Analysis

The sacking of General Li, likely because of a disagreement between Xi and Li over defense policy, suggests some dissatisfaction among some party elites with Xi’s leadership. It also suggests that Xi feels threatened by this discord. Members of the party’s old guard, for example, are rumored to have reprimanded Xi at a recent meeting for his lack of attention to China’s economic troubles and aggressive behavior towards foreign partners. China’s increasingly bellicose activity in the Taiwan Strait may therefore be a way to deflect from party in-fighting, although it also points to a possible attempt by the PLA to assure its “combat readiness” for a future military operation against Taiwan, a point that Xi has pressed as being crucial to a future invasion of the island. 

Importantly, Xi’s removal of party and business elites, including General Li and insurance chairman Wang Bin王滨,  highlights the CCP’s willingness to accept removal of political and economic leaders deemed incompatible with the party’s priorities. This elite turmoil is particularly noteworthy as companies operating in China may find their in-country leadership detained without notice and will need a strategy for how to respond accordingly.

Analysis

Many states in South and Southeast Asia hope to balance relations with both the US and China without framing their diplomatic efforts as such. Vietnam, for example, repeatedly stressed that its recent engagement with the US was explicitly not about the rising threat from China. While China’s aggressive behavior is incentivizing states to align closer with the US, this does not necessarily mean that these states will be friendlier to US government interests or investment opportunities. Reports surfaced during Biden’s visit to Hanoi, for example, that Vietnam continues to engage with Russia to potentially procure weapons in violation of US sanctions. US companies looking to shift operations into India and Vietnam from China should therefore proceed cautiously.

Analysis

China’s housing market will not recover soon. While Country Gardens has won a temporary reprieve, it now has to work on moving its surfeit of stock. This is not only a domestic problem, because international developments, like the unfinished Forest City in Malaysia, also suffer from lack of interest and have become ghost towns. To aid property developers, China recently adjusted housing policies to encourage new home purchases and absorb surplus, including easing restrictions on second home purchases and reducing downpayment ratios. At the same time, other initiatives, like the interest-free lending program initiated by the People’s Bank of China, has only dispersed 1 percent of allocated funds since last November for lack of “qualified projects.” Given both the aging and declining Chinese population, the Chinese housing market appears to be fundamentally changing and may be unable to rise to the heights of previous decades. As housing is a proxy for how the Chinese economy performs more broadly, companies should continue to monitor the sector for indications of China’s economic and financial stability. 

European fears of cheap Chinese EV parts are also only part of the picture. As discussed in our Aug 22 report, the EU passed the European Chips Act only a few months ago. While this is in large part a reaction to the US’s exclusion of European vendors in the CHIPS Act, it also has led to the further sidelining of China. This was evident in the recent announcement by the Taiwan Semiconductor Manufacturing Company that it will build a semiconductor fabrication facility in Berlin. While von der Leyen has said that Europe is not decoupling from China, the EU’s version of “risk reduction” may have the unintended consequence of actually increasing tensions between the EU and China by sidelining China from all the major industries it is currently trying to develop. Regardless of its decoupling and/or risk reduction, however, the EU is wise to try and diversify its supply chains and limit its reliance on China, as the increasingly politicized Chinese business environment is becoming downright unstable and unpredictable.

Analysis

The fusion of tech and politics in China makes it impossible to separate industry priorities from those of the CCP. New regulations for governing members of the Chinese Academy of Sciences, for example, emphasize how science and technology should serve the party, and tech companies must report software vulnerabilities to China’s Ministry of Industry and Information Technology before patches become available. Consequently, Chinese-made devices, such as Huawei’s new phone, are more intrinsically tied to the CCP than similar foreign-made devices are to other governments. This means that sanctions evasion by Huawei is especially concerning for US policy makers as it highlights fundamental flaws in these sanctions’ effectiveness. This tech-politics fusion also means that it will be challenging for companies with significant China exposure to thrive in the US. As chip manufacturer Arm recently discovered, exposure to China can trigger heightened questioning by investors ahead of a company’s IPO, as they become increasingly cautious about companies with significant revenue sources in China. 

Conversely, despite trying to remain above the geopolitical fray, Apple’s association with the US has made it a target in China. “US” companies in China, even if in a joint venture or have a distinct domestic brand, face future trouble both in terms of outcompeting “Chinese” companies for consumers and avoiding protectionist or national security restrictions. This is particularly true for the tech sector and companies operating in sensitive or critical industries, many of which will likely have to recalculate the benefits of continuing operations in China.

Analysis

Regardless of the details of the case, news of an alleged Chinese spy in parliament is likely the last nail in the coffin for those hoping to revive the “Golden Era” of UK-China relations touted by former Prime Minister David Cameron. The recent outcry against China among UK parliamentarians, however, lacks a comprehensive strategy to counter Chinese influence. Unlike the EU, which recently released a series of plans to combat Chinese espionage and economic threats, the UK has not publicly released a strategy and is instead attempting to walk a tightrope where it neither labels China a threat nor embraces it as a partner. This case, however, will increase the political cost for UK politicians or business leaders who advocate for more cordial relations or a more nuanced debate about Sino-British relations. Considering the high level of access that the accused researcher had to key government ministers, including the British Defense Minister, the case may also trigger a renewed appraisal by Washington of how Five Eyes members share sensitive information. 

Chinese espionage operations in the UK and the US are not new, but are becoming increasingly bold. While recent discoveries of Chinese nationals in the vicinity of US military bases highlight how the CCP sometimes relies on its own citizens to spy, the cases in the UK depict the parallel effort to co-opt non-Chinese nationals into spying on behalf of the CCP. Businesses should therefore consider how sensitive information is shared internally to restrict the potential for industrial espionage from a range of potential sources. Catching spies is hard. It is harder when you are not looking for them.

Analysis

The CCP’s encouragement of overseas “Little Pinks” signals a particular challenge for both police forces and governments, which are trained to take accusations seriously but are largely ill-equipped to spot swatting-like behavior. China’s willingness to exploit the openness of democratic systems, from falsely reporting those critical of China to impersonating voters, demonstrates that the CCP’s capacity to control its narratives and to censor dissent is extending beyond Chinese nationals towards anyone deemed critical of China.