Beijing Wants A Cadre Of ‘Reliable And Useful’ Entrepreneurs

WECHAT AND TIKTOK have both secured stays of execution of their US bans: ByteDance’s TikTok by dint of an alliance with Oracle and Walmart that US President Donald Trump has ‘blessed in concept’, whatever that means (probably that it is OK because his friend and Oracle boss Larry Ellison has set it up, even if it does not meet the president’s order that TikTok’s US business be divested to US owners); Tencent’s WeChat thanks to a federal judge in San Francisco issuing a preliminary injunction blocking the Trump’s executive order to shut the app down in the United States.

The tick-tock on TikTok will continue as the deal is yet to be finalised. However, what caught this Bystander’s eye in the WeChat ruling was Magistrate Judge Laurel Beeler’s comments in her written remarks that while the general evidence about the threat to national security related to China regarding technology and mobile technology — the heart of the administration’s argument for the ban — is considerable, the specific evidence about WeChat is modest.

Why this caught this Bystander’s eye was last week’s instructions from President Xi Jinping to the United Work Front Department about the role — and duty — of the private sector and a parallel opinion issued by the Party ahead of the United Front’s work conference on the private sector. The gist of both was the need for tighter Party control over private enterprises and entrepreneurs to focus them on national goals and to create a cadre of within the private sector that is ‘reliable and useful at critical moments’.

This will confirm all the suspicions outside the country that the line between the private and public sectors is becoming ever more blurred and that private ownership of firms does not mean independence from the interests of the state or Party. For Chinese firms operating globally, existing distrust will intensify. The new National Intelligence Law already makes it nigh impossible for them (or any other Chinese firm) to rebuff authorities’ requests that they support national intelligence work.

The new guidance to the private sector will, if anything, widen the scope of how it will be expected to put the national interest ahead of its own. In July, Xi told a symposium for entrepreneurs:

First, I hope everyone will enhance their patriotism. Enterprise marketing knows no borders, and entrepreneurs have a motherland. Excellent entrepreneurs must have a lofty sense of mission and a strong sense of responsibility for the country and the nation, closely integrate the development of the enterprise with the prosperity of the country, the prosperity of the nation, and the happiness of the people, and take the initiative to bear and share the worries for the country.

It remains to be seen how this will play out in practice. In particular, how far will supporting national goals go beyond playing a part in economic recovery from the Covid-19 pandemic and meeting national security obligations? Will it mean playing a directed role in the development of indigenous next-generation technologies and industries that will be needed in a more decoupled world?

Entrepreneurs and firms that understand and adhere to the Party line will likely see significant benefits for their businesses domestically. Foreign firms operating in China will have to find an accommodation with that, even if they are granted some laxity in demonstrating the patriotism that will be expected of indigenous firms. That said, the flip side of a level playing field regardless of a company’s origin is that all firms in China are treated equally.

Next year’s introduction of the 14th Five-Year Plan will provide some clarity. But meeting the plan’s goal of delivering ‘a well-off society‘ will require the innovation of the private sector to be harnessed but not shackled, never an easy balance for industrial policymakers to strike.

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China Mirrors US List Of Unreliable Entities As US Bans TikTok and WeChat

Screenshot of China Ministry of Commerce announcement of the provisions of the Unreliable Entity List, captured September 19, 2020

IN THE MIDDLE of last year, Beijing announced that it was creating an ‘unreliable entity list’. This mirrored the US administration’s use of its cold-war-era entity list of companies, organisations and individuals Washington held to be involved in ‘activities contrary to the national security or foreign policy interests of the United States’.

Beijing today published the regulations of how its version will work — although not the identities of those companies or other entities that are on it. The list will catalogue any entity that poses a threat or potential threat to China’s sovereignty, national security, development and business interests; and those that discriminate against or harm Chinese businesses, organisations or individuals. Those on the list face sanctions from bans on investment to restrictions on work and residence permits and fines. Those come into effect immediately, although listees may be granted a grace period to set right their alleged transgressions.

