The objective of regime change under this agenda in Iraq, Libya, Egypt, Syria and perhaps Ukraine suggests we should be cautious about what we wish for. For China, in any case, this agenda implies regime change, social instability, and the end of the Party-state.

Of course, China has regional and global ambitions and its relative military and other capacities will grow substantially. China wants a role that commands attention and respect from its neighbours, particularly in its ‘near abroad’, and Australia may not always like what it or others do. The US needs to manage relations between states rather than just pursue political change or impose views of complex issues that then become part of the problem.

China feels internationally vulnerable and, as with the US, domestic nationalism influences its policies. Internally, China’s leaders fear fragmentation, instability and competition for power. There are major problems to deal with at home.

With domestic issues as its main priority, China’s foreign policies will remain largely defensive and reactive to external influences, rather than offensive and expansive. China knows it needs stable relations with the US and its neighbours in order to sustain its development. It will seek changes to the rules by basically working within the existing framework.

Maritime disputes are worrying but hardly central to Australia’s strategic interests. Sovereignty claims by all parties are unhelpful and pose serious risks of miscalculation. Australia’s attention is understandably focused on China, but the historical context needs to be understood, including China’s ‘missing out’ on territory in the 1960s and 1970s regional ‘island grab’. Provocations and efforts to change the status quo are not limited to China or unconnected to the US pivot and the regionally divisive Trans-Pacific Partnership.

A US regional presence remains strategically important, but the US and Australia’s values and vital interests are often different and Australia needs to re-examine its concepts of regional order. There are considerable risks in Australia’s growing enmeshment in the US regional security system to where Australia’s security policy is increasingly a function of that of the US, and an independent Australian position is difficult to maintain.

These issues will become important in the future with any adverse regional developments, notably potentially over Taiwan. US diplomatic management of such problems will remain critical. But history will treat unkindly any Australian political leader who, consciously or inadvertently, commits Australia to military conflict involving China without clear public support and a full parliamentary debate, based on an explicit strategic assessment of Australia’s long term vital interests.

Stuart Harris is Emeritus Professor in the Department of International Relations, at the Coral Bell School of Asia Pacific Affairs, ANU College of Asia and the Pacific. His latest book, China’s foreign policy, is available from Wiley.

This article was originally published at policyforum.net, the website of the Asia and the Pacific Policy Society. Republished with permission.

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On a Sunday afternoon three years ago, one of China’s most-wanted fugitives, dressed in baggy jeans and a striped shirt, walked into the country’s pagoda-shaped consulate in Vancouver. Li Dongzhe was ready to take the biggest gamble of his life.

Accused of masterminding a US$113 million embezzlement, he had been living in Canada for almost seven years, beyond the grasp of China’s justice system. At home, he faced likely life in prison or a possible death sentence if found guilty—and government figures show Chinese criminal courts hardly ever acquit.

In Vancouver, he blended into a local Chinese community so familiar he hadn’t needed to learn English—almost like a forced vacation for a workaholic such as himself, he sometimes joked.

So what pulled Mr. Li into the consulate that day?

The answer is contained in documents and hours of recordings, recently made available for The Wall Street Journal to review by Mr. Li’s Canadian lawyer, which give a rare glimpse into the pressures that can build in a life on the lam.

Beijing today is determined to ratchet up those pressures as it pursues illicit wealth allegedly amassed by as many as 18,000 economic fugitives it says are hiding around the world after bilking China during its long-running boom. As much as US$1.25 trillion in ill-gotten funds drained out of China in the decade to 2012, according to the Washington-based advocacy group Global Financial Integrity.

Chinese authorities have followed that money across the globe, chasing white-collar criminals from Fiji to Belgium to the U.S. President Xi Jinping’s government last year unveiled a new and expanded campaign to catch such fugitives abroad dubbed “Fox Hunt.” It’s adding police liaison officers in embassies and pressing foreign governments to assist in the effort.

In Mr. Li’s case, though out of China’s reach, he was feeling the heat on both sides of the Pacific, the recordings and interviews with others familiar with his situation show. He couldn’t be reached for comment.

At home, authorities had detained his relatives and confiscated their assets. Canada is one of many countries that are reluctant to deport Chinese criminal suspects out of concern they might be tortured or executed.

But under Chinese pressure, the Canadians detained him in jail for more than two years on an immigration violation and then placed him under constant surveillance, according to his Canadian lawyer, Douglas Cannon, and others.

“Every knock on the door—just nervous,” Mr. Li told Chinese officials inside the consulate. “Immigration officers? The police?”

Mr. Li had become rich by wheeling and dealing his way through the go-go years of 1990s China. As he began negotiations with Chinese officials in Vancouver, he figured he could cut one more deal: Beijing wanted a scalp and he would offer his—if China agreed to give him a light sentence for returning home.

Growing up in the northern Chinese city of Harbin—a frontier trading city closer to Russia than Beijing—Mr. Li, now 48, got little formal education beyond primary school.

But he had confidence and a knack for business. One venture sold disposable wooden chopsticks. Another trucked Russian color TVs to Chinese cities.

When private-car ownership dawned in the 1990s in China, Mr. Li won concessions to sell Buicks, Volkswagens and Nissans. He formed a medical-supplement business. He scooped up empty land for development.

“He has vision,” said Jiang Guozai, a younger cousin. “In our eyes, he was already very rich when everyone was poor.”

He also was a relentless worker, to the exclusion of all else. Mr. Li’s ex-wife, Qu Hongwei, said he arranged no honeymoon, missed the births of his two children, ignored birthdays and only once in their marriage marked Valentine’s Day, when his aide bought her flowers.

