Mini-Lockdowns Become China’s New Normal

Chart showing 7-day trailing average of confirmed new Covid-19 cases in China, June 1-July 10. Source: Our World in Data.

THE LATEST VARIANTS of Covid-19 are posing new challenges to China’s zero-Covid policy and raising concerns that another round of lockdowns is imminent.

According to authorities, Macau has closed its 30 casinos and other non-essential businesses for at least a week after recording more than 1,500 Covid cases since the middle of June. Some 19,000 people are in mandatory quarantine.

Several casinos have been converted into temporary medical facilities, as Macau has only one public hospital.

While not formally locked down citywide, Macau, in practice, is closed.

Meanwhile, Shanghai authorities announced on Sunday that the city had identified its first case of the Omicron BA.5.2.1 mutation and that residents in several Shanghai districts are undergoing three days of double rounds of Covid testing. Mass testing in multiple districts also took place last week.

Mass testing has become the first line of defence to keep infection levels in check, with a negative test required to travel on public transport or enter certain places and those testing positive being put into mandatory quarantine.

China’s first case of the highly contagious BA.5 variant was discovered in the city in mid-May. Authorities said it was brought into the country by a passenger on a flight from Uganda. It has since been detected as far away as Xian and Dalian in Liaoning province.

Shanghai only emerged from a punishing near two-month lockdown in early June. Central government officials have said that new curbs should be targeted to reduce economic damage, but there is no indication that the huge cost of closing Shanghai has changed Beijing’s commitment to its zero-Covid. strategy.

Elsewhere, mass testing is also being conducted in several districts in Guangzhou and Xining in Qinghai province. Nanchang in Jiangxi province closed places of entertainment on Saturday.

Temporary curbs, including shutting entertainment and cultural venues, have also been imposed in Danzhou and Haikou in Hainan province and Lanzhou in Gansu. In all, some 6 million people are affected.

The town of Qinyang in Henan almost wholly locked down its nearly 700,000 residents from Sunday. One person from each household is allowed out every two days to get groceries.

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Another Xi-Biden Call In Prospect But China-US Relations Still Listing

China's Foreign Minster Wang Yi seen with US Secretary of State Antony Blinken during the G20 foreign ministers meeting in Bali, Indonesia on July 9.

THE NEXT CALL between President Xi Jinping and his US counterpart, Joe Biden, is edging closer.

Foreign Minister Wang Yi and his US counterpart, Secretary of State Antony Blinken (seen above), held a lengthy (5-hour) meeting on Saturday on the sidelines of the G20 foreign ministers meeting in Bali. Afterwards, Blinken suggested that the two leaders would ‘speak in the weeks ahead’.

Xi and Biden last spoke in November last year.

Reports suggest the Wang-Blinken meeting was what diplomats call candid, with Wang criticising Washington for what it regards as suppressing its rise and Blinken attacking Beijing’s support of Moscow in the war in Ukraine.

Blinken also laid out what Washington considers to be the boundaries of legitimate rivalry between the two powers. That adds some context to the unprecedented joint appearance in London last week by the heads of the US and UK domestic intelligence and security services, the FBI and MI5, calling China the ‘biggest long-term threat to [US and UK] economic and national security’.

However, by most accounts, the tone between Wang and Blinken remained professional and the discussion did not degenerate into a re-run of the infamous slanging match of the March 2021 meeting in Alaska.

A statement on the meeting issued by the Chinese embassy in Washington also warned the United States not to cross its well-known red lines, including Taiwan, Hong Kong and Xinjiang. It added that the bilateral relationship faced mounting challenges and was ‘still not out of the difficulties caused by the previous US administration’.

Blinken gave no hint about how extensively or even if the United States would roll back Trump-era punitive tariffs on Moscow. Biden said on July 8 that he had not yet decided on an issue that divides his administration.

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US Stacks The Chips In High-Stakes High-Tech Game With China

Extreme ultraviolet source, droplet generator and collector mirror in a NXE3400b lithography system. Photo credit: courtesty ASML.Copyright © (ASML) All Rights Reserved

REPORTS FROM THE NETHERLANDS say that Washington is pressing the Dutch government to ban exports of semiconductor fabrication equipment to China.

ASML, one of the key manufacturers in the sector, is headquartered in Veldhoven near Eindhoven in the southern Netherlands. China is the company’s third-largest market after Taiwan and South Korea, worth $2.1 billion in 2021, one-sixth of total annual sales.

Since 2019, a Dutch-US agreement on export licences for dual-use technologies has prevented the company from selling Chinese firms its most advanced lithography systems — the machines that use ultraviolet light to trace the circuitry on computer chips (a detail of which can be seen in the photograph above).

According to the reports, Washington wants to expand the scope of the restrictions as it moves to slow Beijing’s drive for technological self-sufficiency. Last year, the US National Security Commission on Artificial Intelligence recommended that the United States ask its allies to prevent all lithography tool exports to China.

The Catch-22 for Washington is that restrictions on sales of advanced Western technology to China only spur Bejing’s development of its indigenous tech industries to end run US sanctions.

Last month, Bloomberg reported that China’s chip industry was growing faster than any other, with 19 of the world’s 20 fastest-growing chip industry firms being Chinese, compared to just eight a year earlier.

Beijing is pouring billions of dollars of investment into chipmaking by funding national champions, encouraging Chinese firms to ‘buy Chinese’ and through industrial policy programmes like ‘Little Giants’, which backs high-tech start-ups. It is also lobbying as discretely as it can manage against a bill in the US Congress that would provide $52 billion to supercharge US semiconductor manufacturing.

The long-term opportunity for China lies in developing a globally competitive chip industry that would dethrone its US rival and perhaps fatally damage US technological leadership. Former Google chief executive Eric Schmidt and Harvard scholar Graham Allison wrote in the Wall Street Journal last month that:

If Beijing develops durable advantages across the semiconductor supply chain, it would generate breakthroughs in foundational technologies that the US cannot match.

Schmidt and Allison proposed that Washington use carrots (tax incentives and subsidies) and sticks (leaning on their governments) to encourage chipmakers TSMC and Samsung to partner with US chip designers and fabricators to manufacture advanced chips in the United States. That would do nothing but escalate Beijing’s reaction to what it already calls ‘technological terrorism’.

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China Faces Risk Of New Round Of Covid Lockdowns

Chart showing 7-day moving average of confirmed new Covid-19 cases in China, Jun 3-July 6, 2002. Source: Our World in Data

NEW COVID-19 case numbers are rising in various cities across China. The seven-day trailing average has increased to more than 300 from a low of 25 in late June.

Authorities are imposing restrictions on business operations (Xian) and public spaces (Beijing) and putting tens of millions of people under social distancing restrictions.

Earlier this week, the Japanese bank Nomura estimated that 114 million people were under full or partial lockdowns, including in Shanghai, which has only recently emerged from a punishing complete lockdown.

With President Xi Jinping repeatedly reaffirming China’s commitment to its zero-Covid policy, can more stringent lockdowns be far behind?

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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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