The new rules were published the day after the US administration banned downloads and transactions related to two Chinese apps, WeChat and TikTok. The restrictions on downloads of the two apps from the Apple and Google app stores take effect from tomorrow (September 20) as does a prohibition on third-party companies providing services within the United States to WeChat such as internet hosting, content delivery networks or peering services.

The third-party services restriction on TikTok is due to take effect on November 12. The stay is to give time for the administration to review a proposed deal whereby the US enterprise-tech giant, Oracle, will take a minority stake in the US and some other international assets of TikTok to satisfy US national security concerns about the video-sharing app’s use of the data it holds on US citizens.

There was a rush to download the apps from the Apple and Google app stores before the bans took effect. It is unclear what penalties US users of the apps will face if they contravene the bans, although the US Treasury is indicating that neither criminal nor civil prosecutions are likely.

The prohibition on using WeChat and its parent Tencent for messaging and for financial transfers and payments aims further the Trump administration’s desire to decouple the two economies. The app is widely used by US businesses and Chinese expats to conduct business with contacts colleagues and customers in China. It has a reported 19 million active daily users in the United States. The Reuters news agency reports that Tencent has quietly developed an enterprise version of WeChat, rebranded as WeCom to avoid the ban, but which it is keeping under-ther-radar in the United States.

As an aside, Beijing recently granted TikTok’s parent, ByteDance a rare new licence to conduct online payments, enabling its Chinese service to move into e-commerce in competition with Alibaba and Tencent, a revenue stream that is out of the question for its US operation, however the ownership of that ends up.

Tencent has said that it will pursue further discussions with the US government while TikTok took the more assertive line that it will continue to challenge what it calls an unjust executive order. The Ministry of Commerce condemned the bans on both apps, promising ‘necessary measures’ to protect the legal interests of Chinese firms, without saying what those might be. Banning US apps in retaliation is not an option as they are already mostly excluded from China.

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China And US Risk Crossed Lines Over Taiwan

WHEN MAO ZEDONG and US President Richard Nixon were normalising China-US relations nearly half a century ago, one implicit trade-off was that in return for recognition by the United States that Taiwan was part of China, Beijing would put off reuniting the island and the mainland sine die. That formulation of what would become the ‘One China’ policy allowed the Taiwan issue to be parked to one side regardless of the state of the relationship.

The understanding had been a dependable pillar of the US-China relationship until the Trump administration. The current US administration has shown more willingness than any that preceded it to lump Taiwan in with all the other issues that concern it about China — trade, technology, cybersecurity, Covid-19 and values. This is dangerous. It enhances the risk of miscalculation on both sides, and the frequency of the opportunities for doing so.

The issue of routinisation again arises with Taiwanese press reports that Keith Krach, a US Under Secretary of State, is to visit the island shortly for high-level economic talks. Last month, US Health Secretary, Alex Azar, became the highest-level US Cabinet official to visit Taiwan since the ‘One China’ severance of formal diplomatic ties between Washington and Taipei in 1979.

Beijing takes such visits as an afront. Today, Foreign Ministry spokesman Wang Wenbin was blunt:

China firmly opposes official exchanges between the US and Taiwan. This position is consistent and clear. I would like to stress once again that the Taiwan question bears on China’s sovereignty and territorial integrity and concerns China’s core interests. It is the most important and sensitive issue in China-US relations. The one-China principle is the political foundation of China-US relations. We urge the US side to abide by the one-China principle and the three China-US joint communiques, and to stop all forms of official ties between the US and Taiwan so as to avoid serious damage to China-US relations and peace and stability across the Taiwan Strait.

The language is, however, pro forma. Weighing all the factors, especially China’s growing economic and military power, Beijing should continue to play a long game and let history run its course. President Xi Jinping has shown many indications that that would be his preference, even while necessarily maintaining a rhetorical commitment to eventual reunification.

