Walz and China

August 19, 2024

This week in The Red Report

From Zhongnanhai: This week in Chinese Politics

Tim Walz’s China

Democratic VP pick, Tim Walz, lived in China in the 1980s and 1990s and brings a unique–and much needed–perspective to the top of the Democratic ticket. If elected, he will likely push the Harris Administration to focus more on human rights, Taiwan, and Hong Kong compared to a second Trump Administration’s likely emphasis on trade and tariffs.

Analysis

Tim Walz could become the first Vice President to have lived in China since George H. W. Bush.  Walz’s extensive experience in the country is proving to be an asset to his foreign policy credentials. In contrast to Republican criticism that Walz’s experience means he will be “soft on China,” Walz’s statements since he first lived in China as a teacher in Guangdong Province in the 1980s show no softness, but instead highlight a nuanced perspective that has consistently included criticism of the CCP’s authoritarian rule and abysmal human rights record. Despite these statements, Chinese media were quick to emphasize Walz’s China experience as a possible friendlier voice for China in DC, noting his nickname as “Coach Sunshine” (阳光教练). Yet Walz’s time spent in China appears to have warmed him to the Chinese people, but not to the CCP, which he has referred to as “standing in the way” of China’s potential. Republican attacks also miss that Usha Vance, the wife of the Republican Vice Presidential nominee, also taught in China, which similarly does not translate into a more “pro-Beijing” outlook for Vance or the Republican ticket. Indeed, Taiwanese media have already picked up on Walz’s “pro-Taiwan” stance as evidence that he will be more supportive of Taiwan against China if the Democratic ticket wins in November.

Walz’s China experience highlights a frequent imbalance between Chinese and American officials, whereby many in the CCP’s leadership have lived, studied, or spent time in the US–including Xi Jinping–while the reverse is seldom true. Far from criticizing Walz’s experience, it should be seen as a rare asset among senior US officials, most of whom are shape policy toward a country with which they have limited interactions. Walz’s experience also makes it more challenging for the CCP to label him as “naive” about China (read: the CCP’s interpretation of China), as Walz can point to far more experience than most US officials. The CCP will therefore try to paint Walz as a friendly voice in the election, if anything because Chinese disinformation is currently overwhelmingly pro-Trump in an effort to stoke social unrest ahead of November’s election.

With a consistent record of emphasizing human rights in China, a Walz Vice Presidency would likely complement a potential Harris Administration’s intent to continue–if not heighten–Biden’s firmness against China’s expansionism and bullying. Rather than seeing Walz as a potential “pro-China” addition to the Harris ticket, US businesses will therefore still need to plan for reducing business ties in China in case of a further deterioration in the bilateral relationship.

On the Hill: Developments in US China policy

US-China rivalry heats up over oceans

US entities should monitor congressional developments on infrastructure as trends towards de-risking supply chains will increase demand for US-made components over Chinese counterparts.

Analysis

Seas and oceans are increasingly becoming a key arena for US-China competition. Maritime infrastructure is crucial for national defense, trade, communication, and for asserting sovereignty over territorial waters. Yet, it is uniquely vulnerable. China’s admission that a Chinese vessel was responsible for “accidentally” severing an undersea gas pipeline between Estonia and Finland last October highlighted the vulnerability of undersea lines and cables, infrastructure that Russia frequently targets. Where a recent election at the International Seabed Authority (ISA) suggests that governments will prioritize protections for undersea infrastructure at the expense of expanding undersea mining contracts, this is less relevant to the US which has yet to ratify relevant conventions or join the ISA

Focusing on on-shore infrastructure, a bill proposed by Senators Mark Kelly (D-AZ), Marco Rubio (R-FL), and Rick Scott (R-FL) will require the Department of Defense to create an interagency strategy report to counter China’s aggressive behavior at sea. Senator Kelly, in particular, is keen on this topic, having sponsored a previous similar bill in May. Building on concerns that Chinese investment in key port infrastructure in the US and other Western countries presents a collective security threat, the proposal targets Chinese-made components and investments in key physical and digital port infrastructure. While this bill may be too little too late for existing port infrastructure, it matches a trend across other industries towards removing China-made components from US infrastructure. 

This trend provides both a challenge for existing infrastructures to audit and upgrade where necessary, and an opportunity for US-based companies to produce substitutes for Chinese components. Companies across a range of industries will feel the effects of such bills, which will reshape how US entities consider geopolitical risk and foreign procurements. US businesses should therefore keep a close eye on congressional developments regarding supply chains and China.

