China And US Talk Tersely But At Least Talk

THE PHRASES USED by both sides after the talks held today by top economic officials from China and the United States describe a bluntly transactional and distrusting relationship.

To Beijing, the talks were ‘pragmatic and candid‘; to Washington, they were ‘candid and substantive‘, according to the two sides’ readouts, both notably short, terse and similar.

The virtual talks, led by Vice Premier Liu He and US Treasury Secretary Janet Yellen, covered the well-rehearsed litany of US tariffs and sanctions on China, what Beijing holds is the unfair treatment of Chinese companies by the United States, what Washington describes as China’s unfair and non-market practices and the war in Ukraine. 

At least, the two sides agreed to ‘maintain dialogue and communication’, according to China’s readout, while Yellen ‘noted’ that she looks forward to future discussion with Liu. In the context of the low ebb of China-US relations, that represents progress of a sort between two countries that see each other as their primary geostrategic rival.

Our man in Washington tells us that US President Joe Biden is leaning towards lifting some of the Trump-era tariffs. However, his administration remains divided over the issue, the China hawks not wanting to yield any possible leverage. Undoubtedly, some of the tariffs make little strategic sense, and easing them would help battle domestic US inflation, albeit on the margins.

Biden will have to make up his mind soon. The tariffs start to expire this month, although the administration said in May that it had initiated the review process needed to roll them over. 

His decision may come after the administration’s debriefing on today’s talks.  

Any rollback of the tariffs is likely to be accompanied by a new US investigation into China’s industrial subsidies, our man in Washington says. That could lead to more duties in strategic areas like technology.

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China’s Modest Manufacturing Pick-Up Will Not Gain Momentum

THE CAIXIN SERVICES purchasing managers index (PMI) hit its highest level in nearly a year in June at 54.5, following the rebound in the manufacturing PMI to 51.7, its highest level since May 2021, after four months of decline.

A PMI reading above 50% indicates expansion; The Caixin index focuses on smaller and medium-sized firms, while the official PMI tracks larger, typically state-owned companies.

While the easing of lockdowns, including in Shanghai, will have boosted the services PMI, June’s uptick in the manufacturing reading stood in contrast to a slowing of manufacturing output in the United States, the United Kingdom, Japan, India, ASEAN and Brazil, and contraction in the euro-area and South Korea.

However, China’s manufacturers will not be immune to the adverse impacts of the conflict in Ukraine and tighter monetary policies to rein in inflation will erode global market conditions. China’s manufacturing output will slow in the coming months, even if less sharply than elsewhere.

Relatively weak growth will likely continue for the rest of the year in the face of strong external and internal headwinds. These range from worsening US-China tensions to President Xi Jinping’s doubling down on the zero-Covid-19 policy. These are buffeting domestic economic activity, which was already slowing, and global supply chains already under strain.

If China gets away with fewer lockdowns — and softer ones — it should see manufacturing, consumption and investment pick up. There will be continuing monetary and fiscal stimulus to bolster private spending and employment, both critical to the twin goals of growth and social stability.

The risk remains old-school investment spending, which could fuel financial instability, especially in the still beleaguered property sector. The government announced an extra $120 billion of lending for infrastructure by state policy banks at the start of June and a further $80 billion via bond issuance at the end of the month.

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Shanghai Police Data Hack Reveals As Much As It Hides

THE REPORTED BREACH of the Shanghai police database is — at the very least — an embarrassment to China’s cybersecurity services but could have more serious ramifications.

According to Bloomberg, unidentified cybercriminals stole 23 terabytes of data, including personal and criminal case information of more than 1 billion citizens. An anonymous poster on the Dark Web using the handle ‘ChinaDan’ claimed to have stolen the data trove from the Shanghai National Police database and offered it for sale for 10 bitcoin ($197,00 at current depressed crypto prices).

