Greetings!

On Tuesday morning, I dropped off my ballot, along with several of my fellow citizens, for the U.S. presidential election.

• As I did I felt that, despite the division in the country, the American democratic still works pretty darn well.

Then I tuned in that evening to the presidential debate.

• Halfway through my confidence in the U.S. system started to falter a bit.
• Okay, I was just plain shocked at what I watched.

Richard Haass, president of the Council on Foreign Relations, succinctly summarized what I was feeling in a Tweet:

I've voted in every presidential election since 1976.

• By my calculation, I have voted for about as many Republican presidential candidates as Democratic ones.
• As we say in the South, I’ve never had a dog in the partisan hunt.

I remember well watching the first televised presidential debate between Nixon and Kennedy.

And, as best I could living a long time overseas before the internet, I watched all the intervening debates.

• That said, none of those earlier debates prepared me for the one on Tuesday night.

I could dwell on the concerns it raises about the state of the of U.S. election process and the state of U.S. democracy overall.

• But this newsletter is devoted to China specifically and international affairs more generally.
• So the question of what impact the debate could have on those two areas is the focus today.

So, in today’s issue:

1. And the Winner is…
2. Still a 'Shining City on a Hill'?
3. How China Wins
4. A Victory for America’s Enemies…
5. ...and Despair of America’s Friends

Let me know what you think. And please forward the China Macro Reporter to your friends and colleagues.

All the best,

Malcolm 

CNN

‘But while Beijing would rather not be a topic at all in the United States election, the debate as a whole will have raised spirits in the Chinese capital.’

‘In an ugly, cantankerous presidential debate, one of the few things Donald Trump and Joe Biden agreed upon was China.’

• ‘But while Beijing would rather not be a topic at all in the United States election, and this rare consensus represents a growing anti-China strain in Washington, the debate as a whole will have raised spirits in the Chinese capital.’

‘For decades, Beijing has criticized US-style democracy, holding up (very real) flaws in the American system as vindication for Chinese authoritarianism.’

• ‘Anyone advancing reform or liberalization in China is forced to answer for every failure in the US, and made to justify why that will be better than the Chinese system, which may not offer much in terms of representation, but at least provides stability and economic growth.’
• ‘On Tuesday, Trump helped to bolster that view, and in turn, further erode global confidence in US-style democracy.’

‘For decades, the US has actively advanced its model of democracy around the world, be it through soft-power, concerted civilian-led initiatives or raw military strength.’

• ‘Part of the justification for apparent US hegemony is based upon the idea of American democracy, that the US is a superpower unlike the British or Soviet empires because it is representative and its elections are free and fair.’
• ‘While the record shows plenty of gaps between Washington's supposed values and how US leadership plays out in reality, the existence of a democracy as the world's strongest power did give some credence to the system in general, much to the chagrin of authoritarians in Beijing and elsewhere.’
• ‘Trump, however, has been a gift for such critics of democracy.’

‘In 2016, following a debate between Trump and then-Democratic nominee Hillary Clinton, People's Daily, the mouthpiece of the Chinese Communist Party, mused "no matter who wins, US presidential election reveals 'ill' democracy." ’ [see the next post]

• ‘It was hard to watch Tuesday's debate and think anything has progressed in four years.’

‘Chinese state media coverage noted the ugly tone, with China Daily saying "the debate seemed to reveal a genuine dislike between the two men, with no pretense of decorum." '

• ‘Reacting to the debate, Hu Xijin, editor of the nationalist state-backed tabloid Global Times, wrote that "such a chaos at the top of US politics reflects division, anxiety of US society and the accelerating loss of advantages of the US political system." ’

People’s Daily

Yuan Peng | China Institute of Contemporary International Relations

'It certainly will not be viewed as a victory of democracy.'

'As the U.S. presidential election draws near, it has become evident that – no matter who wins – history will deem this election the most dark, chaotic and negative one in the past two centuries.'

• 'It certainly will not be viewed as a victory of democracy.'

'To begin with, the two main candidates have smeared each other in the most despicable and uncivilized ways during their many campaign speeches, causing some U.S. citizens to turn away in disgust.'

• 'The campaign has undeniably revealed the dark side of so-called democracy in the U.S.'

'Extremity and separation prevail in U.S. politics today.'

• 'Partisan standoffs and interdepartmental confrontations are taking place all over the country, dragging down political efficiency and disappointing the public.'
• 'Even many U.S. political scholars are concerned about the future of American democracy.'

_____________________________________

Here’s the punchline: This was written in 2016 about the Trump/Clinton campaign.

• Standby to see how the official Chinese media makes use of the Trump/Biden ‘debate’ to illustrate the ills of U.S. democracy and the superiority of the Chinese system.
• One of the first is below

Global Times 

The  Global Times  is a daily  newspaper  under the auspices of the  Chinese Communist Party's  People's Daily  newspaper.

"After watching the worst debate I have ever seen, I feel sorry for American people."

‘The first US presidential debate between President Donald Trump and Democrat candidate Joe Biden that finished on Wednesday just showed the world a divided and chaotic US that is no longer an attractive superpower in terms of politics and soft power.’

• ‘And the embarrassing debate full of interruptions and pointless personal attacks largely reflects the recession of US national power, said Chinese analysts.’  

‘The key words showed on most US and other countries' mainstream media outlets, as well as comments on social media outlets, about the debate include:’

• ‘embarrassment, disgrace, awful, mess and chaos.’ 

‘Many Chinese netizens also commented on social media networks that the debate is more like a "low quality talk show." ’

• ‘ "After watching the worst debate I have ever seen, I feel sorry for American people," said one Chinese web user on Weibo.’
• ‘And another commented on guancha.cn, a Chinese news website "Is there anyone still praising the 'charm' of the US political system?" ’    

Financial Times

‘No one will have savoured it more than the nation’s autocratic enemies.’

‘Hence in a year of lethal contagion, of state violence and economic carnage, none of these troubles is quite the largest issue at stake in November.’

• ‘That is America’s democratic process’

‘The worst presidential debate in memory was also the most ominous.’

• ‘No one will have savoured it more than the nation’s autocratic enemies.’

The New York Times

Steven Erlanger | The New York Times

“European leaders must have woken up this morning thinking, ‘The American leadership is over.'”

‘The unedifying spectacle of Tuesday night’s presidential debate produced some shock, some sadness and some weariness among American allies and rivals alike.’

• ‘As President Trump bellowed, blustered and shouted down both the moderator, Chris Wallace, and his opponent, former Vice President Joseph R. Biden Jr.’
• ‘And as Mr. Biden responded by calling Mr. Trump a “clown,” many wondered if the chaos and tenor of the event said something more fundamental about the state of American democracy.’

‘ “Of course, the ultimate arbiter will be the American voter,” said Ulrich Speck, an analyst with the German Marshall Fund in Berlin.’

• ‘ “But there is a consensus in Europe that this is getting out of hand, and this debate is an indicator of the bad shape of the American democracy.” ’
• ‘There was always a sense among allies that in America, despite political disagreement, “there is one republic, and conflict will be solved by debate and compromise,” and “that power was married to some kind of morality,” Mr. Speck said.’
• ‘But that view is now being questioned, he said.’

‘Many, if not most, European analysts blamed Mr. Trump for the mess.’

• ‘ “The debate was a joke, a low point, a shame for the country,” Markus Feldenkirchen of the German newsmagazine Der Spiegel posted on Twitter.’
• ‘ “Roaring, insults, two over-70s who interrupt each other like 5-year-olds — and a moderator who loses all control. The trigger, of course: Trump’s uncouth, undignified behavior.” ’

‘John Sawers, a former British diplomat and head of a risk analysis firm, said simply:’

• ‘ “My own response is that it makes me despondent about America. The country we have looked to for leadership has descended into an ugly brawl.” ’

‘Jeremy Shapiro, a former American diplomat who is now research director of the European Council on Foreign Relations, said that foreigners would probably view the debate “as another sign of the degradation of American democracy,” as some Americans do.’

• ‘The debate will not change foreign opinions of Mr. Trump or Mr. Biden, he said, but underneath the spectacle is something more troubling.’

‘Both allies and rivals “see Trump and the political culture that created him heralding the decline of American democracy and American culture,” Mr. Shapiro said.’

• ‘That judgment, he added, is “only heightened by the coronavirus response, not just American absence in global leadership but the striking incompetence in dealing with it at home.” ’

‘The coarseness of the debate will resonate abroad, Mr. Shapiro said. “Biden on that stage calling the president of the United States a clown and a liar is not something Biden would have done four years ago under any circumstances,” he said.’

• ‘ “That he felt he has to do it is a sign to outsiders that American culture is in a cycle of decline.” ’

‘Thomas Gomart, director of the French Institute of International Relations, said that the debate strengthened the impression “that the United States has retreated from the global stage and withdrawn into itself.” ’

• ‘Mr. Trump, he said, “has explicitly walked away from the position of a global leader, and Joe Biden may be implicitly doing so, too.” ’
• ‘Mr. Gomart said the debate showed the deep partisanship of today’s America, even in the face of the pandemic. “Those two men are from the same generation, from the same world,” he said. “And yet they are the two faces of a deeply polarized society.” ’

‘That view was shared by Nicole Bacharan, a French-American historian and political analyst who lives in France. She said she was “dismayed,” by what she saw in the debate, adding: “It sent a depressing image of the United States, of the American democracy and its role in the world.” ’

• ‘The events seem bound to heighten European anxieties, Ms. Bacharan said. “European leaders must have woken up this morning thinking, ‘The American leadership is over, and for a while, even if Biden is elected and tried to rebuild what Trump has destroyed,’” she said.’
• ‘The damage that has been done to trans-Atlantic relations will at best take years to repair, she added.’
• ‘ “The truth is, the European leaders feel alone because they know that what Trump has dismantled cannot be rebuilt so quickly and so easily,” she said.’
• ‘ “As for the others, Putin, Bolsonaro, Erdogan, they must be telling themselves what we already knew: They can do everything, because the U.S. isn’t a leader anymore.” ’

Greetings!

In today’s issue:

1. A Tale of Two Chinese Economies
2. Why China’s Economic Recovery is So Uneven
3. What Would Happen If the U.S. Recognized Taiwan
4. Thunder Out Congress
5. Apple in China

This issue is devoted to correctives to:

• The idea that China’s economy is making a sustainable recovery. China in fact is still juicing with infrastructure spending and debt.
• The feeling that China and the U.S. won’t go to war over Taiwan. They certainly might, and it’s a lot more likely than you think.
• The impression that to understand U.S. policy toward China, you just have to watch the administration. You have to watch Congress too.
• The assertions about size the U.S. trade deficit with China, with Apple as the example. Bad trade accounting, bad trade policy.

Keeping these in mind will improve analysis of China's economy (it's really not so great), lead to better assessment of geopolitical risk (read Taiwan - war really is possible), give a keener understanding of where U.S.-policy toward China is going (track actions in Congress), and lead to a re-think about trade accounting (it just doesn't capture trades flows well at all).

1. A Tale of Two Chinese Economies

Relying on analysis from Kevin Rudd and Dan Rosen and their ‘China Dashboard,' the WSJ Editorial Board concludes:

• ‘Investors around the world appear to be taking comfort in the revival of China’s economy, but the question has to be which Chinese economy they’re watching.’
• ‘There are two, and Beijing is subsidizing growth in the wrong one.’
• ‘Look beyond encouraging data such as the second quarter’s above-3% GDP growth, and what’s reviving is the export-and-government-driven manufacturing economy.’

There are a few points in the editorial with which I disagree (and feel don’t accurately represent the findings of the ‘China Dashboard’).

• Still an important corrective to the exuberance in some corners.

2. Why China’s Economic Recovery is So Uneven

‘The China Dashboard,’ put out quarterly by the Asia Society Policy Center and the Rhodium Group, is one of best and most useful analyses of China economy.

• And while it’s one you should definitely have bookmarked, it doesn’t get a lot media coverage.

Now Kevin Rudd and Dan Rosen, respective heads of the organizations just above, have published their findings in a Wall Street Journal op-ed. Bottom lines:

• ‘China’s growth spurt isn’t the beginning of a robust recovery but an uneven bounce fueled by infrastructure construction.’
• China is backsliding badly on its promised economic reforms – and will pay a price.

3. What Would Happen If the U.S. Recognized Taiwan

 'In relations between Beijing and Washington, at their lowest point in decades, an increasingly dangerous flashpoint is Taiwan,' writes Admiral James Stavridis, former Supreme Allied Commander of NATO.   

The Trump administration has been stepping up U.S. relations with Taiwan, with more to come.

• ‘Taken together, such actions could convince President Xi that the time has come for more cross-strait military action.’

‘And there will be a temptation for whoever wins in November to move closer to Taiwan, and even consider formally recognizing Taipei.’

• ‘This would have an explosive effect on the U.S.-China relationship and could trigger a full-scale Chinese invasion of the island.’

What I find most interesting here is that someone as serious as Admiral Stavridis is bringing up the question at all.

Leading me to wonder just why the admiral is especially concerned now.

• And what he might know that we don’t

4. Thunder Out Congress

Regular readers know that I have often recommended watching Congress as well as the administration to understand the direction of U.S. policy toward China.

• Although not many China-related bills have been passed, those introduced indicate the trajectory of attitudes toward and remedies for perceived China problems.

Scott Kennedy of CSIS has made an excellent analysis of what’s been happening in Congress – backed by the numbers. A couple of interesting points:

• The concern is bipartisan – both Republicans and Democrats have introduced a similar number of bills. Somewhat more from the Republicans.
• Of those introduced, only 12 have become law, but an important 12.

5. Apple in China

The USC U.S.-China Institute has produced a handy infographic about Apple and China. And the most important point (an understanding of which might have avoided the trade war - no probably not):

• ‘For the US$451 experts estimate it costs to make a new iPhone, only US$14 stays in China’

Bad trade accounting, bad trade policy.

Go deeper into these issues - Browse the posts below.

