Eye on China

Hurt The Ear, Stab The Heart

A weekly bulletin offering news and analysis related to the Middle Kingdom. This week, Liu He’s upcoming visit, the pressure on Huawei and China’s growth targets dominated the headlines

  1. Trade-Tech War

China’s Commerce Ministry confirmed this week that Vice Premier Liu He will visit Washington for talks on a trade-war deal. Liu will be meeting with US Treasury Secretary Steven Mnuchin and Trade Representative Robert Lighthizer. Ahead of those talks, WSJ, citing unidentified sources, reports that Mnuchin had proposed lifting all or some of the tariffs on Chinese imports in order to give Beijing an incentive to undertake deeper reforms. But CNBC reports, again citing sources, that “there’s no discussion of lifting tariffs now.” This fits into the narrative of a split between hawks and doves in the Trump administration. For instance, Senator Chuck Grassley spoke to the press this week, discussing Lighthizer’s view of the talks with China. He says that as per the USTR “there hasn’t been any progress made on structural changes that need to be made.” This split makes negotiations complicated for Beijing, given that Liu has already had his hands burned after apparently having agreed to a “consensus” in May last year and finding that it meant very little.

But beyond the politics, what’s been the impact of the tariffs from a US perspective? Have they addressed the deficit? Well, not really. Data from China’s General Administration of Customs show that China’s surplus with the US grew 17% from a year ago to $323.32 billion in 2018. This puts the surplus at its highest since 2006. But if you view this trade war as a broader effort to decouple from China, then there are some signs of major changes underway. For instance, Rhodium Group reports that Chinese FDI in the US in 2018 fell to $4.8 billion. That’s a drop from $29 billion in 2017 and $46 billion in 2016. Analysing Mergermarket’s latest report assessing M&As globally tells us that Chinese buys of US firms fell 94.6% from 2016 to $3 billion in 2018. This, according to this China Law Blog analysis, was a direct result of the US government’s security review system, “which has made Chinese investment in any form of technology company virtually impossible.”

From an economic standpoint, essentially technology and innovation is what this is all about. And on that front, developments this week tend to suggest a long-drawn contest. For instance, CNBC’s Jim Cramer reports that US tech executives are willing to bear short-term pain for a long-term payoff. Meanwhile, WSJ reports that federal authorities in Seattle are preparing a criminal case against Huawei for allegedly stealing trade secrets from US companies. Apparently, all of this dates back to a suit filed by T Mobile in 2014. In addition, Reuters reports that a bipartisan group of US lawmakers introduced bills on Wednesday that would ban the sale of US chips or other components to Huawei Technologies Co, ZTE Corp, or other Chinese telecommunications companies that violate US sanctions or export control laws. The Global Times believes that Huawei is becoming a victim of “high-tech McCarthyism.” China Daily calls it a “witch hunt.” (More on Huawei below) Nikkei Asian Review reports that globally, leading tech executives are worried about a split into spheres of influence. Officially, China’s foreign ministry reacted to the proposed US legislation, calling it “an expression of extreme arrogance and an extreme lack of self-confidence.” Hua Chunying added, “actually the whole world can see very clearly that the real intent of the United States is to employ its state apparatus in every conceivable way to suppress and block out China’s high-tech companies. While this is taking place, do note that the total number of US grant patents for Chinese mainland companies increased in 2018 as all other countries declined. In fact, Chinese inventors received a record number of US patents in 2018. Thei bagged 12,589 US patents in 2018, a 12% jump on the year and a 10-fold increase over the 1,223 they received a decade ago. This just shows how complex decoupling is, given how deeply innovation ecosystems are intertwined globally.

