This is the second article in a two-part series about the ten developments that have shaped China in 2014. To read about the first five developments, click here. 

6. Terrorism

China has suffered from a spate of terrorist attacks this year from Uighur separatists, who are from the largely Turkic-speaking Muslim province of Xinjiang. 

Uighur minorities have been long unhappy with the Chinese rule in their homeland and some of the more radical elements have turned to violent tactics.

The outburst of violence is attributable to a confluence of factors, including Beijing’s longstanding oppressive policies of curbing religious practices, economic grievances owing to the resource-rich province, as well as the spread of Islamic fundamentalism in Xinjiang thanks to its geographic proximity to troubled states like Afghanistan and Pakistan.  

7. A diplomatic turnaround?

For the past few years, China’s international reputation has been marred by its overtly aggressive policy towards its neighbours including Japan, Vietnam and the Philippines. 

More importantly, China has also adopted a more confrontational approach with the United States in the region. Many pundits and analysts are becoming increasingly pessimistic about China’s intentions.

However, the world was pleasantly surprised when Beijing announced its cooperation with the US on climate change. Many have described it as a game-changer. At the APEC Summit, Xi also reluctantly reached out to Japanese Prime Minister Shinzo Abe, who is deeply unpopular in China.

Xi and his Premier have also been travelling extensively around the region and indeed the world, offering trade deals as well as economic assistance. There appears to be a diplomatic turnaround, though it is still early days.

The intransigence of Putin and his efforts to bully Ukraine into submission also help to make China look better.  It is interesting to observe that Chinese Vice-Premier Wang Yang, a leading reformer said in the US that China accepted global rules and “we have neither the ability nor the intent to challenge the United States”.

 8. Tackling an impending environmental crisis

When China was hosting the APEC Summit in early November, the government ordered thousands of factories to cease production and tens of thousands of cars to be off the streets. Intense smog disappeared for a week and this gave rise to a new sarcastic phrase “APEC blue” – indicating something beautiful and ephemeral.

Beijing is showing more seriousness this time in tackling the country’s dismal environment problem. 40 per cent of the country’s underground water table as well as 10 per cent of soils are polluted, and the life expectancy of people living in North China has been reduced by few years, thanks to smog.

The government is imposing tougher penalties and perhaps more importantly, curbing the country’s excess capacity in many heavily polluting industries such as steel, coal and cement. Hebei, a big steel-producing province has suffered a significant decline in GDP growth due to Beijing’s increasingly tougher stance on pollution.

9.  Ever-tightening censorship

While Beijing is adopting a more enlightened policy on economic reform, it is also at the same time pursuing a much more intolerant attitude towards dissent.

Many influential voices or ‘big Vs’ on popular social media platform Weibo have been silenced and journalists and activist lawyers have been arrested and put behind bars.

Journalists and their colleagues, including those working at state media, are becoming increasingly disillusioned as well as frustrated. A moderate Uighur scholar and his students have also been sentenced to lengthy jail terms for voicing modest criticisms of the government.

The editor in chief of 21^st Business Herald, a reputable business publication with reformist leanings, was arrested on more dubious charges as well.

10. Xi, the new emperor

Since the passing of the former Chinese paramount leader Deng Xiaoping, the country has adopted a more or less collective leadership at the top.

The standing committee of the Politburo effectively rules the country, with the party secretary general taking the position as the first amongst equals.  This is especially true under the last Hu Wen administration.

However, analysts and China watchers have been surprised at how fast Xi managed to consolidate its power over key institutions of the party and state. Many regard him as the strongest Chinese leader since Deng and his standing has also been boosted by his impeccable princeling lineage as well as a popular wife, who is also a folk singer.  

Consumer-driven organic farming practices in China have the potential to stem falling participation rates in the agriculture sector and help ensure the safety and sustainability of Chinese food production, a key Australia-China bilateral initiative has heard.

Dr Shi Yan of Shared Harvest Farm (Shared Harvest) and Manuela Zoninsein of Smart Agriculture Analytics (SAA) led a session on China’s food security challenges at the fifth annual Australia-China Youth Dialogue in Beijing last month.

The current statistics on China’s agriculture industry are alarming. China has only 7 per cent of the world’s arable land to feed 20 per cent of the world’s population; one-fifth of agricultural land is too polluted to safely grow food; the average farmer is nearly 60 years old and operates a plot of land averaging 0.5 hectares; and another 200 million farmers are expected to leave rural areas for the city over the next decade.

In light of these challenges, how can China ensure the safety and sustainability of its food production into the future?

One development in recent years has been the emergence of community-supported agriculture projects.  Unlike their counterparts in Australia, Chinese farmers take on all environmental and market risks without a safety net, putting severe pressure on farmers during lean years. 

CSA, a model adopted by Shared Harvest, brings together consumers and farmers so that they share the risk of food production food.

Under Shared Harvest’s program, consumers contribute capital up front to pre-purchase vegetables to be organically grown by local farmers.  Due to the extensive use of pesticides in China over the past decades, the land used to grow the vegetables may not meet ‘organic’ marketing certification standards, but the produce is grown using organic methods without artificial pesticides or fertilisers, allowing the land to be certified organic once it has been chemical-free for three years.

At regular intervals, boxes of organically grown produce grown by the farmers are delivered to the capital-investing consumers, with the volume and mix of vegetables reflecting the seasonal production at the source farm.

There are clear benefits of the CSA model. 

Consumers are able to access fresh vegetables from a source they can trust.  Consumers are encouraged to visit the farm where their vegetables are grown, and know that their purchase will help the environment and provide meaningful employment for local farmers. These factors are particularly important to Chinese consumers today as they are increasingly concerned about food safety and the environmental impact of agriculture.

For the farmers, they are able to share the risk of production with consumers and effectively command higher prices for their produce, providing a level of job security that was previously impossible. 

Shared Harvest’s program has seen the average incomes of participating farmers double over the last two years.  Farmers also have access to organic training programs run by Shared Harvest and further benefit in future years once their land is certified organic and their produce can command an even higher premium.

But CSAs will not be enough to solve all of China’s food security challenges. 

Despite ongoing consolidation in the agriculture sector, partially driven by continued rural-to-urban migration, Chinese agriculture is still expected to continue to be dominated by small farmers, with the average farming block expected to increase from only 0.5 hectares to seven hectares over the coming years. 

By way of comparison, in 2012 the average Australian farm was 3,000 hectares in size.  There is therefore a major difference in the types of technology that can (and should) be utilised by Chinese farmers to help increase their production yields.

With this in mind, companies such as SAA hope to play an important role as the technology R&D outsourcer of choice for small farmers in China, says Zoninsein.

Through its use of market intelligence on agriculture technologies across the globe, SAA aims to match small farmers with technology suited to their circumstances. SAA is working with county-level officials in various provinces across China to identify ways to help mechanise agriculture production and increase yields, through using technology such as hand-held GPSs, solar powered greenhouses, and drones which identify differences in leaf colour from the sky.

A key challenge in China will be finding a funding solution to drive the use of technology by small farmers who, by and large, will be unable to afford the technology on their own.  SAA is investigating ways to bridge the funding gap, including through shared ownership models. 

Zoninsein believes that China has the potential to become a world leader in the production of agriculture machinery and technology, and it may well be the case that locally made (and cheaper) products will also help drive uptake.

It will not be possible to eliminate China’s food security challenges overnight, but with entities such as Shared Harvest and SAA working with Chinese farmers to help produce healthier foods and increase yields, while at the same time providing further incentives for farmers to stay on the land, the seeds for a revival in Chinese agriculture have been sown.

Aidan Lavin is a senior associate at Corrs Chambers Westgarth Lawyers in Brisbane.  He was a delegate at the 2014 Australia-China Youth Dialogue.