However, the unpredictability that the Trump administration has injected into the relationship may strengthen the case that a pre-emptive attack may be worth the risk. The calculation around the status quo will change if Beijing perceives the US administration’s support of Taiwanese independence to be both ending the One China policy and matched by wavering in the US commitment to put its forces in harm’s way in defence of Taiwan.

President Tsai Ing-wen is more pro-independence than to Beijing’s liking, and it was miffed by her re-election earlier this year. Since then, there has been an intensification of PLA activity around the island. Beijing has also upped its efforts to isolate Taiwan internationally, both diplomatically and by pressuring multinational companies that do business in China not to label Taiwan as a country.

However, the Trump administration’s abandonment of many of the institutional dialogues between the two countries built up in the Bush and Obama administrations, remove the channels that can communicate countervailing narratives of Beijing’s real intent. That leaves Washington closer to Beijing’s red lines, which would be crossed by any or all of it instigating de facto independence through formal diplomatic recognition or military alliance, or arms sales that would ensure Taiwan could ensure perpetual autonomy.

Beijing can see a United States repeatedly seeking means to demonstrate its support for Taiwan’s autonomy in ways that are deliberately confrontational without breaching Beijing’s redlines. However, Beijing is uncertain how far the US administration intends to approach. As this Bystander noted before, the margin of error is small, and getting smaller. That is where the danger of a miscalculation lies.

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Washington Clamps Down Harder On Chinese Academics

BEIJING HAS REACTED more strongly to the revocation of the visas of 1,000 Chinese graduate students, post-graduate students and researchers in the United States deemed a security risk than it has in the face of many of the recent provocations by the US administration.

Foreign Ministry Spokesperson Zhao Lijian said:

This is outright political persecution and racial discrimination. It seriously violates the human rights of these Chinese students,

Zhao added that China reserved the right to ‘further respond’.

In May, US President Donald Trump ordered an immediate halt to the issuance of visas to Chinese graduate and post-graduate students and researchers deemed to be national security threats to the United States because of links to any entity that has a connection with the People’s Liberation Army. He also instructed the State Department to seek ways to revoke those of such students and researchers already in the United States as part of his campaign to deny China access to US technology and slow its military modernisation.

The same month, the administration warned US universities and researchers at pharmaceutical and healthcare firms of attempts by what it says are Chinese state-affiliated hackers to steel coronavirus research.

Following the president’s order, Secretary of State Mike Pompeo said:

We will not tolerate [China’s] attempts to illicitly acquire American technology and intellectual property from our academic institution and research facilities for Chinese military ends.

The US administration defines military links as any connection with the military-civilian fusion policy. Thus a further 4,000 of some 4000,000 Chinese students in the United States may be at risk of an additional round of visa revocations. The Department of Justice has also been prosecuting Chinese researchers who it accuses of concealing their military connections in their visa applications.

Chinese students (the majority undergraduates) account for more than one-third of all international students in the United States, the largest national cohort. They are a rich source of tuition fees for US universities and colleges, one reason that visa applications for undergraduate courses were excluded from May’s issuance suspension.

However, the State Department recently warned the governing boards of US universities of what it said is the threat to them from illicit Chinese funding for research, intellectual property theft, intimidation of international students and opaque talent recruitment efforts.

It encouraged universities to disclose all Chinese companies that their endowment funds are invested in, especially those in emerging-market index funds, to divest from Chinese companies on the Commerce Department’s entity list and to avoid investing in Chinese companies listed on US stock exchanges (which the administration would like to ban because their accounting does not comply with US standards).

In a separate measure, senior Chinese diplomats in the United States will now require US government permission to visit US university campuses.

As with business, the United States now sees education primarily through a national security lens.

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China Steams Ahead With New Aircraft Carriers

PLA-Navy warships including the aircraft carrier Liaoning and its latest submarines take part in a review in the South China Sea , April 12, 2018. Photo Credit: Xinhua/Mo Xiaoliang.

