SinoInsight 1
July 22
- The U.S. Navy held parallel exercises in the Indian Ocean and the Philippine Sea with “Quad” nations (U.S., Japan, India and Australia).
July 23
- According to The Epoch Times, Assistant Secretary of State Robert Destro and U.S. ambassador at large for international religious freedom Sam Brownback expressed concerns about the CCP’s practice of forced organ harvesting of Falun Gong adherents in a recent telephone meeting with five Falun Gong representatives.
July 27
- Bridgewater Associates founder Ray Dalio said on Fox News that the U.S. and the PRC are in an “ideological civil war” and that the U.S. economy would decline if both countries did not cooperate. “We are in conflict with China. You can call it a war. There’s a trade war, there’s a technology war, there is a geopolitical war and there could be a capital war,” he said.
- According to news reports, Australian rare-earth miner Lynas will receive funding from the U.S. Defense Department to build a processing plant in Texas. The plant is expected to be the first of its kind outside China.
July 28
- The U.S. and Australia held ministerial-level consultations (AUSMIN) in Washington. Key topics discussed include the People’s Republic of China’s recent actions, including on Hong Kong, Taiwan, the coronavirus pandemic, cyberspace, and the South China Sea. News reports say both countries agreed at the consultations to a top-secret defense cooperation agreement to counter CCP aggression.
- Eastman Kodak Co. won a $765 million government loan under the Defense Production Act to produce ingredients for generic drugs. Kodak CEO Jim Continenza said that he expects pharmaceutical ingredients to comprise 30 percent to 40 percent of Kodak’s business over a period.
July 29
- Lieutenant General Kevin Schneider, commander of the U.S. Forces Japan, said during a press conference that the U.S. military is helping Japan monitor “unprecedented” PLA incursions around East China Sea islands controlled by Tokyo. “The United States is 100 percent absolutely steadfast in its commitment to help the government of Japan with the situation. They (PLA ships) would go in and out a couple of times a month and now we are seeing them basically park and truly challenge Japan’s administration,” he said.
- Republican Congressman Ted Yoho introduced the Taiwan Invasion Prevention Act, which aims to “clarify and strengthen the commitment of the United States to defend Taiwan in the event of an armed attack.”
July 30
- PRC ambassador to London Liu Xiaoming accused the U.S. of “treating China as an enemy.” Speaking to reporters, Liu said that the U.S. “think they want a Cold War but we have no interest, we keep telling America, China is not your enemy, China is your friend, your partner.”
- In talking about the U.S. and Huawei, PRC foreign ministry spokesman Wang Wenbin claimed that “the real reason behind Pompeo’s animosity towards Chinese companies has nothing to do with national security or democracy, freedoms, fairness or reciprocity” but because of their nationality. “We hope all countries will commit to uphold a fair, just, open and non-discriminatory business environment and reject nationality discrimination in global scientific cooperation as firmly as they reject racism,” he said.
- The PRC defense ministry announced it recently concluded a high intensity jet bomber drill over the South China Sea.
OUR TAKE
1. With the Sino-U.S. “cold war” in plain sight and tensions rising on both sides, people are concerned about a “hot war” on the horizon, which may include an invasion of Taiwan.
We do not believe the CCP will attempt to invade Taiwan, at least anytime in the near future, given the “perfect storm” of problems (economic woes, coronavirus, floods, food shortages, etc.) at home and abroad. The CCP will be further dissuaded from attacking Taiwan should the U.S. pass tough legislation (such as the recently introduced Taiwan Invasion Prevention Act) committing itself to Taiwan’s defense.
The CCP will be markedly intimidated by deployment of naval assets and military maneuvers in the Indo-Pacific by the U.S. and its allies. To preserve regime security, the CCP will do its best to avoid “accidents” and other controversies with the U.S. military in the region. However, the CCP will keep holding military exercises and engage in some provocative behavior so that its propaganda apparatus can brag about showing defiance to “American imperialism” and keep the nationalists on board.
2. The U.S. is clearly stepping up efforts to decouple from the PRC, including shifting vital supply chains back home and onshoring the production of crucial items like pharmaceuticals and rare earths. Amid Sino-U.S. decoupling, the CCP will step up efforts to win the “capital war” and ensure that foreign investments and capital continue flowing to China. To survive the “new cold war” and deter the U.S. from escalating actions, the CCP needs to keep the economies of China and the U.S. deeply integrated and American funds (particularly U.S. pension funds) invested in the PRC.
To retain American and foreign capital in China, the CCP will roll out “favorable” policies (including promises to “reform and open up more,” widening the interest rate spread between China and the U.S., etc.), create artificial “bull” markets, and tap into its “Red Matrix” and “Great External Propaganda Plan” to sell the idea of China as a “financial safe haven” and a good “investment opportunity” amid worsening global economic conditions. To sustain the “promising” financial situation in China, the CCP will take on more debt while sidelining considerations as to whether it can finance the debt through economic growth and taxation. Western companies, fearing the evaporation of their China investments in the event of an economic and regime collapse in the PRC, could end up investing even more in China to forestall a crisis.
