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The US Private Sector vs. the CCP
This week in The Red Report
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Credit: The thumbnail image contains an image from Pyzhou.
From Zhongnanhai: This week in Chinese Politics
Reining in China’s economy
The CCP’s attempt to prevent domestic deflation and address fundamental weaknesses in China’s economy will likely achieve neither. Instead, the party continues to prioritize its control over the economy over market sense.
Analysis
The CCP is getting serious about curtailing destructive price wars and product dumping to rein in one of the most prominent deflationary pressures in China’s economy. While these price wars are largely a function of intense domestic competition, they are also a response to the shock of US tariffs, which will force Chinese exporters to either lower prices to remain competitive, or to accept higher prices and forgo potential revenue from US sales. Faced with potential losses, the CCP has instigated a top-down intervention to curtail destructive practices while attempting to maintain ultimate control over the economy.
The party’s new legal changes–the first in almost three decades– seek to punish domestic companies for irrational price competition. Legal changes include clearer definitions of price dumping, expanding sectors covered by the law, higher penalties for infractions, and expanded powers for government enforcement. In clamping down on companies dropping prices, often below profit margins, to try to undercut competitors, the CCP is signalling that it will punish certain companies to avoid systemic deflation, and promote growth. These latest legal moves, however, are more of a bandaid than a necessary surgical intervention in China’s economy.
Growth is necessary for two reasons. First, the CCP is trying to avoid the dreaded “involution” (内卷), whereby greater economic inputs fail to yield proportional increases in output. The irony is that involution is largely a result of a reliance on manufacturing and overcapacity to generate GDP growth. It is a feature, rather than a bug of China’s top-down economic planning, which encourages local governments to invest in manufacturing while promoting intense internal competition between provinces and companies. While this competition was designed to produce efficiency, it has backfired, instead driving China towards involution. Despite this, the CCP is unwilling to fundamentally alter course because the current course forms the basis of the party’s control over the economy. In short, the party may force certain companies to change short-term behavior by engaging in fewer price wars, but the CCP will continue to prioritize domestic companies over foreign competitors.
Second, China needs to maintain growth in the face of US trade restrictions, which, despite hints of a possible US-China deal (see “business matters” below), have nonetheless encouraged China to seek alternative trade partners for its economic (and therefore political) security. Political reasons will therefore prevail over market sense in how Chinese companies choose international partners, with US companies increasingly likely to lose out to competitors from other countries.
Companies watching China’s economic developments should note that the party’s purported efforts to end price wars and redress unfair practices by Chinese corporations will likely amount to few positive changes for US companies. One recent example of how the CCP favors its own is a rules change to encourage Chinese stock exchanges to allow “unprofitable but high-potential” companies to go public in an attempt to end a “drought” of IPOs. Such encouragement speaks to how the party often pushes its thumb on the market’s scales to favor domestic enterprises, with foreign companies left to fend for themselves against a hostile political, legal-regulatory, and market landscape. It also demonstrates how, as with legal changes to discourage price wars, in China, politics almost always triumphs over business. US companies should consider how to mitigate this challenge to continuing business in China, including how to reduce exposure, and even potentially exit the Chinese market.
On the Hill: Developments in US China policy
The US-China race for AI
The US and China’s competing visions for AI innovation underscore distinct approaches, with the US leaning on the private sector while China prioritizes the party’s leadership. Who wins will largely depend on which approach is more nimble, better resourced, and more risk acceptance.
Analysis
Whoever controls AI innovation may control the future, at least according to recent statements by US and Chinese officials. Both countries released competing visions for their global leadership in AI concurrent with China’s hosting of the World Artificial Intelligence Conference in Shanghai to much fanfare and an appearance by former Google CEO Eric Schmidt. The US government’s “AI Action Plan,” a comprehensive exposition on how the US can “win” the tech race, underscores the US government view that leadership in AI, and thus economic competitiveness and national security, depend on the private sector. As John Moolenaar (R-MI) summarized: “We will not allow China to use American chips to build the arsenal of authoritarianism. But we will ensure the world runs on American AI.”
