Analysis

The outflow of FDI is of great concern to the Chinese economy, but perhaps less so to China’s political leaders. Fiscal stimulus–itself a partial response to the flight of some foreign investors (and their dollars)–will likely continue, although its utility as a long-term policy solution is up for debate. Yet while General Secretary Xi Jinping was on the charm offensive in San Francisco (see below) as part of an effort to entice foreign investors, policy moves at home suggest that tightened political control of foreign businesses and the economy more broadly is here to stay. In short, Xi’s actions do not match his reassuring words for foreign investors.

Further signals suggest that political control over economic actors continues to dominate the CCP’s decision making.In a sign that China is serious about clamping down on its shadow banking sector, for example, authorities opened a probe into the Zongzi Bank (aka ZZ Capital) conglomerate after it declared itself “severely insolvent.” At the same time, corporate executives continue to disappear, with senior executives at video-streaming company Douyu and a major pharmaceutical company, to name but a few, both going missing in the past few months. Moreover, political oversight over AI development, exemplified through the establishment of China’s new National Data Administration agency 国家数据局 that was announced in March of this year, points to an assertion of government control over emerging technologies that it hopes will provide solutions to flatlining growth figures. While much uncertainty remains about China’s macroeconomic health, Xi’s actions thus far suggest that domestic political and ideological considerations will predominate over domestic business values. This dynamic, combined with the EU’s maintaining a tough stance against China in the lead up to the upcoming EU-China summit, suggests that China will be slow to shake off its “uninvestable” label for foreign investors.

Analysis

As a symbol of thawing tensions, the Biden-Xi meeting was a big success and gave both Biden and Xi their chance to pose as senior statesmen on the world stage. Xi looked visibly thrilled when presented with a Golden State Warriors jersey and gave a speech that dramatically shifted the tone compared to remarks earlier this year when he painted the US as an adversary. 

A major risk for the Biden Administration will be if its overtures to Beijing yield little change in the CCP’s policies or ambitions. Chinese promises at domestic policy changes may be challenging for Xi to implement, or he may be unwilling to hold up his side of the deal and happy to renege on feel-good promises made during the visit. US business leaders, for example, will undoubtedly be concerned about the lack of concrete steps for improving the investment environment and ensuring employee safety. Local employees of US companies like Mintz, for example, remain detained in Beijing on charges of conducting investigations involving “foreign-related statistics inquiries” without legal permission. A major question hanging over the visit will therefore be whether and how the agreements negotiated in San Francisco are implemented. 

The pushback from some in Congress against Xi’s visit also was intense. In an attempt at public shaming, the House Select Committee on the CCP published the names of business leaders present at a dinner with Xi in San Francisco during the summit. A challenge for maintaining high-level dialogue will therefore come from loud voices in Congress, particularly among Republicans, for whom being “tough on China” is an increasingly winning election strategy.  

A word of caution may come from one of the US’s allies. In Australia, Prime Minister Albanese’s concessions to China in dropping its WTO complaints against Beijing–a condition for a high-level meeting with Xi–led to very little in return and arguably rewarded Beijing for its earlier imposition of punitive trade restrictions. While Albanese can claim to be “resetting” Australia’s erstwhile frosty relations with China in favor of improved bilateral trade, the cost appears to be largely Australia’s to bear with little downside for China. The Biden Administration would do well to avoid a similar capitulation.

Analysis

The US government and companies alike should pay attention to China’s ambitions in the deep seas. China controls up to 95 percent of the world’s rare-earth metals or refining facilities, and is already years ahead of the US in the one area that could change this balance. Although there is no binding regulatory body controlling seabeds, the International Seabed Authority (ISA) was established by the 1982 UN Convention on the Law of the Sea functions as a norm-setting institution; China currently holds five of the total thirty seabed exploration licenses approved by the ISA, the most of any country. While the ISA did not approve the next phase of Chinese exploration in July, it does prevent China from maximizing its current licenses and identifying and controlling potential new mineral-rich seabeds.

As the leader in both DSM exploration and technologies, China also has the opportunity to shape the development of the industry in its desired image and serve as a gatekeeper to further US and EU access to mineral-rich seabeds. Such minerals are, of course, critical to the development of clean energy sources and EV batteries, as well as the development of new defense technologies. China’s current dominance in DSM is, therefore, not only a lost business opportunity but a national security concern. At the same time, China is not so far ahead that a concerted effort on the part of the US and its allies cannot close the distance, and DSM therefore also offers a potential avenue for breaking Chinese stranglehold on global supply chains of rare earth metals and minerals.

Analysis

The Biden Administration’s export ban on sensitive technologies is reshaping how Chinese companies and consumers source and manufacture key components. Chinese manufacturers are finding creative ways to circumvent US export bans of sensitive technologies. Nvidia’s chips for the Chinese market were intentionally made with slower processing speeds than their US counterparts to comply with export controls, before the Biden Administration outlawed these chips as well. However, Chinese companies are allegedly extracting RTX 4090 GPUs chips from Nvidia products that were bought prior to the US’s export ban and are now using them extensively in new products for Chinese consumers.

While such a move is emblematic of how Chinese companies often rapidly adapt to market innovations, it also highlights how demand for chips drives these companies to reuse Western technologies for their own products and profits. Companies in chip manufacturing or semiconductors should therefore be especially attentive to how their products might be deconstructed for use as parts in Chinese products.

Analysis

The scale of NXP’s stolen IP theft is not public, but is likely extensive. It also puts statements by Dutch intelligence naming China “the biggest threat to the Netherlands’ economic security” into a new light, as these comments came after Dutch government sources were aware of the NXP hack and shortly before a ban on advanced microchip exports to China. Other Dutch chip manufacturers have also accused Chinese employees of stealing corporate information. The hacking is part of a pattern of Chinese-sponsored groups stealing corporate data related to chip manufacturing and semiconductors that highlights the growing threat to Western companies and organizations, particularly those engaged in sensitive technologies. As the Director General of the Dutch national intelligence agency noted in April this year: “The Chinese use cyber as a weapon, cyber as a way to commit espionage, but they also send people to us — students, but also scientific persons of all kinds to especially steal knowledge from very vulnerable places.” 

Details of the hacking reveal that seven unnamed Taiwanese chip manufacturers also had extensive IP stolen during the same operation, presumably through compromised communications with NXP. NXP recently announced that it intends to continue accelerating its investment in Taiwan, which makes the hacking scandal even more pressing for Taiwan’s security and position within global semiconductor supply chains.

Analysis

Despite DPP optimism about the Lai-Hsiao ticket, its advantage currently stems from weakness among the opposition rather than the strength of Lai himself, who is seen as a staunchly anti-PRC candidate, capable of upsetting the fragile peace in the Taiwan strait. Although Lai and the DPP’s overall approval rating dropped nearly 20 percentage points in recent months (from 41 percent to the low 20s), the election is still his to lose. The traditional opposition party, the KMT, is running arguably the least popular of the three presidential candidates (Hou Yu-ih) but benefits from being an established party with all the relevant machinery in place. Conversely, the relatively new but increasingly popular TPP is headed by the charismatic Ko Wen-je, who is likely to motivate turnout at the polls among younger voters; however, the party’s newness also means it lacks the infrastructure to support a strong campaign. Assuming the DPP comes out on top in January, the US and companies doing business in Taiwan will want to tread carefully until Lai makes his position on PRC relations clear to avoid getting caught out by potentially provocative language on the issue.