The Great Neighbour Returns Home

THE MOST TELLING remark that President Xi Jinping made during his trip to Moscow may have been, ‘Now there are changes that haven’t happened in 100 years. When we are together, we drive these changes.’

The inevitability of the end of the American century is a recurrent theme of Xi’s, with the sometimes stated, sometimes unstated implication that China will replace the United States as the global hegemon.

Russia and China believe they share an interest in accelerating the decline of US-led Western power. Both accuse the West of responding with policies of ‘containment, encirclement and suppression’.

Xi’s state visit saw repeated assertions of his deepening friendship with his host, Russia’s President Vladimir Putin. At one point, he called China and Russia ‘great neighbouring powers and comprehensive strategic partners’.

Undoubtedly, the visit strengthened formal ties between the two countries. Documents were signed on further economic cooperation and deepening the bilateral partnership.

Yet a relationship based on shared hostility to the West may be more a marriage of convenience than a deep friendship, and there are signs that the strengthening of bilateral ties is occurring in a way that makes Beijing the main beneficiary.

That is most evident in the economic relationship. China can sell Russia the goods it needs that the West has sanctioned, and as the West shuns Russian energy, China can buy it on the cheap.

Xi’s holding off on building the Power of Siberia 2 gas pipeline connecting the two countries, a priority for Putin, was a subtle sign of which party holds the leverage.

Any Western hopes that Xi might use his trip to broker peace in Ukraine, however slight to begin with, quickly evaporated. By the end, the message was that the West was prolonging the war by refusing to accept China’s peace plan.

Xi’s presentation of Beijing as a pragmatic peacemaker, the honest broker of world affairs, in contrast to the Washington warmonger, the flailing ideologue, will resonate with much of its intended audience, the Global South.

Yet, after Xi flew out of Moscow, leaving behind an invitation to Putin to revisit Beijing later this year, a new wave of Russian drone attacks hit Kyiv

TikTok Is Short-Form China-US Decoupling

THE CONUNDRUM OVER what to do about the US business of ByteDance video app TikTok is a microcosm of China-US tech decoupling.

The US government wants to disengage TikTok’s US business from any governance structure in which the Chinese government could have legal access to the data of US users or potentially use the app as a channel for propaganda and disinformation campaigns.

In 2018, former President Donald Trump ordered TikTok’s US business to be sold to a US company or be banned in the United States. Neither happened after legal challenges to the order, and Trump’s successor Joe Biden eventually rescinded it.

However, almost five years on, Biden finds himself in the same position as Trump — threatening TikTok with a ban if it does not sell its US business to US owners.

Months of negotiations under the auspices of the Committee on Foreign Investment in the United States (CIFIUS) between TikTok and the Biden administration to ringfence the US business in a way that would satisfy Washington’s security concerns are deadlocked. Under TikTok’s proposed Project Texas, US tech giant Oracle would store US TikTok users’ data and safeguard the US service against any Chinese influence over what content US users see.

However, what would be considered an acceptable outcome to Washington would not necessarily be similarly regarded in Beijing, where ByteDance’s recommendation algorithm, considered the secret sauce of TikTok’s commercial success, is viewed as a national security asset that should not fall into the hands of a foreign owner.

There is the rub. Without the algorithm, TikTok has significantly less value to any US purchaser than with it. With the algorithm, any purchaser would face the same US national security concerns as TikTok.

Beijing would likely block ByteDance from selling TikTok’s US business under any arrangements — either a spin-off or an outright sale — that included the algorithm or the capacity to replicate it.

At this point, Beijing’s public stance is to admonish the United States for using national security grounds to hobble and suppress foreign companies, a line repeated by Foreign Ministry spokesman Wang Wenbin on March 16.

However, this Bystander understands that the guidance officials are giving the company is to protect its intellectual property and overseas operations.

ByteDance is a private, not a state, company, with 60% of its shares owned by global investors. However, the 20% owned by its Chinese founders have outsized voting rights, and the company is based in Beijing and subject to Chinese law.

After the crackdown on the sector in the past couple of years, Chinese tech firms understand their unstated obligation to align with national interests determined by central leadership.

Few US companies would be able to acquire TikTok’s US business, which could cost up to $100 billion. The giant tech platforms Meta and Google would be ruled out on anti-trust grounds. Microsoft and Oracle, which was part of an abortive bid from WalMart for TikTok in 2018, are among the most likely bidders, along with a consortium of private equity firms, probably involving Sequoia Capital, KKR and General Atlantic, three US venture firms that are investors in ByteDance; Sequoia Capital was involved in the Oracle/WalMart bid.