Conversely, the CCP’s persistent top-down emphasis on tech highlights how the party views AI and other technologies as key to winning the “industrial revolution 2.0” that the party hopes will insulate China’s economy against external challenges and outcompete the US. AI innovation helps the party answer two existential questions: how does China become the world’s sole superpower; and how does the party secure its position after Xi? For the CCP, it sees the promise of AI innovation in driving economic growth through improved efficiencies, dominating global industry standards early, and ensuring a monopoly on information worldwide as key levers for securing China’s future. China’s newly announced industry alliances, for example, function as a way to make China’s tech giants innovate on behalf of the CCP’s political interests and position China as the guardian of AI safety worldwide.
The CCP is not wrong in its assumptions. Chinese dominance of AI will likely spell disaster for the US’s standing in the world, not in the least because Chinese LLMs are designed to parrot CCP positions with the intent that these positions will be repeated around the world and replace US soft power. The US’s vision for AI similarly sees the high stakes involved in the innovation race, although Washington’s dependence on the private sector to lead this race underscores a key difference between the US and China’s state-led approaches. While the US and China both employ similar public-private partnerships to drive innovation, the emphasis is notably different in who is anticipated to lead the charge: the private sector or government. The real question for AI innovation will therefore likely be who is better able to innovate: The US private sector or the CCP?
Business Matters
US-China trade talks, round three: China secures a key concession
As US-China negotiations may soon bring stability to markets–including permanent increases to the cost of doing business and a projected significant decline in global trade–it appears that China ultimately holds the upper hand via its global monopoly on rare earths.
Analysis
The third round of US-China trade talks took place 28-29 July in Stockholm, Sweden, in anticipation of the August 12 deadline for reimposing the more severe tariffs first introduced by the US government in April. Preliminary remarks from both parties suggest that another 90-day extension of the status seemed likely. Chinese media further bolstered this conclusion, along with now-standard language about the two countries needing to seek a peaceful and mutually prosperous coexistence.
Part of the optimism surrounding these talks is related to the US government’s recent decision to suspend export controls on advanced semiconductor technology, including Nvidia’s H20 chips. Analysts agree that the United States finds itself in a precarious position, whereby the United States risks China cutting off vital supplies of rare earths if it continues to deprive China of advanced US semiconductor technologies. In his public comments about the talks, US Trade Representative Jamieson Greer implicitly confirmed the centrality of rare earths to the US position, acknowledging that US negotiators are “... making sure that key critical minerals are flowing between the parties…” Given this now well-established American Achilles heel, China is unlikely to relent until any deal is to its liking.
Some trade experts have suggested that the US’s recent trade framework agreement with the EU, which broadly sets US tariffs on EU goods at 15% (certain sectors and products are excluded), might also work as a possible blueprint for the future of US-Chine trade negotiations. When asked for his thoughts on the US-EU deal, however, Chinese Ministry of Foreign Affairs spokesperson Guo Jiajun emphatically rejected the possibility of signing any deal that was reached “at the expense of China’s interests.” Projections based on current tariff rates predict that Chinese exports to the US could decrease by nearly half a trillion dollars by 2027, with U.S. trade to China forecast to fall by $101B.
What that means in concrete terms remains unclear, but its ultimate resolution will have cascading implications for the price of doing global business. For instance, does Chinese access to US advanced technology and semiconductors in exchange for unlimited US access to Chinese rare earths constitute a loss of China’s interests? That is impossible to know at this point. In the meantime, we can more safely conclude that as long as President Trump insists on using tariffs as his chosen tool for reshaping the global economy, China will maintain a reciprocal tariff on the United States in the name of “balance.” Consequently, we can expect commodity prices to remain high even if and when trade starts to flow more freely. The one silver lining may simply be that there will be predictability and stability to those increased prices in the coming months.
