Analysis

The reasons for Li Shangfu and Qin Gang’s disappearances earlier this year are unclear, although it is likely that they either disagreed with Xi and the party center or, as is more likely in the case of Qin, their personal lives distracted from the party’s tightly choreographed public message. More generally, the turmoil at the top points to Xi’s desire to keep individual politburo members focused on pleasing Xi. As Matt Pottinger, former Deputy National Security Advisor in the Trump Administration, argues, “...upheaval is a feature, not a bug, of Xi’s rule,” insofar as it allows Xi to centralize power and maintain the loyalty of the party elite.

The establishment of the Central Financial Commission further tightens Xi’s control over the economy. The commission will likely prioritize the CCP’s direction and streamlining of financial regulation. This is likely a response to a lack of party oversight of micro-lending, individual payment platforms developed by tech companies, and shadow banking and peer-to-peer lending arrangements that currently operate in a gray area of government oversight. These payment platforms became particularly sensitive in 2020 when tech giant Alibaba’s Ant Group, founded by Jack Ma, presented a threat to state monitoring of financial transactions. Companies operating in China will need to play close attention to how the Central Financial Commission develops, including who it recruits as its top leadership, to ensure that financial transactions with Chinese entities comply with new regulations.

Analysis

Newsom’s visit aims to replicate the successes of the Obama Administration in its negotiations with Beijing on climate change, which culminated in the Paris Accords (which the Trump Administration promptly withdrew from). The challenge is that while China is a leader in renewables and EV production, it is also a significant producer of emissions and a champion of fossil fuels. Newsom’s trip is also one of his more high-profile engagements on the world stage as he gears up to a possible presidential run as Biden’s successor. Newsom and the Biden Administration’s overtures to high-ranking exchanges with the CCP, however, face increasing criticism from members of both parties. Newsom also risks undermining US foreign policy by providing the CCP with fodder in their PR war against the US federal government.

Wang Yi’s visit will likely aim to negotiate the terms for a potential Biden-Xi meeting at APEC in San Francisco, but repeated calls from both Democrats and Republicans for the Biden Administration to be tougher on China will give Xi an excuse to withdraw from the summit, as he did with the G20 in Delhi to send a message to the hosts.

Among other reasons Xi might cancel his visit, the Congressional Strategic Posture Commission published a report that opens with a discussion of “the militarily troubling and increasingly aggressive behaviors of Russia and China,” and details threats to the US. In addition, three Republican senators–Rubio, Wicker, and Risch–published a letter underscoring the US’s commitments to the defense of the Philippines against Chinese encroachments in the South China Sea. Meanwhile, Republican House members requested a probe into Fufeng Group, one of China’s largest producers of food additives, on national security grounds and accusations of forced Uyghur labor.

Yet as scholars point out, disentangling trade or commerce from security concerns is not always simple or straightforward. As being “tough on China” becomes more mainstream in US politics, a major challenge for US companies will be to avoid accusations of facilitating forced labor in supply chains that stretch back to China, or of allowing Chinese vendors to evade US restrictions on certain exports like sensitive technologies. This may not always be clear cut, with complex supply chains often obscuring the origins of product components. Moreover, such “de-risking” brings its own challenges. This means that due diligence will likely become increasingly central to companies that want to avoid potential political fallout over their business engagements as companies shift production and sourcing to friendlier locations.

Analysis

One key update to the US’s new export controls is that companies selling semiconductors and/or chips to countries currently under a US arms embargo, such as Iran, will now need to seek permission before completing such sales. While this may curtail some onward sales, this does not, however, solve the US’s problem. This is because certain allies, such as South Korea, have already been exempted from these requirements and can freely sell US tech onward to China. As a result, such changes appear to only provoke China while not guaranteeing the results they seek. On the other side of this trade war, China’s limiting the export of graphite is part of a larger and concerted effort to exert influence on global supply chains. Earlier this year, China imposed restrictions on the export of rare-earth metals germanium and gallium, and graphite has now become another weapon in their trade arsenal; all three are key components to EV batteries.

Chinese EV and EV-battery makers are finding themselves in increasingly attractive positions. While the global market and supply chains are suffering on the whole, Chinese companies are benefiting. For instance, China imposed graphite restrictions on Sweden–Europe’s largest battery maker–in 2020, and then in May of this year a Chinese company, Shanghai Putailai, announced a US$1.5B anode factory in Sweden. Combined with Chinese companies’ joint ventures in Morocco, which would allow China’s products to flow into the US and be eligible for the US$7,500 tax credit under the Inflation Reduction Act, it is clear that China is adopting a multi-pronged approach that punishes the US, circumvents US restrictions, and creates opportunities for the growth of Chinese businesses.

