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      Beijing’s BRI Hubris Comes at a Price

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      Despite more than 3,000 years of Chinese history, many of the world’s countries had little to no direct experience with China or Chinese investment prior to the launch of the Belt and Road Initiative (BRI). There was a presumption on the part of many governments that international best practices were well established and that China would be in compliance with those standards as it rolled out the initiative. As they now know, that often turned out not to be the case, but the fact that the Chinese business model is a mix of public and private sector participation, rules and regulations that are not necessarily logical or coherent and are often misunderstood has complicated matters.

      Is China’s Belt and Road Initiative Strategic Genius, Arrogant Overreach or Something Else?

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      For all concerned, the BRI has in many ways been a leap in the dark, since such an ambitious undertaking had never before been attempted. The Chinese government, and many of the nation’s companies active in the initiative, were, and remain, on a learning curve. The enforceability of Chinese regulations on private sector Chinese companies operating overseas can be inconsistent, and Chinese-built infrastructure has, at times, been found to be substandard. Regulations governing the practices of Chinese firms are frequently revised, leaving many organizations scrambling to keep up in the public and private sectors. It then takes a while for new guidelines to translate into practice abroad.

      BRI Financing

      BRI financing is highly dependent on loans from the China Development Bank, China Export-Import Bank and other state-owned commercial banks. China’s foreign exchange reserves are important sources of capital for these institutions. Although Beijing maintains the world’s largest aggregation of foreign currency, its foreign reserves have declined in recent years, which, when combined with its dramatically slowing economy, raises questions about the sustainability of BRI financing in the medium term.

      Under the presumption that foreign capital and support from multilateral financial institutions will be required to sustain BRI projects in the future, China’s Ministry of Finance established the Multilateral Cooperation Center for Development Financing with eight multilateral development banks and financial institutions. The center is expected to enhance the project financing process through a combination of better information sharing, improved project preparation and capacity building. The ministry has also developed the Debt Sustainability Framework for Participating Countries (DSF) of the BRI, collaborating with its counterparts from 28 partner countries. China’s DSF is virtually identical to the World Bank-International Monetary Fund DSF, which governs lending operations for the multilateral institutions and many bilateral lenders. That should increase its prospects for success.

      China’s effort is a significant step forward in guarding against the debt challenges associated with the BRI. Debt sustainability can only grow in importance for Beijing. As the BRI progresses, China will have no choice but to take steps to improve reporting transparency vis-à-vis financing, transaction structures and debt repayment. As for host governments that have become saddled with tens of billions of dollars of debt as a result of debt-trap diplomacy, their concerns have been widely shared with Beijing. Many of these nations have already become more discriminating BRI consumers. Although the trail of debt-related issues will certainly not diminish going forward, they will hopefully become less severe in time.

      The Chinese government has sought to integrate the BRI with its green growth agenda in an attempt to address criticism of its continued reliance on coal power and the lack of environmental oversight on Chinese infrastructure projects. Although Beijing has made great strides toward improving environmental and resource productivity, greater efficiency gains are vital to achieving a shift toward low-carbon, resource-efficient, competitive economies. Future progress will largely depend on the country’s capacity to integrate environmental aspects into the decision-making process for all its domestic and foreign policies to ensure that industrial and environmental policy objectives and measures are well aligned and mutually supportive.

      Reputational Risk

      At ongoing risk also is China’s reputation. The blowback it has experienced as a result of its rollout of the BRI from countries around the world has been unprecedented. The same may be said about its trade practices with the US and its response to COVID-19. Many of the world’s governments and people have simply lost confidence in Beijing, to the extent that they had confidence to begin with. The ball is squarely in Beijing’s court to raise the level of confidence the world may have in the future regarding what it says versus what it actually does. There is no better proving ground on that score than the BRI.

      A combination of hubris, a bulldozer approach to getting things done and a complete lack of sensitivity had worked well for the Communist Party of China at home for 70 years, and Beijing apparently believed that doing the same would work well overseas. While some aspects of Beijing’s original approach ended up yielding some positive results, President Xi Jinping’s move toward “BRI lite” in 2018 had to be taken with a grain of salt. He deserves credit for acknowledging some of the initiative’s pitfalls, but the Chinese government’s pivot must ultimately be considered too little and too late.

      If it wanted to more fully acknowledge the error of its ways, it would have offered to renegotiate every BRI contract that was clearly skewed in its favor rather than waiting to be asked to do so, award debt forgiveness on a broader basis and stop in its tracks any project under construction that is inconsistent with best environmental practices. That is clearly not going to happen.

      *[Daniel Wagner is the author of “The Chinese Vortex: The Belt and Road Initiative and its Impact on the World.”]