Even if a sale could be pulled off, separating TikTok’s US operations from the rest of its business would be complex, especially if the recommendation algorithm has to be extracted. Like the broader China-US relationship, the systems are tightly enmeshed and would take a long time to separate.

Mr Xi Goes To Moscow

THE EMPEROR DOES not usually travel to visit the vassal.

However, President Xi Jinping will go to Moscow to meet his Russian counterpart and friend Vladimir Putin on Monday and Tuesday.

It will be his first visit to Russia since Putin’s invasion of Ukraine shortly after the two leaders declared their partnership without limits when they met during the Beijing Winter Olympics in February 2022.

Yet the war has made it transparent that there are limits to the relationship, and they are becoming complex.

The visit will be widely seen as a show of support by Xi for Putin, a message that China stands by its friends aimed at the Global South as much as at the West.

However, the visit also promotes hopes that Xi can develop an exit strategy with Putin to end the fighting, although, to this Bystander, those hopes are not well-founded.

China has put forward a 12-point peace plan, largely dismissed in the West as providing a ceasefire during which Moscow can regroup and rearm. The proposal does not require Russian troops to leave occupied territory. It also requires the West to withdraw, leading Moscow and Kyiv to negotiate an end to the conflict, presumably mediated by Beijing.

Xi is expected to talk to Ukrainian President Volodymyr Zelensky after he has met Putin. That may be the start of some shuttle diplomacy, but how much scope Xi has to pursue it is uncertain.

His biggest constraint is that any end to the war in Ukraine acceptable to the West will also require a new security architecture in Europe. While it would suit Xi to shape that to China’s advantage, it would be a monumental task that appears unachievable given the deteriorating state of China-US relations.

Putin’s surprise visit to the occupied Ukrainian port of Mariupol on Saturday suggests the Russian leader has no intention of backing down. The International Criminal Court issuing a warrant for his arrest gives him further incentive not to do so.

At this point, there is little basis for a negotiated end to the war. A protracted conflict seems inevitable, although the length of the kinetic phase of the war may be clearer once the spring surges are done. Yet they do not promise a decisive breakthrough for either side.

Meanwhile, the geopolitical sakes for Xi remain high. For as long as Washington cannot let Moscow win the war, China cannot afford for Moscow to lose it. That may be the one thing the imperial visit underlines.

OECD Ups China’s 2023 GDP Forecast But Risks Persist

THE OECD HAS raised its forecast for China’s GDP growth this year to 5.3%, seven-tenths of a percentage point higher than its forecast last November.

However, its latest Economic Outlook sees growth slowing next year to 4.9% as the surge in economic activity from abandoning the zero-Covid policy moderates.

China’s lag in easing its anti-COVID restrictions compared to other countries is why it will have faster growth in 2023 than in 2022 when the overwhelming majority of G20 economies will experience the reverse as they got their re-opening boosts last year.

Signs of the impact of full reopening in China were seen in January and February’s purchasing managers’ surveys, with substantially more firms reporting rising output than falling output. Retail sales for the two months rose by 3.5% year-on-year.

The OECD expects household savings built up during the zero-Covid-policy period to be spent in 2023, especially on in-person services, boosting aggregate domestic demand. With inflation relatively subdued, policymakers also have the scope to keep monetary policy loose to help support consumption.

At the same time, the OECD expects stronger commodity demand from China, which accounts for a large share of consumption in many markets, to put upward pressure on commodity prices, especially if Chinese energy demand strengthens significantly after stagnating in 2022.

However, a resumption of international travel by Chinese residents will further boost global air traffic and services trade, with the strongest gains likely in neighbouring Asian economies based on visitor patterns before the pandemic.

The official growth forecast for this year is 5%. Downside risks are still significant — US-China tensions are high and concerns about global financial vulnerabilities are rising.

The real estate slump still casts a long shadow over the economy. Property investment is stabilising but not turning around, falling by 5.7% year-on-year in January-February, although that represents an improvement on December’s 12.2% decline. 

Youth unemployment, which rose to 18.1% in January-February from 16.7% in December, is another persisting concern.

State-led investment grew by 10.5% year-on-year in January-February, far outpacing private investment growth of 0.8% year-on-year. New premier Li Qiang’s words of support for the private sector during the Two Sessions reflect the need for authorities to encourage the country’s discouraged entrepreneurs.

Otherwise expansionary policy-fuelled growth in the short term will fizzle out in the medium term.

China Revamps Tech, Financial And Data Governance

THE NATIONAL PEOPLE’S CONGRESS will rubber-stamp sweeping reforms to China’s governance in the coming days.

New institutions will oversee the financial and technology sectors, which multiple state organisations currently regulate.