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  1. Not Just a ‘Sesame Seed’

The pressure on Huawei, discussed above, is clearly having an impact. Apart from telecommunications infrastructure and equipment, concerns are also being raised in the US about Huawei’s sale of solar equipment in terms of the security of the US energy grid. Amid all this, first the company sacked Wang Weijing, who was arrested in Poland on espionage charges. The company says that it took this decision since Wang’s actions “brought Huawei into disrepute.” Thereafter, Huawei  founder, the reclusive Ren Zhengfei, spoke to the press this week, denying any espionage allegations and downplaying Huawei’s significance in the broader US-China friction. He said that the company was but a “sesame seed in the trade conflict between China and the US.” But that’s not how things are playing out. First, there is the element of national pride associated with Huawei, which is not just evident from the government’s reaction but also from media/social media and some companies’ reactions. Second, there’s an element of concern about Huawei being targeted as part of an “encircling hunt” by the West owing to the linkages between politics, economics and trade and Huawei’s inherent advantages owing to its R&D efforts. Ren also said that Huawei has “never received any request from any government to provide improper information” and that “no law requires any company in China to install mandatory back doors.” Of course, take this with a big sack of salt.

Meanwhile, the Canada-China spat over Huawei is escalating. Of course, Michael Korvig and Michael Spavor remain in detention, with no clarity yet on the charges against them. Beijing has rejected Justin Trudeau’s argument about Korvig, a former diplomat, enjoying diplomatic immunity. Also a Canadian citizen charged with drug smuggling in China was sentenced to death during a retrial. Another Canadian citizen, whose father is imprisoned in China, was reportedly harassed at Beijing airport. In all of this, Canada has reached out to a number of countries for support. Foreign Minister Chrystia Freeland this week that Canada is grateful for the support it has received in recent days from Germany, Estonia, France, Latvia, Lithuania, the Netherlands, the United Kingdom Britain and the United States. That diplomatic outreach is irking China’s ambassador to Canada, Lu Shaye. Speaking to Canadian journalists this week, Lu described Meng Wanzhou’s detention as an act of “backstabbing.” He also warned the Canadian government from using the WEF in Davos as a platform to make their case. ”If Canada has a sincerity in solving these issues, Canada will not do such things. We hope Canada will think twice before making any actions,” he was reported as saying. Lu also warned of “repercussions” if Canada blocked Huawei from its 5G systems. That decision by Ottawa isn’t likely to come anytime soon, according to Bloomberg’s reportage.

Amid the threats, there are also carrots being offered. Ren Zhengfei says that the company is going to invest some $100 billion to rebuild its network system in the next five years. This will be done with four goals in mind: minimalising the network; minimalising the transaction models of network; achieving utmost cybersecurity; and the privacy protection of the General Data Protection Regulation. Huawei Canada president Eric Li also said this week that the company will be spending around $2 billion on hiring more software engineers to make its equipment more secure, resilient and efficient, hinting that a good chunk of that pie could go to its Canadian operations.

Meanwhile, Germany is reportedly considering new rules for its next generation mobile phone network, which could end up curbing Huawei.

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  1. Li Seeks Feedback

China’s General Administration of Customs put out new trade data this week. The numbers are intriguing in that your perspective would depend on the time fame you’d consider, and do note, markets tend to take a more near-term horizon. So December exports fell 4.4% from a year earlier, while imports tumbled 7.6%. The shock here is that according to Reuters, analysts had expected export growth to slow to 3% with imports going up 5%. But for the entire year of 2018, which is what state media is highlighting, foreign trade rose 9.7% year-on-year to a historic high of 30.51 trillion yuan ($4.5 trillion). Xinhua reports that “exports rose 7.1 percent year-on-year to 16.42 trillion yuan last year, while imports grew 12.9 percent to 14.09 trillion yuan, resulting in a trade surplus of 2.33 trillion yuan, which narrowed by 18.3 percent.”

But maintaining that momentum in 2019 is going to be tricky. Premier Li Keqiang chaired a State Council meeting on Monday to discuss the economy and discuss the government work report, which he will present to the NPC in March. He warned that “downward pressure on economic growth is on the rise, with a host of tough challenges ahead.” This comes amid reports that the GDP target for the year is likely to be lowered. What adds credence to this is that out of the 12 of China’s 31 province-level divisions that have published their annual growth targets, eight of them have reduced their growth targets for the year.