China's manufacturing activity contracted in December, HSBC's closely watched purchasing managers' index shows, as the world's second-largest economy is buffeted by domestic headwinds.

The British banking giant's final PMI for the month came in at 49.6, HSBC said in a statement on Wednesday, slightly up from a preliminary reading of 49.5 but still the lowest in seven months.

It also marked the first contraction since May's 49.4. Readings above 50 indicate growth, while anything below points to shrinkage.

The index, compiled by information services provider Markit, tracks activity in China's factories and workshops, and is a key indicator of the health of the Asian economic giant, a key driver of global growth.

"Today's data confirmed the further slowdown in the manufacturing sector towards year end," Qu Hongbin, HSBC's economist in Hong Kong, said in the statement.

The slowdown was mainly driven by sluggish domestic demand as new orders contracted for the first time since April 2014, he added.

In contrast, new exports rose for the eighth month in a row and at a slightly quicker rate than in November, according to the statement, signalling buoyant foreign demand as US growth recovers.

China's economy faces multiple challenges including falling property prices, high debt levels, and what some economists see as a looming threat of deflation.

It expanded 7.3 per cent in the third quarter, the government said in October, lower than the 7.5 per cent of the previous three months and the slowest since 2009 at the height of the global financial crisis.

It has showed continued weakness in the current fourth quarter.

The central People's Bank of China last month cut interest rates for the first time in more than two years to jolt slowing growth, but analysts say further easing steps are needed.

"We believe that weaker economic activity and stronger disinflationary pressures warrant further monetary easing in the coming months," Qu said.

Chinese leaders have committed themselves to rebalancing the economy to one in which the country's increasingly prosperous consumers drive growth, even if at a slower rate.

The government set a growth target of around 7.5 per cent for this year. It is widely believed policymakers lowered that goal to about 7.0 per cent for 2015 at a key economic meeting earlier this month.

There is no doubt that Australia and China are getting more involved in collaborations in the business sector, diplomatic dialogue as well as cultural exchange. However, Australia-China interactions in the third sector pale beside those in the public and private sector.

Take the Official Development Aid (ODA), for example. Australia has built a bilateral cooperative partnership with Chinese government. Accordingly, Chinese NGOs can apply for financial support to run aid programs with the focus on improving basic humanitarian status through the Direct Aid Program (DAP), which is a flexible, small grants scheme managed by the heads of Australian missions. Funds for each program range from $10,000 to $50,000.

Canada, Japan, England, and EU also run similar projects in China. By comparison, Australia's DAP is relatively smaller in terms of disbursal of funds, which implies less official engagement in social welfare in China. It's a similar story for Australian nonprofit organisations’ involvement in China. Numbers show that out of nearly 10,000 international NGOs in China, those based in US account for nearly 40 per cent. No Australia-based NGOs have been listed as the top ten international NGOs in China, a list made by a famous Chinese scholar, WangMing, in NGO study. On the list, those top ten international NGOs mostly come from US, UK, and Japan.

Is it necessary for Australia to explore more collaborative relations in Chinese philanthropic sector, as it does in the other two sectors? As a person-to-person communication platform among Australian and Chinese youth, the Australia China Youth Dialogue takes its exploratory step by setting up philanthropy session into its yearly conference schedule. This year in Beijing, the ACYD committee invited three experts from international NGOs to introduce their working experiences in Chinese philanthropic sector and their insights into civil society in China.

Given the close link between philanthropy and social welfare, there is no doubt that a lively involvement in philanthropic sector in China can serve as a bridge for Australia to better understand its regional and global social policy environment. This is also consistent with China's broader international relevance to Australia.

At a micro level, Australian companies with business links to China also have incentives to carry out corporate philanthropy. These incentives include but are not limited to the following aspects: building their public reputation in Chinese market, enhancing the loyalty and the sense of belonging of the staff members; and improving external competitive environment through corporate philanthropic activities.

As for strategic suggestions for Australian organizations to enter Chinese philanthropic sector, Clare Pearson, one of the speakers in ACYD 2014 Philanthropy Session, shared her experiences of working education programs in China for an international non-profit organisation.

As scholars have already pointed out, the emergence of China's third sector is the result of attempts from the government to open space for NGOs' development and the rise of the economy, whereas the third sector in the West is the result of market and government failure. 

Currently, there are some policy signs that suggest the central government has recognised that NGOs complement the government’s role in social service provision. Recently, the Chinese government announced it would end the so-called dual-control policy for NGOs registration, which would make it easier for NGOs to attain legal status.

The rise of the Chinese economy and the subsequent widening wealth gap between the rich and poor has resulted in various social welfare issues. There is consequently a marginalised group of people who rely on the philanthropic sector to ease their sufferings.

According to the official channel, in 2013, there were 54,1000 officially registered social organisations under Ministry of Civil Affairs, with a 8.4 per cent growth rate compared with 2012. Some estimate that the number will double in the next couple of years, given the relaxed political enviroment. Also, there are more social organizations operating with the identity of government-organized NGOs (GONGOs) or companies or even without official registrations. So, when it comes to Chinese NGOs, they refer to a broad range of organizations operating outside the state and market, no matter of their registration status.

Given the preceding two aspects, running social service projects in Chinese philanthropic sector is a worthy entry point for Australian organizations, by which they can receive a more friendly and relaxed policy environment and at the same time display their professions. This suggestion has been verified by researchers. A study conducted by HAN Junkui from Beijing Normal University indicates that 74.5 per cent of international NGOs prefer to build frequent collaborative relationships the with Chinese government. In addition, 93.6 per cent of international NGOs have either occasional or continual working relations with Chinese government.

More specifically, for Australian organisations, it is useful to have an overview about international donor agencies’ strategy in Chinese philanthropy before they make their moves.

A recent study carried out by Chunhui Children China, Half the Sky Foundation and Skoll Foundation shows that international donor agencies prefer innovative philanthropic programs and those resulting in far-reaching social impact. Apart from conventionally financial support, international companies tend to make contributions through diverse approaches. For example, they will send their employees to do voluntary services, or they will provide management consulting support to NGOs. Also, international companies are more willing to choose philanthropic programs that are related to their business domains or those that will contribute to the community those companies belong to.

A story from a Chinese grassroots NGO illustrates well how international organisations can actively participate in an NGO’s development. Established in 1994, Beijing Stars and Rain is China's first non-governmental educational organisation dedicated to serving children with autism, which has built long-term partnership with various international organisations. Visa regularly sends its employees to the volunteer project in Beijing Stars and Rains. The Hilton Beijing Capital Airport hotel provides a venue and materials for autistic youth to develop their basic labor force skills.

However, many Chinese NGOs, especially grassroots NGOs, are now struggling with poor organisational management problems, such as short of expertise in service provision, limited space for staff career development, lack of disclosure mechanism, and so on. This further lowers the accountability to NGOs’ various stakeholders and then negatively affects the public’s willingness to make their donations or contributions. Less external trust and support again worsen NGOs’ development. Helping grassroots organizations to improve their management may break the cycle.

Engaging more in Chinese philanthropy deserves more attention and is a worthy pursuit for Australian organisations looking to engage with China Lending expertise to social service NGOs in management capacity building can be an entry point for Australian organisations to start their journey in Chinese philanthropy.

Chinese markets started the year with a bang on Monday, with Shanghai ending at a more than five-year high as the benchmark was yanked higher by property and commodity stocks, while Shenzhen received a boost from expectations of a link with Hong Kong. 

The Shanghai Composite rose 3.6 per cent to 3350.52, climbing to its highest level since August 2009, and continuing an extraordinary bull run that saw the market surge 53 per cent in 2014. The Shenzhen Composite jumped 1.5 per cent to 1436.86. 

