Anti-Red is the New Black

From Zhongnanhai: This week in Chinese Politics

Fiscal Stimulus is in

China’s politburo announced “countercyclical” measures to boost the economy as the country struggles to rebound from its Covid-induced lockdown. While details of the announcement were fuzzy, party leaders underscored the property sector, local government debt, stable employment, and consumer demand as key areas of focus. The politburo is aiming to contain risks to economic growth and to prevent social unrest from high youth unemployment and flatlining or decreasing living standards. The announcement also supports earlier claims by the politburo to support private investment and boost consumer spending, particularly on white goods and in rural areas, as part of a broader attempt at economic stimulus. These measures are likely a result of internal pressure to calm markets and boost domestic support as the 5% annual growth target looks shaky despite official assurances to the contrary. Despite this and the lack of details in the announcement, stocks in China and Hong Kong responded well, particularly in the embattled property sector that continues to face a challenging credit environment.

 

Analysis:

The CCP politburo - the highest decision-making body in China - is concerned that the economy is not rebounding as hoped after COVID. Recently announced stimulus packages, combined with recent regulations to centralize economic decision making, suggest that the CCP is attempting to tackle macro-level structural challenges in the economy. This announcement, however, is not the “big bang” stimulus that China has pursued in the past and it is unclear whether such measures will prove successful in their ambitions to return growth to pre-pandemic levels. The announcement also crucially cut language that targeted property speculation, which suggests that populist messaging about housing over private returns on property investment was reduced in favor of stabilizing macroeconomic fluctuations. Taken together with earlier regulations over specific sectors, the CCP looks like it is trying to stimulate the economy without the massive public spending that it has engaged in the past.

 

On the Hill: Developments in US China policy

Anti-Red is the New Black


Presidential hopeful Ron DeSantis spoke at a recent event about his aim to counter China’s economy by ending its preferential trade status, banning the import of Chinese-made goods produced through stolen intellectual property, and restricting technology sharing. While recent polling puts DeSantis at a distant second behind Republican frontrunner Donald Trump, DeSantis’s tough-on-China position is increasingly mainstream for both major parties. The bipartisan American IP Defense and Enforcement Advancement Act (IDEA Act), for example, was recently introduced by the US senate with the aim of relaunching a defunct program for state and local law enforcement to reimburse small and medium enterprises that incur losses from IP theft, a particularly sore point in US-China relations. This bill comes amid heightened political scrutiny of US companies operating in China, most recently BlackRock and MSCI, with politicians from both parties questioning these companies on national security grounds.

 

Analysis:

While Republicans traditionally have taken a more hawkish approach to China than Democrats, this divergence is narrowing with both parties seeing “tough-on-China” as a campaign winner. This means that US entities operating in China will need to watch US domestic politics particularly closely, particularly at the state and local level where China is increasingly included in campaign platforms. US businesses with significant China exposure will therefore likely face squeezes from both US and Chinese politicians looking to boost their domestic standing by demonizing the other. 

Heightened political attacks on China are not only stoking geopolitical tensions between Washington and Beijing. They are also influencing Chinese outbound investment flows, which are increasingly directed away from the US and towards resource-rich states in the Global South. Ramping up anti-China rhetoric is therefore not only negatively influencing if and how US companies decide to operate in China, it is also accelerating China’s decoupling from the US economy. This, in turn, decreases the chances of US businesses successfully penetrating Chinese markets or finding Chinese investors. For US businesses operating in China and across emerging markets, political rhetoric on the US campaign trail is likely to complicate efforts to expand their overseas market share.

 

What’s Trending in China’s economy?

South and Latin American Countries Switch to Trade in RMB

Bolivia is the latest country to start using the RMB, rather than USD, to pay for imports and exports, with 10% of their foreign trade conducted in the currency between May and July of this year. Bolivia joins several other Latin American and Caribbean nations, including Brazil and Argentina, who also use the RMB to pay for foreign transactions. A Goldman Sachs’ study found that RMB holdings in just Brazil, Chile, Mexico, and Peru alone total nearly USD$30B, nearly 10 times more than in 2018. In January of this year, Argentina signed a currency swap agreement with the PRC, planned since 2015, to mitigate USD austerity measures in the region. By the end of 2022, the RMB had overtaken the Euro as Brazil’s number two currency. More broadly, the PRC state-owned financial platform, UnionPay, is now accepted in more than 20 Latin and South American countries, which signals China’s increasing presence in the region.

 

Analysis:

PRC efforts to woo Latin and South American nations is not new but has found increasing success in recent years. The result is a renewed interest in debates about the “Beijing Consensus,” a model that promises rapid economic growth without political liberalization, to replace the Washington Consensus that has historically governed much development in the region. Beyond ideological differences, this shift portends problems for the US on both sides of the Pacific. China is trying to reduce its dollar dependence by promoting trade in RMB; at the same time, Latin and South American countries are increasingly moving away from the US as their dollar reserves dwindle and Washington fails to provide requested investment and aid. Moreover, by creating trade networks conducted in RMB, the PRC is also insulating itself from the risk of potential US sanctions. After seeing the effectiveness of sanctions against a dollar-dependent Russia following its invasion of Ukraine, this move may be part of a long-term strategy to prepare the PRC for similar action in Taiwan.

