SinoInsight 1
June 22
- U.S. Secretary of State Mike Pompeo said in an interview on Fox’s The Sean Hannity Show that after meeting with Politburo member Yang Jiechi in Hawaii “trying to understand why on Earth the Chinese Communist Party is engaged in the activities that they are,” he realized that “it’s ideological for them, whether that’s what’s taking place between China and India today.” Pompeo also said that U.S. President Donald Trump “who understands that the Chinese Communist Party and globalists here in the United States have worked together to put real harm and real risk here to the United States” and that Trump is “not going to permit that to continue to happen.”
- When asked about the Sino-U.S. “phase one” trade deal on Fox News, White House trade advisor Peter Navarro said, “it’s over” and noted that the coronavirus outbreak was a “turning point.”
June 23
- Peter Navarro rescinded his statement about the trade deal on Fox News, saying that his words were taken “wildly out of context.” In a statement, Navarro said that his remarks had nothing to do with the trade agreement, and that he was “simply speaking to the lack of trust we now have of the Chinese Communist Party after they lied about the origins of the China virus and foisted a pandemic upon the world.”
- U.S. Treasury Secretary Steven Mnuchin said at a virtual event sponsored by Bloomberg and Invesco: “If we can compete with China on a fair and level playing field, it is a great opportunity for U.S. businesses and U.S. workers, as China has a large, growing middle class. But if we can’t participate and compete on a fair basis, then you are going to see a decoupling going forward.”
June 24
- In addressing a group of business executives at the Arizona Commerce Authority, White House National Security Advisor Robert O’Brien delivered a speech that was critical of the CCP and its behavior. According to various news reports, O’Brien said that “the Chinese Communist Party is Marxist-Leninist” and “Party General Secretary Xi Jinping sees himself as Josef Stalin’s successor.” O’Brien also drew a distinction between the CCP and the Chinese people: “We have deep respect and admiration for the Chinese people. The United States has a long history of friendship with the Chinese nation. But the Chinese Communist Party does not equal China or her people.”
- According to various news outlets, National Security Advisor Robert O’Brien’s remarks are the first in a series of speeches on China by senior Trump administration officials that will be delivered during the next few weeks. Secretary Pompeo, U.S. Attorney General William Barr and FBI Director Christopher Wray are set to speak.
- Secretary Pompeo issued a statement titled, “The Tide is Turning Toward Trusted 5G Vendors” where he noted that several countries in Europe and large telecommunications companies in the United Kingdom, France, South Korea, Australia, and India are opting to use Ericsson, Nokia, and Samsung over Huawei. While not mentioned by Pompeo, telecom operators in Singapore also announced that they had chosen Ericsson and Nokia as their main 5G network provider.
- In an interview with Fox News, FBI Director Wray said there was a roughly 1,300 percent increase in espionage cases with links to the PRC over the past decade and that the FBI has over 2,000 active investigations tracing back to the PRC government. Wray said that the CCP has an interest in shifting U.S. politics to a “more friendly pro-China, pro-Chinese Communist Party direction” and it sometimes gets “wrapped up in election issues.” Wray added that “this is not about the Chinese people or Chinese Americans,” but “the Chinese government and the Chinese Communist Party.”
- According to several Western news outlets, the Pentagon compiled a list of 20 Chinese companies with ties to the People’s Liberation Army, including Huawei, China Telecom, China Mobile, and Aviation Industry Corporation of China.
June 25
- In delivering remarks at a meeting of the German Marshall Fund’s Brussels Forum, Secretary Pompeo said that “it is tempting for many, particularly in our business communities who make money in China, to say we must calm tensions and simply accept an increasingly belligerent CCP. That’s nonsense … There is no compromise between freedom and authoritarianism.” Pompeo also said that the U.S. has accepted the European Union’s offer to create a U.S.-EU dialogue on China that would serve as a “catalyst for action.” When asked about the Hawaii meeting during the Q&A session, Pompeo said that it was made clear that the “world is now confronting the CCP,” not just the United States.
OUR TAKE
1. The remarks by senior Trump administration officials this week provide further confirmation that the U.S. and the PRC are waging a “new cold war” in earnest.
The Trump administration is now openly engaging the CCP in an ideological battle, something that the CCP deeply fears because it concerns the Party’s political legitimacy. We observed an ideological turn in U.S. policy on China as early as August 2018 and that the U.S. and the PRC were already in a “new cold war” in our 2019 Special Report. We also predicted in July 2019 that the Sino-U.S. conflict will be a “critical battle of ideology, value systems, and morality.”
The Trump administration also appears to be preparing the U.S. business community for the vicissitudes of the “new cold war.” It is noteworthy that the first in a series of speeches by a senior Trump administration official addressing the threat of the CCP regime was delivered to business executives. Treasury Secretary Steven Mnuchin’s remarks about decoupling were made at a virtual event sponsored by Bloomberg and Invesco. Meanwhile, Secretary Pompeo has signaled clearly to businesses that they should not take the CCP’s side as the U.S. ramps up efforts to tackle the “China challenge.”