An unassuming man with a square jaw and spectacles, he avoided flashy displays of wealth but allowed himself a top-of-the-line Audi with chauffeur.

Still, his ambitions outpaced his ability to generate cash, a person familiar with the situation said.

In 2000, he teamed up with Gao Shan, the manager of an out-of-the-way Bank of China branch in Harbin, according to statements the two made to authorities later in China that were reviewed by the Journal. Efforts to reach Mr. Gao were unsuccessful.

Mr. Li introduced Mr. Gao to officials at local companies and the two men offered the executives kickbacks to make deposits at Mr. Gao’s branch, Mr. Gao said in the statements.

Then Mr. Gao doctored transactions with fake stamps and phony invoices to siphon 939 million yuan (then about US$113 million) from the customers into accounts controlled by Mr. Li, Mr. Gao said. Millions of dollars were never recovered.

Among those approached in Harbin were an expressway company and a local pension fund. The kickback to one telecommunications-company executive equaled 1% of the deposit, Mr. Gao told Chinese authorities.

Mr. Li admitted to Chinese authorities his companies obtained money through the bank branch but considered the funds bridging loans, and insisted he didn’t take any for personal use, according to his statements. Mr. Gao told authorities he just hoped to get a promotion by building up the bank’s deposits.

During this period, Mr. Li bought four apartments on Pender Street in downtown Vancouver, a typical offshore investment for rich Chinese.

And when a Harbin friend living in Canada approached Mr. Li with a request to support the Royal Winnipeg Ballet, Mr. Li provided over $450,000 to underwrite an 18-day tour by the company in China, according to a Canadian government report. The ballet company didn’t respond to requests for comment.

Then, in late 2004, at least one Bank of China customer began asking questions. Mr. Li got wind detectives were on his trail, his Canadian lawyer, Mr. Cannon, said. He then fled, bolting for Vancouver.

Mr. Li arrived in Canada a day after Mr. Gao, now 49, immigration records show.

Chinese police issued an arrest warrant and Interpol Red Notices seeking Messrs. Li and Gao for what was believed to be one of China’s largest-ever bank embezzlement frauds.

In Vancouver, Mr. Li assumed a low profile, and within six months of his arrival in Canada sold all traceable assets there, including the Pender Street properties.

With China eager to get him back, Vancouver police began surveillance of Mr. Li and agreed to send an officer to Harbin to hear a briefing.

Back home, some of Mr. Li’s cousins were imprisoned on suspicion of involvement in the embezzlement, according to Mr. Cannon, the lawyer, and relatives of Mr. Li.

Authorities evicted some family members and former business associates from their homes. And they took control of many of Mr. Li’s properties, dealerships and other businesses, then sold some of them, Mr. Li said in later statements to authorities.

In February 2007, roughly two years after Mr. Li arrived, Vancouver police traced him to a hotel and forced open the door, a Canadian government report said. They arrested Mr. Li and charged him with overstaying his tourist visa.

But Canadian immigration officials decided not to deport Mr. Li for fear he “would face a risk to life, a risk of torture or a risk of cruel and unusual treatment or punishment” in China, they said in an April 2008 ruling.

Stuck in jail, Mr. Li wrote a 37-page proposal to China’s government. He said he’d accept up to three years in jail if authorities dropped charges against his family members and returned their real estate.

Mr. Li suggested such a deal would set an example for other criminals who had fled China and encourage more to turn themselves in. It was time for everyone to “exercise their political wisdom, legal flexibility and negotiation skills,” Mr. Li wrote, according to a copy viewed by the Journal.

It is unclear whether Beijing responded.

But China’s Ministry of Foreign Affairs did pledge in an August 2008 memo to Canadian officials that if Mr. Li were extradited and found guilty, “the presiding court will not sentence Li Dongzhe to death,” according to a copy reviewed by the Journal. The memo didn't provide any other assurances.

China’s Ministry of Foreign Affairs said in response to questions that all dealings with Mr. Li were handled according to Chinese law.

After more than two years, Canadian authorities released Mr. Li in mid-2009. But they saddled him with a 6 p.m. curfew and bans on handling cash or credit cards, driving, using the Internet and even going near the waterfront. To get around the cash ban, he asked contacts including his lawyer to help with his shopping.

An electronic monitor was strapped to his ankle and two video cameras inside his apartment recorded the front door and his balcony.

Mr. Cannon, in an interview, recalled joining Mr. Li on a trip to the mall to buy clothes when two uniformed Canadian immigration officers tailed them.

The Canada Border Services Agency declined to comment on individual cases but in a statement said it “works closely with international and domestic law enforcement partners” and “is committed to ensuring Canada is not a safe haven for people who are fugitives from justice.” Other Canadian government offices, including the Foreign Ministry in Ottawa and the Royal Canadian Mounted Police, declined to comment.

Mr. Li was miserable in other ways, too. He disliked Western food and rarely had visitors—not even his former partner Mr. Gao, who was trying to carve out a quiet life with his family in Canada despite facing his own pressure from Canadian authorities. Mr. Li lived in a bland two-bedroom apartment overlooking a parking lot that he rented with his brother, who had gone with him to Vancouver.

Living such a life was “torture,” Mr. Li said later during one of his recorded meetings with Chinese officials.

In March 2010, he’d had enough. He made a fresh approach to the Chinese consulate with a letter proposing a confidential meeting, according to a copy reviewed by the Journal.

After several months, the consulate invited him in but rejected one of his prerequisites—official Canadian involvement—Mr. Cannon said. Mr. Li agreed anyway, and starting in mid-2011 met Chinese officials around a dozen times, recordings show.