 

Tech Futures

Electric Vehicles Surge

Electric vehicle (EV) sales have dramatically increased in China since the country’s post-Covid reopening according to figures from three EV startups. These figures are correlated with the CCP’s attempts to boost consumption rates through the announcement of 20 new measures that are designed to stabilize household spending, particularly on expensive items like EVs and smart appliances.There are also specific measures that target rural consumption, which means that EV penetration rates will likely increase in rural areas. Combined with the extension of existing tax breaks for EVs and government sponsorship for installing charging stations, China’s EV sector will likely grow significantly in the next few years as it capitalizes on large government investment in the sector that favors domestic brands and startups. Indeed, EV sales by domestic brands stand ahead of the more mixed results from global car manufacturers in the last quarter, with sharp drops in sales for established foreign car manufacturers operating in China. This includes a 26% drop in China sales for Toyota, which still performed the best last year out of foreign automobile brands in China with the exception of Tesla.

 

Analysis:

Recent moves to boost consumers’ EV purchases will likely disproportionately favor domestic Chinese brands, particularly startups involved in the EV manufacturing supply chain, over their global rivals. While this makes for a challenging market for global car brands operating in China in the short term, there is a larger challenge in the long run as the Chinese government looks to support domestic brands to export overseas, with the hope of outcompeting established foreign EV firms both in China and in foreign markets in the near future. 

Multiple reports from European automakers note the threat of Chinese EVs to their market shares in Europe, with Chinese companies aiming to capture 15% of the European market by 2025, despite Chinese EVs currently holding only a very small share. This is not only cause for concern for European automobile companies; it also means that China may attempt to impose tighter controls to regulate access to essential parts in EV supply chains. Moreover, increasingly pervasive Chinese tech in foreign markets - particularly tech that sends large amounts of personal and potentially sensitive data like an EV’s driving routes and location - means that foreign consumers will have their data increasingly exposed to Chinese corporate and state actors, which presents a heightened economic and security risk to both individuals and states.

 

Espionage Alert

Chinese Malware in Guam (is just the beginning)

US military, intelligence, and national security officials are on the hunt for potential malware embedded in networks “controlling power grids, communications systems and water supplies that feed military bases in the United States and around the world.” In February, US intelligence agencies and Microsoft detected “mysterious code” in telecommunications systems in Guam. Microsoft traced the malware code to state-sponsored Chinese hacking group, Volt Typhoon, which has been active since mid-2021, targeting Guam and other US infrastructure. Microsoft’s evaluation is that the group intends to embed malware but not immediately activate it, leaving it dormant for future use. A key tactic of the malware is to imitate existing cyber management tools to avoid detection by existing security programs. Microsoft issued their own guidance for other companies to follow, which was complemented by the National Security Agency issuing their own Cybersecurity Advisory.

 

Analysis:

Home to Andersen Air Force Base, it is thought that the PRC may hope to interfere with US military communications to Guam in the event of a PRC invasion of Taiwan; a competing theory is that it is meant to disrupt domestic functioning in the US to distract citizens from such an invasion. PRC espionage is not limited to telecommunications but spans multiple sectors, both in Guam and in the continental US, and the US and Microsoft’s release of relevant information is part of a new US effort to help companies combat Chinese espionage. In advising clients, it is worth directing them to the US Cybersecurity & Infrastructure Security Agency, who also issued a detailed analysis of the malware and ways to undo it.

 

On more thing…

Taiwan Toys with “White Power” (not that kind)

Taiwan’s upcoming presidential election continues to be filled with drama after presidential hopeful Ko Wen-je 柯文哲, whose party color is white, launched a campaign slogan to “vote white, vote right” and that advocated for “white power” at the polls. “White” is presented as the alternative choice to the colors of the two major “green” (DPP) and “blue” (KMT) parties, as Ko is running as an alternative candidate for the Taiwan People’s Party (TPP). The English translation, however, evokes far-right racist politics in the US, a point that was unfortunately emphasized by a fellow TPP candidate tagging Donald Trump in a Facebook post about the slogan. Between an embattled KMT candidate and Ko’s series of recent mishaps, the Taiwan presidential election is looking increasingly like the DPP candidate, William Lai’s, to lose.

 

Analysis:

 A DPP victory will largely continue the policies of the current president, Tsai Ing-wen 蔡英文, albeit with a new faction of the DPP in charge that appears less competent and less adept at handling sensitive foreign relations. A Lai victory would be welcomed by Washington at rile Beijing, and likely precipitate a tenser international security environment in East Asia than under Tsai, with a higher likelihood for mishaps or miscommunications than with the current administration. This is unwelcome news for the US, who just agreed to a US$350 million arms package (part of a total US$1 billion) for Taiwan and whose relations with Beijing continue to sour by the day.

 

OK, one final thing…

WeChat Pay and Alipay recently announced that they would accept foreign credit cards as part of their payment platforms, which makes it significantly easier for foreign visitors to operate in China using their apps.

Previous
Previous

China, Lawfare, and the Contest for Control of Low Earth Orbit

Next
Next

How China’s Political System Discourages Innovation and Encourages IP Theft