      The views expressed in this article are the author’s own and do not necessarily reflect Fair Observer’s editorial policy. More

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      in US Politics

      The Guardian view on delaying elections: it’s what autocrats do | Editorial

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      Donald Trump’s suggestion that the 2020 US election could be crooked is a challenge to democracy itself Postponing elections is what autocracies do. On Friday, Hong Kong’s leader, Carrie Lam, announced a delay to September’s planned legislative council (LegCo) elections. Ms Lam cited the coronavirus public health emergency as her justification. Yet the real reason is Hong Kong’s political emergency. Hong Kong’s elections have been postponed because even with its very limited democracy, Ms Lam and the Chinese government are afraid the voters will choose a LegCo with greater sympathy for the protests.In spite of their very different systems, Donald Trump’s reasons for proposing the postponement of November’s US presidential election are essentially the same. Mr Trump also cites the pandemic. But his real motives are also political. He thinks he is losing the campaign. He thinks Joe Biden will be elected in November. He wants to stop him if he can, by fair means or foul. And he wants to discredit his own defeat. Continue reading… More

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      in World Politics

      The West Must Help Myanmar Escape China’s Embrace

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      On July 2, Myanmar became the only country in India’s immediate neighborhood to accuse China of interference in its internal affairs. Senior General Min Aung Hlaing, the commander-in-chief of the Tatmadaw or the combined armed forces of Myanmar, accused China of arming terrorist groups like the Arakan Army (AA) and Arakan Rohingya Salvation Army (ARSA) in an interview with Russian state-run TV channel Zvezda. He also sought international help to suppress them.

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      Min Aung Hlaing’s statement is telling. It reveals that China is putting unprecedented pressure on its neighbors in the Association of Southeast Asian Nations (ASEAN). It is important to note that Min Aung Hlaing praised China as an “eternal friend” during a visit to Beijing in 2019. He thanked China for its support and for countering international pressure on Myanmar over its treatment of Rohingya civilians, a Muslim minority in Rakhine State.  

      The senior general has turned on Beijing at a sensitive time. China is facing international criticism for the spread of the COVID-19 disease, its detainment of Uighur Muslims in the Xinjiang region and for its aggression toward its neighbors. Yet it could be seen as part of a longer pattern in Myanmar.

      Turning Away from China Not Easy

      More than 10 years ago, the then-ruling military junta decided to reduce Myanmar’s economic dependence on China. At the heart of this decision was the goal of reducing China’s excessive influence in Myanmar.

      When retired General Thein Sein was president from 2010 to 2015, he ushered in initiatives to repair relations with India, the West and ASEAN. At first, these initiatives led to increased international aid, but it was short-lived due to the military crackdown on the Rohingya insurgency in the Rakhine state. Myanmar has faced international condemnation, isolation and sanctions since. By 2017, the brief “honeymoon” was over and China was back to its old games, with the West losing its window of opportunity in Myanmar.

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      China has been known to support the United Wa State Army (UWSA). The UWSA is an armed force of an ethnic minority that runs an autonomous region with little interference from central authorities. As per the Asia Times, the “UWSA’s relationship with China is a pillar of its autonomy.” China uses the UWSA to exert leverage within Myanmar. It also benefits economically because minerals from the Wa area are exported across the border to China.

      The UWSA is one of the many insurance policies Beijing uses to retain its eminence in Myanmar. Today, it has cultivated the ruling National League for Democracy (NLD) led by Aung San Suu Kyi, a Nobel laureate who was once the darling of the West. She wants to reverse Thein Sein’s decision in 2011 to suspend work on the Myitsone dam. Beijing’s State Power Investment Corporation (SPIC) was supposed to build this $3.6-billion dam at the source of the Irrawaddy River.

      The Myitsone area is said to be the birthplace of the Kachin people, after whom the state is named. They have fought the Tatmadaw since 1962, making itis one of the longest civil wars for a resource-rich region. The Kachin oppose the dam because it could put large parts of their region under water and threaten their livelihoods. As the BBC reports, Suu Kyi “needs to establish prosperity and peace if she is to convince the Burmese people of the benefits of democracy.” The dam might provide irrigation and electricity, boosting the ruling NLD.

      Suu Kyi is turning to China because the West has abandoned her. The days when former US President Barack Obama visited Myanmar and kissed her cheek seem distant. The Rohingya crisis has been roundly criticized by Western media and brought allegations of genocide.

      Chinese President Xi Jinping has stepped into the vacuum and visited Myanmar earlier this year. China has been planning the China–Myanmar Economic Corridor (CEMC) as part of its Belt and Road Initiative. It includes infrastructure such as railways and a deep-sea port at Kyaukphyu on the Bay of Bengal. This port will help China avoid the more vulnerable Straits of Malacca, where it fears being choked off.

      The West Must Change Tack with Myanmar

      Since 1990, Western powers have imposed sanctions on Myanmar for a variety of reasons ranging from human rights violations to lack of democracy. At the same time, they rushed to engage with China despite the 1989 Tiananmen Massacre. Myanmar became an outcast even as China won investments, joint ventures and a red carpet welcome to the World Trade Organization.

      Unlike China, which has had no election for 75 years, Myanmar has held three major elections in 1990, 2010 and 2015. A fourth is due in October this year. Suu Kyi’s NLD has won the past three elections.

