SinoInsight 1
May 18
- Mainland news outlets reported that U.S. semiconductor company GlobalFoundries was shutting down its Chengdu factory and pulling out of China. News of GlobalFoundries followed Taiwan Semiconductor Manufacturing Company’s (TSMC) May 15 announcement that it was investing $12 billion in the United States to build a semiconductor plant in Arizona. TSMC and GlobalFoundries are ranked first and third respectively in the Global Semiconductor Foundry Market Report 2020. Meanwhile, U.S. chipmaker Intel is in talks with the U.S. Department of Defense to build a commercial foundry in partnership with the Pentagon to “supply a broad range of microelectronics” to meet federal government security and infrastructure requirements, according to a report in The Wall Street Journal.
May 19
- Luckin Coffee Inc announced that it had been notified by Nasdaq on May 15 that the latter plans to delist it from the U.S. stock exchange. Luckin Coffee said in its announcement that it plans to challenge the move before Nasdaq’s hearing panel and will remain listed until the panel delivers an outcome. Luckin Coffee was listed on Nasdaq 18 months after it was founded on May 18, 2019, a listing record according to mainland media.
May 20
- The White House issued a document titled “United States Strategic Approach to The People’s Republic of China.”
- The U.S. Senate unanimously passed the Holding Foreign Companies Accountable Act, a legislation that could force Chinese companies to give up their listings on American stock exchanges and require an auditing process that would make it much harder for Chinese companies to get listed.
- U.S. Secretary of State Mike Pompeo said in a press briefing that “China’s been ruled by a brutal, authoritarian regime, a communist regime since 1949 … For several decades, we thought the regime would become more like us through trade, scientific exchanges, diplomatic outreach, letting them in the WTO as a developing nation. That didn’t happen. We greatly underestimated the degree to which Beijing is ideologically and politically hostile to free nations. The whole world is waking up to that fact.” Since early May, there have been an increasing number of commentaries by prominent Western figures cautioning the U.S. against waging a “cold war” with China. Some Western figures and media outlets have also attacked Secretary Pompeo and his China moves using language and logic not too dissimilar from those being thrown up by PRC propaganda outlets.
- U.S. President Donald Trump tweeted that the CCP’s “disinformation and propaganda attack on the United States and Europe is a disgrace” and those attacks “come from the top.”
May 21
- Senior Republican Senator Chuck Grassley tweeted, “We heard from the third highest person in Chinese embassy that they didn’t like my congratulating Taiwan’s democratically elected leaders + my recent comments being hard on China. So what!?”
OUR TAKE
1. President Trump’s May 20 tweet and Secretary Pompeo’s May 20 remarks on the CCP suggest that the Trump administration has lost patience with the CCP regime. In particular, the CCP’s cover-up of the coronavirus outbreak and subsequent disinformation campaign have demonstrated clearly that the CCP will not behave like a civilized nation during a crisis and hence cannot be dealt with as one. The Sino-U.S. rivalry could see a steep escalation in the near future.
2. Secretary Pompeo’s May 20 remarks on the CCP are consistent with his landmark “China Challenge” speech on Oct. 30, 2019. We warned back then that “the Trump administration’s overall China strategy and political crisis in the CCP will doom any rapprochement attempt [by the CCP] and escalate the Sino-U.S. rivalry.” Additionally, we have been warning about serious Sino-U.S. confrontation since early 2018. We explain and forecast the direction of Sino-U.S. relations in our 2019 and 2020 Special Reports.
In July 2019, we noted that the “current Sino-U.S. conflict is not just a trade war or a tech war, but a critical battle of ideology, value systems, and morality.” The window of opportunity is closing fast for businesses, investors, and governments to mitigate their political and geopolitical risks and uncover hidden opportunities as U.S.-China competition heats up.
3. Despite what mainstream media outlets and experts are saying, it is the CCP, and not the U.S., that is responsible for the recent sharp escalation of Sino-U.S. tensions. Until the outbreak of the coronavirus, the Trump administration had been relatively restrained in confronting the CCP regime likely due to economic reasons (deep economic integration between both countries, a strong U.S. economy, etc.) and promising bilateral trade negotiations.
The CCP’s cover-up of the coronavirus epidemic in China, however, led to a deadly pandemic and wrecked the U.S. and the global economy. In his May 20 remarks, Secretary Pompeo said that the pandemic cost the world an estimated $9 trillion and 300,000 lives. Put another way, the CCP essentially upended the main factor (economics) that had been preventing the U.S. from waging a full-blown “cold war” against China. The upcoming U.S. presidential election, domestic political pressures, and the withdrawal of supply chains from mainland China give President Trump additional incentive to get tougher on China without being overly concerned about economic consequences.