The recordings suggest Mr. Li initially oozed confidence. He said his family had legitimate wealth that should be returned. He said his brother, who was also wanted by Chinese authorities for alleged involvement in the fraud, had no significant role in his business. The brother couldn’t be reached for comment.

And Mr. Li repeated his claim that his arrangement could become a “showcase” to encourage other fugitives to do deals.

“You are sincere but not resolute enough,” one Chinese official responded in the recordings.

Soon, Mr. Li offered a show of good faith: He convinced his brother to surrender. In exchange for a verbal assurance from the consulate that he wouldn’t be prosecuted, the brother returned to China in July 2011, according to recordings and documents viewed by the Journal.

“We are answering the motherland’s call,” Mr. Li said to the Chinese consular officials.

Mr. Li appeared to click with his primary interlocutor, You Xiaowen, China’s chief police liaison officer in Canada.

One Friday, over a seafood dinner out, they chatted about hometowns and Vancouver’s affordable lobster, according to a recording of the meeting.

“You’re a nice guy, and that’s why we can talk,” said Mr. Li. Mr. You didn’t respond to a request for comment.

Still, Mr. Li didn’t seem to be making progress. His initial demands—like a three-year jail sentence—fell away. He was growing weary.

“There’s never a happy day,” Mr. Li said during one recorded meeting. “The food is tasteless.”

On Sept. 4, 2011, Mr. Li sat down with China’s consul general in Vancouver, Liang Shugen, according to recordings, documents and photos from the meeting reviewed by the Journal.

The consul read a vague five-point offer that he said had been approved in Beijing. For Mr. Li’s and Mr. Gao’s voluntary surrender, he said, China could verbally promise unspecified “leniency”—but not rule out life in prison.

No harm would come to innocent family members, the official pledged, and they could reclaim legitimate assets.

“This is the best deal you’ve got,” said Mr. Liang. “Seize it.”

Efforts to reach Mr. Liang, now based in South Africa, were unsuccessful.

The offer required both Mr. Li and Mr. Gao to return, and it would expire on New Year’s Day. Mr. Li sounded thrilled and Mr. Liang accepted his suggestion that they pose for a photo.

“Now we have these promises from the Chinese government, we can go back with relief,” Mr. Li said to Chinese officials in the recordings.

His exuberance didn’t last, the recordings show. In a meeting the following month, Mr. Li worried aloud that his brother’s return to China in July had cost him leverage: If Mr. Li failed to follow, his brother could face prosecution.

He suggested to Mr. You that the time had come for China to demonstrate its sincerity by, for instance, handing back his family in Harbin an apartment or two. The Chinese officials didn’t budge.

“I tell you, Counselor You, now I don’t know what to do,” Mr. Li said. “Because I’ve made this big step, now I can neither retreat, nor move forward.”

He added: “I am all alone in Canada. Every single family member is in China. Am I digging my own grave?”

As negotiations wore on, Johnny Chang—one of Mr. Li’s few friends, the lead dancer in the Winnipeg ballet he had sponsored—said he twice flew to Vancouver to help Mr. Li with issues that required English, like buying clothes. Mr. Li seemed lonely and anxious, he recalled.

“Did he really need help?” Mr. Chang said in an interview. Sometimes Mr. Chang and his wife talked about whether Mr. Li required assistance or just wanted a friend, with Mr. Li phoning him at all hours for small talk, he said. “I think it was mental.”

On Dec. 27, as the deadline approached, the recordings capture Mr. Li pleading with Mr. You, the policeman: “Can you give me one more month?”

But three days later, his departure was back on track. Meeting with Chinese officials, he is heard in the recordings discussing how to handle two bulky suitcases.

Then, Mr. Li’s microphone suddenly picked up sobs as the reality of his situation sank in.

“I’m sorry,” Mr. Li whimpered.

His despondence, seemingly from nowhere, startled Chinese officials.

“Sorry, nothing,” one official snapped.

“Even when my father died, I didn’t cry,” Mr. Li mumbled, according to the recordings.

“Don’t be emotional,” said the official.

Mr. Li babbled through tears about trust, duty and age. He referred to family members he feared he had let down. He lamented he hadn’t seen his daughter in seven years. He told Mr. You he feared losing the policeman’s companionship. “I’m really ashamed.”

The officials abruptly ended the meeting.

On Dec. 31, 2011, exactly seven years after he fled China, Mr. Li went to Vancouver International Airport and signed a Canadian Certificate of Departure that described him as a nondangerous Chinese criminal denied entry to Canada.

Mr. Li bumped into Mr. Chang, the dancer, who was scheduled on a flight departing from a nearby gate.

“Well, I’m leaving in an hour,” Mr. Li told his friend, who recalled the meeting in an interview. He said that Mr. Li appeared confident that he was going to be free when he arrived home.

Just before 1 p.m., Mr. Li lifted off aboard Air China Flight 270 to Beijing. He paid to upgrade to business class, people familiar with his departure said, leaving two Chinese consulate staffers in coach for the 10-hour trip. After he landed, without fanfare police took Mr. Li to his hometown and remanded him in Harbin No. 1 Detention Center, family members said.

Eight months later, Mr. Gao, who was also negotiating his return to China, followed. He had missed the end-of-year deadline to await an assurance from Canada that his wife and daughter wouldn’t be deported. They continue to live there.

Once Mr. Gao was airborne, people familiar with the matter say, Chinese authorities pounced.

Police in various cities arrested a clutch of Mr. Li’s business associates and family members, including some it had detained and released earlier, as well as his brother. When Mr. Gao’s plane touched down, state-run media trumpeted the capture of the alleged bank fraudsters.