Tech Futures
China weaponizes EV battery tech exports
China aims to make US companies' “decoupling” from Chinese tech as painful as possible.
Analysis
China's latest export controls on EV battery technologies mark a shift from a more low key to brazen economic warfare. EV battery controls serve as a template for future restrictions that target critical supply chains. US companies should expect Beijing to increasingly weaponize its technological advantages across sectors where it holds dominant market positions from rare earth processing to pharmaceutical ingredients to solar panel manufacturing..
For Beijing, controlling EV battery technology is as much about protecting domestic industry as it is about wielding economic leverage as a geopolitical weapon. China's dominance in lithium processing (>70%) and global EV battery production (~80%) is a strategic asset to pressure foreign competitors and maintain technological dependence. This month, China's Ministry of Commerce officially implemented export licensing requirements for key EV battery technologies. This formalizes controls first proposed in January 2025, demonstrating Beijing's deliberate six-month progression from proposal to implementation. The message is clear: if the US wants to decouple from Chinese technology, China will make it as painful and expensive as possible.
US companies face immediate supply chain disruption that will necessitate diversification away from Chinese dependencies. US companies with Chinese technology dependencies face three immediate risks: supply disruption through licensing delays, increased compliance costs across dual jurisdictions, and potential technology transfer restrictions that could strand investments. Beyond EVs, sectors like renewable energy, consumer electronics, and advanced manufacturing should anticipate similar export control expansions.
The strategic implications extend to capital allocation and partnership decisions. US firms must now price in "China risk" when evaluating technology licensing deals, joint ventures, and supplier relationships. This suggests a broader decoupling acceleration, with companies forced to choose between accessing Chinese markets or avoiding Chinese technological dependencies. US companies should evaluate their current suppliers and identify potential alternatives. Failure to do so will likely spell larger costs in the future.
Espionage Alert
CCP ramps up cyberattacks on US corporations
CCP-supported cyber groups like Salt Typhoon are increasingly targeting US companies, which will have to invest more to protect themselves.
Analysis
A series of major cybersecurity attacks by Chinese state-sponsored actors against US government, military, and critical infrastructure targets should remove any doubt of China’s adversarial intentions against the US and US-based companies. The Chinese state-sponsored group “Salt Typhoon,” for example, is a prominent example of how state-aligned organizations target Western public and private sectors for a combination of disruption and financial gain. Last month, the group attacked Canadian telecommunications companies as part of a global cyberespionage campaign, and has previously utilized stolen files to compromise critical infrastructure.
Cyber attackers target crucial weaknesses that many companies largely overlook, including through cloud and network services and technologies, like Cisco routers. One exploitation, for example, involved Microsoft products like Sharepoint storage services. Such attacks via the cloud are increasingly prevalent and potentially devastating for companies that rely on cloud services and wrongly presume are secure. Salt Typhoon has also recently evolved to become motivated by money, and as such is increasingly targeting major companies to maximize potential ransom profit. Cyber threats that were once reserved for foreign government or military targets are therefore increasingly aiming their sights at corporations.
Despite the clear and present threat of cyber espionage, recent arrests of two Chinese nationals in Italy for alleged links to a state-sponsored hacking group Silk Typhoon and for conducting cyber attacks against US entities on direction from China’s Ministry of State Security, underscores that governments are starting to take these threats against the private sector seriously. But the arrest of a few individuals pales compared to the scale and sophistication of state-sponsored cyber infiltration backed by Chinese state resources.
Companies need to take these threats seriously and address them in-house, including by embracing simple solutions like ensuring up-to-date patching, turning off unnecessary network services to reduce attack surfaces,and implementing network segmentation to try to reduce the spread of a potential attack. Ultimately, CCP-supported groups like Salt Typhoon are increasingly prominent threats to US companies that will likely need to be defended from within, rather than relying on cloud providers or government protections.
Book Recs
What we’re reading to better understand China
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