Mounting geopolitical and economic risks for the PRC will eventually transform into political risks for the Xi leadership.
Tensions between the People’s Republic of China and the United States cooled off in the months leading up to an in-person meeting between Xi Jinping and President Joe Biden in November 2023. For a while after the Woodside Summit, the U.S. and the PRC appeared to have entered a period of détente in what some observers have dubbed a “new cold war.”
The détente, if there was one, was short-lived. Near the end of March 2024, the Biden administration began calling out Beijing over exporting excess capacity and supporting Russia’s war effort against Ukraine, as well as working with allies with an eye on China. Washington’s moves appear to be triggered by recent developments and ongoing efforts to curb the Chinese Communist Party threat over the long term, and are likely to heighten the political and geopolitical risks facing the Xi leadership.
Overcapacity and chips
Economists and media outlets in the U.S., the United Kingdom, and other countries have been raising concerns about the PRC’s overcapacity and fears of another “China shock” since the start of 2024. The Biden administration harped on the issue more prominently in late March.
On March 27, U.S. Treasury Secretary Janet Yellen said in a speech in Georgia that PRC government support in sectors like steel and aluminum in the past led to “substantial overinvestment and excess capacity that Chinese firms looked to export abroad at depressed prices.” Now “we see excess capacity building in ‘new’ industries like solar, EVs, and lithium-ion batteries.” Yellen added that “China’s overcapacity distorts global prices and production patterns and hurts American firms and workers, as well as firms and workers around the world.”
Speaking at an American Chamber of Commerce event in Guangzhou on April 5, Secretary Yellen said that PRC “direct and indirect government support” is “currently leading to production capacity that significantly exceeds China’s domestic demand, as well as what the global market can bear.” She added, “As I’ve said before, China is too large to export its way to rapid growth. And if policies are oriented only at generating supply and not also at generating demand, global spillovers will result.”
The PRC rejected Yellen’s assessment that its policies are creating excess industrial capacity. According to state mouthpiece Xinhua’s report on a meeting between Yellen and premier Li Qiang in Beijing on April 7, Li urged the U.S. to “refrain from turning economic and trade issues into political or security issues” instead view production capacity from a “market-oriented and global perspective.” However, Li’s rebuttal is unlikely to sway Washington from spotlighting the issue or possibly take future action to punish and dissuade Beijing from exporting excess capacity of key products such as electric vehicles, lithium-ion batteries, and solar panels.
The Biden administration has also been stepping up its “tech war” against the PRC. According to Reuters, the administration pressed the Netherlands in the week of April 8 to have its leading chipmaker ASML Holding NV stop servicing some tools in China. People familiar with discussions added that Washington is also looking to add to a list of Chinese chipmaking factories restricted from receiving Dutch equipment. In another report, Reuters indicated that the Netherlands would likely go along with the U.S. on tightening export restrictions to China.
Shoring up alliances and Ukraine
In early April, the Biden administration moved to strengthen its alliances with Japan and the Philippines.
Meeting in Washington D.C. on April 10, President Biden and Japanese prime minister Fumio Kishida announced a military agreement that would restructure the U.S. military command in Japan and strengthen operational planning and exercises between the two countries. Two days prior, the AUKUS defense ministers said in a statement that the countries are “considering cooperation with Japan on AUKUS Pillar II advanced capability projects.”
And in a trilateral meeting between Biden, Kishida, and Philippine president Ferdinand Marcos Jr. on April 11, the three leaders expressed “serious concerns” about the PRC’s “dangerous and aggressive behavior” in the South China Sea, the situation in the East China Sea, and the need for peace and stability in the Taiwan Strait. The three leaders also resolved to “advance trilateral defense cooperation, including through combined naval training and exercises between our three countries and additional partners.”
Meanwhile, the Biden administration has been warning its allies of deepening PRC support for Russia.
The Financial Times reported on April 5 that U.S. Secretary of State Antony Blinken warned EU and NATO foreign ministers during meetings in the week of April 1 that Beijing was assisting Moscow “at a concerning scale” and providing “tools, inputs, and technical expertise,” citing three people familiar with the discussions. One of the people said that Blinken’s warnings were “explicit.” The person added, “There has been a shift and it was felt in the room … this was a new development. It was very striking.”
Secretary Yellen also told PRC vice premier He Lifeng when they met in Guangzhou on April 6 that companies, including those in the PRC, “must not provide material support for Russia’s war against Ukraine, including support to the Russian defense industrial base,” and warned of “significant consequences if they do so.” In a press conference in Beijing on April 8, Yellen said, “any banks that facilitate significant transactions that channel military or dual-use goods to Russia’s defense industrial base expose themselves to the risk of U.S. sanctions.”
US concerns, PRC risks
There are several likely reasons for why the Biden administration is turning the screws on the PRC. First, there is growing evidence and awareness of the threat posed by the CCP, including the PRC’s harassment of Filipino vessels in the South China Sea and buzzing of the midline in the Taiwan Strait, cyber attacks against the U.S. and the UK, and other influence operations. Second, Russia’s offensive has put Ukraine’s front lines in danger of collapse, and Washington is becoming increasingly concerned about what the PRC is doing to sustain Moscow’s war effort. Third, there is a U.S. presidential election at the end of the year, and President Biden has an incentive to come across as being tough on China and aligning himself with popular sentiment.
Increasing U.S. pressure on the PRC will likely worsen the many crises plaguing the regime. For instance, new U.S. tariffs and other trade actions to address the PRC overcapacity problem would hurt China’s exports and create another drag on the rapidly deteriorating Chinese economy. U.S. allies and other countries could also take similar trade actions to minimize the impact of another “China shock,” compounding Beijing’s headaches. Meanwhile, Beijing would struggle even more to attract much-needed foreign capital and investments to stabilize China’s economic decline should the U.S. and its allies begin sanctioning Chinese companies and the PRC for supporting Russia.
Mounting geopolitical and economic risks for the PRC will eventually transform into political risks for the Xi leadership. Businesses, investors, and governments must account for Xi Jinping and the CCP’s growing risks in making China-related decisions.
