A weekly bulletin offering news and analysis related to the Middle Kingdom. This week, Xi asks the world to Sell in China, and has a good phone call with Trump.
1. A Diplomatic Expo
In 1793, Qing Dynasty’s Emperor Qianlong had famously responded to a British diplomatic mission led by Lord Macartney by arguing: “I set no value on objects strange or ingenious, and have no use for your country’s manufactures.” On Monday, President Xi Jinping will do just the opposite, welcoming the world to sell in China. He will do so while inaugurating the first-ever China International Import Expo in Shanghai.
In the run-up to the big opening, official agencies and state media have been highlighting the unprecedented size and scope of the event, along with the attendance of international leaders. For instance, Vice Commerce Minister Fu Ziying says that some 3000 companies from over 130 countries and regions will be bringing more than 5000 new products and technologies to China. Xinhua tells us that the expo includes seven exhibition areas, showcasing consumer goods, electronic products, intelligent equipment, foods, medical and health care products, automobiles, and trade in services.
Behind the economics, however, this is a deeply political event from the CCP’s perspective. It was, in fact, listed in March as one of the four big events on China’s diplomatic calendar by Foreign Minister Wang Yi. According to the People’s Daily, the expo will showcase the influence of the Chinese market, the attractiveness of China’s opportunities and the appeal of the Chinese system. So expect Xi to use this opportunity to hammer home some important talking points:
- The first of these is to re-orient the narrative from China being the world’s factory to China being a key global marketplace.
- Expect him to emphasize that China remains committed to reform and opening up, multilateralism and free trade. This, of course, is a counter-narrative to the increasing frustrations of the West with China’s industrial policy, market restrictions and trade practices.
- Look at this in the context of the frustrations that are also being expressed by some BRI states. A good example of this is Pakistan, wherein one of the promises of CPEC has been that it will boost Pakistani exports.
- Expect Xi to also re-emphasize that China’s growth and stability is important for other countries, i.e., building the linkages that forge a shared community and shaping perceptions of China as a responsible stakeholder.
What all this leaves unaddressed, however, are the more fundamental issues of procedural regulations, compulsory JV requirements in many sectors, customs procedures, IPR concerns and preferential treatment of SOEs that restrict companies’ access to and role in the Chinese market. Many of these were highlighted in this joint opinion piece written by Jean-Maurice Ripert and Dr Clemens von Goetze, the ambassadors of France and Germany to China, respectively. Mentioning some clear demands, the two diplomats called on China to “show real commitment” towards reform.
2. The Economy + AI
The CPC Politburo held a session on the economy on Wednesday. According to state media reports, the Politburo assessed that so far this year, “the country achieved overall economic stability with steady progress, and economic performance was kept within a proper range.” However, there are serious concerns looking ahead.
The Xinhua report adds that according to the Politburo, “the current economic situation is a combined result of long-term and short-term as well as internal and external factors.” This means that the economy is facing “increased downward pressure” amind “profound changes” in the external environment. As a consequence, the Politburo statement argued that the government needs to “be more proactive in taking measures to cope” with such pressures.
This is a significant shift from the Politburo’s assessment three months ago, notes this SCMP piece. Back then, the leadership had only spoken of “noticeable” changes in the external environment. In addition, this statement made no reference to Xi’s “three tough battles,” which indicates easing up on the deleveraging campaign, as this piece argues.
This downward pressure on the economy was reflected in the official manufacturing and services PMIs, both of which dipped in October. Meanwhile, the private Caixin/Markit Manufacturing PMI rose marginally from 50 in September to 50.1 in October. Data on new orders also showed only marginal improvement, highlighting the systemic issues that the Chinese leadership faces.
The roadmap for dealing with the problems, as per the Politburo, is to “uphold the underlying principle of pursuing progress while ensuring stability, remain committed to the new development philosophy, pursue supply-side structural reform as the main task, further push reform and opening up wider, and come up with targeted measures to address major contradictions.” But what has this meant in practice so far? This Bloomberg Economics chart sheds some light on the decisions taken by the Chinese government.
In addition, there is renewed focus on infrastructure development as a driver of growth. The State Council issued a guideline this week. The document says: “Efforts will also be made to enhance financial support for projects under construction and major projects, encourage participation of private investment, while forestalling and defusing financial risks and risks from covert local government debt.” Along with this, Xi met with private business owners in a first-of-its-kind symposium on Thursday. Private companies in China are continuing to face liquidity crunches amid the government’s deleveraging efforts. Increasingly, many of these companies are being backed by strategic investors with state or local government backgrounds, argues this Bloomberg report. During Thursday’s symposium, Xi reportedly assured that the CPC would continue to “encourage, support and guide” the private economy.