To read the original article, click the title.

Let me know what you think. And please forward the China Macro Reporter to your friends and colleagues.

All the best,

Malcolm 

The Wall Street Journal

The Editorial Board

‘Look beyond encouraging data such as the second quarter’s above-3% GDP growth, and what’s reviving is the export-and-government-driven manufacturing economy.’

‘Investors around the world appear to be taking comfort in the revival of China’s economy, but the question has to be which Chinese economy they’re watching.’

• ‘There are two, and Beijing is subsidizing growth in the wrong one.’

‘Look beyond encouraging data such as the second quarter’s above-3% GDP growth, and what’s reviving is the export-and-government-driven manufacturing economy.’

• ‘As of August, manufacturing investment is positive again and this is driving industrial production and exports.’

‘But the Chinese economy comprised of household consumers—ordinary Chinese people—is stuck in the doldrums.’

• ‘The unemployment rate is falling, to 5.6% in August. But this measures only some urban workers, and the true level of unemployment and underemployment almost certainly is much higher.’
• ‘The best reason for optimism is that consumer spending perked up in August. This was mostly concentrated in luxury goods, however—and in China stockpiling jewelry and handbags constitutes a form of saving.’

‘The explanation for this divergence is straightforward, as Kevin Rudd and Daniel Rosen explained recently in these pages [see the posts below].’

• ‘President Xi Jinping still talks a good game about economic reform, but he has all but abandoned many of the overhauls his predecessors attempted.’
• ‘In the broadest terms, China no longer seeks to attract a wide variety of foreign investment as a path toward higher productivity and more economic opportunities.’

‘Instead, since the 2008 financial panic and especially since Mr. Xi took power in 2012, Beijing has relied on debt-fueled stimulus of manufacturers and local governments to avert recessions.’

• ‘The trend is pronounced in the months since the coronavirus pandemic took hold.’

‘The main difference between today and a decade ago is the way Beijing is financing this binge.’

• ‘Then policy makers leaned heavily on state-owned banks to supply credit, including to local governments.’
• ‘Now the government is issuing bonds directly.’
• ‘This may be somewhat better for financial stability, but it doesn’t make capital spending undertaken with borrowed funds any more productive.’

‘The consequences are less clear-cut but they matter immensely.

• The true state of health of China’s economy will have serious economic and political implications.’

‘On the economics, it matters that the world’s second-largest economy isn’t playing its part to support the global recovery from the virus.’

• ‘Its 1.4 billion worker-consumers should be powering a global rebound. Instead Beijing is depending on the rest of the world to continue absorbing Chinese exports.’
• ‘Expect this to stoke more hostility to trade across the West.’

‘The political significance of Mr. Xi’s economic mercantilism is harder to predict.’

• ‘China’s lingering unemployment crisis and household saving behavior suggests ordinary Chinese are skeptical of the current recovery.’

‘Mr. Xi’s authoritarian turn might free him from some concerns about that sentiment spilling into open opposition to his rule.’

• ‘But it’s notable that the Communist Party is going to such great lengths to persuade Chinese that its economic model is working.’

The Wall Street Journal

Kevin Rudd | president of the Asia Society Policy Institute & former Australian prime minister

Dan Rosen | Rhodium Group.

‘China’s growth spurt isn’t the beginning of a robust recovery but an uneven bounce fueled by infrastructure construction.’

‘China is the only major world economy reporting any economic growth today, grinding out 3.2% growth in the most recent quarter while the U.S. shrank 9.5% and other advanced economies endured double-digit declines.’

• ‘This rebound is real, but behind the short-term numbers the economic restart is dubious.’

‘China’s growth spurt isn’t the beginning of a robust recovery but an uneven bounce fueled by infrastructure construction. Second-quarter data showed the same imbalance other nations are wrestling with:’

• ‘Investment contributed 5 percentage points to growth, while consumption fell, subtracting 2.3 points.’

‘An honest look at the forces behind China’s growth this year shows a doubling down on state-managed solutions, not real reform. State-owned entities, or SOEs, drove China’s investment-led recovery.’

• ‘In the first half of 2020, according to China’s National Bureau of Statistics, fixed-asset investment grew by 2.1% among SOEs and decreased by 7.3% in the private sector.’
• ‘Finished product inventory for domestic private firms rose sharply in the same period—a sign of sales difficulty—while SOE inventory decreased slightly, showing the uneven nature of China’s growth.’

‘Perhaps the most significant demonstration of mistrust in markets is the “internal circulation” program [covered in the previous issue] first floated by President Xi Jinping in May.’

• ‘On the surface, this new initiative is supposed to expand domestic demand to complement, but not replace, external demand.’

‘But Beijing is trying to boost home consumption by making it a political priority.’

• ‘Dictating to markets and decreeing that consumption will rise aren’t the hallmarks of an advanced economy.’

‘China also faces mounting costs abroad.’

• ‘By pumping up production over the past six months, as domestic demand stagnated, Beijing has ballooned its trade surplus, fueling an international backlash against state-driven capitalism that goes far beyond Washington.’

‘For years, the world has watched and waited for China to become more like a free-market economy, thereby reducing American security concerns.'

• ‘China’s economic norms are diverging from, rather than converging with, the West’s.’
• ‘Long-promised changes detailed at the beginning of the Xi era haven’t materialized.’

‘Though Beijing talks about “market allocation” efficiency, it isn’t guided by what mainstream economists would call market principles.’

• ‘The Chinese economy is instead a system of state capitalism in which the arbiter is an uncontestable political authority. ‘

‘That may or may not work for China, but it isn’t what liberal democracies thought they would get when they invited China to take a leading role in the world economy.’

The Wall Street Journal

Kevin Rudd | president of the Asia Society Policy Institute & former Australian prime minister

Dan Rosen | Rhodium Group.

'Under Xi Jinping, Beijing hasn’t liberalized. It’s doubled down on politically directed state capitalism.'

‘Since 2017, the China Dashboard, a joint project of Rhodium Group and the Asia Society Policy Institute, has tracked economic policy in China closely for signs of progress.’

• ‘Despite repeated commitments from Chinese authorities to open up and address the country’s overreliance on debt, the China Dashboard has observed delayed attempts and even backtracking on reforms.’

‘The Covid-19 outbreak offered an opportunity for Beijing to shift course and deliver on market reforms.’

• ‘Signals from leaders this spring hinted at fixing defunct market mechanisms.’

‘But notably, the long list of reforms promised in May was almost the same as previous lists—such as separating capital management from business management at state firms and opening up to foreign investment while increasing the “quality” of outbound investment—which were adopted by the Third Plenum in 2013.’

• ‘In other words, promised recent reforms didn’t happen, and nothing in the new pronouncements explains why or how this time will be different.’

Asia Society Policy Institute & Rhodium Group

“The China Dashboard: Tracking China’s Economic Reform Program” delivers a series of data visualizations tracking China’s progress toward its self-defined reform objectives in 10 essential economic policy clusters.

A terrific resource on China's economy, published four times a year – great graphs and commentary.

Here'sthe latest.

• And read the entire 36-page report here.

______________________________________

‘The China Dashboard: Tracking China’s Economic Reform Program, a joint project of the Asia Society Policy Institute and the Rhodium Group, delivers a series of data visualizations tracking China’s progress toward its self-defined reform objectives in 10 essential economic policy clusters.’

‘The Dashboard was born in the hope that China would prioritize convergence with liberal economic norms, and when it did so, that would be observed abroad in a timely manner so that an international consensus about mutual interdependence could be achieved.’

• ‘At a time of profound systemic dilemmas around the world, our indicators do present a conclusion, and it is consistent with China’s own policy pronouncements: China has not implemented reform in recent years and under the flag of COVID-19 is further deferring market liberalization even while talking about the importance of market allocation efficiency.’

‘This reality is driving the systemic rivalry with market democracies and will likely do so for some years to come regardless of electoral outcomes in any given nation.’

Nikkei Asian Review

Admiral James Stavridis 

former Supreme Allied Commander of NATO and Dean of the Fletcher School of Law and Diplomacy at Tufts University

‘U.S. diplomatic recognition of Taiwan would have unpredictable and extremely dangerous consequences for both nations, the region, and of course for Taiwan, which would end up as ground zero in the fight.’

'In relations between Beijing and Washington are at their lowest point in decades, an increasingly dangerous flashpoint is Taiwan.'

'There are certainly strong signs of a warming relationship between Washington and Taipei.'

• 'And with the coming U.S. election likely to prompt an increase in disagreements between China and the U.S. -- especially as the competition for influence and power in the emerging markets of sub-Saharan Africa and Latin America continues -- there will be a temptation for whoever wins in November to move closer to Taiwan, and even consider formally recognizing Taipei.'

‘Is the U.S. actually considering formal recognition of Taiwan?’

• ‘And if the U.S. attempted to do so, what is the likely outcome?’

‘Watch out for more actions from the U.S. that could antagonize Beijing, including:'

• ‘fresh high-level official visits to Taiwan; the shifting of more advanced fighter aircraft to Guam; further U.S. sanctions that interfere with Chinese microchip access; or added sanctions directed against individual members of the Chinese Communist Party and their families.

‘Taken together, such actions could convince President Xi that the time has come for more cross-strait military action.’

• ‘Especially if there is a period of confusion in the U.S. following the November election.’

‘In addition to the type of cross-strait warplane incursions seen last weekend, other military actions could take the form of:’

• ‘a significant Chinese military exercise in the waters around Taiwan; cyberattacks against key social networks on the island; the emergence in Taiwan of "sleeper cells," with so-called "little green men" in unmarked uniforms or civilian clothes moving to sow chaos; heightened submarine activity in the coastal waters off Taiwan; and military strikes against the channel islands including Quemoy, Matsu, and Penghu.’
• ‘China's Coast Guard and fishing fleet could also be a factor in the waters around the island, conducting surveillance and offensive electronic warfare, all accompanied by a significant diplomatic and public disinformation campaign.’

 ‘The coming U.S. election likely to prompt an increase in disagreements between China and the U.S.’  

• ‘And there will be a temptation for whoever wins in November to move closer to Taiwan, and even consider formally recognizing Taipei.’ 

‘This would have an explosive effect on the U.S.-China relationship and could trigger a full-scale Chinese invasion of the island.’  

• ‘Events could then easily spin out of control, leading to a U.S. military response against any Chinese offensive action on Taiwan.’  

‘How would the world respond?’

• ‘There would likely be a combination of supporting intelligence operations; diplomatic protests at the United Nations; a worldwide influence campaign to condemn Chinese aggression; economic sanctions on Chinese goods; outright U.S. military assistance to Taiwan; and the flying of U.S. defensive counter-air sorties from Guam or even from Taiwanese bases.’
• 'Naval interdiction and ground troop deployment would be unlikely given the significant potential to lead to great power war, something both sides would try to avoid.’

‘In short, U.S. diplomatic recognition of Taiwan would have unpredictable and extremely dangerous consequences for both nations, the region, and of course for Taiwan, which would end up as ground zero in the fight.’

Center for Strategic & International Studies

Scott Kennedy | Center for Strategic & International Studies

‘Although the vast majority of introduced bills haven’t made it to the President’s desk (and in most cases, even out of committee), Congress has had a growing effect on American China policy.’

‘The Trump administration has been rolling out new measures on China seemingly almost every day.’

• ‘The institution at the other end of Pennsylvania Avenue – the Congress - has also ramped up its activity on China.’

‘Most bills address a single issue, but some cover multiple China-related topics.'

• ‘As Figure 1 shows, the greatest focus, not surprisingly, has been on trade, commerce and investment.’
• ‘But the proposed legislation runs the gamut of issues, including supply chain security, defense and national security, human rights and democracy, the coronavirus, and immigration.’

‘Applying a partisan lens to the data reveals noticeable similarities and differences between Republicans and Democrats on China.’

• ‘Republican members of Congress have been somewhat more active than their Democratic counterparts.’
• ‘Though not the only factor, the spike in Republican-sponsored legislation coincided with the formation of the House Republican China Task Force, which is geared toward having Republicans coordinate legislation.’
• ‘Theprominence of bipartisan concern on China policy more generally stands out, particularly in an era when there are wide partisan gulfs on so many other areas.’

‘Although there has been a large jump in the number of bills introduced by members of both parties, as Figure 4 shows, there has not been an equivalent rise in the number of enacted laws.’

• ‘According to the collected data, of the 366 bills introduced, 19 were passed only by the House of Representatives, 7 made it through only the Senate, and just 12 passed both houses and were signed into law by the President.’
• ‘Of course, some bills that are introduced individually end up being folded into a larger appropriations or authorization bill or some other vehicle, and there is still time for some other bills to be adopted before this session closes.’

‘Nevertheless, the basic conclusion still stands; a lot more ideas have been proposed than have been adopted.’

• ‘And so, from a quantitative point of view, as the Chinese saying goes, there’s been “loud thunder but little rain” (雷声大雨点小).’

‘Nevertheless, the 12 bills that have been introduced and made it into law so far in the 116th Congress have been impactful.’

• ‘The “Secure 5G and Beyond Act of 2019” will mean greater investments in critical infrastructure technology from trusted (non-Chinese) suppliers.’
• ‘According to the Washington Post, the National Defense Authorization Act for FY2020, passed in December 2019, references China over 200 times in its conference report and includes a large number of measures meant to counter China’s growing military prowess.’
• ‘The two laws on Hong Kong show that US concern about the city is shared by both the Executive branch and Congress and is fully bipartisan, and so one can expect sustained U.S. opposition to the encroachments on Hong Kong’s autonomy and the violation of Beijing’s commitment to maintain the “one country, two systems” in word and deed until at least 2047.’

‘Although the vast majority of introduced bills haven’t made it to the President’s desk (and in most cases, even out of committee), Congress has had a growing effect on American China policy.’

• ‘Congressional attention to China is unlikely to wane; we should expect it to continue to expand in the coming years.’

