Analysis

China faces a series of unenviable challenges in the new year. This includes a flatlining economy, an explicitly aggressive incoming Trump Administration, an increasingly hostile EU and NATO, social dissatisfaction at home, and the lingering half-life of COVID-19 on public health and social cohesion. While none of these issues is existential for the CCP, they risk exacerbating domestic tensions that may erode the CCP’s authority at home. 

In a major announcement, General Secretary Xi Jinping noted the party’s need to “turn the knife inward” to instill party discipline and root out corruption, a favored phrase that more suggests internal discipline through purges of Xi’s detractors as it does minimizing corrupt practices. Heightened attention to intra-party discipline suggests that Xi is feeling his power threatened as challenges to the party’s (and therefore his) leadership build. Given China’s internal economic problems, the external shock of the incoming Trump Administration’s likely tariffs and other measures that will target China’s economy, CCP leaders will therefore likely attend to enforcing compliance with the party line amid rocky economic conditions ahead. 

Indeed, a central issue is the looming risk of deflation, a taboo word among the Chinese leadership that is second only to the other “d” word: "depression." Market confidence in China’s economy is based largely on how well the CCP can project stability, predictability, and demonstrable investment in key sectors. Yet while official figures note national growth at 4.6% for the third quarter–a figure that should be questioned in the best of times–businesses in China appear to be struggling. Stimulus measures–which will likely continue next year–appear limited in their capacity (or willingness) to change much, seen most notably by state-owned financial institutions continuing to buy government bonds as a safe bet, rather than investing in businesses or other ventures that might better stimulate the economy. 

As we note in previous Red Reports, opposition to fundamental changes in the Chinese economy are part of the CCP’s prioritization of political control over promoting private-sector growth. However, and ironically, this calculation may kneecap China’s economy, and in doing so undermine a key pillar of the CCP’s claim to political legitimacy. Businesses should therefore closely monitor ongoing discussions of China’s struggling private sector as a bellwether for the global economy.

Analysis

The period between incoming and outgoing presidential administrations, particularly from opposing parties, is characterized by uncertainty and turbulence. China is already making moves to shore up partners, particularly among BRICS and the Global South, as insulation against anticipated tariffs or sanctions. Clarity is therefore fundamental to maintaining a tough stance against China into the new year. Despite this, the incoming administration still appears to be divided about the best approach to China, both in terms of what the US’s end game should be and in terms of how we achieve it. 

The threat posed by China to the US is real and intensifying. There is, however, a necessary balance between understanding the significant threat posed by China, and counterproductive or misguided overreaction. The conflict calls for smart policy decisions based on fact, rather than sentiment. Moreover, debate as to how and when the US responds to China is important. A key challenge for the incoming administration will therefore be how to encourage healthy debate about foreign policy options without fear of being branded “soft” on China. One key area that this tension may become apparent will be in differences about what “success” against China looks like and what the best approach might be to achieve it. On the other hand, individuals with keen business interests in maintaining ties with China at the expense of pressing national security interests will likely have a prominent seat at the new administration’s table. 

Getting China right, while promoting healthy debate, will arguably be the new administration’s top policy challenge. The new administration will therefore need to think carefully about what its ultimate goal for China looks like and how it will achieve it, particularly regarding how it will work with (rather than punish) allies and partners in service of these goals. Some in the Republican Party–most notably Mitch McConnell, appear intent on shaping the incoming administration’s foreign policy approaches towards China by promoting a globally engaged view of the US.

Analysis

TikTok may be forced to sell to a US entity or be banned by January 19, pending intervention by the Supreme Court; the EU is also considering a similar ban. A US federal court recently upheld a law passed by congress last April, with bi-partisan support, that identified the Chinese-owned ByteDance subsidiary as a threat to US national security. TikTok has said (apparently without irony) that the law violates First Amendment freedom of speech rights and would silence millions of US users, but the US government regards the freedom of speech argument as specious, given that TikTok users have multiple other platforms available to express themselves. The Supreme Court will hear arguments on January 10 and has indicated they will decide the case before the law is set to take effect. 

Chinese news outlets are cautiously optimistic about the outcome, even if it is difficult to predict. President-elect Trump previously stated he would try to save TikTok, while senate Republicans, led in this particular effort by Mitch McConnell, have openly signaled their desire that the court allow the law to take effect. While we await arguments and the final ruling, this case is a clear warning to all Chinese-owned or -affiliated companies operating in the US that that their operations may be in jeopardy in the coming months or years. 

In China, the State Administration of Market Regulation (SAMR) has alleged that Nvidia has violated Chinese anti-trust laws by withholding sales of chips to China following acquisition of a Chinese company in 2020. The suit is China’s retaliation for the Biden administration’s tightening of export controls on semiconductors and other advanced technology earlier this month, as Nvidia accounts for at least 90% of global AI-chip sales last year. The SAMR must rule within 180-days of issuing the complaint, with possible outcomes including: ordering the cessation of illegal activities, confiscating illegal gains, and imposing fines. Nvidia’s stock fell more than 2.5 percent after the announcement despite the company defending its practices and signaling its willingness to comply with the Chinese regulatory commission. 

Nvidia still sells to China, but only chips with limited processing capabilities in order to comply with US export controls. US tech companies, including Nvidia, have been aggressively lobbying to loosen controls because their ability to turn a profit or, in some cases, stay in business, relies heavily on Chinese sales. At the same time, China has been diligently developing its domestic semiconductor industry but still lags far behind Nvidia. To further encourage domestic development, industry leaders issued a rare joint statement exhorting Chinese companies to buy domestically made products because US-products were “no longer safe.” The realignment of Chinese business acquisitions and arbitrary action against Nvidia as retaliation for US foreign policy should be warnings for all US-owned companies operating in China that they, too, may be subject to increased scrutiny or unpredictable punitive measures for actions beyond their controls.