Recent developments put the real estate sector in the limelight, with a subindex following the sector gaining 17 per cent over the last five sessions. Citi says the news flow for the sector was "mostly positive" at the end of the year -- in particular, the bank cited data from Soufun pointing to a pick-up in sales for the beleaguered property sector, with transaction volume up 23 per cent year-over-year during the week ending December 28 in 37 key cities. The bank also cited recent moves by the People's Bank of China to change the way that banks calculate deposits, which is expected to increase lending. 

Shares in real-estate companies surged on Monday and so too did materials companies. The gains in steel and coal companies were reminiscent of a similar jump in December, when the government announced its plan to build seven million affordable homes in 2015. 

Big property developers rocketed higher on Monday with China Vanke Co jumping 7.3 per cent and Poly Real Estate Group Co gained 10 per cent. Among commodity companies, Yanzhou Coal Mining also hit the 10 per cent daily upper limit, while Baoshan Iron & Steel Co added 6.6 per cent. 

It's a "massive sector rotation, with the recent rally in the China property sector being the catalyst to buy upstream commodity names," Reorient Group head of equity sales trading David Welch said in Hong Kong. 

Premier Li Keqiang also added fuel to the fire after he said that a stock trading link between Hong Kong and Shenzhen should be established, according to a report in the Shenzhen Special Zone Daily. The report did not give further details, but the suggestion mirrors a recently launched program connecting Shanghai with the former British colony. 

The report helped knock the Shenzhen Component Index up 4.6 per cent to 11520.59, with consumer companies leading the charge. Midea Group Co surged 8.9 per cent, while Gree Electric Appliances ended the day 9.9 per cent higher.

China ended a decade-old quota system limiting exports of rare-earth minerals that was at the center of a World Trade Organisation dispute which the country lost in 2013, industry officials said on Monday. 

The shift signals China's sensitivity to complaints about its global trade-rule breaches and willingness to jettison a policy that has yielded little value in giving it greater control over a material widely used in high-technology industries. 

Beijing will instead monitor rare-earth exports using a system of permits issued based on trade contracts, without the need for additional state approval, according to a Ministry of Commerce statement. 

"The change is likely because of the pressure from the WTO decision," said Frank Tang, an analyst at investment bank North Square Blue Oak. "China is saying that as a WTO member, it'll have to abide by WTO rules." 

The government had chosen in December to keep export tariffs on rare-earth minerals unchanged, leaving the abolition of the quota as the only viable option to show that it is willing to comply with the WTO ruling that found its rare-earth export rules discriminatory. 

The US, European Union and Japan in 2012 complained that China was using the quota to push up global rare-earth prices in violation of WTO rules. The WTO ruled against Chinai in October 2013. 

Chinese officials say the state, on a broader level, is also trying to reduce its role in the economy. "The most important factor for the abolition of the quota is that the government has been moving toward greater market orientation," said Jin Bosong, deputy director of the commerce ministry's International Trade and Economic Cooperation Research Institute. 

Beijing's decisions come as the world has reduced its reliance on rare earths from China, which until recent years produced about 93 per cent of the world's rare earths. The minerals are essential for the production of high-technology applications including missile systems and smartphones. 

China's share of global rare-earth output has shrunken to around 86 per cent, as other producers amped up supply in recent years to counter the Asian giant's dominance. 

In 2010, China pushed global rare-earth prices sharply higher   --   in some cases tenfold   --   when it slashed its export quota on the 17 elements by 40 per cent from the preceding year. The shock prompted the Obama administration to describe the move as a "wake-up call." Trade complaints followed, adding rare earths to a raft of items   --   including car parts and solar panels   --   that have been the subject of friction between China and its trading partners in recent years. 

China has said it tightened the export quota as part of efforts to clean up a highly polluting domestic rare-earth mining industry. In 2012, it eased quota restrictions after the US, European Union and Japan lodged a complaint. But after it lost the WTO case, government officials conceded the quota's days were numbered. 

"If we fail [to win an appeal], we may remove the export quota policies, but use other methods to control," said commerce ministry senior analyst Mei Xinyu. Mr Mei didn't immediately respond to a request for comment Monday. 

As global demand weakened and sources of supply increased, China's rare-earth exports have fallen short of the quota's limits in recent years, making the policy increasingly redundant. 

The world's second-largest economy exported 24,866 metric tons of rare earths in the first 11 months of last year, well below its 2014 quota of 30,611 tons, Chinese customs said. Exports totaled 22,493 tons in 2013, sharply lower than the ministry's 30,996-ton quota. 

China's rare-earth export volumes began to recover from September 2013, but global supply of the minerals remains ample. In the first 11 months of last year, the value of China's rare-earth exports fell 33 per cent from a year earlier, according to customs data. 


 

East Asia Forum

China is working to make the international order suit its interests better and put China front and centre in global affairs. Xi Jinping’s new diplomatic focus on multilateral diplomacy includes giving new profile to existing arrangements where China can lead, such as the BRICS and Shanghai Cooperation Organisation (SCO). He is also pushing his own initiatives, such as the Asian Infrastructure Investment Bank, while pursuing economic reform and military modernisation.

To make all this work in the face of scepticism or even hostility from the US and its allies, China needs junior partners with influence, like fellow UNSC member and friend in need Russia, even though Putin’s strategic aims are quite different from Xi’s. At his November 2014 speech to the Central Work Conference on Foreign Relations Xi kept the neighbourhood and great powers firmly in the diplomatic framework. But he also added a new category of ‘major developing powers’ -- presumably including Russia -- to China’s diplomatic strategy.

Both sides are wary about a hostile international environment dominated by the US. But Xi’s view of the US is much more nuanced than Putin’s, who regards the US as Enemy Number One. The Chinese government is not afraid to criticise the US, but has not forgotten that China is probably the world’s greatest beneficiary of globalisation and the US-led Asian order. Xi Jinping sees a stable, if different, relationship with the US. ‘Fostering a more enabling international environment for peaceful development’ is important to the achievement of his ‘Two Centenary Goals’.

China has used the Russian government’s helpful obfuscation to remain on the fence regarding Ukraine. Official press commentary of Putin’s recent -- and strongly anti-US -- speeches is factual and neutral in tone. It’s probable the Chinese government is increasingly uncomfortable with Putin’s Ukraine policy and his anti-Western ranting, though they would not report this in the press. It seems even more likely that they would be aghast at his denial that China’s vast land neighbour Kazakhstan is a state.

In the meantime, China continues to enjoy the benefits of Russia’s military technology. The Russian News Agency reported on 14 November 2014 that Russia is ready to supply Su-35 fighter jets to China. This will be a resumption of hi-tech arms exports that were suspended several years ago. At that time China appeared to have reverse engineered Russia’s jet technology and put it on the market.

Russian Defence Minister Sergei Shoigu visited Beijing in November and announced a plan for new joint naval exercises in 2015, one in the Mediterranean and one in the Pacific. These two locations were presumably chosen to demonstrate the global reach of a Sino–Russian combined force. But the Chinese Defense Ministry was careful to specify to reporters that China follows ‘the principles of no confrontation and no alliance’. They did not repeat Shoigu’s claim that Russia ‘expressed concern over US attempts to strengthen its military and political clout in the Asia Pacific Region’.

But this year’s biggest Russian combat training exercise, Vostok 2014, appeared designed to test combat readiness against China itself, indicating less than complete strategic confidence in Putin’s new best friend.

In his State of the Union address in December, Putin gave the Asia Pacific the most cursory mention. He accorded more words to the Eurasian Economic Union. The EEU is the most obvious expression of Putin’s frustration at China’s dominance, as they jockey for economic and political power in Central Asia. Russia’s position is only likely to weaken: one of the main tenets of Xi’s foreign policy is the building of the ‘New Silk Roads’. The main route is overland, making a dogleg to Moscow almost as an afterthought after working its way through the Khorgos International Center for Boundary Cooperation, through Kirgizstan, Tajikistan and Uzbekistan, and on to Iran and Europe. It looks as though Chinese dominance of the Central Asian region will give little economic benefit to Russia.