Business Matters

The great rebalancing of China’s fragile economy

Capital flow from the Chinese economy is on path to be negative for the first time in decades, as Foreign investors flee and domestic investors look abroad. Take measures to protect your companies and investments while bracing for further slowing of the Chinese economy.

Analysis

As China’s economy continues its precipitous decline, domestic and foreign investors alike are rebalancing their portfolios to insulate themselves from its effects. If the decline continues on its current trajectory, the Chinese economy is set to have its first annual net outflow since 1990. From April to June, foreign investment into China dropped by a market-shaking US$15B, according to numbers from the Chinese State Administration of Foreign Exchange. As we always like to caution, Chinese statistics are notoriously unreliable and have likely downplayed the true figures. This result does not bode well for Beijing, which has been making efforts to attract and retain foreign investors. The Chinese State Council issued another set of directives just last week. Such measures are too tepid to quell investors’ worries. 

This active outflow over the last quarter is compounded by a broader trend toward companies’ curtailing their future exposures. We now know that the beleaguered property industry saw a 13% reduction, year-on-year, in cross-border deals into China between January and June, with Singapore picking up the greatest deal of business outside of Hong Kong. The depth of China’s problems are also surfacing in oft-quashed reports about protests, in both the property and manufacturing sectors, which provides outside observers some sense of the degree to which China is struggling to maintain control of the issue, both practically and perceptually. This is perhaps what has led to claims that HP is considering an aggressive shift out of China and into Southeast Asia, designating Singapore for its backup office as HP explores options for building new production plants, especially in Thailand. The company later denied such statements, although rumors persist

One notable counterpoint is the German automotive industry, which is bucking the trend and EU Commission efforts to de-risk from China by increasing its investment. As one of its largest markets, German car manufacturers are loath to give it up, especially as it may not be able to make up the losses. However, the fact that new Audi’s will now be produced in China without the signature four-ring logo, in order to domesticate the brand and mitigate potential international tensions, seems a grim harbinger for the future of foreign-owned business in China.

Even China’s domestic investors are looking abroad to safeguard their money. Outbound investment from China to foreign markets is up significantly, as indicated by China’s having exhausted its quota for Qualified Domestic Institutional Investors (QDII)--a designation created in 2006 to help curtail and control Chinese outbound investment. This shift is a key indicator of poor economic performance and low market confidence domestically, but should also be a concern for global markets: for those reliant on Chinese money, its movement is now significantly constrained, not to mention how accepting such funds is becoming an increasing political liability.

In short, continue to exercise extreme caution and do not mistakenly see opportunity in this particular crisis. Find alternative markets, de-risk or even de-couple from your Chinese assets, and prepare for what now seems like the inevitable consequences of a deep and prolonged Chinese economic downturn.

Tech Futures

De-risking reshapes global tech ecologies

Huawei’s chip innovation breakthrough highlights the limits of US export controls and the extent of China’s drive to develop domestic substitutes. Businesses should monitor these announcements closely, as they also point to the potential for increased government control over the tech industry in the name of national security. 

Analysis

Chinese tech giant Huawei announced that it is close to finalizing design on a chip to rival Nvidia’s H100, according to US media reports. Many of Nvidia’s chips are currently restricted for import to China because of US export controls. Huawei’s claimed breakthrough, while largely secret, is somewhat contradictory. It implies that US semiconductor and chip controls are ineffective at preventing China from acquiring these vital technologies through smuggling or through lax third party enforcement. Businesses should therefore expect the US to likely increase pressure on partners to fall in line with its export controls in the coming years. Huawei's breakthrough also suggests that US export bans have counterproductively spurred a domestic innovation drive in China to replace US equivalent technologies. Ultimately, the question remains as to what, precisely, the US government hopes to achieve by enforcing export controls: is it to prevent China from accessing critical technologies, or is it trying to protect US tech companies from IP theft in China? 

While Huawei has not yet replicated the success of its competitors like Nvidia, it appears likely that China’s purported breakthrough in chip markets will likely happen sooner rather than later. If anything, this is because the Chinese government is supplying substantial financial and logistics support to its own tech companies as an extension of the state’s security apparatus; to win the tech race, the state needs to hone the tech industry in service of national goals. While that is likely not the ambition of the US government vis-à-vis its own tech industry, it is a demonstrable difference between China and the US that will likely lead to increasing government involvement in technology and a global reshaping of economies around the world. This is particularly so in “non-Western” states like Turkey, Malaysia, and Vietnam (see below) as they fall under increasing pressure by Washington or Beijing to “choose” a side in the tech contest. While news of Huawei’s chip breakthrough should therefore concern tech companies in the US because of the potential for greater competition, it also spells an uncertain future for an industry facing national security pressures.

