Xi And Blinken Talk Tough

IT IS A general assumption of this Bystander that jaw-jaw is preferable to war-war.

The visit of US Secretary of State, Antony Blinken, his second in a year, is evidence that both sides are trying to keep the lines of communication open.

Both sides have an interest in stabilising their relationship. Xi Jinping has a slowing economy to deal with and US President Joe Biden has an election to contest.

However, the forthright and critical public comments of Blinken and Chinese officials highlighted the range of issues, including Beijing’s support for Russia’s war in Ukraine, trade and investment, Taiwan, the South China Sea and technological rivalry, that will continue to strain ties.

TikTok’s US Sale Or Ban Draws Nearer And China Retaliates

THE US LEGISLATION requiring the sale or ban of the ByteDance-owned short-form video app TikTok in the United States is heading to President Joe Biden’s desk for signature into law. It passed the US Senate on April 23.

At the same time, Chinese authorities have ordered the removal of various US-owned social media applications from local app stores.

On April 19, the Cyberspace Administration of China (CAC) ordered Apple to remove Meta’s WhatsApp and Threads apps and the Signal and Telegram messaging apps from its app store in China, citing national security concerns.

Reportedly, Beijing said Meta’s apps carried content about President Xi Jinping that it deemed inflammatory and breached China’s cybersecurity legislation. 

China has long used the Great Firewall to block the services of the US platform tech giants such as Facebook and Instagram. However, users have been able to download WhatsApp and use it via a virtual private network (VPN) to access content that is outlawed in China. 

The market share of all four of the newly proscribed apps is small within China, and there is little doubt that the CAC’s action is politically motivated retaliation for the US move against TikTok. 

However, it also follows a pattern of Chinese authorities closing loopholes in the Great Firewall and tightening controls across digital media. Mobile app developers have been required to register with authorities since last summer. Beyond apps, websites and AI models have also been subject to greater content curbs, particularly politically sensitive information.

Apple is likely to be criticized in the United States for complying with the CAC order but argues that it had little choice legally but to comply. ‘We are obligated to follow the laws in the countries where we operate, even when we disagree,’ the company said in a statement. 

However, like other Western multinationals that source from China or sell into its domestic market, it is being edged one step closer to having to choose sides.

Espionage Erodes Trust

AS A FOOTNOTE to this Bystander’s thoughts about international trust in China in the previous post, German prosecutors announced the arrest of an aide to a member of the European Parliament on suspicion of ‘especially severe’ espionage for China. 

This came a day after three German nationals were arrested on suspicion of spying for China and handing over technology with military applications, and on the same day as two UK citizens were charged with spying for China, including one reported to have worked as a parliamentary researcher for a member of the UK parliament belonging to the governing Conservative Party. 

In the United States last year, a Chinese engineer who had been a graduate student in Chicago was sentenced to eight years in prison for spying for China. State-backed Chinese hackers have been accused of stealing data from both the private and public sectors and targeting US critical infrastructure.

Growing concerns over Chinese espionage will increase political pressure on governments to adopt a more hawkish position towards Beijing. 

However, as the visit last week by German Chancellor German Chancellor Olaf Scholz to Beijing suggests, Germany will aim to continue treating security concerns and economic cooperation as separate issues.

That aligns with a strategy document released last year for Germany’s relations with China, in which the government underlined Berlin’s systemic rivalry with Beijing. This required it to reduce the risks of economic dependency. Yet Germany also wished to maintain strong trade ties and work with China on issues such as climate change.

With every instance of espionage, the trust needed to walk that fine line is eroded further.

The Chinese embassy in Berlin said Beijing firmly rejected accusations that it carried out spying activities in Germany. While that is to be expected, and every country that can spies on others, the embassy’s wolf-warrior tone—’We call on Germany to desist from exploiting the espionage accusation to politically manipulate the image of China and defame China’—does little to enhance trust, either.

Olympic Swimmers Test Trust In China

CHINA WILL NOT emerge well from the unfolding revelations that its anti-doping agency cleared 23 of the country’s top swimmers to compete in the Tokyo Olympics in 2021 after failing tests for a banned performance-enhancing drug. 

The country’s 30-member swimming team won six medals at the Tokyo Olympics, including three golds.

The China Anti-Doping Agency (Chinada) said that ‘unintentional ingestion’ caused the presence of the heart medication trimetazidine (TMZ) in the positive tests of 23 of the 30-strong national swimming squad. The tests were administered at a training camp seven months before the delayed Tokyo Olympics.

TMZ enhances the body’s oxygen takeup. The same drug got Olympic star Sun Yang a three-month ban in 2014. Sun is currently serving a ban of eight years, reduced on appeal to four, for missing scheduled drug tests.

