Analysis

As the Vice-Premier responsible for financial markets, commerce, and trade, He Lifeng is a predictable choice as the new Economic Czar. He is a close ally of Xi Jinping, having overlapped in Fujian when both worked for the Xiamen city government and then later when Xi was governor of the province, and is therefore a politically trustworthy choice for overhauling the party’s monitoring of the financial sector. He also makes for a convenient future scapegoat for Xi if the Chinese economy continues to sour. 

Despite He’s assurances that the Chinese economy is doing well, China recently reported its first quarterly deficit in foreign direct investment since 1998, and prominent foreign companies, such as Gallup, announced that they were closing their China-based operations. In a widespread and intensive effort to prevent the collection and distribution of “unofficial” data that the Party deems politically sensitive (broadly and ambiguously defined), the CCP is specifically targeting consulting or research companies like Gallup that produce their own consumer or economic data. For foreign companies remaining in China, the various bodies under He’s leadership will increase demands for access to company data on the grounds of ensuring compliance with new financial and national security regulations. These demands pose serious data privacy questions about who has access to sensitive foreign company information. That access gives the CCP, the PRC government, and potentially every Chinese company free rein to steal IP, which is already endemic. Moreover, foreign companies that do not comply with these broad and vague regulations open themselves to investigation, fines, asset and data seizures, and even detention of company personnel. While these regulations are new, they represent increased emphasis, but no significant change, in PRC and provincial level actions. The Party has been using existing regulations to achieve the aforementioned effects for some time. Companies operating in China should therefore separate—to the extent that any multinational entity can—any China-based entities from counterparts outside the PRC, and minimize the sharing of information between these entities, while working on the assumption that any data gathered or stored in China is available to the Communist Party (and therefore Chinese competitors).

Analysis

After Xi showed that he was willing to forego the G20 in India to avoid a meeting with Prime Minister Modi over geopolitical squabbles, his decision to attend APEC in San Francisco and meet with Biden is a big win for the US and the State Department. The push to increase dialogue from zero to multiple exchanges between political elites is a clear sign that both sides increasingly wish to reduce tensions, even if the meetings themselves do not yield specific outcomes.

One victory from recent meetings was China’s publication of regulations on methane control, which resulted from a dialogue between John Kerry and Chinese counterparts. Recent overtures appear to be having some effect in China, including a notable increase in favorability towards the US in recent polls, although this has not translated into a more favorable business environment for US companies operating in the country. Moreover, recent reports that the US is arming Taiwan and willing to defend the Philippines will hinder any dramatic improvement in PRC attitudes toward the United States.

Analysis

One place China may look to spur economic growth is the rapid development of domestic semiconductor technologies, which currently supply only around 15 percent of China’s needs. With export controls now in place in the US, Japan, and the Netherlands–the three biggest and most advanced exporters of these technologies–China is going to find itself in a difficult position. On the one hand, the new controls will certainly hinder China’s short-term capacity to produce advanced semiconductors; on the other, the lack of access abroad is certain to spur development of domestic technologies to replace previous foreign imports, and those efforts will benefit from unfettered access to the rare minerals and metals necessary to make such advances. While this may look like a win for the West in the short-term, the long-term effect may be the development of Chinese technology of unknown capacities and completely independent of foreign supply chains, which will ultimately decrease Western leverage over China. This does not mean companies should jump to partner with Chinese companies and share sensitive IP with them, but it is a reminder that defensive policies can produce unknown and unintended consequences. 

China’s growing influence on the global supply chain should be cause for concern, especially in the short term. Although the Biden administration’s Inflation Reduction Act and the EU’s Critical Raw Materials Act are intended to help cultivate domestic or allied sources for rare earth metals and minerals, they are too little, too late. Between 2018 and 2021, nearly 75 percent of the US’s rare earth metals were imported from China and, for the EU, that number climbs to 99 percent. Even if China refused permits for a third of requested future sales (a conservative assumption), the short-term implications could devastate the defense and tech industries that require these resources to produce current technologies and create new ones. Moreover, estimates are that it will take a decade, if not longer, for the US and EU to catch up to China’s refining capacities, even if we try to recycle existing materials. In short, brace for shortages and price hikes of key minerals and metals, and actively invest in the development of alternative suppliers and refining facilities not tied to China.