In this transactional relationship, there is little strategic trust. China’s dominance will frustrate Russia, while Putin’s diplomatic alienation will increase the cost of China’s political support. Today’s confluence of interests will not last forever.

Rebecca Fabrizi is Senior Strategic Research Fellow at the Australian Centre on China in the World, College of Asia and the Pacific, ANU.

This article originally appeared on the East Asia Forum. Republished with permission.

East Asia Forum

It became clear in 2014 that Xi Jinping was the dominant leader of China. Even President Obama recognised this at the end of the year, stating that no recent Chinese leader had consolidated power so quickly as Xi since Deng Xiaoping.

China now has a new ideology: Xiism. Xi’s power could be seen through the control over Party messaging, which Xi stood at the centre of. From the development of the China Dream theme which first appeared at the end of 2013, to the New Silk Road concept which seemed to embrace most of the world, Xi was the central spokesperson. This culminated by the end of the year with a bulky book carrying Maoist-style pictures of Xi on the front and inside grandly titled ‘On Governing China’.

Xi’s power could also be seen in a more brutally political way in the ongoing anti-corruption campaign, which finally reached the door of former Politburo Standing Committee member, Zhou Yongkang, who was formally expelled from the Party and indicted for ‘corruption and fornication’ in November 2014. Zhou’s treatment is unprecedented in modern China, and showed Xi was willing to take on powerful vested interests and deal with the consequences.

There was no sign throughout 2014 that Xi was insecure in his position. Public approval of the corruption campaign was high, leading to a whole new mode of behaviour by officials. And the Fourth Plenum held in October 2014 produced a lengthy disquisition on strengthening ‘rule of law with socialist characteristics’ which also appealed to the newly emerging, all-important Chinese middle class with their interest in stronger property rights, a more predictable legal environment and a sense that the government was listening to them.

All of this tended to put Xi’s colleague, Premier Li Keqiang, somewhat in the shade, despite him ostensibly being in charge of macroeconomic issues. Li visited the UK, India and other countries during the year, but his profile was low. It seems that the real manager of China’s slowing economy was Liu He, who Xi made clear was one of his most trusted advisors, and who heads the small group on the economy.

Both Xi and Li however remained consistent on one issue, and that was that China’s growth rate is now set at below 7.5 per cent and the Chinese people have to live in a world where double-digit GDP growth is a thing of the past. The main focus now is on creating an economy that is service sector orientated, that consumes more, that is more urban, and that is less driven by investment than previously.

Xi spearheaded a diplomatic offensive, visiting countries in Latin America, Africa, South Asia and then, in November, attending the G20 summit in Brisbane, visiting Canberra and travelling to New Zealand and Fiji. In Brussels in late March he articulated the concept of the EU and China being ‘civilisational partners’. But he also managed to come up with the New Silk Road mantra, which covered a land and maritime link. And he embraced a Russia ostracised by Europe and America over its actions in the Ukraine, and a Middle East where China was rapidly becoming one of the key players, despite efforts to keep out of the treacherous politics there.

Even with the US, Xi was able to produce a surprise during the APEC meeting in early November by signing off a major environment protocol with his American counterpart. He also announced with Australian Prime Minister Tony Abbott final details of a Free Trade Agreement, and supported an Asia-wide free trade zone concept, the FTAAP, putting him in conflict with the United States and the Trans-Pacific Partnership process it is driving.

This hyperactivity betrayed a China which no longer wished to be as isolated as it had looked in the later Hu and Wen period up to 2012. A tepid rapprochement was made with Japan in November.

After its initial support for the Hong Kong government’s proposals for how elections for the Chief Executive in 2017 might be run, it largely kept out of direct dealings with the subsequent protests in the city. On Taiwan, too, Xi continued to be a mixture of pushy (demanding more consideration of the ‘one country, two systems’ idea, precisely at the time it seemed to be falling apart in Hong Kong) and supportive of incumbent President Ma Jing-jeou, despite the latter’s disastrous mid-term election results in November.

Ironically, perhaps the one area where Xi seemed to be bereft of new ideas was North Korea, which he dealt with largely by ignoring it, even when its young leader mysteriously disappeared for a number of weeks in September.

For all the energy and determination of the Xi leadership, there was one area where it remained utterly consistent with its predecessors: human rights lawyers and dissidents were ruthlessly dealt with. IIlham Tohti, a Beijing-based Uighur academic received a life sentence. Academics, intellectuals and people from the artistic sphere were given strict instructions on what was regarded as healthy, and what was proscribed.

There seemed to be few things that China’s new but confident leader did not feel qualified to opine on, even daring to issue instructions to the much derided national football team on how to play better. This, in hindsight, may well be the bravest statement he made all year. With almost all other areas, as one commentator stated, there was hope, but for Chinese football ability despair and disappointment was the default, and that alone looked unlikely to change, despite Xi’s brave intervention.

Professor Kerry Brown is Executive Director of the China Studies Centre at the University of Sydney.

This article originally appeared on the East Asia Forum. Republished with permission.

The majority of Australians believe the nation should remain neu­tral in any armed conflict ­between China and Japan over the East China Sea islands and reject US requests for a military contribution to support Japan.

An online poll commissioned by the new Australia-China Relations Institute, headed by former foreign minister Bob Carr, found 71 per cent of respondents were against Australia taking sides in a conflict over the uninhabited ­islands known as Senkaku in Japanese and Diaoyu in Chinese. The poll, to be published today, reveals that 68 per cent said an Australian prime minister should turn a US president down if asked for a contribution.

The islands are administered by Japan but claimed by China, which 14 months ago created a new air defence identification zone that includes the islands, and seeks to require aircraft within it to comply with Beijing’s rules.

Barack Obama said in Tokyo last April that the US commitment to Japan’s security was ­“absolute and … covers all territories under Japan’s administration, including the Senkaku islands”.

“We don’t take a position on final sovereignty on the Senkakus but historically they’ve been ­administered by Japan and should not be subject to change unilaterally,” the US President said.

Of the 1000 Australians over 18 surveyed by UMR Research for Mr Carr’s institute, 76 per cent said that if Australia supported Japan and the US in a conflict with China, the value of Australia’s trade with China would fall. However, just 40 per cent of the respondents were even aware of the dispute between China and Japan over the islands.

Foreign Minister Julie Bishop told The Australian it was not surprising Australians would “indicate overwhelmingly they don’t want our country involved in a ­hypothetical war”.

She said she did not ­believe that conflict would occur. If it did, it was a “broadly held view that the ­nations with competing territorial claims would lose much more than they would gain”.

Ms Bishop said Australia did not take sides on territorial issues and ­argued they should be ­resolved through peaceful negotiations.

She witnessed this at work, she said, when she had lunch with Japan’s Foreign Minister, Fumio Kishida, in Beijing shortly before the long-awaited meeting in ­November between Japan’s Prime Minister Shinzo Abe and China’s President Xi Jinping.

The survey followed the publication of the Australia-China ­Relations Institute’s first major paper, on the same theme, drafted by Nick Bisley, professor of international relations at La Trobe University, and Brendan Taylor, head of the Strategic and Defence Studies Centre at the Australian ­National University.

Mr Carr said the Taylor-Bisley paper concluded that the ANZUS treaty, which binds Australia, New Zealand and the US to co-operate on defence matters, was triggered not only by legal niceties, but by the tone of the relationship — “what would the Australian people want done?”. He acknowledged there had been a lessening of the tension between China and Japan on the ­islands since their leaders met at the APEC summit in Beijing in November. But “there is still no agreement on the substance or on the management of the issue”.

