Xi is here to stay

September 2, 2024

This week in The Red Report

From Zhongnanhai: This week in Chinese Politics

Why a celebration of Deng Xiaoping hints at China’s future

Xi’s evocation of Deng’s legacy points to a push for the party to embrace Xi’s policies, including deeper party control over the economy. Businesses in China should pay close attention to how the party embraces Deng, as it suggests that Xi aims to tighten his grip on the party and stay in power for the foreseeable future.

Analysis

As dictators do, Xi Jinping demands primacy, full attention and credit, and does not accept questions. His engagement with China’s past leaders, particularly Mao Zedong and Deng Xiaoping, has therefore often tread a cautious path between acknowledging their contributions to the party without elevating their status above his own. Xi’s celebration of Deng’s 120th birthday therefore marks a notable signal from party elites as Xi looks to embrace select messages from Deng’s legacy, namely that of continued change in the face of resistance. Somewhat ironically, Deng’s name was downplayed until recently as he stood for “collective leadership” in the party, which clashed with Xi’s push for effective one-man rule. Xi’s approach draws more parallels to Mao Zedong’s totalitarian rule compared to Deng’s methods. 

Evoking Deng’s legacy to legitimize and justify Xi’s proposed policies, which primarily concern the use of technology and innovation to spur economic growth and the party’s grip on society, therefore highlights how determined Xi is to push through structural changes that he considers necessary to the party’s longevity. These moves also underscore how the party’s message is for party members (and Chinese citizens) to embrace these reforms or suffer consequences. Moreover, they suggest that Xi is planning to stay in charge for the long run, with Deng’s selective legacy one of continued status as “paramount leader” of the CCP despite formally stepping down from roles like General Secretary. 

Prioritizing Deng at this point therefore serves Xi in multiple ways: it alerts the party that it must support his policies; it elevates his status to the same level as the party’s most-famous leaders; and it suggests that Xi intends to remain in power for life. For foreign businesses in China, this means a likely acceleration of the difficulties that many have faced in the past few years as the party leadership emphasizes deepening political control over the economy in the name of national security. Challenges for foreign businesses–ranging from the party’s seizure of data, restrictions on employees, and the promotion of IP theft by Chinese entities–are therefore likely to persist for the foreseeable future.

On the Hill: Developments in US China policy

US-China relations after November 

Regardless of the outcome in the US presidential election this November, China will continue to dominate foreign policy concerns for the new administration. 

Analysis

New details about a meeting in July 2023 between US National Security Advisor Jake Sullivan and China’s Foreign Minister Wang Yi, hint at possible continuities for the next administration’s China policy. The meeting, a “strategic channel” that served as a response to the Chinese spy balloon incident, appears to have served as an effective “shock absorber” for potentially explosive issues in US-China relations and suggests that both sides are more open to managing issues–at least in the short term–than many previously thought. As the two meet this week to continue their dialogue, details of these meetings are highly relevant to understanding how the US and China see each other as competitors. 

Details of Sullivan’s discussions, however, also indicate fundamental differences between how the US and China see the world. China wants a clearer label on the relationship as either cooperator or competitor, compared to the US’s more nuanced approach; Taiwan is a firm red line for China and Beijing considers the US position on Taiwan as impermissible meddling over Taiwan’s eventual annexation. Beijing is furthermore angered by US export controls and attempts at what the CCP considers efforts to “curtail” China’s economic development. These issues will persist beyond November, but they hint at the key areas that a new administration will need to tackle as arguably the most important pillar of their foreign policy platform. 

Vice President Harris has more foreign policy experience than some commentators suggest, meeting with all five of the US’s allies in the Asia-Pacific, championing causes like human rights and democracy abroad, and supporting efforts at home like semiconductor and tech investment to boost US domestic security. Her stance therefore appears more about strengthening the US than attacking China, compared to Trump’s more punitive approach during his presidency where trade wars became a key feature of his China policy. For Trump, China will likely be his biggest punching bag so he can look tough on foreign policy. His campaign is promising to introduce steep tariffs on Chinese imports. Trump’s tariffs proved popular at home, and indeed have been broadly continued by the Biden Administration, which suggests–despite being part of Trump’s platform–that they will likely be continued by whoever occupies the Oval Office next year. 