If companies are looking for potential non-China suppliers, the Australian government’s recent decision to double funding for financing critical minerals, including lithium, cobalt and rare earth ores, to the tune of US$1.26B, should provide hope. Although Australia lacks the refining capacities of China–who currently possess 90 percent of the world’s refining capacities for cobalt, lithium, and nickel–the increased investment is intended to attract new businesses and innovation to help close the gap. In addition to partners down under, Sweden also recently discovered a deposit of rare earths that has the potential to significantly reduce its reliance on China, although it, too, is estimated to take 10 to 15 years for it to be mined at full capacity. Investors are similarly optimistic about new projects in Chile, which is known to have large deposits of rare earths, and private investors have committed US$130M for exploring new and environmentally friendly mining options. Lastly, a potential deposit of rare earth metals worth up to US$37B was just reported in Wyoming, although samples need to be taken and it would be years before mining could begin.

Analysis

The Biden Administration intends that its executive order will set AI governance standards worldwide, with the US hoping to continue its leadership in setting global industry and technology standards. Yet China’s first-mover advantage means that some of the Biden Administration’s ideas appear to parallel Chinese guidelines in a geopolitical race for AI leadership. While the EU is taking a more measured approach, the US and China are battling out over whose regulations will become the standard for tech companies worldwide. Xi has made tech and AI an important part of the party’s leadership strategy, which he recently reinforced at a speech at the World Internet Conference.

The US’s claims to be tackling China head-on in AI governance, however, were undermined by reports that the Pentagon gave around $30 million in federal grants for research by a leading AI scientist at UCLA, who was involved in establishing a parallel institution in Wuhan and joined a CCP “talent plan” that aims to transfer technology innovation back to China. While it appears that the professor in question was not acting nefariously, the co-option of overseas AI development to support China’s domestic innovation is a common tactic of the CCP in its race to dominate global AI. Companies working in AI should be especially vigilant that their data is secure, that their personnel are protected from being approached by foreign agents, and that they have vetted any other entities with which they are conducting business.

Analysis

The CCP’s distrust of weather stations as sites of potential foreign espionage dates back to the early years of the PRC and has long been a source of party paranoia. In this case, however, party officials accused foreign entities of illegally deploying weather monitoring stations that both failed to submit data to authorities and transmitted the data overseas without approval, in violation of China’s national security and data laws. This approach reinforces the CCP’s increasingly restrictive and hostile approach to foreign businesses, and specifically highlights how China employs its new national security laws across industries and sectors to eradicate any data collection not sanctioned by the party. The public announcement of these findings did not likely spring from any genuine national security concern. Rather, it likely signals that the party is serious about its new national security guidelines and that foreign entities operating in China–regardless of sector–should take notice and behave accordingly.

Taiwan, on the other hand, is keen to showcase its new weather satellite as a signal that its economy is more than semiconductors, and is also competitive in other technologically advanced industries. Taipei continues to push technology sharing and cooperation as part of its concerted efforts to pursue economic relations with Western democracies, notably in the recent signing of an Enhanced Trade Partnership with the UK and closer ties with the Baltic states. As national economies engage in a global mitosis between competing nodes of China and the West, Taiwan’s outreach efforts will likely play an increasingly prominent role in Western tech cooperation as a barrier to Chinese espionage efforts.

Analysis

The Philippines recently canceled all Belt-Road Initiative projects in the country, started buying Japanese naval equipment, and has been growing closer to the US. All of these moves mean that tensions between Beijing and Manila are likely to not only increase, but could implicate the US in a confrontation with China in the near future. Importantly, the US is treaty-bound to protect the Philippines in case of attack by an external party, which may be a reason why the Philippines is emboldened to act more aggressively to defend its interests in the South China Sea. As both Beijing and Washington appear keen to improve US-China relations, at least at the elite level, events in the South China Sea may disrupt the positive overtures and threaten global security.