Most notably for this Bystander, a new Party central work commission for the technology sector will oversee the restructuring of the science and technology ministry, which is intended to channel more resources to achieving breakthroughs.

President Xi Jinping is likely to chair the new commission as the intent of the governance reform is to move faster toward self-reliance in the face of what the State Council said were “the severe situation of international scientific and technological competition as well as external containment and suppression”.

Hitherto, the development of an indigenous semiconductor industry, for example, has underwhelmed. However, putting tech development under high-level Party leadership that will impose top-down policymaking will be no guarantee of more successful outcomes, even if policy implementation is less bedevilled by bureaucratic in-fighting and more responsive to the top leadership’s direction.

A new national financial regulatory administration will replace the existing banking and insurance watchdogs and bring supervision of the industry, apart from the securities sector, into a body directly under the State Council. Some powers will be removed from the People’s Bank of China. Details are yet to be made public. The securities regulator will also be directly overseen by the State Council.

The Party’s central financial work commission will likely be revived to enable Party direction of the new financial regulatory architecture which appears to be separating macroprudential regulation from market supervision. The new premier would likely chair the work commission.

Data is the third area of sweeping governance reform. A new national data bureau will be responsible for coordinating the sharing and development of data resources and planning the digital economy. The country’s top state-planning agency, the National Development and Reform Commission, will oversee it.

New central party committees overseeing ministries have been a hallmark of Xi’s governance. Yet, the latest reforms are the most sweeping since the creation of the National Supervisory Commission in 2018 to oversee anti-corruption work.

They reflect what top leadership considers China’s priorities: scientific and technological self-reliance and development, reducing systemic risk in the financial system and tighter control over data collection by private companies and cross-border data transfers.

.

Ukraine War Creates Growing Complexity For China

THE 12-POINT PEACE plan for Ukraine that China released last week sits as uncomfortably on the fence as possible.

Largely a repackaging of earlier ideas and proposals, it straddles giving support to Moscow while distancing Beijing from a conflict that has become increasingly diplomatically awkward for China.

Top diplomat Wang Yi went to Moscow to meet Russian President Vladimir Putin and Foreign Minister Sergey Lavrov two days before the first anniversary of Russia’s invasion of Ukraine to underscore the strength of a relationship that Putin and Xi Jinping famously declared shortly before the attack was without limits.

However, the longer Russia’s failure to win militarily in Ukraine drags on, the more complex the limits to the China-Russia relationship become, though, similarly, the lower China-US relations sag, the more certain Beijing comes that confrontation with Washington is inevitable, so China will not turn its back on its ally Russia.

Wang’s statement while in Moscow that the two countries support ‘multipolarity and democratisation of international relations’ was little more than diplomatic speak for a shared objective of opposing US-led Western management of global affairs.

Beijing’s peace plan for Ukraine similarly calls for the West to honour a ceasefire that would relieve Moscow of the current stalemate in the fighting, allowing it to regroup and rearm, lift sanctions on Russia, and back out of the conflict, leaving the two parties, Moscow and Kyiv, to resolve it with Beijing mediating a reconciliation of the irreconcilable positions of ‘respecting the legitimate security concerns’ and the ‘sovereignty and territorial integrity’ of both.

Both its conditions and internal contradictions mean China’s plan has little credibility and less chance of progress, leaving Beijing having to weigh the risks of increasing its support for Beijing, including active military support, against the damage that would do to its broader interests with Washington leaning heavily on it not to provide Moscow with lethal weapons.

That is a tactical, not strategic, calculation for Beijing. It will instinctively empathise with Moscow feeling aggrieved by NATO’s eastward growth in Europe, and see parallels in the Indo-Pacific. China will also be storing up favours to be called in at the UN and within the G20 and other multilateral institutions if the reunification of Taiwan becomes less peaceful.

Wang Yi Woos Europe As China-US Relations Worsen

THE MEETING BETWEEN Wang Yi (above) and US Secretary of State Antony Blinken during the Munich Security Conference was testy.

Wang’s accusation that the United States was creating a political farce out of the shooting down of balloons indicated no desire to de-escalate the row, while Blinken’s assertion that China was preparing to supply Russia with weapons to use in Ukraine was equally goading.

In his formal speech to the conference, Wang described the US decision to shoot down the balloon as hysterical and absurd and an attempt to divert attention from its domestic problems. He also said the US would never dictate China-Russia relations.

Wang devoted much of his time in Munich to meeting EU leaders and his counterparts from the EU member states. China is attempting to drive a wedge into the crack that is appearing between the United States and its Western European allies over China.

At the World Economic Forum meeting in Davos last month, French economy minister Bruno Le Maire said Europe and the United States differed on whether China was our or in, as he put it.