Meanwhile, the Politburo this week also held a group study session, where Xi spoke about new technologies and AI. He emphasized that “development of new-generation AI is a strategic issue” for China, adding that key core AI technologies should be “securely kept in our own hands.” Notice how different this message is from the one that Vice Premier Liu He and even Xi had delivered during the World AI Conference in Shanghai in September. Back then, it was all about “deepened collaboration and open dialogue.”
During Wednesday’s session, Xi also highlighted sectors that he’d like Chinese companies working in AI to focus on: AI should be used in areas such as education, health, sports, housing, transport, disabled and old-age care, and housekeeping. What’s not mentioned in that list is public security. However, according to this SCMP report, Xi said that public security was one field in which it could be used “in depth.” While on the subject, Baidu says is ready to test its first batch of “robo-taxis” in Changsha, Hunan Province. It’s still unclear when and how long testing will last. Caixin reports that earlier this year, China rolled out a national policy that allows companies to test driverless cars on public roads, although these tested cars will still need a safety driver on board. Baidu has also announced that it will be rolling out self-driven passenger cars next year in partnership with Hongqi, or Red Flag, the car brand long favored by China’s political elite.
3. War, Weapons & Students
Wrapping up his Southern Tour last week, Xi conducted an inspection of the Southern Theatre Command. A big part of his message, while at the command headquarters, was “the importance of preparing for war and combat.” This is significant since Taiwan and the South China Sea fall under the responsibilities of the Southern Theatre Command, and the situation with regard to both of those regions is increasingly growing complex. For instance, last week, the United States sent two warships through the Taiwan Strait in its second such operation this year. This week, Brent Christensen, the director of the United States’ de facto embassy in Taipei, said, “Any effort to determine Taiwan’s future by other than peaceful means… is of grave concern to the United States.”
Next week, meanwhile, Zhuhai in Guangdong Province will play host to the China Airshow. A number of countries’ air forces, including Pakistan, Saudi Arabia, the UK, Japan, etc., will be participating. Based on media reports, here’s some of the hardware that’s likely to be on display at the event.
- The “Silk Road Eye” an airborne early warning (AEW) radar, developed by the 14th Institute of China Electronics Technology Group Corporation.
- J-20 stealth fighter jets, along with the Y-20 transport aircraft, the H-6K bomber, KJ-500 early warning aircraft, GJ-2 unmanned aerial vehicle and J-10B fighter.
- The CH-10 tilt-rotor UAV.
- A model of the core module of China’s Tianhe, or Harmony of the Heavens, space station.
Finally, a new report by Alex Joske for the Australian Strategic Policy Institute released this week shed light on the PLA’s expanding research collaboration with institutes outside China. The report says that since 2007, the PLA has sponsored more than 2500 military scientists and engineers to study abroad. Many of these “scientists work in strategic and emerging technology sectors such as quantum physics, signal processing, cryptography, navigation technology and autonomous vehicles.” It adds that: “Scientists sent abroad by the PLA have minimal or no interaction with military personnel in their host countries. Some of those travelling overseas have actively used cover to disguise their military affiliations, claiming to be from non-existent academic institutions.” The objective of this approach, according to the report, is “Picking flowers in foreign lands to make honey in China,” i.e., leveraging overseas expertise, research and training to develop better military technology.
Related Stories (With views from a range of analysts):
- FT: Chinese military researchers exploit western universities
- NYT: Chinese Military May Gain From Western University Ties, Report Warns
- The Globe and Mail: China’s military scientists target Canadian universities
4. A ‘Good’ Call
A telephone call between Donald Trump and Xi Jinping confirms that the two men will be meeting at the G20 summit in Argentina later this month. Trump’s tweet described it as a “long and very good conversation.” Xinhua’s readout on the call said that bilateral trade and the Korean Peninsula issue were discussed. All of this has generated some optimism, particularly in the markets. In addition to the call, this Larry Kudlow statement is further encouraging the positive sentiment: “It is possible some good positive things could — I say could — come out of President Trump-President Xi talks. It’s possible.” One example of such sentiment is this Deng Yuwen piece in SCMP, wherein he predicts that the trade war will be over by the end of the year. Bloomberg also reports that following the call, Trump has “asked key cabinet secretaries to have their staff draw up a potential deal to signal a ceasefire.” Shades of this can be found in the Xinhua readout, according to which Xi urged “the economic teams of the two countries to increase their contacts and conduct consultations over issues of mutual concern so as to reach an agreement which is acceptable for both sides.”
