SinoInsight 1
On June 17, U.S. Secretary of State Mike Pompeo and CCP Politburo member Yang Jiechi met in Hawaii to discuss a range of issues. According to news reports, they met for seven hours and discussed the Sino-U.S. relationship, the coronavirus pandemic, Hong Kong, Taiwan, and Xinjiang. The PRC side reportedly requested the meeting.
PRC foreign ministry spokesperson Zhao Lijian said in a statement that Yang urged Pompeo to have the U.S. work with China to bring “bilateral relations back to the track of coordination, cooperation and stability.”
State Department spokesperson Morgan Ortagus said in a statement that Pompeo “stressed important American interests and the need for fully-reciprocal dealings between the two nations across commercial, security, and diplomatic interactions.” Pompeo also called for “full transparency and information sharing” from the PRC to combat the COVID-19 pandemic and prevent future outbreaks.
In a tweet on June 18, Secretary Pompeo tweeted that Yang Jiechi “recommitted to completing and honoring all of the obligations of Phase 1 of the trade deal” during their meeting.
Also on June 18, PRC state media reported that a draft of a national security legislation for Hong Kong had been submitted to the Standing Committee of the National People’s Congress. The NPC Standing Committee is due to hold a three-day meeting from June 18 to June 20.
OUR TAKE
1. The Pompeo-Yang meeting was billed by observers and the media as a session for the U.S. and the PRC to touch bases, keep diplomatic channels open, and even lower bilateral tensions. In examining open source information, we believe that the meeting allowed both sides to sound out each other and better understand each other’s intentions and, at least for the PRC side at the time of writing, to take action that will lead to increased friction in the Sino-U.S. “new cold war.”
2. We believe that the CCP called the meeting to clarify and discern the Trump administration’s attitude towards China in light of the administration’s recent hawkish moves against the PRC. In particular, the CCP would be very keen to confirm the Trump administration’s position on Hong Kong, Taiwan, human rights (religious freedom), investigations into the origins of the coronavirus, the technology war (Huawei), and the “phase one” trade deal.
The submission of the draft of the Hong Kong national security law to the NPC Standing Committee a day after the Pompeo-Yang meeting indicates that the CCP likely ascertained what we have been saying for some time—the Trump administration is serious about dealing with the CCP threat and waging a “new cold war.” We will examine the geopolitical developments leading up to the Pompeo-Yang meeting (India-China clash, North Korea-South Korea friction, military maneuvers in the Taiwan Strait, etc.) and how both sides could act going forward in a forthcoming article.
3. Some observers say that the submission of the draft Hong Kong national security law is a sign that the U.S. reached a “compromise” with the CCP and is prepared to “sell-out” Hong Kong. A perusal of CCP statements, however, reveals the exact opposite had transpired.
Had the U.S. “sold-out” Hong Kong, the official PRC statement on the Pompeo-Yang meeting would note that the U.S. “supports one country, two systems” and the PRC’s “counterterrorism and security” actions in Hong Kong. However, the official PRC statement has Yang defending the “establishment of a legal system and enforcement mechanisms” in Hong Kong as “purely China’s internal affair” and calling on the U.S. to “stop meddling in Hong Kong’s internal affairs in any form.” Yang’s remarks indicate that Pompeo had pushed him and the PRC hard on Hong Kong.
The submission of the draft Hong Kong law to the NPC indicates that the CCP, having decided that the Trump administration is for real on confronting the PRC, is advancing its plans to “deny” the U.S. and its allies the opportunity to turn Hong Kong into an anti-CCP base. We maintain that the CCP will still prefer not to pass the Hong Kong law if possible and will ramp up efforts to pressure Hong Kong into enacting Article 23 as a “lesser of two evils.”