Russian figure skater Kamila Valieva also tested positive for TMZ before the 2022 Winter Olympics; she received a four-year ban.

Both Chinada and the World Anti-Doping Agency (Wada) now face intense criticism for covering up the positive test results of China’s swimmers.

Wada has confirmed it was notified of Chinada’s decision in June 2021 but says that its review of the contamination theory presented by Chinada could not disprove the possibility. It concluded that the swimmers were not at fault and that an appeal against Chinada’s decision was not warranted.

Swimming’s governing body, World Aquatics, then known as Fina, was also notified about the tests in 2021 and reached a similar conclusion as Wada.

In response to press reports in recent days about the positive tests, China’s foreign ministry spokesman Wang Wenbin said on Monday that the story was false; China’s anti-doping centre had conducted what he said was a detailed investigation that concluded that the athletes’ behaviour did not constitute a doping violation.

Chinada has said that as it had concluded that the swimmers had not broken anti-doping rules, it was not obligated to publish details of tests of innocent parties.

However, in 2023, the US anti-doping agency, Usada, told Wada that it had been tipped off that positive test results had been hidden. Wada repeated that no evidence of wrongdoing had been found. As the allegations were first reported by the New York Times, this Bystander’s working assumption is that Usada suggested, let us say, to the newspaper that this was something they should look into.

At this point, the allegations of a coverup are all ‘he said/she said’. Thus, it comes down to reputation for trust. 

In recent years, the Chinese government has consistently ranked first or second for being trusted by its citizens among the 28 countries included in Edelman’s Trust Barometer, a widely quoted survey conducted annually by the US public relations company. Unsurprisingly, it is one Chinese officials like to cite.

One can question the results of any public opinion survey conducted in an authoritarian country, but the broader point is that nothing like similar levels of trust in the Chinese government is expressed elsewhere, especially in countries that fall under the umbrella of belonging to the West.

If anything, China is looked upon increasingly less favourably in the West. Even in the Global South, it may be respected but is rarely loved. Plenty of countries may have little love for the West, but they have no desire to see US hegemony replaced by a Chinese equivalent. 

At the same time, a Carter Center-RIWI survey published in 2021 found that most Chinese remain convinced that China’s international reputation is broadly, if not very, favourable, an opinion it is not in the government’s interest to challenge. 

In the same vein, it is notable that China has no true allies apart from, for historical reasons, North Korea. Beijing would not go to war to defend another country out of a commitment to shared values. Even the ‘friendship without limits’ with Russia has been shown to have limits by the wars in Ukraine and Gaza. Once the need for a united anti-Western front fades, it may prove to be a marriage of convenience. History certainly backs such an outcome.

In the narrow case of the Olympic swimmers, whereever the truth lies, China is unlikely to get the benefit of the doubt — and the more it tries to wolf warrior its way through it, the less it will be beleived.

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US Lawmakers Fast Track TikTok Ban Or Sale

US LAWMAKERS HAVE bundled a prospective ban on TikTok, the short-form video app owned by ByteDance, into their foreign aid package for Ukraine and Israel.

The bill would require Bytedance to sell its stake in TikTok, the international version of its highly successful Douyin app in China, within nine months, with an additional three months allowed if a sale is in progress. A previous bill that passed the US House of Representatives in March but is stalled in the Senate set a six-month deadline.

Adding TikTok to the foreign aid package end runs the Senate delay.

The aid package is a priority for the Biden administration. Senate approval of the legislation is likely. However, it is not easy to see how senators could significantly weaken the TikTok sale or ban provision without putting the whole aid package at risk, nor is it clear that a majority would want to.

Both Republican and Democrat lawmakers are concerned that Chinese authorities could force ByteDance to hand over US TikTok user data or direct the company to suppress or promote content that it deems in its interest.

TikTok says it has not shared US user data with Chinese authorities and that it stores US user data on servers in Texas owned by the US enterprise technology company Oracle.

The US government has provided no evidence of data sharing to date. However, lawmakers and US intelligence officials’ concerns that it could, in compliance with Chinese law, underline the suspicion with which Chinese companies are viewed in Washington as being aligned with Beijing’s interests and the strength of anti-China sentiment, especially in a US election year.

TikTok lobbied hard against the bill, seeking to leverage what it says are 170 million users of its app. It has indicated that it will launch legal challenges if it becomes law, arguing that it violates the rights of free speech under the US Constitution’s First Amendment. The company has had some, if not complete, success in the courts challenging attempts to ban the app at the state level.

Any legal challenge would likely extend the sale or ban timeline.

International (primarily US-based) investment firms, such as Carlyle, General Atlantic, Sequoia and Susquehanna, own 60% of ByteDance’s equity. Its Chinese founders own 20% and its employees the rest, although its founders have the controlling stake.