Lowy Institute executive director Michael Fullilove said public opinion would depend on how such a crisis developed, on the role of the US, and on the leadership provided by the government.

Narushige Michishita, director of the Security and International Studies program at Tokyo’s Graduate Institute for Policy Studies, noted Australia was not obliged to defend Japan by treaty.

“What we expect from Australia is moral support — to stand up against unlawful attempts to expand territories by force,” he said.

Andrew O’Neil, head of the School of Government and International Relations at Griffith University, noted the questions had been asked in an abstract way.

“What if China attacks US forces operating in the East China Sea? How about if the (Chinese navy) decides to sink a Japanese vessel as tensions escalate?

“It’s analogous to a Taiwan Strait scenario where Australia, like the US, would be unlikely to intervene if Taipei unilaterally declared independence from China, but would almost certainly assist in the event China initiated conflict.”

Activity in China's manufacturing sector has grown at its fastest pace in three months according to a private survey.

The HSBC/Markit Services Purchasing Managers’ Index (PMI) was 53.4 in December, up from 53.0 in November.

A reading above 50 indicates expansion, while a reading below signals contraction.

Chief economist, China and co-head of Asian economic research at HSBC, Hongbin Qu, said the solid performance was supported by another strong expansion in new business.

"The employment index improved modestly and price pressures remain muted. The services sector continued to hold up well amidst the manufacturing downturn, providing some counter-weight to the downward pressures on the economy” he said.

"We continue to believe that there is insufficient demand in the overall economy and more easing measures are warranted in the coming months.”

German carmaker BMW has agreed to offer 5.1 billion yuan ($A885 million) in subsidies to its Chinese dealers to help make up for losses from slowing sales, Bloomberg news agency reports.

Quoting a top official from the China Automobile Dealers Association, Bloomberg reported on Monday that the subsidies would be paid to dealers in February and was the highest ever paid by a carmaker in China.

BMW confirmed that it had held an "open and constructive discussion" with its dealer partners.

Both sides had "reached consensus on the structure of optimised business measures and financial allocation for the dealers, so as to jointly overcome the short-term challenges, moving forward to a successful future of long-term and win-win partnership", it said in an emailed response.

But BMW insisted it had agreed not to divulge the exact sums involved.

"BMW and its dealer partners are fully aware that the overall automotive market in China is normalising with the growth speed from super high rate to the lower but stable pace," it said.

This year the German carmaker planned to introduce "more than 10 new premium products to China, such as the premium compact car in this fast-growing segment, high-end luxurious sedans models and innovative New Energy Vehicles (hybrids)", it said.

China is one of BMW's biggest markets. In the period from January to November 2014, sales of its BMW and Mini brands there rose by 17.2 per cent to 415,000 cars.

In an opinion piece for yesterday’s edition of The Australian, former Foreign Minister and New South Wales Premier Bob Carr warned against Australia getting involved in a conflict between Japan and China over disputed islands in the East China Sea. The underlying reason offered is one that is widely shared: that Australia’s (and Asia’s) economic prosperity is too heavily dependent on China.

As those in agreement might put it, it is a fool’s errand to fight the future -- better to work with it.

Which brings us back to the one really successful thing China has done in positioning itself in the region: using the prospect of its potential power for current leverage and gain. The problem is that Beijing’s approach depends very much on sustaining the narrative that it holds the key to Asia’s future prosperity. And this claim depends on spreading the belief that China can escape the middle-income trap and enjoy an economic boom for decades to come.

That China is the ‘miracle’ economy seemed plausible when its GDP achieved above-trend growth of well over 10 per cent while the rest of the developed world struggled with the threat of recession from 2008 onward. We now know that the way it did so was to embark on the largest fixed-investment splurge in economic history, and is now bearing the costs of doing so. (This is an issue I and other authors have written about frequently over the past few years so it won’t feature in this article.)

But as Chinese growth slows even further in 2015 and official forecasts are likely to be revised further downward as the months roll on, Beijing’s capacity to use its status as ‘the future of Asia’ for current leverage will become more limited.

First, for those who believe that China is already the dominant economic power, consider a few facts.

It might be the world’s factory but export-manufacturing in China is dominated by foreign-owned and foreign-invested firms. This means that China is only the world’s preferred sub-contractor -- a less exalted position. Over two-thirds of China’s trade is processing trade, with advanced economy consumption markets in North America, the European Union and even Japan more important than China when it comes to being a source of net demand, which is what trade and global manufacturing is ultimately dependent on.

When one considers that around three-quarters of China’s domestic market is made up of non-tradable goods, the actually net demand that China offers the world is far smaller than official numbers suggest.

Furthermore, Chinese foreign direct investment into the region is still dwarfed by that coming from America, Europe, Japan and even South Korea. China is not a major source for technology transfer into developing Asian economies, unlike these advanced economies. The American, Euro, Japanese and Singaporean currencies remain far more important as tradable currencies than the Chinese renmimbi. And China is an insignificant giver of foreign aid in the region.

Yet, just as in the nineteenth century, English spinning mills were convinced that their prosperity would be secured for decades if they could just convince every Chinese to buy one handkerchief, today’s China is now the great hope for an explosion of net demand in Asia and the world. Note the excitement generated in Australia when an intention to sign a Free Trade Agreement was announced last year. If only we can get every Chinese to eat one slice of Australian cheese each week, or have an Australian T-bone once a month. You get the idea.     

This is why the slowing Chinese growth will matter to the country’s standing, and dilute Beijing’s capacity to impose its will on countries without a shot being fired. China has relied on the argument, made on its behalf, that anger Beijing and there will be economic costs in the future if not now. In Australia’s case, an FTA is indication that China is prepared to do business with us, presumably only if our future political and strategic policies do not get in the way of the economic relationship.

We are told that the Chinese consumer, particularly the emerging middle classes, will want what we can provide. But Australian products and produce will only reach Chinese markets if political relations with Beijing are strong. And if we need to ‘sacrifice’ relationships with powers such as Japan or even the United States, then that is what we ought to do.

China’s capacity to impose an economic price against trading partners with whom it has strained relations tends to be overstated, especially against advanced economies (from whom China needs technology and know-how) and commodity suppliers. Like most countries, China conducts trade and other economic interactions out of necessity, not choice. Exacting economic vengeance, even against small countries, also has unintended consequences such as raising the political risk assessments made by other firms and countries in the Chinese political economy -- with deleterious consequences for China.

But the perception that China is becoming a more ‘normal’ economy subject to normal economic laws and limitations is also significant. The previous Fourth Generation of Leaders frequently and openly warned that China’s economic model was “unstable, unbalanced, uncoordinated and unsustainable” (in the words of then Premier Wen Jiabao) but was largely ignored or dismissed by outsiders as over-caution.

The evidence that Premier Wen was correct is building. But in response, President Xi Jinping has been keen to reassure the world that China will come through with flying colours. The current leader, the most ambitious and powerful since Deng Xiaoping, clearly understands the power of controlling the narrative of one’s future for current gain.

In 2015, the economic story is now far more contested. China is slowing and its economic problems are more than simply cyclical. The US seems to be roaring back, regaining manufacturing prominence and reinventing itself as a net energy exporter, while it still remains the world’s leader in innovation and technology by a considerable margin. There are now hopes and even expectation that Narendra Modi can finally help India realise its economic potential. Even Japan under Shinzo Abe cannot be written off.

‘The supreme art of war is to win without fighting,’ said Sun Tzu. Articles by scholars such as Arvind Subramanian titled ‘The Inevitable Superpower: Why China’s Dominance is a Sure Thing’ (Foreign Affairs, Sep/Oct 2011) does no end of good for Chinese standing and leverage. Subramanian’s article assumes that China will continue growing at recent rates for decades. As growth slows and economic reality is digested, such articles become less plausible. And when that happens, winning without fighting for China, so to speak, becomes less possible.           

