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.

Strong Dollar Sends Yuan To New Lows, And No One Is Bothered

THE YUAN HAS fallen to a record low against the US dollar since it became internationally convertible in 2011 when Beijing allowed some overseas fund-management and securities firms to invest their yuan onshore.

This point has been coming. The People’s Bank of China has been letting the currency fall, managing only the speed of the descent with its trading band mechanism.

With inflation relatively low by world standards at 2.5% in August, China has the headroom to take the inflationary hit from a depreciating currency that makes imports more expensive. The intention is that the boost the falling yuan will give to exporters will revitalise an economy whose growth has slowed.

However, exports now account for only around 20% of the economy. A cheaper yuan will go only some of the way to offsetting the effects of zero-Covid lockdowns and a deeply troubled property market that is looking more and more like a structural, not cyclical, problem.

Raising interest rates to defend the currency would only worsen the property sector’s malaise. To the contrary, cutting them has been part of Beijing’s stimulus toolkit.

The yuan is far from the only currency to be battered by the US dollar’s strength. The euro, yen and British pound are all reeling from the US Federal Reserve’s aggressive raising of interest rates to bring down US inflation that has proved more persistent than expected.

The Federal Reserve will not abandon that policy soon. So far, US exporters have not been squealing about how the strong dollar is hurting them, as happened in the run-up to the Plaza accord in 1985. That international agreement to the US dollar led to the endaka shock to the economy of Japan, then playing the role China has recently taken as exporter to the world.

We are not at the point of a re-run of that yet. Neither China nor the United States have a short-term incentive to alter their currency’s trajectory. That point will come, but the question is whether it arrives before or after the Fed thinks it has tamed inflation.

However, just recall, a decade ago Beijing was being accused of being a currency manipulator for keeping the yuan low.

Ukraine Crisis Will Slow China’s Economy

CHINA WILL NOT be immune from the global economic impacts of the Ukraine crisis.

Higher prices for energy and food and metals commodities — Russia and Ukraine are significant producers of all three — will raise inflation, providing a drag on real GDP growth. Almost certain recessions in Ukraine and Russia due to the fighting and sanctions, respectively, and an intensification of existing bottlenecks in global supply chains for raw and intermediate goods will exacerbate the impact.

It is too early to know the severity of these shocks, given their dependency on the outcome of the crisis. However, some scenario-based estimates are being made.

One set that crosses this Bystander’s desk comes from The Conference Board, a US business research organisation, which produced the chart above. Assuming an oil price averaging $125 a barrel in the second quarter of this year, The Conference Board estimates that China’s GDP growth for this year will be reduced by between point two and point five of a percentage point and by the same amount in 2023.

By comparison, the comparative numbers for the world economy are reductions of 0.4-0.9 percentage points and 0.1-0.3 percentage points, respectively.

Long-term energy contracts and the likelihood of buying more discounted Russian energy and agricultural commodities such as wheat that Moscow will not be able to sell into sanctioning markets will somewhat mitigate the impact on China. Nonetheless, the Conference Board is forecasting a 0.5-1.5 percentage points increase in year-on-year consumer price inflation in China for this year and a 0.1-0.8 percentage points increase in 2023.

Those will be unwelcome numbers for authorities already struggling to tame politically sensitive energy and food price rises.

The Ukraine crisis will add to the challenge of meeting the newly announced target of 5.5% GDP growth for this year. That was already looking ambitious. Headwinds from the real estate slump, the cost of the zero-Covid tolerance policy and the measures imposed by the United States to limit Chinese access to US capital, technology and intellectual property are already slowing the economy’s momentum.

US Extends Tariffs On Chinese Solar Products

THE UNITED STATES has extended for another four years import tariffs on solar panels and cells, which are primarily made in China but barely in the United States.

The tariffs, imposed by the Trump administration in 2018 as one of its anti-China trade measures, were due to expire on February 6. US President Joe Biden renewed them by proclamation on February 4.

They are over and above anti-dumping and countervailing duties levied on solar cells and panels from China.

The tariff renewal will continue to exempt imported bifacial panels widely used in utility-scale solar projects in the United States, a loophole long criticised by US solar product manufacturers.

The Biden administration has also doubled the allowable duty-free import quota for solar cells to 5 gigawatts, a nod to his renewable energy ambitions and intent to promote domestic production. However, along with the bifacial exemption, this underlines how the president has to dance around competing policy agendas.

Most photovoltaic products imported into the United States come from Thailand, Malaysia and Vietnam, all countries where Chinese companies own production facilities.

The Commerce Ministry criticised the extension, saying it will hold back renewable energy development while not boosting domestic US production.

Last September, the World Trade Organisation rejected China’s complaints about the tariffs.

Three months previously, the United States banned imports from Hoshine Silicon Industry, a producer of raw materials used in solar cells, over allegations of the use of forced labour in Xinjiang, which is where four of the world’s five largest polysilicon factories are located.

