Analysis

Is China’s economy collapsing or thriving? Depending on who you ask, it is one, the other, or both, which leads to contradictory analyses about the health of China’s economic output. 

Domestic surveys in China–to the extent that they can be trusted–report widespread pessimism about the economy. One major issue is that the Chinese economy heavily depends on real estate, both for personal savings and as a pillar of banking and local government finances. As the property sector collapses, the knock-on effects are widespread and cascading, with developers going bust, debts mounting, and consumer confidence plummeting. Traditional responses to declining growth by local governments, namely to borrow more and invest in infrastructure, are no longer an option as the government tries to crack down on public debts. China’s leaders are therefore running out of fiscal options to boost the economy like they have in the past. Moreover, attempts to boost exports from the subsidized manufacturing sector, particularly in sectors where there is overcapacity, are producing a widespread backlash among some (though not all) Western countries. Traditional means to boost output and generate growth through investment are therefore proving less effective compared to the pre-Covid era in buoying China’s economy. 

This does not, however, mean that China’s economy is failing. Rather, it is serving a new purpose, as dictated by the CCP, to shift China’s growth drivers in favor of supporting national security and the party’s long-term objectives. Innovation, rather than investment, is the new mantra for rescuing China from its current gloom. For party leaders, short-term pain is therefore worth it for longer-term ambitions that include a “self-sufficient” society (read: free from reliance on foreign investors or technologies). The Chinese economy is therefore not so much failing (although it is certainly troubled) but rather is experiencing major growing pains as the party shifts intentions as to how the economy should serve the country. This is not to say that the current pains are intended or purposeful. CCP leaders would much rather have GDP growth at similar levels to the past few decades. Rather, that part of the CCP’s current political and security strategy necessitates a degree of realignment towards domestic production and consumption that is exacerbating existing economic challenges. 

The key questions are whether the Chinese economy can persist under these conditions, and whether foreign businesses can tolerate this painful pivot. Some foreign investors are already revisiting their China strategies as investments yield questionable results. Yet even for companies in the US that are largely shielded from Chinese competitors through existing tariffs, China’s export of its overcapacity is having major effects by undercutting manufacturing and making US products less competitive globally. The CCP’s continued pushing of the Chinese economy is therefore extremely important for US businesses regardless of whether they operate in China.

Analysis

China took center stage in both the Trump-Harris presidential debate and on Capital Hill as the US gears up towards November’s election. Noting the centrality of China to US foreign policy and domestic political discourse, Trump and Harris traded barbs about their engagement or opposition to China during the presidential debate. Trump noted his introduction of tariffs against China, while Harris pointed to Trump’s “selling American chips to China to help them improve and modernize their military.” Both candidates are intent on attacking the other for being “soft” on China, which suggests that US-China relations are likely to continue declining regardless of who wins the election. Yet they take different approaches to how to deal with China. Trump is focused on additional tariffs against Chinese products, while Harris’s attention concerns promoting US domestic innovation and competitiveness as a strategy for “winning the competition for the 21st century.” In response, Chinese state media struck a very neutral tone with how China was discussed in the debate, preferring to either not dwell on, or not mention, the candidates’ discussions of China. 

Foreign policy also dominated Congress during “China Week,” where bills on topics ranging from Taiwan to China’s Currency were debated and voted on “under suspension of the rules,” which allows for quick passage of legislation with a quick House vote. Several of the proposed bills will have major implications for Chinese businesses and their US subsidiaries, including the blacklisting of Chinese biotech firms. This included WuXi AppTec and WuXi Biologics, with shares of both companies slumping in Hong Kong in response, although the bill still has to pass through the US Senate before becoming law. Other bills included banning Chinese drone manufacturer, DJI, also on national security grounds. In particular, a bill targeting Hong Kong’s trade offices in the US, combined with a business advisory issued by the State Department warning companies about the risks to their operations in Hong Kong, highlights how the US government (correctly) no longer considers Hong Kong as a separate entity from China.