Dr. John Lee is an Adjunct Associate Professor at the Strategic and Defence Studies Centre at the Australian National University, a senior fellow at the Hudson Institute in Washington DC, and a Director of the Kokoda Foundation defence and security think-tank in Canberra.      

Wall Street Journal

China’s paramount leader, Xi Jinping , frequently reiterates that China is pursuing “peaceful development.” On a trip to France last year, he described his country as “peaceful, pleasant and civilised.” But 2014 saw the rhetoric of peace wearing increasingly thin.

That’s not just because Beijing is muscling for territory as far afield as Malaysia and Indonesia. Much closer to home, the discontents and hazards of Chinese empire are mounting. From Xinjiang to Hong Kong to Taiwan, the peripheries of Greater China are burning.

China’s leaders have decisions to make in every direction, and recent evidence suggests they may not choose compromise anywhere. Which means that fear and loathing of Beijing will likely increase among tens of millions of people, that the Communist Party will face growing challenges to its reputation for “harmonious” and prosperous rule, and that after years of quiet the Taiwan Strait may become a dangerous world’s most dangerous flashpoint.

Start with Hong Kong. After police tear-gassed peaceful pro-democracy protesters in September, 200,000 people flooded into the streets. For 75 days, umbrella-wielding demonstrators occupied downtown streets to defend the liberties and institutions that China promised they could keep after British rule ended in 1997.

Unless Chinese leaders reverse course and grant Hong Kong the universal suffrage that was promised, China’s most international city -- and still its leading financial center -- faces a future of raucous protest and paralyzed government. Beijing may prefer that outcome to the alternative of allowing seven million Chinese subjects to pick their own leaders.

But it entails risks, from democratic dissidents on the mainland drawing inspiration from Hong Kong’s struggle, to foreign investors losing trust in the city’s courts and regulators.

The gravest implications of Hong Kong’s drama concern Taiwan, the democratic island that is growing more and more determined never to live under Beijing’s authoritarian control. China has claimed sovereignty over Taiwan since 1949 and tied its fate to Hong Kong’s since the 1980s, when Chinese supremo Deng Xiaoping promised that both territories would keep their freedoms if they came under Beijing’s rule.

“We have proposed to solve the Hong Kong and Taiwan problems by allowing two systems to coexist in one country,” he said.

The “one country, two systems” formula clearly failed to protect civil liberties in Hong Kong, which helps explain why Taiwan last year experienced an anti-China political earthquake of its own.

In March, the so-called Sunflower Movement blocked a trade deal with China by bringing 600,000 people into the street and occupying the legislature for 24 days. Protesters said the deal wasn’t transparent and would make Taiwan’s economy dangerously dependent on China. In November, midterm elections handed the Beijing-friendly ruling party its worst-ever defeat, a powerful verdict against six years of increasing economic integration with China. The opposition, which has previously called for formal independence from China and is hated in Beijing, is expected to win the presidency in January 2016.

That would end the calm that has prevailed across the Taiwan Strait since 2008. Gaining control of Taiwan has been a Chinese obsession for 65 years. It is the chief item of business left unfinished from Mao’s revolution and remains the focus of Chinese military modernisation. China would prefer for Taiwan’s 23 million people to unify voluntarily, but Beijing regularly warns that it “will not abandon the possibility of using force,” as retired general Liu Jingsong said last month. Xi Jinping said in 2013 that “these issues cannot be passed on from generation to generation”.

If Beijing responds to the rise of Taiwan’s opposition by trying to intimidate Taiwanese voters economically or militarily, China would threaten regional peace in East Asia. Given those stakes, it’s concerning to see how Beijing treats other perceived domestic irritants, not only in Hong Kong but thousands of miles away, in China’s western borderlands.

Though it barely registers on international radar, the northwestern region of Xinjiang is twice the size of France and could become China’s Chechnya. The homeland of roughly 10 million Turkic Muslims known as Uighurs, Xinjiang is a battleground between a central government intent on control and a native population seeking to preserve distinct traditions. In recent decades Beijing has flooded the region with Han Chinese, discouraged or criminalized Muslim worship, and treated Uighur activists as separatists or terrorists.

This repression radicalizes Uighur discontent, which now appears to have spawned the terrorism Beijing always feared. In the past 15 months, explosions and knife attacks have killed scores of people in train stations, markets and even Beijing’s Tiananmen Square. Clashes involving Xinjiang police have killed more than 100.

Beijing’s response is tougher and broader repression in Xinjiang. More bans on Muslim veils and beards in public, more closures of Uighur-language schools, more limits on Uighur travel. More family-planning restrictions and forced abortions. More discrimination against Uighurs seeking work in local government or state energy firms (Xinjiang has China’s largest coal reserves and 20 per cent of its oil).

In September a Beijing court sentenced Professor Ilham Tohti, the country’s most prominent Uighur spokesman, to life in prison on separatism charges for which no evidence has been publicly presented. Seven of his students were also imprisoned for shorter terms on the same charges.

Tighten the screws, refuse compromise, destroy moderates, alienate the next generation: While the implementation in Xinjiang is far more severe, this is the same playbook used by the government in Hong Kong, and it’s typical of the authoritarianism that makes Taiwan hold tight to self-rule. Such tactics have often fostered fury at the edges of empires, making those empires more volatile than they appear. The past year is a warning that China is no exception.

David Feith is a Journal editorial-page writer based in Hong Kong.

This piece was first published in the Wall Street Journal. Reproduced with permission. 

Australian and New Zealand farmers are having a tough time selling lambskins as China’s tanneries face slowing demand for the products, particularly from Russia, and as Beijing cracks down on some chemical-intensive processing plants.

In Australia, lambskin prices were down by close to 85 per cent last year. Sheep farmers are also being hit in New Zealand, where prices have fallen by as much as 40 per cent.

China’s government is under rising pressure from a rapidly emerging middle class to address the country’s air, soil and water quality. In May, China began regulating tanneries and other factories believed to be contributing to pollution, targeting smaller outfits in particular.

In Xinji, a gritty factory town 150 miles south of Beijing that is dominated by the tanning industry, Zhao Jingchuan sat surrounded by stacks of finished sheepskins in a workshop that doubled as an office. Outside, a mound of raw, still-bloody skins lay waiting to be processed.

Business is slack, said Mr Zhao, manager of Jinquan Fur and Leather Co. Ltd., though he put most of the blame on slowing demand. “The whole economy, the whole market isn’t good,” he said.

Mr Zhao’s most important export market, Russia, has dried up as the plummeting ruble has made imported lambskins more expensive for Russian customers. Russia is also keeping more of the skins it produces as a result of U.S. and European bans on importing Russian farm products in the wake of the Ukraine crisis.

Mr Zhao also blames China’s stalling housing market—and the knock-on effect on demand for leather furniture—for the lull in business. Tougher environmental standards account for perhaps 20 per cent of the slowdown in business, he estimated.

The company has spent about 15 million yuan (US$2.42 million) on a treatment plant to deal with the run-off chemicals from the tanning process. Mr Zhao believes larger factories like his will ultimately benefit from stricter environmental rules, as smaller outfits that can’t meet modern standards close.

The smaller factories were flying under the radar of regulators and often skirting wastewater-treatment rules. “They can’t do that anymore,” he said.

Next door, another tannery, Xinji Pilot Leather Industry Ltd., stood idle. Workers cleaning huge wooden drums, in which hides are spun with chemicals as part of the tanning process, said the factory had been transferred to new ownership and would be back in operation once environmental standards were met.

Mark Mei, chief executive at Mengzhou Senlong Fur Co. in eastern Henan province, said sales of his company’s lambskin products to shoe factories in southern Guangzhou province fell between 50 per cent and 60 per cent last year as a result of slower demand from Russia.