      When it comes to the treatment of minorities, China has been worse than Myanmar. Its treatment of Tibetans has been terrible and its persecution of Uighurs makes daily headlines. Therefore, Min Aung Hlaing’s revelation that China is championing the Rohingya — a majority of whom are now sheltering in Bangladesh — is deeply ironic. China is supporting the Arakan Army and the Arakan Rohingya Salvation Army to destabilize Myanmar and win their support in the future. This policy of interference in Myanmar has implications for both India and Bangladesh. It is in keeping with the Chinese policy of destabilizing India’s northeast region.

      China’s strategy of destabilizing Myanmar even as it makes it an economic vassal has lessons for others. Western powers must provide Myanmar with much-needed investment. The Tatmadaw, led by Senior General Min Aung Hlaing, clearly wants to avoid Chinese domination. Suu Kyi is also no natural ally of China. They have both been pushed into Chinese arms by Western intransigence. Along with investments, a security arrangement involving many countries such as India, Bangladesh and Western powers would help.

      Currently, the Quadrilateral Security Dialogue (or the Quad) is the best vehicle to guarantee Myanmar’s security. It must thwart the development of CMEC. Otherwise, the Chinese navy will be sitting on India’s doorstep and the Quad would lose strategic advantage in the Indian Ocean. India has already been strengthening its relationship with Myanmar under its “Look East” or “Act East” policy. The relationship has been on the upswing since 2010 and is set to improve further.

      Yangon is sensitive to India’s strategic and security concerns. India has shown the same degree of understanding. For India, Myanmar is the archway to ASEAN and the far east. With the Chinese causing mischief at its borders, Myanmar has increasing strategic importance for India.

      The West must join India in its constructive engagement with Myanmar. In the October elections, Aung San Suu Kyi’s NLD is expected to win again. This victory could usher in an era of stability, economic progress and development. Myanmar’s civil and military leadership has no desire to embrace vassal status. It is up to the West to step up and give Myanmar a choice. With the Chinese menace rising by the day, failure to do so would be a historic blunder.

      The views expressed in this article are the author’s own and do not necessarily reflect Fair Observer’s editorial policy. More

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      What Has COVID-19 Done to Small Businesses?

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      Small and medium-sized enterprises (SMEs) are businesses with revenues, assets or employees below a certain threshold. SMEs are important to the health of any country as they tend to form the backbone of the economy. When compared to large enterprises, SMEs are generally greater in number, employ far more people, are often situated in clusters and typically entrepreneurial in nature. They drive local economic development, propel job creation and foster growth and innovation.

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      According to the World Bank, SMEs represent about 90% of businesses and 50% of employment worldwide. In the United States, 30 million small businesses make up 44% of GDP, 99% of the total businesses and 48% of the workforce, amounting to 57 million jobs. In India, the SME sector consists of about 63 million enterprises, contributing to 45% of manufacturing output and over 28% of GDP while employing 111 million people. SMEs in China form the engine of the economy comprising 30 million entities, constituting 99.6% of enterprises and 80% of national employment. They also hold more than 70% of the country’s patents and account for more than 60% of GDP, contributing more than 50% of tax collections.

      Different Countries Define SMEs Differently

      Though most experts agree on the crucial role SMEs play in any economy, the definition of an SME varies by country. In the US, the Small Business Administration (SBA) defines SMEs broadly as those with fewer than 500 employees and $7 million in annual receipts, although specific definitions exist by business and sector. Annual receipts can range from $1 million for farms to $40 million for hospitals. Services businesses such as retail and construction are generally classified by annual receipts, while manufacturing and utilities are measured by headcount. In June, the Indian government revised its SME definitions, expanding the revenue caps on medium and small enterprises from $7 million and $1.5 million to $35 million and $7 million respectively. In the United Kingdom, a small business is defined as having less than 50 employees and turnover under £10 million ($12.7 million), whereas a medium business has less than 250 employees and turnover under £50 million. 

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      Proper definitions matter. If SMEs are classified well, their access to capital and other resources can improve. They can apply for grants, get tax exemptions, collaborate on research with governments or universities or access other schemes. This gives SMEs better opportunities to survive and thrive.

      Since SMEs tend to be the biggest employers in most economies, a good policy to promote them creates jobs and develops worker skills. Furthermore, proper definitions enable governments to focus their efforts regarding SMEs and level the playing field for them vis-a-vis large corporations.

      Given the scale and nature of their business models, SMEs operate at the mercy of vagaries of the economy, geopolitical events and local policies. They battle competition from multinational giants, volatile cash flows, fickle customers, demanding suppliers and constantly churning employees. But the COVID-19 pandemic has crossed all boundaries. While the 2000 crisis was a dot-com bust and 2008 was a collapse of the financial systems, 2020 is clearly the SME crisis. It is Murphy’s Law at its extreme — anything that can go wrong has indeed gone wrong.

      The coronavirus crisis started off in early 2020 as a supply shock, which has now turned into a demand shock, impacting customers, employees, markets and suppliers alike. The consequences can be potentially catastrophic with the International Monetary Fund estimating that SME shutdowns in G20 countries could surge from 4% pre-COVID to 12% post-COVID, with bankruptcy rates in the services sector increasing by more than 20%.

