1 TikTok bill paves way for further heightening of Sino-US tensions
House passes TikTok bill, prohits ‘sensitive data’ transfers
March 13
The U.S. House of Representatives voted 352 to 65 to overwhelmingly approve a bill that would ban TikTok from operating in the U.S. or force ByteDance to divest itself from TikTok.
H.R.7521, or the Protecting Americans from Foreign Adversary Controlled Applications Act, prohibits “foreign adversary controlled applications” from operating in the United States. TikTok and “any other application or service developed or provided by ByteDance” or “an entity under the control of ByteDance” are explicitly named as “foreign adversary controlled applications.” TikTok aside, the bill also covers all websites, desktop applications, mobile applications, or augmented or immersive technology applications with more than a million active users that the U.S. considers to be “controlled by a foreign adversary” and the President determines to “present a significant threat to the national security of the United States.”
The bill provides three clauses that would determine if a company or entity is controlled by a foreign adversary. First, a “foreign person that is domiciled in, is headquartered in, has its principal place of business in, or is organized under the laws of a foreign adversary country.” Second, an entity where a foreign adversary has a 20 percent stake in it. Third, an entity that is “subject to the direction or control of a foreign person or entity” from one of the foreign adversary countries. The U.S. considers the PRC, Russia, Iran, North Korea, Cuba, and the Maduro regime in Venezuela as foreign adversaries.
March 15
TikTok notified some of its U.S. users urging them to call their Senators to veto the bill. “Tell your Senator how important TikTok is to you. Ask them to vote no on the TikTok ban,” the notice said. “Now, if the Senate votes, the future of creativity and communities you love on TikTok could be shut down.”
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TikTok has about 170 million American users, and the average TikTok user spends 95 minutes on the app daily. A poll in February 2024 by The Associated Press and NORC Center for Public Affairs Research found that 31 percent of U.S. adults would favor a nationwide ban on TikTok while 35 percent would oppose that action. Also, about 6 in 10 adults are extremely or very concerned about the amount of time that children and teenagers spend on TikTok, while most adults are concerned about the spread of misinformation on the app.
March 20
1. U.S. national security officials gave a classified briefing to senators on the Commerce and Intelligence committees on the threats posed by TikTok.
After the briefing, Senate Commerce Chair Maria Cantwell said she was considering holding a public hearing on TikTok and social media, and that she does not want to rush TikTok legislation to the Senate floor. “It’s important to get it right. The key point is to get a tool that can be used to stop foreign actors from doing deleterious things that might harm U.S. citizens, or U.S. military or the U.S. government. So we’re gonna do that. We’re gonna get it done. And we’re not going to take forever,” Cantwell said.
According to an Axios report on March 21 about the classified briefing, national security officials described how the PRC can harvest user data and weaponize it through propaganda and misinformation, citing one senator. Another senator said they were told that TikTok can spy on the microphone of users’ devices, track keystrokes, and determine what users are doing on other apps.
2. The U.S. House of Representatives voted 414 to 0 to pass a bill that would prohibit data brokers from transferring Americans’ “sensitive data” to foreign adversary countries, including China.
Americans react to the TikTok bill
Reactions to the TikTok bill in the U.S. were mixed.
Content creators were furious at the bill, arguing that a TikTok ban would shut down or hurt small businesses, as well as intrude upon the right of Americans to freedom of expression.
Some commentators and media outlets lauded the bill, arguing that TikTok is subjected to CCP control via its parent company ByteDance. They added that TikTok can be potentially abused to subvert the U.S. and harm national security through its addictive algorithm, allowing the spread of misinformation and disinformation on its platform, and spying on Americans. They also argue that the dangers of allowing a CCP-controlled TikTok to continue operating in the U.S. far outweigh the dangers of passing a bill that is overly broad and vague in key definitions and could potentially be abused to curb the rights of Americans.
Other commentators, and particularly lawyers and those with some understanding of the U.S. constitution and the law, argue that the TikTok bill is akin to a “Patriot Act 2.0” and is not constitutionally sound. Some voiced concerns that the bill could be used by the U.S. government and the ruling party to go after their political enemies or those who disagree with them but who are in control of popular social media platforms.
