Beware the CCP Bearing Gifts

This week in The Red Report

For those who wish a more in depth discussion of Red Report analyses, please sign up for Red Report Live, a one-hour discussion with the authors. Each session is one hour and costs $250 per attendance or $2,500 for an annual subscription to 12 sessions. To sign up, please email [email protected].

From Zhongnanhai: This week in Chinese Politics

There is no substance behind the CCP’s effort to win back foreign capital

The CCP is mounting a charm offensive to entice foreign investors back to China. Not only should businesses think twice about the offer, they should realize that the CCP’s change of heart will likely be short-lived as domestic political and economic pressures mount.

Analysis

After a decade of censure and subjugation to the CCP, China is trying to woo back investors. Due to a sputtering economy and an ineffective government stimulus, CCP leaders are looking to the domestic and foreign private sector to generate growth and spur broader investment. In recent meetings between the CCP and private sector leaders, including top US CEOs like Apple’s  Tim Cook, General Secretary Xi Jinping claims he has reopened China to foreign investment in key sectors. European investors, in particular, are increasingly viewing China as an alternative destination to the US amid increasing tensions between Europe and the Trump Administration

Yet it is unclear whether the party’s offering will deliver any real benefits. The party’s release of five employees of a US diligence firm after two years of a baseless detention is a claimed concession, but US companies are unlikely to view ending a two-year old outrage as much of a positive sign, as nothing will prevent authorities from doing it again. Moreover, these employees were only five of many more.cCan US companies really afford to have employees detained for years at a time for conducting business-as-usual? Moreover, as China’s playbook repeatedly demonstrates, foreign investment in China abets the CCP’s agenda by transferring IP and boosting the competitiveness of domestic entities. 

In part, this struggle is a result of China experiencing a taste of its own medicine. Part of the party’s growth strategy in the reform era was to mass produce goods that rely on automation and Chinese government subsidies to offer cheaper prices than foreign competitors. This strategy aimed to undercut overseas production, effectively putting foreign competitors out of business and consequently driving up foreign unemployment. Yet Chinese factories are now becoming increasingly expensive compared to other regional economies like Vietnam or Indonesia. Consequently, China is now suffering from a similar phenomenon that it unleashed on the world, whereby cheaper goods from overseas are increasingly flooding Chinese markets. 

The challenge for Chinese leaders is that one solution to this “reverse China shock” is increased automation through AI and robotics to boost growth through improved efficiency. Chinese leaders, for example, are looking to companies like DeepSeek to help drive a new wave of technological industrialization. This necessarily means fewer workers, particularly in manufacturing hubs, along with all the political and social issues that arise when manufacturing leaves town with little replacement. These pressures will incentivize the CCP to attempt to demonstrate support for affected communities, which will likely manifest as economic nationalism and support for domestic manufacturing over foreign investors. 

Consequently, the CCP is fighting an uphill battle: emphasizing technological innovation today to try to boost growth through automation, while facing domestic pressures to continue providing jobs for displaced Chinese workers. Public resistance to foreign goods undercutting Chinese producers will therefore likely force the CCP to opt for protectionist measures that favor Chinese companies over foreign competitors. Inevitably, nationalism will therefore win as the party will prioritize its own survival over the private sector’s–particularly foreign corporations–interests, as it has done for the past decade. Overtures to foreign corporations are therefore likely to be short lived, and businesses should respond accordingly.

On the Hill: Developments in US China policy

US affirms China as number one adversary

The US Intelligence community prioritizes China over Russia as a sign of the Trump Administration’s foreign policy objectives. Businesses should take note that the US will therefore likely tighten restrictions on China-based trade and investments.

Analysis

The Trump Administration’s shake up in American foreign policy–from dropping support for Ukraine to triggering trade wars with America’s neighbors–has sparked a scramble around the world to understand geopolitics in a new era of great power competition. The US intelligence community’s newly released Annual Threat Assessment is therefore significant in understanding the new administration’s priorities. The assessment, for example, dropped certain Biden-era security priorities, most notably global security concerns resulting from climate change. At the same time, it reaffirmed the US’s position that Russia remains an adversary but that China remains the US’s chief rival. With Moscow affirming that it is firmly on China’s team, future attempts at US-Russia reconciliation will be confronted with the reality that aiding Russia abets China. While some argue that Trump is after a “grand bargain” with Beijing, China remains squarely in the US’s intelligence community’s sights. Businesses can therefore expect a continuation of anti-Russia and anti-China policies, including controls on trade and investments, which are likely to tighten over time. Moreover, this document will likely form the basis of many other states’ engagement strategies with the Trump Administration, so it is an important document for understanding how the world will react to the US’s changing policy framework.