Analyst Bob Davis, however, offers a far more nuanced assessment of the call in this tweet. If I can paraphrase his argument. since the two men are talking again, a trade deal is possible, although there has been no progress on substance. Finally, keep in mind that it’s election season and the call does help bucking up the markets. What I’d like to add to this analysis is the fact that the call and optics at G20 also play well for Xi at home, given all that’s been discussed in Section 1 above. Whether either side is ready to make substantial concessions remains to be seen.
But irrespective of some sort of a truce, the fact is that there are deeper and structural issues at play in the Sino-US dynamic. For instance, also this week, the US Commerce Department imposed an export ban on Chinese state-backed chipmaker Fujian Jinhua Integrated Circuit Co Ltd. arguing that it “poses a significant risk of becoming involved in activities that are contrary to the national security interests of the United States.” Reuters reports that Fujian Jinhua makes so-called DRAM, the memory chips that make computers, phones and other devices run more quickly and smoothly. The ban, therefore, takes direct aim at Beijing’s efforts to ramp up its semiconductor industry and eventually reduce foreign dependence. A few days later, the US Justice Department unveiled criminal charges against Fujian Jinhua and United Microelectronics Corporation (UMC) of Taiwan, along with three UMC officials for acts of commercial espionage. The indictment claims that the parties sought to steal an estimated $8.75 billion worth of trade secrets from semiconductor giant Micron. The indictment also comes four months after Fujian Jinhua won a patent dispute with Micron in a Chinese court, gaining an order for Micron to stop sales in China of more than a dozen solid-state drives, memory sticks and chips.
5. Ties with India
The 21st round of India-China border talks led by National Security Advisor Ajit Doval and Chinese State Councillor and Foreign Minister Wang will be held from November 23-25. Another set of conversations that are expected later this month, as per this Hindu report, are with a visiting delegation of the VIP security wing of China’s Public Security Ministry. This is the team of people that takes care of the security of the seven PSC members. Meanwhile, Central Tibetan Administration President Lobsang Sangay wants New Delhi to convey to Beijing that Tibet is a “core issue for India” while negotiating autonomy for Tibet with the Chinese leadership.
BRI and CPEC are back in discussions in India. At the at the first South Asia Regional Connectivity conference in New Delhi this week, Foreign Secretary Vijay Gokhale spoke about the importance of a “rules-based order” that upholds “sovereignty, territorial integrity and equality of all nations” when it comes to connectivity initiatives. He further added that “connectivity efforts in the region must be based on principles of economic viability and financial responsibility. They should promote economic activity and not place nations under irredeemable debt burden.” This comes as India has reportedly lodged a formal protest with regard to a bus service from Xinjiang to Lahore, saying that it violates India’s sovereignty and territorial integrity. This is how China’s foreign ministry responded to the Indian protest: “It (CPEC) has nothing to do with territorial sovereignty disputes and does not affect China’s principled position on the Kashmir issue.”
Meanwhile, Niti Aayog and the Development Research Centre of the State Council held their fourth round of talks, with the statement saying that the two sides would undertake joint research in the areas of WTO reforms, urbanisation and frontier technologies. In addition to this, for the second time in a fortnight, China has reportedly alerted India of a possible flood-like situation in the Brahmaputra river in Arunachal Pradesh. In April 2018, India and China had signed an agreement to share data on Brahmaputra and Sutlej, with China beginning sharing data from May.
6. Abe’s Diplomacy
It’s been a long week for Japanese Prime Minister Shinzo Abe. After years of tensions, Abe traveled to Beijing for a landmark visit last week, the first such visit in seven years. The palpable shift in the relationship was captured in Abe’s call to initiate a new phase of bilateral ties, moving from “competition to coordination,” the cornerstone of which is “pragmatic cooperation” as per Premier Li Keqiang. President Xi elaborated on that further, saying “Under the new situations, China and Japan, increasingly interdependent in bilateral areas, also share more common interests and concerns on multilateral occasions.” The new situations, of course, have a lot to do with the US under Trump.
Writing for The Diplomat, Daniel Hurst captures the key outcomes of the visit. Here’s some of the major deals and perspectives.
- Around 50 business agreements worth $18 billion signed between Chinese and Japanese local governments, companies and financial institutions, reports Xinhua.