Gong Xi Fa Cai

THIS BYSTANDER WISHES happiness and prosperity to all in this Ren Yin year.

US Drops Charges Against Chinese Military Academics

AS A MATTER of record, this Bystander should note that the US Department of Justice has dropped charges against five Chinese academics accused of concealing their ties to the People’s Liberation Army.

The five faced charges of visa fraud, as we wrote at the time.

The cases were dropped shortly before the trial of one of the five, Tang Juan (seen above in a photo submitted with court papers), was about to start on July 26. The Justice Department said it had ‘determined that it is now in the interest of justice to dismiss [the charges]’.

That reflects some internal concerns that the cases were not legally watertight on some technicalities. Further, courts had already dismissed parts of two cases because the FBI had not properly informed the defendants of their rights against self-incrimination.

Reading between the lines, the Trump administration, which brought the charges, was overreaching in its efforts to find spies among Chinese academics working at US universities.

Severe Flooding Hits Central China

RECORD RAINFALL IN Henan province has caused extensive flooding and left at least 12 people dead.

The twelve who died were trapped by rising waters in the metro system in Zhengzhou, the provincial capital which lies on the southern bank of the Yellow River. More than 500 others were rescued from flooded trains and platforms underground.

The city experienced two-thirds of its annual rainfall in 24 hours spanning Monday and Tuesday. The silt-rich Yellow River often floods during the rainy season from July to October.

Some 100,000 residents have also been evacuated from the city, known for being a centre for iPhone assembly at a Foxconn plant, though the company says that the flooding has not affected operations.

More than a dozen cities in the province have been deluged. Property damage is extensive. Henan accounts for a quarter of the country’s annual wheat harvest.

Concern is mounting that a breached dam in Luoyang city could collapse. Several reservoirs whose water levels are above safety levels also pose a risk of further disasters, as do landslides.

Forty-five years ago 125,000 people lost their lives in flooding in Henan, many in incidents that occurred after the initial flooding.

Thousands of rescuers including soldiers are being deployed in a huge rescue effort. State media is actively countering social media grumbling about the lack of warnings of flood risk ahead of the heavy rains.

Local officials have been told to act pre-emptively where they see danger and not wait for instructions from central authorities. This would suggest that lessons have been learned from the slow initial response to the Covid-19 outbreak in Wuhan, where municipal officials were accused on not acting swiftly enough to contain the outbreak.

The flooding in Henan is the latest example of extreme weather around the world.

Police Enforce Hong Kong Public Health Crackdown

A HEAVY POLICE presence has been deployed in Hong Kong to prevent an outbreak of a seasonal coronavirus variant.

The variant, only previously detected there and in Macao, appears to be a combination of US and UK variants with traces of a hitherto unclassified Taiwan variant. Were it to be recognised by the World Health Organisation, the variant might be designated as the B.1.6.4.32, although the WHO may wait until xi in its new Greek alphabet naming convention has been used.

Authorities have imposed extreme social distancing measures and closed down open spaces such as Victoria Park to prevent superspreader events. Some 7,000 police are reportedly on the streets on public health patrols. At least one prominent Hongkonger is now in police quarantine. More are likely to follow.

Residents are also being discouraged from using popular folk remedies such as shining mobile phone flashlights or using wax-based equivalent light sources.

The response has been more muscular than to a similar outbreak at this time last year, which failed to contain the contagion completely. New measures have since been adopted at Beijing’s insistence, drawing on its own success in suppressing such outbreaks.

Happy New Year

THIS BYSTANDER WISHES you a Happy Year of the Ox. We are told this will be a year of new beginnings, but equally one of change and unrest. Many of the challenges of the Year of the Rat will carry over.

A smooth sea never made a skilled sailor.

Jack Ma Peeks Above The Parapet

JACK MA’S REAPPEARANCE speech was as humble and dutiful as his previous one, last October, was caustic and critical.

After a nearly three-month absence from public view that sparked rumours that the high-profile billionaire founder of Alibaba and its fintech spin-off Ant Group had been detained by authorities displeased by his dismissive criticisms of China’s financial regulators, Ma joined a meeting of 100 rural teachers by video link. (The screenshot above is from a clip posted to social media.)

His presentation touched on two issues dear to the heart of Party leadership: that the country had eradicated poverty; and that entrepreneurs had a duty to serve society, in this case by supporting teachers and improving rural education.

It was unclear where Ma was speaking from, nor did he mention where he had been of late.

Between Ma’s two public appearances, regulators had forced the last-minute pulling of Ant Financial’s initial public offering and started an antitrust investigation into Alibaba as part of a broader reining-in of the private tech companies.

Ma, too, will find himself on a tighter leash and make sure not to strain against it. The same will be true for his companies, as this Bystander suggested previously.

However, his reappearance alone will be of some reassurance to investors. Nonetheless, that does not give China’s tech giants and their leaders any latitude to step out of line.