CCP reacts to the TikTok bill
March 14
A spokesperson for the PRC Ministry of Commerce said during a regular press conference that the U.S. should stop “unreasonably suppressing” TikTok and the “relevant party should strictly abide by Chinese laws and regulations.”
March 15
The Wall Street Journal reported that PRC officials have sent signals to ByteDance that its executives have understood as meaning that the PRC authorities would rather TikTok be banned in the U.S. than have it sold, citing people familiar with the matter.
The people said that ByteDance executives view the Ministry of Commerce statement on TikTok on March 14 as reinforcing Beijing’s message to the company that it would face regulatory hurdles if it tried to divest TikTok. The PRC authorities warned in 2023 that it would have to approve a sale or divestiture of TikTok because that would involve exporting technology.
The people added that ByteDance founder Zhang Yiming has not indicated that he is having any conversations with external buyers about selling TikTok. Zhang holds a significant stake in ByteDance.
PRC steps up exchanges with American youth
March 17
PRC state media reported about a trip by 24 American high school students to China.
Song Guoxuan, the PRC deputy consul general in San Francisco, saw the students off at the San Francisco International Airport and expressed the hope that they would “foster a spirit of friendship between the two nations.”
PRC state media said that the trip was part of a larger initiative by Xi Jinping, who invited 50,000 young people from the U.S. to visit China on exchange and study programs over the next five years in November 2023.
Our take
1. The CCP’s response to the House of Representatives’ TikTok bill has been relatively muted, at least at the time this newsletter was published. There are several likely reasons for this.
First, the CCP authorities likely do not want to call too much attention domestically to the U.S. attempt to ban or force a divestment of TikTok because it does not want the Chinese people thinking and discussing “sensitive issues” like internet censorship at home, the relative freedom of overseas social media platforms, and growing U.S. vigilance against CCP subversion. The CCP suffers from an underlying anxiety that attention to such “sensitive issues” will increase the Chinese people’s hatred of its authoritarian and illiberal rule, and eventually contribute to the destabilization of social order and undermining of regime stability.
Second, Beijing likely does not want to call attention to the CCP’s control over TikTok via ByteDance by launching a boisterous defense of the company, which will only disadvantage TikTok as the Senate deliberates legislation.
Third, the CCP is likely aware that Americans are divided over the TikTok bill and would be hoping that social pressure, with some direction from lobbyists and TikTok, would be enough to stymie the passage of the legislation without it having to say or do much publicly.
Fourth, the CCP authorities likely do not want to escalate tensions with the U.S. and worsen its relationship with foreign countries in general. Beijing is striving to attract foreign investment to rescue the Chinese economy and maintain regime stability, and would have likely weighed that it is counterproductive to speak up too vigorously on the TikTok matter and frighten foreign companies and investors who are increasingly concerned about China’s geopolitical risks.
2. We believe that it is quite likely that the CCP will prefer to see TikTok banned in the U.S. than have it sold.
First, Beijing almost certainly does not want TikTok’s algorithm, data, and other technologies to fall into the hands of U.S. companies that are not subject to CCP control or strong influence. The PRC is embroiled in a “new cold war” with the U.S. and its allies, and fears that the West could exploit TikTok that is under American control for counter-propaganda against the PRC.
Second, the CCP authorities will not want to give up a valuable “beachhead” for influencing American society. TikTok counts among its users many young Americans, and the CCP will want to abuse the social media platform to shape the younger generation’s perception of the PRC and ease Sino-U.S. tensions further down the road. Also, the CCP could already be exploiting TikTok’s algorithm to fragment U.S. society through the dissemination of extreme ideologies, propaganda, and disinformation; various commentators have pointed out that Douyin (the mainland version of TikTok) promotes educational content while TikTok promotes “entertainment” and other less desirable content that tend to have a negative influence on youth people and society in general.
Third, the CCP could exploit a TikTok ban to serve its propaganda and brainwashing agenda at home. For instance, the CCP authorities could seize upon a TikTok ban to “educate” the Chinese people about how democracy in America is “hypocritical,” how freedom of speech in America is a “sham,” and how there is really no difference between the lack of free speech in China and in the United States.