- Li called for a direct hotline between the two defense ministries to turn the East China Sea into a “sea of peace, cooperation and friendship.” This also involves an agreement to restart talks about joint explorations for gas and oil in the East China Sea, CGTN reports.
- A three-year currency swap agreement of up to 3.4 trillion yen ($30.4 billion).
- A potential “development cooperation dialogue” to oversee joint infrastructure projects in other countries.
- The Japan Bank for International Cooperation and the China Development Bank will also launch a scheme to jointly finance infrastructure projects in third countries.
- Analysts are reading this as Japan’s acceptance of BRI, in all but name.
- Why is all this happening at this stage? Well Michael Ivanovitch in this CNBC piece argues that China “does not need Japan for the steady growth of its huge and rapidly expanding domestic market. And neither is China desperate for Japanese investments…It is also ridiculous to think that China needed Japan as an ally in its trade dispute with the U.S.” So why is Beijing engaging? Ivanovitch says, “China is now testing how far a more constructive relation with Japan may go in the context of a rapidly changing geopolitical landscape.” On the other hand, he believes that China is key to Abe’s economic agenda, with Japan’s exports to China being key to the country’s entirely export-driven 1 percent growth in the first two quarters.
Meanwhile, Cary Huang in this SCMP piece argues that despite all the positivity from the visit, fundamental differences between persist between China and Japan over history, territory, regional ambitions and geopolitical strategy. Perhaps one example of this is the Abe-Narendra Modi meetings that followed after Abe returned from Beijing. The two sides emphasised their Special Strategic & Global Partnership, with talks on the Indo-Pacific and maritime cooperation and establishing a 2+2 dialogue between Foreign Ministers and Defence Ministers.
Assessing the meetings over the past week, Long Xingchun, research fellow at The Charhar Institute, writes in The Global Times that “Modi and Abe should discuss how to cooperate with China, not how to come together to oppose Beijing,” seeking potential cooperation between the Asia-Africa Growth Corridor and BRI.
7. Mixed Bag
In the final section today, I thought I’d put together a quick breakdown of stories related to a few specific countries:
- Pakistan: PM Imran Khan is in China for the first time since taking office. Here’s the set of activities on his list. What one should watch out for are potential commitments of funds, signalling of a shift in CPEC projects, possible announcement of investments in agriculture and housing projects and so on, given that China’s ambassador to Pakistan has predicted “good news” to emerge from the visit. Yao incidentally also caught up with Pakistan’s COAS General Qamar Javed Bajwa to discuss Khan’s visit.
- Sri Lanka: China finds itself involved in the political and constitutional crisis in Sri Lanka. On Friday, President Maithripala Sirisena sacked Prime Minister Ranil Wickremesinghe and swore in former President Mahinda Rajapaksa as his replacement. A day later Reuters reported that Cheng Xueyuan, China’s envoy to Sri Lanka, sent Rajapaksa a customary congratulatory message. He also met with Wickremesinghe, assuring that China would not interfere in the political crisis. Since then, the foreign ministry in Beijing has been emphasizing that China adheres to the principle of non-interference in countries’ internal affairs. But there are serious questions regarding this, with Ranjan Ramanayake, a deputy minister in Wickremesinghe’s government, accusing China of spending “millions to buy MPs in Sri Lanka” for Rajapaksa. The Chinese embassy in Colombo has dismissed these charges. However, recall this NYT piece from earlier this year, which had argued that during the 2015 elections, “large payments from the Chinese port construction fund flowed directly to campaign aides and activities for Mr. Rajapaksa.” Meanwhile, also noteworthy is this remark by Sri Lanka’s new foreign minister Sarath Amunugama: “There’s no benefit to Sri Lanka to be tilting to one side or the other. By being friendly with India, we are not being unfriendly with China.”
- Philippines: Chinese Foreign Minister Wang Yi visited the Philippines this week, holding talks with Rodrigo Duterte in his hometown of Davao. Rappler reports that three key deals were signed, including formal turnovers of a $1-million grant from China to the Philippines and of RMB 50 million “law enforcement-related materials and equipment” and an assessment for the Davao River Bridge Project. The big message, however, was that ahead of Xi’s trip to the country later this month, a deal on joint energy development in South China Sea seems increasingly likely. Philippines’ Secretary of Foreign Affairs Teodoro Locsin Jr says that the discussion with regard to this is moving in a “positive direction,” while Wang was quoted as saying that China is ready to “shelve differences and pursue joint development.”
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