‘This will be reflected not only in introduced and adopted bills and resolutions, but also through hearings meant to shed light on critical issues as well as hold the executive branch accountable, investigations, and congressional letters to executive branch officials and agencies.’

• ‘Hence, the thunder we witnessed this year may be followed by a deluge of rain when the 117th Congress comes to order in January.’

USC - U.S.-China Institute

‘For the US$451 experts estimate it costs to make a new iPhone, only US$14 stays in China’

Great infographic below.

‘Apple has sold over 2.2 billion iPhones since 2007, many of them in China.'

• ‘Those iPhones (and iPads, etc.) were assembled in China.'

‘But for the US$451 experts estimate it costs to make a new iPhone, only US$14 stays in China:'

• ‘US$7 to Foxconn and US$7 to the workers it employs.’

‘China's workers and its giant phone market helped Apple become the first company worth US$2 trillion.’

‘The iPhone is not as popular in China as in the past.’

• ‘Just two years ago, Apple sold most of the more expensive phones in China.'
• ‘In 2019, however, Apple only won over 9% of China's buyers.’

Greetings!

In today’s issue

1. China Tech Bans as Geopolitical Tools
2. Oracle and Walmart's TikTok Deal
3. Xi's Latest Top to Bottom Control Efforts
4. European Business in China – Position Paper 2020/2021
5. Where Trump and Biden Stand on China

1.China Tech Bans as Geopolitical Tools

This summer we’ve bans or threatened bans on Chinese tech from India, the EU, and the U.S.

• It’s tempting to see these as either trade or national security moves or both.

But, as Connor Fairman of the Council on Foreign Relations points out:

• ‘These threats have existed for a while, however, and the more immediate causes are geopolitical incidents involving China.’
• ‘Against this geopolitical backdrop, banning Chinese tech products is an attractive tool for many policymakers because it allows them to push back against China without risking military escalation.’

Here’s something to keep an eye on:

• ‘Leaders from smaller but still dynamic markets, though, could be tempted to follow India’s example, banning Chinese tech companies’ products when military or diplomatic options are unattractive or unavailable.’
• ‘Now that India, the European Union, and the United States seem to have settled on banning Chinese tech products, other countries with active disputes against China could see that as their cue to follow suit at the next opportunity.’

So the tide could turn even more sharply against Chinese tech companies, further complicating issues from the U.S.-China tech war.

2. Oracle and Walmart's TikTok Deal

I have only been watching the TikTok saga out of the corner of my eye.

• I only started paying attention when I thought a deal had been reached.

Wrong, it turns out. We still don’t have a final deal but, according to reports, contradictory representations of a deal from both sides.

• The deal so far though seems not to meet President’s Trump’s requirements (even though he has so far signed off).
• And the Chinese seem equally unhappy (and may not sign off).

At least now it’s getting interesting. Stay tuned.

3. Xi's Latest Top to Bottom Control Efforts

Since taking office (and the reason he was given the office), General Secretary Xi has aimed to bring China’s political, economic, and social worlds under firm Chinese Communist Party Control.

• But there are still gaps, and in the past week, he has worked to fill two of them.

The first was to squelch any dissent among China’s elites,

• Ren Zhiqiang – wealthy, politically connected, and scion of a Communist family – was sentenced to 18 years in prison.’
• The charges were graft, taking bribes, and the like.
• But more likely ‘his real crime was criticizing the Communist Party and calling the country’s hard-line leader, Xi Jinping, a “clown.” ’

‘Mr. Ren’s punishment has underlined how far Mr. Xi has rolled back allowances for dissent, even from members of the elite.’

• “Cracking down on Ren Zhiqiang, using economic crimes to punish him, is a warning to others — killing one to warn a hundred,” said Cai Xia.’

The second was to bring the private sector under Party control.

• Through carrots & sticks this has been going on for a long time. But now it’s formal policy.

‘ “Unify members of the private sector around the party, and do better in promoting the healthy development of the private economy,” Mr. Xi said in orders to officials.’

• ‘The new directives call for ensuring that China’s rising capitalists are recruited into the party’s “united front” of allies, ready to support the government’s economic and political priorities.’

These again raise the question of how much control will China accept before a backlash.

• Until then Xi is reshaping China perhaps in ways that Mao not Deng.

4. European Business in China – Position Paper 2020/2021

Each year, the EU Position Paper is one of the most important publications on the foreign business in and the economy of China.

• What makes it so important is that the Paper pulls no punches - it's an honest review of the situation.

That is the style of the Chamber's president, Joerg Wuttke, who in more than 30 years in China has told truth to power on both sides.

• His hand is evident - and very welcome..

Virtually every page of the Paper is valuable; included below is just a snippet.

• I encourage you to read the entire report.

5. Where Trump and Biden Stand on China

For some time I’ve had an eye out for an unbiased and comprehensive assessment of where China policy could go after the U.S. presidential elections – and I found it.

• Bottom line: ‘The hard-line on Beijing likely to continue regardless of U.S. election outcome.’

Let me know what you think. And please forward the China Macro Reporter to your friends and colleagues.

All the best,

Malcolm 

Council on Foreign Affairs

Connor Fairman | Council of Foreign Relations

‘Now that India, the European Union, and the United States seem to have settled on banning Chinese tech products, other countries with active disputes against China could see that as their cue to follow suit at the next opportunity.’

‘Chinese technology companies will remember summer 2020 for their products being banned from some of the largest markets in the world.’

• ‘After the Trump administration announced new restrictions against companies selling products made with U.S. technology to Huawei in May, the telecommunications giant was effectively banned from India and the European Union.’
• ‘The United States and India both announced bans against TikTok and WeChat, and in early September, Delhi announced that it was banning an additional 118 Chinese apps, bringing the total number of Chinese apps banned by India this summer to 177.’

‘The decisions to ban various Chinese tech products this summer were broadly justified as efforts to protect national security.’

• ‘These threats have existed for a while, however, and the more immediate causes are geopolitical incidents involving China.’
• ‘Beijing’s crackdown on Hong Kong, initial mishandling of the COVID-19 pandemic, and border conflict with India have all helped trigger the wave of bans.’
• ‘They have also contributed to a rise in anti-China sentiment in the countries where these bans took place, leading an internal report by China’s Ministry of State Security to conclude that “global anti-China sentiment is at its highest since the 1989 Tiananmen Square crackdown.” ’

‘Against this geopolitical backdrop, banning Chinese tech products is an attractive tool for many policymakers because it allows them to push back against China without risking military escalation.’

• ‘In India’s case, banning Chinese telecoms and apps appeases domestic calls for a boycott of Chinese goods and retribution for Indian troops killed near the disputed China-India border.’

‘India is well-positioned to use bans.’

• ‘Its smartphone market is the second-largest in the world, behind China, and, prior to the COVID-19 pandemic, was expected to continue growing at an annual rate of over 14 percent over the next three years.’
• ‘Exclusion from India represents enormous losses in revenue for Chinese companies, and new space for Indian companies to replace them.’

‘Leaders from smaller but still dynamic markets, though, could be tempted to follow India’s example, banning Chinese tech companies’ products when military or diplomatic options are unattractive or unavailable.’

'The U.S. Department of State’s Clean Network programannounced in August might also provide an incentive for some countries to ban Chinese tech products in the future.' 

• 'At its unveiling, the program announced a list of over thirty “clean countries” that had committed to excluding China from their 5G networks.' 

'For countries that consider banning Chinese technology, the program, and the growing list of countries that have signed on to it, could provide diplomatic coverage and support.' 

• 'In particular, the Clean Store line of effort, which calls for the removal of Chinese apps from mobile app stores, could be an easy pathway for countries to punish Chinese behavior, due to the relative ease of banning apps, compared to scrutinizing undersea cables, cloud service providers, and telecommunications networks.'

‘Chinese tech companies have much to worry about.’

• ‘With Huawei’s global aspirations effectively shattered by the U.S. Department of Commerce’s newest restrictions in August and several other Chinese companies falling victim to geopolitical tensions, they should be wary of their positions in countries that have strained relations with Beijing.’

‘Now that India, the European Union, and the United States seem to have settled on banning Chinese tech products, other countries with active disputes against China could see that as their cue to follow suit at the next opportunity.’

The Motley Fool

‘The TikTok story isn't over yet, and there could still be plenty of twists ahead.’

‘The key takeaways’

‘The TikTok story isn't over yet, and there could still be plenty of twists ahead, with unresolved arguments about its ownership stakes, use of tax proceeds, and the new AI export rules in China.’

‘1. The formation of TikTok Global’

‘In a joint statement, Oracle and Walmart announced the creation of a new company, TikTok Global, an independent company headquartered in the U.S. Its five-person board would have four Americans.’

• ‘Oracle and Walmart will own 20% of TikTok Global, with respective stakes of 12.5% and 7.5%, and the data of TikTok's U.S. users will be stored in Oracle's cloud servers.’
• ‘The two companies also announced that TikTok Global will be spun off in an IPO in less than 12 months.’

‘As a stand-alone company, TikTok Global could be valued at up to $60 billion. By comparison, ByteDance was valued at $110 billion after its last funding round.’

‘Oracle and Walmart claim TikTok Global will be entirely owned by American investors, and ByteDance will no longer own a stake.’

• ‘But in a separate announcement in Chinese, ByteDance claimed it will retain an 80% stake until the IPO -- implying that Oracle, Walmart, and other American investors might need to pay a hefty post-IPO premium to buy out its stake.’

‘4. China hasn't approved the deal’

‘Chinese regulators also haven't approved the deal yet. ‘

• ‘Last month, China unveiled new restrictions that bar the export of technologies that use AI services like text analysis, content suggestions, and voice recognition. This could trip up a sale of TikTok's overseas app.’

‘If push comes to shove, the Chinese government could threaten to shut down ByteDance's core Chinese business to halt the deal.’

• ‘If forced to choose between its home market and a messy deal with American investors, ByteDance might abandon its overseas ambitions altogether -- and leave a huge hole in the short video market for hopeful challengers like Facebook's Instagram Reels.’

‘5. U.S. courts could still step in’

‘President Trump ordered bans on both TikTok and Tencent's WeChat, but a federal judge in California recently halted WeChat's removal from U.S. app stores with an injunction, citing concerns regarding the harm done to the app's Chinese users within the United States.’

• ‘That 11th-hour decision indicates U.S. courts could still save TikTok from being banned, even if the deal with Oracle and Walmart collapses.’

Bloomberg

‘The unusual deal was there for the taking all along and doesn’t truly change much.’

‘The TikTok saga is finally drawing to a messy conclusion, and it appears President Donald Trump may be content to backpedal and take a deal that is similar to something that was there all along.’

• ‘But this plan is a far cry from what the White House had been demanding for months.’

‘Assuming this latest iteration of the deal stands, does it truly change anything? Somewhat.’

‘From the beginning, the White House had three basic goals: Total American ownership of the U.S.-based TikTok; protections against the TikTok algorithm potentially spreading disinformation; and data security.’

‘Obviously, Oracle’s and Walmart’s partial stake deal and ByteDance’s retention of its algorithm mean the first two requirements aren’t fully met.’ 

• ‘And while having Oracle act as the official data guardian may appear reassuring from a security standpoint, the situation won’t be drastically different from the current state of affairs.’ 

‘TikTok has always said American data is kept securely in the U.S. with backups in Singapore.’

• ‘So replacing other American cloud-computing providers with Oracle won’t be a big change.’
• ‘Further, while Oracle will reportedly be able to monitor any changes in the software code, the technical challenge to make sure all modifications aren’t problematic is enormous.’ 

‘Trump’s willingness to accept a water-downed deal indicates how this saga was as much about scoring political points than truly caring about TikTok’s national security risks.’

• ‘Oracle’s proposal is similar to what ByteDance was willing to do months ago— from the creation of an autonomous TikTok management structure to the designation of a new headquarters outside of China.’
• ‘Plus, the company had already vowed it would add 10,000 jobs in the U.S.’

‘But the political calculus for Trump is complicated.’

• ‘If he does follow through on a TikTok ban, it would risk annoying tens of millions of Americans who enjoy using the short-video app right before the presidential election.’
• ‘Moreover, a ban might spur China to retaliate against U.S. businesses within its borders, which could hurt the U.S. stock market. That’s a scenario he wants to avoid.’

‘Overhanging everything is some political uncertainty.’

• ‘The Chinese government still needs to fully sign off on the deal, which is not guaranteed.’
• ‘Beijing could still find the terms are too onerous, it could become another trade war bargaining chip, or it may use an approval period to delay a decision.’
• ‘Then it will be up to Trump to decide again whether he wants to follow through on his threat to ban the app.’

The New York Times

Chris Buckley | The New York Times

“Cracking down on Ren Zhiqiang, using economic crimes to punish him, is a warning to others — killing one to warn a hundred.” 

‘Ren Zhiqiang, the property tycoon nicknamed “Big Cannon,” was notorious for his blunt criticisms of the Communist Party, and yet his wealth and political connections long seemed to shield him from severe punishment.’

• ‘Until now.’

‘A court in Beijing sentenced Mr. Ren to 18 years in prison on Tuesday.’

• ‘The court said he was guilty of graft, taking bribes, misusing public funds and abusing his power during and after his time as an executive at a property development company.’
• ‘Mr. Ren’s supporters and sympathizers said that his real crime was criticizing the Communist Party and calling the country’s hard-line leader, Xi Jinping, a “clown.” ’

‘Mr. Ren’s punishment has underlined how far Mr. Xi has rolled back allowances for dissent, even from members of the elite like Mr. Ren, a scion of a Communist family and former friend of senior officials.’

• ‘His supporters also see the long prison term as a warning to others, especially elites, who may be thinking about openly challenging the party and Mr. Xi.’

‘ “Cracking down on Ren Zhiqiang, using economic crimes to punish him, is a warning to others — killing one to warn a hundred,” said Cai Xia, an acquaintance of Mr. Ren’s who formerly taught at the Central Party School, which trains rising officials.’

• ‘ “It’s a warning to the whole party and especially to red offspring,” Ms. Cai said, referring to the children of party officials.’

