ANNUAL REPORT

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162 the Chinese government’s success in pushing through financial sector reform last year and overcoming opposition to two factors: a strong political advocate (the PBOC) and clear objectives (getting the RMB into the Special Drawing Rights * basket). 183 However, without a new clear objective, the impetus for additional reforms has weakened. (For more information on the inclusion of the RMB into the Special Drawing Rights basket, see Chapter 1, Section 1, ‘‘Year in Review: Economics and Trade.’’) Fiscal and Financial Challenges The Chinese government is overhauling its fiscal and financial systems to attempt to address the funding needs of its reform agenda. China’s debt challenges harken back to the 2008–2009 $587 billion (RMB 4 trillion) stimulus package, which flooded local governments and companies in designated sectors with cheap credit, leading to unsustainable debt burdens and overcapacity. 184 China’s total debt to GDP has grown from 151.3 percent in 2007 to 254.6 percent in the first quarter of 2016, reaching $27.2 trillion (see Figure 4). 185 In a discussion with the Commission in Beijing, Michael Pettis, professor of finance at Beijing University, noted that although a banking crisis in the next two years is unlikely, the enormous growth of debt is unsustainable. 186 According to Andrew Polk, China director at the financial consultancy Medley Global Advisors, the ability of the PBOC to inject liquidity through the interbank system, the stability of large Chinese banks’ capital supported by China’s high savings rate, and limited national exposure to city-level banks would enable the government to manage existing debt obligations and prevent a nationwide financial crisis. But Mr. Polk noted that the rising number of nonperforming loans (NPLs) could create localized financial crises in heavy industry and SOE-dependent provinces in the northeast. 187 These rising debt obligations raise concerns about China’s ability to finance reforms laid out in the 13th FYP. 188 (For more information on China’s rising debt levels, see Chapter 1, Section 1, ‘‘Year in Review: Economics and Trade’’; for more on the challenges associated with SOE debt, see Chapter 1, Section 2, ‘‘State-Owned Enterprises, Overcapacity, and China’s Market Economy Status.’’) dkrause on DSKHT7XVN1PROD with USCC * Special drawing rights (SDR) are the International Monetary Fund’s (IMF) international reserve asset made up of five major reserve currencies. In November 2015, the IMF determined that the RMB had met its ‘‘freely usable’’ criterion and voted to include the RMB as part of the SDR, validating the PBOC’s reform efforts over the last year. For more information, see Eswar S. Prasad, ‘‘China’s Efforts to Expand the International Use of the Renminbi,’’ (prepared for the U.S.-China Economic and Security Review Commission), February 4, 2016, 82–89. VerDate Sep 11 2014 12:16 Nov 02, 2016 Jkt 020587 PO 00000 Frm 00072 Fmt 6601 Sfmt 6601 G:\GSDD\USCC\2016\FINAL\06_C1_C2_M.XXX 06_C1_C2_M
163 Figure 4: China’s Total Debt-to-GDP Ratio, 2007–Q1 2016 Source: Bank of International Settlements, ‘‘Long Series on Total Credit to the Non-financial Sectors,’’ September 8, 2016. Mounting Debt Challenges for Local Governments China’s central-local government fiscal system allocates 53 percent of tax revenue to local governments, but requires local governments to fund 85 percent of centrally mandated programs. 189 To bridge the revenue gap, local governments have relied on off-balance-sheet local government financing vehicles (LGFVs) * and sales of land-use rights, commonly seized from local farmers at belowmarket prices. 190 The total size of local government debt, including LGFVs, is not known. China’s National Audit Office reported that LGFV debt reached $3.4 trillion (RMB 23 trillion) in 2015, but this number only measures direct LGFV debt for local infrastructure projects and does not incorporate all the commercial projects that LGFVs are now involved in.† A September 2016 paper from the Brookings Institution estimated that LGFVs financed around three-quarters of China’s fiscal stimulus in 2009 and 2010, and that after the stimulus, local governments used LGFVs to obtain financing for local champions and infrastructure projects, creating around $7.2 trillion (RMB 48 trillion) in LGFV debt by 2015. 191 In 2014, the State Council’s amendments to the National Budget Law outlined its fiscal restructuring plan to bring off-balance sheet borrowing onto the budget, reduce the risk of local government default, and create more affordable revenue sources. 192 Reforms since 2014 were aimed at reducing the debt burden and bringing all offbalance-sheet borrowing into the official budget. According to a dkrause on DSKHT7XVN1PROD with USCC * LGFVs use land and other government assets as collateral to raise funds for major infrastructure and real estate projects. † The China-based financial database WIND, which measures only LGFVs that issue bonds, found that LGFV debt totaled $5.5–5.6 trillion (RMB 37–38 trillion) in 2015. Chong-En Bai, Chang-Tai Hsieh, and Zheng (Michael) Song, ‘‘The Long Shadow of a Fiscal Expansion,’’ Brookings Papers on Economic Activity, Conference Draft, September 15–16, 2016, 12–13. VerDate Sep 11 2014 12:16 Nov 02, 2016 Jkt 020587 PO 00000 Frm 00073 Fmt 6601 Sfmt 6601 G:\GSDD\USCC\2016\FINAL\06_C1_C2_M.XXX 06_C1_C2_M C1S3Fig4.eps
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USCC 2016 ANNUAL REPORT
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1 2016 REPORT TO CONGRESS of the U.
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U.S.-CHINA ECONOMIC AND SECURITY RE
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• The safety of food, drug, and o
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CONTENTS Page TRANSMITTAL LETTER TO
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IX Page Recommendations ...........
