Washington retreats on the ‘China challenge’; Beijing’s strategy behind recent power curbs in China

Sept. 20
President Joe Biden delivered remarks before the 76th session of the United Nations General Assembly. Biden’s speech focused on global cooperation, climate change, and the coronavirus pandemic. “We are not seeking a new Cold War or a world divided into rigid blocs. The United States is ready to work with any nation that steps up and pursues peaceful resolution to shared challenges, even if we have intense disagreements in other areas,” he said.

Biden did not mention China by name in his speech. However, he noted that the U.S. is focusing on “priorities and the regions of the world, like the Indo-Pacific, that are most consequential today and tomorrow.” Biden did list “Xinjiang or northern Ethiopia” when calling out the “targeting and oppression of racial, ethnic, and religious minorities” in the world.

Sept. 21
1. In a prerecorded speech to the U.N. General Assembly, Xi Jinping pledged to “not build new coal-fired power projects abroad.” He also repeated the PRC’s commitment to cap carbon emissions before 2030 and achieve carbon neutrality before 2060.

On international relations, Xi called for the rejection of “forming small circles or zero-sum games.” He added, “One country’s success does not have to mean another country’s failure, and the world is big enough to accommodate common development and progress of all countries.”

U.S. climate envoy John Kerry told reporters outside of the U.N. headquarters that he was “absolutely delighted” at Xi’s climate pledge. Getting the PRC to stop financing coal-fired projects abroad was the top of Kerry’s agenda during his recent Tianjin trip. The following day, Kerry told MSNBC that he is going back to China “somewhere in the next weeks to follow up on the conversation with President Xi and President Biden.”

2. When asked why President Biden did not mention China in his U.N. speech during a press gaggle, White House press secretary Jen Psaki said that Biden and “a lot our partners around the world, including from the G7, see China as a country where there is great competition but not a country where he sees it is one where we seek conflict.”

She added, “I think it was indicative of his objective of laying out our proactive agenda of the big issues that we can work together on, including with China: climate, addressing cyber—threats—addressing terrorism threats around the world.” Psaki also said that Biden’s remarks were “not directed at any one country.”

Sept. 24
1. Leaders of the Quad countries (Australia, India, Japan, the U.S.) met in Washington D.C. They discussed vaccines, climate change, technological cooperation, cyber space, infrastructure, supply chains, and other issues. The leaders did not mention China in their public remarks.

A day before the meeting, a senior Biden-Harris administration official told reporters that the Quad is an “informal grouping” and “does not address security issues.”

2. The U.S. Justice Department reached an agreement with Huawei chief financial officer Meng Wanzhou to allow her to return to China. The agreement, entered in federal court in Brooklyn, saw Meng admit to some wrongdoing in exchange for prosecutors deferring and later dropping wire and bank fraud charges. Canadian newspaper The Globe and Mail first reported on the Justice Department-Meng Wanzhou deal on Sept. 17.

Meng flew back to China from Canada on the same day that the agreement was reached. Also, the PRC released businessman Michael Spavor and former diplomat Michael Kovrig, the two Canadians it had detained shortly after Meng was arrested in Vancouver in December 2018 at the behest of U.S. officials who sought her extradition.

3. Commerce Secretary Gina Raimondo told The Wall Street Journal in an interview that she is seeking to improve America’s business ties with China.

While PRC subsidies disadvantage U.S. companies, Raimondo noted that “the U.S. must trade with China given the size of its market,” according to the Journal. “It’s just an economic fact. I actually think robust commercial engagement will help to mitigate any potential tensions,” she said.

Raimondo said she views Huawei as a security threat, and the Commerce Department would continue to block the company from getting advanced chips for 5G and other technologies. She would also “work with allies to keep advanced technology out of the hands of Chinese competitors.”

Raimondo said she saw PRC investment in technology to deal with climate change “as being an area of fruitful co-investment” with China, adding that she would check if a PRC state-owned enterprise was involved and if the company posed national security concerns.

1. The Biden-Harris administration’s China actions last week indicate a substantial weakening of the U.S. stance towards the CCP and further adulterating of the “China challenge” as laid out by the Trump administration.

The various signals from Washington also mean that our analysis of the recent Biden-Xi phone call is being validated. We noted that “Washington’s priority is accommodation and rapprochement with Beijing,” and “appears to be preparing to make concessions” to the CCP. Biden’s dialing down of the Sino-U.S. competition at the U.N. by stressing “cooperation” rather than confrontation, the Quad shifting away from the Trump administration’s priority of addressing the CCP threat to focusing instead on climate change and vaccines, and the Justice Department’s Meng Wanzhou deal appear to be some of what Washington had conceded to Beijing. Meanwhile, Xi Jinping’s climate “commitments” (the CCP views climate change through the lens of ideology and politics, and cannot be trusted to keep its pledges) at the U.N. and softening of tone towards the U.S. are likely part of the quid pro quo recently reached between Beijing and Washington.