The New York Times

Chris Buckley and Keith Bradsher | The New York Times

“Unify members of the private sector around the party, and do better in promoting the healthy development of the private economy.” Xi Jinping

‘Mao Zedong vowed to abolish China’s capitalists.’

• ‘Deng Xiaoping said they could get rich.’

‘Now Xi Jinping, China’s current leader, has his own message for the country’s private businesses that reflects a drive for both economic growth and greater Communist Party control:’

• ‘We’re here to help you, but you must also help and heed us.’

‘The party laid the groundwork this week for greater party influence over private business, while also promising them more support and opportunities to convey their needs.’

‘Though lacking many specifics, the guidelines underscored the competing economic and political undercurrents bearing on Mr. Xi’s government.’

• ‘China needs to shore up growth, especially after a hit from the coronavirus epidemic.’
• ‘At the same time, Xi sees smaller private firms as a weak spot in his efforts to secure Communist Party dominance across society.’

‘ “Unify members of the private sector around the party, and do better in promoting the healthy development of the private economy,” Mr. Xi said in orders to officials published Thursday by People’s Daily, the party’s main newspaper.’

‘More broadly, the instructions reflect a long-running debate within China about the role of private business in a country where the government still controls crucial levers of industry.’

• ‘Private business’ freewheeling approach has long unnerved some Chinese leaders who want businesses to hew more closely to the party’s strategic goals, which can range from strengthening sway abroad to lifting people out of poverty in underdeveloped parts of the country.’

‘Officials must establish additional channels for business owners to share their needs and grievances.’

• ‘Above all, the new directive admonishes officials to accept the private sector as a vital part of China’s economy.’
• ‘ “Fully grasp that the existence and development of the private sector is long term and inevitable,” it says.’

‘At the same time, the new directives call for ensuring that China’s rising capitalists are recruited into the party’s “united front” of allies, ready to support the government’s economic and political priorities.’

• ‘Businesses must build up party organizations, the guidelines said, implying that internal Communist Party committees will be more active in companies.’ (More than 90 per cent of private enterprises had established party cells by the end of 2018.)
• ‘Entrepreneurs should receive instruction to ensure they “identify politically, intellectually and emotionally” with the party, the guidelines said.’

‘ “This united front work has been happening all along, and so this wasn’t out of the blue, but this time it’s clearer and more systematic,” he said.’

 Joerg Wuttke, president, EU Chamber of Commerce in China

European Union Chamber of Commerce in China

‘European business sees China moving in multiple directions at the same time.’

Each year, the EU Position Paper is one of the most important publications on the foreign business in and the economy of China.

• What makes it so important is that the Paper pulls no punches - it's an honest review of the situation.

That is the style of the Chamber's president, Joerg Wuttke, who in more than 30 years in China has told truth to power on both sides.

• His hand is evident - and very welcome..

Virtually every page of the Paper is valuable; included here is just a snippet.

• I encourage you to read the entire report here.

___________________________________________

‘For much of the last four decades, European business has been confident that China’s leaders were leaning heavily towards continued opening-up after having emerged from an era of seclusion.’

• ‘Unfortunately, the last several years have challenged this confidence.’

‘European business sees China moving in multiple directions at the same time.’

• ‘For example, a ‘one economy, two systems’ model has emerged.’

‘Onehalf of China’s economy continues to open, is increasingly fair and well regulated, and very much wants European investment.’

• ‘For instance, while late in the game, the lifting of equity caps in the automotive sector has led to meaningful opportunities for European manufacturers and their suppliers, several of which have either increased their shareholdings or are aiming to take full control of their long-held joint ventures.’

‘However, this more market-driven half of the economy also includes saturated sectors that China seems to have finally unlocked purely to perpetuate its now familiar narrative that it will open its doors wider and wider to foreign investors.’

• ‘The lifting of equity caps for foreign investment in the financial services sectors serves as a key example in this respect.’
• ‘China’s closed-off banking sector allowed domestic financiers to fully saturate the entire market without the challenge of outside competition.’

‘The eventual removal of the direct barriers to foreign banks was then hailed in Chinese state media as a monumental step towards China opening its economy.’

• ‘However, the fact that the reform took place so late in the game made it more akin to letting foreign investors onto a railway platform only after the train had long since departed.’

‘In a market already dominated by state-run banks—four of which are the largest in the world—only a few remaining niches, like cross-border services, still have space for European banks.’

• ‘After entering those niches, European banks are then confronted by secondary barriers, like restricted access to licences and complex administrative approvals, meaning that most cannot even catch the crumbs from the table.’
• ‘European bankers project that the already pitiful foreign share of less than two per cent of the market will shrink.' 
• 'Meanwhile, Chinese banks are feasting on Europe’s open banking ’

‘The other, state-driven half of the economy sees China still nursing its national champions and state- owned enterprises (SOEs) that have largely uncontested access to a fifth of the world's consumers, producers, depositors and innovators.’

• ‘China's leaders reaffirmed its plan to enhance the role of its SOEs as recently as July 2020.’
• ‘China currently has 97 behemoths run at the central level by the State-owned Assets Supervision and Administration Commission (SASAC), and another 130,000 SOEs run at the provincial and local levels.’
• ‘The enduring and growing challenges facing European companies in this half of the economy are depleting business sentiment.’

‘Meanwhile, as China’s indigenous companies catch up to and even surpass European firms in some areas, many European business leaders are starting to wonder if Jeffrey Immhelt, former CEO of General Electric, was right a decade ago when he said,’

• “I am not sure that in the end [China] wants any of us to win, or any of us to be successful.”

The Wall Street Journal

‘Hard line on Beijing likely to continue regardless of U.S. election outcome.’

‘The hard line the U.S. has taken on China in recent years is likely to continue no matter whether President Trump or Democratic challenger Joe Biden wins the presidential election.’

‘Mr. Trump has charted a more confrontational China policy than his Republican and Democratic predecessors pursued in the four decades since Washington and Beijing set up full diplomatic relations.’

• ‘What began as a fight over trade has evolved into a multi-front assault with the U.S. targeting China’s tech companies, its alleged theft of research and intellectual property and its officials involved in jailing Muslim ethnic groups and thwarting democracy in Hong Kong.’
• ‘Advisers to Mr. Biden say they share the Trump administration’s assessment of China as an authoritarian rival intent on disrupting the American-led global order.’

‘Both Mr. Trump and Mr. Biden have in the past publicly boasted of having a personal connection with President Xi Jinping.’

• ‘And both now say their views on China have soured.’
• ‘Each campaign has produced video ads accusing the opposing candidate of being weak-kneed on China.’

‘A Biden administration is likely to maintain efforts started by Mr. Trump to reduce American dependence on Chinese manufacture of critical goods and to compete with China in strategic sectors such as artificial intelligence and next-generation 5G wireless networks.’

• ‘A core part of Mr. Trump’s trade war with China—tariffs that cover roughly three-quarters of everything China sells to the U.S.—is likely to remain, at least in the early part of a Biden administration.’

‘Unlike Mr. Trump, Mr. Biden is committed to diplomacy, in keeping with his decades helping to mold the global order Mr. Trump often criticizes.’

• ‘Mr. Biden aims to work closely with allies, mobilizing them to counter Beijing’s expanding global influence.’
• ‘He also says he will work with China to address global issues like the coronavirus pandemic and climate change.’

‘That emphasis marks an essential distinction between Mr. Biden’s and Mr. Trump’s approaches to China.’

• ‘ “The analysis—and some pushback measures—would be the same,” said Winston Lord, a former ambassador to China under President Reagan and assistant secretary of state under President Clinton.’

‘The focus on allies, promoting democracy and competing with China in other ways, said Mr. Lord, means Biden “policies would not look a lot like Trump’s.” ’

The Wall Street Journal

‘Mr. Trump and Mr. Biden both say they want to build up American manufacturing and lessen what they see as U.S. reliance on China, especially in sectors deemed vital to national security and competitiveness.’

• ‘A brief second-term agenda released by the Trump campaign promises to lure 1 million manufacturing jobs from China to the U.S. by offering tax credits to American companies.’
• ‘More generous terms are proposed for businesses in sectors like pharmaceuticals and robotics—areas also favored in Biden campaign proposals.’

‘Mr. Trump has suggested that his first-term agenda is a prelude to a “decoupling” from China, meaning a thorough separation of the two economies.’

• ‘Biden aides, on the other hand, say a broader rupture makes no sense beyond key sectors.’

‘The Biden platform often invokes the challenge of China as a spur to bolstering the American economy by ramping up spending on infrastructure, clean energy, worker training and research and development.’

‘On trade, Mr. Biden has said he won’t join trade agreements without first helping American workers.’

• ‘That is likely to include the Trans-Pacific Partnership, which the Obama administration negotiated and Mr. Trump rejected, at least early in a Biden administration.’

‘A second Trump term, meanwhile, could see the president pursue a follow-up agreement to the Phase One trade deal concluded in January.’

• ‘That deal centered on Chinese pledges to increase purchases of U.S. goods and services.’
• ‘Left out were thornier issues the Trump administration originally wanted Beijing to address, including subsidies for state-owned companies and data security.’

The Wall Street Journal

‘Technology will remain a point of friction and competition no matter the president.’

‘A signal Trump administration effort has been to brand Chinese technology companies as threats to national security, accusing them of working with or being beholden to China’s ruling Communist Party.’

• ‘A threatened ban on the Chinese short-video app TikTok forced its parent company to change its structure to continue to operate in the U.S. Huawei Technologies, the world’s largest telecommunications gear maker and a leader in 5G, has been effectively barred from much of the U.S. market and blacklisted from receiving U.S. technology.’
• ‘The Trump administration has lobbied allied countries to uproot Huawei gear from their networks.’

‘A “clean network” initiative expected to get a boost in a second Trump term seeks to exclude a wider array of Chinese internet and telecoms firms from internet and communications infrastructure used by the U.S. and other countries.’

‘The Biden campaign platform also promises to maintain the U.S. lead in technology and to confront Beijing’s efforts to erode that edge, through cyberattacks, forced technology transfers and luring American-trained scientists to work in China.’

• ‘Biden aides point to Beijing’s Made in China 2025—an ambitious program to develop technologies of the future like biomedicine and clean energy—as a rationale for the U.S. to guide government investment into fields and sectors seen as competitively key.’

The Wall Street Journal

‘The Trump administration identified China as a strategic competitor, and senior officials have publicly criticized what they see as Beijing’s malign intentions in world affairs, from cyber espionage to checkbook diplomacy. Mr. Trump has called out China for unleashing the coronavirus pandemic.’

‘The Trump administration has stepped up U.S. military activities in the South China Sea, challenging China’s building of artificial islands and effort to strengthen control over the strategic waters.’

• ‘Allies Japan and Australia have been enlisted, and with them, the Trump administration has pushed for what it calls an Indo-Pacific region free of Chinese aggression.’

‘Biden advisers say that Mr. Trump has undermined this by quarreling with allies over trade and military spending.’

• ‘They point to the Trump administration’s withdrawal from international organizations like the World Health Organization and a multinational pact on Iran’s nuclear program as weakening U.S. leadership.’
• ‘A Biden presidency would seek to rejoin many of these arrangements.’

‘Mr. Biden promises to place greater emphasis on promoting democracy and human rights in dealing with China.’

• ‘At times, Trump, as he sought to strike a trade deal, appeared to hold off criticizing Beijing over its crackdown on democratic advocacy in Hong Kong and its mass detention of ethnic Uighurs in Xinjiang.’
• ‘In recent months, the administration has moved to penalize Beijing, placing sanctions on officials enforcing policies in those regions.’

Greetings!

In today’s issue:

1. A Different Approach to U.S.-China Relations

Ever the contrarian, Yukon Huang says: ‘The path to better outcomes is exceptionally narrow, as the required compromises go against the instincts of both countries’ current leaders.’ He suggests:

• ‘Should Democratic nominee Joe Biden become president, he would be wise not merely to revive traditional alliances or the Obama administration’s Asia pivot, which was viewed by Beijing as a strategy to contain China.’
• ‘In response, Beijing should rein in its more aggressive foreign policy tendencies, particularly in the South China Seaand in its Belt and Road Initiative.’

Provocative but maybe just too far against the leaders’ instincts. 

2. October Surprise: China?

David Wertime suggests two possible Get-Tough-on-China October surprises from President Trump:

• Dump the Phase One Trade Deal
• Wag the Dog by generating a clash with China in the South China Sea, the East China Sea, or the Taiwan Straits.

The first is expected, and the second is garnering more attention as Mr. Trump’s re-election troubles multiply. 

3. Trump's Tariffs, Trade War Failed.

‘Last week it transpired that the US’s overall trade deficit in goods and services had reached its highest level since 2008, with a widening gap between exports and imports with China.’

• ‘Hence, even on its own illogical terms, Donald Trump’s trade policy has completely failed in its self-allotted aim of reducing the US overall, and bilateral Chinese, deficit.’

Not a good look going into the election, but Mr. Trump can always blame the China Virus.

4. A Tale of Two Hong Kongs

So far China is having some success in beating Hong Kongers into submission, and at the same time, in juicing Hong Kong as a global financial center.

• Especially interesting is that one of the motives of both is to smoothly integrate Hong Kong into the massive Greater Bay Area and to insure that Hong Kong has the chops to fund it.

5. China’s Economy Bounces Back, But to Which Growth Path?

Brookings’ David Dollar dissects China’s economy, and asks ‘what are the likely long-term effects of the pandemic on China’s growth model?’

• Besides noting that China will less export- and investment- dependent, he points out:

‘There is a good chance that people will be more cautious about many activities even after a vaccine is developed, so private consumption will be lower and household savings will be higher than they were when China was on its previous growth path.’

• A real stick-in-the-spokes for ‘rebalancing’ to a consumer-led economy. 

6. Go Deeper: The Return of Big Chinese Surpluses (And Large U.S. Deficits)

'For all the talk of Sino-American decoupling, the broad pattern of global trade—at least the unbalanced bit of global trade—is remarkably simple right now,' writes Brad Setser.