As the Biden Administration tightens sanctions against Chinese entities that it determines are abetting Russia’s war in Ukraine, and as China continues to dominate foreign policy discourse on both sides of the political aisle, Harris and Trump will therefore likely find their choices constrained by a US public that is increasingly likely to see China as a rival and adversary. While for Trump this is advantageous to his style of punitive politics insofar as he can attack China as a way to energize his supporters, Harris has the more uphill battle of having to explain why patience and focusing on building US strength rather than going after China more directly is ultimately the better longer term solution to US-China competition. In either case, Chinese leaders are facing a less-than-friendly US political leadership in the coming years, which will most certainly filter into a tougher time for bilateral business relationships.

Business Matters

China-led Trade War Heats Up

China continues to overproduce and dump globally while retaliating against Western efforts to protect domestic companies. Beijing’s newest economic strategy suggests they are ready to wait out the West in pursuit of longer-term goals.

Analysis

Beijing appears to be doubling down on its policy of state-subsidized overproduction as the solution to its domestic economic woes, resulting in continued global dumping and unfair market advantages for its companies. Xi Jinping’s recent mantra of “establish the new before breaking the old” (xiānlì hòupò 先立後破) puts emphasis on growing the manufacturing sector, such as semiconductors and EV related technologies, while maintaining traditional sectors like steel. Growing Chinese exports of semiconductors in the first half of this year, however, already raised the specter of overproduction, while the EU recently decided to impose a 36% tariff on Chinese-made EVs (on top of an existing 10%) unless Beijing could find another way to compensate for their unfair market advantage. Despite growing international concern, companies should prepare for increased Chinese dumping.

Janet Yellen previously warned China about the cascading implications of its overproduction on global markets, but Chinese state media continues to dismiss such concerns and encourage accusations of Western protectionism. Moreover, China just opened a new probe into EU dairy imports in retaliation for their EV tariffs, while Canada’s announcement of even more severe EV tariffs are expected to elicit a similar response targeting Canadian barley and pork imports. With the Biden administration set to announce new hikes for US tariffs on Chinese goods this week, National Security Advisor Jake Sullivan is reportedly set to meet with China’s Foreign Minister, Wang Yi, in September to try to diffuse tensions and mitigate further escalation of the trade war.

It is becoming increasingly clear that Beijing does not care about its overproduction and the impact of dumping on the global economy; as long as the government is saving jobs at home it seems that the ends justify the means. Overproduction also suggests that the PRC has other goals as it pursues economy-wide domestic resilience. One of those possible goals relates to China’s interest in forcibly annexing Taiwan. A key component of this decision will be whether or not Beijing thinks it can withstand US-led efforts to sanction the PRC, as this has been a central fixture of the US toolkit deployed against Russia after it invaded Ukraine. While it has been long established that Beijing has been learning from Moscow’s experiences, a more recent take-away among Chinese leadership is that the West lacks staying power, as demonstrated in waning support for Ukraine in the US. Consequently, Beijing may see no need to acquiesce to Western demands, as it is much better equipped to wait out the West’s attention span on any given issue, and can, in turn, cut off future avenues of retaliation.

Tech Futures

How China still acquires US technology

Chinese investors are broadly able to maintain access to critical US tech despite export controls and other restrictions. Companies need to be increasingly vigilant about who their investors are, particularly if they include foreign entities.

Analysis

China continues to exploit a major loophole in the US’s tightening export controls through the use of private and corporate investors in US technology companies. Chinese entities frequently use a series of shell and holding companies to disguise their ultimate benefactors, but there are also instances where China-based investment firms have successfully invested in, or acquired outright, US firms operating in sensitive industries. This includes microchip manufacturers like California chip-designer ATop Tech, which a Hong Kong-based investment firm, Avatar Integrated Systems, purchased through a bankruptcy court despite the company’s relevance to US critical infrastructure. This is particularly notable for Chinese investment offers, as China’s leaders increasingly pressure businesses and entities to consider themselves as extensions of the Chinese state and as ultimately serving the interests of the party’s drive for tech superiority over corporate interests. 

Where the Committee on Foreign Investment in the United States (CFIUS) is intended to prevent transactions like this, its limited scope means that it is largely unable to ensure US security through investment deals conducted via bankruptcy courts or foreign venture capital firms, which often finance tech startups and other fledgling companies. While the balance between much-needed investment in new technologies and national security concerns is delicate, deals like that of Avatar and ATop Tech highlight how Chinese entities remain able to access key technology despite export bans and other restrictions imposed by the US government. With limited alternatives for US-based investment, this area remains critical for both national security and global tech competitiveness. Moreover, as Chinese investment firms also see slowing gains from investing at home, they are also incentivized to look abroad for adequate returns, which looks set to exacerbate the trend of Chinese outbound investment in tech.

