In today’s issue:
1. Rest easy. Xi is Safe.
- 'Does Xi Jinping Face a Coup Threat?'
2. China a Career Killer?
- 'Why Chinese Companies are Having a Tough Time Recruiting in the U.S.'
3. Rethinking 2020: What’s Overlooked and What’s Overhyped
4. China’s Financial Opening Accelerates
- ‘China’s Easing of Regulations Restricting Foreign Ownership of Financial Firms’
- ‘Reasons for Increases In Cross-Border Capital Flows into China’
'Does Xi Jinping Face a Coup Threat?'
- This is clickbait for China wonks.
And it led me to listen to the full and fascinating Pekingology podcast with CSIS’s Jude Blanchette interviewing Yale’s Dan Mattingly.
- Here are some highlights:
‘In the popular imagination, what an autocrat has to fear unrest. He has to fear protestors in the street, storming the gates and taking him down.’
- ‘Generally though, what has led to the unconstitutional exit of authoritarian leaders from office isn't mass protest, isn't mass uprising - instead it's coups; it's other elites taking down the leader. And that's really what autocrats have to worry about.’
- ‘A study shows that almost 70% of leaders in the post-war period of autocratic leaders when they've exited office has been because of coups.’
- ‘So it's this fear of other elites that's really important.
‘And who launches coups and what are coups successful nine and 10 times a successful coup is by the military.’
- ‘So if you're an autocrat, you really have to be nervous about what's the military doing and is the military coming after me?’
‘If you take a kind of broad view of different types of authoritarian regimes, one-party regimes like China under the CCP are generally more stable, more resilient, less likely to experience a coup.’
- ‘Military dictatorships - and China is by no means a military dictatorship - are more vulnerable to coups than one-party systems like China.’
Dr. Mattingly goes on to argue that Xi Jinping has sufficiently secured the support of the leadership of the People’s Liberation Army to keep himself safe from a military coup.
- We can all rest easier.
My interview with Julian Ha, a partner in the global executive search firm, Heidrick & Struggles, highlighted issues about the U.S. executives who work or refuse to work for Chinese companies doing business in the U.S. that I had never considered. He told me:
- ‘Just a few years ago, some of the very large Chinese conglomerates - the Anbangs, the HNAs, and the Wandas, and the Huaweis - were all expanding globally but in the U.S. in particular.’
- ‘And they were all hiring folks at senior levels to help them run the factories, to run the corporate functions, marketing, and so on.’
But ‘because of the uncertainty created by the retraction from the U.S. market and the rise of anti-China sentiment, the Chinese companies that are still in the game in the U.S. are having a much harder time recruiting talent.’
- ‘When a Chinese company is being threatened with or actually being put on the Entities List, senior talent think twice about joining.’
- ‘Potential recruits ask themselves, “Is this something that would be a career-limiting move?” ’
‘And they may be right.’
- ‘I have seen senior executives who took on very public roles within some of these Chinese companies finding that their life after those companies has been more limited.’
- ‘I would even go so far as to say it has a bit of a taint. A bit like working for big tobacco.’
‘Rethinking 2020: What’s Overlooked and What’s Overhyped’ from MacroPolo provides a corrective to conventional wisdom.
What’s overlooked?
1. ‘Closing the Curtain on the GDP Obsession Era’
- ‘Although some observers have noted this shift on GDP, its significance may be underappreciated.’
- ‘It is tantamount to simultaneously reshaping political incentives, changing the investment-driven model, and redirecting focus toward de-risking and reforming the economy.’
- ‘In short, the Xi administration has been unexpectedly tolerant of austerity—a precondition for ramming through very difficult structural reforms that are essentially growth negative in the near term.’
2. 'Decoupling Is Everywhere Except in Reality’
- ‘If a single word were chosen to define US-China in 2020, “decoupling” would be a good candidate.’
- ‘Bandied about with abandon, the term has created the perception that these highly complex supplier networks were being severed in real time.’
- ‘What has been overlooked is just how little meaningful decoupling actually happened.’
- ‘What has actually happened on the decoupling front appears disproportionately modest relative to the attention heaped on it.’
What’s overhyped?