“Russia was our biggest market for shoes,” he said.

He said the environment-related closings of some tanneries in Hebei province, where Xinji is located, have meant more lambskin is being processed in nearby Henan. Also, demand for lambskin clothes on Chinese e-commerce sites such as Alibaba ’s Taobao surged last year, he said, though for his business, these factors haven’t been enough to offset the decline in sales to Guangzhou.

The effects of the slowdown reach as far as New Zealand and Australia, two of the five largest exporters of sheepskins globally, alongside South Africa, Spain and the U.K., according to the United Nations Food and Agricultural Organization. U.N. statistics don’t distinguish between the skins of sheep and lambs, which are usually cheaper and used mainly in lower-quality products such as shoe and bag linings. Sheepskin tends to be used to make blankets and more expensive branded footwear such as Ugg boots.

On the east coast of New Zealand’s subtropical North Island, sheep farmer Rick Powdrell expects to cull around 2,700 lambs this year, which means the drop in lambskin prices will significantly cut into farm revenue. Mr Powdrell said it helps that prices of live sheep and just-slaughtered ones have stayed strong.

New Zealand farmers produce around US$35 million of lambskins a year, according to Statistics New Zealand data.

Carl Alsweiler, manager of marketing at Alliance Group, a meat processor based in Invercargill, on New Zealand’s southern end, said the price falls were linked to China’s environmental policies, but that a soft global economy was also a factor.

China is the biggest importer of sheep and lamb skins, receiving about 74 per cent of all skins exported world-wide, while remaining one of the top five sheep and lamb skin producers, according to FAO data. Turkey and Russia and Italy are smaller importers of the skins.

Most leather products require chemicals such as chromium to help preserve the skin. In addition, gases such as hydrogen sulfide are frequently churned out into the air as workers in factories process the skins so they can be preserved.

Beijing began its clampdown on tanneries as part of a wider sweep on factories seen as failing to meet new environmental guidelines. Alliance Group’s Mr Alsweiler said there was evidence some Chinese tanneries were now grouping together to avoid being targeted.

The number of tanneries forced to shut since May isn’t known because no data is kept on the number of factories in operation. Chen Zhanguang, deputy secretary-general of the China Leather Industry Association, said large factories tend to do better at meeting environmental regulations, and that many smaller ones are struggling.

“The factories which cannot reach the standards will definitely be turned off,” he said, though he said the rules apply only to new factories. He blamed the fall in lambskin prices mainly on lower domestic and international demand.

He said the leather-goods market may get a boost from the U.S., which appears to be emerging from several years of slow growth.

For one factory owner who gave only his surname, Feng, the combination of weaker demand and new rules proved too much. He said he ran a small tannery in Xinji for eight years, but closed it early last year due to poor orders and stricter environmental controls.

“To be frank, it really did pollute the environment,” said Mr Feng. He has given up on tanning, moving to another province and opening a restaurant, he said.

HONG KONG— China Southern Airlines Co. said on Monday that it removed its chief financial officer and an executive vice president from their posts amid a police investigation.

The move brings to four the total number of executives the state-run Chinese airline has said is under investigation. The company said last week that it removed its director of flight operations as well as an executive vice president from their posts for similar reasons.

The Guangzhou-based company said the probe was “due to suspicion of job-related crime,” but it hasn’t provided further details. Company representatives weren’t immediately available for comment late Monday.

China Southern on Monday said that it was notified of an investigation into CFO Xu Jiebo and Executive Vice President Zhou Yuehai.

China Southern, which has the country’s largest airline by fleet size, said the removals wouldn’t have an impact on its business or operations. The company has the largest domestic presence of China’s big three state carriers but like its peers has struggled due to slowing domestic economic growth and a frugality campaign that has weighed on sales of first- and business-class tickets.

The latest probe into China Southern comes amid China’s anticorruption campaign, which has gathered momentum since President Xi Jinping took office two years ago. Communist Party leaders have acknowledged that perceptions of corruption threaten their grip on power.

Several executives of large state-owned companies, which dominate crucial sectors of the economy such as energy and resources, have been put under investigation amid Beijing’s anticorruption drive.

That includes the transportation industry, where previously current and former Chinese executives at aVolkswagen AG joint venture with state-owned FAW Group Corp. and at Nissan Motor Co. ’s joint venture with Dongfeng Motor Corp. were put under investigation.

In the past year, China has put a series of senior executives at state-run companies, such as oil giant China National Petroleum Corp. and conglomerate China Resources (Holdings) Co., under investigation. In a July report, the official Xinhua News Agency said more than 50 senior managers at state-owned enterprises have been removed as part of the crackdown since late 2012, when the current anticorruption drive went into effect.

Toyota Motor Corp. said Tuesday it aims to sell 1.1 million cars in China in 2015, resetting the target it missed last year amid industry wide slowing growth.

Toyota said it sold 1.03 million cars in China last year, up 12.5 per cent from a year earlier, but short of its goal.

Toyota’s missed target was largely expected, as one of the company’s joint ventures in China had earlier cut its sales forecast. FAW Toyota Motor Co. slashed its annual sales target by 6 per cent in September, citing a sluggish economy and high dealership inventory.

Growth in the world’s largest market for autos by sales has slowed sharply in recent months. Sales of total automobiles including passenger and commercial vehicles rose 6 per cent in the first 11 months of 2014, down from 14 per cent from a year earlier, according to the government-backed industry group China Association of Automobile Manufacturers.

Matt Tsien, president for General Motors Co. ’s China operations, on Tuesday estimated that China’s auto market could rise 7.5 per cent in 2014. China is scheduled to release its auto sales numbers next week.

GM said it sold 3.54 million vehicles in China in 2014, which includes its China joint ventures, up 12 per cent from a year earlier.

Chinese consumer sentiment improved in December, regaining some ground lost since its three-year low levels in October, according to a private survey.

The Westpac-MNI China consumer sentiment indicator increased 1.3 per cent to 112.5 in December from 111.0 in November.

Consumer confidence had previously sunk to a three-year low of 110.0 in October. Overall sentiment decreased 10 per cent in 2014.

According to Westpac, the drop in the absolute level of consumer sentiment in 2014 showed that consumers were relatively anxious about the economy, but the new numbers could indicate that pessimism is in retreat. 

Three of the five components that make up the survey improved between November and December but all components have weakened over the second half of 2014.

Consumer views on business conditions reversed between November and December. In the previous survey, indices hit a new series’ low, but increased notably in December.

View on current personal finances were positive while expectations for their future financial situation remained unchanged.

The survey also indicated that consumer spending plans for discretionary services such as dining out and entertainment lifted in the month, but there was caution about purchasing big-ticket items.

China’s housing market also showed signs of stabilising, with house buying sentiment continuing to improve. The share of respondents reporting it was a ‘good time to buy a house’ rose again in the month.

In the survey, 16.8 per cent of consumers nominated domestic real estate as the ‘wisest place for their savings’, up from the low of 13.8 per cent in September.

Chief economist of MNI Indicators, Philip Uglow, said the improvement in sentiment over the past two months "provides some hope that the worst could be behind us,"

"Sentiment remains relatively weak though, which cautions against being overly optimistic” he said.

Westpac’s senior international economist, Huw McKay, said the pronounced pessimism regarding the housing and labour markets that dominated 2014 are shifting in a more favourable direction.

"Within the generally positive trend in the December survey details, it is notable that forward looking indicators on the economy improved more so than the coincident ones. That sort of relative performance has been historically associated with turning points in growth” he said.

"Consumers seem to have responded positively to the reduced degree of ambiguity regarding the policy stance, with the combination of housing support and interest rate cuts materially reducing uncertainty on this front.”