ONE OF THE naval world’s worst-kept secrets is that China is building its third and fourth aircraft carriers. The closest to official confirmation of that to date has come from Li Jie, a senior researcher at the Naval Military Studies Research Institute of the People’s Liberation Army (PLA), speaking at a national defence education event in Beijing.

There was nothing that has been reported in Li’s remarks to alter what we already believe to be the case. He said that on the third carrier an electromagnetic catapult launch system would replace the ‘ski-jump’ of the PLA-Navy’s first two carriers, the Liaoning (seen above in 2018) and the Shandong, and that the power system of the fourth carrier would be ‘very likely to adopt significant changes’. That could mean nuclear powered or that the solution found to the power demands of electromagnetic catapult launching, which are typically beyond a conventionally powered carrier, might be extensible to the vessel’s whole propulsion system.

The third carrier is also likely to be larger than the Shandong — of the order of 80,000-85,000 tons versus 66,000-70,000 tons. That makes it a decent mid-sized carrier, but will also let it accommodate an additional 12 fighter jets, taking its complement to the 48 considered the minimum necessary for combat.

Catapult launching will allow its aircraft to carry heavier payloads, for a broader range of aircraft to be deployed, such as the new KJ-600 surveillance plane, and for more rapid flight operations. Along with the third carrier’s greater sea range, this will extend the reach and effectiveness of its carrier-based fighters.

However, the fifth-generation carrier-based fighters that China is developing (with some difficulty), the FC-31/J-31, will still not be a match for the F-35 stealth fighters the US Navy already has in the air. We note in passing that South Korea has F-35Bs (the short takeoff/vertical landing variant) and has allocated money in its 2021-25 defence budget to build a 30,000-ton carrier for them, similar to Japan’s destroyer helicopter carriers. For its part, Tokyo has F-35Bs on order for its mini-carriers.

Nonetheless, the rapid build-out of a blue-water fleet with carriers as the centrepiece means that China’s maritime security within the first island chain already looks increasingly assured. The PLA-Navy’s capacity to put adversaries at risk up to 1,500 kilometres off China’s coast will grow with its next carriers.

The third carrier is expected to be commissioned into service in 2023 and operational the following year. It has been under construction at the Jiangnan military naval yard in Shanghai since 2018.

Meanwhile, the Liaoning and the Shandong have carried out joint exercises for the first time, conducting live-fire and coordination drills in the Bohai and Yellow seas last week that appear to have continued into this.

There is nothing out of the ordinary about synchronised operations between two carriers, and it is just one more thing the PLA-N has to master as it learns how to operate carrier battle groups.

However, in the context of Taiwan, one implication of PLA-N dual-carrier operations is that in the event of a military invasion of the island, they could effectively blunt a possible US intervention on Taipei’s behalf. The US Navy’s dual-carrier exercises in the Western Pacific have shown the effectiveness of such coordination for sustaining high-intensity attack missions by carrier-based aircraft.

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Decoupling Cuts Both Ways

Screenshot of SMIC web site

THE THREAT TO blacklist China’s largest contract chip-maker Semiconductor Manufacturing International Corp. (SMIC) fits squarely with the US administration’s efforts to hobble China’s technology development by denying it access to the US technologies that it will need until it can develop indigenous industries.

According to the Reuters news agency, the US Defence Department has proposed adding state-owned SMIC to the entity list, part of the US export-control regime that would prevent any US company doing business with it without a special licence from Washington.

The nub of the threat that poses to SMIC’s business is that one-half of the company’s chip-making equipment is US-made. A blacklisting would deny it the servicing and maintenance that the equipment will inevitably need, even if production is kept going in the short-term.

More significantly, it would make it impossible for SMIC to buy the equipment that is required to make the more advanced chips that it does not yet manufacture but which Chinese tech firms such as Huawei and HikVision will need as Washington chokes off their US sourcing. SMIC was already vulnerable to US sanctions.