• Expert analysis with great charts.

Go deeper into these issues - Browse the posts below.

To read the original article, click the title.

Let me know what you think. And please forward the China Macro Reporter to your friends and colleagues.

All the best,

Malcolm 

Carnegie Endowment

Yukon Huang | Carnegie Endowment

‘But the path to better outcomes is exceptionally narrow, as the required compromises go against the instincts of both countries’ current leaders.’

‘The rapidly deteriorating relations between the U.S. and China may have less to do with historical differences in political systems and ideology than with the similarities in their leaders’ aspirations.’

‘Both came to power with strong populist agendas symbolized by Trump’s “America First” and Xi’s “Chinese Dream.” ’

• ‘Trump’s political base lies in a largely rural, white working-class who feels economically neglected and views globalization as synonymous with sending jobs abroad.’
• ‘Xi’s supporters are restless workers and stalwart party cadres who welcome the opportunity to reclaim China’s status as a great power.’
• ‘The interaction of these two objectives is a recipe for conflict, not engagement.’

‘Trump’s actions have undermined the principles of an international system based on strategic alliances and cooperative behaviors.’

• ‘His assumption that geopolitics is a zero-sum game has moved U.S. policy toward China beyond containment to aggressive competition and decoupling.’

‘Beijing continues to argue that it is merely reacting to the provocations of others—be it potentially destabilizing protests in Hong Kong or U.S. restrictions on Chinese companies like Huawei.’

• ‘Regardless, China’s recent foreign policy initiatives and “wolf warrior” diplomacy—as China’s newly aggressive style of international engagement has been dubbed—have played into the hands of U.S. hardliners.’

‘Simplistically, one could characterize the Trump-led Republican Party’s China strategy as “chaotic decoupling,” whereas the Democrats favor “containment with hedging.” ’

• ‘Although Democrats are critical of Trump’s go-it-alone approach and argue in favor of building global alliances, skeptics could reasonably question why this would be any more effective than past efforts to tame China’s behavior.’

‘Disengagement, however, is not a realistic option—the costs are simply too great for both sides.’

• ‘But the path to better outcomes is exceptionally narrow, as the required compromises go against the instincts of both countries’ current leaders.’

‘If there is a basis for forging a more constructive relationship, it will likely come from China’s dependency on a rules-based multilateral system to become a more prosperous and innovative great power.’

• ‘By recognizing China’s needs, the United States can forge a new strategy of engagement that would benefit both nations.’

‘Should Democratic nominee Joe Biden become president, he would be wise not merely to revive traditional alliances or the Obama administration’s Asia pivot, which was viewed by Beijing as a strategy to contain China.’

• ‘Instead, he should move to defining the acceptable dimensions of a new relationship.’

‘In response, Beijing should rein in its more aggressive foreign policy tendencies, particularly in the South China Sea and in its Belt and Road Initiative.’

‘In a better world, China would come closer to becoming what former deputy secretary of state Robert Zoellick called a “responsible global stakeholder.” ’

• ‘Until recently, this less threatening vision of China was seemingly consistent with China’s own long-standing position in managing foreign relations.’

Politico

David Wertime | Politico

‘A Phase One trade deal collapse is the most likely China-related event to upend the U.S. election.’ 

‘A Phase One trade deal collapse is the most likely China-related event to upend the U.S. election.’ 

• ‘Harvard Law School’s Mark Wu says President Donald Trump could declare China “off track in meeting the purchase commitments.” ’
• ‘Eurasia Group’s Paul Triolo says Trump “has become progressively less interested in the trade deal.” ’
• ‘E14 Fund’s Calvin Chin says ditching the deal is the “easiest to pull off [with] good electoral bang for the buck.” ’
• ‘The Bay Area Economic Council’s Sean Randolph tells China Watcher that “while this might look like a failure at one level, Trump could try to show that he's in control, tough on China, and looking out for U.S. interests.” ’

‘There could be major movement re: Taiwan or the South China Sea.' 

• ‘Asia Society’s Orville Schell tells China Watcher “what I fear in the next two months is a ‘Gulf of Tonkin’ like incident — trumped up or real — in the South, East China Sea or Taiwan Straits that leads to a military clash and enables Trump to declare a national emergency.” ’ 
• ‘Evan Medeiros of Georgetown University says to look for “a naval clash in the South China Sea.”’
• 'Gordon H. Chang of Stanford University votes for Trump making “a dramatic move to highlight his support for Taiwan.” ’

Bloomberg

Noah Smith | Bloomberg

'Trump is unlikely to realize or admit that his favorite economic weapon, tariffs, is hurting the very companies it was intended to help.' 

FT.‘Last week it transpired that the US’s overall trade deficit in goods and services had reached its highest level since 2008, with a widening gap between exports and imports with China.’

• ‘Hence, even on its own illogical terms, Donald Trump’s trade policy has completely failed in its self-allotted aim of reducing the US overall, and bilateral Chinese, deficit.’

Bloomberg. 'With the U.S. presidential campaign heading into the home stretch, President Donald Trump will surely try to tout his record on economic issues.'

• 'Trump was elected in 2016 on a promise to restore American competitiveness, revitalize the flagging manufacturing sector, and reduce gaping trade deficits.'
• 'But even before the pandemic, his trade war looked decidedly less than successful.'

'Despite a massive slate of tariffs that mostly began in the second half of 2018, the U.S.-China bilateral trade deficit barely budged, if at all:'

‘The same pattern holds for the overall U.S. trade deficit, which hasn’t changed much since the end of the last recession:’

‘U.S. imports flatlined in 2018 and 2019, but so did exports.'

• ‘Nor did the U.S. factory sector enjoy a renaissance. Manufacturing production had been growing along with the overall economy before Trump unleashed his trade war, but it stagnated afterward:’

‘Tariffs simply failed to do the job Trump and advisors such as economist Peter Navarro and trade representative Robert Lighthizer wanted them to do.’

• ‘They may have hurt China’s economy somewhat, but at the cost of also hurting U.S. consumers in the process.’

‘And they didn’t accomplish any of their primary stated purposes — cutting the trade deficit, increasing U.S. competitiveness relative to China, or restoring U.S. manufacturing.’

Financial Times

James Kynge | Financial Times

'Beijing is determined to keep Hong Kong’s financial fires burning partly because it needs its fundraising prowess to spearhead an ambitious plan to develop the Greater Bay Area.'

‘It is a tale of two Hong Kongs.'

• ‘Twelve pro-democracy activists were last week captured by China’s coast guard as they attempted a dramatic speedboat escape to Taiwan.’
• ‘Two days before the thwarted escape was revealed, Ant Group announced plans in Hong Kong to launch what may become the biggest share offering in history.’

 ‘The huge initial public offering has become a focal point for those who hope that capitalism can continue to boom even as civil liberties are eroded.’

• ‘ “The destruction of political rights in Hong Kong does not necessarily mean its demise as an economic and financial centre. It will be different from what it was,” says Steve Tsang, director of the China Institute at Soas University in London. “It may be the end of Hong Kong as we knew it, but it will not be the end of Hong Kong.” ’

‘As tensions escalate between the US and China, Ant Group is not offering shares for sale in the US but is tapping top investment banks such as Citigroup, JPMorgan and Morgan Stanley to pull in all-important American institutional money.’

• ‘In this regard, the listing is designed to suck in US funds to further one of Beijing’s strategic aims: the creation of a technology and finance network in the Greater Bay Area that has the momentum to become a world leader.’

‘Former officials and government advisers say Beijing is determined to keep Hong Kong’s financial fires burning partly because it needs its fundraising prowess to spearhead an ambitious plan to develop the Greater Bay Area, a zone of some 70m people in southern China with an annual gross domestic product already greater than that of Australia, Indonesia or Mexico.’

• ‘ “Beijing will do everything it can to help Hong Kong fulfil its role as a fundraising centre for the Greater Bay Area and southern China’s window to the world,” says a former senior Chinese official in Hong Kong, who declined to be identified.’
• ‘ “But it is time that Hong Kong worked hard for mainland China’s benefit, not just for itself.” ’

‘Underlining such ambitions, Hang Seng Indexes has launched a tech Index, to track some of mainland China’s biggest technology companies.’

• ‘Several of these companies, such as Alibaba, JD.com and NetEase, have their primary listings in New York but have recently launched “homecoming” secondary listings as US-China tensions have risen. Ant Group is expected to be included in the tech index.’

‘Such “homecomings” represent a huge potential windfall for Hong Kong’s financial prospects.’

• ‘China Renaissance Securities, an investment bank, says there are 32 US-listed Chinese companies with a total market capitalisation of almost $200bn that qualify for such listings.’
• ‘Even if only a proportion of these was to go ahead in Hong Kong over the next few years, the impact would, at a minimum, shore up the market, say investors.’

‘Although inflows of “red capital” from the mainland plus the draw of the Greater Bay Area vision are expected to help buoy fortunes, questions of governance loom large, says Kurt Tong, who served as US consul-general in Hong Kong for three years until June 2019.’

• ‘ “A harder question is whether Hong Kong will continue to remain regionally or globally relevant and be more than just an unusually sophisticated part of China.” ’ 

‘ “The key to this will be the continued rule of law,” says Tong.’

• ‘If authorities crack down on journalists who uncover corruption, abuses may proliferate. If professional services firms are encouraged to turn a blind eye to some accounting irregularities, trust may be eroded.’
• ‘If researchers who criticise China’s state-owned enterprises find that their work visas are terminated, transparency will suffer.’
• ‘If an insider culture dominated by well-connected mainland Chinese families takes hold, businesses will fear an uneven playing field.’

 ‘ “Hong Kong became a thriving international financial centre because it was, and is, a gateway to China,” says Karine Hirn, partner at East Capital, an investment fund.’

• ' "But I actually see a possibility that [Hong Kong] becomes a more dynamic financial centre as it gets a boost from China’s business influence.” ’

China Leadership Monitor

David Dollar | Brookings

‘China can turn all of these factors to its advantage, but it will take an acceleration of reform to do so.’ 

Terrific but long analysis. I've reorganized a bit to get David's points across succinctly. You definitely should read the whole report 

‘What are the likely long-term effects of the pandemic on China’s growth model?’ 

1. ‘First, in the short run, China will certainly be less export-dependent.’ 

• ‘The rest of the world was hit by the virus later than China and thus will recover later, so for the moment there is depressed demand for Chinese exports and they cannot be a leading force for recovery.’ 

‘Also, it is difficult to separate the virus from the U.S. trade war, which is continuing and likely to escalate. ‘Hence, in the future it is likely that there will be less trade and investment back and forth between China and the U.S.’ 

2. ‘A second likely change in the growth model is that it will be less investment-dependent.’ 

• ‘China has built up very high leverage in its economy, a sign that the big lending spree since the global financial crisis included many bad projects, which now have turned into bad loans that threaten the stability of the financial system.’ 
• ‘The pandemic increases the risk of a financial crisis because some otherwise sound businesses will go under, leaving more bad debts.’ 

3. ‘Third, while uncertain at this moment, there is a good chance that people will be more cautious about many activities even after a vaccine is developed, so private consumption will be lower and household savings will be higher than they were when China was on its previous growth path.’

• ‘An obvious substitute for lost private demand would be more government provision of social services, such as healthcare, education, unemployment compensation, and pensions.’ 

4. ‘Finally, as a corollary to the third point, the pandemic has exposed weaknesses in China’s safety net, especially for the nearly 300 million migrant workers, 200 million of whom do not have fair access to public services in health, education, and pensions.’ 

• ‘China is entering a demographic phase in which the elderly population will increase dramatically while the labor force will shrink.’ 
• ‘Most of the elderly live in the countryside, often as their grown children work elsewhere.’  
• ‘Mobility is constrained by the hukou system as well as by access to healthcare and the portability of pensions.’ 
• ‘Given what is likely to be a persistent shortfall in demand, this is a good moment to expand public resources for social services and to unify the urban and rural systems.’

‘China can turn all of these factors to its advantage, but it will take an acceleration of reform to do so.’ 

Council on Foreign Relations

Brad Setser | Council on Foreign Relations

'World trade in goods doesn’t add up without China’s $1 trillion surplus in manufactures on one side, and the United States $1 trillion deficit in non-petrol trade on the other side.'

'For all the talk of Sino-American decoupling, the broad pattern of global trade—at least the unbalanced bit of global trade—is remarkably simple right now.'

'On the surplus side of the ledger there is China, along with a few other Asian producers of the manufactures.' 

• 'Keith Bradsher has reported that China's share of global exports reached a record in the second quarter, at nearly 20 percent.'
• 'Continued strength in exports has helped China post monthly (goods) surpluses of around $60 billion in July and August.'

'And on the deficit side of the ledger there is… the United States. The U.S. trade deficit (goods and services) topped $60 billion in July, its highest level in many years'

‘It is thus now more clear than ever that world trade in goods doesn’t add up without China’s $1 trillion surplus in manufactures on one side, and the United States $1 trillion deficit in non-petrol trade on the other side.

‘The need for a U.S. deficit to offset Asian surpluses (and Asian surpluses to fill the U.S. deficit) has to a degree long been true.

• ‘What’s striking though is that the pandemic has led to a compression of most other trade imbalances.’
• ‘‘So almost all that is left now is the big Chinese surplus (from q2 on) and the equally big U.S. deficit (from q2 on).’

‘These are “real” imbalances too.’

• ‘Over the last 12 months, China generated a $1 trillion surplus in manufactures off around $2.3 trillion in exports.’

‘In July, China generated a $110 billion surplus in manufactures off $230 billion in exports.’

• ‘So even counting imported parts, China is getting close to exporting $2 worth of manufactures for every manufactured good it imports.’

‘And the United States’ roughly $1 trillion U.S. deficit in manufactures comes off around $2 trillion in manufactured imports.’

• ‘So the U.S. exports a dollar in manufactures for every two it imports.’