The CCP authorities will likely be able to shape how ByteDance handles a forced sale. In recent years, the authorities have been acquiring special stakes, or “golden shares,” in major Chinese tech and media companies as they sought to tighten their control over the private sector. These “golden shares” grant the CCP authorities board representation and/or veto rights for key business decisions.
What’s next
The CCP will unlikely permit ByteDance to sell TikTok should the TikTok bill pass the Senate and be signed into law by President Joe Biden. The CCP could also have TikTok challenge the bill in the courts and engage in a lengthy legal battle. A TikTok ban is likely to exacerbate divisions within the U.S. and could influence the U.S. government to intensify efforts to counter the CCP threat.
A further straining of Sino-U.S. relations over TikTok will likely hurt the PRC more than the U.S. as foreign businesses and investors re-evaluate their China plans amid rising geopolitical tensions and risks.
2 China’s economic ‘rebound’ appears to slow after the Two Sessions
Falling fiscal data
March 21
The PRC finance ministry released fiscal revenue and expenditure data for January and February 2024. Some key data includes:
- The national general public budget revenue decreased 2.3 percent from the previous year to 4.4585 trillion yuan.
- National tax revenue decreased 4 percent year-on-year to 37.820 trillion yuan. Non-tax revenue increased 8.6 percent year-on-year to 676.5 billion yuan.
- Domestic value-added tax decreased 5.3 percent year-on-year to 1.4958 trillion yuan.
- Domestic consumption tax increased 14 percent year-on-year to 406.8 billion yuan.
- Corporate income tax was 1.017 trillion yuan, or nearly unchanged from a year ago (increased 11.4 percent in 2023 to 1.0167 trillion yuan).
- Personal income tax decreased 15.9 percent year-on-year to 326.2 billion yuan.
- Stamp duty decreased 7.1 percent year-on-year to 72.6 billion yuan. Of the total, securities transaction stamp duty decreased 46.8 percent year-on-year to 15 billion yuan.
- Deed tax increased 6.6 percent year-on-year to 93.3 billion yuan, property tax increased 21.5 percent year-on-year to 67.8 billion yuan, and land valued-added tax increased 7.2 percent year-on-year to 112.6 billion yuan.
- National tax revenue decreased 4 percent year-on-year to 37.820 trillion yuan. Non-tax revenue increased 8.6 percent year-on-year to 676.5 billion yuan.
- The national general public expenditure increased 6.7 percent from a year ago to 4.3624 trillion yuan.
- Debt interest payments increased 5 percent year-on-year to 131 billion yuan.
- The government fund budget revenue increased 2.7 percent from a year ago to 714.9 billion yuan.
- Revenue from the transfer of state-owned land use rights was 562.5 billion yuan, or unchanged from the same period in 2023.
- The national government fund budget expenditure decreased 10.2 percent from the previous year to 1.1223 trillion yuan.
- Expenditure related to the transfer of state-owned land use rights increased 3.2 percent year-on-year to 809.8 billion yuan.
Foreign investment flows into China shrink
March 23
The PRC commerce ministry announced that foreign investment flows into China shrank 19.9 percent in the first two months of 2024 from a year ago to 215.09 billion yuan. Also, newly-established foreign-invested enterprises in China reached 7,160, a year-on-year increase of 34.9 percent.
PBoC hints future RRR cuts
March 21
During a press conference at the Two Sessions, People’s Bank of China deputy governor Xuan Changneng noted that China has a “flexible monetary policy toolbox” and “ample policy headroom,” and there is still room for further cuts to the reserve requirement ratio. Xuan’s statement was the second time in the past three weeks up to that point that the central bank hinted at the possibility of more RRR cuts.
The PBoC lowered the RRR by 0.5 percent on Feb. 5, 2024. Pan said earlier at a Two Sessions press conference on March 6 that the average RRR of China’s entire banking sector was around 7 percent and further cuts could be made.