Authorities have thus far disclosed no information on how the most extensive known hack of Chinese data happened or who might have executed it. We may never know, even if the official investigation reveals a vulnerability at the Shanghai police’s cloud services provider, almost certainly a Chinese big-tech firm. Alibaba, Tencent and Huawei are China’s leading cloud services providers.

Early speculation by outside cybersecurity experts is that there was a bug or misdeployment of the distributed search and analytics engine widely used by cloud services. Tighter regulation or rectification of cloud-service providers would hint at where authorities believe the cause of the hack to have been. So, too would be demotions, or worse, of police personnel or other members of the security apparatus.

One reason that the hack is so embarrassing for the Chinese government. Another is that it is now implementing a strict data privacy and protection regime under the umbrella Data Security Law and Personal Information Protection Law enacted last year and the earlier Cybersecurity Law. The trio imposes stringent data privacy obligations on all businesses regarding personal and non-personal data while giving state agencies extensive leeway over collecting and processing such data.

Internationally, the leaking of data files on Xinjiang haves had reputational and sanctions consequences for China. The scale of this breach will again expose Beijing to scrutiny over the extent of state surveillance.

Should reports escape the censors (the hashtag #dataleak has been blocked on Weibo), some Chinese may ask themselves not just why authorities hold so much personal data but why police in a city of 28 million have data on more than 1 billion people. However, police are a national force under the Ministry of Public Security, and the hacker(s) may have accessed the ministry’s records via the Shanghai police database. Yet that, in turn, reminds how interconnected China’s internal security systems are.

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NATO Looks Far Eastward

Screenshot of NATO Strategic Concept document adopted at Madrid Summit June 29-30, 2022

IT HAS BEEN more than a decade since NATO published a new Strategic Concept, its high-level mission statement. For the first time, the one adopted at its Madrid Summit on June 29-30 mentions China as a competitor and challenger.

The NATO document still identifies Russia as the alliance’s most significant and direct threat but says that China’s ambitions and coercive policies challenge its ‘interests, security and values’.

[China] employs a broad range of political, economic and military tools to increase its global footprint and project power, while remaining opaque about its strategy, intentions and military build-up. The PRC’s malicious hybrid and cyber operations and its confrontational rhetoric and disinformation target Allies and harm Alliance security. The PRC seeks to control key technological and industrial sectors, critical infrastructure, and strategic materials and supply chains. It uses its economic leverage to create strategic dependencies and enhance its influence. It strives to subvert the rules-based international order, including in the space, cyber and maritime domains. The deepening strategic partnership between the People’s Republic of China and the Russian Federation and their mutually reinforcing attempts to undercut the rules-based international order run counter to our values and interests.

Beijing, through its Mission to the European Union, accused NATO of maliciously attacking and smearing China and repeated its criticism that NATO was part of the Cold War mentality of the United States and its Western allies.

NATO claims itself to be a defensive organization that upholds the rules-based international order, but it has bypassed the UN Security Council and waged wars against sovereign states, creating huge casualties and leaving tens of millions displaced.

NATO remains open to constructive engagement with Beijing, including building reciprocal transparency, but says it will protect itself against what it calls ‘coercive tactics and efforts to divide the Alliance’. Pointedly it says it will stand up for the rules-based international order, including freedom of navigation.

While NATO cites China as one of several threats, from terrorism to climate change, the unprecedented attendance at the Madrid summit of the leaders of Australia, Japan, New Zealand and South Korea, all US allies, indicates the intensity of its eastward glare and Brussels growing security alignment with Washington.

China’s global power projection, and thus its conventional military threat to Europe, is aspirational and distant, although Europe is in range of both Chinese nuclear weapons and cyberattacks. Beijing is focused militarily on Taiwan and its near abroad. However, NATO allies would be obliged to take action were that to draw the United States into military action that escalated into attacks on US territory.