3. To counter ideological challenges from the U.S., the CCP is resorting to conflating itself with the Chinese people and China. In doing so, the CCP is creating grounds for itself to play the “racism” card against the Trump administration, as seen with PRC foreign ministry spokesman Wang Wenbin’s calls to “reject nationality discrimination” and “reject racism” on the Huawei issue. We wrote on July 25, “as the CCP seeks to regain ground and go on the offensive, it will eventually be forced to focus less on condemning U.S. ‘ideological bias’ towards the PRC and instead play up the ‘racism’ card.”
We previously explained why the CCP is claiming that “China is not the enemy,” and how 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.” The CCP’s “racism” charges, while invalid, could prove very damaging image-wise for the Trump administration, as well as for the U.S. and its Western allies. The Trump administration needs novel solutions to negate the CCP’s “racism” accusations.
4. The CCP fears being challenged on ideology and human rights because those issues question their political legitimacy. Additionally, steep economic decline in China also threatens their legitimacy, by tearing up the CCP’s social contract with the Chinese people. The Trump administration’s tough China strategy, if maintained and escalated, will create the necessary conditions for rapid regime collapse.
Businesses, investors, and governments need contingencies for a post-communist China, including ways to mitigate political risks and liabilities while finding hidden opportunities.
SinoInsight 2
On July 30, Xi Jinping convened a meeting of the CCP Politburo. The Politburo decided to convene the Fifth Plenary Session of the 19th Central Committee in October 2020, with the economy as the main agenda for discussion. The Central Committee will also discuss the PRC’s fourteenth Five-Year Plan and deliberate long-term goals for 2035.
OUR TAKE
1. The CCP’s recent political and economic decisions suggest the economic plan rolled out at the Fifth Plenum could take China down the path of partial “closing up” that we first noted in January 2019.
2. China’s economic decline accelerated with the Sino-U.S. trade war, and the coronavirus outbreak has left the Chinese economy almost stagnant. The severity of China’s economic problems are best observed from the CCP’s continually changing economic work priorities and sloganing:
- September 2019: Li Keqiang brings up the “six stabilities” (employment, finance, foreign trade, foreign and domestic investments, job expectations) during a PRC State Council meeting.
- April 2020: Xi Jinping mentions the “six guarantees” (employment, basic livelihood, market entities, food and energy security, supply chain stability, and operations of grassroots institutions) while on an inspection tour in Shaanxi Province.
- May 2020: Li Keqiang emphasizes the “six guarantees” in his annual government work report and takes the unprecedented step of not setting a GDP growth target for the year.
- June 2020: PRC vice premier Liu He said at an economic forum in Shanghai, “A new pattern of dual-cycle development, with domestic circulation as the main one and mutual promotion at the international and domestic levels, is taking shape.”
- July 2020: In a meeting with business leaders and tech entrepreneurs, Xi Jinping said that they should be focused on “domestic circulation” and China should be more technologically self-sufficient (自力更生).
Xi stressed PRC “self-sufficiency” in September 2018 while on an inspection tour in China’s northeast. Xi’s remarks at the time stirred panic amongst Chinese business people because talk of “self-sufficiency” was a popular slogan during the Mao era, or when China was a closed country. We believe the CCP was already planning to partially “close up” China as a worst case contingency to cope with the Sino-U.S. trade war. Today, Xi’s talk of “self-sufficiency” and so-called “domestic circulation” also hint at the CCP’s plan of a partial “closing up.”
3. At a glance, Xi’s talk of “self-sufficiency” and “domestic circulation” seems achievable. China’s population of 1.4 billion people should theoretically be able to consume goods marked for export. On paper, the PRC did not appear to fare too badly despite the coronavirus, with a second quarter GDP growth of 3.2 percent, a “bull” market, increased foreign investments in June, an appreciating currency, and widening China-U.S. interest rate spread. China also does not appear to be export dependent, with exports accounting for 19 percent of GDP in 2019, according to PRC data.
A closer investigation of other data paints a contradictory picture about “self-sufficiency” within the Chinese economy. China’s exports mainly comprise consumer goods like electronics and clothing, and China exported 17.2 trillion yuan worth of goods in 2019. That year, China’s retail sales of consumer goods totaled 41. 2 trillion yuan; China’s total exports in 2019 amounted to 41.7 percent of total retail sales of consumer goods. In other words, for Xi Jinping’s “domestic circulation” plan to function, the Chinese people have to step up their purchase of consumer goods by around 40 percent, a big ask with the bleak domestic unemployment situation, rising inflation, and even stagflation.
“Domestic circulation” is unfeasible once evaluating more data. China’s total retail sales of consumer goods in the first half of 2020 decreased 11.8 percent from a year ago to 17.2 trillion yuan, a sign of declining spending power. China’s consumer market has been shrinking for the past three consecutive years. Under these circumstances, attempts to motivate the Chinese people to buy up goods previously marked for export could prove disastrous. For instance, China manufactured 1.701 billion cell phones in 2019, however domestic demand accounted for only 389 million sets. Trying to sell domestic, and flooding the market with an oversupply of cell phones, would lead to disastrous price wars that could wreck the entire cell phone industry in China.
Businesses, investors, and governments must see through CCP propaganda in order to uncover the political risks of investing in China.
