Accusations of overcapacity drive geopolitical polarization
From Zhongnanhai: This week in Chinese Politics
China’s economy at “overcapacity”
Accusations of China’s “overcapacity” will likely strengthen resolve in Beijing to continue state intervention to boost exports in the economy and exacerbate protectionist measures in the West.
Analysis:
“Overcapacity” is the new buzzword in discussions of China’s economy, with accusations by the Biden Administration that massive state investments are driving excess industrial capacity amid insufficient domestic consumption. In response, China’s increase in exports of certain products, most notably in tech and clean energy sectors, have led to accusations by foreign leaders that China is dumping its overcapacity on foreign markets. In response, China’s Minister of Commerce, Wang Wentao 王文涛, rejected claims of overcapacity, although that did not prevent the EU from moving forward with anti-dumping measures against Chinese industries, including electric vehicle and solar panel manufacturers. Overcapacity is not by itself unique to China’s case, it is arguably endemic to its state-interventionist economic model. Western officials argue that significant state involvement in the economy has led to an imbalance that would be otherwise corrected if there was a greater degree of market forces at play.
In the US in particular, accusations of China’s overcapacity–and therefore dumping its excess production on foreign markets–will likely complement national security concerns about allowing Chinese products and services into US markets. As Beijing responds with counter-accusations that the West is trying to curb China’s growth, this issue is therefore likely both to persist and to further worsen economic and political relations between China and Western states. Companies should therefore be prepared in the eventuality that the Biden Administration erects an increasing number of protectionist barriers against China (albeit likely in a somewhat ad hoc manner), which will restrict trade and other exchanges. In addition, current trends point towards these protectionist barriers lasting for the foreseeable future, which means that companies should plan now for their connections to China being potentially severed for the long run.
On the Hill: Developments in US China policy
Yellen goes to Beijing
Yellen’s visit is positive for maintaining dialogue, but highlights the Biden Administration’s firm stance against Chinese state intervention to increase exports at home in domestic markets and abroad in its support for Russia.
Analysis:
Following a call between President Biden and General Secretary Xi Jinping, Treasury Secretary Janet Yellen traveled to China to meet with senior leaders and emphasized the progress towards a “more stable footing” in US-China relations. At the same time, she reinforced the Biden Administration’s threat of sanctions on Chinese exports and warned “significant consequences” if Chinese companies support Russia’s war efforts in Ukraine. Yellen’s comments about overcapacity in China’s economy also struck a nerve and echoed similar comments by Secretary Raimondo that labeled the country as “uninvestable.” It is unclear whether channels for the US to discuss concerns about overcapacity will be productive given that CCP leaders consider the issue both not an issue and not the US’s concern, particularly when the target is key industries like EVs that Beijing has targeted for growth. While progress in negotiations between the US and China is therefore unlikely to advance too dramatically, it is likely that the Biden Administration will use Yellen’s visit to frame future barriers for Chinese entities looking to access the US market.
Yellen’s visit came off the back of a delegation of American CEOs who met with Xi Jinping in late March as part of a play by Beijing to use pro-China business leaders to soften anti-China rhetoric in Washington. While some CEOs were happy to sing China’s praises, most notably Apple CEO Tim Cook, others were unconvinced by their curated visit. Stephen Roach, former chief economist at Morgan Stanley, was reportedly censored on the trip for expressing criticism of the recent political clamp down in Hong Kong. Much to Beijing’s chagrin, Roach’s words appear to be increasingly the view of foreign business leaders, with KPMG announcing it will follow the example of several other firms and close its law office in the city in the wake of the new national security laws. As Hong Kong’s leaders increasingly vie for Beijing’s favors at the expense of the economy, foreign business should be therefore cautious about their operations and investments in both China and Hong Kong, regardless of how many cabinet secretaries and CEOs the US sends to Beijing.