4. As Sino-U.S. relations continue to worsen, it is likely that the Trump administration will step up calls for an international investigation into the origins of the coronavirus and even sanction the PRC in a bid to force through an investigation. The Trump administration and U.S. lawmakers could even play the human rights card with increased frequency and threaten to hold the CCP accountable over topics that were once considered “sensitive” or “taboo.” Meanwhile, the Trump administration will likely strengthen its support for Taiwan. All of the aforementioned moves by the U.S. will lead to an intensification of the CCP factional struggle and could lead to political Black Swans emerging in China in the second half of 2020.
SinoInsight 2
On May 18, the CCP Central Committee and PRC State Council issued a document on “accelerating the improvement of the socialist market economic system in the new era.”
Key points in the document include:
1. Persevere with “socialism with Chinese characteristics and public ownership.”
2. Cut back on direct government intervention in the markets.
3. Step up the degree of structural reforms.
4. Further open China’s economy to the world.
5. Expand and strengthen state-owned capital in important sectors and advance “mixed-ownership” reform.
6. Gradually liberalize monopolized industries.
7. Support small- and medium-sized enterprises and financial institutions.
8. Extend for another 30 years a policy on a second round of agricultural land contracts.
9. Promote so-called “shareholding-dization” (產股份化) of rural collective assets.
10. Promote the transfer of rural land (including covert land deals).
11. Implement a market access “negative list.”
12. Lift household registration restrictions for cities (with the exception of megacities).
13. Promote a stock issuance registration system and explore the creation of a management system for corporate credit bond issuance.
14. Reduce the scope of land levies.
15. Promote “Internet + Circulation” (互联网+流通) to reduce logistics costs.
16. Implement policies to boost employment.
17. Balance fiscal and financial responsibilities and rights between the central government and local governments.
18. Clean up and regulate local government financing platforms, including removing local government functions from those platforms.
19. Advance legislation for a property tax.
20. Strengthen monetary policy and avoid triggering of systemic financial risks.
21. Advance the internationalization of the renminbi.
22. The country will prioritize investing in basic research and the development of core technologies.
23. Advance “industrial layout optimization” in major industrial regions.
24. Streamline administrative licensing matters.
25. Establish a country-wide credit reporting system and groom Chinese credit reporting and rating agencies into global entities.
26. Raise workers’ wages and set up a mechanism to review the minimum wage standard.
27. Improve the social security system.
28. Improve the national public health emergency management system.
29. Promote the “Belt and Road Initiative.”
30. Hasten the opening up of China’s western and coastal regions.
31. Accelerate the development of free trade pilot zones and free trade ports.
32. Reduce trade tariffs, as well as remove trade restrictions outside the “negative list.”
33. Introduce personal and financial institution bankruptcy laws.
34. Minimize unnecessary administrative matters and improve on the mechanism to correct miscarriages of justice.
35. Restrict the authority of the government and refine the process of auditing public funds, state-owned assets and resources, and the economic responsibilities of leading cadres.
36. Persevere in upholding the Party’s leadership and supervision.
37. Establish reform incentives and “fault tolerance” mechanisms.
OUR TAKE
1. The May 18 economic reform document is comparable to the economic reform plan rolled out at the Third Plenum of the 18th Central Committee in 2013. The document is also a product of the CCP’s “survival-dominance” dynamic. The CCP, however, will unlikely be able to accomplish the reforms stated in the document.
On the domestic front, Xi Jinping has to balance economic liberalization with tightening the regime’s control over society as he copes with the intensifying CCP factional struggle. With the factional struggle mentality moving from “you die, I live” into “perish together” territory, Xi will inevitably have to prioritize regime control over economic liberalization. Given the circumstances, there is a very low chance that Xi will be able to actualize most of the proposals in the economic reform document, just like how he was unable to actualize the reforms proposed at the Third Plenum of the 18th Central Committee.
Meanwhile, U.S. policy on China has clearly shifted since 2013, especially under the Trump administration. Recently, the Trump administration even signaled that it no longer has any illusions about the nature of the CCP regime or any remaining hope left that the regime will change (see SinoInsight 1). The U.S. and its allies will unlikely take the CCP’s word that it will reform and will instead continue to ramp up pressure on the CCP regime across the board. External pressure will in turn make it even more impossible for the CCP to carry out domestic reforms.
