SinoInsight 1
On Oct. 6, the foreign ministers of Quadrilateral Security Dialogue (the Quad) nations—Australia, Japan, India, and the U.S.—held a second meeting in Japan. U.S. Secretary of State Mike Pompeo also held one-to-one meetings with each of his foreign counterparts on the sidelines of the Quad ministerial.
In an interview with Nikkei Asia, Pompeo said that the Quad has “already proven and will continue to prove very useful and effective in providing all the tools and instruments to make sure there is prosperity and freedom in the region, in a free and open Indo-Pacific.” He added that the Quad democracies are “very capable nations with capable economies and capable security apparatuses.”
Pompeo also said, “President Trump made clear that not every multilateral institution was worth a darn. It’s all about whether it actually delivers profitable, successful outcomes, good deals for all of the constituents.” As for the Quad, “at the appropriate time, once we’ve institutionalized what we’re doing, the four of us together, we can begin to build out a true security framework, a fabric that can counter the challenge that the Chinese Communist Party presents to all of us.”
Pompeo reiterated the above points in interviews with U.S. media and radio shows. In speaking to Hugh Hewitt of the Hugh Hewitt Show on Oct. 9, Pompeo said, “this Quad format, this capacity for those four powerful economies, big nations, democracies to work together to push back against the Chinese Communist Party is something that I hope that we here at the State Department can institutionalize in a way that provides powerful protection for the American people for decades to come.”
On Oct. 7, the U.S. and Japan held bilateral security discussions. On the same day, Australian foreign minister Marise Payne embarked on a three-day trip to Singapore. During her visit, Payne “exchanged views on a range of regional and international issues” with Singaporean prime minister Lee Hsien Loong, according to a press statement by the Singapore foreign ministry.
OUR TAKE
1. The Quad may be an informal security and defense forum, but recent developments indicate that the Trump administration is looking beyond the creation of an “Asian NATO” with its institutionalization.
Secretary Pompeo said in several interviews on the Quad ministerial in Japan that the four countries are “powerful” and “capable” economies and democracies. He also spoke about “profitable” multilateral organizations that deliver “good deals for all of the constituents.” Pompeo’s comments, when juxtaposed with his earlier remarks about moving the “global economy forward” with “friends in Australia, in India, in Japan, New Zealand, Republic of Korea, and Vietnam,” as well as government officials disclosing to Reuters that the U.S. is “pushing to create an alliance of ‘trusted partner” dubbed the ‘Economic Prosperity Network,’” suggest that the Trump administration is thinking about the Quad or a future Indo-Pacific organization anchored by the Quad in both security and economic terms.
Another possible sign the institutionalized Quad will focus on security and economics is Australian foreign minister Marise Payne’s trip to Singapore a day after the Quad ministerial. Payne could have brought up the Quad discussions in speaking with Singaporean prime minister Lee Hsien Loong on a “range of regional and international issues.” From both an economic and security standpoint, it makes sense for the Quad nations to keep Singapore in the loop about their plans; Singapore is a democracy, a regional and global business hub, located in a strategic “choke point” in the Strait of Malacca, one of the leading ASEAN nations, and a U.S. partner nation, yet close to the PRC.
2. The economic dimension of the Quad alliance would be appealing to all four nations involved as they look to decouple from China and mitigate the CCP’s threat to their national security.
The U.S. could also take the opportunity to show to the world that countries aligned with American values and interests, but reject the CCP, can enjoy free trade with the U.S. and will be exempt from punitive tariffs. Presently, the U.S. and Australia have a free trade agreement, and the U.S. and Japan signed a bilateral trade deal last year. This July, the U.S. and India discussed the possibility of a free trade deal. If the Trump administration does pursue an economic Quad and demonstrates the trade benefits of joining such a strategic organization, other countries could find it worthwhile to make membership inquiries.
3. Defense and security matters will likely be the Quad’s first priority given the CCP’s belligerence this year at the Sino-Indian border, the South and East China seas, and the Taiwan Strait. The CCP’s bellicose rhetoric directed at Taiwan, as well as its aggressive military maneuvers and build-up, means that PRC invasion of Taiwan is a legitimate concern.
To deter the CCP, an institutionalized Quad or a future Indo-Pacific organization anchored by the Quad could make efforts to boost Taiwan’s prominence on the world stage. For instance, Taiwan could be invited to participate in Quad military exercises as an observer or a “partner nation,” join the “Economic Prosperity Network,” and partake in Quad-related regional or global healthcare initiatives. Far from inviting invasion as some observers hypothesize, the CCP—which exploits weakness but cows in the face of strength—will not risk attacking Taiwan, knowing that the latter has the backing of powerful friends in the region and beyond.
4. In July 2018, we analyzed that President Trump is withdrawing the U.S. from the existing CCP-hijacked international institutions and creating a new world system. We also noted that Trump “is seeking to build a rules-based, reciprocal global trading system” that could later “become the foundation of a new intergovernmental organization.”