Espionage Alert

US allies increasingly unified in publicizing Chinese espionage

Espionage cases in both the West and China heighten the possibility of legislation that punishes corporations engaged in bilateral business relations. Corporations should therefore closely monitor espionage stories as a potential ref flag for how future restrictive legislation might progress. 

Analysis

A former Chinese spy gave evidence at a Canadian inquiry about the extent of China’s extensive espionage activity across North America, including how CCP agents are active throughout the US to a greater extent than previously thought. The news coincided with the conviction in the US of a Chinese-born US citizen on charges of providing information on dissidents to the CCP. Targeting diasporic communities is a common tactic for Chinese intelligence efforts, which often prioritize gathering information via those with family or cultural ties to China about others in their communities. While for China, these communities are considered part of its global reach that includes diasporic Chinese communities, this expansionist perspective violates the sovereignty of targeted states like Canada, Australia, and the US, and are likely to continue to inflame tensions between China and the West. 

Stories of China’s espionage have clearly riled CCP leaders. Recent reports, for example, from China about the destruction of Taiwanese spy rings and the unearthing of over 100 espionage cases from Taiwanese actors play a dual role in demonstrating the CCP’s prowess against foreign security forces and using the ever-present threat of espionage as justification for the intensified national security footing of Chinese society. Similarly, accusing US institutions like the National Endowment for Democracy of anti-China “ideological infiltration” and for supporting “separatism” in Hong Kong and Taiwan attempts to shift attention from Beijing’s own actions. 

US businesses operating in China should be aware of this dynamic, which increases the likelihood that American firms might be accused of similar “infiltration” or of furthering objectives of the US government at China’s expense. Remember, the CCP does not require evidence to make a case against US citizens or businesses. There is no rule of law. Moreover, repeated stories about Chinese espionage will continue to erode Western politicians’ perceptions of China and will likely encourage the passage of legislation that restricts or punishes business’s engagement with China. Businesses should therefore keep a close eye on how espionage stories emerge and evolve in the media as a canary in the coalmine for potential additional restrictions on their future global engagements.

One more thing…

What is happening in Vietnam?

The recent death of Vietnam’s General Secretary and Hanoi’s rejection of China’s claims in the South China Sea have created an opening for US interests. The Biden Administration, however, appears hesitant to become too friendly with Vietnam, and companies should approach investment in the country with caution. 

Analysis

After the death last month of General Secretary Nguyen Phu Trong, Vietnam has renewed its central position in US-China competition. Vietnamese leaders are asserting their strong negotiating position between DC and Beijing. This is demonstrated by US Secretary of State Antony Blinken attending Nguyen’s funeral and meeting the new leadership of the Communist Party of Vietnam (CPV); and by Vietnam’s new CPV General Secretary To Lam traveling to China to meet CCP officials. 

China’s recent assertiveness in the South China Sea has pressured Hanoi to adopt a more conciliatory tone towards the US and its partners, most importantly the Philippines, as Vietnam seeks to maintain its own sovereignty claims over islands like the Paracels. While part of the dispute stems from potential maritime natural resources, Vietnam’s recent countering of China’s island-building frenzy suggests that there is more at stake than just natural gas. Closer ties between Vietnam and the Philippines over their shared rejection of China’s aggressive behavior, for example, suggests that security calculations, as well as economics, drive Hanoi’s decision to not roll over to China. Chinese drones spotted over Vietnam days ahead of a meeting between Hanoi and Manila underscore the heightened tensions in the region. 

Conversely, China dominates Vietnamese trade and investment and is a more natural ally for the ideologically aligned CPV. Both the US and China similarly see Vietnam as a potential “friend-shoring” destination, particularly for electronics manufacturing. This would permit indirect investment into each other’s economies without direct engagement, a feature of which other Southeast Asian countries are also taking advantage. Despite this, the US is reluctant to concede certain aspects to Vietnam, like granting Hanoi its much-desired “market economy status.” Vietnam therefore presents a key but complex frontline in US-China competition and one that companies should consider with extreme care if they are looking to invest in a non-China destination.

Book Recs

What we’re reading to better understand China

If you would like additional information and analysis tailored specifically for your specific business or institution, please contact us at [email protected].

Reply

or to participate.