RMB exchange rate drops
March 22
The PBoC set the renminbi midpoint rate, around which the yuan is allowed to trade in a 2 percent band, at 7.1004 per dollar. This was 62 pips weaker than the previous fix of 7.0942.
On the same day, the onshore yuan fell below the psychologically important 7.2 per dollar level to hit 7.24, the lowest since Nov. 17, 2023. The yuan closed at 7.2275; Reuters reported market sources as saying that state banks stepped in to buy the yuan for dollars.
Previously, the onshore and offshore yuan showed “stable” fluctuation around the 7.19 mark since January 2024.
Xi to meet with top U.S. executives?
March 21
The Wall Street Journal reported that Xi Jinping could meet with some U.S. business leaders on March 27 after the annual China Development Forum in Beijing. People familiar with the matter said that Chubb’s CEO Evan Greenberg, National Committee on U.S.-China Relations president Stephen Orlins, and U.S.-China Business Council president Craig Allen are expected to attend the meeting.
The people added that the list of participants is still being completed and the Xi meeting could still be canceled at the last minute.
Big picture
The PRC’s latest economic data showed continued weakness in the Chinese economy in early 2024. Meanwhile, the U.S. Congress has issued several bills targeting China, including a measure to stop investments in indexes tracking Chinese stock and a measure to ban Americans from investing in the stock of firms that appear on human rights sanctions lists.
Our take
1. The PRC’s fiscal revenue situation for the first two months of the year suggests that the Chinese economy is not as strong now as compared to a year ago when Beijing ended the “zero-COVID” policy:
- China’s fiscal revenue for the Jan-Feb 2024 period is lower than what it was during the same period in 2023 when the country was just emerging from three years of lockdowns. Meanwhile, the Jan-Feb 2024 period saw a fiscal deficit of 96.1 billion yuan, compared with a surplus of 474.4 billion yuan for the Jan-Feb 2023 period.
- The drop in domestic value-added tax and flat growth for corporate income tax indicates that business operations and enterprise revenue in China are both declining even though the country is already more than a year out of “zero-COVID.”
- The decrease in personal income tax collected indicates a drop in residents’ income and hints at higher unemployment and reduced business operations.
- The decline in stamp duty collected indicates a drop in real estate and securities transactions. The sharp drop in securities transaction stamp duty collected can be partly attributed to the CCP authorities halving the stamp duty on stock trades in August 2023 as a response to stock market woes.
- The slight increase in government fund budget revenue and bigger decrease in the government fund budget expenditure suggests that local governments are spending more on land works (land acquisition, leveling, etc.) than taking in revenue from land sales.
Similar to our analysis of earlier released official data, fiscal revenue and expenditure data for January and February 2024 suggests that optimism about the Chinese economy rebounding may be premature and China’s economic prospects have not actually improved much.
2. China’s economic outlook looks even gloomier considering the PBoC’s constant hinting at more RRR cuts and the fluctuations in the RMB exchange rate.
Despite its indications otherwise, the central bank has limited tools to stabilize the market and stimulate the economy. For one, while China’s M2 broad money supply approached 300 trillion yuan at the end of February, a lot of the funds are idle as both enterprises and residents are reluctant to invest and spend. Also, the PBoC dares not cut interest rates given the Federal Reserves has not yet lowered rates despite planning to do so three times this year. Instead, the central bank is looking to ensure ample liquidity through RRR cuts.
Meanwhile, the drop in the RMB exchange rate after spending two months hovering around the 7.19 level suggests that capital outflows have made it difficult for the central bank to prop up the RMB rate. Growing geopolitical pressures and the Fed holding rates steady will see the RMB and the Chinese stock market come under increased pressure going forward.
3. Xi Jinping is likely looking to meet top U.S. executives to assure them about the state of the Chinese economy and the PRC’s commitment to so-called “high-level opening up.” However, we believe that Xi will not be able to offer concrete plans on how his leadership plans to boost the economy and carry out reforms to the U.S. executives because Beijing is limited in what it can do under present national security, ideology, and other constraints.
If Xi can only offer superficial assurances, Western investors and businesses will have even less confidence in China’s economic prospects. This could prompt more capital outflows and fewer inflows at a crucial time for the CCP regime.