Le Maire’s boss, President Emmanuel Macron and the EU’s foreign policy chief, Josep Borrell, are both expected to visit Beijing later this year. German Chancellor Olaf Scholz visited China late last year.

A senior UK minister is another likely visitor as London, although not an EU member anymore, edges closer to the positions of Paris and Berlin that China is too big and powerful to ignore and diplomacy and engagement are more conducive to managing differences than hostile rivalry and competition.

US President Joe Biden has worked hard to bring Europe ‘onside’ with his increasingly hard-line on China (a position he is partly forced to adopt by the increasing hawkishness towards China within the United States). However, he has yet to win European hearts and minds fully.

Wang told Borrell that China and the EU should restore relations to pre-epidemic levels as soon as possible and ‘resist decoupling’. He also told Dutch Foreign Minister Wopke Hoekstra that the Netherlands should play ‘a positive role in ensuring the stability of the global industrial and supply chains’, a plea not to go along with US efforts to cut off China’s supply of critical technologies.

Western European diplomats are, by instinct, more cooperative than their US counterparts, and Europe had closer relations with China, particularly during the Trump administration.

Yet the differences between Brussels and Beijing remain deep, and the EU and its member nations will not pull back from their efforts to diversify from China, stand up to economic coercion and crack down on cybersecurity threats. Nor will they care for Wang’s next stop after Munich being Moscow.

China is pushing at a door that is slightly ajar, not fully open.

China Symbolically Sanctions Two US Defence Contractors

TWO PROMINENT US defence contractors have been added to China’s list of ‘unreliable entities’ because they make weapons Washington sold to Taiwan.

Lockheed Martin and a subsidiary of Raytheon, Raytheon Missile and Defense, are proscribed from doing business with Chinese firms and banned from making new investments in the country.

They are also being fined twice the contract value of the arms sales to Taiwan since September 2020, with payment required within 15 days, after which penalties will be imposed, although it is unclear how that will be enforced.

This is the fourth round of Chinese sanctions on the two companies since 2019.

Like previous ‘unreliable entities’ listings by the commerce ministry, these will likely be largely symbolic. Neither US company has sales in the mainland as the United States does not sell arms to China. By not stating the exact fine, the commerce ministry is tacitly acknowledging that it would not be paid.

The day before the latest sanctions announcement, Beijing had said it would hit the United States with ‘countermeasures’ over violations of its sovereignty.

However, while the retaliation is modest, the timing is pointed with Wang Yi expected to meet his US counterpart, Antony Blinken, during the Munich Security Conference this weekend.

It will come, if it still happens, as bilateral relations worsen in the wake of the surveillance balloons row that caused Blinken to cancel a planned visit to Beijing earlier this month.

China-US Trade Defies Decoupling For Now

TRADE WARS ARE easy to win. So said former US President Donald Trump when he launched his against China in 2018. However, when it comes to China-US trade, the big winner appears to be trade itself.

Despite all the talk of decoupling and the trade war transmuting into a technology war and now a new cold war (perhaps), merchandise trade between the two countries has never been more extensive, recovering even from its Covid-19 pandemic setback.

The industrial policy measures taken by the US Biden administration may take some of the bloom off the rose once they have kicked in more fully, especially if Washington successfully cajoles US supply chains to move out of China.

Yet that is a slow process. For now, the talk is way ahead of the trade.

US multinationals, in particular, have proved resilient to both tariff and political pressures to decouple from China. The larger ones have the experience and clout to work the system.

Their Chinese counterparts are politically more constrained, self-evidently state-owned enterprises most of all, but they, too, take care of their own interests.

Pop Goes Who Knows What

NEAR SPACE IS becoming like a holiday fairground: pop a balloon and win a prize.

Since shooting down a Chinese stratospheric surveillance balloon on February 4 off the South Carolina coast, US Air Force pilots have shot down three more, one on each of February 10, 11 and 12.

These are smaller than the first, and US officials have attributed no provenance or purpose to them.

Meanwhile, Washington has imposed a new round of sanctions against six Chinese defence contractors that it says it has identified as suppliers to China’s military reconnaissance balloon program.

Beijing’s story that the first balloon to be shot down, the big one, was a strayed weather balloon has looked increasingly threadbare.

This Bystander would not be surprised to learn of balloons over China being shot down before long so accusations of US hypocrisy can be revved up again.

Who knows where this will all end, except, presumably, down.

Update: The blame game has started. On February 13, the foreign ministry accused the United States of flying at least 10 balloons into its airspace in the past year. State media also report that the PLA-AF was preparing to shoot down a balloon spotted off China’s coast over the weekend.