Analysis

The announcement of the new law conclusively eviscerates hopes that Hong Kong might remain somehow independent of the CCP’s grip. It further confirms that Hong Kong’s political leaders are committed to making Hong Kong a de facto part of mainland China, or what might be termed the city’s “Mainlandization.” This prioritization of politics over economics or local distinctiveness looks set to deepen further Hong Kong’s economic and demographic troubles, from a poor performing stock exchange to a continuing outflux of skilled residents. Many foreign business people reported pessimism about Hong Kong’s economic future. A recent survey noted a sharp increase in concerns that Hong Kong is an increasingly unattractive destination for finance, consulting, and other industries. 

The new law underscores the CCP’s continuing push for “national security”  (defined as anything Beijing dislikes at the time) over business or economic sense, particularly when foreign businesses are concerned. This trend looks set to not only continue, but tighten in both Hong Kong and China. Moreover, the CCP’s willingness to pursue Hong Kongers overseas, even after they have moved abroad, suggests that the CCP’s already broad view of national security is global in scope, as the party’s paranoia makes it willing to target dissidents worldwide. While neither of these points is new, Hong Kong’s law highlights the CCP’s increasing capacity both to act on this expansive view of security and willingness to forgo foreign capital, investment, and skills as it creates a more hostile environment for foreign businesses. Foreign entities still operating in Hong Kong should proceed with extreme caution and pause planned expansions or investments in the city until further clarity about the legal implications of the proposed law are more certain.

Analysis

While both the US and China have agreed to continue bilateral meetings between officials at various levels, Sullivan’s meeting with Wang reflects realpolitik about how to engage with the CCP in areas where cooperation is possible, while maintaining a suspicious eye towards each other (see “Espionage Alert” below). This “frenemy” status, however, faces two major challenges that the Biden Administration will have to address in the build up to the 2024 election. First, what is the endgame of reestablishing engagement with China (a hotly debated question in both DC and Beijing)? At present, simply keeping communication open appears to be the priority, at least for the Biden Administration, but the ultimate desired result of that communication is less clear. Whereas previous administrations considered engagement with China as a way to ensure its participation in the international rules-based community, the contemporary CCP has alternative ambitions to both shape and reset the existing order in its favor. While communication is admirable, it is unclear whether the US has fully thought through the purpose of that dialogue. 

Second, should the US maintain engagement with China amid increasingly hostile acts, including espionage and cyber attacks, by the CCP? As we enter the 2024 presidential election cycle, individual politicians will likely face increasing pressure at home to signal their “tough-on-China” credentials. With debates in the US about new restrictions on Chinese tech imports, visa restrictions and other measures, and as China increases its anti-US rhetoric at home, it is unclear whether both sides will be able to generate or even maintain a productive dialogue under intensifying countervailing domestic pressure. Despite high-level meetings, the general trend in US-China relations therefore continues downward. This means that even if businesses are still able to navigate between the two countries under current conditions, they should also have a strategy in the event that the US and China worsen or break altogether.

Analysis

While the increase in EV sales for China does signal future growth, plenty of reasons suggest caution is due. On the domestic side, China has strongly disincentivized its citizens from driving Teslas, with bans on driving them into government or other sensitive venues. Globally, this is part of the growing tensions between the US and China, where the US Secretary of Commerce, Gina Raimondo, called Chinese EVs a security threat following new-year restrictions on US EV tax credits to exclude cars with batteries sourced from China. Given Western fears and protectionist responses to China’s surging capacity for EV production, Beijing has also said it will try to rein in production, which may hamper the industry’s competitiveness. 