Business Matters
The US, Japan and Australia invest in diversifying supply chains to mitigate Chinese risk
In an attempt to contain China, the US and Japan are investing aggressively in on-shoring semiconductor production while Australia bets on CHIPS Act subsidies to diversify rare minerals supply chain.
Analysis:
In a major announcement this week, the Taiwan Semiconductor Manufacturing Company (TSMC) revealed that it will increase its investment in the United States by 60%. Incentivized by the CHIPS Act, TSMC will receive a US federal government grant worth US$6.6B and receive up to US$5B in loans, in addition to claiming up to a 25% tax rebate. Pledging to break ground on a previously unannounced, third Arizona chip factory by the end of the decade, the move will bring TSMC’s US-based investments to a total value of US$65B. The company has further promised to produce the world’s (currently) most advanced, two-nanometer chips in the US, putting the US on track to produce 20% of the world’s most advanced chips by 2030 and fulfilling one of President Biden’s policy goals. TSMC shares rose 3.7% just after the announcement, the largest increase for the company in the last month.
It is not just the US looking to increase domestic chip production, as Japan has similarly invested heavily in on-shoring semiconductor manufacturing. A previous leader in the industry, Japan is making a comeback by attracting investment by the very companies that outcompeted them in the early 1990s: Samsung (South Korea), TSMC (Taiwan), and Micron (US). TSMC is even exploring the option of building a second chip manufacturing plant in the country, following its successful 2021 plant, bringing the company’s total investment in Japan to US$20B. This news is further bolstered by an announcement this week that Microsoft will invest US$2.9B in data centers in Japan by 2025. Investment in Japan continues to be a trend, with companies from Taiwan and elsewhere looking to find more stable East Asian locations for their manufacturing and headquarters.
While the US and Japan seek to shore-up semiconductor production, an Australian company is making similar moves in the mining industry. Explicitly looking to take advantage of US and European efforts to reduce their reliance on Chinese minerals, Cobalt Blue is set to start building a new cobalt-nickel refinery in Western Australia by the end of the year. The company (is rightly) banking on the fact that on 1 January 2025 the foreign entity of concern (FEOC) rules laid out by the US federal government come into full effect and, if any part of a battery is connected to a FEOC, it will no longer be allowed in US products; Cobalt Blue believes this gives it a unique market advantage as it will produce “ethical” cobalt. Controlling upward of 70% of the global rare earth metals production, China has filed a complaint against the US with the WTO challenging US subsidies of batteries and the larger EV market.
Tech Futures
AI-generated disinformation targets US elections
Enterprises, governments, and voters are ill-equipped to counter disinformation–particularly when it is generated by nefarious state actors–which will have potentially dramatic consequences for elections this year.
Analysis:
AI-generated content is the latest front in the war against online disinformation. Discussions about the threat of disinformation are increasingly central among policymakers, with Chinese actors increasingly relying on AI or AI-enhanced content to sow distrust abroad. Where Taiwan bears the brunt of China’s use of AI, these efforts are growing increasingly sophisticated as they pivot to generating fake content that targets elections in the West. While Chinese state media claims that such accusations are “baseless,” a recent report by Microsoft details how Chinese agents target foreign democracies by using fake social media accounts to poll voters about what divides them most, and then exploiting that information using generative AI content. AI generated content is also increasingly weaponized to create misinformation about tragic events and sow distrust.
Where Taiwan’s recent presidential election was “the first time that Microsoft Threat Intelligence has witnessed a nation-state actor using AI content in attempts to influence a foreign election,” Taiwan appears to be a testing ground for further disinformation targeting the US, Europe, and the South Pacific. The state-backed hacking groups active in targeting Taiwan favor AI-generated memes and videos, which are likely to proliferate in other key elections this year from the US to India. Despite this threat, tech companies, media organizations, and voters appear ill-equipped to counter disinformation. A major question for the coming year is therefore how and when individuals can spot disinformation, and how companies should plan for an eventuality that AI-generated disinformation about their own brand, product, or employees damages the company’s bottom line or reputation.