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Xi Jinping’s Visit Heralds More Stability In Hong Kong

China's President Xi Jinping swears in John Lee as Hong Kong chief executive at the Hong Kong Convention Centre on July 1, 2022

HONG kONG IS marking the halfway point of its 50-year one country, two systems governance with a two-day visit by President Xi Jinping to swear in the city’s new chief executive John Lee (seen above) on July 1, also the anniversary of China’s resumption of sovereignty from the United Kingdom.

Xi’s visit has been wrapped in extensive secrecy, security and Covid protections. It is his first visit outside the mainland since the pandemic began.

He reportedly spent the first night back across the border in Shenzhen and all Hong Kong politicians he is meeting went into quarantine ahead of the visit.

Xi made mention of one country, two systems on his arrival but the overarching theme of the visit is a ‘new era of stability’.

That presages further suppression of dissent, even if Hong Kong remains freer than anywhere else in China.

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Another BRI Challenger Enters The Lists

US President Joe Biden announces the Partnership for Global Infrastructure and Investment at the G7 summit in Germany, June 26, 2022; Photo: Federal Government/Balk

FORGIVE THIS BYSTANDER’S world-weariness, but the Partnership for Global Infrastructure and Investment (PGII), the $600 billion plan for infrastructure and investment to challenge the Belt and Road Initiative (BRI) launched at the G7 summit in Bavaria, seems a bit old hat.

The US government’s statement that President Jo Biden (seen above announcing the PGII at the G7 summit) would announce flagship PGII projects ‘along with additional projects that have been undertaken over the past year’ — and links to a list of ten of them — is a bit of a giveaway.

Not that this would be the first time for governments to wrap up existing initiatives and past promises, tie a bow around them and announce a shiny ‘new’ package.

The PGII intends:

…to develop a values-driven, high-impact, and transparent infrastructure partnership to meet the enormous infrastructure needs of low- and middle-income countries and support the United States’ and its allies’ economic and national security interests.

What worthier and worth-laden circumlocution of intent to counter Beijing’s growing poured-concrete diplomacy could one imagine?

In one sense, the PGII is no more than a rebranding of the Build Back Better World (BBBW) plan rolled out at the G7 meeting in the UK a year ago. BBBW was a play on Biden’s domestic infrastructure plan.

The PGII’s four major categories for investment — clean energy, health systems, gender equality and information and communications technology — will sound familiar from his 2020 election campaign. Cynics might say that having failed to get much traction domestically with his infrastructure plans, the US president is now trying his luck internationally beyond the obstructivism of Congress.

The BRI has had at least a decade’s head start on the PGII. Its investment total is in excess of $1 trillion, although how much in excess is moot as there has been a tendency until recently to slap the BRI label on any overseas Chinese investment.

In many cases, the transparency and effectiveness of that investment and the loans supporting it have not been of the highest standards. However, Western criticism has not been accompanied by much by way of an alternative that does not come with the conditionality typically required by multilateral institutions such as the IMF, the World Bank and the IFC.

The $600 billion over five years that the G7 is now offering will not all be government money. The intention is to combine government funding with private capital from long-term investors such as pension funds, private equity funds and insurance funds — much as large companies augment China’s government overseas direct investment in BRI.

Those large Chinese companies can be state-owned, such as Zijin Mining, CNOOC, China Three Gorges and China Railway Construction, or private such as Alibaba, Boyu Capital and the metals and mining group Tsingshan.

In 2021, 560 new BRI projects worth at least USD100mn were signed, according to Ministry of Commerce data. The average value was USD355mn, compared to USD585mn in 2015. BRI activities are shifting to smaller, less costly and more creditworthy projects that are easier to manage and are less likely to concern recipient countries about the risks of taking on what turns out to be unmanageable and politically contentious debt.

This Bystander assumes that the PGII will subsume the EU’s standalone counter to BRI, its Global Gateway project announced late last year and which we described as ‘at least half a decade late and more than a euro short’. That would give needed financial buklk to the PGII.