Li’s mantra to manage the economy is to “strike a balance among stabilizing growth, promoting reforms, restructuring, improving people’s well-being and preventing risks.” On Tuesday, then, Li met with a bunch of economists and entrepreneurs for feedback. Trivium China reports that six people were asked to make presentations, and that the choice of the individuals and the subject areas they discussed reflect government priority. Apparently, what Li wanted from this meeting was feedback that “may hurt the ear or stab the heart.” SCMP reports that at the event, “Li warned of a difficult year ahead for the Chinese economy and vowed to increase investment in public services and infrastructure, as well as expand consumption while avoiding a ‘flood-like’ stimulus to counter the downturn.”

Keep this in mind when reading reports about the PBOC pumping money into the system. For instance, this Wednesday, the central bank injected a record net 560 billion yuan ($83 billion) in the markets. This, analysts argue, is a short-term measure given the tax and holiday season, and not a stimulus attempt. What’s a far more structural effort is increased infrastructure spending. The NDRC has reportedly authorized plans to build infrastructure projects worth some $72 billion in transportation, water conservancy and energy around the country. Regions like Xinjiang and Henan have already started issuing bonds to fund some of these projects. Also, In addition, the Ministry of Finance has announced a range of tax cuts. Also, the Ministry of Human Resources and Social Security says that it will ease the burden on companies to shore up employment, i.e., lay off less or fewer people and take back a chunk of the unemployment insurance premium that gets paid.

Also at the end of the week, the NDRC, Ministry of Commerce, and the State Administration for Market Regulation issued a joint statement, pledging measures to boost consumption. “The Chinese economy is operating steadily in general, but there are changes and worrisome developments, with a complicated and severe external environment and increased uncertainties,” said the statement. State media reports suggest focus on two specific sectors, i.e. automobiles and electrical home appliances.

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  1. Border and Faith

PTI reports, citing sources, that the India has decided to shift the ITBP command from its current base in Chandigarh to the border of Leh in Jammu and Kashmir by 1 April. The Leh district is the base for the 14 Corps of the army. The reported aim of the shift is to allow better interaction between the two forces “for strategic and defence planning.” Earlier in 2016, the ITBP’s northeast base was shifted from Shillong in Meghalaya to Itanagar in Arunachal Pradesh. While along the border, News18 reports that the PLA has made significant advances in constructing an ‘all-weather road’ that connects the Doklam plateau with its network of highways. “According to latest updates from intelligence sources, a 12-km-long stretch of Merug La-Doklam road has been black-topped and is close to finishing,” the report adds. It further adds that another stretch of road from Yatung to Jelep La has also been black-topped.

Away from the border, electric vehicles appear to be the next avenue for cooperation between Indian and Chinese businesses. Anil Srivastava, Principal Advisor at NITI Aayog, headed the Indian delegation at a event in Beijing, called China EV100. It sounds much like an early exploratory conversation, which could lead somewhere. This (dated) Quartz piece and this BBC piece on changes in policies related to NEVs offer a glimpse at the growth of the electric vehicle market in China

Now to something quite surreal. A weibo post by a Taiwanese actress about her association with an Indian religious/spiritual group led to not just a storm on social media but also invited government action. The Ministry of Public Security and China Anti-Cult Association forwarded the post and warned the public that some spiritual schools are mired in sexual assault scandals. Often one tends to believe that religion or spirituality are frictionless components of the bilateral relationship between India and China, but that’s not the case at all.