‘There are of course reasons why the return of the Sino-American trade imbalance might be temporary.’

• ‘China’s dominance of personal protective equipment manufacturing for example has helped push up its goods surplus.’
• ‘The pandemic created a temporary boom in electronics demand to facilitate remote work (and school) as U.S. consumption shifted away from domestic services toward imported hardware, playing into another Chinese strength.’ 

‘And China's overall current account surplus ($120 billion, or just over three percent of China's GDP) has been increased by the fall in travel.’

• ‘That has cut into China's reported services deficit.’

‘But there is also a policy story that suggests the renewed Trans-pacific imbalance could be durable.’

• ‘As Michael Pettis has noted, China has responded to the pandemic with policies that support firms and production—and been very restrained in its direct income support for consumers and households.’
• ‘The United States, by contrast, provided a lot of support for households—at least initially.’

‘China’s fiscal response is generally estimated to be far smaller than in 2009, while the United States’ response (to date) has been bolder.’

• ‘That policy differential—plus China’s ongoing exchange rate management which has kept the yuan relatively weak—could reinforce the return of pre-2008 style trade imbalance.’

Greetings!

The outlines of U.S.-China ‘decoupling’ are becoming a little firmer.

• With this, two sides are emerging.

On the ‘What Decoupling?’ side:

• U.S. companies in China are mostly staying put.
• And U.S. financial institutions are increasing their stakes.

On the ‘Could we decouple faster?’ side is tech, especially semiconductors:

• China isn’t yet capable of producing world-class chips.
• And the Trump administration is getting better and better at starving China of them and the technology needed to make them.

At the same time, the U.S. is waking up to the need for its own industrial policy that accelerates the U.S. lead in semiconductors and counters China’s massive support of its industry.

• Nothing is firm yet, but it’s now just a matter of time.

For China’s part, General Secretary Xi Jinping is betting on the state sector, supported by private firms, plus lots of money, to try to end China’s reliance on foreign imports and make China’s tech sectors not only self-reliant but world leaders.

We look at each of these in today’s issues:

1. Betting on China: Manufacturers & Financial Firms

• 'US Companies Defy Trump’s Threats About ‘Decoupling’ From China.'
• 'Why Is Wall Street Expanding in China?'

2. Betting Against China: Tech

• 'The Coming Tech Cold War With China.'
• 'Semiconductors and Modern Defense Spending.'

3. Betting On The State: Xi Jinping

• 'Xi Signals Unshaken Commitment to State’s Role In Chinese Economy.'

Go deeper into these issues - Browse the posts below.

To read the original article, click the title.

Let me know what you think. And please forward the China Macro Reporter to your friends and colleagues.

All the best,

Malcolm 

Ker Gibbs, AmCham Shanghai

Financial Times

‘US companies are ignoring Donald Trump’s threats to “decouple” from China and repatriate manufacturing.'

Read more of ‘AmCham Shanghai: 2020 China Business Report’ results.

‘US companies are ignoring Donald Trump’s threats to “decouple” from China and repatriate manufacturing, according to a survey of more than 200 companies with operations in the country.’

• ‘The American Chamber of Commerce in Shanghai found that fewer than 4 per cent of respondents were relocating some production capacity back to the US. The majority — more than 70 per cent — had no plans to relocate any manufacturing out of China despite higher tariffs from Mr Trump’s long-running trade war with the world’s second-largest economy.’

‘ “Covid-19 hit the Chinese economy hard in early 2020, but the recovery was quick,” Ker Gibbs, chamber president, said on Tuesday.’

• ‘ “American companies still see China’s consumer market as a great opportunity.” '

‘Earlier this week, Mr Trump reiterated his enthusiasm for “decoupling” the world’s two largest and closely integrated economies.’

• ‘ “If we didn’t do business with [China] we wouldn’t lose billions of dollars,” he said. “We will make America into the manufacturing superpower of the world and will end our reliance on China once and for all.” ’

‘According to the survey, the rapidly deteriorating Sino-US relationship is now the largest concern for American companies, overshadowing for the first time perennial fears about slower economic growth in China, domestic competition and intellectual property protection.’

• ‘ “The geopolitical tension is the number one concern among business operations managers, which is remarkable,” Mr Gibbs said.’

‘The Chinese economy has shown signs that it has largely bounced back from the coronavirus pandemic.’ 

• ‘China is also continuing to rack up large bilateral monthly trade surpluses with the US — surpluses that Mr Trump expected the two countries’ “phase-one” trade deal, signed in January before coronavirus erupted in central China, would help reduce.’

The Economist

‘Far from short-term greed, Wall Street’s taste for China reflects a long-term bet that finance’s centre of gravity will shift east.’

‘In the tech industry the rupture between China and America continues to grow.’

• ‘Yet in one part of the global economy the pattern is of superpower engagement, not estrangement: high finance.’

‘BlackRock, a giant asset manager, has got the nod to set up a Chinese fund business.’

• ‘Vanguard, a rival, is shifting its Asian headquarters to Shanghai.’
• ‘JPMorgan Chase may spend $1bn to buy control of its Chinese money-management venture (see article).’
• ‘Foreign fund managers bought nearly $200bn of mainland Chinese shares and bonds in the past year.’

‘Far from short-term greed, Wall Street’s taste for China reflects a long-term bet that finance’s centre of gravity will shift east.’

• ‘And unlike in tech, both sides think they can capture the benefits of interaction without taking too much risk.’

‘Western, and in particular American, capital markets still reign supreme on most measures. Derivatives are often traded in Chicago; currencies in London.’

• ‘American firms dominate the league tables in asset management and investment banking.’

‘The White House has sought to weaponise America’s pre-eminence, by pushing Chinese firms to delist their shares from New York, for example.’

• ‘But if anything the trade war has shown the growing muscle of China in finance.’

‘A big wave of ipos is taking place in Hong Kong, often done by firms keen for an alternative to New York.’

• ‘China’s prowess in fintech will soon be centre-stage with the listing of Ant Group, which may be the world’s largest ipo’
• ‘And then there is the surprising rush of Wall Street firms and other foreign investors into mainland China.’

‘They have been knocking on the door for 30 years with little success.’

• ‘Now they are betting that China is serious about welcoming foreign finance.’

‘With its current-account surplus set to fall over time, or even fall into deficit, it needs to attract more foreign capital.’

• ‘The terms of access have improved.’
• ‘China is at last allowing Western firms to take control of their mainland operations and has made it easier for fund managers to buy and sell mainland securities.’
• ‘The potential prize is vast: a new source of fees for Wall Street banks, and for fund managers a huge universe of potential customers and companies to invest in.’

‘There are risks.’

• ‘China could bend the rules to protect local banks and brokers. Corruption is a hazard: in 2016 JPMorgan Chase was fined by American regulators for giving jobs to well-connected Chinese “princelings”.’
• ‘Worries over human-rights abuses may intensify.’
• ‘And navigating America’s sanctions regime will be tricky—global banks active in Hong Kong, such as hsbc, are already under pressure to cut off some Chinese officials there.’
• ‘Yet American financial firms’ exposure to China is low enough that they have little to lose.’

‘The tech industry is dangerously dependent on China: Apple assembles many of its devices there.’

• ‘By contrast, the top five Wall Street banks have only 1.6% of their assets exposed to China and Hong Kong.’

‘China’s ability to attract Wall Street firms during a bitter trade war shows the clout its capital markets have.’

• ‘But to become a financial superpower it would need to create its own global finance and payments infrastructure and make the yuan more freely convertible.’

‘The leading Chinese firms have a tiny presence abroad (just 5% of revenues for Ant) and most of China’s trade is invoiced in dollars, making it vulnerable to American sanctions.’

• ‘Building an alternative to America’s global monetary network is a huge task that will take years and require China’s control-obsessed officials to loosen their grip further.’

‘Still, the trade war has given China a big incentive to take the next step.’

Foreign Affairs

Adam Segal | Council on Foreign Relations

‘The contours of the “tech cold war” have become clear.’

‘China and the United States are preparing for a long-term technological rivalry.'

‘Three and a half years into its first term, the administration of U.S. President Donald Trump has finally assembled a comprehensive strategy for technological competition with China.’

• ‘From cutting chains that supply Chinese tech giants to barring transactions with them to regulating the undersea cables on which telecommunications depend, the Trump administration’s measures have often been incomplete, improvisational, and even detrimental to some of the great strengths of the American innovation system.’

‘They have, however, set the outlines of U.S. technology policy toward China for the near future. That policy rests on:’

• ‘blocking the flow of technology to China,’
• ‘reshoring some high-tech supply chains and restructuring other global supply chains, and’
• ‘investing in emerging technologies at home.’

‘Trump has set the course for U.S. technological competition with China.’

• ‘If there is a change in administration, the changes in the policy are likely to be a matter of fine-tuning.’ 

‘These essential precepts are as clear to Beijing as they have become in Washington. As a result, China is preparing for a future in which it cannot rely on the United States for essential technologies. Beijing’s counterstrategy, too, has crystallized.’

• ‘China is racing to develop semiconductors and other core technologies so as to reduce its vulnerability to supply chains that pass through the United States.’
• ‘In pursuit of that goal, its leaders are mobilizing tech companies, tightening links to the countries participating in China’s Belt and Road Initiative, and sustaining a campaign of cyber-industrial espionage.’
• ‘As it looks to diversify its supply chain, China has taken an interest in open-source solutions that it believes will not be subject to U.S. sanctions.'
• ‘Finally, if worst comes to worst, Beijing retains a powerful policy tool in its quiver: it can always retaliate against U.S. technology firms.’

‘The contours of the “tech cold war” have become clear, but who, if anyone, will benefit from this competition remains an open question.’

• ‘A bifurcated technology world will likely innovate more slowly, at least in the short term.’

‘It will also be expensive.’

• ‘A report from Deutsche Bank estimates the costs of the tech war at more than $3.5 trillion over the next five years.’
• ‘Still, leaders on both sides of the Pacific hope to fast-track technological development at home by making it a matter of national security.’

‘This year, the National People’s Congress unveiled a five-year plan in which municipalities, provinces, and companies will invest close to $1.4 trillion in building “new infrastructure” through AI, data centers, 5G, the Industrial Internet, and other new technologies.’

‘Chinese policymakers especially seek to reduce their country’s dependence on the United States for semiconductors.’

• ‘Chinese industrial policy has allowed the country to make gains in areas such as supercomputers, but Beijing’s top-down direction can also produce inefficiency, waste, and redundancy.’

‘Most notably, the government has so far failed to close the gap between China and the United States in semiconductors, despite decades of support to that industry, and current efforts are unlikely to yield immediate breakthroughs.’  

• ‘In October 2019, Beijing established a $29 billion semiconductor fund, and in August, Chinese officials introduced other policies to support the chip industries, including tax benefits, research and development support, and incentives for international semiconductor companies to relocate to China.’
• ‘Two government-backed chip manufacturers have reportedly hired more than 100 veteran engineers and managers from Taiwan Semiconductor Manufacturing Company, the world’s leading chipmaker, and a cybersecurity firm recently revealed a two-year hacking project that stole source code, software development kits, and chip designs from seven Taiwanese chip firms.’  

Center for Strategic and International Studies

James Andrew Lewis | Center for Strategic and International Studies

‘Semiconductors should be the focal point for this new kind of U.S. defense spending.’

‘There is growing recognition of the competition with China in key technologies.’

• ‘But for semiconductors, the measures the United States has taken so far are defensive.’

‘Measures to block exports of semiconductors manufacturing equipment, restrict sales of chips made using U.S. equipment, and block Chinese acquisitions of U.S. chipmakers work to preserve the status quo, for now.’

• ‘They slow China’s growth, but they do not provide for a strong U.S. semiconductor industry.’

‘Doing this requires increased federal investment to accompany policies oriented toward ensuring access to the global market.’

• ‘Federal investment in strategic industries is no longer a taboo concept.’

‘Let’s start by noting the United States used industrial policy to win in each of its global conflicts.’

‘Not only was industrial policy the key to helping win those conflicts, but the technology base built in World War II and later expanded tremendously for the Cold War is the foundation of our national wealth today.’

• ‘Silicon Valley was built on that federal investment, but those investments were made decades ago.’

‘We are coasting on spending in science, research, and technology that date to the 1980s.’

• ‘To defend ourselves against hostile powers, federal investment is again necessary.’

‘Semiconductors should be the focal point for this new kind of defense spending.’

• ‘The Chinese know this, which is why they have been willing to spend billions of dollars for decades to build their own industry.’

‘Semiconductors power our economy and our weapons, but there is now a real risk that the United States will lose its leadership in this foundational technology.’

• ‘Funding the CHIPS Act will compensate for revenues lost to new export sanctions on China and help maintain strength in a foundational technology.’

‘Some argue that the U.S. chip industry does not need federal support.’

• ‘This would be true in a perfect world where no other country used subsidies. Nor does China have any intention to end its subsidies.’

‘This leads us to the CHIPS Act.’

• ‘CHIPS could be a significant step forward for national security if it is adequately funded. It would provide incentives for investment in semiconductors in the United States and better position it to compete.’

‘The original language of the Creating Helpful Incentives to Produce Semiconductors (CHIPS) for America Act (now merged in the National Defense Authorization Act with the American Foundries Act) provided strong support for the semiconductor industry, including $3 billion of R&D funding for the National Science Foundation (NSF), $2 billion for the Department of Energy, and $2 billion for the Defense Advanced Research Projects Agency.’

• ‘It created a National Semiconductor Technology Center to conduct research with the private sector, with a recommended budget of $3 billion over 10 years.’
• ‘It proposed a $10 billion trust fund to match state and local incentives, created an Advanced Packaging National Manufacturing Institute at the Department of Commerce, and authorized a semiconductor research program at the National Institute of Standards and Technology.’
• ‘Finally, it called for tax credits for qualified semiconductor equipment or manufacturing facility expenditures through 2027.’

‘Fully funding the CHIPS Act will create incentives, competitive advantage, and support national security.’