Analysis

The aggressive growth of the Chinese space industry is raising alarms in Washington. Vice chief of space operations for the US Space Force, Gen. Michael Guetlein described the environment as increasingly hostile and characterized by the erosion of longstanding norms, with China developing “anti-satellite weapons, advanced satellite jammers, and other capabilities designed to disrupt U.S. satellites critical to navigation, communication, and missile defense.” Often under the guise of civilian research programs, China has advanced its military space programs and is making significant progress in space situational awareness, which is critical for a range of military actions. To counter these efforts, the US has strengthened its partnership with Japan’s space force to coordinate space object surveillance and keep track of China’s dynamic satellite constellations. Moreover, Taiwan is also developing new space capabilities, in collaboration with Amazon, and has signaled its desire to work with the US, Japan, and EU to coordinate future efforts. Trump’s pick to lead NASA, commercial astronaut Jared Isaacman, has recognized that America “...can’t be second,” and suggested the need to deepen the agency’s reliance on private sector providers.

The influence of Elon Musk over president-elect Trump, however, has also sparked concerns among the space industry. Federal reviews of Elon Musk’s rocket company, SpaceX, have discovered its repeated failure to comply with security reporting protocols. As it transpires, the reviews are concerned less with SpaceX and more with Musk himself. It took years for Musk to be granted his currently held top-secret clearance, and the Air Force recently denied him a more restricted access, citing several security risks. Moreover, his current clearance still requires regular reporting of international travel and meetings with foreign leaders and dignitaries, which it was discovered he has been derelict on since 2021. Remarking about Musk’s potential new roles in the forthcoming Trump administration, Senator Richard Blumenthal (D-CT), chairman of the Senate judiciary sub-committee on privacy, technology, and law, publicly declared, “I think it is a profound threat to our national security that Mr. Musk and SpaceX are in this position.” Depending on how ardently president-elect Trump comes to Mr. Musk’s defense, these violations could lead to renegotiating or reassigning government contracts currently held by SpaceX.

Analysis

China’s Salt Typhoon is the most extensive cyber espionage campaign against the US in history, with new details continuing to emerge as to the extent and gravity of the attack. Despite this, public awareness of the hack appears wanting. In response, some lawmakers, like Mark Green (R-TN) and John Moolenaar (R-MI), are pushing for a higher profile of the hacking attempt across media like Fox News. The aim is to get the attention of the incoming administration. This means that while the story has been more of a slow burn across US media over the past few weeks, it looks likely to persist as a key point for China hawks in Congress who will want to use it as evidence of China’s adversarial nature. 

In partial retaliation, the Biden Administration announced that it would ban remaining operations from China Telecom in the US, ramping up an earlier ban from the Federal Communications Commission in 2021 that did not fully remove the company’s infrastructure from US networks. The move highlights a growing realization that China is using tech to exfiltrate vast amounts of US data and sensitive information, but remains a bandaid on a bullet hole that addresses a symptom, rather than a cause of Chinese intelligence gathering efforts. Indeed, the attack, as far as we can tell, is still ongoing, and includes infiltrating devices of almost all Americans, including senior political and business leaders. 

One immediate response to Salt Typhoon should be the migration to end-to-end encrypted messaging on mobile devices, which businesses should mandate for sensitive company-related communications. Companies should also, if they don’t do so already, think about the increasingly likely contingencies needed in the eventuality of a cybersecurity breach or a targeted attack by malicious actors. Failure to do so could be costly in terms of not only leaked IP, but also severe reputational damage as consumers lose confidence and politicians target businesses with weak protections.

Analysis

Scandal-ridden Prince Andrew continues to make headlines as the UK denied entry to his confidant, Chinese businessman Yang Tengbo, on national security grounds. The UK government accused Yang of spying for the CCP and of involvement in United Front activities. The scandal has reinvigorated public debates about the espionage threat from China in the UK, as UK authorities have discovered more Chinese agents engaged in extensive operations in the country. 

Despite persistent evidence of China’s nefarious actions against the UK, the new Labour government appears intent on a “reset” in UK-China relations to reestablish good relations that were previously emphasized under David Cameron’s (pre-Brexit) premiership. Driven by a sagging economy, an acute cost-of-living crisis, and ongoing trade tensions with the EU, the UK government is searching for alternative global partners, and has decided that China might fulfil this criteria. Perhaps the most drastic sign of this reprioritization of economic promises over national security came when the UK announced suspension of its own “China Audit” amid the Foreign Secretary’s trip to Beijing, which was set to report on China’s espionage and other nefarious activities targeting the UK. 

The UK’s predicament highlights the pressure that many US allies feel in balancing between China as a security threat versus as a crucial trading partner. This is a false dichotomy: engaging China for trade in certain sectors, including tech and other sensitive fields, heightens–rather than diminishes–national security risks. It also risks hampering local economies by eroding domestic business through exposure to China’s unfair trading practices. Despite this, several European NATO allies will likely resist the incomingTrump Administration’s confrontation with China. This resistance will toughen if Trump hits the allies with tariffs or strikes his own deal with China that excludes US partners. Either way, the new administration will quickly find that it needs its partners to enforce any restrictions against China, and these partners may not all be willing.