Yet, how well the PGII competes with the BRI will depend on its implementation and how well the G7 governments can rally private capital to their cause to give substance to the headline number of $600 billion.

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The Unhealthy Use Of China’s Health Codes App

THE PUNISHMENT OF five local officials in Henan province for using a COVID-19 quarantine enforcement app to prevent protesters from travelling shows the capacity for digital repression and Beijing’s desire that local officials’ use of it does not get out of hand.

The punishments of two officials for ordering the tampering with the codes and three for carrying it out followed an investigation by the local discipline and supervision commission in Henan’s provincial capital, Zhengzhou.

Earlier this month, hundreds of people who had lost savings in a Ponzi scam in Henan found their health codes on the smartphone apps used to enforce COVID-19 quarantines suddenly turned red, despite testing negative for COVID-19.

A red code prevents access to public transport, hotels and other facilities. This prevented the citizens from travelling back to Henan to access their frozen bank accounts and petition authorities for redress.

The scam had already been widely shared on social media, and the apps turning red outraged social media users already weary from lockdowns. Posts about family members of depositors being placed in mandatory quarantine after their relative’s health code turned red further fuelled the anger at health codes being turned into what was called certificates of good citizenship.

The public relations damage at a time when Beijing was doubling down on its zero Covid policy soon had state media condemning the alleged abuses by local officials. China Daily described tampering with health codes as ‘ one of the worst forms of abuse of power’.

China’s new digital privacy regime limits the independent misuse of digital technology by China’s vast bureaucracy. However, while central leadership will not impose any limits on its ability to use technology for political ends, it is demonstrating that it will discipline lower-level officials if they do so for their own ends, even if that is a misguided attempt to maintain local public order.

However, the more significant concern remains that the health code system provides higher-level authorities with a repressive tool to track and quarantine arbitrarily any opponent or critic.

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China’s Aircraft Carriers: And Then There Were Three

China's third aircraft carrier, the Fujian, seen at its lannchng ceremony on June 17, 2022 a the Jiangnan military naval shipyard in Shanghai.

CHINA’S MOST ADVANCED aircraft carrier is now in the water following its launch ceremony at the Jiangnan shipyard in Shanghai on June 17 (seen above).

The next step for the Fujian will be completing its fitting out and then sea trials before being commissioned into service alongside its sister carriers, the Liaoning and the Shandong. Commissioning is expected next year, with operational deployment in 2024.

The Fujian is the PLA Navy’s first domestically designed and built carrier. With a displacement that state media describe as ‘more than 80,000 tonnes‘ but foreign analysts speculate may be closer to 100,000 tonnes, it is the largest warship built outside of the United States.

Designated a Type 003, the Fujian is immediately distinguishable from its two predecessors not just by its size — approaching twice the displacement of the other two, but also by its flat deck. Electromagnetic catapults will launch its aircraft, not the ‘ski jumps’ seen on the Liaoning and the Shandong.

Such CATOBAR systems are used by the US Navy’s Nimitz and Gerald R Ford-class carriers and allow aircraft to be launched with heavier payloads, whether weapons or fuel.

They also make it easier to launch aircraft with less take-off thrust and more weight than fighters, such as airborne early warning and control (AEWC) aircraft. The PLA-N currently has to use helicopters for AEWC duties.

The Fujian’s size also means it will be able to carry more aircraft and fuel than its sister carriers and thus deploy more fighting power for longer and further out to sea.

It will be equipped with an estimated 48-strong flight of ‘Flying Sharks’ (the carrier-borne version of the J-15 fighter jet) plus Harbin Z-20 helicopters. A complement of 48 fighters is considered the minimum necessary for combat.

The Fujian will also be able to accommodate two aircraft being developed for Type 003 carriers, although not without teething troubles, the larger J-35 fighter and the multi-role KJ-600 utility aircraft, one of whose roles will be AWEC duties. More than likely, the Fujian will also carry combat drones.