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2 ernment’s “going out” strat
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4 economically and politically stra
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6 wage rates are determined by free
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8 while allowing a greater role for
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10 began construction on its first
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12 from—the People’s Republic o
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14 cluding cyber and human intellig
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16 exporter of manufactured goods,
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18 Pakistan’s economic and securi
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20 Beijing appears to remain skepti
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22 trends in Hong Kong with regard
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24 UNSCR 2270. However, in May and
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26 Korea, designating Dandong Hongx
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28 tional order—both before and a
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30 to examine China’s economic an
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32 debt, and jeopardizing long-term
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Introduction CHAPTER 1 U.S.-CHINA E
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37 Statistics with Chinese Characte
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39 up from 52.3 percent in the seco
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41 Early signs suggest President Xi
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43 Figure 4: China’s Total Debt b
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45 reserves to defend the RMB. 75 I
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47 The pace of U.S. export growth t
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49 The United States continued to r
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51 commitments, China has only take
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53 Table 3: Top Five Business Chall
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55 U.S. Tech Firms and Their Chines
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57 ment of Justice’s May 2014 ind
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59 Internet Censorship As a result
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61 on the future of U.S.-China rela
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63 Chapter 1, Section 2, “State-O
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65 Table 5: Failed Chinese Bids for
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67 • Accelerating Bilateral Inves
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69 cess capacity, which will share
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71 United States Challenges Chinese
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73 rulings of the DSB [Dispute Sett
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75 Conclusions • In 2015, the U.S
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77 Addendum I: WTO Cases Recent and
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79 ENDNOTES FOR SECTION 1 1. Lucy H
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81 55. Gabriel Wildau and Don Weinl
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83 119. American Chamber of Commerc
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85 and Espionage Operations, oral t
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87 217. Kane Wu, “Chinese Compani
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89 271. Office of the U.S. Trade Re
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93 Lardy, senior fellow at the Pete
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99 pany competitiveness and stimula
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105 Table 2: Select Chinese Overcap
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107 levels. 135 The situation is on
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109 Figure 5: China’s Monthly Cru
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Page 209 and 210: 195 The ultimate impact of the ruli
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215 Figure 7: JL-2 Missile Range Co
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221 Space-Tracking Facility in Arge
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223 Table 1: Significant PLA Bilate
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227 Nigeria will be the first expor
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231 tional annexes to the 2014 Noti
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233 Select U.S.-China Security-Rela
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257 China’s Core Interests—Cont
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259 guerrillas in Colombia and held
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271 stan. 109 In 2014, the PLA Air
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275 conflict Chinese expeditionary
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279 RECOMMENDATIONS Developments in
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SECTION 3: CHINESE INTELLIGENCE SER
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291 Strategic Support Force In Dece
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293 of advanced intelligence, surve
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295 tives, and sexual entrapment. 4
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297 information to a Chinese intell
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299 such as power transmission grid
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301 for transferring trade secrets
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303 nal U.S. discussions of issues
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305 ENDNOTES FOR SECTION 3 1. U.S.-
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307 29. U.S. Department of Justice,
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309 63. U.S. Department of Justice,
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311 106. Eric Holder, “Attorney G
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314 sure its own ambitions in South
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316 Chinese foreign direct investme
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318 • Pakistan: In 2015, China an
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320 India “Acts East” and Puts
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322 Counter Terrorism and Religious
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324 tivities of the Dalai Lama and
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326 incursions across the border fr
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328 conducive to sea lane protectio
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330 Karachi Port, that could eventu
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332 India and OBOR India has not en
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334 China’s Arms Sales to Pakista
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336 For China, the goals of CPEC ar
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338 according to Mr. Small, “The
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340 side the Treaty on the Non-Prol
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342 Facets of U.S.-India Defense Re
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344 of China, but has advocated for
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346 • Recent U.S.-China tensions
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348 24. Debasish Roy Chowdhury, “
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350 71. Jeff Smith, Cold Peace: Chi
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352 127. U.S.-China Economic and Se
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354 2016, 86; Andrew Small, The Chi
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358 Taiwan’s Economic Challenges
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364 agreements. 57 Since then, many
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366 $67.2 billion, comprising 25.4
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368 Foreign Direct Investment China
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370 is leading the initiative, have
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374 Taiwan and the 11-Dash Line The
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384 trade-based partner to an innov
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390 • China’s military moderniz
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410 Hong Kong’s Political Gossip
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414 moving up one place compared to
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418 Chinese Censorship of Prize-Win
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420 Hong Kong and the ‘‘Panama
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424 Table 1: Select PLA Hong Kong G
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428 sitive periods in Hong Kong, le
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436 150. Commission meeting with Ta
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442 Korea. The resolution also bans
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444 increase pressure on Pyongyang.
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446 pand China-South Korea ties. 54
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448 Technical Details of THAAD The
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456 Korea runs perpetual merchandis
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460 pressure is more likely to brin
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462 ty for sanctions violations, co
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479 sailors would be stationed in J
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485 Table 1: U.S. Goods Trade with
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489 basis for President Obama’s c
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APPENDIX II BACKGROUND OF COMMISSIO
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APPENDIX III PUBLIC HEARINGS OF THE
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537 June 9, 2016: Public Hearing on
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APPENDIX IIIA LIST OF WITNESSES TES
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541 Alphabetical Listing of Panelis
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APPENDIX IV LIST OF RESEARCH MATERI
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547 China’s Military Agreements w
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APPENDIX V ACRONYMS AND ABBREVIATIO
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551 OPM PBOC PLA PMI PPI PPP PRC QD
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553 2016 COMMISSION STAFF MICHAEL R
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