The recent extra-territorial expansion of US export controls against Huawei barred any company from selling it chips without a US licence if those chips were designed using US software or manufactured using US equipment. SMIC is a Huawei supplier.

Like Huawei, SMIC is also accused of endangering US national security and of having links to the People’s Liberation Army. Although SMIC denies this, it is more than likely that its chips do get used in hardware that gets sold to the military, however indirectly. A US defence contractor claims that researchers at PLA-affiliated universities use SMIC chips and processes and that there are business links between SMIC and China Electronics Technology Group (CETC), a state-owned defence electronics research contractor.

Thus the race is on to develop an indigenous chip-making industry before the US administration destroys Chinese tech firms’ supply chains.

Meanwhile, US President Donald Trump gave a further airing to his musings on decoupling the US and Chinese economies over the long holiday weekend in the United States. He spoke of making the United States a manufacturing powerhouse that was not dependent on China.

Driving out SMIC and other customers for US products would create the mirror image of that.

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China’s Trade Gets Ahead Of The Economy

Chart of percentage change year-on-year of China's monthly imports and exports. Graphic: China Bystander

THE LATEST MONTHLY trade figures are a bit of a mixed bag when it comes to drawing broader lessons from them. As our chart above shows, the import and export numbers have different tales to tell.

China’s exports jumped a larger-than-expected 9.5% year-on-year in dollar terms in August, the third successive month of increase and the highest rise this year to date.

Given that most of Chinese exporters’ markets are still in Covid-19-induced recession, it is highly unlikely that global demand rose by anything like the same amount so that pace would be unsustainable until world trade normalises. Backlogs and suppressed demand are more likely the cause of the current uplift. Exports of medical supplies, including personal protective equipment, and electronics goods needed for working at home were also notably up.

China’s trade surplus with the United States rose to $34.2 billion in August, its highest level since November 2018, despite the US-China Phase One trade deal signed in January intended to reduce the surplus. The agreement calls for China to buy $200 billion of US goods and services in 2020-21 over and above 2017’s levels.

The Petersen Institute for International Economics tracker shows imports from the United States running well below the levels needed to be on track with the commitment. It counted, as of July, US exports to China of the products covered by the agreement worth $48.5 billion this year, compared with a prorated year-to-date target of $100.7 billion.

The 1.8% rise in US imports in August will not take much of a bite out of that gap. The target, however, is not annual but covers two years, so there is time for Beijing to catch-up — or perhaps change the terms of the deal with a new US administration, should November’s US presidential elections produce one.

Imports overall in August, fell by 2.1% in dollar terms, confirming earlier data that domestic demand remains weak. State-supported industry benefitting from stimulus measures is driving the recovery. That has yet to work through to retail consumption.

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China-Europe Relations Get Another Kick

Screenshot of Premier League listing of broadcasters in China, September 4, 2020

THE TERMINATION BY England’s elite football league, the Premiership, of its broadcast rights deal in China potentially gives another kick to the already bruised relationship with Europe.

The cause of the cancellation of the three-season £564 million ($700 million) contract is said to be streaming service PPTV withholding a £160 million payment that was due in March. PPTV is owned by retail billionaire Zhang Jindong’s Suning Holdings.

With the suspension of the Premier League because of Covid-19, there were no games to stream. Negotiations between the two sides over a rebate and revised terms for the coming season, which will start next week behind closed doors, have come to nothing so far but reportedly are not entirely dead.

The cancellation could be a negotiating ploy, but Suning’s talk of a ‘strategic adjustment‘ does not suggest the door is open too far. Nonetheless, the cancellation will take a bite out of the £4.2 billion the League has sold the overseas rights to its games last season, this and next.

The dispute appears to be contractural. However, but politics is never far from sport. The NBA, the globally expanding dominant professional basketball league in the United States, got a sharp lesson in that last year when its games were temporarily taken off-air in China following a tweet supporting Hong Kong protestors by an official of one of its teams.

