Analysis

China’s leaders will shortly announce the future direction of the world’s second-largest economy, including how they intend to steer the country back towards high growth and stronger consumer confidence. Hopes for dramatic changes in policy, however, are increasingly muted as the CCP gathers for its Third Plenum, a major meeting of political and economic leaders that has historically heralded major shifts in party’s economic governance. Instead, official statements suggest that the Plenum will likely reinforce General Secretary Xi Jinping’s major priorities of “further comprehensively deepening reforms and promoting Chinese-style modernization” without significant changes to China’s economy. While the Plenum will certainly be full of Xi’s favorite phrases like “high quality development” and “high-level socialist market economy,” it is therefore unclear how the Plenum might reverse the currently gloomy outlook for and performance of China’s economy, ranging from the property crisis, to outflows of foreign investment and local government debt crises. 

Importantly, the Plenum will likely include pointers for how the CCP intends to balance state-owned and private sectors. While Xi has hinted that the party should “firmly press ahead” with efforts to boost China’s private sector and better attract foreign investment, including making it easier for foreign businesses and their employees to operate in China, foreign businesses in China should proceed with great caution. First, the CCP is explicit about how it intends for the private sector and foreign businesses to both provide necessary economic growth and help transfer key technologies to Chinese partners. Second, the state-owned sector will continue to dominate China’s economy as it provides a more direct lever for party control and the enforcement of the party’s policy priorities. 

Foreign businesses in China are therefore permitted to operate in the country because it is currently in the CCP’s interests for them to do so. Ultimately, this means that if the political winds change, or if tensions increase with the US or Europe, then foreign businesses will likely be early targets for the party. Foreign businesses in China should therefore consider their position in the Chinese market not based on statements from any one political event, like the Third Plenum, but should instead proceed carefully, given the actions of the CCP and prevailing political trends within China.

Analysis

While US Secretary of State Antony Blinken’s recent criticism of China’s continuing support for Russia might not seem unusual given the current tensions between Washington and Beijing, the comments suggest a notable push by the Biden Administration for its allies to decouple fully from Beijing. Framing China’s support as a fundamental threat to Europe’s security, the Biden Administration is employing a broad range of tactics to entice states to support US efforts to counter China. These efforts include closing loopholes in export controls on AI tech and chips, divesting from China’s economy, and reducing partnerships with Chinese counterparts in both the public and private sectors. The effectiveness of such efforts are questionable, with chip export bans, in particular, seemingly navigable despite barriers.  Nevertheless, these restrictions are as much signals to other allies and partners that the era of US-China engagement is at an end as they are about restricting China’s acquisition of Western technology.   

Some Chinese companies navigate geopolitical barriers by stockpiling US goods, while others opt for direct investment in the US rather than rely on imports. Still, the barriers imposed by the US and Chinese governments are nudging the global economy towards bifurcation. In some places, this has already led to notable economic shifts. Taiwanese investment in China, for example, plummeted by 80% in Fujian Province this year compared to 2023, while investment from the US into Taiwan increased. Moreover, opinion polls in Western countries suggest that US attempts to wean allies’ economies off China are succeeding. A recent survey in Sweden noted that only 13% of Swedes were in favor of increased cooperation with China, while a land sale in Norway’s Svalbard region was recently halted over fears that China would buy the land. 

Conversely, China is pushing its partners, particularly those in the Global South, to align more closely with Beijing’s policies over issues like Taiwan in exchange for Chinese investment deals. Taken collectively, businesses should take note of the trends towards decoupling that will shape not only their operations in the US and China, but also their operations globally as governments face increasing pressure to choose Washington or Beijing.

Analysis

At the end of June, Chinese premier, Li Qiang, announced China’s new Regulations of Rare Earths, set to take effect on October 1. Key among the thirty-two-article proclamation is Article 4, which states that “[r]are earth resources belong to the State, and no organization or individual shall encroach upon or destroy them.” While underground resources already technically belong to the government, the State Council’s restatement of this claim suggests that previously lax oversight, which had permitted some private mining and processing of rare earths, is coming to an end. Article 14 further announces the creation of a rare-earth traceability system to manage production and, importantly, track the flow and export of resources. The government claims that the new regulations are intended to improve safety, spur innovation, and lead to green development, but international pundits widely received the announcement as retaliation for recent US and EU tariffs. 

China’s tightening control over rare earths exacerbates an already acute problem. China mines around 60% of all raw rare earths and refines upward of 85%, meaning they have a functional monopoly on the rare-earth supply chain. In August 2023, China announced its first wave of rare-earth restrictions targeting germanium and gallium, which are crucial components for EV batteries and other advanced and defense-related technologies. Like this new measure, the earlier export controls were also retaliation for anti-China US policies. While alternative supply chains are being explored, such as Europe’s and Australia’s investments in new rare-earth refineries, these projects are years away from production and even further from closing the gap with China’s established dominance. 

In addition to possible shortages of rare earths, companies must be aware of new potential regulatory issues. If all rare-earths are now state-owned, and EV batteries and semiconductors require such metals to be produced, then companies’ normal suppliers may now suddenly cause their products to fall afoul of the Biden administration, which continues to blacklist Chinese companies and individuals at a rate faster than during the Trump administration. Moreover, if companies were planning on benefitting from the CHIPS and Science or Inflation Reduction acts, these new government affiliations may scuttle those plans. 