ByteDance has sought to ringfence TikTok from the rest of its operations, basing the business in Los Angeles and Singapore with a Singaporean chief executive and striking the US data storage arrangement with Oracle. However, ByteDance maintains effective operational control, including the development of the recommendation algorithm and other software crucial to ByteDance and TikTok’s success.

That linkage is more critical than the governance structure for controlling TikTok. Beijing has indicated that it will impose strict export controls on ByteDance software in the event of a TikTok sale.

Beijing Steps Up The Pressure In The Taiwan Strait

BEIJING IS STEADILY eroding the Taiwan Strait median line, the unofficial demarcation between the mainland and Taiwan.

Its latest moves to operate new commercial aviation routes that skirt the median line are a further step up in its grey-zone operations intended to intimidate the incoming Taiwanese administration of President-elect Lai Ching-te.

The new flight corridors connecting to the airports in Xiamen and Fuzhou run close to the Taiwanese-controlled islands of Matsu and Kinmen, which Taipei says is a safety risk. It will demand any aircraft using them turn around — a request unlikely to be complied with or capable of being enforced.

Beijing announced the new flight path in January but has not specified when it will become operational until now.

China’s aviation authorities say that from four days ahead of Lai’s inauguration on May 20, they will ‘further optimise’ the airspace around Fuzhou airport, without elaborating.

Matsu and Kinmen have become increasing points of conflict between Beijing and Taipei. In mid-February, two Chinese fishermen drowned while being chased by the Taiwanese coast guard close to Kinmen.

Beijing responded by increasing maritime patrols near Kinmen. To further assert its claims in the Taiwan Strait, the Chinese coast guard boarded a Taiwanese tourist boat in the area and conducted a brief inspection, triggering a formal protest from Taipei.

Tensions will continue to grow in the run-up to Lai’s inauguration as Beijing increases its maritime patrols and civil aviation in or close to space Taipei claims as its own.

China’s First Quarter GDP Flatters To Deceive

CHINA’S ECONOMY OUTPERFORMED naysayers’ expectations in the first quarter, but the signs are there that the economy’s brisk start to 2024 may be fading and the economy’s deeper structural problems are still there.

According to the National Bureau of Statistics, GDP grew by 5.3% year-on-year during the period, beating economists’ consensus expectations by 0.4 of a percentage point.

It also surpassed the 5.2% growth in the fourth quarter of 2023.

Strong export volumes and manufacturing investment drove the economy forward in the first quarter. However, a warning sign for the longer term is that domestic demand remained weak, with retail sales and industrial output failing to match expectations.

The deeply-troubled property market also remains deeply troubled. One proxy indicator is that cement output in March fell a record 22%.

An upturn in the global electronics cycle drove the export strength, although price weakness is indicated by March’s fall in exports in dollar terms even as volumes rose.

The global impacts of China’s price weakness are an increasing concern outside the country’s borders, with trade partners’ fears of the risk of exported deflation growing.

Germany’s chancellor, Olaf Scholz, is visiting Beijing this week and repeating the message of US Treasury Secretary Janet Yellen, who was in town last week: Beijing needs to address its industrial overcapacity.

The National Bureau of Statistics said on April 11 that China’s headline inflation eased to 0.1% year-on-year in March from 0.7% previously, with food prices falling by 2.7% year-on-year and core inflation easing to 0.6% year-on-year.

The People’s Bank of China will likely cut interest rates further later this year to bolster growth; the official GDP growth target for the year is a challenging 5%. The central bank is holding off for now for fear that further monetary easing while the dollar is strengthening will put unwanted depreciation pressure on the yuan, which would accelerate capital outflows.

Uncertainties about the economic outlook, including automotive exports coming under scrutiny in Western markets, have prompted Fitch Ratings to downgrade its sovereign credit outlook for China to negative.

Upbeat IMF Raises Its China Growth Outlook

THE INTERNATIONAL MONETARY FUND’S latest update to its World Economic Outlook is generally upbeat, reflecting the likelihood of a hard landing for the global economy receding as adverse supply shocks unwind.

The Fund is now projecting 4.6% growth in China’s economy this year and 4.1% in 2025. That is an upward revision of four-tenths of a percentage point for 2024 from its previous forecasts in October 2023. The 2025 projection is unchanged

The upgrade reflects carryover from stronger-than-expected growth in 2023 and increased government spending on capacity building against natural disasters, according to the Fund.

The seemingly unending property crisis is the most significant downside risk identified by the Fund:

Absent a comprehensive restructuring policy package for the troubled property sector, real estate investment could drop more than expected and for longer, with negative implications for domestic growth and trading partners. Unintended fiscal tightening in response to local government financing constraints is also possible, as is reduced household consumption in a context of subdued confidence.

