How to read mixed signals on the trade deal; debunking the ‘China will crumble’ white paper

SinoInsight 1
Will they or won’t they? Both the United States and the People’s Republic of China have issued conflicting signals over the past week on whether a trade deal can be reached:

Deal
Sept. 23

• According to a Reuters report, Chinese importers bought another 10 boatloads of U.S. soybeans this month.
• U.S. President Donald Trump holds an event to call for an end to religious persecution on the sidelines of the United Nations General Assembly. While the event featured a prominent Uyghur speaker, Trump did not mention Xinjiang or China in his speech.

Sept. 25

• When asked by reporters about the prospect of a Sino-U.S. trade deal during a bilateral meeting with Japanese prime minister Shinzo Abe, Trump said that China wants to “make a deal very badly” and “it could happen sooner than you think.”

Sept. 26

• PRC commerce ministry spokesman Gao Feng said at a regular press briefing that China had bought a “considerable” amount of U.S. pork and soybeans, and that tariffs on those orders would be exempted. Gao added that the U.S. and China are in “close communication” over high-level trade talks scheduled for October.
• Hong Kong chief executive Carrie Lam holds the first public dialogue since anti-extradition protests broke out in June. Two days earlier, Trump had said in his speech to the UN General Assembly that how China chooses to handle the Hong Kong situation will “say a great deal about its role in the world in the future.”
• U.S. National Drug Control Policy director Jim Carroll said that he believes that the PRC, “starting with President Xi down through the Minister of Public Security Zhao [Kezhi],” is “absolutely committed” to cracking down on fentanyl. President Trump had previously linked the PRC’s trafficking of fentanyl to the U.S. with the trade talks, and criticized Xi Jinping in August for not adhering to his promise on curbing the drug.
• White House Economic Advisor Larry Kudlow tells Fox Business Network that the PRC’s purchase of U.S. pork and soybeans ahead of the latest round of trade talks are encouraging. “I would say that mood music, if you will, is very positive going into the negotiations,” he said.

Sept. 28

• Bloomberg quotes a U.S. Treasury spokesperson as saying that the Trump administration is “not contemplating blocking Chinese companies from listing shares on U.S. stock exchanges at this time.”
• U.S. Secretary of State Mike Pompeo posts a picture of himself with Henry Kissinger on Twitter. “Honored to meet again with one of my most esteemed predecessors, Dr. Henry Kissinger. I’m always grateful for our conversations,” Pompeo wrote. The PRC has labeled Pompeo a “China hawk” and frequently criticizes him.

No deal
Sept. 23

• U.S. Deputy Assistant Attorney General Adam Hickey criticizes the PRC’s theft of trade secrets in an interview with CNBC. “It’s that part of their industrial policy, part of the way they try to accomplish that, is state-sponsored theft or creating an environment that rewards or turns a blind eye to it,” he said.

Sept. 24

• Trump criticizes the PRC on trade, intellectual property theft, and pernicious behavior at the UN General Assembly. He also said that he would not “accept a bad deal” with China.
• The U.S. leads over 30 countries in condemning the PRC’s “horrific campaign of repression” in Xinjiang on the sidelines of the UN General Assembly.

Sept. 25

• The Hong Kong Human Rights and Democracy Act of 2019 gets approved by both the U.S. House and Senate foreign affairs committees, and will be moved for a floor vote in mid-October.
• The U.S. Senate Committee on Foreign Relations passes the Taiwan Allies International Protection and Enhancement Initiative (TAIPEI) Act, which expresses U.S. support for Taiwan’s global diplomatic alliances.
• The U.S. Treasury Department imposes sanctions on five Chinese nationals and six entities for violating Washington’s sanctions on Iran.