The report also emphasized the Trump Administration’s priorities in its engagements with China, including preventing an invasion of Taiwan and ceasing cyber attacks against US infrastructure. It also highlighted one issue of particular importance: China’s involvement in illicit fentanyl production. At the same time, the report notes China’s lack of capacity to “sufficiently constrain the activities of PRC companies and criminal elements” involved in fentanyl supply and trafficking. This prioritization suggests that the Trump Administration, as with Canada, will likely employ a perceived lack of progress on decreasing fentanyl production as a negotiation tool to achieve other outcomes ranging from potential trade deals to alignment on Ukraine. Companies therefore need to prepare for the possibility that the Trump Administration uses fentanyl as a bargaining chip to try to force China’s hand over changes to trade or investment policies.

Business Matters

Export Controls vs Tariffs: China’s economy sputters while its tech sector booms

Although export controls and tariffs seem to have impeded China from reversing its precipitous economic decline, they have also spurred on the meteoric rise of China’s tech industry while preventing US investors from taking part.

Analysis

Between the former Biden and current Trump administrations, the US has imposed a range of increasingly strict export controls on advanced and sensitive technologies to China and levied ever-increasing tariffs on Chinese goods entering the US. While controls and tariffs are intended to serve as complementary tools in the defense of US national security interests, their collective impact on China’s economy and tech sectors have led to a mixed outcome that signals significant instability and risk for investors. 

China’s economy is in bad shape. This was true before the current suite of punitive measures was imposed by the US, which has only exacerbated an already precarious situation. For instance, foreign-direct investment into China has dropped more than 99% over the last three years. Moreover, with a FDI net influx of only $4.5B in 2024, China’s economy saw a 90% drop year-on-year from 2023 and achieved a 33-year low. China has also adjusted its projected fiscal deficit-to-GDP ratio from 3% to 4%, although FitchRatings calculates the actual rates as moving from 6.5% in 2024 to 8.8% in 2025; the median ratio for an “A” rating is projected to be 2.7%. 

Following the meeting of the Two Sessions, the central government announced several new programs aimed at spurring growth, including a RMB$300B consumer subsidy program and RMB$500B injections into state banks and quotas for local government special bonds. These programs are too small to correct for the current negative and deflationary trends. The weakness of these responses may stem in part from Xi Jinping’s oft-cited aversion to government welfare programs, but they also certainly derive from a lack of available money, specifically falling tax revenues. Government coffers have a pittance of what they had before the pandemic. In short, the US’s current economic measures have impeded China from righting the sinking ship that is its economy.

However, the PRC government is investing what little it does have into the tech sector in hopes of hatching a golden goose. Chinese premier, Li Qiang, reassured a global audience of CEOs at the 2025 China Development Forum last week that China would ensure a stable operating environment despite US controls and tariffs.  China can point to recent tech successes, including the collaboration between the EV company, BYD, and tech giant Huawei to produce new EV batteries capable of charging in just five minutes. Another Huawei linked company, Shenzhen SiCarrier Technologies, is also receiving significant government funds to develop replacement technologies for fabricating semiconductors, whose exports the US and its allies currently restrict. Moreover, while venture capital investments are down in China as a whole–largley due to the US ban on investments into advanced tech in China–AI and machine learning investments, heavily supplemented by Chinese government investment, are up domestically. Despite China’s economic struggles, its tech industry is growing quickly.

In sum, although the Chinese economy is broadly in decline, China’s tech industry is booming. From a business perspective, this makes for a lose-lose situation. While many industries in China are still available for investment, they are all high risk due to China’s general economic malaise. Conversely, the only investment that seems like a sure bet at the moment–Chinese tech–is foreclosed by current US government restrictions. For now, it is probably best to sit tight and see what happens when the Trump Administration makes its next move in the tariff wars on April 2.

Tech Futures

How to defend against subsea sabotage?