      SMEs are bearing the brunt of the economic and financial fallout from the COVID-19 pandemic, not least because many were already in duress before the crisis. This could have a domino effect on the economy, given the pivotal role played by SMEs. Therefore, it comes as no surprise that most governments have sought to intercede legislatively with their fiscal might to ameliorate the predicament of SMEs.

      Indian and American Response

      It is instructive to note how different countries have responded to the economic crisis. India is a good country to start with. In early May, the government announced a 20-trillion-rupee ($250 billion) stimulus package called Atmanirbhar, equivalent to 10% of India’s GDP. It was a mixture of fiscal and monetary support, packed as credit guarantees and a slew of other measures. The centerpiece was an ambitious 3-trillion-rupee ($40 billion) initiative for SMEs, including instant collateral-free loans, subordinate debt of 200 billion rupees ($2.5 billion) for stressed micro, small and medium enterprises (MSMEs), and a 500-billion-rupee ($6.5 billion) equity infusion. Perhaps the largest component of the stimulus was the Emergency Credit Line Guarantee Scheme (ECLGS) that provides additional working capital and term loans of up to 20% of outstanding credit. 

      Although the scheme received positive feedback, the initial uptake was slow. On the supply front, bankers fretted about future delinquencies arising out of such accounts as the credit guarantees only covered incremental debt. On the demand side, SMEs were worried about taking on additional leverage when there is uncertainty about economic revival. Moreover, a 20% incremental loan may not suffice to service payrolls and operating expenses and keep business alive.

      Also, while this scheme addressed existing borrowers, the fate of those who are not current borrowers is unclear. While initial traction for the scheme was low, the recent momentum has been encouraging. The finance ministry reports that as of July 15, banks have sanctioned 1.2 trillion rupees ($16 billion), of which 700 billion rupees ($9 billion) have been disbursed largely by public sector banks, although private sector banks have joined in lately.

      Meanwhile, even the largest global economy has struggled with its SME relief program. In mid-March, US President Donald Trump approved a $2.2-trillion package under the Coronavirus Aid, Relief and Economic Security (CARES) Act to help Americans struggling amid the pandemic. One of the signature initiatives under the act was the $660-billion Paycheck Protection Program (PPP) aimed at helping small businesses with their payroll and operating expenses. This program was distinct from its peers in its loan forgiveness part, in which the repayment of the loan portion used to cover the first eight weeks of payroll, rent, utilities and mortgage would be waived. 

      The program, though well-intentioned, has struggled with execution issues exacerbated by labyrinthian rules. Matters came to a head when the initial tranche of $349 billion ran out in April. The program had to be refinanced but, by June, it was closed down with $130 billion of unused funds in its coffers. The program was restarted again and extended to August by Congress.

      Worse, the program saw refunds from borrowers who were unclear about the utilization rules. Loan forgiveness would be valid only if the amount was utilized within eight weeks. This stipulation made SMEs wary because their goal was to use cash judiciously and optimize the use of the borrowed amount to last as long as possible. These rules have since been amended by the Small Business Administration. It now gives SMEs 24 weeks to use the borrowed funds and allows them more flexibility on the use of funds. In any case, questions have been raised about capital not reaching targeted businesses and unintended parties benefiting instead. 

      Despite the changes in SBA rules, the jury is still out on whether more SMEs will take out PPP loans. Some are lobbying for full loan forgiveness. However, dispensing of repayment requirements essentially creates handouts that could lead to the lowering of fiscal discipline and increasing incentive for fraud. A recent proposal by two professors, one from Princeton and the other from Stanford, suggests “evergreening” of existing debt, a practice that involves providing new loans to pay off previous ones. Though innovative, it is not quite clear how such a policy would provide better benefits compared to a loan repayment moratorium, especially when it comes to influencing future credit behavior. 

      In addition to the PPP program, the SBA has announced the Economic Injury Disaster Loans (EIDL) program. This offers SMEs working capital loans up to $2 million to help overcome their loss of revenue. The program was closed down on July 13 after granting $20 billion to 6 million SMEs. Maintaining equitability and efficacy in the distribution process has been a challenge, though.

      European Responses

      Europe’s largest economy, on the other hand, has fared relatively better. In early April, German Chancellor Angela Merkel announced a €1.1-trillion ($1.3 trillion) stimulus termed the “bazooka.” This constituted a €600-billion rescue program, including €500 billion worth of guarantees for loans to companies. The German state-owned bank KfW is taking care of the lending. The program also includes a cash injection of €50 billion for micro-enterprises and €2 billion in venture capital financing for startups, which no major economy has successfully managed to execute. Notably, the centerpiece of the German program is the announcement of unlimited government guarantees covering SME loans up to €800,000. These loans are instantly approved for profitable companies.

