Xi’s plan to win back foreign businesses hits hacking roadblock

From Zhongnanhai: This week in Chinese Politics

China tries to woo back foreign businesses

CCP heralds “New Productive Forces” as key to reassuring foreign investors and ensuring China’s future economic growth. While some American CEOs appear to be sold, the CCP continues to pursue “self-reliance” at the expense of foreign corporations.

Analysis:

China’s leadership is walking a tightrope between asserting greater Party control over previously normal business practices while trying to reassure nervous foreign investors that China is an open and business-friendly destination. At the Boao Forum, China’s equivalent of the World Economic Forum at Davos, various speakers underscored that China welcomed foreign investment and trade, despite news of a challenging economy and the widespread seizure and restriction of foreign companies’ assets, data, and employees. At the forum, Jin Zhuanglong 金壮龙, Minister of industry and information technology, noted that China encourages foreign firm’s to undertake major research projects and promised to provide safeguards for foreign scientists, entrepreneurs and investors. These overtures align with the central government’s latest vision for “new productive forces” (that is, growth through advances in science and technology) to spur economic growth.
The wooing of foreign business elites suggests that the Chinese Communist Party (CCP) assumes that it can both attract capital and talent all while prioritizing absolute political control over China’s economy and society. The emphasis on political control by Xi and his allies, for example, was encouraged by rumors that Xi Jinping’s wife, Peng Liyuan, may be joining the Politburo after a recent “investigative” trip to Changsha. Part of the irony is that concurrent to the recent forums, China blocked certain US chips from government devices (see our tech story below) and continues to emphasize self-reliance from foreign-made technologies. The message of openness was also clouded by Chinese reports that foreign “consulting” firms were out to “steal” sensitive information. Such reports did little to help the central government’s case that it has turned a new leaf in its relations with foreign businesses. 
The message from the CCP is clear: we may need foreign businesses now, but we are working to make them obsolete in the future. The major takeaway for foreign businesses is therefore to exercise extreme caution in engaging with China, as the CCP is enticing the same foreign businesses on which it simultaneously claims to be reducing its reliance. In an era where elite politics dominates, the chips will therefore continue to fall in favor of the party over the private sector.

On the Hill: Developments in US China policy

Congress remains tough on China, in spite of America’s CEOs

US business leaders met with senior officials, including Xi Jinping, in Beijing to demonstrate the CCP’s openness to foreign firms. Several visiting CEOs announced expanded investments in China, but politics in the US will likely look unkindly on business leaders’ attempts to change the conversation on China.

Analysis:

As part of the overture to stem the outflow of foreign capital and expertise, the CCP invited CEOs from major US firms to Beijing, including for some to meet personally with General Secretary Xi Jinping. While the group was far from representative of US policymakers, and notably included no women, the CCP’s exploitation of business leaders as a wedge against US politicians is a favored tactic when state-state diplomacy is stalled.

Playing along with China’s aspirations, Apple’s Tim Cook told state media: “I think China is really opening up, and I’m so happy to be here.” Off the back of the visit, major US companies, including Apple, also announced expansions in the Chinese market, partially reversing the prevailing trend of foreign companies fleeing China and the slow-motion collapse of Hong Kong. Notably, Cook’s announcement came amid reports that Apple’s sales have slumped in China, in part because Chinese competitors are increasingly out-competing Apple products. At the same time, former US officials attending the Boao Forum exposed their lobbying interests; Carlos Gutierrez, former US secretary of commerce, publicly defended TikTok despite the app’s refusal to divest from its Chinese owners. 
Notwithstanding the arguments of American business leaders for renewed engagement, Congress appears to be less moved to soften its stance towards Beijing. On the Hill, Rep. John Moolenaar (R-MI) will replace outgoing co-chair Mike Gallagher (who is leaving Congress to join the data analytics firm Palantir) on the influential Select Committee on Strategic Competition Between the United States and the Chinese Communist Party, after Speaker Mike Johnson tapped him for the position. Moolenaar will work alongside ranking member Raja Krishnamoorthi (D-IL) and will likely continue Gallagher’s tough stance on Chinese influence in the US. This suggests that, despite lobbying efforts by the business community for a softer stance against China, Congress is unlikely to be swayed, especially in an election year as officials from across the political spectrum try to avoid being labeled “soft on China.”