SinoInsight 2
On June 17, The Wall Street Journal published an excerpt from former U.S. National Security Advisor John Bolton’s book about his time in the Trump administration. Bolton criticized Trump for supposedly “pleading” with Xi Jinping for help in domestic politics, subordinating national security issues to his re-election prospects, disregarding U.S. commitments and obligations to Taiwan, and not pressing the PRC on human rights. “The Trump presidency is not grounded in philosophy, grand strategy or policy. It is grounded in Trump,” Bolton wrote.
Among Bolton’s many claims, his most controversial was that Trump told Xi during their meeting in Osaka in June 2019 that he should “go ahead” with constructing concentration camps in Xinjiang. When asked to comment on what Bolton claimed Trump had said during a congressional hearing, U.S. Trade Representative Robert Lighthizer said, “Absolutely untrue. Never happened. I was there.”
OUR TAKE
1. John Bolton’s claims about President Trump and his China policy do not bear much semblance to what has been unfolding since the Trump administration released the 2017 National Security Strategy. The U.S. has very visibly and progressively toughened its stance on the PRC across the board, including ending the previous policy of “engagement,” imposing tariffs on Chinese products, exposing CCP influence and interference operations domestically and abroad, taking action to curb intellectual property theft and espionage, rebuilding the U.S. military to deal with the People’s Liberation Army and to fight in the Indo-Pacific region, strengthening ties with Taiwan to a degree not seen in decades, and confronting the CCP on “sensitive” human rights issues like the persecution of Falun Gong (see here) and Uyghur Muslims (Trump signed the Uyghur Human Rights Act, which allows the U.S. to sanction individual PRC officials for human rights abuses, on June 18). On June 18, Trump tweeted that the U.S. “certainly does maintain a policy option, under various conditions” to carry out “a complete decoupling from China.” In considering the totality of what the Trump administration has done to confront the PRC and curb its influence at home and abroad in the past three years, it is impossible to conclude that Trump has no China strategy or is perfunctorily doing things merely to secure re-election.
The Trump administration’s actions to confront the CCP over human rights, while inconspicuous, is crucial. The administration has been promoting international religious freedom for the past two years and has now made it a top priority (see here and here). By pushing the CCP on religious freedom and topics once considered “taboo,” the Trump administration’s pressure engenders dire implications for the factional struggle in the CCP elite (see here and here).
2. Given the Trump administration’s decision in 2017 to embark on strategic competition with the CCP, it makes sense for Trump to “be nice” to Xi Jinping, until the U.S. is ready for a great power contest. We previously explained why Trump treats Xi and the CCP differently from the perspective of the CCP factional struggle. Trump also has both domestic and geopolitical reasons to not “get tough” on Xi too quickly. For one, the United States is a democracy, and the Trump administration needed time to educate the public on the CCP threat and bring Americans to a consensus on the China issue. The Trump administration also needed time to prepare the U.S. materially for a “new cold war” with the PRC and “decouple” from China to a point where the U.S. economy will not be too badly hurt by confrontation with the CCP. Put another way, Trump’s attitude towards Xi Jinping is determined by his need to balance costs and benefits.
The Trump administration’s calculations for gradual escalation, however, have been scuttled by the coronavirus pandemic. The pandemic simultaneously exposed the CCP’s perniciousness in all areas and negated somewhat the need to prepare the U.S. for confrontation with the PRC. Going forward, President Trump has less reason to be overly courteous with Xi Jinping and the CCP.
3. John Bolton’s “revelations” have provided fodder for Trump’s critics, domestic political opponents, and even the CCP to mount pressure campaigns against him. The various pressure campaigns will likely serve as catalysts to make Trump want to get even tougher on the PRC, not less. We believe that Trump could next move to challenge the CCP more strongly on human rights, values, and ideology.
SinoInsight 3
On June 17, the PRC State Council held an executive meeting to discuss policies to allow the CCP to fulfill its “six guarantees” promise. The meeting decided that the financial industry will need to sacrifice 1.5 trillion yuan ($211 billion) in profit this year (or almost two-thirds of the industry’s total profits in 2019) to help the economy. The financial industry is required to cut fees, offer lower lending rates, defer loan repayments and grant more unsecured loans to small businesses. According to a Bloomberg News report, PRC regulators are asking banks to keep profit growth below 10 percent in 2020.