      Berlin’s relief measures were specifically targeted at supporting Germany’s pride, the Mittelstand. This term refers to the 440,000 SMEs that form the backbone of the German economy. They employ 13 million people and account for 34% of GDP. Many of these firms manufacture highly-specialized products for niche markets, such as high-tech parts for health care and auto sectors, making them crucial to Germany’s success as an export giant. Not surprisingly, these companies have seen a contraction in revenues, especially the ones that depend on global supply chains. 

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      The swift implementation of these initiatives, coupled with the resilience of the Mittelstand, is demonstrating that SMEs can survive and thrive in this environment. The Germans have also been preaching and practicing fiscal prudence in normal times, which has now worked in their favor. Germany can afford to inject capital and do whatever it takes to save its SMEs.

      Since its first stimulus, Berlin has followed up with an additional €130-billion package consisting of tax, SME loans and spending measures aimed at stimulating demand. This included a €46-billion green stimulus focused on innovation and sustainable projects such as e-mobility and battery technology. In keeping with the German tradition, the SMEs who make the Mittelstand have stayed agile as well. They are diversifying their customer base and pivoting their business models to more recession-proof sectors. 

      The UK, another major world economy, also launched an array of relief measures, including the Coronavirus Business Interruption Loan Scheme (CBILS) worth £330 billion ($420 billion). This was designed to support British SMEs with cash for their payroll and operating expenditure. It also announced the Bounce Back Loan Scheme (BBLS) focused on smaller businesses. This enjoyed a better launch than CBILS because the latter, with its larger loan quantum, required more vetting and paperwork.

      Loans from the CBILS initiative, although interest-free for a year, are only 80% guaranteed by the government. This makes banks less willing to lend during these troubled times because they are afraid of losing 20% of the loan amount. This slows credit outflow and starves SMEs of much-needed capital. As of July 15, less than 10% of the allotted capital had been utilized, which banks blame on an inadequately designed scheme. By mid-July, only £11.9 billion had been disbursed to 54,500 companies through the CBILS and £31.7 billion to 1 million smaller firms through the BBLS.

      Businesses have sought modifications from policymakers to existing schemes. These include hiking government guarantees for loans to 100% and waiving personal guarantees for small loans. The Treasury has agreed to some of these demands. Critics also point to structural deficiencies in the system. They believe the administrative authority for SME loans should be a proper small business bank instead of the British Business Bank, which was not designed for SMEs. Already, the UK government has warned that £36 billion in COVID loans may default. More drastic measures seem to be on the way, including a COVID bad bank to house toxic SME assets.

      Responses Elsewhere

      Economies around the world have been responding to disruption by COVID-19. It is impossible to examine every response in this article, but Japan’s case deserves examination. The world’s third-largest economy had been battling a recession even before the pandemic. Declining consumption, falling tourism and plunging exports were increasing the pressure on an aging society with a spiraling debt of over $12.2 trillion. The pandemic has strained Japan’s fiscal health further.

      In response to the pandemic, the Bank of Japan announced a 75-trillion-yen ($700 billion) package for financing SMEs, which included zero-interest unsecured loans. Additionally, the National Diet, Japan’s parliament, enacted a second supplementary budget, which featured rent payment support and expanded employment maintenance subsidies for SMEs.

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      The execution of these programs has been tardy. The government’s 2015 digitalization drive is still incomplete, impacting the distribution of subsidies and the implementation of other relief measures. Of the more than 400,000 applications for employment adjustment subsidies, only 80,000 companies received aid by mid-June. Application procedures are unnecessarily complex, adding to the woes of SMEs.

      Any discussion on SMEs in the global economy would be incomplete without examining China, which was the first country to deal with the COVID-19 disease. In February,  the government announced a 1.2-trillion-renminbi ($174 billion) monetary stimulus. Large state-owned banks were ordered to increase lending to SMEs by at least 30% in the first half of 2020. Three of these banks alone were supposed to lend 350 billion renminbi ($49.7 million) to small businesses at preferential rates. In addition, Beijing encouraged local policymakers to provide fiscal support to keep SMEs afloat.

      China’s stimulus seems more understated compared to other major economies and their own 2008 bailout package. After controlling the first COVID-19 wave in March, the Chinese have focused on restarting the economy and reopening businesses instead of relief measures and bailouts.

      In February, surveys in China showed that 30% of SMEs had experienced a 50% decline in revenue. Surveys also found that 60% of SMEs had only three months of cash left. At the end of March, almost half a million small businesses across China had closed and new business registrations fell by more than 30% compared to last year. The resumption of work has been an uphill struggle. In April, the production rate of SMEs had crossed 82% of capacity, but the sentiment had remained pessimistic. Notably, the Small and Medium Enterprise Index (SMEI) had risen from 51.7 in May to 53.3 in June, indicating that SMEs are slowly reviving.

      With the easing of lockdown measures, domestic demand in China has picked up, driving SME sales. In turn, greater demand is increasing production activity and accelerating capacity utilization, causing a mild rise in hiring. The green shoots of recovery of Chinese SMEs should encourage authorities worldwide. 