However, the PLA-N will still be short of matching the maritime airpower of the United States and its regional allies.

While it has not been announced which of the PLA-N’s three fleet commands the Fujian will join, the East Sea fleet is the only one lacking a carrier. The Liaoning serves in the Northern command and the Shandong in the Southern one. The East Sea fleet is based in Ningbo, not so far from Taiwan.

The Fujian is conventionally powered. China’s fourth carrier, currently under construction, will likely be nuclear-powered as part of plans to make the PLA-N a ‘blue-water’ navy able to operate ‘out of area’ in waters such as the Western Pacific and the Indian Ocean by 2025.

Having three carriers is an important milestone towards that objective as the PLA-N will meet the conventional assumption that three is the minimum number of carriers a navy needs: one operational, one in port and one in maintenance.

However, it will need at least a second Type 003 before it can follow the modern naval doctrine of operating carrier battle fleets in coordinated or ‘networked’ pairs for greater combat efficiency.

Once the Fujian is operational, Beijing will have secured its coastal waters, but for now, it can only project force, not deploy it, beyond the first island chain.

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Worst Summer Rains In 60 Years Lash Southern China

Screenshot of Google map showing southern Chinese provinces worst affected by flooding during June 2022's annual summer rains

SOUTHERN CHINA HAS been seeing its heaviest summer rains for 60 years, bringing floods, widespread destruction of crops and more disruption to supply chains.

Hundreds of thousands of Guangdong and Guangxi residents living around the Pearl River delta have been evacuated after a week of persistently high rains. State media have aired footage of people being rescued with ropes and rubber dinghies, and cars floating down streets. Several cities in Guangdong have raised their flood alerts to the highest level.

The rain has disrupted manufacturing and shipping, already suffering under strict anti-Covid measures. Particularly in the more mountainous north of the province, where the flooding is most severe and landslides have happened, businesses were ordered to close temporarily, and public transport was suspended as rising waters approached dangerous levels. The direct economic loss so far is estimated at more than 1.7 billion yuan ($250 million).

To the north of Guangdong, Jiangxi province has also raised its flood warnings. Officials report direct economic losses already reaching 470 million yuan, with 43,300 hectares of crops inundated.

In neighbouring Hunan province, 21,607 hectares have been damaged, and there are reports of landslides and building collapses.

China’s National Meteorological Center warned that downpours could continue for another week, although the heaviest rains are expected to move northwards across central China from mid-week.

In recent years, climate change has made the south wetter and the north hotter and drier.

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US Xinjiang Imports Ban Takes Effect, Further Darkening Trade Relations

US LEGISLATION BANNING the import of products made in Xinjiang unless the importer can prove the product was not created with forced labour went into effect today.

The Uyghur Forced Labour Prevention Act was passed last December and presumes that goods from Xinjiang are made with forced labour. That flips on its head the burden of proof required under existing US bans on importing products made with forced labour.

The act has been roundly condemned by Beijing.

Given the near impossibility of US importers verifying their Xinjiang supply chains on the ground as independent auditors are being denied access, the law will become as good as a blanket ban. How it is implemented, particularly the rigour with which US authorities pursue the diffusion of Xinjiang products throughout supply chains in the rest of China and the region, will determine how dampening the blanket is on trade.

Xinjiang produces more than 90% of China’s cotton, which is used by the textile and apparel industries across the country. Thus the impact of the law will be widespread in those sectors.

According to the South China Morning Post, stocks of unsold cotton are piling up at Xinjiang mills as US importers get their supply chains into compliance. With the next harvest less than three months away, half the cotton harvested last autumn has yet to be sold.

Xinjiang is also a grower of tomatoes for export and a producer of solar-grade polysilicon and electronics components.

The act will further harm China-US relations, regardless of any cosmetic changes the Biden administration may make to Trump-era tariffs on Chinese imports of consumer goods, semi-manufactures and raw materials.

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