Business Matters

China adopts additional protectionist measures, but semiconductors remain an exception

Tech companies should be wary about the promise of cooperative Chinese markets going forward, except if if they are in the semiconductor business and have high risk tolerance.

Analysis:

In the name of self-reliance, China has blocked the use of Intel and AMD chips in government computers. The protectionist move supposedly bolsters Chinese national security but largely responds to similar and proposed measures by the Biden administration to sanction Chinese products. The new Chinese policy would have all government agencies shift away from not only computers that run on US companies’ chips but also change to domestic or, at the very least, non-Microsoft operating systems, such as Huawei or other linux-derived OS. This change is part and parcel of China’s “Xin Chuang” 信創 or “IT Application Initiative,” which is the new face of China’s “Made in China 2025” policy and intended to expand domestic industries and decrease Chinese reliance on foreign products. This trend is expected to continue for the foreseeable future, and tech companies are advised to prepare for reduced access to or even ejection from Chinese markets in the short- and long-term, respectively.

While striving for self-reliance, however, China is struggling in at least one key industry: semiconductors. At the Semicon China Expo in Shanghai this week, at least two companies–Naura Technology Group and the Semiconductor Manufacturing International Corp. (SMIC)--claimed advances that allowed them to produce 7-nm chips. These claims exceeded expectations about capabilities predicted for both companies but still puts them far behind more advanced chips on the global market that are 5- or even 3-nm in size; closing this gap will still take several years, if not longer. This announcement also coincided with the Dutch Prime Minister’s visit to Beijing to meet with Xi Jinping. The two leaders will discuss the Dutch government’s denial of export licenses to ASML–the biggest supplier of semiconductor chip manufacturing equipment–for the export of products to China. The Dutch government’s license denial came after significant US pressure. While this demonstrates the success of US efforts to contain Chinese technology development, it is important to understand that US allies depend on the Chinese market far more than the US does, and that US pressure creates difficulties that may strain our relationships and alliances.

Sensing the lag in China’s tech development efforts, Chinese companies also appear disinclined to wait for China to catch up: Nvidia just announced a new partnership with BYD, China’s largest EV producer, which includes AI-training, in-car computing, and auto-manufacturing. This move by Nvidia will likely test the patience of the US Department of Commerce, which announced export controls on advanced chip technologies in 2022 and then tightened those controls in 2023 when companies were found exploiting loopholes. While this new partnership is said to not violate the updated controls, it may prompt the Department of Commerce to revisit the issue once more. More tellingly, it indicates that companies both in China and the US are balking at efforts to limit commerce and that appeals to national security in both countries are less compelling than the need to turn a profit. Such sentiments suggest that there are deals to be made, but the mercurial nature of both Chinese protectionist measures and US export controls makes it a high-risk opportunity.

Tech Futures

ByteDance isn’t budging on TikTok

ByteDance looks unlikely to sell off TikTok, but US investors remain caught between potential returns and scrutiny from Congress.

Analysis:

TikTok’s parent company, ByteDance, continued to refuse to sell the popular social media platform despite the threat of a ban that is currently working its way through the Senate. ByteDance’s founder, Zhang Yiming 张一鸣, signaled that he opposes divesting TikTok even in the face of mounting pressure from Congress (and US public opinion) to do so. While Congress’s decision over TikTok will dampen ByteDance’s planned global expansion, and may have already led to layoffs within various parts of the company, ByteDance’s refusal to consider divestment will continue to make Chinese tech and its attendant national security risks central to the debate in the US this election year.

