Analysis

China announced major monetary and fiscal stimulus boosts, the largest since the pandemic, in a bid to revive the economy. On direction from the Politburo, China’s Central Bank–the People’s Bank of China (PBOC)–cut a key short-term interest rate and announced planned reductions in bank reserves, alongside measures like lower borrowing rates for mortgages that aim to free up liquidity, encourage lending, and prop up the flailing property sector. The CCP is aiming to boost growth, shore up the stock market by allowing companies to use PBOC funds to buy stock, and avoid deflation, although weaker measures to boost consumer demand will likely curtail intended effects of the stimulus. This mixed messaging from the CCP’s economic leaders has led some to label the Chinese economy as being in “garbage time,” referring to the end of a sports game where the outcome is already decided but play has yet to end. While “garbage time” might be an overstatement–there are still many factors propping up China’s economy, including a ballooning state-owned sector–it speaks to the uphill battle that policymakers face in regaining confidence.

For US markets, commodity prices spiked after China’s announcement, which suggests that inflation volatility will likely continue with successive stimulus announcements from China. In short, the stimulus appears to be a welcome short-term measure by both Chinese and foreign markets, but the overall mood is one of caution, not in the least because previous stimulus efforts led, in part, to booming debt in 2008 and to a property bubble in 2020, the effects of which continue to color market sentiment. 

The announced stimulus was also overshadowed by the disappearance of a prominent economist after he questioned the CCP’s economic policy decisions in a private WeChat message. As a further sign of how politics continues to trump economics, CEOs in China are reportedly issuing doctored profit forecasts and “competitively devaluing their own stock prices” to undermine their performances and avoid attention from CCP officials. In particular, much of the drive for devaluing comes from the company leaders, whose status on China’s “wealthiest CEOs” list is fraught with dangers of detention and asset seizures. In short, no one wants to be China’s wealthiest person anymore. Moves to devalue, despite potentially hefty losses in stock value, are therefore a function of self-preservation in a system where the party is asserting its authority over China’s corporate class. 

Given the number of new billionaires produced during the last stimulus package in 2020, it is therefore likely that the current stimulus will produce similar boosts to personal fortunes and a race by these newly minted corporate elites to escape notice from authorities. We are likely to therefore see contradictory results from the latest stimulus package: an uptick in China’s overall economic performance, but with large private corporations reporting more conservative growth figures.

Between the CCP’s widespread anti-corruption campaign that continues to take aim at displays of wealth and the growing share of the state-owned sector in China’s economy, the private sector is incentivized to yield to party politics over corporate interests. This means that economic data about corporate performance from Chinese companies is unreliable and that Chinese business partners are likely to either misreport information or to submit to CCP demands for alignment with state priorities. US companies therefore need to continue to exercise extreme caution when engaging with Chinese partners, even if economic information appears positive after the recent stimulus announcement.

Analysis

China is broadening its attempts to interfere in US elections, with enhanced capabilities in spreading targeted disinformation campaigns, cyber attacks, economic coercion, and the use of proxies to spread pro-China messages. While it is unclear how successful these endeavors are in influencing voting outcomes, collectively they point to a broad effort to disrupt the election process, sow distrust among voters about outcomes, and promote extreme candidates over moderate alternatives. As the Director of National Intelligence notes, China is using AI in “influence operations seeking to shape global views of China and amplify divisive U.S. political issues, but not for any specific operations targeting U.S. election outcomes.” Ultimately, China’s ambition is to use the US’s open society to undermine the political process and to hinder the US’s capacity to compete with China on the world stage. 

Recently, China has embraced AI-generated content to both produce disinformation abroad and to defend against disinformation at home. Many of the techniques and technologies involved in this content production have been honed over time through experimentation with messaging that targets Taiwan. Taiwan’s recent presidential election, for example, was the first time that a state used AI content–ranging from memes to videos–to try to influence a foreign election, according to Microsoft. China is now implementing lessons from Taiwan in disinformation campaigns worldwide. 