      Policy Lessons for the Future

      Governing nation-states is an arduous task at the best of times and especially so in a nightmarish year of dystopian proportions. No wonder governments worldwide have appeared underprepared to combat the COVID-19 crisis. Whilst predicting a global pandemic of this scale would be next to impossible, there were early warning signs that severe disruptions to global health care, supply chains and business models were imminent. Yet scenario planning and stress testing of economic models has been flawed, impacting the swift rollout of relief measures.

      The crisis has also underlined the importance of fiscal discipline when economies are doing well. Countries that do so can build a robust balance sheet to leverage during troubled times. This crisis also brings home the importance of evaluating and reevaluating the efficacy of the entities that deal with SMEs. Policymaking is an iterative process, especially when it comes to SMEs and bodies that oversee them must be overhauled periodically.

      Importantly, policies pertaining to SMEs must have inputs from those with domain expertise. Structures must take into account execution capabilities and speed of delivery. Instant loan approvals with suboptimal due diligence have to be constantly balanced against longer vetting but slower turnarounds. Similarly, policymakers have to analyze the various types of instruments, fiscal and monetary, that can be used for SMEs. What works in one country may not work for another. 

      It is important to remember the nuances of different policy measures, such as guarantees, forgiveness, monitoring and moratoriums. Guarantees are a sound instrument for relief but are potential claims on the government’s balance sheet and contingent liabilities. They also have little economic value if capital is not promptly delivered to SMEs. Forgiveness provisions have their own issues. They may be important in a crisis but could incentivize subpar credit behavior in the future. Similarly, monitoring is important but is impractical when millions of SMEs are involved. There is no way any authority can keep a tab on the intended usage of funds. Finally, moratoriums have their own problems. Businesses could misuse moratoriums, putting pressure on banks and making accounting difficult. They were cheered at the onset of the crisis but further extensions could be costly to the ecosystem. 

      Going forward, governments need to prepare for the long haul. The consequences of the COVID-19 pandemic will stay with us for the foreseeable future. What began as a liquidity crisis might well become a solvency crisis for SMEs despite the best attempts to avoid that eventuality. If that does happen, governments will need to plan for efficient debt restructuring. They will have to institute insolvency management processes while figuring out how to handle bad asset pools. In simple language, governments will have to make tough decisions as to distributing gains and losses not only among those living but also future generations.

      The views expressed in this article are the author’s own and do not necessarily reflect Fair Observer’s editorial policy. More

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      US push for global alliance against China hampered by years of 'America first'

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      The confrontation between the US and China is gathering pace with each passing week. In the past few days, the Chinese consulate in Houston has been shuttered amid allegations it was a spy hub, and the US mission in the south-western city of Chengdu was closed in retaliation, on similar grounds.The FBI has started arresting Chinese researchers at US universities with suspected links to the People’s Liberation Army (PLA), one of whom temporarily took refuge in the consulate in San Francisco, before surrendering.US academics and businessmen are being put under greater scrutiny for ties to Beijing and have been warned to come clean about them under the Foreign Agents Registration Act.The tougher legal moves have been accompanied by a concerted set of speeches assailing China by the Trump administration’s major national security and foreign policy officials, culminating in an address on Thursday by the secretary of state, Mike Pompeo, declaring: “The free world must triumph over this new tyranny.”Pompeo travelled to Yorba Linda, California, home of the Richard Nixon presidential library, to declare that the Republican president’s historic opening to China in 1972 had begun an exercise in failure in east-west detente.“The kind of engagement we have been pursuing has not brought the kind of change in China that President Nixon hoped to induce,” Pompeo said. “The truth is that our policies – and those of other free nations – resurrected China’s failing economy, only to see Beijing bite the international hands that fed it.”Some of the grand geopolitical language can be put down to the importance of anti-China sentiment in Donald Trump’s bid to salvage his presidency in the November election. And some of it is inspired by Pompeo’s own efforts, increasingly at the expense of his day job, to position himself for a presidential run in 2024.But much of what Pompeo had to say will have global resonance thanks to Beijing’s rising aggression on multiple fronts around the globe. At the same time as rounding up more than a million Muslim Uighurs in internment camps, the regime has quashed the liberties enjoyed by Hong Kong, taken over disputed atolls, reefs and shoals in the South China Sea and turned them into concrete redoubts, and conducted a dangerous land grab on its border with India.Pompeo argued that combatting the grip of the Chinese Communist party “is the mission of our time”, a declaration likely to get heads nodding in large parts of Asia and the Pacific at least. But his claim, in his next breath, that “America is perfectly positioned to lead it” will ring hollow among many of Washington’s bewildered allies.In their eyes, China has expanded in a vacuum left by the US retreat under the Trump administration into “America First” jingoism and unilateralism. More

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      in World Politics

      The Real Scandal of Chinese Hacking

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      The image most people have of the world of espionage spans an intriguingly varied cast of contrasting personalities. It includes the colorful, the creepy, the beautiful but also the deceptively ordinary. It features a sexy Mata Hari and Christine Keeler. It stretches across history from Christopher Marlowe to the Cambridge Five, from Rosencrantz and Guildenstern to Julius and Ethel Rosenberg. And most people retain the image of the world-weary Cold War spies that have populated the novels of Graham Greene and John le Carré and the movies inspired by them.