Merics | Mercator Institute for Chinese Studies, Berlin

“The signals are clear: China’s state-led capitalism will stay, especially now that kick-starting the economy is urgent.”

‘The facts: On a visit to Anhui Province, Chinese President Xi Jinping stressed his support of state-owned enterprises as the core of the economy.’

• ‘Xi has been touring the regions this year and his stop at steelmaker Magang on August 19 was his fifth at a large state-owned enterprise (SOE).’

‘Xi’s visits are strong signals of how much support SOEs enjoy in Beijing and underscore policy declarations issued over the last months.’

• ‘They have stressed the need to maintain the “public economy as the mainstay of the economy” and Xi’s belief in the importance of SOEs as drivers of innovation.’

‘What to watch: Xi is marking out his priorities in the run-up to the Chinese Communist Party’s Central Committee plenum in October that will discuss the People’s Republic’s 14th Five Year Plan (2021-25), and “future targets for 2035.” ’

• ‘These will reflect a strong state-led development model and the desire to become a nation of “wealth and power” by 2035.’

‘After officially dropping the Made in China 2025 Strategy due to global pushback, Xi’s visits and the statements about the role of the state in the economy prove that industrial upgrading, indigenous innovation, and achieving industry leadership in strategic industries will loom large.’

• ‘The US-China trade war, technological dependence and increasing tensions with the European Union over Hong Kong, human rights and trade are stark reminders to policymakers in Beijing of the need for national self-reliance and technological build-up.’

‘The next months will see more signals of state support for domestic technology and industrial modernization.’

‘MERICS analysis by Nis Grünberg: “Xi’s tours give carefully curated political signals about Beijing’s priorities.”

• “Private companies are still welcome, in fact China needs their innovation and growth potential more than ever.”
• “But a foundation of politically controlled, strategic industries will remain at the core of the economic system.”

“The desire for strong SOEs and their international expansion is driven by a growing discourse about self-reliance and independence from imports of critical technology.”

• “The Trump administration’s moves to ban Chinese companies and products are making Beijing’s desire to boost domestic capabilities and independence more urgent.”

“The signals are clear: China’s state-led capitalism will stay, especially now that kick-starting the economy is urgent.”

Greetings!

‘None of the disputes between the U.S. and China, even the South China Sea, has as much explosive potential as contemplated changes in America's relations with Taiwan,’ writes Jerry Cohen.

• Among those contemplated changes is abandoning the decades-old U.S. policy of not confirming that it would defend Taiwan against an unprovoked attack by China – the policy of ‘strategic ambiguity.’
• In other words, saying directly: ‘Xi Jinping, if you attack Taiwan, we will defend the island, and you will be at war with the U.S.’

You would not be faulted for thinking this was coming from the China Hawks in the Trump administration.

• In fact, the loudest voices calling for this policy change are coming from the mainstream foreign policy community.

Just this week, Jerry Cohen, dean of China legal scholarship in the U.S., and Richard Haass, president of the Council on Foreign Relations, have both called for the U.S.’s abandoning ‘strategic ambiguity.’ [Today’s issue is bookended by their essays.]

• Jerry Cohen writes: ‘Most important, the United States should abandon the policy of "strategic ambiguity" that fosters uncertainty about whether it will come to the defense of Taiwan, since this ambiguity increases the risk that conflict might result from mistaken assumptions on Beijing's part.’
• And Richard Haass argues: ‘Indeed, such a change should strengthen U.S.-Chinese relations in the long term by improving deterrence and reducing the chances of war in the Taiwan Strait, the likeliest site for a clash between the United States and China.’

This assumes, of course, that Xi Jinping himself sees this as a deterrent.

• And not a signal to attack Taiwan immediately, catching the U.S. flatfooted before it could act on its new commitment.

It is one thing to help Taiwan repel a Chinese attack.

• It is another to recapture Taiwan from Chinese occupation.

And, based on U.S. wargames, there is a real question about whether the U.S. could prevail in either case.

• Add to that the uncertainty about President’s Trump acting on U.S. commitments to its allies, and Xi could decide act if the policy changes.

In the West, we tell ourselves that Xi Jinping would never damage China’s economy and political standing just to reunite Taiwan with China.

• And we are wrong.

Since the KMT retreat to Taiwan in 1949 in the wake of a communist victory, the Chinese Communist Party has had no higher objective.

• Unlike his more patient predecessors, Xi Jinping sees the window for achieving this closing.
• Nothing closes that window faster than the S. abandoning ‘strategic ambiguity’

All that said, I agree (and have argued here) that the U.S. should abandon ‘strategic ambiguity.’

• My concern is that we might do this, as the U.S. has done disasterously throughout its history, without taking the other guy’s point of view into consideration.

In this issue:   

1. 'Taiwan Needs Unambiguous American Support'

• A surprising (to me) statement by a leader of the foreign policy establishment on a long-needed policy change.

2. 'TikTok Deal Is Complicated by New Rules From China Over Tech Exports'

‘In a bureaucratic two-step, China on Friday updated its export control rules to cover a variety of technologies it deemed sensitive, including technology that sounded much like TikTok’s personalized recommendation engine.’

Scott Kennedy of CSIS says:

• “At a minimum they’re flexing their muscles and saying, ‘We get a say in this and we’re not going to be bystanders.”
• “It could be an effort to outright block the sale, or just raise the price, or attach conditions to it to give China leverage down the road.”
• ‘He added that it showed a rare bit of consensus between China and the United States that both agreed ByteDance was a national security priority.’

In any case, this is one of the rare times when China has pushed back, however indirectly, against a U.S. move against it.

3. 'Huawei: Has Trump Really Won?'

‘The Commerce Department’s actions are likely the death blow against Huawei.’

• Even its most secure markets will switch to new suppliers to prevent the inevitable disruption that will occur when its two-year stockpile of U.S.-made chips dries out.’

‘In the context of the U.S.-China tech war, the dashing of Huawei’s global aspirations is but one battle, and the United States should expect a punitive retaliation against its technology companies by the Chinese government.’

4. 'The Big China Disaster That You're Missing'

The disaster here is flooding in China, and here is an impact that should be factored in analyses:

• ‘Consider this knock-on effect.’
• ‘In theory, banks will likely take losses because of natural disasters; their clients will pass them along to insurers.’
• ‘The last thing China’s burdened, state-run financial institutions need are continued natural disasters.’ 

5. 'Don't Rush to Fully Normalize Relations With Taiwan' 

Jerry Cohen writes:

• ‘Given the anti-PRC atmosphere in Washington, there is even interest in possible establishment of formal diplomatic relations between the United States and Taiwan.’
• ‘Such "recognition" of the island's government, whether under its current name—the Republic of China (Taiwan)—or as a newly-branded Republic of Taiwan, would very likely trigger a long-threatened military reaction from Beijing that could envelop the PRC, the United States and Taiwan in a devastating nuclear war.’

He also provides an excellent briefing on the events in China-Taiwan-U.S. relations that brought us to this point. 

Go deeper into these issues - Browse the posts below.

To read the original article, click the title.

Let me know what you think. And please forward the China Macro Reporter to your friends and colleagues.

All the best,

Malcolm

Foreign Affairs

Richard Haass | President, Council on Foreign Relations

‘The time has come for the United States to introduce a policy of strategic clarity: one that makes explicit that the United States would respond to any Chinese use of force against Taiwan.’

‘For four decades, successive Republican and Democratic administrations resisted answering the question of whether the United States would come to Taiwan’s defense if China mounted an armed attack.’

• ‘Washington’s deliberate ambiguity on the matter helped dissuade China from attempting to “reunify” Taiwan with the mainland, as it could not be sure that the United States would remain on the sidelines.’
• ‘At the same time, the policy discouraged Taiwan from declaring independence—a step that would have precipitated a cross-strait crisis—because its leaders could not be sure of unequivocal U.S. support.’

‘The policy known as strategic ambiguity has, however, run its course.’

• ‘Ambiguity is unlikely to deter an increasingly assertive China with growing military capabilities.’

‘The United States should adopt a position of strategic clarity, making explicit that it would respond to any Chinese use of force against Taiwan.’

• ‘Such a policy would lower the chances of Chinese miscalculation, which is the likeliest catalyst for war in the Taiwan Strait.’

‘If the United States maintains this policy of ambiguity it will not keep the peace in the Taiwan Strait for the next four decades.’

• ‘Too many of the variables that made it a wise course have fundamentally shifted.’

‘China now has the capability to threaten U.S. interests and Taiwan’s future.’

• ‘China’s defense spending is 15 times that of Taiwan’s, and much of it has been devoted to a Taiwan contingency. Chinese planning has focused on impeding the United States from intervening successfully on Taiwan’s behalf.’

‘Gone are the days when Taiwan’s dollars went further than China’s, as China now fields equipment on a par with anything the United States makes available to Taiwan.’

‘Whether the United States could prevail in a Taiwan conflict is no longer certain, and the trend lines continue to move in China’s favor.’

‘Unless the United States devotes significant resources to preparing for a conflict in the Taiwan Strait, it stands little chance of preventing a fait accompli.’

• ‘Waiting for China to make a move on Taiwan before deciding whether to intervene is a recipe for disaster.’

‘One thing has not changed over these four decades: an imposed Chinese takeover of Taiwan remains antithetical to U.S. interests.’

• ‘If the United States fails to respond to such a Chinese use of force, regional U.S. allies, such as Japan and South Korea, will conclude that the United States cannot be relied upon and that it is pulling back from the region.’

‘These Asian allies would then either accommodate China, leading to the dissolution of U.S. alliances and the crumbling of the balance of power, or they would seek nuclear weapons in a bid to become strategically self-reliant.’

• ‘Either scenario would greatly increase the chance of war in a region that is central to the world’s economy and home to most of its people.’

‘Meanwhile, the 24 million people of Taiwan would see their democracy and freedoms crushed. China would subsume the island’s vibrant, high-tech economy.’

• ‘And China’s military would no longer be bottled up within the first island chain: its navy would instead have the ability to project Chinese power throughout the western Pacific.’

‘China’s aim to gain control of Taiwan, through force if necessary, needs to be taken seriously.’

• ‘There is speculation that Xi will marry his ambitions with the new means at his disposal to realize his “China Dream” and force “reunification” with Taiwan, potentially as soon as 2021.’
• ‘No one should dismiss the possibility that Taiwan could be the next Hong Kong.’

‘Washington can make this change in a manner that is consistent with its one-China policy and that minimizes the risk to U.S.-Chinese relations.’

• ‘Indeed, such a change should strengthen U.S.-Chinese relations in the long term by improving deterrence and reducing the chances of war in the Taiwan Strait, the likeliest site for a clash between the United States and China.’

The New York Times

Paul Mozur | The New York Times

‘The moves from Beijing ensnare TikTok and potential American buyers including Microsoft and Oracle, wedging them in the middle of a tussle between the United States and China over the future of global technology.’

‘As the sale of TikTok enters its final stages, Beijing is saying it wants the last word.’

• ‘In a bureaucratic two-step, China on Friday updated its export control rules to cover a variety of technologies it deemed sensitive, including technology that sounded much like TikTok’s personalized recommendation engine.’

‘Then on Saturday, the country’s official Xinhua news agency published commentary by a professor who said the new rule would mean that the video app’s parent, the Chinese internet giant ByteDance, might need a license to sell its technology to an American suitor.’

• ‘It is exceedingly rare for a professor to make comments about a specific, in-progress deal, and that it signaled that ByteDance would now have to consult the Chinese authorities about the controls said Scott Kennedy of the Center for Strategic and International Studies.’

‘Beijing’s last-minute assertion of authority is an unexpected wrinkle for a deal as two groups race to buy TikTok’s U.S. operations before the Trump administration bans the app.’

• ‘Taken together, the rule change and the commentary in official media signaled China’s intention to dictate terms over a potential deal, though experts said it remained unclear whether the Chinese government would go as far as to sink it.’

‘The moves from Beijing ensnare TikTok and potential American buyers including Microsoft and Oracle, wedging them in the middle of a tussle between the United States and China over the future of global technology.’

• ‘Beijing’s displeasure alone could scare off TikTok’s suitors, many of whom have operations in China.’
• ‘TikTok is the most globally successful app ever produced by a Chinese company, and the conflict over its fate could further fracture the internet and plunge the world’s two largest economies into a deeper standoff.’

‘ “At a minimum they’re flexing their muscles and saying, ‘We get a say in this and we’re not going to be bystanders,” said Scott Kennedy.’

• ‘ “It could be an effort to outright block the sale, or just raise the price, or attach conditions to it to give China leverage down the road,” he said.’
• ‘He added that it showed a rare bit of consensus between China and the United States that both agreed ByteDance was a national security priority.’

‘If Beijing blocks the sale of TikTok, it would effectively be calling the Trump administration’s bluff, forcing the U.S. government to actually go through with restricting the app and potentially incurring the wrath of its legions of influencers and fans.’

• ‘Ordering companies like Apple and Google to take down TikTok in app stores globally could also prompt further anger against the Trump administration and even lawsuits.’

‘Beijing’s move also could risk empowering the more hawkish members of Mr. Trump’s team and igniting an even more forceful response from the administration, which has said that it could take more measures to block tech companies like Alibaba and Baidu from doing business in the United States.’

Foreign Affairs

Connor Fairman | Council on Foreign Relations

‘The Commerce Department’s actions are likely the death blow against Huawei.’

‘On August 17, the U.S. Department of Commerce announced that non-U.S. companies were prohibited from selling items produced with U.S. technology to Huawei.’

• ‘The decision follows restrictions imposed by the Commerce Department in May against companies using U.S. technology to manufacture Huawei-designed chips, which left open the possibility for the company to purchase widely available chips designed by other companies.’
• ‘This latest effort has been cited by some as the “nail in the coffin” for the company, as U.S. technology is integral to multiple stages of the semiconductor supply chain, including design, manufacturing, and testing.’