Commerce Secretary Gina Raimondo’s remarks that the U.S. “must trade with China,” as well as John Kerry’s enthusiastic reaction to Xi’s climate “pledge” and upcoming trip to China, also suggest that the Biden-Harris administration is preparing to make even more concessions to Beijing. We noted earlier that the administration “could make wholesale reductions on up to half of Trump-era tariffs while launching an investigation into Chinese subsidies that could ultimately amount to nothing.” Washington could also make additional concessions involving Huawei and other PRC technology companies.

The Biden-Harris administration’s present approach towards China and recent trends suggest that the Sino-U.S. relationship is headed along the second scenario that we outlined after analyzing the administration’s interim strategy documents. However, we do not rule out a sudden shift towards the first scenario should political Black Swans emerge in China and Washington looks to capitalize on Xi Jinping’s domestic troubles.

2. On paper, Xi Jinping appears to have stolen a march on the United States and gained leverage over his factional rivals. Biden-Harris administration’s current weakness on China and the gradual elimination of the Trump administration’s China policies allow Xi to now claim that his strategy for dealing with the U.S. during the Trump years (“delay and wait for change,” or 以拖待變) was a “success.” Xi would gain even more standing in the Party and ammunition to use against his opponents should the Biden-Harris administration remove some Trump tariffs and make other significant concessions to the PRC before the upcoming Sixth Plenum of the 19th Central Committee in November.

Washington’s reluctance to confront the CCP could be an important factor convincing Xi to focus on domestic issues. In particular, Xi appeared to begin ramping up efforts to tighten control over the regime, clamp down on the financial sector, and close in on powerful political enemies like the Jiang Zemin faction after General Mark Milley’s “no conflict” assurances to General Li Zuocheng in late 2020.

However, Xi’s factional struggle moves are bound to bring him more than he bargained for, given the “you die, I live” nature of factional politics in the CCP elite. Fierce domestic pushback against the Xi leadership could influence the Biden-Harris administration to take bolder “anti-Xi, not anti-CCP” measures (President Biden’s mention of Xinjiang, including at the U.N. recently, directly targets Xi’s negative political legacy) and escalate U.S. pressure against Xi Jinping to accommodate leadership change in the CCP.

3. Businesses, investors, and governments must not view Washington’s rapprochement with Beijing as a sign of Sino-U.S. relations reverting to the pre-Trump and pre-Xi era. Political risks in China are sky-high at present and rapidly rising, Evergrande’s debt crisis is threatening financial contagion, and Xi Jinping is tackling the financial sector with an eye on realigning interest networks and ousting factional rivals. Those who double down on China and draw closer to Beijing stand to lose big when political Black Swans appear, especially if they find themselves on the losing side of the intra-Party factional struggle.

Washington’s approach to China and Beijing’s seeming “rise” should not dissuade China’s neighbors or U.S. allies and partner nations from cultivating, maintaining, or strengthening a tough stance towards the CCP regime. The CCP’s bark is currently worse than its bite, and the Xi leadership is in a particularly vulnerable state given the “perfect storm” of problems facing the PRC. Countries who stand up to Beijing and resist CCP influence operations will find that in the long run, their interests are better preserved than those who kowtow now for short-term advantage.

     SinoInsight  2     

OUR TAKE

1. The central government’s annual power consumption target is likely only one factor for why local governments are restricting electricity usage. We believe that the CCP’s climate and energy strategy, geopolitics, and rising commodity prices also influenced Beijing’s effort to tighten “dual energy consumption control.”

2. The coronavirus pandemic, the CCP’s restriction of Australian coal imports last year as part of reprisals against the country, and global economic pressures have seen coal, chemicals, steel, and other commodity prices go up across the board. In August, China’s PPI rose 9.5 percent year-on-year to reach a 13-year high.

Rising thermal coal prices make it costly for power companies to sustain electricity output. A recent Yicai Global report noted that Guangdong Power Grid’s thermal power plants “have not been operating at full capacity so far, with one of the units out of operation and another one only producing half the usual power supply,” citing people familiar with the matter. The report also noted that power operations were affected by the current coal price and supply, with the power grid suffering losses of 0.1 to 0.2 yuan for every kilowatt-hour of electricity it generates.

Mainland media outlet chnfund.com (中國基金報) reported that thermal coal prices have far exceeded historic highs, with thermal power companies losing money and power generation firms being unwilling to supply electricity even if they have the coal. A person in charge of a thermal power company who did not wish to be named told the chnfund.com that it is difficult to specify how much money companies like his are losing at the moment because different power plants use different generating units and consume different amounts of coal. However, “it is certain that with current coal prices, it is a loss regardless of what unit is used,” the person said. The person added that thermal coal prices in the futures market had soared to more than 1,100 yuan per ton, with spot-to factory prices going over 1,400 yuan per ton; thermal power companies are already suffering full losses at prices below 1,000 yuan per ton.