Repeated acts of sabotage will continue to show China as an adversary to the West. Companies with China-based operations will likely face increased pressure to divest and to relocate elsewhere.

Analysis

China unveiled new technology that it claimed would make it far more efficient to sever undersea cable infrastructure, much to the shock of the global tech and defense sectors. The newly announced deep-sea cable-cutting device is perhaps a surprising announcement considering that China denies its involvement in sabotaging subsea cables between Taiwan’s islands. (What is the legitimate purpose of an undersea cable cutter?)

China conducts its undersea sabotage through the use of shadow fleet vessels, including foreign-registered fishing or coast guard ships, which are not officially part of the Chinese military even while they do the military’s bidding. The newly patented technology, a result of a published article by China Ship Scientific Research Center (CSSRC) and its affiliated State Key Laboratory of Deep-sea Manned Vehicles, further underscores the interconnected nature of China’s use of non-military institutions, including academic centers, to perform state-backed research in areas of national security as part of a whole-of-society approach to furthering the CCP’s ambitions. Businesses engaged with Chinese entities should take note of this example and be especially attentive to how their Chinese partners are likely intertwined with government entities or funding. 

The heightened potential for cable severing from the Baltic Sea to the Taiwan Straits also underscores the extensive use of Russia and China’s “grey zone” warfare against critical infrastructure. These frequent acts of sabotage underscore several key risks for businesses. First, severed undersea cables decrease connectivity that must be mitigated through alternative means, notably through satellite communications. For islands like Taiwan, this has led to a deal with Elon Musk’s Starlink to provide connectivity. This reliance on Musk makes Taiwanese officials notably nervous because of Musk’s closeness to the CCP and discussion of Starlink’s terminating access in Ukraine. Alternative options to undersea connectivity are therefore far from risk free. Second, as sabotage likely increases, political pressure will likely mount in the US and Europe to denounce such acts and intensify reciprocal sanctions or punishment against Russia and China. Where governments have been reluctant to attribute blame for these attacks, this recalcitrant approach will likely be unsustainable as evidence mounts against Russia and China. Businesses with China engagements will therefore likely face increased political pressure to divest or to wind down China-based operations.

Espionage Alert

Is Signal secure for corporate leaders?

Signal is secure end-to-end encryption for the sharing of some information, but the corporate world–much like government–needs to improve its awareness about how online security can threaten offline outcomes.

Analysis

Revelations that a journalist was added to a Signal group chat with senior Trump Administration officials–including the Vice President, Secretary of Defense, and National Security Advisor–have raised important questions about executive and national security and the use of private secure messaging apps (SMAs). Despite NSA warnings about the vulnerabilities of Signal and restrictions on Signal on government devices, senior officials’ used the app to discuss top secret information. This practice violates laws and regulations on the handling of sensitive information relating to national security and potentially exposes national security to US adversaries. Further investigations reveal that senior defense officials, including Mike Waltz, were also exposed this week in having potentially sensitive digital information publicly available, ranging from connections on certain apps to leaked emails and passwords through cyber breaches. Collectively, this story highlights how business leaders should exercise caution in sharing information online. In general, security and ease of use are inversely related qualities: best practices in communication security will involve some degree of inconvenience and effort.

Know that Signal is relatively safe (and even authorized for some government communications, if not classified war plans). Signal has secure end-to-end encryption, and no evidence exists that any actor has yet broken that encryption. However, spyware like Predator or Pegasus from NSO Group (famously used to compromise Jeff Bezos’ communications) can circumvent SMAs like Signal, iMessage, and Threema by reading your open, decrypted communications just as you do. That is, when you read an SMA message on your spyware- compromised device, it has already been decrypted for you and that is what the spyware “reads.” Corporate leaders should know the vulnerabilities of Signal and other SMAs before signing up and, as the past week’s news demonstrates, should recognize the increased risk of group chats in which sensitive information is shared with unknown participants. Failure to do so many trigger unintended offline consequences, including financial losses, for companies considered to have lapse digital security measures.

Book Recs

What we’re reading to better understand China

If you would like additional information and analysis tailored specifically for your specific business or institution, please contact us at [email protected].

Thumbnail Image: By U.S. Secretary of Defense - 250305-D-FN350-1474, Public Domain, https://commons.wikimedia.org/w/index.php?curid=161243470

Reply

or to participate.