A less prominent aspect of this story is how the collapsing property industry is also likely to affect the sustainability of China’s EV dominance. The Chinese city of Hefei is an EV manufacturing hub that provincial government investments have carefully cultivated; Hefei now produces more cars than the state of Michigan. With a provincial holding company worth US$86B, Hefei officials are able to support companies that need cash. The catch, however, is that much of that money is produced through the sale of land leases to developers, which dropped 38% in 2023 relative to 2022. The number of apartments sold was also down 45%, and the total floor area of planned projects was down 57%. The result is that the Hefei government is running out of funds to prop up the companies that are fueling the EV boom. We should be on the lookout for if and how such provincial-level concerns get resolved, as they will dictate much of the future competitiveness of Chinese EVs.

Analysis

In a demonstration of the need for a Taiwanese AI model distinct from Chinese-made equivalents, Japanese testers of Baidu’s Ernie Bot asked the model “who won Taiwan’s presidential election?” and were met with a response of “Lai Ching-de” followed unprompted with a CCP policy line that “there is only one China.” The Taiwanese government’s investment in AI represents a partial pivot towards software innovation compared to its historical embrace of hardware development in fields like semiconductor manufacturing. This investment, however, remains small compared to the Chinese government’s embrace of AI development as a national-level development priority, which continues to incentivize innovation in China’s burgeoning tech ecosystem. Moreover, Taiwan’s approach currently aims at a model that appears to be primarily for domestic use, whereas China’s models are intended for both domestic use and export.  One of the challenges for Taiwanese variants will therefore be that China is increasingly able to set global standards in AI, in addition to determining who and where AI models are deployed around the world. 

The AI geopolitical tech race is heating up. The Biden Administration recently announced that it wants tech companies to flag foreign users of US models. A major challenge for the US, other governments and corporations will be that AI will significantly ease the production of disinformation in a variety of languages, and could incentivize users to rely on Chinese-built models. The danger here is that the Chinese models can both harvest user data and provide responses that are in line with the Chinese Communist Party’s priorities. While Taiwan’s investment in AI development is a necessary step to compete with Chinese disinformation and to counter the security ramifications of Chinese models accessing Taiwanese users’ data, Taide therefore represents a relatively small first step towards actively competing with China in the AI arena. Taide’s development underlines that innovation in AI continues to dominate this vital new frontier of geopolitical competition for both governments and corporations.

Analysis

While Volt Typhoon is but one component of a much broader cybersecurity landscape, the public announcement that US agents have neutralized at least part of the group’s infrastructure suggests that the Biden Administration is keen to demonstrate both its capacity to respond to such threats, and to its allies that cyber threats from China are a significant threat to the West’s collective national security. That said, Volt Typhoon’s botnet approach highlights the vast challenge of this threat, whereby cyber attacks can target almost any product that is connected through the internet of things (IoT). This means that both governments and corporations are constantly and even increasingly vulnerable as IoT device numbers rise. Furthermore, IoT growth and vulnerability mean that individual employee’s home devices become as valuable to hackers as more obvious targets. In short, IoT attacks make cyber defense more difficult. For corporations, ensuring cyber security of both corporate data and insulating their data from potential botnet attacks through digital weak spots like IoT are therefore going to continue to be crucial tasks in the coming years.

Analysis

After a less-than-decisive election in January–in which the incumbent Democratic Progressive Party (DPP) candidate, Lai Ching-te 賴清德 (William Lai), won the presidency, but the opposition Nationalist Party (KMT) won more seats in the legislature–focus has shifted to the election of a new speaker in the Legislative Yuan. The third-place Taiwan’s People’s Party (TPP) announced that its eight legislators will vote for its own candidate, and then withdraw from the election process if no single candidate has the more than 50 percent of legislative votes to become speaker. This was indeed what happened. After an initial round, the vote moved to a second round where the KMT’s candidate for speaker, Han Kuo-yu 韓國瑜, was duly elected speaker. Han’s populist positions conflict with those of the DPP and the president-elect, and will most certainly lead to continued legislative showdowns that have come to define Taiwan’s politics. The move by the TPP also signals that it will try to maintain independence from both the KMT and the DPP, which means that it may well have more clout in the coming legislative session to define the agenda.