On June 18, the People’s Bank of China lowered the 14-day reverse repo rate by 20 basis points to 2.35 percent.
OUR TAKE
1. The CCP’s effort to get the financial industry to practice some “altruism” in giving up profits to help the Chinese economy is destined to fail given corruption, extreme self-interest, and moral degeneracy in the CCP regime. The privileged class will continue to find and exploit loopholes in the new financial policy to make money while the less privileged and small businesses will still struggle to make ends meet. If the CCP adopts a “one size fits all” approach to bolster the economy, it could end up instead compounding financial risks for small- and medium-sized banks and triggering a systemic financial crisis.
2. In the PRC government’s ideal scenario, getting the financial industry to sacrifice profits will allow businesses to survive, mitigate unemployment, and develop the real economy. This in turn allows the PRC government to generate revenue to finance basic government operations and preserve the regime amid a steep economic slowdown due to the coronavirus pandemic and long-term systemic problems.
The CCP, however, has not been successful at developing the real economy despite the introduction of several policies to achieve that outcome in recent years, including various stimulus measures, issuing consumer vouchers, and introducing lower loan rates for small and medium enterprises. Instead, the financial industry and businesses have exploited these policies to channel funds into the property market, push up housing prices, and grow the property bubble.
3. The CCP’s profit sacrificing requirement for the financial industry will not do much to help the economy if it cannot resolve existing problems, such as financial institutions and enterprises taking advantage of the central bank’s stimulus policy to profit from arbitrage.
Presently, some Chinese companies are borrowing money at low rates not to grow their operations, but to purchase wealth management products, structured deposits, securities, or property to profit from arbitrage. Meanwhile, small- and medium-sized banks have been continually increasing interest rates on structured deposits (from 4 percent at the beginning of the year to 5 percent in mid-April), a move that incentivizes companies to make money through financial arbitrage instead of developing the real economy.
In China, structured deposits have been abused by investors and companies in recent years to make a quick buck in the context of the CCP’s ever tightening financial supervision and an economic downturn. By the end of April 2020, Chinese banks had issued a record 12.14 trillion yuan worth of structured deposits. The CCP appears to have moved to curb arbitrage involving structured deposits, resulting in a month-on-month decrease of total structured deposits by 300.9 billion yuan and a 206.5 billion yuan decrease of work unit structured deposits at the end of May 2020.
Curbing financial arbitrage, however, is not nearly enough to ensure the success of the CCP’s profit sacrificing policy. Financial institutions will still be reluctant to lend to SMEs due to the fallout of the coronavirus (rising unemployment, reduced overseas orders, etc.) and a weak real economy. On top of that, local governments are prone to devise measures, both legal and fraudulent, to superficially meet the policy requirements of the central government.
4. China’s commercial banks recorded a net profit of 2 trillion yuan and 600 billion yuan in 2019 and the first quarter of 2020 respectively. On paper at least, the financial industry can tolerate giving up 1.5 trillion yuan in profits to help enterprises, especially because thriving and prosperous enterprises are more likely to become loyal customers. Put another way, China’s financial industry would be sacrificing short-term profits for long-term financial stability and reduced principal losses.
In reality, however, the bulk of the financial industry’s profits are made by the six major state-owned banks. In 2019, the six major state-owned banks made 1.14 trillion yuan, or 57 percent of the overall profit. Meanwhile, many of the small- and medium-sized banks are operating on the margins. Should the CCP insist on a “one size fits all” approach to profit sacrificing (a distinct possibility given the preference of PRC officials to “prefer left rather than right”), it will not only fail to resolve the arbitrage problem resulting from financial institutions exploiting government policy, but will end up triggering systemic financial risks.