In a two-day trial in Harbin in September 2013, Mr. Li conceded that his companies engaged in fraud and bribery but he claimed to not have profited personally. He waited in detention, hoping his deal in Vancouver for leniency would stick.

A year later, in September 2014, standing in a green polo shirt with his ankles shackled, Mr. Li heard the court return guilty verdicts. He was sentenced to life in prison and all his assets were confiscated.

“We could consider giving him a lighter punishment,” the verdict said about Mr. Li, citing his voluntary surrender. “But a lenient sentence is not warranted” because the bank fraud “was particularly severe.”

His brother, who pleaded not guilty to fraud, was sentenced to 25 years. The court credited Mr. Gao with a full and truthful confession and sentenced him to 15 years.

The 166-page decision made no mention of Mr. Li’s contact with the Vancouver consulate.

Last month, a provincial high court rejected Mr. Li’s appeal, citing reliable evidence of his crimes.

“Chinese law-enforcement agencies and judicial agencies will not enter into any kind of deals with those criminals fleeing abroad,” said Xu Hong, a legal expert at China’s foreign ministry, in response to questions from the Journal at a press briefing.

“The reason why these criminal suspects are willing to return to China is they don’t see a way out to continue staying abroad.”

Mr. Cannon, who also represented Mr. Li’s brother, said Mr. Li returned to China believing he had an agreement that would protect his family and limit his own prison time.

In the end, he said, “My clients took a chance and lost.”

Premier Li Keqiang said in a meeting on Wednesday that the government will work to ensure that China's economic growth falls within a reasonable range, as the world's second-largest economy loses steam. 

Mr Li, in the State Council meeting, said the government has to implement proactive fiscal policies and take measures to safeguard employment. He also said China would step up targeted easing to maintain steady growth.

He said the government would also cut red tape for imports and exports, which are drivers of the country's growth. 

China recently lowered its gross domestic product growth target to about 7 per cent in 2015 from 7.5 per cent in 2014. 

The country's economic growth slowed to 7.4 per cent last year, the slowest pace in over two decades.

Copper has taken its biggest fall since late January, weighed down by economic weakness in top consumer China and expectations the Federal Reserve will prepare the ground for an increase in US interest rates.

Other metals slid to fresh lows as investors stepped up selling during the day, sending tin and lead to their weakest levels in 57 months and nickel to a 14-month nadir.

The Fed was expected to remove the word "patient" from its statement on the timing of its first rate rise since 2006, possibly paving the way for policy tightening as early as June.

The US dollar was steady near its recent 12-year peak against a basket of currencies. A strong dollar makes dollar-priced metals more costly for non-US investors.

In China, there was more evidence of economic weakness after prices for new homes fell at the fastest pace on record in February. The cabinet has promised "flexible" use of monetary policy to support the economy.

"China is moving away from a growth-at-all-costs model. This is fundamentally affecting heavy industries. It's entirely possible you could see weak apparent demand in 2015 as base metals readjust to the new model," said Nic Brown, head of commodities research at Natixis.

Three-month copper on the London Metal Exchange closed down two per cent, the biggest one-day drop since late January, to $5,670 a tonne. The metal is down about 10 per cent so far in 2015.

Chinese consumer demand remains tepid a month after the Lunar New Year, while smelters are producing ample copper supply. But several miners have cut supply forecasts, which is expected to affect refining capacity later in the year, underpinning prices.

Against that, the Indonesian government said Newmont Mining Corp's copper export permit will be extended for six months.

LME lead ended 2.1 per cent weaker at $1,687 a tonne, having earlier hit its lowest since June 2010 at $1,676.50 a tonne.

"We suspect there are growing volumes of lead scrap available in the Asian market but we are struggling to find out where it's being recycled and how it's coming back to the lead market," Brown said.

Zinc dropped 1.3 per cent to finish at $1,988 after touching the lowest since April 2014.

Zinc treatment charges have been settled 10 per cent higher at $245 a tonne of concentrate due to a well-supplied market, a report said.

Aluminium closed 1.3 per cent weaker at $1,763 and tin tumbled 2.9 per cent to close at $16,850 a tonne, after touching its lowest since June 2010 at $16,785 a tonne.

Nickel failed to trade in closing rings and was bid down 1.6 per cent at $13,600, after hitting its lowest since January 2014 at $13,510.

Hold on to your jewellery and consider getting into river panning because the price of gold is forecast to double in the next 15 years.

Growing wealth across Asia, particularly in China and India, will fuel demand for the precious metal and send its value soaring, a new study from ANZ predicts.

ANZ's report `East to El Dorado: Asia and the Future of Gold' says the price of gold could exceed $US2,400 per ounce by 2030, more than double its current value of around $US1,100.

"Asia's rise will have profound implications for the gold market," ANZ chief economist Warren Hogan said.

As incomes rise across Asia, so will the appetite for gold rings and necklaces, the report predicts.

Gold holds cultural significance in China and India, where high-quality gold jewellery is considered an ideal gift for weddings in the hope it can bring luck and happiness.

"A growing middle class will buy more jewellery," Mr Hogan said.

Difficulty in obtaining gold in China and India in the past also adds to the allure, the report says.

The Chinese government has a history of nationalising gold stores, while in India gold imports were largely banned until 1990.

Developments in money management practices in Asia, and rising demand for diverse financial products, will also help fuel demand for gold, the report says.

"A larger body of professional money managers will drive investment demand," Mr Hogan said.

"And regional central banks will purchase more gold to provide confidence in newly floated currencies."

"These factors will support a long term and significant increase in the gold price."