‘Although Huawei has built up an estimated two-year reserve of U.S. chips needed for its 5G base stations and cloud computing business, it lacks a similar stockpile of components that go into their smartphones, including memory chips, camera lenses, and 5G processor chips.’

• ‘Less than a month ago, it appeared that the company’s access to these items was unfettered, as it inked an agreement to continue licensing patented technology for its mobile phones from San Diego-based Qualcomm in late July.’

‘Now, the language of the Commerce Department’s announcement suggests that even this deal, which would have supplied Huawei with Qualcomm technology used by most mobile phones, will be negated.’

• ‘Analysts predict that if Huawei runs out of the components that go into their handsets, shipments could drop by as much as 75 percent next year.’ 

‘The Commerce Department’s actions follow a multi-year U.S. campaign to exclude Huawei from several markets that it hoped to supply 5G equipment to, including those of the Five Eyes, India, and several countries in the European Union.’

• ‘These are some of the largest markets outside of China and will result in massive revenue loss for the company.’
• ‘While Huawei remains an important telecommunications gear supplier in Southeast Asia, Latin America, and Africa, many countries in these regions will likely finally forgo partnering with the company for 5G, fearful that it will not be able to supply and maintain gear for their networks under the new restrictions.’

‘For years, the Chinese government has attempted to boost its domestic semiconductor industry, with mixed success.’

• ‘Despite tax incentives and multiple rounds of funding by the China National Integrated Circuit Industry Investment Fund since 2014, Chinese chipmakers are still unable to produce the chips that power high-end smartphones and 5G equipment.’

‘Estimates for how long it would take them to catch up to foreign counterparts range from three years to “generations.” ’

• ‘Huawei cannot afford to wait that long, and it is quickly running out of options.'

‘The Commerce Department’s actions are likely the death blow against Huawei.’

• Even its most secure markets will switch to new suppliers to prevent the inevitable disruption that will occur when its two-year stockpile of U.S.-made chips dries out.’

‘In the context of the U.S.-China tech war, the dashing of Huawei’s global aspirations is but one battle, and the United States should expect a punitive retaliation against its technology companies by the Chinese government.’

Bloomberg

Anjani Trivedi | Bloomberg

'The last thing China’s burdened, state-run financial institutions need are continued natural disasters.’ 

‘The Three Gorges Dam on the mighty Yangtze, the world’s largest dam is under pressure in the massive flooding that’s wiping away billions of dollars of value in China.’ 

• ‘The predicament symbolizes a looming crisis for Beijing.’
• ‘Climate change is bringing more frequent and intense deluges that threaten the economic heartland, and infrastructure defenses installed with the disasters of previous eras in mind can’t keep up.’ 
• ‘There’s very little time to prepare for what’s coming.’ 

‘The problem isn’t that China lacks water management projects.’

• ‘It has built hundreds of thousands of levees, dikes, reservoirs and dams on its seven major river systems.’
• ‘But many are struggling to cope with months of rain-fed flooding that has ravaged vast swathes of industrial and agricultural land and engulfed millions of homes.’

‘Flood policy hasn’t been made the a priority it should be given the high stakes.’ 

• ‘The Yangtze River Economic Belt is home to more than 40% of China’s population (about 600 million people) and accounts for almost 50% of export value and 45% of gross domestic product, according to China Water Risk.’ 
• ‘On its own, the region could be the third-largest economy in the world.’

‘More severe disasters are anticipated.’

• ‘Climate change is increasing the risks of extreme rainfall events, making it “even more likely that dams like the Three Gorges will be unable to prevent the worst flooding from occurring in the future,” hydroclimatologist Peter Gleick, a member of the U.S. National Academy of Sciences, told the South China Morning Post.’

‘Consider this knock-on effect.’

• ‘In theory, banks will likely take losses because of natural disasters; their clients will pass them along to insurers.’

‘In China, insurance companies aren’t well-prepared; statistics remain sparse and risk-modelling around flood events has become more difficult.’ 

• ‘In 2016, China’s non-life insurers were hit with losses of more than 4 billion yuan related to floods and storms between June and August.’

‘This time, Fitch Ratings Inc. analysts expect claims “to continue to surge as the rainy season is not over yet in certain parts of China.” ’

• ‘They noted on July 15 that insurers in Hubei, Guangxi and Jiangxi provinces had reported aggregate incurred losses of more than 500 million yuan as of a week earlier, including claims from motor, agricultural and property insurance.’

‘The last thing China’s burdened, state-run financial institutions need are continued natural disasters.’ 

Newsweek

Jerry Cohen | Council of Foreign Relations

‘Most important, the United States should abandon the policy of "strategic ambiguity" that fosters uncertainty about whether it will come to the defense of Taiwan.'

‘None of the disputes between the U.S. and China, even the South China Sea, has as much explosive potential as contemplated changes in America's relations with Taiwan.’

• ‘Given the anti-PRC atmosphere in Washington, there is even interest in possible establishment of formal diplomatic relations between the United States and Taiwan.’
• ‘Such "recognition" of the island's government, whether under its current name—the Republic of China (Taiwan)—or as a newly-branded Republic of Taiwan, would very likely trigger a long-threatened military reaction from Beijing that could envelop the PRC, the United States and Taiwan in a devastating nuclear war.’

‘It would be much wiser to continue the policy of gradually demonstrating increased support for Taiwan's current status.’

• ‘Much more can be done by Washington and other concerned governments to build on existing "unofficial" arrangements for political, economic, educational and cultural cooperation with Taiwan, as well as for expanding its opportunities to contribute to many functional international activities.’

‘New forms of imaginative links with Taiwan must be developed.’

• ‘Of course, pressure for Taiwanese participation in existing public international organizations should be increased, as should efforts to help it retain its remaining formal diplomatic relationships.’
• ‘But this will require the U.S. to return to vigorous alliance diplomacy and to institutions and arrangements that it has recently abandoned, such as the World Health Organization and the Trans-Pacific Partnership.’
• ‘Otherwise, Beijing's growing role as gatekeeper will continue to frustrate global governance by excluding Taiwan, as WHO experience illustrates.’

‘Most important, the United States should abandon the policy of "strategic ambiguity" that fosters uncertainty about whether it will come to the defense of Taiwan, since this ambiguity increases the risk that conflict might result from mistaken assumptions on Beijing's part.’

• ‘The U.S. can anchor its relationship with Taiwan in long-standing policies, while articulating a clear but moderate statement of its determination to defend the island against unprovoked attack.’

‘This would serve as a strong reminder to the PRC that public international law no longer permits nations to use force to settle territorial disputes.’

• ‘Such an assurance will do much more to protect the 23 million Taiwanese than would formal U.S. diplomatic recognition.’

Newsweek

Jerome Cohen | Council on Foreign Relations

‘Beijing has long maintained that any formal declaration of independence by Taiwan would be intolerable and trigger possible nuclear war.’

More from Jerry Cohen's terrific essay.

‘To understand why Taiwan is a flashpoint requires recalling recent history.’

‘When in 1949, Chiang Kai-shek's Nationalist forces lost the Chinese Civil War on the mainland to Mao Zedong's Communists, Chiang's central government, called the Republic of China (ROC), fled to Taiwan.’

• ‘The ROC had reincorporated Taiwan into China four years earlier, after the Allied Powers, victorious in World War II, authorized Chiang's military to occupy the island, which had been a Japanese colony for half a century.’

‘China had been forced to transfer sovereignty over Taiwan to Japan in the 1895 peace treaty that ended the First Sino-Japanese War.’

• ‘Following Japan's 1945 defeat in World War II, Tokyo surrendered sovereignty over the island but, because of the ongoing Chinese Civil War, the post-World War II treaty arrangements never specified whether that sovereignty was transferred to the ROC, then occupying the island, or to the PRC, which established its national government on October 1, 1949, or to some other status.’

‘Taiwan's legal status was thus in doubt as Mao's PRC forces were preparing an assault that might overcome Chiang's control of the island and terminate the civil war.’

• ‘The highly debated question in Washington was whether the United States, which had long equivocated about how to respond to China's civil war, would intervene in the Taiwan Strait to defend the ROC.’

‘In January 1950, President Harry S. Truman and Secretary of State Dean Acheson announced, amid great controversy, that the U.S. would not intervene.’

• ‘Despite the fact that no peace treaty had transferred Taiwan's sovereignty to either of the still-contending Chinese governments, Washington maintained that Taiwan had, in fact, been restored to China when Chiang's forces were placed in control of the island.’
• ‘That, stated Secretary Acheson, was done in accord with the allies' wartime commitments, and "nobody raised any lawyer's doubts" about it.’
• ‘The U.S. thus concluded that, since Taiwan should be deemed Chinese territory, Washington should not intervene, since intervention would subject it to international condemnation for violating China's territorial integrity.’

‘Yet less than six months later, when North Korea invaded South Korea, the U.S. immediately reversed its position.’

• ‘Because it perceived the North Korean attack to be not only the initiation of civil war in Korea, but also an all-out attack by the communist bloc that threatened Taiwan as well as French-controlled Indochina, President Truman announced that the legal status of Taiwan, referred to by its Anglo-Portuguese name "Formosa," had actually never been determined and that it would await "restoration of security in the Pacific, a peace settlement with Japan or consideration by the United Nations"; in the interim, America's Seventh Fleet would defend Taiwan.’

‘That stunning reversal remained the official U.S. position for over 20 years.’

• ‘It was the principal obstacle to establishment of diplomatic relations between the U.S. and the PRC, even after the ROC was replaced by the PRC as the Chinese representative at the UN.’

‘Chairman Mao insisted that if the U.S. wanted to normalize bilateral relations, the U.S. would not only have to give up its diplomatic relationship with the ROC, but also formally concede that Taiwan is Chinese territory—a position that Chiang Kai-shek himself shared.’

• ‘That was the challenge confronting President Nixon when he made his world-famous visit to China in February 1972.’

‘There, in the Shanghai Communique, he waded into the problematic waters of whether Taiwan is part of China.’

• ‘The U.S. not only "acknowledged" the PRC claim that all Chinese on either side of the Strait believe that Taiwan is part of China, but also went on to state that "the United States does not challenge that position." ’

‘Nevertheless, when negotiating normalization with Beijing in 1978, President Jimmy Carter, while agreeing to terminate the U.S.-ROC defense treaty as well as diplomatic relations with the ROC, secured Deng Xiaoping's temporary willingness to tolerate continuing American arms sales to Taiwan.’

• ‘Congressional adoption of the Taiwan Relations Act (TRA), several months after normalization, further documented abiding American concerns for Taiwan's defense against possible PRC resort to force.’

‘The TRA even presented an ambiguous possibility that the U.S. might itself come to Taiwan's defense, if necessary.’

• ‘The premise of the U.S. position, expressed in the 1979 normalization joint communique and two subsequent ones with the PRC, is that the U.S. will accept a peaceful resolution of the Taiwan Strait dispute that is freely consented to by both sides.’

‘In 1979, both sides of the Strait were governed by harsh military dictatorships.'

• ‘The American hope was that, over time, each government might evolve in democratic fashion and eventually find a cross-Strait modus vivendi.’

‘Since 1987, Taiwan has gradually and peacefully achieved the democratic, rule of law, human rights-protecting society for which it is now widely praised.’

• ‘The PRC, by contrast, has developed into an extraordinary economic powerhouse with a military that increasingly threatens Taiwan and a political system that, under Xi Jinping, has become the most successfully repressive regime in Chinese history.’

‘Nevertheless, despite the growth of a distinctive Taiwanese identity that has led most islanders to fear reunification with the mainland, the ROC, under the Nationalist government of President Ma Ying-jeou, from 2008 to 2016 made over 20 "semi-official" agreements with the PRC that opened up broad cross-Strait cooperation.’

• ‘That remarkable feat was based on the shared belief of the Nationalist government and the PRC that Taiwan is part of China, although many Taiwanese doubted the wisdom of this development and there was never any agreement on whether this notional "China" should be represented by the ROC or the PRC.’

‘In 2016, this limited and abstract "one China consensus," usually referred to as "the 1992 consensus," dissolved with the island's election of President Tsai Ing-wen of the Democratic Progressive Party, which had never accepted "the 1992 consensus." ’

• ‘President Tsai, a moderate leader of a party long associated with the goal of establishing independent Taiwanese statehood, nevertheless made clear from the outset her desire to continue Taiwan's cooperation with the PRC, convinced, as she put it after her resounding 2020 re-election, that "both sides have a duty to find a way to exist over the long term." ’
• ‘Yet she has steadfastly refused to endorse "the 1992 consensus," because to do so would deprive Taiwan of the future option to deny that the island is Chinese territory, to declare its formal independence from China and to establish diplomatic relations with other countries on that basis.’

‘Beijing has long maintained that any formal declaration of independence by Taiwan would be intolerable and trigger possible nuclear war.’

• ‘President Tsai, a careful leader who has shown no interest in exercising what may justifiably be called the nuclear option, has countered by claiming that no formal declaration is necessary since Taiwan has long enjoyed de facto independence.' 
• 'Xi Jinping's reaction has been to cease many aspects of the cross-Strait cooperation and contact attained under President Ma, and to mobilize ever-greater military, political, diplomatic, economic and psychological pressures on the Tsai government in the hope of coercing it to belatedly embrace the "one China consensus." ’

‘The Trump administration, reflecting its inconsistent efforts to forge an overall policy toward the PRC, for most of its almost four years paid relatively little attention to Taiwan.’

• ‘Although continuing to sell arms to the island, the administration sought to avoid offending Beijing in most of its ostensibly "unofficial" contacts with the island.' 
• 'But that policy has now changed as part of its recent all-out efforts to challenge the PRC, and Washington has made many new moves to demonstrate stronger support for the island’.

‘It is in this context that the possibility of U.S. establishment of formal diplomatic relations with Taiwan must be discussed.' 

• 'Such a dramatic move, which might be thought to sustain President Trump's flagging re-election prospects, would be a leap too far and very likely lead to tragedy for all concerned.’