Reduced power generation and consumption in turn impact China’s industrial output. The year-on-year growth rate of power generation in June, July, and August was 7.4 percent, 9.6 percent, and 0.2 percent respectively. From June to August, total year-on-year electricity consumption was 7.8 percent, 12.8 percent, and 3.6 percent respectively, while the total two-year average growth rate was 8.4 percent, 7.8 percent, and 6.0 percent respectively. Meanwhile, the year-on-year output growth (actual growth rates after deducting price factors) of industries above designated size in August was 5.3 percent, or 1.1 percent lower than the growth rate in July.

3. The CCP can tolerate the reduction of some production capacity and economic growth in view of the regime making strategic gains in other areas.

The Xi leadership’s implementation of climate change and energy production measures are geared towards helping the CCP regime survive and dominate. Beijing has an interest in cutting the PRC’s carbon footprint because decades of pollution and environmental degradation have taken their toll on China and the populace. The CCP is also looking to cut its reliance on other countries for natural resources to reduce its vulnerability to geopolitical shocks. Further, Beijing wants to corner the new energy market (electricity) and advance its domination agenda by becoming a global supplier of new energy. China already manufactures more than 60 percent of the world’s solar panels, and is also constructing the world’s biggest ultrahigh-voltage “super grid.”

Beijing’s climate and energy strategy requires sacrifice in other areas. The implementation of “dual energy consumption control” and shutting down of enterprises with high energy consumption is one such sacrifice, and lower economic growth is another. However, the CCP will likely use the excuse of pursuing “high quality growth” to paper over economic deterioration resulting from its energy and climate policies.

4. As CCP officials made clear to U.S. climate envoy John Kerry in his second trip to Tianjin, the PRC believes that climate issues cannot be separated from politics and larger bilateral issues. Put another way, the CCP is willing to “cooperate” on climate, but only if the U.S. and other countries are willing to make concessions in areas outside of climate and “improve” their overall relationship with China. By prioritizing climate change and insisting on dealings with China along the categories of cooperation, competition, and confrontation, the Biden-Harris administration is leaving the U.S. extremely vulnerable to being manipulated by the CCP.

It is possible that the PRC central government’s effort to tighten “dual energy consumption control” in recent weeks is partly linked with the quid pro quo struck between Xi Jinping and President Joe Biden in their recent phone call. Washington could later point to China’s climate saving “improvements” (i.e. burning less coal) over the past few weeks and beyond to justify making lopsided concessions to Beijing (see SinoInsight 1). And given the concessions that Washington has already doled out (releasing Meng Wanzhou, sale of some chips to Huawei, clear de-escalation of Sino-U.S. tensions, etc.), Xi Jinping has received more than adequate political compensation for the dip in production and growth resulting from recent power restrictions.

Some Chinese observers believe that the CCP is strategically cutting production to drive up global commodity prices with an eye on undermining the United States (rising inflationary pressures, higher infrastructure costs, financial risks, etc.). While the theory cannot be entirely discounted, we have reservations about it given that Xi Jinping has greater incentive to grant the Biden-Harris administration some political “wins” and avoid creating fresh geopolitical problems for the PRC while he is focused on paving the way for securing a third term at the 20th Party Congress.

5. Beijing’s long-term strategy and plans are bound to be inhibited and even undermined by local officials. As we have noted on numerous occasions, CCP officials have a penchant for “preferring left rather than right” and taking a “one-size fits all” approach to implementing orders from Party Central. The effort by local governments to hit their “dual energy consumption control” target this year is bound to make things more challenging for Beijing in an already very challenging time (coronavirus, inflationary pressures, slowing economy, etc.)

For instance, areas that adopt a “one-size-fits-all” approach to power restriction and rationing will see enterprises with high energy consumption (chemicals, cement, smelting, etc.) being disproportionately affected. Lower production by such enterprises will in turn impact supply chains as raw material and other commodities become scarce, leading to another wave of price increases. Already, cement prices in south, east, and central China are on the rise, and recent power restrictions in Henan, Shandong, and other places would likely lead to price increase in those areas in the near future. Meanwhile, paper manufacturing companies are also announcing price increases for products such as corrugated paper. According to mainland media reports, some companies have raised prices four times over the span of 20 days, and have an inventory period of fewer than 15 days.

Local governments’ “dual energy consumption control” measures could also create problems for Beijing when winter arrives. Stringent regulation of power and coal burning during the winter months could result in social problems and unrest.