Kamala Harris and China
From Zhongnanhai: This week in Chinese Politics
China’s views on the Democratic Party’s presidential nominee
A Harris Administration would likely continue Biden’s China policies of countering Beijing’s assertiveness and increasing pressure on US allies to align with Washington’s foreign policies. Therefore, if Harris wins in November, US-China relations will maintain their current downward trajectory.
Analysis:
Joe Biden’s withdrawal and Kamala Harris’s ascent to the top of the Democratic ticket ahead of November’s election shocked many, including China’s leaders. While Beijing’s official line is “no comment” on US internal affairs, CCP leaders are scrambling to determine the direction of a Harris Administration’s foreign policy towards China and Taiwan. Harris’s China engagement is limited–she has only met General Secretary Xi Jinping once as Vice President–but the likelihood is that, if elected, she will maintain or even intensify US pressure against China on issues ranging from Taiwan and Hong Kong to human rights. She will also probably continue pushing US partners to align with policies like export controls, which suggests that US-China relations will likely continue to calcify geopolitical alignments.
Chinese social media hint at China’s approach to a Harris administration. Where some online users suggested that China’s leaders should follow Biden’s lead and resign, many criticized Harris while praising Trump. Trump’s relative popularity on Chinese social media stems, in part, from his appeal as an autocratic politician, a reputation that General Secretary Xi Jinping has cultivated as his own personal brand. Trump’s support among Chinese netizens also draws support from right-wing Republicans’ touting of shared conservative stances on social issues and lamenting of America’s “demise,” a view that perhaps ironically aligns closely with Chinese nationalist positions.
This somewhat counterintuitive position means that while many in China criticize the US, those same people admire Trump; a view that appears to be mirrored by far-right populists in the West that admire Xi Jinping’s personalist rule even if they see China as an adversary. While social media posts are heavily regulated, and therefore a limited reflection of true public opinion, the overt support for Trump on Chinese platforms suggests that China’s leaders share this support for his candidacy, at least to some degree. Moreover, praising Trump also helps to stoke instability in American society ahead of November's election, which the CCP is keen to exploit.
On the Hill: Developments in US China policy
The South China Sea
Secretary of State Blinken’s visit to Asia underscores how China’s assertiveness in the South China Sea is increasingly the focal point of US-China tensions. Businesses interested in monitoring how US-China tensions are reshaping geopolitics should therefore pay close attention to this issue.
Analysis:
Asserting dominance over the South China Sea has become one of China’s most important foreign policy issues. This region is significant to Beijing for multiple reasons: it is a vital lifeline for shipping (including natural resources like oil) between China and foreign markets; it is central to China’s undersea cables’ network; and it is strategically central to future plans for invading Taiwan. These reasons partially explain why China is willing to anger its neighbors as it claims expansive territorial waters more than 800 miles from China but within a few miles of foreign coastlines. Yet, divergent responses to China’s assertiveness, ranging from the Philippines’ combative approach to Malaysia’s passive acceptance, also suggest that states in the region will tolerate China’s bullying to varying degrees, mostly depending on how important they value Chinese trade and investment.
Against this background, Secretary Blinken visited Southeast Asia this week where he met with regional leaders and China’s Foreign Minister, Wang Yi 王毅, on the sidelines of the ASEAN summit in Laos. Blinken’s visit aimed to secure US support for its key allies amid uncertainty from Biden’s withdrawal from the presidential election, as the Biden Administration seeks to cement its legacy in East Asia. Blinken underscored how he sees partners like Japan and the Philippines as vital for combating China’s aggressive expansionism. The US’s increased military support to both partners demonstrates how conflict between the US and China affects other countries, with many falling under increasing pressure to pick a side. This means that businesses should look to the South China Sea as a bellwether of US-China relations, and of how different states might react to being forced to align more closely with one side over the other.
Business Matters
Beijing struggles to restart its sputtering economy
All indicators point to long-term trouble for China’s economy, with growth down, no plan on how to jump-start consumption, and high political risk for investors. Now is not the time to bet on China’s economy.