ByteDance’s decision is only one side of the story. The other challenge is that multiple major US investors, including General Atlantic, Susquehanna International Group and Sequoia Capital, have significant investments in ByteDance. With news that the Federal Trade Commission is investigating TikTok over allegedly faulty privacy and data security practices, and that some members of Congress may try to buy TikTok if a sale is forced, TikTok will face additional political scrutiny in the US in the coming weeks. This case highlights the risks for US investors in continuing their engagements with Chinese tech companies in the face of intensifying public debates. Companies with such investments should therefore be prepared for potential reputational and financial damages associated with being called out by Congress or by competitors looking to position themselves as a safer investment partner within their industry.

Espionage Alert

DOJ calls out China’s hacking

The DOJ unveiled a large-scale Chinese hacking scheme that targeted key individuals and infrastructure in the US and its allies over several years. In response, the UK dropped its new policy of not sanctioning Chinese entities for fear of interrupting trade. This reversal highlights how geopolitics increasingly influences government interventions in how the private sector engages with Chinese counterparts.

Analysis:

The Department of Justice named and sanctioned members of the China-backed APT31 hacking group–who operated under the guise of a Wuhan-based tech company–as the latest coordinated cyber campaign against the US by China’s Ministry of State Security. The attacks included sending over 10,000 malicious emails and led to sanctions against the individuals and entities involved. The DOJ’s report on the attacks highlights how China broadly conducts cyber campaigns to mass target individuals from different countries and across multiple professional backgrounds, which are then likely used to narrow future efforts to more narrowly target individuals of interest. 

The announcement was coordinated with intelligence agencies in the UK, Australia, and New Zealand, each of which also revealed attacks by the same hacking group. These attacks targeted firms, politicians, activists, and, in the case of the UK, a data breach of 40 million registered voters, around 75% of all registered voters in the country. Despite the intensive and proven threat of China’s state-backed cyber capabilities, recent reports from the UK highlight the country’s inability to counter these threats effectively. A group of UK MPs who are currently sanctioned by China, including the former leader of the Conservative Party, released a statement arguing for a tougher stance against Chinese actors. In response, the UK government introduced new sanctions against involved individuals and a related Chinese entity. 

The coordinated response comes at a tricky time for the US’s partners as they seek to balance economic and commercial interests against issues of national security in their relationships with China. This recent news, however, has dramatically shifted the balance in favor of national security, undoing moves by new Foreign Secretary (and former Prime Minister-cum-lobbyist for China) David Cameron to stop sanctioning Chinese entities for fear of losing trade access to the Chinese market that was announced just last week. Fearing looking weak in an election year and in the face of a severe cyber attack, the Conservative party is now aligning itself more closely with the US position that China is an adversary and should be treated as such. This move is also influencing debates in Australia and Europe as states are forced into a zero-sum choice between engagement with the US or China. Businesses operating in these locations should therefore be aware that they will likely face increased scrutiny if they have engagements with China as politicians and intelligence agencies tighten their coordination in the face of China’s aggressive actions. 

On more thing…

“Three Body Problem” becomes a hit outside China

The release on Netflix of an adaptation of perhaps China’s most popular novel of recent years presents a “Western-friendly” vision of China as a cultural and technological superpower.

Analysis:

Liu Cixin’s trilogy, The Three Body Problem, became a global success story for China over the past decade, appearing on Obama’s book list among other high accolades. Now, the novel’s adaptation for Netflix, the latest in a line of adaptations that also include a movie and a television series made for Chinese audiences, has found similar appeal around the world. Despite this, Liu no longer owns the rights to the book or the series, and the road to the current Netflix adaptation is itself worthy of its own show, including poison and a murder. Now, Netflix’s adaptation is drawing ire from Chinese nationalists, who are growing increasingly brazen in their online attacks against anything deemed “anti-China,” including many of the country’s best-loved icons. Where The Three Body Problem will likely expose a broad audience to a bestselling Chinese cultural product, the threat of online nationalist attacks has therefore soured the show’s reception in China and serves as a reminder that even Chinese individuals and products are not safe from hyper-nationalist attacks.

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