Collectively, these efforts, many passing with bipartisan support, indicate how Congress and party leaders on both sides of the aisle view tough-on-China bills as vote winners for the election. While there will be much ink spilled about what top-of-the-ticket candidates say about individual policies targeted at China, what happens in Congress in terms of actual policy proposals is arguably more important. To this end, the overall tone in DC therefore appears unchanged regarding China, which means that US companies that continue to engage with China will face a bumpy road ahead, even if they claim to be committed to their China-based operations.

Analysis

Amid a US-China trade war and collapsing Chinese economy, India is positioning itself to be an unlikely winner. In an attempt to insulate its supply chains, Apple has started shifting its manufacturing centers from China to India. In the last year alone, Apple produced US$14B worth of iPhones in India, representing about 14% of its total production and up 100% year-on-year. While China still remains crucial to Apple’s iPhone production globally, Chinese domestic iPhone sales were down 24% in the first six weeks of 2024, giving Apple few reasons to linger. This comes, too, as Apple has ordered nearly an additional 10M of their next-gen iPhones with an OS that will incorporate generative AI. Given the Biden administration’s ever-tightening restrictions of semiconductor and chip exports to China that will be required to make such phones, India seems likely to receive even greater investment from Apple going forward. And it’s not just Apple: US companies across all sectors are looking to India to meet their production needs as China becomes an increasing liability.

In a somewhat surprising twist, India looks poised to have its cake and eat it, too, as Chinese companies are also looking to move their manufacturing plants to India in an effort to circumvent US tariffs and escape China’s sluggish economy. While the Indian government has rejected Chinese companies coming to India on their own–like EV maker BYD–they seem willing to consider joint ventures, with companies like China’s state-owned automobile manufacturer SAIC Motors getting in on the ground floor of India’s nascent EV market through India’s JSW Group. India is also increasingly reliant on trade with China, exporting solar panels, medicine, and other raw materials while importing circuit boards, batteries, and yarns for the textile industry. This imbalance has made receiving increased Chinese capital inputs appealing, despite a significant portion of India’s business leaders and politicians worrying that Chinese companies will be unwilling to share technology and, ultimately, undermine India’s domestic production capacities in the long-term.

That India should or will end up being the unlikely benefactor of the US-China trade war is not a foregone conclusion. While India’s Prime Minister, Narendra Modi, leads the world’s largest democracy and, therefore, seems like a natural ally for the US, relations between Biden and Modi have been tense, with the US worried that India is becoming an illiberal democracy with a penchant for Xi-style authoritarianism. On the other side of the trade war, India has an even more contentious relationship with China, with whom they have been engaged in a border conflict since 1962 that most recently resulted in military engagement in 2022. While Modi’s tough stance on China has softened somewhat in recent months, his acknowledgment of Taiwan’s newly elected President, William Lai Ching-te, also sparked Beijing’s ire. In short, while the Indian market is large and certainly appealing as an alternative to China, it suffers from its own instabilities and remains somewhat beholden to Beijing: advance with caution.

Analysis

As the US-China tech race heats up, ensuring the necessary human capital and skills in vital technologies is increasingly central to private companies and governments. This is particularly true for tech industries, like semiconductors, quantum computing, and AI innovation, where the CCP has fused its interests with these industries as part of the state’s weaponization–in some cases literally–of China’s tech sector. Individual employees of businesses in these sectors will therefore increasingly come under scrutiny from both the US and Chinese governments. In the case of Taiwan, for example, Taiwanese authorities accused China of “stealing” chip making talent and corporate secrets as a means to undermine Taiwan’s national security. 

In part, governments are responding to these threats (and to US pressure) by tightening export restrictions in key sectors. The Dutch government, for example, is pressuring ASML, a leading semiconductor manufacturer, to limit its exports to China. Corporations, however, are only part of the equation. The skilled workers in these companies are vital for producing key technologies and are therefore prime targets for corporate espionage and employee poaching. In the case of China, the fusion of state and private interests is both financial, through public investment, and political, through mandating that corporate strategy aligns with party priorities. This means that corporate poaching is as much a decision of CCP officials as it is corporate interests. The detention of AstraZeneca employees–seemingly for transporting unapproved drugs and collecting patient data without authorization–highlights how the CCP is willing to leverage its influence over the private sector to ensure its tech and security interests. 

