Analysis

China’s slowing economy will take center stage this July as the CCP’s top leadership announced that it will discuss how to reinvigorate flatlining economic growth. Party elites are set to unveil major economic policy reforms at the much-delayed Third Plenum, which is usually held in the fall after the Party Congress. The CCP will likely use the Plenum to recapture market confidence, which has been shaky with revelations that China’s economy is not growing as fast as official figures suggest and with foreign investors facing increasingly challenging business conditions in China. While details about the Plenum are mirky, senior officials will likely announce major state intervention in specific sectors, including the real estate sector, local government debt, and tech. Foreign companies should proceed with caution in the lead up to the Third Plenum, and pay close attention to announcements that favor state support for Chinese domestic companies over foreign counterparts. The increasing pressure from top CCP leaders for the government to support domestic industries means that foreign companies should ultimately prepare for the possibility that they may ultimately need to cease operations in China. 

The major buzzwords for the Plenum are the catchy “comprehensively deepen reform” and advance “Chinese-style modernization,” which, while purposefully vague, is party-speak for continuing to push for economic growth, embracing new technological innovation or “new productive forces,” and ensuring the primacy of the CCP. These effects are already being felt in parts of the Chinese economy. Provincial and local governments, for example, have had their budgets squeezed as government priorities shift to efficiency through technological innovation. The property sector saw an uptick in developer shares with the announcement for further government intervention in housing supply and real estate. And investors in Shanghai will be happy to hear that the Plenum is focusing on the Yangtze River Delta as a key target for the building of high-tech industrial clusters, all part of a top-down drive to achieve growth through domestic consumption and efficiency gains in technological innovation. 

The Plenum will likely produce mixed outcomes for foreign companies in China. On the one hand, announced interventions in real estate should help to stabilize the sector, and by extension the Chinese economy more broadly. At the same time, the continued emphasis on self reliance, indigenous technological innovation, and the need to tackle risks to China’s economic security, suggest that the country will remain suspicious of foreign entities. While there are signs that the CCP welcomes foreign investment in key sectors, like tech, it is also clear–as we explore below–that the preference is for investment into domestic companies, rather than in foreign entities or joint ventures. 

Analysis

The US State Department announced plans for an international cybersecurity plan that aims to position the US as an early mover, and therefore global leader, in cyber norms and AI. The plan emphasizes the need to uphold “rights-respecting” digital technology among a coalition of US allies and partners against malicious cyberattacks. Combined with the earlier release of the National Cyber Strategy, the Biden Administration is making cyber and AI a core part of both its attempt to set global standards in emerging tech and to compete with China. As companies like Google combine AI and cybersecurity, and others warn of the risks posed by AI to cybersecurity, the State Department’s announcement emphasizes the increasing fusion between tech and national security, notably expanding bans on chip exports to China by companies like Intel and Qualcomm. US tech companies looking to engage the Chinese market will need to consider how to comply with what will likely be tightening regulations about what that engagement looks like with respect to both cybersecurity and national security.

AI governance is the latest front in US-China cooperation and competition, and the Biden Administration’s emphasis on cybersecurity is part of a broader consideration of how Chinese competitors use US technology. Secretary Blinken announced that the US and China would hold high-level talks about AI in the coming weeks, on top of a recent United Nations resolution on the future of AI safety that was co-signed by both countries. We doubt this will have much effect, in part because China’s state-backed development of domestic AI platforms is taking off, reversing an earlier crackdown on tech companies that crippled the sector in China. Chinese AI research now leads the US in most fields, and Chinese companies are increasingly creating products that do not rely on US tech. For companies like Toyota and Nissan, the solution is to partner with Chinese AI technologies as a means to maintain market access in China. Yet as Blinken’s announcement underscores, this approach will be challenging for US companies beholden to US restrictions on uses of Chinese tech. US companies, particularly in the tech sector, will therefore need to plan for how they can continue to engage global partners while complying with an increasingly bifurcated tech and cyber world.

Analysis

Chinese overproduction and dumping were key topics for discussion on Xi Jinping’s visit to Europe last week, as he continues to try and drive a wedge between the EU and US (more on this below, “One More Thing”). Relevant to business matters were an announcement by French President Emmanuel Macron on the need to “update” the EU’s relationship with China and Xi explicitly welcoming additional French agrifood products into Chinese markets, in addition to emphasizing France and China’s long-standing good will. Prior to the meeting, the EU had labeled agriculture a “strategic sector” and lobbied China to keep it off the table amid rising trade tensions, identifying their greatest weakness for their rival in a move that could have and still may backfire. While this may be a short-term win for France and the EU, it is clear that they are playing into China’s hands and further exacerbating transatlantic tensions.

Xi’s agriculture concession is likely meant to offset the ongoing conflict regarding China’s dumping of EVs on EU markets, where the world’s largest automotive terminal, the Antwerp-Bruges merged port, is currently inundated with Chinese EVs. Xi’s concession may also have been intended to soften the blow of Hungary’s agreeing to let China’s largest EV producer, BYD, break ground on a new industrial park that is set to open in 2025. With the EU’s 2035 carbon-zero target fast approaching–and with it a proposed ban on combustion engines–EU vehicle manufacturers are faced with a serious dilemma: they must either band together to accelerate research and development or consider teaming up with their Chinese EV counterparts. The European Commission’s on-going anti-subsidy investigation against China will likely affect that choice, as will companies’ weighing the risk of ending up banned from US markets under the CHIPS Act. While some Chinese officials have recognized that China has an overproduction problem, even proposing viable if difficult solutions, China’s overproduction continues unabated and choices will need to be made.