Analysis:
The Chinese economy is in trouble. Following an utterly vacuous communiqué at the conclusion of China’s Third Plenum in July, economists were left with serious doubts about China’s economic future. Lacking any significant or new economic initiatives, Beijing appears set on its current trajectory with only minor adjustments, focusing on innovation, green energy, consumption, and talent acquisition. Economists’ concerns were compounded by the untimely announcement that China’s Q2 economic growth was down to 4.7%, falling notably short of the 5.3% predictions; flagging consumer demand was named a key cause. It is important to remember, too, that Chinese statistics are historically unreliable and often inflated, meaning that real growth may actually be well below the state figure. Announcements coming out of a Chinese Politburo meeting last Tuesday suggested such a possibility, as they adopted a much grimmer outlook than during the Third Plenum, with China’s leaders pledging to get the economy back on track but omitting details for how to accomplish that goal.
Significant problems in multiple sectors no doubt contribute to Beijing’s decision-making paralysis, as everything seems to be going wrong at once. The Hong Kong Stock Exchange hit a three-month low last week after tech megacompanies, like Alphabet and Tesla, underperformed last quarter and brought about a downturn in AI investments. Chinese investors remain nervous, too, about the Exchange’s trajectory given the lack of specific plans by the government. The People’s Bank of China cut key interest rates last week, effectively pumping US$25B back into the economy and surprising economists who remain pessimistic about its potential effect on the broader economy. Key concerns include the languishing property market; Chinese overproduction; and increasing tariffs or other restrictions on Chinese goods in not only the EU and US, but now also among its Southeast Asian neighbors.
Investors should be wary of concluding that great risk equals great opportunity in this case. While it is certainly possible that the Chinese economy will turn around, there are no numbers or new policy initiatives that would support this conclusion, at least for the foreseeable future. Although the US risks cutting off its nose to spite its face by preventing US company’s collaborations with China, Chinese companies continue to be blacklisted. Even non-Chinese companies with China in their supply chains are succumbing to political pressure (the most recent example being Shein’s failed US IPO). The unequal treatment of foreign companies in China is also only likely to increase as domestic issues worsen and international tensions rise. In short, avoid making new investments in China that you cannot afford to lose, and expect investments made to take a beating in the short- if not long-term.
Tech Futures
G42 takes center stage in US-China contestation
High hopes for a US-backed AI company in the UAE that would counter China’s innovation appear in doubt as Emerati officials postpone US Congressional meetings with the company. Tech companies should take note of how geopolitics is increasingly seeping into corporate decision making.
Analysis:
The government of the UAE canceled upcoming meetings between US Congressional staffers and G42, a much-touted AI company funded by $1.5 billion from Microsoft. The Emirati government’s intervention to block meetings between the company, Emirati officials, and the US House Select Committee on China came after the US expressed concerns that G42 might transfer key AI technology to China. In response, Microsoft announced that it would scale back its involvement with G42. As the US ramps up pressure on its global partners to fall in line with its limits on exports of sensitive technology, including sophisticated chips used in AI innovation, Washington’s pressure for other states and companies to enforce those restrictions and limit their own exports of these technologies to China faces opposition. This is particularly true in the Middle East, with states like Saudi Arabia and the UAE often trying to balance relations between the West and China.
A major challenge for US tech is that security will likely increasingly shape business decisions in the sector. In the case of G42, for example, the US heralded its dropping of China’s Huawei in favor of the US’s Microsoft as a positive sign that the US was winning the tech race. For sectors like EVs, the US is also explicit that the US should lead the way rather than relying on Chinese-made alternatives. In response to shifting trends towards including security in business calculations, OpenAI similarly announced that it would restrict access to its platforms from China. In response, China is investing heavily in its own tech companies to undercut rivals and outcompete private competitors.
This prioritization of security over business is a necessity for restricting China’s access to key technologies, but it comes with a number of risks. First, tech companies are unlikely to warm to government demands that firms sever key relationships without an alternative revenue stream. Such demands will likely increase tensions between governments and the tech sector. Second, it is unclear how effective these restrictions will be given the multiple pathways by which China can acquire US technology–usually via third countries that are not party to US restrictions. The US’s game of national security whack-a-mole is therefore currently incapable of sealing all avenues by which Chinese companies can acquire US technology. This does not mean that it is not a gallant effort to restrict US tech exports, but rather that viewing tech as a zero-sum national security contest with China means that entities–and governments–caught in the middle will likely voice frustrations and may end up choosing China over the US.