Espionage Alert
Cybersecurity lapses lead to political pile on
Homeland Security criticizes Microsoft for lapses in cybersecurity that led to hacking by Chinese agents. Tech companies will face increasing pressure to both defend against these attacks and to weather political criticisms that their defenses are insufficient.
Analysis:
Recent reports from the US Cyber Safety Review Board about how Chinese-backed hackers targeted Microsoft last year denounced the company’s policies and preparedness to defend against such attacks. The attacks, which targeted a swathe of politicians and other individuals, led to a coordinated effort by the Department of Justice and other affected governments to deplore the hacking as an attack on democracies and an act of cyber espionage. The Board, a body under the Department of Homeland Security, accused Microsoft of a series of preventable security lapses that allowed the hacking group Storm-0558 to breach more than twenty Western companies last year. In response, Microsoft noted that it would improve its cybersecurity protocols, but its competitors are already arguing that the company has too much influence over the products used by US consumers.
Microsoft’s case highlights the challenge for companies in both defending against such state-sponsored cyber threats and withstanding public attacks by politicians who hope to strengthen their national security or anti-China credentials. While this example depicts the risks for tech companies, state-sponsored hacking targets increasingly include other sectors like public utilities. Companies should therefore actively pursue advanced cybersecurity measures, even if they are in a non-tech sector, to both prevent damages and to avoid becoming a potential target for politicians at home as cyber breaches become increasingly publicized.
On more thing…
East Asia hedges against China, while Ma visits Beijing
The US embraces closer ties with Japan and the Philippines at China’s expense. Companies will likely be unable to use operations in these states to circumvent export restrictions between the US and China, but trade between the US and its East Asian allies is predicted to increase at China’s expense.
Analysis:
Biden’s recent “check in” call with Xi Jinping stressed the US’s support for freedom of movement in the South China Sea in a warning against China’s aggressive tactics in the region. In support of that message, leaders of Japan and the Philippines met for trilateral talks with President Biden in DC. The three discussed a variety of issues from bullet trains in Texas to joint combat training and patrols, with the specter of China looming large in the background. Japan’s overtures to the US come amid a blip in their relations with the Biden Administration over the blocking of Japan’s Nippon Steel planned purchase of US Steel and Tokyo’s aspirations to join the AUKUS defense arrangement. For the Philippines, China’s increasingly assertive behavior in the South China Sea has precipitated a shift in alignment away from Beijing under former-president Duterte towards Washington under current President Marcos.
Collectively, these visits highlight the strengthening of the US’s position in East Asia as its allies, including those previously on the fence like South Korea, lean towards Washington over Beijing. For businesses with footprints in states like Japan or South Korea, some of which use their position in these states to maintain engagement with China outside the US’s export controls, this geopolitical shift will therefore likely restrict their capacity to circumvent US restrictions. Conversely, it will likely also mean that trade and economic cooperation between the US and its East Asian allies will likely increase at the expense of trade with China in the coming years.
At the same time, Taiwan’s former President Ma Ying-jeou 馬英九 traveling to Beijing to meet with Xi Jinping, with rumors that the CCP will also invite the current chairman of Ma’s opposition KMT party to visit China in June. Despite criticism from many in Taiwan, including being labeled a “useful idiot” for China, Ma’s visit highlights how politics on the island remains divided between those who favor, and those who oppose, closer cooperation with China. As some major Taiwanese firms look to offshore their Taiwan-based operations and supply chains to mitigate the risk of a potential (if unlikely) invasion, Ma’s visit might be seen by some as a positive step towards cooling cross-strait tensions, but the visit adds additional uncertainty about Taiwan’s future political direction under a KMT presidency.
Books recs
What we’re reading to better understand China
If you would like additional information and analysis tailored specifically for your specific business or institution, please contact us at info@2430group.org.