2. Businesses, investors, and governments should be very skeptical of the CCP’s latest economic liberalization plan and guard against political and geopolitical risks stemming from the Sino-U.S. “cold war.”
SinoInsight 3
In the evening of May 21 (Hong Kong time), PRC state media unveiled nine items that would be discussed during the National People’s Congress meetings during the Two Sessions. Item five on the agenda referenced a draft legislation for a new national security law for Hong Kong. The Wall Street Journal reported that the PRC foreign ministry had made phone calls to foreign embassies in Beijing and sent letters to ambassadors to explain Beijing’s rationale for introducing the Hong Kong legislation.
According to Hong Kong media reports that were published in the afternoon of May 21 (Hong Kong time), the NPC’s Hong Kong national security law was drafted in accordance with the PRC constitution, national security legislation, and selected articles in the Hong Kong Basic Law (not including Article 23). The NPC’s Hong Kong national security law could include specific provisions targeting so-called “splitting the country, subverting the PRC government, foreign intervention, and terrorism.” The Hong Kong stock market and currency declined that afternoon after the news broke, and there was a strong sense of unease on the ground.
U.S. President Donald Trump was asked by reporters about the NPC’s Hong Kong national security law in the afternoon of May 21 (U.S. time). Trump replied, “I don’t know what it is because nobody knows yet. If it happens, we’ll address that issue very strongly.”
OUR TAKE
1. Article 18 of Hong Kong’s Basic Law states that PRC laws “shall not be applied in the Hong Kong Special Administrative Region except for those listed in Annex III to this Law.” Currently, the PRC laws listed in Annex III of the Basic Law are concerned with issues of sovereignty and diplomacy. Under the “One Country, Two Systems” model, the PRC can only pass laws that deal with Hong Kong’s defense and diplomatic affairs; Hong Kong’s internal affairs are governed by its Basic Law.
Given the conditions above, the NPC’s Hong Kong national security law will likely turn out to be a legislation that is more “conceptual” than “operational” in function. However, the legislation could lead to some very concrete real-world outcomes.
2. The CCP is very likely hoping that the passage of the NPC’s Hong Kong national security law will spur the Hong Kong government and pro-Beijing legislators to ram through Article 23 of the Basic Law. We previously analyzed that the CCP likely does not have confidence that Hong Kong’s pro-establishment camp (who are pro-Beijing) will necessarily retain its majority in Hong Kong’s Legislative Council (LegCo) after LegCo elections are held this September. In the event that the pro-establishment lawmakers fail to pass Article 23 before the elections and are voted out, the CCP will at least still have the NPC’s Hong Kong national security law in place.
The CCP is also likely betting that the Hong Kong people will be so demoralized by the passage of the NPC’s Hong Kong national security law that they do not put up strong resistance to the passage of Article 23. (What the CCP wants is one thing; the anti-extradition bill protests in 2019 indicate that the Hong Kong people will resist the CCP and Article 23 to the bitter end.)
Further, the CCP is almost certainly making an effort with the NPC’s Hong Kong national security law to demonstrate to the world that it is doing things “by the book” with Hong Kong and that it is not “forcing” Hong Kong into passing Article 23. Put another way, the CCP is preempting global denunciations should Hong Kong pass Article 23, and is laying the groundwork now to ensure that the U.S. and the world at least cannot accuse the CCP of doing things illegally or without proper justification. (The U.S. could still find other reasons to use the Hong Kong Act should Article 23 be enacted in Hong Kong, but the CCP cannot be faulted on legal or sovereign grounds with the NPC’s Hong Kong national security law.)
Finally, the CCP is looking to gauge how the U.S. and the world react to the NPC’s Hong Kong national security law so that it can know what to expect and how to respond to efforts to implement Article 23 in Hong Kong.
3. Some observers may believe that it is counterintuitive for the CCP to pass the NPC’s Hong Kong national security law now when global anti-CCP sentiment is at an all-time high. The CCP, however, is passing national security legislation on Hong Kong at this time precisely because global sentiment is turning against its regime and regime security is being seriously imperiled. From the CCP’s perspective, it has to rein in Hong Kong (lest it turns into an anti-communist base) if it is to survive and dominate the “new cold war” with the United States.
4. The fact that the CCP is rolling out a Hong Kong national security law before Hong Kong enacts its own is a sign that the CCP is keenly cognizant of impending regime collapse.