For businesses operating in areas of China’s “national interest”–an increasingly expansive category–employees will likely find themselves unwilling participants at the frontline of geopolitical competition. Companies should not only be hypervigilant about attempts to poach their employees, but also ensure that their employees are aware that they may be approached and of the very real risks–especially for Taiwanese employees–associated with working for a Chinese employer. The crucial question for US businesses will therefore be how to continue attracting and retaining key talent, much of which includes Chinese nationals, while securing those employees against pressure from foreign governments.

Analysis

Albany is at the center of a spying scandal involving a former senior aide to New York Governors Kathy Hochul and Andrew Cuomo, who stands accused of being an unregistered foreign agent for China. New York prosecutors accused Linda Sun, Governor Hochul’s former Deputy Chief of Staff, of espionage, visa fraud, human smuggling, and money laundering. The accusations include millions of dollars paid to Sun by CCP officials in return for political favors, including the removal of negative comments about China from governors’ speeches and the canceling of meetings with Taiwanese government officials. Sun’s arrest led to confusion that Governor Hochul had ordered the expulsion of the Chinese Consul General in New York, a power that the governor lacks, although the Consul General–perhaps conveniently–left his position a few months ago and has therefore avoided much ire from the New York governor’s office. Despite this, the former Consul General reappeared in public at a gala in New York last week, possibly as a rejoinder to Governor Hochul’s claims to have gotten him fired. 

While Sun’s case is clearcut in its scale and traceable quid pro quod financial transactions, the case points to a larger risk of foreign influence at state and local levels that will likely be more challenging to uncover. Importantly, as evidenced by cases like that of the head of a US think tank and parliamentary aides in Germany, China will prioritize influencing individuals of Chinese heritage, but will also target individuals with no cultural or familial ties to China. This presents a delicate case for US national security in how to determine genuine threats without racial profiling that is immoral, illegal, and ineffective. 

High-profile cases, like Sun’s, will also likely increase pressure on state and local governments to review their staff and processes to prevent similar security breaches. For businesses engaging with China, this will likely make it more challenging to engage effectively with state governments, and may result in challenges for buying land or conducting standard business operations as state governments become increasingly suspicious of engagements with China.

Analysis

Senior figures in the Republican Party appear to be steering the GOP in different directions on Taiwan. Senator Marco Rubio, in an op-ed in the Washington Post, argued convincingly that China’s economy is not on the brink of collapse and that the US needs to take seriously the threat that China poses to existing world orders. His op-ed, however, did not mention support for Taiwan, a traditional mainstay of Republican policy in East Asia. At the same time, former Governor and Presidential Candidate Nikki Haley argued in a recent interview that the US would be unlikely to send troops to defend Taiwan against a future Chinese invasion. While these two opinions are more nuanced than simplistic “interventionism versus isolationism” framings, they also point to an increasingly wobbly platform on Taiwan among US political elites that has Taipei extremely nervous. 

Historically Republicans have been the more “pro-Taiwan” party, a trend that attracted many in Taiwan to support President Trump. The GOP, however, has recently pivoted under Trump’s new line that Taiwan “stole” US chip jobs and should therefore “pay for its own defense.” During the presidential debate, Trump doubled down on these claims, arguing that the Democrats had handed chip jobs to Taiwan and that the US should question its support for Taipei.

These comments suggest that a Republican presidency would be more likely to take a “Ukraine approach” to a possible invasion of Taiwan, supporting the island from afar rather than by deploying US troops. This shift in the GOP platform will not only make Taiwan’s leaders nervous, it also has dramatic implications for regional stability as other treaty allies, including Japan, will likely question the US’s commitments to the region and may seek alternative security arrangements. Taiwan is therefore crucial to the US’s influence in East Asia, where support for the island stands for more than an agreement to send military aid in case of an invasion, but rather as a symbol of US security guarantees that have defined global security for the past eighty years. If Trump wins in November, the added uncertainty over the US’s future support for Taiwan will likely have dramatic consequences for US businesses operating in Asia, notably in companies redirecting supply chains away from Taiwan as insurance against a heightened risk of Chinese invasion.