ANZ's report predicts annual gold demand from 10 key Asian countries - including China, India, Japan, Indonesia and South Korea - will double from 2,500 tonnes to 5,000 tonnes.

Australia produces 266 tonnes of gold a year, the second largest after China, so local gold miners should benefit from the value of their wares rising.

"The higher the gold price goes, the more economical some perhaps marginal gold mines become," ANZ's commodity strategist Victor Thianpiriya said.

"With demand expected to go the way that we think - there's a lot of scope for Australian gold miners to capitalise on that."

A climbing US dollar, which gold is priced in, has dampened investor demand for gold so far in 2015, Mr Thianpiriya said.

But he said investors still see gold as a safe haven during periods of share market and economic decline.

"One things that's never changed for the gold market in the last 30 or 40 years is its safe haven appeal," he said.

"Most of the time you don't want to pay for it. But if you need it, you're glad you have it."

SHANGHAI—The average price of new homes in 70 Chinese cities fell further in February amid sluggish demand due to the Lunar New Year holiday and fears among potential home buyers of more price cuts.

On a year-over-year basis, the average price of new homes dropped 5.7 per cent in February, after a 5.1 per cent decrease in January and a 4.3 per cent fall in December. It was the sixth month in a row of declines, based on The Wall Street Journal’s calculations from data released Wednesday by the National Bureau of Statistics.

The pain in China’s property market is likely to continue despite Beijing’s efforts to help the economy, analysts said, noting that so far only major cities such as Beijing and Shanghai are showing signs of recovering.

Housing sales in the third and fourth tier cities account for around two-thirds of the country’s real-estate market, and the persistent weakness in demand in such cities has been a drag on the world’s second-largest economy.

A sharp decline in housing sales has been a factor in the government efforts to boost the economy. The central bank announced a cut in benchmark interest rates in late February, following a reduction in November, and let banks lend more by reducing the portion of their deposits they need to set aside as reserves.

On a month-over-month basis, prices in February slipped 0.43 per cent, unchanged from the 0.43 per cent fall in January, but widening from December’s 0.40 per cent decline, according to calculations by The Wall Street Journal.

Private-sector home prices fell in 69 of 70 cities in February from a year earlier, unchanged from the 69 cities that posted declines in January. On a month-over-month basis, home prices fell in 66 of 70 cities in February, compared with January’s 64.

“The government can’t ignore the property market at this juncture,” said Rosealea Yao, an analyst at Gavekal Dragonomics.

She added that she expects Beijing to ease more policies, including lower down-payment requirements, and make further cuts in interest rates or banks’ reserve requirements.

Many Chinese cities are still saddled with high inventories of unsold homes, and authorities in a number of provinces have said they are buying up private housing units to convert them into housing for lower-income households.

But many Chinese individuals remain nervous about the market. Diminished hopes for a turnaround in home prices and expectations that property taxes could be put in place soon have driven some investors to look for opportunities abroad.

“Many of my customers are worried about the value of their property in China,” said Zita Wong, an adviser at Griffin Plutus, a wealth management firm based in Shanghai. “They are no longer looking for property here and are instead looking for assets abroad as a hedge.”

Premier Li Keqiang said Sunday that China has ample tools to “intensify fine-tuning measures to assure market confidence,” suggesting that Beijing is willing to lend support to the economy to keep it humming. He noted that China’s urbanization drive should help the housing market and genuine demand for homes remain strong.

China’s real estate sector is estimated to account for nearly one-quarter of gross domestic product when construction, cement, steel, chemicals, furniture and related industries are factored in. Housing sales nationwide fell 16.7 per cent to 498.3 billion yuan ($79.6 billion), the steepest decline in three years since a 24.7 per cent plunge recorded in the January-February period in 2012. For the whole of 2014, housing sales slipped 7.4 per cent.

China posted 7.4 per cent economic growth last year, its worst performance in nearly a quarter of a century. It has set an even lower target this year of 7 per cent but some analysts say it could fall short of its objective.

“The property market will have to switch to boosting the economy from being a drag in order to hit the 7 per cent GDP growth target this year,” said ING economist Tim Condon.

Yahoo Inc. is withdrawing its remaining operations in China, laying off between 200 and 300 employees and shutting down its Beijing research center, according to a person familiar with the matter.

The company said it informed employees of the job cuts on Wednesday. The Beijing office, Yahoo’s only physical presence in mainland China, was mostly made up of engineers and functioned as a research and development center. “We will be consolidating certain functions into fewer offices, including to our headquarters in Sunnyvale, California,” Yahoo said.

The layoffs are the latest in a series of cost-cutting measures by Chief Executive Marissa Mayer. Including the latest round, Yahoo has cut 700 to 900 employees since October, mostly in offices outside the U.S.

The CEO is under pressure to rein in expenditures after activist investor Starboard Value LP last year urged her to reduce costs by as much as US$500 million.

The layoffs in China represent about 2 per cent of Yahoo’s global staff of 12,500. Job cuts in recent months have affected workers in Bangalore, India, and the company’s Canadian offices.

Yahoo has a fractious history in China, a country where U.S. tech companies have struggled with government censorship and competition from local rivals. In 2007, Yahoo settled a lawsuit with the families of two Chinese dissidents who were jailed after the Internet giant provided information to authorities about their online activities.

Ms. Mayer was an executive at Google Inc. in 2010 when the search giant withdrew from China after a confrontation with local authorities over censorship.

Yahoo’s decision to close its Beijing office wasn’t influenced by issues related to censorship or pressure from the Chinese government, the person familiar with the matter said.

Yahoo stopped offering services to users in China in 2013. That year, it told email users to transfer their accounts to Alimail, an email service offered by Yahoo’s close partner in the region, Alibaba Holding Group Ltd.