Through “Spamoflague” campaigns, which mimic US voters in an attempt to persuade others into adopting similar policy positions, Chinese government and security agents are widespread on social media platforms, where they use fake social media accounts to poll voters about what divides them most, and then exploit that information using generative AI content. Notably, Chinese disinformation is currently overwhelmingly pro-Trump as CCP officials see support for Trump as more likely to stoke social unrest in the US. While Chinese attempts are less about seeing Trump elected, and more about sowing discord and undermining faith in the electoral process, this approach has still proven effective at interfering in US elections by amplifying fake stories. Yet attempts to combat these mis/disinformation campaigns are currently sparsely resourced and targeted individuals are often unaware that the content they consume is propaganda from a foreign state. While Chinese efforts are unlikely to sway the outcome of the election, they highlight the growing threat from China’s coordinated strategies to erode the US from within. As news of these efforts continue to emerge, US companies that engage with Chinese partners will therefore likely face growing pressure from politicians to dissociate on national security grounds.

Analysis

The Biden administration proposed a ban on Chinese-developed softwares and select hardwares for wheeled vehicles this week. Citing fears about Internet-connected technologies’ ability to feed user information back to Beijing, the Department of Commerce preemptively banned Chinese software that–as our Director Glenn Chavetz argued in Cipher Brief–could pose a threat to US security. In response, the Chinese Ministry of Foreign Affairs again complained about the expanding scope of US national security concerns, which has been a frequent refrain in recent years. Although this proposal was crafted over several months, Israel’s recent tampering with the production of Taiwanese-produced pagers (hardware) to add explosives capable of being triggered by a coded message (software) gives exigency to US concerns.

While Beijing’s complaint about the US’s ballooning definition of national security is certainly disingenuous–data privacy, both individual and governmental, clearly falls under its remit–there are very real business implications that accompany the term’s expanding and somewhat mercurial usage. On the one hand, Washington is creating a global PR challenge for itself due to its often sudden interventions into market affairs. Moreover, at least five separate Chinese automobile brands have tried to enter the US market since 2005, all ending in failure. The proposed new law only appears to confirm Beijing’s narrative about Chinese companies being unfairly targeted, which may sway countries that are on the fence about whether to support the US or China. On the other hand, legislating the use of non-Chinese softwares and hardwares may also create additional business opportunities. Driving assist and self-driving software rely on LiDAR (Light Detection and Ranging) technologies, more than 60% of which are currently produced by Chinese companies globally. Removing them from the US market may stimulate development and jobs in these and related sectors domestically.

With national security at the forefront of legislators' minds, Israel’s weaponization of everyday technology put paid to fears about the broader issue of technological tampering. If Israel can detonate a pager, the logic goes, what stops China from weaponizing even more advanced technologies against its adversaries? To get ahead of potential policy changes, companies must take a hard look at all levels of their supply chains. That is precisely what motivated a group of US officials to accompany executives from 26 makers of uncrewed systems or anti-drone systems to Taiwan this week, as they seek out new manufacturing partnerships that do not involve Chinese parts or labor. Following IBM’s announcement last month that it would close all its China-based research and development offices (with speculation they may relocate to India, confirming our earlier predictions), there is a clear trend toward companies actively insulating their bottom lines from reliance on Chinese suppliers to avoid falling afoul of not just the potential threats of PRC manufactured components, but also future US national security regulations.

Analysis

US proposals to ban Chinese technology, and punish those who facilitate its development, has put the tech sector at the top of Washington’s regulatory agenda. In addition to proposed bans, noted above, US investment and cooperation in Chinese technology development is similarly under increasing suspicion. Building on proposed tightening of rules for US investors over the summer, accusations of investors inadvertently aiding Chinese research efforts, including for military uses, has led to question about how both research partners and investors might be abetting China’s efforts in its tech race. 

This heightened attention has two potentially large ramifications for investors. First, investment firms with ties to China will likely come under increased scrutiny by the US government, particularly as the FBI ramps up probes into venture capital firms. In a recent investigation, for example, the FBI noted that it was looking into whether Hone Capital was transferring sensitive technology to Chinese authorities. Hone Capital is a California-based firm backed by a Chinese private equity group that invested in 360 US tech startups in under three years. As a wealthy source of tech startup capital, Chinese-backed firms are likely to expand in Silicon Valley, particularly as China’s flagging economy makes investments in China’s own tech sector appear increasingly less attractive. Investors and other partners will therefore likely face calls to closely vet not only the companies that they are investing in directly, but also other investment partners that may have ties to China. 