Sept. 26

• Sandra Oudkirk, U.S. State Department deputy assistant secretary for Australia, New Zealand and the Pacific Islands, tells the U.S. House Foreign Affairs Committee that she would be traveling to Taipei in two weeks to consult with them on APEC-related issues. She said in her testimony: “We believe that China’s active campaign to alter the cross-strait status quo, including by enticing countries to discontinue their diplomatic ties with Taiwan, is harmful. This effort undermines regional stability, it undermines a framework that has been established for decades, and that has enabled peace, stability, and development across the Indo-Pacific.”

Sept. 27

• PRC foreign minister Wang Yi said at the United Nations that “tariffs and provocation of trade disputes, which upset global industrial and supply chains, serve to undermine the multilateral trade regime and global economic and trade order. They may even plunge the world into recession.”
• Reuters reports that the Trump administration is considering delisting Chinese companies from U.S. stock exchanges.

OUR TAKE
1. Conflicting Sino-U.S. trade war signals have caused frequent fluctuations in stock markets worldwide and raised the levels of global uncertainty. Many are wondering when the trade war will end and whether a trade deal will remove uncertainty in global markets and economies.

We believe that the signing of a trade agreement between the U.S. and China, even an interim one, will do little to remove global uncertainty. As we wrote in July, the Sino-U.S. conflict is “not just a trade war or a tech war, but a critical battle of ideology, value systems, and morality.” Businesses, investors, and governments are better served making plans that account for long-term “strategic competition” between the PRC and the United States instead of focusing on the outcome of a trade deal. Those who place too much emphasis on trade deal signals face increased risk levels and stand to lose out on hidden opportunities.

2. In our 2019 Special Report, we looked at why 2019 is a decisive year for both the U.S. and the CCP. As things stand, the CCP is benefiting from the present situation and will come out ahead if things move along the current trajectory. Meanwhile, the Trump administration is walking into the CCP’s trap by being insufficiently tough on the PRC, and key windows of opportunity are closing fast for America to get ahead in the Sino-U.S. showdown.

There are, however, three months left to 2019.

President Trump could yet realize that signing any sort of trade deal with China will not fundamentally resolve long-standing Sino-U.S. issues and decide that confrontation is the way to go. In the event of full-blown “strategic competition,” the U.S. can use novel solutions to mitigate the costs of a Sino-U.S. conflict, as well as foil the CCP’s plans and “Pearl Harbor” strategies (we wrote in June that the CCP could “find ways” to get “impeachment proceedings started against” Trump).

Meanwhile, the “you die, I live” factional struggle between the Xi camp and the Jiang faction in the Party’s elite ranks is a wildcard that could trigger a political Black Swan event and tremendous change in China. The delayed CCP Fourth Plenum and its agenda suggest that the Xi-Jiang struggle is escalating and that there is a very serious political crisis in the regime.

CCP elite politics is upstream of nearly all issues in China today, including economics. And factional struggles have a decisive impact on CCP elite politics. Businesses, investors, and governments must track the factional struggle and CCP elite politics to avoid being blindsided by Black Swans and instead seize the opportunity to benefit from rare, unexpected events.

SinoInsight 2
On Sept. 27, the PRC State Council published a white paper titled, “China and the World in the New Era.” Key points include:

• The white paper claims that under the CCP’s 70-year leadership, China has undergone “earth-shaking changes” and created an “unprecedented miracle in the history of mankind.”
• The white paper claims that China’s successful development is wholly attributed to CCP leadership. “China is huge in size, has complex national conditions, and its governance difficulties are rarely seen. Without a unified and strong leadership, China will move towards division and crumble, bringing disaster to the world,” the white paper said.
• The white paper claims that “the Chinese people do not have it in their genes to invade others or dominate the world.”
• The white paper claims that China’s development is an “opportunity” for the world, and not a threat or challenge.
• The white paper describes the Belt and Road Initiative, a CCP global expansion project, as “providing more public goods for the international community.”
• The white paper emphasizes the need for multilateralism and the need to maintain the current international order under the United Nations.
• The white paper stresses that China will never seek hegemony, carry out expansionism, and strive to grow its sphere of influence.
• The white paper promotes China’s “development experience” and the “community of shared future for mankind” (人類命運共同體).