While both the Chinese restrictions and potential US responses unfold, it is important for companies to start stockpiling and diversifying supply chains to ensure future production capacity before China’s new policy takes effect in October. Firms in Europe and Australia are building processing capacity; and the Philippines is now marketing itself as a “China-free” producer of nickel that is just waiting for Western investment. Although nickel is not a rare earth, this news suggests that countries with such metal and mineral deposits are ready to take sides in the ongoing US-China trade war, and that they understand companies will be looking for “China-free” supply chains going forward. Now is the time to explore those options and gain an early mover advantage.

Analysis

Xpeng Aero HT, a subsidiary of Chinese EV manufacturer Xpeng, has announced that its first “flying car” or “electric vertical take-off and landing (eVTOL) vehicle” is expected to go on sale at the end of 2025 for approximately US$200,000 with a target of selling 5,000 units in two years. China is betting big on the development of the “low-altitude economy,” referring to airspace below 3000 meters, which was valued at US$69.5B last year and expected to be worth as much as US$2T by 2030. As with other China-made EVs, consumers expressed concerns that the price of XPeng’s promised deliveries might increase because of tariffs on Chinese exports, although the company has suggested that it will open local manufacturing facilities to avoid potential barriers. 

The Chinese government has provided support at all levels – central, provincial, and city – for developing flying cars, such as approving permits and creating regulatory schemes, because the vehicles are expected to reduce significant congestion issues in major urban areas. For foreign markets, flying cars also represent the next frontier in automobile and EV manufacturing, and Chinese companies like XPeng lead US-based rivals in the race to dominate the “low altitude” market. Being the first movers allows these companies to provide an alternative product that will help dilute issues of overcapacity that are currently challenging China’s EV industry. Yet, issues of tech security–including data security and the sharing of personal data–that currently plague China-made EVs will still be present in other vehicles and are likely to face tightening regulations and possible import restrictions in the US. China-made flying cars, while an enticing window onto the possible future of travel, may therefore find an increasingly challenging market in Western states compared to their predecessors in the EV market.

Analysis

Smartphone inspections will become an increasingly common interaction with Chinese police as China’s security authorities implement the recently passed updates to the country’s anti-espionage law. Under the most recent updates to the law, “national security” is defined so broadly as to encompass almost anything that the government or local security authorities deem to be so, including inspecting baggage and electronic devices suspected to be involved in espionage. Importantly, this means that all foreigners entering China will be required to hand over personal and company electronic devices on request from a police officer or other official. This will likely be an increasingly common occurrence for foreign visitors to China, as local officials are incentivized to ensure national security at all levels of government, and detaining a foreigner’s electronic devices is one way to demonstrate officials’ adherence to the updated laws. Keep in mind that the Chinese authorities’ always could and frequently did seize devices at their discretion and with no recourse for foreign travelers. What is noteworthy, in the current situation, is the passage and publication of a law that explicitly emphasizes this right, as it signals to the state’s security apparatus that such seizures are now a preferred, if not expected, security protocol.

While unlawful detention continues to remain a risk for all foreigners in China, these new measures highlight the necessity to carry dedicated devices when traveling in China or Hong Kong. This is important not only for foreigners in China, but also for PRC nationals working for US companies or abroad, who may be increasingly targeted as potentially suspicious because of their ties to overseas entities. Collectively, iterative tightenings of laws in the name of national security contradicts and confuses the so-called “pro-business” messages that CCP leaders purport to champion at events like the Third Plenum. Business leaders should therefore continue to view the party’s overtures towards the private sector, and foreign businesses in particular, with a skeptical eye.

Analysis

A recent ruling in the UK may introduce possible fines and import bans for companies sourcing cotton from Xinjiang, an autonomous region in China that the CCP has effectively turned into a mass internment camp for the region’s Muslim Uyghur population. The court ruling asked the UK’s National Crime Agency to reopen investigations into whether cotton imported from Xinjiang uses slave labor, which according to rights groups and Western governments, is likely. While the CCP is trying to rebrand Xinjiang as a key site for trade and innovation, exemplified by recent expos and visits by foreign dignitaries, the US and other states urge foreign companies to stay away from Xinjiang to avoid assisting the CCP’s crackdown against the region’s Uyghur population. 

This ruling opens a legal path for these groups or governments to prosecute companies found to have sourced products that use slave labor. Importantly, the ruling also underscores how ignorance over supply chains cannot be used as an excuse to evade potential future prosecution. The ruling at a minimum should incentivize companies to audit their suppliers to ensure that they are not facilitating China’s use of slave labor or mass internment of its minority populations. This approach is already followed by US congressional committees, which are increasingly willing to name-and-shame US companies for engaging with Xinjiang-based suppliers or business partners. It also provides a roadmap for other states to follow suit in penalizing companies that source from ethically questionable entities through fines and import bans. One challenge for foreign companies is that this will likely make goods like cotton more expensive, and therefore will decrease their competitiveness against China-based companies, like Temu and Shein, whose suspiciously low prices have triggered regulatory and fair trade investigations in both the US and Europe. 

Companies should also be aware of likely future moves to broaden the scope of such prosecutions beyond slave labor and Xinjiang to cover a much wider scope of issues that will likely encompass goods and services from all of China, rather than just Xinjiang. Planning contingencies for an end to China-based suppliers should therefore be among US companies’ top priorities.