In the US, BYD is working hard to distinguish itself from TikTok and Huawei, but has no plans to enter the US market due to its currently unpredictable and protectionist business environment. While this means that BYD’s main competitor, Tesla, and other EV makers will not have to compete for American loyalties (for the time being), it does mean that there is a smaller global market onto which China can offload its current vehicle surplus. It also means that US companies selling products abroad must be ready to compete with cheap Chinese goods or accept losses simply to move their products. Adjusting expectations will be key in the coming months as geopolitics and the market work, sometimes at odds with one another, to resolve this imbalance.

Analysis

Several major US tech firms, including Apple, announced that they will deepen their engagements with China despite security, intellectual property and geopolitical risks. Apple is banking on China and AI to help buoy its recent stock fluctuations. Sales of its iPhone recently grew in China, despite predictions that China sales would flop in competition with domestic smartphone competitors. Echoing announcements by Qualcomm that demand from China is driving sales, particularly demand for chips to power AI products in smartphones, Apple is therefore bucking the trend of US tech companies “decoupling” from China. 

China’s recent announcement that it would ease restrictions on foreign investment into Chinese tech companies, much to the Biden Administration’s chagrin, highlights how tech is highly valued in terms of both industry and national security. Apple’s announcement that it would partner with Chinese firms, in particular, was well received by senior Chinese politicians, as was CEO Tim Cook’s visit to China last month. This is likely because Apple has acknowledged that it transfers manufacturing techniques to Chinese suppliers, effectively handing over US industrial IP to China. Echoing moves by foreign automakers in China, Apple has seemingly decided that embracing Chinese technology and suppliers is the only way to remain in the Chinese market. 

Apple’s path, however, is Faustian. Its decision to transfer IP to local suppliers means that Apple’s access to the Chinese market is time limited. Soon enough, Chinese companies will replicate Apple’s technology and processes and produce their own version of the iPhone. This is not only a pattern that has emerged over the past 40 years, it is explicit Chinese state policy for domestic tech companies to displace foreign companies.

In theory, Congress or the Administration could object to Apple’s tech transfer on the grounds of national security or economic competitiveness, but neither shows any signs of doing so. Other US companies, however, should be cautious of following Apple’s example; while Apple may have decided that exchanging technology for market access makes sense in the short term, in the longer run, it will lose both.

Analysis

Chinese hackers infiltrated a contractor to the British Ministry of Defence (MOD) and accessed information about key personnel and their financial records, according to a report by the MOD to members of parliament. Speculation is that by accessing bank records, Chinese hackers attempted to find defense employees with financial hardship and then target them for coercion into spying for China. This attack is the latest in a line of cyberattack campaigns against the UK that were traced to China, which led the British government to sanction select hacking organizations over the past few months. 

Where China’s espionage efforts often target overseas Chinese and dissidents, a wave of recent arrests and exposés of Chinese spies and hackers, particularly in Europe, is helping to cement the idea of China as an adversary in many Western states. Moreover, the FBI’s recent warning, for example, that China was targeting US infrastructure, further underscores the dual risk of Chinese espionage efforts to both collect data on foreign companies and personnel, and to disrupt the functioning of foreign states. 

In response to accusations of espionage, China detained one of its own citizens, who worked for a US logistics company and is married to a US citizen, on suspicion of “illegally providing state secrets to overseas parties.” While it is unclear to what extent the arrest is connected to charges in Europe and the US against Chinese espionage, it emphasizes how current tensions between China and the West are spilling into the private sector. Companies will increasingly have to contend with protecting their data and cyber assets from hackers, and the possibility that Chinese state actors are attempting to coerce employees or other individuals to steal sensitive information for financial gain.

Analysis

Following the German Chancellor’s trip to Beijing, Xi Jinping’s visit to France, Hungary, and Serbia struck a delicate tone with leaders in Brussels and Washington. In Xi’s first visit to Europe since before the pandemic, China is aiming to drive a larger wedge between the US and its European allies, particularly on the issue of Russia and Ukraine. France’s calls for Europe to have “strategic autonomy” from the US on geopolitical decisions is notably attractive to Beijing. Hungary and Serbia are also close partners of both Moscow and Beijing, with Hungary regularly sabotaging EU and NATO efforts to present a collective response to Russia. His visit to Serbia is also symbolic; this year marks the 25th anniversary of NATO’s bombing of the Chinese embassy in Belgrade, a clear message that China is a friend to those who oppose NATO. 

Xi secured some notable wins on his trip, including a joint statement with France on AI, promises of investment in Serbia, and proving that China is Hungary’s best friend when it comes to foreign partners. China’s efforts to woo France to its side, however, were marred by reports from French media that Chinese police and diplomats in France coerced Chinese dissidents in the country and then pressured those same dissidents to keep quiet by threatening their relatives in China. 

As part of Beijing’s grand balancing act, Xi’s European tour came a week after Blinken’s visit to China where he warned about Chinese provisions of military technology to Russia and Iran, and shortly after a top Chinese security official, Chen Wenqing, traveling to Moscow and Putin announced that he will travel to Beijing this week. While the challenge for Beijing is whether it can maintain its close friendship with Russia while maintaining market access to Western Europe, Xi’s visit highlights how different European governments are willing to prioritize trade over geopolitical security. The challenge for European companies is that market access to China will likely come increasingly at the expense of market access to the US. Companies will therefore likely have to choose who their ultimate economic partners will be in the long run.