As US companies continue to bear the consequences of US government actions, it would be wise for the government to think of other ways of helping companies recoup lost earnings or secure alternate supply lines. Secretary of Commerce Gina Raimondo announced that the Department of Commerce intends to revise the controls annually to keep pace with evolving technology. While this makes sense in theory, it also creates great uncertainty for tech companies that may lead to losses. For instance, Nvidia stocks lost 3% of their value after the updated regulations were announced because the regulations nullified Nvidia’s revised plans made in response to last year’s regulations (which involved specifically manufacturing slower chips for sales exclusively to Chinese markets). Consequently, tech companies may push back against government oversight if such controls do not become more predictable. However, on the business side, companies like Nvidia must also devote more effort to understanding not simply the effects of China’s behavior on the bottom line, but likely US legal and regulatory responses.

Analysis

Many in Taiwan are drawing parallels between Terry Gou’s position with Foxconn’s legal challenges in China and Alibaba founder Jack Ma, who was similarly cut down to size by the CCP after publicly criticizing its finance policies. The CCP’s slapdown of Ma, along with several other billionaires in China, was a display of strength by the party. For Gou, the moves may similarly be about curtailing his negative public comments against the party in his election bid, but it is also likely a move against a famously Taiwanese entity operating in China. The parallels with Jack Ma are limited, as Gou is likely being used as a pawn to punish Taiwan. China’s retaliatory attacks on foreign companies as a response to geopolitical tensions are hardly new. However, such attacks are becoming more brazen and more targeted towards individuals within foreign companies. Extra consideration should be taken by foreign companies operating in China before they send company representatives to China.

The CCP’s punishment of foreign individuals is not limited to those who travel to China. As the case of Canada’s spamouflage attack highlights, the CCP is willing to go after any critic of the party, regardless of location. The case also highlights the challenge of weaponized AI and social media platforms in spreading disinformation at the expense of Western politicians, activists, or business leaders. As Chinese AI companies like Zhipu aim to build a Chinese equivalent of OpenAI through investment from tech giants like Alibaba and Tencent that are intimately tied to the CCP and the priorities of the Chinese state, China’s AI capabilities will create additional–and likely increasingly convincing–deep fakes and disinformation. Spamouflage attacks like those in Canada will therefore likely increase and become more sophisticated, with potentially chilling consequences on public discourse.

The news from Canada may also trigger renewed scrutiny of Ottawa’s policy on foreign investment in Canadian real estate, which is generally permissive of foreign ownership of land and property. A challenge for the Canadian property market, however, is that mortgage borrowers are increasingly unable to meet regular interest payments and risk default, which is leading to a heightened risk of a bank run in Canada. This means that security concerns about foreign property ownership will likely take a backseat when foreign investments are available–even if they are from Russia or China–to buoy the banking sector.

Analysis

The head of MI5 was quick to emphasize that much of Chinese espionage is targeted towards IP theft, particularly in the tech sector and especially in critical industries like semiconductors. Moreover, the targets of many of these state-sponsored efforts are increasingly small and medium-sized businesses, start-ups, and universities, which are often less focused on data security than larger companies. Chinese companies also try to gain access to sensitive technologies through predatory investment, where complicated company structures–a favored technique of Chinese investment firms–obscure investor’s connections to Chinese entities and allow these companies to avoid investment restrictions. Extra care needs to be taken by firms engaging in the transfer of assets or data with other companies, and in ensuring that existing data and IP are secured from unauthorized access or theft.

Analysis

Australia’s decision to not terminate a 99 year lease held by Landbridge Industry Australia, a subsidiary of China’s Rizhao-based Shandong Landbridge Group, on Darwin Port in northern Australia, has drawn ire in Washington as the US now uses Darwin as a base for its military forces and is concerned that China may use the facility for espionage. Similarly, New Zealand’s Prime Minister, a conservative, visited China in an attempt to woo investment to New Zealand and has expressed reservations about participating in AUKUS defense arrangements for fear of creating tensions with Beijing. Both cases highlight that even among US allies, economic interests and security concerns often conflict.

This issue also underscores that global companies with footprints in Australia and New Zealand should be especially cautious about potential infiltration or data leaks. China will likely aim to exploit the less stringent security measures and more favorable political environments in these Five Eyes countries to gather data on business and government actors in the US. This spells a potential re-examination in Washington of the importance of Five Eyes when two of its partners are willing to engage in more risky behavior with China than the other three.