Analysis

Xi’s efforts are not just about stabilizing China’s US$ eight trillion stock market. Recent rocky economic conditions are a fundamental test of his domestic political legitimacy and his efforts to transform China into a global superpower. While some pundits see optimism in China’s economic future, many note that the markets have been repeatedly spooked by Xi’s persistent prioritization of political power over economic sense since the start of the pandemic, pointing to the targeting of foreign companies, a stock rout, and a clamp down on Hong Kong as examples of how China has become “uninvestable.” 

In response, the renewed focus by the center on the markets suggests that the CCP is determined to stabilize recent fluctuations and crucially to ensure that there is sufficient capital for tech startups that rely on the stock market, often in lieu of funding from state-owned banks that are more reluctant to lend to startups. These startups, which frequently rely on going public as part of their growth strategies, are an important component in the CCP’s ambitions for tech superiority, which means that there is an intimate relationship between China’s tech sector and the markets that have suffered greatly during the recent rout. Recent high-level personnel shuffles and the reassuring of foreign investors is therefore hugely important to China’s political future as both a stable economy capable of appeasing its domestic population and as a tech superpower capable of competing with the US on the world stage. It appears that, at least for now, there may be some relaxing of the draconian economic controls that we’ve seen over the past year.

That said, some relaxing of economic controls will not be enough to achieve Xi’s aims. Tensions between China and the United States continue to run high; and Xi has shown no sign of backing down in Hong Kong, reducing state-sponsored IP theft, or narrowing the expansive 2023 amendment to the counterintelligence law, which defines economic due diligence as espionage.

Analysis

The Select Committee’s tactic to call out US firms suggests that it is feeling emboldened to take on wealthy players in the US in both the VC and tech sectors. As the US Treasury drafts regulations prohibiting investments in certain sectors of China’s economy (sometimes called “reverse CFIUS), the Select Committee’s moves therefore help to position it ahead of the curve among the “tough on China” crowd on the Hill. For companies with investments in China, the threat of having their investments publicly questioned and their reputations damaged by the US Congress is now significantly higher, particularly if those investments are in the tech, defense, or other sensitive industries. 

Sequoia Capital responded to the accusations by explaining that its Chinese investment arm is now separate from the parent company, but this does not appear to have satisfied lawmakers. If this trend continues, which is likely even if Gallagher is no longer Chairman of the Select Committee, US companies will face added pressure to divest from China to avoid accusations of undermining national security. Moreover, tech and defense companies will likely face additional scrutiny over uses of their products or technologies in Chinese military or espionage efforts. Collectively, US companies will therefore increasingly require a “China strategy” to help address potential accusations of facilitating China’s military and economic rise. 

As one example of the risks that companies may face if they continue to engage with China in areas tied to forced labor or sensitive technologies, Volkswagen’s recent engagements in Xinjiang–part of the company’s long term investment in the region–have led to its cars being held by the US over accusations of forced labor in VW’s supply chains. Moreover, because of VW’s continued engagement in Xinjiang, a German investment fund labeled the company as itself “uninvestable,” borrowing the language used to describe the Chinese economy more broadly.

Analysis

 Given China’s dominance in the solar and PV markets, the West has difficult choices to make. It is not just China’s production of the solar panels themselves that is the problem, but its stranglehold on the entire supply chain. Even with Western efforts to diversify, by 2027 China is still predicted to produce 73.9% of PV solar modules, 79.5% of solar cells, 88.6% of solar wafers, and 89.2% of polysilicon globally, not to mention future plans of companies like Longi to aggressively expand into global markets. If clean energy is the way of the future–which seems to be the case, as investment in solar outstripped oil in 2023–then it means dealing with China in more nuanced terms than outright bans, controls, and tariffs. While the US and Europe are banding together to build new and alternative supply chains, joint ventures between US companies and Chinese counterparts may be necessary in the short term to learn from China’s expertise and help jump start the lagging US solar industry. This does not mean relying on China forever, but until the West can close the technology gap, then some uncomfortable alliances may be the most efficient option.

Analysis

Questions of digital security and supply chain sourcing cloud both Shein and Temu’s business strategies. Both companies have been linked with questions of forced labor in their supply chains, particularly in Xinjiang where the US has leveled accusations of slavery in the creation of fast, cheap fashion that relies on nearby Xinjiang cotton production. To counter this, Shein, like TikTok and other China-linked firms, has dramatically increased how much it spends on lobbying the US government in the past year in an attempt to mitigate reputational and legal fallout from its association with China (Shein is headquartered in Singapore but was founded in China). As Temu and Shein compete with each other for market dominance in the US, they look also to increase their influence on US politics. Notably, this raises issues for digital security in both the US and China - with China’s Cyberspace Administration expressing concerns about user data and exposure of Chinese technology at the same time as the US government articulated its own nervousness about these companies’ position in ecommerce markets. While the DOD has recently expanded its list of companies with ties to the Chinese military, less attention has been paid to companies like Shein and Temu that fall outside the traditional scope of defense or tech industries. Perhaps renewed public attention to these companies through Temu’s Super Bowl commercial will help to refocus attention on the risk of engaging with these platforms.

Analysis

HRL Laboratories, not to mention the FBI, will likely ask themselves how they did not identify suspicious activity from one of their employees sooner. The individual’s activities include extremely high risk behavior. These include applications to Chinese government-sponsored talent programs that aim to recruit talent overseas to assist with knowledge transfer back to China, repeated travel back to China, and attempts to access information and data seemingly outside of the employee’s job parameters. The risk is particularly high for sensitive industries, including the tech and defense sectors, where China’s prioritization of six arenas for national development, including quantum and AI, increase the incentive for espionage. 

Companies operating in these sectors need to be hypervigilant against these threats, either from individuals who seek to gain from their exploitation, or from employees who might be pressured to share corporate information, most commonly during a visit to China or an invitation to speak at a Chinese university or conference. Precautions should be taken to ensure that employees are aware of the potential risks associated with working in sensitive industries and how to protect themselves accordingly.

Analysis

Hong Kong’s already tarnished reputation sank lower this week as China effectively banned soccer star Lionel Messi. A friendly match between Messi’s Inter Milan and a local Hong Kong team in the city turned sour as Messi remained on the bench for the entire game, despite the Hong Kong government’s assumptions that Messi would play. The game, part of a government campaign to “elevate Hong Kong’s status as Asia’s world city,” instead led to legions of angry fans, ticket refunds, and the Chinese government canceling the Argentine national team’s upcoming tour of China, a move that may also be punishment for Argentina’s new president’s withdrawal from BRICS. Messi’s seeming refusal to shake Hong Kong Chief Executive John Lee’s 李家超 hand and a later appearance during a game in Japan further fanned nationalist flames in China, with some speculating that Messi had made a political statement against China and Hong Kong. Messi’s fall from China’s grace showcased the risks of engaging with China even for high profile individuals (and companies) as Chinese nationalist rhetoric continues to drive political decisions in both Beijing and Hong Kong. Far from highlighting Hong Kong’s post-Covid revival, the event further underscored that, in the words of one Yale professor, "Hong Kong is over.”