The Chinese address for its home page, Yahoo.cn, redirects visitors to its Singapore site.

The South China Morning Post earlier reported news of the layoffs.

Reserve Bank of Australia researchers have warned that Chinese policymakers may not be willing to stimulate the nation's slowing property market as much as needed, in a glaring warning for Australian commodity exporters. 

In the central bank's quarterly Bulletin, the RBA noted that the latest slowdown in the Chinese property market has coincided with a pronounced increase in property developer leverage.

This means the market remains a key risk to Chinese economic growth, financial stability and to the imports of resource commodities. The latter will sound warnings bells for Australia, which counts China as its largest trading partner. 

The outlook for the Chinese property market, particularly for new property construction, is of relevance to Australia given the sector's use of raw materials such as such as iron ore and coking coal, the RBA report says.

Overnight, the price of iron ore fell below $US55 a tonne for the first time since 2009 as concerns about an oversupplied market as big miners lift production and waning Chinese demand weighed. 

Several analysts have recently warned of a fall to around $US50 a tonne before a price floor can be found.

"While the process of urbanisation in China is continuing and will provide a level of support for construction activity in coming years, the property market is likely to remain weak for a time," the RBA research concluded. 

"Various levels of government have taken actions to support activity and confidence in the market."

There is scope for the relevant authorities to provide more support if required, the RBA said, however, "the goals of deleveraging and achieving sustainable growth may limit the extent to which policymakers are willing to provide further stimulus to the sector." 

The RBA research noted that the current weakness in the property market is different from previous downturns because there are indications that developers may be much more highly geared than in the past, contributing to financial stability risks. 

"Residential property cycles in China have been larger than cycles in commercial real estate, and may pose risks to activity and financial stability," the RBA said. 

Property development, and especially residential property development, represents a large portion of China’s economic activity and has made a significant contribution to the nation's overall growth in recent years. 

The warning comes as new data from China's National Bureau of Statistics showed the average price of new homes in 70 Chinese cities fell further in February amid sluggish demand due to the Lunar New Year holiday and fears among potential home buyers of more price cuts.

The pain in China’s property market is likely to continue despite Beijing’s efforts to help the economy, analysts said, noting that so far only major cities such as Beijing and Shanghai are showing signs of recovering.

China aims to install as much as 17.8GW of solar projects in 2015, according to an announcement posted to the National Energy Administration website yesterday.

The target was much larger than many in the industry were expecting as an earlier consultation document that solicited opinions on the NEA's plans set a provisional installation target of 15GW.

Last year China added a total of 10.6GW of solar power to the energy network, according to a China News Service report on the announcement, the NEA said that this accounted for about one quarter of all new installations made across the globe in 2014.

This was despite a target of 14GW of solar power installations being set early in the year. The target was later amended in August 2014 after only 3.3GW being installed in the first six months of the year.

Of last year's 10.6GW of installation, large-scale plants accounted for 8.55 GW of installations, while the remaining 2.05 GW were distributed solar power projects.

The amount of distributed power installation was far below the NEA's target for the year and was the main reason why the overall target for 2014 installations was missed.

In order to avoid having projects built that are not connected to the power network, the NEA says it will monitor connection rates and adjust quotas according to the rate at which connections are occurring. 

Those areas that do not reach specified targets for connection rates will have the amount of installations approved in the following year scaled back.

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Chen Guangcheng’s new book, “The Barefoot Lawyer: A Blind Man’s Fight for Justice and Freedom in China,” sheds light on two of the three mysteries surrounding his amazing 2012 escape from Communist captivity to freedom in America.

The book details how the blind dissident managed to slip through the police cordon around his humble farmhouse and make his way to Beijing and the U.S. Embassy. That is a riveting tale. But of greater import to U.S.-China relations is Mr. Chen’s version of the events that led him to leave the embassy after the two governments spent days negotiating over his fate.

The resulting deal seemed to end a diplomatic crisis as the two countries prepared to convene their annual high-level Strategic and Economic Dialogue. Although Chinese officials refused to let him leave the country, skillful U.S. negotiators found a compromise. Mr. Chen would leave the embassy and stay in China, while the government would allow him to study law at a Chinese school and then at New York University’s Shanghai campus.

Soon after he left the embassy, the understandably anxious Mr. Chen repudiated the hard-won deal. This reignited the crisis in the full glare of world publicity. Fortunately, after NYU’s U.S.-Asia Law Institute agreed to grant Mr. Chen an academic fellowship in New York, further frantic negotiations secured his freedom to leave the country.

That tense week became an issue in the 2012 U.S. presidential campaign. Republican leaders charged the Obama administration with bungling the initial negotiations over Mr. Chen’s case and coercing him to leave the security of the embassy in return for a very risky offer to remain in China. Secretary of State Hillary Clinton rejected the charge, claiming that the administration had been “guided by [Mr. Chen’s] choices and our values.”

“Hard Choices,” Secretary Clinton’s memoir of her years in the State Department, acknowledges that “Chen appeared frail and vulnerable.” Ambassador Gary Locke and State Department Legal Advisor Harold Koh “spent hours with Mr. Chen, holding his hand, soothing his fears, and talking about his hopes for the future.”

Mrs. Clinton insists that Mr. Chen’s decision to leave the embassy reflected his free will. Because he quickly regretted that decision, her memoir brands him “unpredictable and quixotic.”

In his book, Mr. Chen says he felt enormous pressure to leave the embassy, despite his great fears that the Chinese government would not respect the compromise in practice. I can testify to those pressures and fears since I had extensive telephone conversations with him at the time.