Also Read: China cautions countries against helping Taiwan to produce submarines

  1. Tech Troubles:

Profound changes are underway in China’s bustling technology sector. The headwinds are broadly characterised by a slowing economy, regulatory tightening, deepening frictions with the US and declining funding avenues. This Bloomberg piece and this short FT video offer a good round-up of these issues. For instance, VC deals in the end of 2018 fell to a three-year low. Another indication of the difficulties being faced is this report on ByteDance, which claims that the company barely met its revenue forecast in 2018. However, perhaps what is of greatest significance is what’s happening to employment at China’s tech firms. This report by Elliott Zaagman offers details of some of the reports of job losses.

While all of this does suggest some overall tightening, difficulties for startups and market consolidation, it’s not necessarily a bad thing to happen, given concerns with regard to wasteful funding and overcapacity. Also, it doesn’t mean that fundraising has dried up entirely. For example, SenseTime is reportedly looking to raise another $2 billion this year. Considering the Chinese government’s desire to become a world leader in AI, this associating oneself with AI could be the key to raise capital. Another thing that’s unchanged is the intense and often ugly competition that characterises the tech sector. This week, three new products were launched in the space dominated by Tencent’s WeChat. Among these is ByteDance’s Duoshan app, which has a model similar to that of SnapChat.

On the regulatory front, earlier this month, the China Netcasting Services Association released two sets of management rules for the short video industry. Essentially, these are guides for what sort of content is acceptable and what the companies should be doing to monitor the content on their apps. SCMP reports,

The first rule states that all video content, including the title, introduction and viewer comments, need to be reviewed before broadcast. Further, all companies involved in the short video business also need to set up a content reviewing team with a strong political sense.” The report adds that the second set, “lists a total of 100 categories of banned content on short video apps, ranging from separatism to sex to slandering, which are designed to provide ‘practical’ censorship standards for frontline content modifiers.

Also Read: China Fintech Today: A New Column About China’s Financial Technology Sector

  1. Xi Watch

After Kim Jong Un’s recent visit to Beijing, reports suggest that Xi is “highly likely” to visit North Korea in April. However, there isn’t yet an official confirmation of any of this. Nevertheless, Xi’s had a busy week. He delivered a speech at the CCDI meeting last Friday, which I’d covered last week. Carefully studying that speech is now officially “an important political task” for all the Party members.

The CCDI meeting ended on Sunday, with a communique adopted. And guess what was the primary task identified? “The top priority of the CCDI’s work in 2019 remains firmly safeguarding Xi’s status as the core of the CPC Central Committee and the whole Party, as well as the authority and centralized, unified leadership of the CPC Central Committee,” Xinhua reports. There’s, of course, more than that to do. The second item among the 8 priorities list that the CCDI has put out says: “It will take up resolute actions against the practice of formalities for formalities’ sake and bureaucratism.” This refers to the tension between local and central governments on policy implementation.

On Wednesday then, Xi addressed the annual meeting on political and legal affairs. So what’s his ideal model for law-based governance? Xinhua reports that “Xi underlined the need to improve the law-based social governance model under which Party committees exercise leadership, the government assumes responsibility, non-governmental actors provide assistance and the public gets involved.” He also focussed on cracking down on corruption among law enforcement agencies. The speech comes at a time when a rather curious scandal involving China’s supreme court has broken out, with a massive documents relating to the ownership of a $56 billion coal mine having gone missing. Meanwhile, Xi also wants to step up “the building of a safety protection system to safeguard the legitimate rights and interests of the country’s overseas institutions and working staff.”

To round the week off, Xi headed out for an inspection tour to assess the coordinated development efforts of the Beijing-Tianjin-Hebei region. At the heart of all of this is the Xiongan New Area, which is Xi’s pet project.

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About the author

Manoj Kewalramani

Manoj Kewalramani is a multimedia journalist based in New Delhi. Over the past 11 years, he has worked with prominent news networks in India and China. His news and editorial work includes field reporting, commissioning and managing assignments and producing shows and documentaries along with formulating and executing digital news strategies. Manoj is an alumnus of Takshashila’s Graduate Certificate in Public Policy. At Takshashila, he curates a weekly brief, Eye on China, which tracks developments in China from an Indian perspective.