1. ‘China Slams Door on The World'
- ‘Yet when it comes to capital markets, China has gone in precisely the opposite direction, further linking itself to global capital.’
- ‘Although market openings began around 2018 and capital inflows rose steadily since, it wasn’t until 2020 that foreign capital inflows saw a notable spike.’
2. ‘BRI Is Down but Not Out’
- ‘China’s overseas lending plummeted in 2019, leading some to prognosticate the death knell of the “Belt and Road Initiative” (BRI).’
- ‘Yet China’s overseas lending has risen in 2020, though it has not returned to the heights seen in 2017 and 2018.’
‘China’s Financial Opening Accelerates’ by Nick Lardy and Tianlei Huang of the Peterson Institute for International Economics goes in-depth on some of the points made by MacroPolo:
- ‘Despite predictions by some observers that the United States and China are headed for a “decoupling,” China’s integration into global financial markets is accelerating.’
'The best example of China’s deepening integration into global financial markets is the substantial increase in the role of US and other foreign financial institutions in China.'
- 'This was made possible when Chinese market regulators, starting in 2017, gradually eased long-standing restrictions on foreign ownership, most of which were incorporated into the US–China Phase One agreement signed in January 2020.'
'The attraction of the Chinese financial market for foreign firms is substantial and will only grow.'
- 'The total assets of China’s financial sector at the end of the second quarter of 2020 stood at RMB340 trillion ($48 trillion).'
- 'Because of previous restrictions, foreign firms have only a tiny slice of most segments of this market; they control less than 2 percent of banking assets, for example, and less than 6 percent of the insurance market.'
The analysis explains 'several factors have contributed to the rapid increase in foreign holdings of onshore renminbi-denominated Chinese securities.' They are:
- 'Chinese stock and bond markets have grown rapidly since 2014 and have become too big for global investors to ignore.'
- 'The number of channels that facilitate foreign portfolio investment has also grown.'
- 'The inclusion of Chinese securities in global stock and bond indices, like the Bloomberg Barclays index, drew institutional investing.'
- ‘Interest rates on Chinese government bonds are higher than the US interest rate, and a rate cut is unlikely.'
- 'The renminbi appreciated about 6 percent vis-à-vis the dollar between January and early December 2020; from its low point in late May, it appreciated 8 percent. Foreign investors can now both earn higher returns on Chinese bonds and convert their RMB earnings back into dollars at a more favorable rate.'
- ‘China's rapid economic recovery from the COVID-19 pandemic reflects the profitability of Chinese industry, which is driving its strong equity market performance.’
Here’s a trend that is likely to continue regardless of the state of U.S.-China relations.
- That’s because China sees a benefit in bringing foreign expertise and capital.
- And doesn’t fear competition because it closed those markets long enough for its own firms to attain overwhelming dominance.
One more thing.
In the last issue I referenced former National Security Advisor, Gen. H.R. McMaster’s 'Biden would do the world a favor by keeping Trump’s China policy.' About this I wrote:
- ‘Gen. McMaster gets one big thing wrong when he writes: "U.S. policy between the end of the Cold War and 2017 was based on a flawed assumption: that China, having been welcomed into the international order, would play by the rules, and, as it prospered, would liberalize its economy and, ultimately, its form of governance." '
‘In fact,' I wrote, 'this was never the avowed aim of the administrations during the period he cites.’
- ‘This would be a quibble except that it may well be that, based on his writings, the incoming Indo-Pacific Coordinator, Kurt Campbell, may hold the same incorrect view, and that is an issue for crafting policy – keep an eye out of this.’
From the reader response I received I realize I didn’t explain my objection well. The problem is this:
- Past administrations pursued a policy of engagement with China but not with the primary aim of changing China to a democracy from an autocracy.
- The aim was to encourage, among other things, trade and business and China’s joining the community of nation’s as what Robert Zoellick called a ‘responsible stakeholder.’
If viewed as a tool only to change China’s political order, ‘engagement’ failed.
- And that is just what critics who favor all-confrontation/all-the-time contend.
- By misreading history and discrediting engagement with China they aim to advance their policy prescription of confrontation.
A better solution is both confrontation and engagement.
- This is, in part, how President Reagan ended the Cold War.
And that is why this misreading of history can lead to bad U.S policy toward China.