      The advent of the internet has significantly transformed the landscape of spy-duggery. To be a spy used to require a solid education followed by intensive behavioral training and cross-cultural awareness. But in contrast with the past, the people identified as spies these days tend to be nerds: hackers, digital pirates and cyber-spies. Just as drone operators sitting in a remote location operating what resembles a video game console have increasingly replaced the soldier on the battlefield, the spies in today’s news are faceless operators. Their personalities are unknown and biographies singularly devoid of color and drama.

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      The picture becomes even more complex when we consider how the stories told about the cyber-spies emerge in the media. The source tends to be a government exposing them. But with so little substance to expose other than designating hidden lines of code, the public can’t even be sure that a newly-identified spy is real. And given that any clever coder motivated enough to rise to the challenge can hack the most secure target, the act that is identified as espionage may just be a feat of coding prowess by a teenager seeking to impress a few cyber-friends.

      We must not forget the need of some politicians in democratic nations to raise the alarm from time to time either to justify exceptional security measures they wish to impose, possibly for other reasons, or simply to prove to the electorate how vigilant they are in defending their vulnerable nation. In such circumstances, decoding the political intent behind incidents caused by coding becomes a major challenge. It is in such a context that, over the past week, the governments of the US and the UK have signaled at least two cases of spying by everyone’s favorite enemies in treachery: Russia and China.

      In the harvest of spy alerts from the past week, there was also what has become the obligatory mention of Russian meddling in Western elections (the Scottish independence referendum of 2014). But in the two contemporary cases that made the headlines, the goal turned out not to be the usual military, electoral or cultural goal (“sowing doubt” and “creating confusion”) but medical. The spies in question were seeking to hack research into the responses to COVID-19, the disease caused by the novel coronavirus.

      According to The Guardian, the US Justice Department has indicted two Chinese hackers “for seeking to steal Covid-19 vaccine research” and other acts of industrial espionage. “Justice Department officials said Li [Xiaoyu] and Dong [Jiazhi] targeted biotech companies in California, Maryland, Massachusetts and elsewhere but did not appear to have actually compromised any Covid-19 research.”

      Here is today’s 3D definition:

      Compromise:

      Allow an idea, concept, process or object to escape from the hands of a person or institution that has been jealously hoarding the idea, concept, process or object with a view to reaping the maximum profit from it

      Contextual Note

      The message that nothing was compromised will reassure the public. But, as often in these cases, the motivation and the supposed agency of the Chinese government are implied rather than proven. With its typical lack of clarity, CNN clarifies: “While the indictment does not specify if the hackers had been working at the behest of the Chinese government as they targeted the coronavirus projects, senior national security officials have been warning of Chinese government attempts to steal coronavirus research from US institutions for months.”

      In other words, much like Russiagate, if “national security figures” warned that something might be initiated by an identified agent (the Chinese government) and then something (but not exactly the thing they feared) does seem to happen, the conclusion requires no further investigation. That is exactly how conspiracy theories are built and justified, but it is also how the best scoops in the media are constructed.

      Historical Note

      In the world of geo-diplomatic intelligence spawned by the Cold War and continued by all nations who can afford it ever since, spying, hacking and spreading disinformation have become a kind of operational norm. This means that whenever a political leader needs to create a scare, there will always be one available for immediate exploitation. Over the past 70 years, alarms about spying and foreign meddling only burst into the media at moments in which leaders judge it expedient to draw such incidents to the public’s attention. In the midst of an intractable pandemic that has caused severe political grief to the leaders of the US and the UK, this is one of those moments.

      Most of these cases produce mild diplomatic incidents that may have immediate pragmatic consequences but rarely alter the balance of power or degenerate into forms of durable conflict. In today’s case, pitting China against the US, after the closure of the Chinese Consulate in Houston, the consequences appear to be far from negligible. It is, after all, an election year in the US and Donald Trump’s chances of getting a new four-year lease on the White House are rapidly dwindling. This may be just the first act of a four-month drama or an alternative scenario — alongside the Israel-Iran conflict — for Trump to have the tail towag the dog.

      Embed from Getty Images

      With the ultimate prospect of an intercontinental war, no one in the media seems to notice what is special and different about the idea of hacking research on COVID-19 treatments, cures and vaccines. That is because both the media and politicians have failed to ask the basic question: Why would anyone want access to urgent medical research?

      In a rational world in which nearly 8 billion people find themselves assailed by fear of contamination, accompanied by the gutting of their economies and the violent transformation of their way of life, research on treatments and cures should logically take the form of a universal collaborative project spontaneously shared among all competent experts and researchers across the globe. Instead, we are passively witnessing a competition driven solely by the profit-motive of a few.