Second, investment partnerships, particularly in emerging technologies like AI, will likely need to assure the US government that they are sealed off from Chinese engagements. Major investments in AI centers in the Middle East, for example, are channeling regional funds into tech startups alongside major companies like TSMC and Samsung in a way that directs sovereign wealth funds from countries like Saudi Arabia to invest in US technologies instead of Chinese competitors. Yet these investment groups will likely face similar questions about how secure their operations and partners really are. For investment firms, due diligence on partners and co-investors will therefore need to become a priority to avoid potential fallout from exposed connections to China.

Analysis

China is increasingly in the news for conducting mass data breaches and tech spying networks, which can prove effective at exploiting weaknesses in security networks to extract sensitive information on entire populations. At the same time, a steady trickle of reports about individuals charged with spying for China continues to feed news cycles. If China is capable of large-scale digital espionage, why does it continue to recruit individuals in the West, often at great effort and expense, to pursue its spying ambitions?  

China’s extensive espionage efforts often take a two-pronged approach: exploiting vulnerabilities in technologies to collect data en masse; and targeted recruitment of individuals within governments, institutions, or companies as assets for China’s intelligence services. The increase in recruitment efforts, in particular, has heightened concerns in Europe and the US that China is coordinating closely with Russia to recruit assets within institutions like the European Parliament who will prove useful to both Moscow and Beijing. In Europe, recruitment focuses on anti-Western politicians at the political extremes, offering financial rewards for information or for participation in propaganda efforts. While Europe has faced the brunt of these efforts, recent reports highlight how similar techniques are being used within the US, particularly among political aides at both state and federal levels. Individuals are more useful to China than digital attacks for extracting targeted information and are less likely to be discovered, particularly when they are in unsuspecting industries. 

PRC government and business entities also employ these techniques against the private sector. The recent case of a Chinese national accused of a years-long effort to steal sensitive information from NASA and other organizations, highlights how the individual, an employee of a Chinese state-owned corporation, used a spear-phishing campaign by mimicking US researchers to obtain sensitive software from key suppliers. This case also demonstrates how China favors the use of intermediaries and proxy actors, including individuals working as vendors or distributors to US companies, to both steal corporate IP and recruit new informants. Importantly, recruitment efforts are not limited to PRC nationals, but are instead expanding to include a wide range of individuals across the private sector, think tanks, and academia. Corporations need to take these threats seriously, as failing to do so may result in not only theft of sensitive IP, but also potentially damage corporate reputation beyond repair.

Analysis

The US and China are increasingly pushing third countries to be exclusive about the origins of inbound investment and components in manufacturing supply chains. For countries like Mexico, pressure to “choose sides” is receiving mixed responses, particularly when both the US and China are trying to offer increasingly attractive deals to try to outcompete the other. Mexico’s proximity to the US and strength in manufacturing for import to US markets means that the country is in a strong negotiating position with both states. A recent announcement by Microsoft for a $1.3 billion investment in cloud computing and AI infrastructure, for example, hints at the scale of interest in Mexico. 

Mexico will likely become even more central to US-China competition as the US mulls not only bans on imports of Chinese EVs and other products manufactured in China, but further proposes to ban Chinese software or components in finished products. This will have dramatic consequences for countries like Mexico, which often serve as a neutral third party for Chinese manufacturing that avoids US import restrictions. 

As we explore in previous Red Reports, controlling Chinese imports through tariffs is a complicated and usually ineffective game of whac-a-mole that incentivizes near-shoring or investing in third parties–like Mexico–to avoid restrictions. The US’s announcement that it will potentially shift focus from tariffs to regulations, including banning Chinese software and components in vehicles regardless of where they are manufactured, presents an alternative and complementary approach to tariffs. This regulatory approach may therefore prove more effective than tariffs in nudging countries like Mexico to reconsider Chinese investments. Watching what happens regarding US policy in Mexico will therefore prove important for companies attempting to monitor how geopolitics is reshaping global investments and supply chains.