Junior miners are enjoying a strong start to 2015 as iron ore price gains help the stocks rebound after commodity equities were hammered in the latter part of last year.

Shares in iron ore miners BC Iron, Atlas Iron and Arrium have exploded out of the blocks in the first week of trading as investors speculate on a possible iron ore price floor.

After falling to a five-year low in December the price of iron ore has steadied above $US70 a tonne -- comfortably above the $US65.70 it reached late last month.

The firming price comes on the back of rumours that China plans to speed up $US1.1 trillion worth of infrastructure projects and restock its iron ore port inventories.

The commodity endured a horror 2014, with losses of about 50 per cent hitting smaller iron ore miners hard. Atlas Iron lost close to 80 per cent of its value through last year.

The iron ore price crashed as demand softened in line with China’s slowing economic growth rate, while mining giants Rio Tinto and BHP Billiton cranked up output in a bid to bolster their earnings sheets.

While BHP and Rio are able to stay profitable with shipments of low priced iron ore, junior miners don’t have the same luxury.

But the appearance of what may be a floor in the commodity price has renewed investor interest in heavily discounted junior stocks.

In the first five trading days of the year Arrium has rallied 37.2 per cent, closing Thursday's trading session up at 29.5 cents, after an 86 per cent drop in value last year.

Meanwhile, Atlas Iron has soared 78.8 per cent to 27.5c, after plunging 80 per cent last year.

And after losing 90 per cent of its value last year, BC Iron has shot up 35.8 per cent in five days, to 72c at Thursday's close.

Metals and mining analyst for Argonaut, Matthew Keane, said a slight uptick in the iron ore price has given a back wind to the sector, which was “heavily beaten down" at the end of last year.

Mr Keane said that while there is speculation that there will be iron ore inventory restocking in China, the emptying ports may not drive more demand if the steel market is weak.

“We still have an oversupply on the ocean at the moment,” Mr Keane said, adding that the medium term outlook for iron ore and the junior miners wasn’t ideal.

On his forecasts, iron ore should hover around $US70 for the medium term, but he said it would not be a surprise if the price tracked down to $US60.

BC Iron’s break even point relies on an iron ore price of $US68, while Atlas Iron’s break even is higher at $US73, Mr Keane said.

Because of its higher quality output, Arrium should break even just below $US60, he said.

Mr Keane said that rather than a movement of genuine re-pricing in these stocks, the surge in the junior miners was more reflective of short term speculative trading, and that the recent surge might turnaround.

“A lot of guys have been shorting stocks all the way down -- I think there might be another round of shorting on these shares if the prices start to go back down.”

Mr Keane said that if the iron ore price held steady, investors would rather return to the mining giants, who have far bigger profit margins, than pool their cash in smaller capped stocks.

Wall Street Journal

Contrary to popular belief, banks aren’t the source of China’s major economic headaches. They’re merely the accommodators. The real culprit is the current fiscal system.

Consider the debt issue first. Beijing’s fiscal policies limit local governments’ share of tax revenues to about 45 per cent, even as local governments account for 85 per cent of state expenditures (up from 65 per cent around 2000). This has forced local governments to fund their social and infrastructure spending via off-budget financing, typically from land sales and shadow banking. The result is bank lending for expenditures that don’t generate commercial returns and should have been funded all along out of the state budget. Such debt piles up and is eventually written off with other nonperforming loans.

Then there’s the country’s slowing growth. The problem isn’t a lack of productive capacity to grow at 7 per cent a year; it’s that a 7 per cent rate is unsustainable due to inadequate demand.

China can no longer rely on exports given Europe’s continued malaise and America’s relatively import-weak recovery. Chinese investment rates meanwhile will decline given lower returns and the need to deleverage.

Household consumption won’t greatly increase because growth, having been exceptionally high for a decade, will decline as wage increases slow. To date, Beijing is pursuing selective stimulus policies that only heighten the ultimate need for deleveraging.

So how can China deal with its debt issue while also finding the demand to make up for weaker external markets and lackluster growth in investment and personal consumption? The answer lies in restructuring the current fiscal system -- and it appears a plan is already in the works.

China’s budget is unusual in its limited size and in how it misaligns revenues and expenditures between the central government and the provinces. The total budget is only 28 per cent of gross domestic product (compared with 40 per cent to 45 per cent for the major OECD economies and more than 35 per cent for upper middle-income countries).

In June, Beijing promised to complete a detailed framework for a major fiscal overhaul within two years. The package aims to reduce local budget shortfalls by expanding the value-added tax (to include services) and instituting new taxes on natural resources and property. It also calls for restructuring local government debts (often into long-term bonds) and eliminating loans backed by land.

By introducing multiyear budgeting, the new approach could reduce incentives for collecting off-budget revenue to meet short-term fiscal targets. Local officials will be assessed partly on how they manage their debts.

A restructured fiscal system will relieve the pressure on commercial and shadow banks to fund infrastructure projects. More important, it will enable a more balanced structure of aggregate demand by reducing reliance on debt-fueled investments by state-owned enterprises and increasing the role of state budgetary expenditures.

This may sound sacrilegious to anyone who believes that only private-sector dynamism can cure economic ills, but China’s state is unusually parsimonious in its social expenditures and has plenty of room to grow. As noted in the World Bank’s “China 2030” report, Chinese social spending and transfers as a share of GDP are roughly half those of comparable middle-income economies and a third those of OECD countries.

With a stronger revenue base and a clearer mandate to fund social services, government consumption could increase to around 18 per cent of GDP by the end of the decade from 13 per cent today. That would offset significant investment declines and provide the demand needed for 7 per cent growth over the decade to come.

A byproduct of major fiscal reform would be greater public scrutiny of central and local budgets, as citizens would expect rising state expenditures to directly improve their living standards. This would create pressures for more meaningful participation of citizens in the National People’s Congress and provincial assemblies, paving the way for more democratic decision making.

Commentary outside China has largely ignored Beijing’s ambitious fiscal agenda, instead obsessing over small changes in interest and exchange rates. But given the current system, financial liberalisation will be less effective than fiscal reform in altering the behavior of economic and political actors.

Success, however, is far from assured. Some reforms already announced may be blocked by vested interests. More work on both strategy and tactics is needed before we can be confident that China has found the path to sustainable high-speed growth.

Yukon Huang is a senior associate at the Carnegie Endowment and a former World Bank Country Director for China.

This article was first published in the Wall Street Journal. Reproduced with permission. 

China’s consumer price index — a main gauge of inflation — stabilised in December at 1.5 per cent, up from 1.4 per cent in November.

The index saw 2 per cent growth overall in 2015 according to China’s National Bureau of Statistics.

The producer price index (PPI) — a measure of costs for goods at the factory gate — dropped sharply to -3.3 per cent in December compared to -2.7 per cent previously.

ANZ Bank's chief Greater China economist Liu Li-Gang said the figures suggest a need for authorities to be vigilant on the rising risk of deflation.

"In addition to monetary policy response, this could be a good opportunity to push forward the factor (water, energy and utility) price reform” he said.

Mr Liu said China’s central bank appears to be reluctant to cut reserve requirement ratio to counter falling prices and economic slowdown.

“While the markets expected the PBoC to cut the reserve requirement ratio (RRR) following the rate cut in late November, the central bank re-classified the requirement of loan-to-deposit ratio (LDR) for commercial banks in mid-December."

Mr Liu said this measure only has a limited impact on market liquidity and that market interest rates have risen even after the November rate cut and the LDR modification move.

"In our view, Chinese authorities will need to use both structural reform measures as well as monetary policy tools to head off the risk of deflation, especially when domestic demand remains weak and commodity and energy prices continue to fall,"

Mr Liu said RRR cuts, or similar monetary easing measures can be expected in the first quarter of 2015.