      The real question is: Why isn’t this research already being shared? Why must it be hacked? Everyone knows the answer to that question. It is too obvious, too much a part of the landscape to mention. That is why they dare not even ask the question or assess the consequences. The winner of the race expects to be handsomely rewarded, benefiting from a monopolistic position. And the nation that harbors the winner will be the first to exploit it, with the option of hoarding.

      That is how today’s world order works and everyone seems to accept it as normal, even in these far from normal times. It’s a unified ideological system that governs both geopolitics and the economy. Competition, profit and what Thomas Piketty has called the “sacralization of property,” including industrial property, are the pillars of our historical heritage from the industrial age. 

      Secrets permit monopolies. Monopolies guarantee excessive profit. The rule of the game is that researchers on one side of the world must be unaware of the progress of their colleagues elsewhere. May the best researcher win. Yet this not only slows down progress toward a satisfactory solution, but it also increases the risk that the winning solution may be flawed or incomplete.

      In today’s world, sharing means compromise. But that is deemed unacceptable for a simple reason: Compromise means being compromised. Totally unacceptable.

      *[In the age of Oscar Wilde and Mark Twain, another American wit, the journalist Ambrose Bierce, produced a series of satirical definitions of commonly used terms, throwing light on their hidden meanings in real discourse. Bierce eventually collected and published them as a book, The Devil’s Dictionary, in 1911. We have shamelessly appropriated his title in the interest of continuing his wholesome pedagogical effort to enlighten generations of readers of the news. Click here to read more of The Daily Devil’s Dictionary on Fair Observer.]

      The views expressed in this article are the author’s own and do not necessarily reflect Fair Observer’s editorial policy. More

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      US-China tensions escalate after closure of Houston consulate

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      Diplomatic tensions between the US and China has escalated sharply with the Trump administration’s closure of the Chinese consulate in Houston to protect “American intellectual property and private information”.A Republican senator claimed that the Texas consulate, which covered several southern states, was an “espionage hub”. China described the closure as “unprecedented” and an “outrageous” escalation, and threatened retaliation.“China strongly condemns such an outrageous and unjustified move, which will sabotage China-US relations,” the Chinese foreign ministry spokesman Wang Wenbin said at a regular news briefing on Wednesday. “We urge the US to immediately withdraw its erroneous decision, otherwise China will make legitimate and necessary reactions.”Fire services were called to the Houston consulate overnight after smoke was seen rising from the compound. US officials said staff, who were given 72 hours to leave the country, were burning documents in its grounds.It was unclear whether the closure of the consulate was triggered by a new development. During a visit to Denmark on Wednesday, the secretary of state, Mike Pompeo, suggested the move reflected a US decision to be less tolerant of Chinese behaviour.“President Trump has said ‘enough’. We’re not going to allow this to continue to happen,” Pompeo said. “We are setting out clear expectations for how the Chinese Communist party is going to behave, and when they don’t, we’re going to take actions that protect the American people, protect our security, our national security, and also protect our economy and jobs.”The state department spokeswoman Morgan Ortagus said: “The United States will not tolerate the PRC’s [People’s Republic of China’s] violations of our sovereignty and intimidation of our people, just as we have not tolerated the PRC’s unfair trade practices, theft of American jobs and other egregious behaviour.”Marco Rubio, the acting chairman of the Senate intelligence committee, said: “It’s kind of the central node of a massive spy operation: commercial espionage, defence espionage, also influence agents to try to influence Congress. They use businessmen as fronts in many cases to try to influence members of Congress and other political leaders at the state and local level. And so it’s long overdue that it’d be closed.”The consulate closure came a day after the US accused two Chinese nationals of trying to steal Covid-19 vaccine research, claims that China described as “slander” on Wednesday.This month the FBI director, Christopher Wray, said China was the “greatest long-term threat to our nation’s information and intellectual property and to our economic vitality”. The Chinese foreign ministry accused US authorities of targeting its diplomats in the US, including opening their pouches without permission “multiple times” and confiscating items intended for official use.The ministry said its embassy in the US had received bomb and death threats, the result of the US “fanning hatred against China”. Beijing accused US diplomats in China of “infiltration and interference activities”.“If we compare the two, it is only too evident which is engaged in interference, infiltration and confrontation,” it said.Ties between the two countries have deteriorated further in recent weeks as the US has taken a harder position against China and lobbied its allies to do the same. The closure of the consulate follows a tightening of restrictions for Chinese nationals working in state media in the US, which Beijing claims as the reason for it expelling more than a dozen western journalists over the last few months.On Wednesday Chinese state media suggested the possibility of closing US consulates, posting a poll on Twitter asking users to choose between missions in Hong Kong, Chengdu, Guangzhou and others.China has blamed international criticism of its passage of a harsh and broadly applied national security law in Hong Kong on the US, making the closure of the Hong Kong consulate a possible but escalatory measure.Nick Marro, a China analyst at the Economist Intelligence Unit, said: “In recent weeks we’ve seen some appetite on the Chinese side in trying to de-escalate tensions. Whether that agenda survives these recent developments will be a critical thing to watch.” More