2. Secretary Pompeo’s June 25 remarks affirm our analysis of the Pompeo-Yang meeting in Hawaii. As we wrote previously, “Sino-U.S. tensions and geopolitical risks will spiral up” after the Hawaii meeting.
Pompeo’s comment that the “world is now confronting the CCP,” the EU’s request for a U.S.-EU dialogue on China, and the fact that countries are opting not to use Huawei 5G equipment for their networks puts one of the trends that we identified in our China 2020 outlook on track for verification. We wrote that “American leadership, pressure, and influence will give rise to a global ‘anti-CCP bloc.’ U.S. foreign policy could create a new international order and world economic system.”
3. Businesses, investors, and governments should recognize that the Sino-U.S. “new cold war” is escalating rapidly and the window of opportunity to act on mitigating geopolitical risks (shift supply chains, etc.) is shrinking fast. We estimate that the Trump administration could start moving from words to actions against the PRC within the next three months. Tough U.S. actions against the CCP, especially if a second wave of deadly infectious diseases hits China, could lead to a “Berlin Wall” moment for the CCP regime as early as this year.
Businesses, investors, and governments must make preparations for tremendous change in China and find solutions to turn liabilities into opportunities.
SinoInsight 2
On June 22, the PRC State Council General Office issued guidelines calling on export companies to sell their products on the domestic market. The guidelines noted that the PRC government will provide support for export companies to facilitate domestic sales. Local governments and government departments are required to attach great importance to the matter.
Key points in the guidelines include:
- The PRC government will simplify the certification process for the labeling of export products as domestic products. Tax procedures will also be simplified.
- The PRC government will provide “multi-channel support” for domestic sales.
- Financial institutions are encouraged to “improve supply chain financing services and strengthen operational credit support” for export firms.
OUR TAKE
1. The State Council guidelines on getting export companies to sell to the domestic market reflects a steep decline in foreign demand for Chinese goods, a development that is closely linked with the coronavirus pandemic. By urging export firms to sell in mainland China, the CCP is hoping to prevent a collapse of industrial chains and a further weakening of China’s competitive advantage in manufacturing.
The CCP’s plan, however, will more likely than not backfire. Chinese residents have reduced spending power due to the economic downturn in recent years and the pandemic, and home mortgages comprise the bulk of household debt. Also, export companies will have to compete with domestic firms, and in doing so, negatively impact domestic markets.
2. Official PRC data shows that the domestic market will not be able to absorb much of the external goods that will be shifted.
Consumption has risen in China in recent weeks, but the PRC is far from recovering from the effects of the coronavirus pandemic. According to data from the PRC’s National Bureau of Statistics, retail sales in May totaled 3.1973 trillion yuan, a 2.8 percent decrease (3.7 percent decrease after accounting for price factors) from the previous year. From January to May, retail sales fell 13.5 percent over the same period last year to 13.873 trillion yuan.
Exports have also been falling. According to PRC customs data, China’s export volume for the whole of 2019 was 17.2 trillion yuan, or $2.5 trillion. From January to May 2020, China’s export volume was 6.2 trillion yuan (down 4.7 percent from a year ago), or $885 billion (down 7.7 percent year-on-year).
The domestic market will find it difficult to “absorb” shifted export volume when Chinese people have decreased spending power. For instance, the domestic market could see an additional 1.7 trillion yuan worth of goods if only 10 percent (a conservative estimate given the pandemic conditions) of the export volume for 2019 is relabeled for local consumption. Export companies will likely struggle to sell the 1.7 trillion yuan worth of products locally if domestic retail sales drop by a corresponding 10 percent (about 4.1 trillion yuan by 2019 retail sales figures).
Chinese spending power is even more questionable when certain data points are considered. NBS figures show that from January to May 20202, passenger traffic fell 56.9 percent from a year while freight traffic fell 10.4 percent. This shows that economic activity in China still has quite a bit of recovering to do. Less economic activity means higher unemployment figures, rendering the Chinese people unlikely to possess, nevermind spend any spare cash on typically pricier export goods.
Lastly, PRC premier Li Keqiang recently observed that 600 million people in China (or 76.9 percent of China’s working population) earn a monthly income of less than 1,000 yuan. When over two-thirds of China’s population do not make enough to pay rent in a mid-sized Chinese city, it is highly doubtful that the CCP will be able to resolve its export problem by selling to the domestic market.
3. The CCP is currently facing a “perfect storm” of problems, the three most pressing of which are a deteriorating economy, the coronavirus pandemic, and increasingly confrontational Sino-U.S. relations. A worsening of any of the aforementioned problems, especially the outbreak of a second wave of infectious diseases, could result in Black Swan events in China.