Espionage Alert
Foreign travel a no-go for Chinese officials
Possession of “state secrets” is the CCP’s latest reason for denying its officials foreign travel, while additional regulations over the digital arena and in Hong Kong demonstrate China’s securitization of the public and private sectors.
Analysis:
China is clamping down further on what it sees as gaps in its already sweeping anti-espionage campaign. Further revisions to China’s expansive national security law increase restrictions on government officials’ use of confidential information. Individuals in possession of state secrets are now banned from traveling abroad without explicit approval and internet companies will have to demonstrate that they are cracking down on possible leaking of sensitive digital information. While this is more of a continuation and clarification of existing laws concerning state security, the publicity given to this update suggests that its announcement is as much a signal to officials that engagements with foreign actors is off limits, and that the securitization of the Chinese state will take priority over other concerns. Keep in mind as well that China’s definition of a state secret is changeable, arbitrary, and so broad that it often includes business information that Westerners consider utterly benign.
The announcement in Beijing coincides with a similar trend in Hong Kong, where the introduction of a bill covering digital security highlights the trend towards both Hong Kong’s capitulation to Beijing and the overall prioritization of security (broadly conceived) over other interests. A further notice from CCP officials that espionage charges can be leveled against anyone, regardless of whether any harm occurred to national security interests, further underscores the CCP’s message that anyone can be accused and charged with espionage, a convenient cover for detaining anyone deemed contrary to the CCP’s priorities.
For businesses operating in China, these updates reinforce the existing reality of monitoring and possible arbitrary detainment of operations and employees. The expansion of such efforts to the digital realm and to Hong Kong, however, increasingly places the burden on businesses to both enforce the broadly and vaguely worded “protection of state secrets” and to cooperate fully in the likely case that their employees, data, or internal business dealings fall under the auspices of state security forces.
On more thing…
Trade still trumps security for some
Analysis:
Italian Prime Minister Giorgia Meloni visited Beijing as part of a “relaunch” (read: flip-flop) of relations between Rome and Beijing despite US and EU concerns that Italy could be the weak link in the West’s collective defense against an increasingly assertive China. In Beijing, Meloni signed trade agreements in an attempt to reset relations after Italy’s flip-flopping on China in recent years: Italy was the first Western state to join China’s flagship Belt-Road Initiative in 2019 and subsequently withdrew just eight months ago. Framing the visit as part of the “Marco Polo” and “Silk Road” spirit, Chinese state media were quick to tout Meloni’s trip as evidence that trade and “pragmatic” reasons should remain the basis for foreign relations, rather than through competition. Meloni’s trip was purportedly about advocating for Italian businesses operating in China, but as we outline above, this trip is unlikely to change how China views foreign firms. While Italy is not the only EU member state to cozy up to China, it is one of the largest to do so, with potentially drastic consequences for how the EU opposes Chinese aggression in the future.
EU member states take increasingly divergent approaches to China, much to Washington’s annoyance and Beijing’s advantage. Dissent within the EU helps Beijing insofar as it restricts the bloc’s collective decision making on issues like banning Chinese EV imports or condemning China’s human rights record. For states like Hungary, China also represents an economic lifeline where support from other EU members is evaporating. Hungary, which is led by the autocratic and dictator-friendly Viktor Orban, received a staggering 44% of all Chinese investment in the EU last year, two-thirds of which was in EV production, and is beholden to China through a security arrangement that permits Chinese security forces to operate freely in the country. Conversely, states like Poland are taking a firmer stance against China, using bilateral dialogues to pressure China into reducing illegal border crossings into Poland through its border with Belarus.
Collectively, these cases highlight how different states are diverging in their alignment between pro-West or pro-China camps. Businesses with global operations should avoid applying blanket approaches to their global offices when it comes to navigating geopolitics, particularly regarding shifting local regulatory environments as different states respond to US-China competition.
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