OUR TAKE
1. The CCP regime is presently facing a “perfect storm” of problems, the most consequential being a political crisis born out of the Xi-Jiang factional struggle. When beset with crises, the CCP tends to double down on its propaganda to project an “all’s well” image.

The “China and the World in the New Era” white paper strengthens several popular CCP propaganda narratives, including:

“The CCP should not be challenged because it is the only and best hope for China”

• This narrative is clear from the white paper’s boast that the CCP’s leadership has led to an “unprecedented miracle in the history of mankind” and the claim that “without a unified and strong leadership, China will move towards division and crumble, bringing disaster to the world.”
• The narrative is part of a strategy to equate the CCP with China; once the distinction is blurred, the CCP can tap on nationalism and political correctness to defend against criticism of its pernicious behavior while claiming credit for the accomplishments of all ethnic Chinese people.
• Domestically, the narrative is aimed at reinforcing the notion that only the CCP can resolve China’s many crises while obscuring the fact that most of those crises were brought about by CCP rule. The narrative is also aimed at dissuading mainland Chinese from challenging CCP rule or face the alternative of “chaos” and “instability.”
• Externally, the narrative serves as a “caution” to other countries not to attempt or support regime change in China lest it brings “disaster to the world.”

“China does not seek global hegemony and is a protector of the current world order”

• This narrative is seen from the white paper’s references to the Belt and Road Initiative, hegemony, multilateralism, support of the UN, and the line “the Chinese people do not have it in their genes to invade others or dominate the world.”
• We earlier elaborated on the CCP’s “survival-dominance dynamic” and why the CCP ultimately seeks world domination. Also, the CCP has a vested interest in preserving the current world order because it has successfully hijacked said world order.
• The narrative is designed to counter the Trump administration’s effort in recent years to raise awareness about the CCP expansionism and global threat.

“Community of shared future for mankind”

• This slogan is a watered-down version of Karl Marx’s infamous call, “Workers of the world, unite!” According to Marx, communism is the final stage of mankind’s socio-economic development. The CCP’s vision of a “shared future for mankind” must be viewed from its ideological vantage point.

2. We believe that the Sino-U.S. trade war has already effectively debunked many of the CCP’s propaganda narratives. This debunking is particularly threatening for the CCP in light of the accelerated worsening of the Chinese economy this year.

According to official Chinese figures, China’s fiscal deficit from January to August 2019 reached a high of 1.6 trillion yuan, an increase of 105.1 percent over the same period in 2018. Revenue from taxation grew by only 0.1 percent over the January-August period, while non-tax revenue soared by 27.3 percent. The drastic reduction in tax revenue collection points towards a mass wave of business closures in China. The business closures are partly the result of the trade war, and partly the outcome of local governments imposing administrative costs and fines on businesses to earn more revenue (evidenced by the soaring non-tax revenue).

China’s national budgetary revenue and expenditure of government-managed funds showed a deficit of 675.8 billion yuan during the January-August 2019 period. This is compared to a surplus of 259.9 billion yuan in 2017 and a surplus of 290.8 billion yuan in 2018. Meanwhile, the growth of local government land sales revenue plummeted in 2019 (4.2 percent) as compared to 2017 (37.3 percent) and 2018 (36.4 percent). This suggests that the real estate industry, a pillar of China’s economic growth, has reached an inflection point.

As the PRC government’s finances continue to dwindle, the CCP regime is at high risk of a debt crisis, a property bubble crisis, and a systemic financial crisis. Financial and economic crises will in turn lead to social unrest and raise the cost required for security forces to carry out “stability maintenance,” which increases the regime’s financial burden. This vicious cycle, once it emerges, will erode the CCP’s political legitimacy and pose a severe challenge for its regime.