The calls came about at Mr. Koh’s request as a way to allow Mr. Chen to discuss the situation with an American friend in whom he had expressed confidence. So on each of the two days before he left the embassy, I received briefings from Mr. Koh and Assistant Secretary of State Kurt Campbell, and then I talked with Mr. Chen.

On the first day we talked, after hearing Mr. Chen’s repeated fears, I advised him to stay in the embassy. Meanwhile U.S. diplomats were urging him to consider the anticipated drawbacks, including the State Department’s doubts about the legality of harboring him as well as the certainty of the Chinese government’s outrage.

After a second day of persuasion by U.S. diplomats, Mr. Chen was significantly less fearful and seemed willing to assume the risk of leaving the embassy. I urged him to ask that President Barack Obama personally issue a statement promising continuing concern for Mr. Chen’s security. Although no presidential statement was forthcoming, Secretary Clinton did offer her own assurance as she arrived in Beijing for the Security and Economic Dialogue.

Neither Mr. Chen’s book nor Mrs. Clinton’s clarifies the biggest puzzle of what the latter calls “a drama right out of a spy novel . . . in the streets of Beijing.” How did Mr. Chen evade China’s secret police for several days after his arrival in the capital and before a U.S. government van took him to the embassy?

Mr. Chen tells us that human-rights activist Hu Jia and his wife,Zeng Jinyan, two of the most closely watched and restricted dissidents in China, were among the supporters who visited him at his temporary Beijing “safe house” without apparent detection. His supporters made many phone calls among themselves and with embassy contacts, again without apparent detection.

Mr. Chen’s book describes a subsequent car chase in which the car transporting him to meet the embassy van and the van itself were very closely followed for a considerable time by no fewer than four police cars. None of the pursuers succeeded in intercepting the conspirators’ vehicles, even when they had to stop to transfer Mr. Chen to embassy custody.

Ms. Clinton’s book, obviously based on her diplomats’ reports, merely states that staff in the embassy van “saw Chinese security in the area” of the pickup but it was not overtaken. Normally, China’s secret police are notoriously efficient. Neither Mr. Chen, Mrs. Clinton nor anyone outside the Chinese leadership may yet know the whole truth behind this strange tale.

Mr. Cohen, a law professor at New York University, is co-director of NYU’s U.S.-Asia Law Institute and an adjunct senior fellow at the Council on Foreign Relations.

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China faces three big problems in the foreseeable future: the burden of local government and corporate debt, excess industrial capacity and a rapidly cooling real estate sector. Of the three big problems, local government debt is arguably the most serious with the potential to destabilise the country’s financial system.

Beijing has been trying to size up the true extent of the country’s hidden and opaque local government debt responsibilities. Despite the comprehensive national audit effort in 2013, the government is still trying to get to the bottom of the problem. According to Caixin, a credible local newspaper, the true size of local government debt could be as large as 40 trillion yuan.

The figure has shocked bureaucrats at the Ministry of Finance who have told local officials to go back to their books for another look.  There is a fear that local governments want to report as much debt as possible due to the new rules which will force them to bring any opaque and secret loans onto their balance sheets.

The cut off date for local governments to report their true debt amount is 8^th of April, 2015. The final reported and verified number will form the factual foundation for a future fiscal management plan. That is why so many local governments have finally come clean on their debt obligations for the first time.

After much confusion and dithering, Beijing finally took a decisive step last week to address this issue through a program to restructure local government debt, replacing short-term high interest debts with long-term government backed debt. The initial program is only worth about one trillion yuan. There has been speculation the program could be as large as 10 trillion yuan.

The program will address several urgent issues. Firstly, a lot of short-term borrowings are due in the first half of 2015; the program will swap short-term debts into longer-term debts with lower interest rate. This will ease the immediate burden of repayments as well as win time to resolve the debt problem over a longer period of time.

The debt-restructuring program also forces local governments to reveal their hidden debts and increase overall transparency. The new rule dictates local governments must bring all their spending onto their books and cut off their access to shadow banking facilities such as local government financing vehicles (Avoiding China's debt downfall 12 March 2015).

Though this program is the first concrete step to tackle the problem, there are many more issues that the government needs to resolve before they can find a long-term solution to this problem. A former vice-president of Bank of China, Wang Yongli, has several tips for Beijing.

The first step is to impose strict budget discipline. Fiscal disciple has gone out the window since the global financial crisis, local governments have turned to the shadow banking sector to fund their spending programs with total disregard for the country’s budget law. Though local governments are strictly limited in their ability to issue debt, they have borrowed heavily through front companies and used their credit ratings to support other projects.

The government has to control the further growth of debt before starting the painful process of deleveraging. Wang argues local governments must not be allowed to expand their debts without explicit approval from the central government.

However, in order to achieve this goal, Beijing must return more revenue to local governments, allowing them to fund basic social services and infrastructure spending.  Since the 1994 intergovernmental fiscal reforms, the central government’s share of fiscal revenue soared to 50 per cent -- yet there was little change to their expenditure obligations, according to the International Monetary Fund.

This arrangement forces local governments to rely on land sales as well as the shadow banking system to fund their programs. Beijing has to reform the existing fiscal system to make local governments less reliant on land sales to fund basic services.

Because local governments have borrowed heavily from the shadow banking system, a lot of debts are either hidden or opaque. This makes it hard for the central government to assess the true extent of the problem. The first step towards finding a long-term solution must be to understand the scale of the issue.

The Ministry of Finance, the central bank and other agencies are undertaking this herculean task. If there is one thing worse than a pile of debt, it must be a bottomless pit of hidden debt.