Our analysis is halfway to full verification. To date, the Trump administration has pulled America out of the United Nations Human Rights Council, submitted a formal notice of withdrawal from the World Health Organization, and effectively sidelined the World Trade Organization by blocking appointments to its appellate body (six out of seven seats are presently empty). In the case of the last two actions, the administration has directly or indirectly noted that they were taken to counter the CCP threat. Trump and U.S. trade representative Robert Lighthizer have argued that the WTO does not address China’s unfair trading practices and constrains Washington from doing so. Meanwhile, Trump has expressed his displeasure at the WHO’s handling of the coronavirus outbreak, lack of independence from the CCP, and unwillingness to adopt reforms as reasons for withdrawing from the international body. Trump, however, is also looking to work with more “credible and transparent partners” to address world health issues.
The recent Quad meeting could pave the way for the establishment of a new rules-based trading system in the Indo-Pacific whose members are committed to promoting freedom and democracy while standing against tyranny and authoritarianism. If successful, this trade system could potentially expand globally to include other democracies looking to leave CCP-hijacked world institutions and/or escape U.S. penalties (such as tariffs) aimed at addressing CCP trade abuses.
Businesses, investors, and governments need to recognize the growing political and geopolitical risks associated with binding their interests too closely with Communist China as the U.S. builds an “anti-CCP bloc.”
SinoInsight 2
On Oct. 9, Huang Qifan, China Center for International Economic Exchanges vice chairman and former Chongqing City mayor, said at a business forum in Beijing that efforts by the U.S. to decouple from China will be “self-defeating” (“殺敵一千，自損兩千”) and “tantamount to suicide.”
Huang said that the CCP has “three magic weapons” to deal with financial problems:
- China’s capital markets are not freely convertible. “China has always been very cautious. When markets are not freely convertible, others cannot attack China at will,” Huang said.
- Foreign financial institutions only account for 1.8 percent of China’s 300 trillion yuan (about $44.8 trillion) assets. “They cannot turn the tide,” Huang added.
- Those who provide financial services in China are constrained by the PRC constitution. Those who run afoul of the constitution “will still be punished,” Huang said.
On the same day, the yield on China’s national debt exceeded 3.2 percent, suggesting that there was a “hidden” interest rate hike.
On Oct. 10, the People’s Bank of China announced the lowering of foreign exchange risk reserve ratio on forward settlement and sale of foreign exchange from 20 percent to 0 percent from Oct. 12, 2020. The PRC established the foreign exchange risk reserve ratio in 2015 and set it at 20 percent on Oct. 15 that year. The ratio was adjusted to 0 percent on Sept. 8, 2017, before being set back to 20 percent in August 2018 to counteract the impact of the Sino-U.S. trade war.
OUR TAKE
1. According to the latest data from the PRC’s China Central Depository & Clearing, foreign institutions held 2.6 trillion yuan worth of Chinese bonds at the end of September, an increase of 134.1 billion yuan from the previous month and up 719 billion yuan (positive 38.3 percent) from December 2019.
The CCP has been able to attract speculative foreign funds by manipulating and spreading certain narratives on China. Examples of common narratives include how China has successfully brought the coronavirus epidemic “under control,” how the Chinese economy is recovering, how China’s interest rate differential has increased, and how the renminbi is appreciating. These narratives are convincing because they contain a “kernel of truth,” but often withhold the full picture. Also, the gradual inclusion of Chinese bonds in major international indexes (FTSE Russell, JPMorgan Chase, Bloomberg) makes it easier for the CCP to bring in foreign capital to make up for its foreign exchange shortages caused by a reduction in export orders.
2. We have been warning about systemic financial risks in China and the dangers of CCP propaganda in providing a deceptive picture of the Chinese economy. Huang Qifan’s recent speech about the CCP’s so-called “three magic weapons” is part factual, part propaganda, and partially confirms our warnings about financial risks.
Foreign investors have been flocking to Chinese securities recently due to the attractive interest rate differential set by the CCP authorities and China’s perceived “success” in handling the coronavirus. However, foreign investors may never get to see their returns because the CCP does not want money flowing out of China. As we have mentioned in previous newsletters, the CCP is facing fiscal shortages and its so-called “dual circulation” model with a focus on “internal circulation” is essentially unworkable given the Chinese people’s lack of spending power. With Sino-U.S. relations in a downward spiral and impacting China’s exports and crucial technology sector, the CCP regime will find it arduous to fulfill its interest rate differential to foreign investors, even if it wanted to.
When foreign investors finally catch on that something is amiss and look to cash out, the CCP can employ the first and third of the “three magic weapons” mentioned by Huang Qifan to keep their cash locked in China. Specifically, the CCP can revise policies or set up various administration and legal obstacles to restrict the outflow of capital at crunch time; as Huang noted, capital markets in China are not “freely convertible.” Meanwhile, foreign investors and financial service providers could find themselves “constrained by the constitution” and unable to remit funds out of China. Those who challenge the authorities will simply be “punished.”