Its prescription for accelerating growth is:

Additional property sector–related reforms––including faster restructuring of insolvent property developers while protecting home buyers’ interests––or larger-than-expected fiscal support could boost consumer confidence, bolster private demand, and generate positive cross-border growth spillovers.

Government efforts to stabilise the downturn with demand-side policy support, including relaxing mortgage rates, have largely failed. Authorities will change track, directing their efforts to supply-side support, such as improving some developers’ access to financing.

The government is cautious about allowing troubled developers to go to the wall. Yet the writing is on the wall for the most indebted of all, Evergrande, whose liquidation was ordered earlier this week by the High Court in Hong Kong.

Under a 2021 agreement, Chinese courts recognise Hong Kong insolvency decisions. However, Chinese courts have recognised just one of five winding-up orders granted in Hong Kong courts since the 2021 agreement.

The liquidators, from Alvarez & Marsal, a US firm that worked on some notable corporate failures, including Lehman Bros. and Arthur Andersen, will also need to follow Mainland Chinese laws when conducting the liquidation process. That will probably mean that mainland lenders to Evergrande will be prioritised over foreign creditors.

Beijing Moves To Bolster Chinese Equities

THIS BYSTANDER ALWAYS allows a wry smile when a Communist government takes policy steps to bolster the stock market.

The People’s Bank of China says it will cut banks’ reserve requirement ratio (RRR, or the amount of capital banks have to keep in reserve) by one-half of a percentage point on February 5.

It is unusual for a central bank to give notice of such a cut so far ahead, which underscores the urgency that a $6 trillion stock market sell-off has added to authorities’ efforts to stimulate an economy struggling to come to grips with the crisis in the property sector.

Central Bank Governor Pan Gongsheng said this would inject 1 trillion yuan ($139 billion) in long-term liquidity into the market.

Financial ties between stock exchanges on the mainland and Hong Kong are also being tightened, and regulators will relax the rules on loans to commercial property companies to help developers pay off other debt.

Premier Li Qiang’s recent calls to stabilise the market are being heeded if somewhat woolily, so further stimulus is likely. Bloomberg has reported that policymakers are seeking to inject 2 trillion yuan from the offshore accounts of Chinese state-owned enterprises into a stabilisation fund that would buy shares onshore through the Hong Kong exchange link.

Authorities are also tightening limits on capital outflows by restricting access to funds that invest in offshore securities to keep more money directed at the domestic market. Some institutional investors have also been told not to sell domestic stocks.

With the CSI 300 Index touching a five-year low this week before the central bank’s announcement perked things up a bit, it seems that retail equity investors are seen as a potential source of social instablility as much as the unemployed.

Yet policies to address the structural issues would be more reassuring to investors than just propping up the stock market, a task at which authorities have had little success over recent months.

China Meets 2023 Growth Target But Headwinds Persist into 2024

China’s economy grew by 5.2% year-on-year in 2023, the National Bureau of Statistics (NBS) reported. That met the annual target of ‘around 5%’.

Fourth quarter GDP growth matched the full-year rate, up from the 4.9% year-on-year growth in the third quarter and up 1 percentage point on a quarter-on-quarter basis.

Last year’s full-year number will have been plumped up by the fact that the economy was rebounding from 2022’s pandemic-depressed 3.0% growth, even if the bounce back was patchier than had been hoped at the beginning of 2023.

Retail sales averaged disappointing growth of 7.8% in 2023, and industrial output averaged 4.6%. Furthermore, state investment is far outstripping private investment, pointing to the importance of government stimulus to the growth number as the economy battled deflation and the property crisis.

Premier Li Qiang, attending the annual gathering of the global elite’s great and good, the World Economic Forum in Davos, was spinning up the economic performance and minimizing the size of the stimulus. Nonetheless, there are reports that China is considering issuing a rare special sovereign bond that would raise 1 trillion yuan ($140 billion) to finance efforts to perk up the economy.

According to Bloomberg, total debt rose to a record 286.1% of GDP in the fourth quarter. With the downside internal and external risks to the economy remaining as concerning as ever, taking on more debt will amplify the dangers of future crises and the capacity to deal with them.

Come March, when the GDP target for 2024 will be made public, authorities are likely to go for something close to 5% again. That would be higher than the recent forecasts by the likes of the World Bank, which earlier this month forecast 4.5% growth for this year.

Eyecatchingly, or perhaps eyebrow-raisingly, the National Bureau of Statistics said that youth unemployment fell to 14.9% in December. The agency stopped publishing the metric early last year when the level had risen to around 20%. The reported drop in youth unemployment was far sharper than the moderate easing in overall unemployment.

Whether that reflects newly minted graduates accepting that they have to take lower-skilled and lower-paying jobs or some jiggling the with reporting methodology, this Bystander couldn’t possibly say.