The former vice president of Bank of China also urges both central and local governments to start creating balance sheets for state assets under their controls, crystallising their assets as well as liabilities. Given the size of China’s large public sector, it is absurd that no one seems to know the true size of its liabilities as well as assets.

Resolving China’s debt problem will be a painful long march and it will take a lot more than a debt swap program to solve it.

Follow Peter Cai on Twitter: @peteryuancai

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Cabinet's national security committee has given the green light for Australia to sign up to join a China-led development bank and potentially invest $3 billion.

The Asian Infrastructure Investment Bank is being promoted by China as a way of financing regional development but the US does not support the initiative.

Britain, France, Germany and Italy have queued up to join this month.

Cabinet is expected to formally decide to sign up when it meets on Monday, Fairfax Media reports, though it may only agree to a ‘memorandum of understanding’ initially as it seeks to improve governance commitments on the China-led bank.

The news follows an initial decision to reject the offer from China last year amid alleged pressure from the United States.

Lowy Interpreter

In his latest contribution to our debate, Shashank Joshi raised some excellent points against my sceptical view of the emerging India-US strategic partnership. But I'm still unpersuaded.

To explain why, it helps to step back and clarify the question we are debating here. It is not whether strategic relations between Delhi and Washington have grown closer in recent years, because clearly they have. It is what these closer relations mean for the geo-political contest between America and China.

India's position is clearly important to this contest. Many Americans, and many of America's friends in Asia, have long believed that India's growing wealth and power will be vital in helping America counterbalance China's growing strategic weight, and resist China's challenge to US regional leadership.

Indeed, the belief many people have that India will play this role is central to their confidence that America can and will preserve the status quo against China's challenge. It is therefore important to decide whether the progress we have seen in US-India relations justifies that confidence.

I have argued that in a geopolitical contest of the kind we see unfolding between America and China today, India's relations with America will only make a difference to the extent that India is seen to be willing to support America in a US-China conflict.

That is because who wins the contest between the American and Chinese visions of Asia's future order ultimately depends on which is seen to be more willing to fight for their vision. Each power wants the other to believe that it will go to war to impose its vision, and hopes that, if all else fails, this will persuade the other to back off.

This way of describing what is happening will surprise those who think that this kind of old-fashioned power politics disappeared after 1989, but it seems to me the only way to understand events in Asia today. In fact power politics never went away; people simply started to think that America was the only power that was indulging in it. It has been taken for granted that America will fight to support its vision of regional order, but that no one would be willing to oppose them. Now China is proving that false. We can no longer assume that China is any more determined to change the current order than America is to preserve it. 

That is why India's role in this contest depends on how far it appears willing and able to materially support the US in a conflict with China. In a game played for these stakes, nothing less counts for much. 

As I read him, Shashank makes two key points about this question.

One is that, while India might not be willing to send combat forces to fight alongside America's in a coalition against China, it would provide other, non-combat support such as basing and refuelling facilities. That sounds like what the diplomats call 'all support short of actual help'. It would do very little either practically or symbolically to bolster America's position against China, and certainly much less than American boosters of the relationship expect. 

His second key point is that perhaps India would be willing to provide America with more substantial support if it saw really fundamental issues of regional order at stake in a US-China conflict. He cites the example of the wide support given to America in opposing Iraq's invasion of Kuwait in 1990 by countries who saw basic questions of international order being tested there.

I agree with Shashank that very important issues for India would be at stake in a US-China clash. But deciding to support America against China would be much harder than joining the coalition against Iraq. In every way China is both a much more valuable partner and a much more dangerous adversary. The key question for India, and for America's other friends in Asia, is what would have to be at stake for them to make that decision? 

So it boils down to this: would India go to war with China to help America preserve the current order based on US primacy? If the answer is no, then I don't think the new warmth between America and India matters much to the future of Asia, and America's position in Asia is rather weaker than most people assume.

This article was first published by Lowy Interpreter and is reproduced here with permission.

Treasurer Joe Hockey says Australia will join a new China-led bank only if Australian companies had a chance to win contracts out of it.

Cabinet's national security committee is understood to have approved Australia's deeper engagement in talks on the Asian Infrastructure Investment Bank.

The bank is being promoted by China as a way of financing regional development, but the US does not support the initiative.

Britain, France, Germany and Italy have queued up to join this month.

It is understood cabinet on Monday will discuss Australia's conditions for joining the bank, ahead of senior government members talking to Chinese officials about it on the sidelines of the Boao Forum in China from March 26 to 29.

Mr Hockey said there was a "lot of merit" in the bank, but there must be transparency and no single country dominating it.

"It's going to be using contractors in our region," Mr Hockey told Fairfax radio on Friday.

"We want work for Australians out of this bank and because it's operating in our region, in our neighbourhood, it is important that Australia fully understand and look at participating in this bank."

Prime Minister Tony Abbott, who won't be attending the forum, told reporters in Melbourne no final decision had been made but the government took infrastructure seriously.

"We have a huge infrastructure deficit not just in this country but across our region," Mr Abbott said.

"It's important to do what we reasonably can to address that."

Labor deputy leader Tanya Plibersek said the bank had the potential to boost infrastructure investment by about $100 billion and the government should support it instead of dithering.

Australia will be represented at the Boao Forum by Governor-General Peter Cosgrove, Finance Minister Mathias Cormann and parliamentary secretary Steven Ciobo.

Also attending panel sessions will be former PM Bob Hawke, former treasurer Peter Costello and former foreign minister Bob Carr.

Mr Hawke was one of the founding members of the non-government, non-profit international organisation.

Senator Cormann will address a session on the global investment agenda on March 27.

Sir Peter will be one of the opening plenary speakers on March 28.