Last December, what looked like an organised social media campaign called for one of the Premier League’s top teams, Arsenal, to fire one of their star players, Mesut Ozil for being critical of Beijing’s treatment of his fellow Muslims.

Relations between the United Kingdom and China have since taken a turn for the worse over Hong Kong and after the U-turn by the UK government excluded Huawei from its 5G network.

The cancellation also came as Foreign Minister Wang Yi concluded a five-nation bridge-building visit to Europe ahead of the China-EU summit on September 14. The trip did not go as well. It highlighted that the distances between Europe and China on issues such as Huawei, human rights, Hong Kong and Taiwan remain enormous.

Wang’s warning in Norway that awarding the Nobel Peace Prize to any Hong Kong protesters would be taken as interference in China’s internal affairs particularly didn’t go down well, kindling memories of the years-long rift caused by awarding of the 2010 prize to the late activist Liu Xiaobo.

Nor did his threat that president of the Czech Senate, Milos Vystrcil, would ‘pay a heavy price’ for leading a delegation to Taiwan. This earned Wang an sharp rebuke from Germany’s foreign minister, Heiko Maas, that was supported by several of his EU colleagues. Such tough talk, even if couched in diplomatic niceties, marks a turn for the Europeans.

None of that, however, undermines Beijing’s need for better relations with Europe as insurance against a US-European coalition against it — or the Premier League’s need to serve one of its biggest markets.

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India Targets Chinese High Tech After Latest Himalaya Clashes

INDIA HAS ADDED 118 more Chinese-owned apps to the list of 59, including TikTok, that it banned in June on national security grounds. The newly sanctioned apps include some of the most popular: Alibaba’s Taobao, Ant’s Alipay, Tencent’s game, PUBG Mobile, and Baidu’s search engine.

Announcing the latest bans, India’s Ministry of Electronics and Information Technology said that the apps were prejudicial to the ‘sovereignty and integrity’ of India and to security and public order. The ministry said it had received complaints about the apps sending users’ data to servers outside India.

Delhi has also recently imposed new restrictions on Chinese investment and informally told its telecoms operators to phase out Chinese equipment from suppliers such as Huawei from their networks.

The latest bans follow clashes last weekend between Indian and Chinese forces in the Himalayas and the reported death by mine blast of one Indian soldier, a member of the ethnically Tibetan elite force that patrols the high-altitude border, the first casualty since at least 20 Indian soldiers and an unknown number of Chinese troops were killed in June during a high-altitude confrontation in Ladakh’s Galwan Valley.

China has said that no Indian soldier had died in the latest skirmishes but may be hiding behind semantics.

State media is ramping up its condemnatory rhetoric, which does not bode well for next week’s meeting of the Shanghai Cooperation Organisation in Russia which both China and India’s defence ministers are attending.

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China’s Economy Continues Long Haul Of Recovery

MORE EVIDENCE THAT China’s economy is fitfully grinding out recovery from the ravages of Covid-19 comes from Caixin’s manufacturing purchasing managers’ index (PMI) for August.

This hit 53.1, up from 52.8 in July and was the fourth consecutive month of expansion. Readings above 50 signal growth.

Caixin’s index is more weighted to private sector manufacturing than the official index, whose August reading showed the pace of expansion levelling off from July, perhaps because of flood-disruption in western parts of the country. Non-manufacturing remains strong, however, with the official services PMI rising to 55.2 from July’s 54.2.

Caixin’s August number is in line with other data showing rising manufacturing exports and employment. Stimulus measures to offset the impact of Covid-19, equivalent to about 4% of GDP, are working through the economy, though they are investment-led, rather than directly supporting consumption. The policy drives for import substitution and technological self-sufficiency look to be kicking in, too.

Growth for the year of around 2% looks achievable, which would make China the only large economy to grow this year. Still, it is hard to escape the conclusion that for now demand still lags supply, and will do so until domestic small business gets back onto a sound footing, stimulus measures start to boost consumer sentiment and household spending, and economies around the world recover their strength, which looks the most distant prospect of the three.

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