Conversely, while Chinese investors are going after US tech companies, US and Western private equity firms are pulling back from their China holdings as China becomes both an economically risky and geopolitically fraught investment. In part, this is both because of China’s wobbling economy, but it is also a product of the Biden Administration’s restrictions on US investments in key technologies, like quantum computing and AI, which many investors now see as radioactive for their own portfolios. A byproduct of this withdrawal from Chinese investments, however, is that the US will have far fewer entry points into Chinese tech innovations than China will have into similar industries in the US. Rather than see investment environments as segregating into US and Chinese spheres, the reality is more complex with multiple overlapping embedded interests across both markets. Companies in tech and other sensitive arenas therefore need to be increasingly cautious about foreign investment offers, particularly if the ultimate benefactors of the deal are murky.

Espionage Alert

Taiwan espionage prosecutions hint at China’s invasion plans

Uptick in prosecutions of PRC spies in Taiwan suggests that China is laying the groundwork for a potential future invasion, but questions remain as to whether those recruited as assets were aware of their situation. Companies need to be extra vigilant in case their employees are approached by Chinese intelligence operatives, which is increasingly likely among companies in sensitive industries. 

Analysis

A string of recent rulings by Taiwan’s High Court highlight China’s increasing recruitment of assets within the Taiwanese military, a tactic that China is aggressively pursuing as it prepares for a possible future invasion. While China is highly unlikely to invade in the near future, the targeting of military personnel in Taiwan suggests that Beijing is laying the groundwork for insider support within the Taiwanese military. This inside support is vital for ensuring Beijing’s victory in Taiwan.  Securing domestic support within Taiwan ahead of a planned invasion is therefore key to Beijing’s plans, and Beijing’s efforts at recruitment will likely accelerate in the coming years. These arrests, while important signs of such efforts, are also likely only a fraction of the total number of Chinese assets recruited in Taiwan, both because many are likely yet to be uncovered and because the Taiwanese government is unlikely to report every case on national security grounds. 

The accused spies in Taiwan, involving 8 to 10 individuals from the Army Aviation Special Operations Command (陆军航空特战指挥部), point to a larger and more brazen push by Chinese intelligence agencies to recruit overseas assets in recent years. Where Taiwan is a major focus of these efforts owing to the CCP’s desire for its conquest and annexation, the recruitment of assets also extends to other individuals with ties to China. This includes a former PRC citizen and pro-democracy advocate in the US who was arrested on charges of reporting to Beijing about fellow Chinese dissidents, and a mayor of Chinese heritage in the Philippines who came under intense national scrutiny after murky details about her past drew suspicion that she was a Chinese asset and led to her flight from the country. In some cases, these individuals may be unaware that they are being used as assets by China’s Ministry of State Security (MSS). This means that companies working in technology or other sensitive industries that employ PRC citizens need to train their staff about the possibility that they might be approached by MSS personnel, and how they can respond in such scenarios.

One more thing…

Internet service providers are prime targets for Chinese hackers

Latest reports of Chinese hackers accessing internet service providers emphasizes the importance of cyber security, especially for companies and employees in sensitive industries. 

Analysis

Chinese government-backed hackers are turning to US internet service providers to access sensitive information about specific individuals. Recent revelations about Chinese hackers’ new tactics suggests that as with other espionage cases (see above), China is increasing its scope and aggressiveness when it comes to espionage. Most of the targets of these attacks allegedly include government and military personnel, including those working undercover. The attacks, part of a coordinated effort by the group Volt Typhoon, also underscore a key weak point for US national security efforts, namely that individual internet users each present a potential access point for foreign governments as their hackers target gaps in critical infrastructure defenses. 

For businesses in sensitive industries like technology or defense, these reports underscore the importance of internet and information security for both companies and employees, including for home-use devices. Note, however, that technical protections alone will not suffice. Hackers attack human vulnerabilities as well. Many so-called hacks start with social engineering and credential theft. This means going beyond encouraging the use of individual VPNs to include more extensive company-wide security and training protocols. Companies failing to implement such measures will likely become fresh targets as Chinese-backed hacking groups expand their target sets.

Book Recs

What we’re reading to better understand China

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