SinoInsight 1
U.S. climate envoy John Kerry held climate talks with his PRC counterpart Xie Zhenhua in Tianjin from Aug. 31 to Sept. 2. Kerry also spoke with PRC foreign minister Wang Yi, Politburo member Yang Jiechi, and Politburo Standing Committee member Han Zheng via video link.
The CCP officials collectively emphasized to Kerry that Sino-U.S. cooperation on climate cannot be separated from larger bilateral issues.
Wang Yi said that the U.S. should cease treating the PRC as a “threat and adversary, and stop besieging and suppressing China all over the world.” He described Sino-U.S. climate cooperations as an “oasis,” and added, “but surrounding the oasis is a desert, and the oasis could be desertified very soon. China-U.S. climate cooperation cannot be separated from the wider environment of China-U.S. relations, and the U.S. should meet China halfway and take vigorous action to put China-U.S. relations back on track.”
Yang Jiechi told Kerry that the Sino-U.S. relationship faced severe difficulties for some time because of “erroneous acts by the U.S. to interfere in China’s internal affairs and undermine China’s interests.” He added that both countries “still need to respect each other, pursue peaceful coexistence, properly manage differences and seek mutually beneficial and win-win cooperation,” according to state media reports of the meeting.
Han Zheng urged the U.S. to “create a good atmosphere of cooperation,” with cooperation being “premised on trust,” according to state media. Han also appeared to sidestep Kerry’s call for the PRC to set more ambitious climate targets, noting instead that “on the issue of climate change, China has always been true to its words and resolute in deeds.”
After the talks, John Kerry told reporters that his meetings with Xie Zhenhua were “very constructive and detailed.” He also said, “My response to them was, ‘Hey look, climate is not ideological. It’s not partisan, it’s not a geostrategic weapon or tool, and it’s certainly not day-to-day politics. It’s a global, not bilateral, challenge.’”
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According to a Sept. 1 Axios newsletter, Israel was surprised that the Biden-Harris administration mentioned China “only in passing” during Israeli prime minister Naftali Bennett’s recent trip to Washington. Bennett had “prepared for wide-ranging discussions on China” based on what his aides believed were Biden’s top priorities, namely, “China, climate change and COVID-19.”
A senior Israeli official briefed on the U.S.-Israel meeting said, “We were very surprised how little this issue came up in the meetings. In any case, we are very sensitive and aware of U.S. concerns and are going to balance between the need to strengthen trade with China and maintaining our national security.”
Israel foreign minister Yair Lapid said in a Sept. 1 press conference that there was “no concrete demand coming from the U.S. about our relations with China” and “nobody asked us to change anything.”
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U.S. businesses have been heavily lobbying the Biden-Harris administration and Congress to roll back the Trump administration’s China tariffs and clarify the White House’s approach to China, according to news reports last week (see here and here).
Politico reported, “Groups representing hundreds of the biggest U.S. companies, from Amazon to JPMorgan Chase and Nike, have so far gotten lawmakers to kill legislation that would mandate government reviews for American investments in China, weaken anti-Beijing rhetoric in an evolving House legislative package, and insert corporate-friendly provisions to an anti-forced labor bill that would reshape how the federal government implements trade restrictions.”
OUR TAKE
1. After taking office in January, the Biden-Harris administration abandoned the Trump administration’s ideological confrontation with the CCP (i.e. exposing the Party as a brutal Marxist-Leninist organization that does not represent the Chinese people) in favor of a vague “democracy versus authoritarianism” framework. The administration also sought to split its engagement with the PRC into three baskets—competition, confrontation, and collaboration. This approach suggests that Washington is looking to avoid a “new cold war” and zero-sum competition with the PRC. Climate change is seen as an area where the U.S. and China can find “common ground” and eventually reach a breakthrough in the bilateral relationship.
The CCP, however, has made it very clear in the recent round of climate talks that it only views Sino-U.S. climate cooperation through the lens of ideology and politics. For the Party, there is simply no way to disentangle cooperation in climate change from other aspects of the bilateral relationship, and especially not when U.S. actions against the PRC disproportionately impact the CCP’s survival and quest for global domination. From Beijing’s perspective, it must exploit Washington’s climate priorities to encourage America to revert the Sino-U.S. relationship back to the pre-Trump “engagement” era, or to other more favorable arrangements for the CCP regime.
The fundamental difference in how the CCP and the U.S. see climate cooperation means that both sides will be at an impasse on the subject until one side accedes to the demands of the other. The balance of “great power competition” will then swing in favor of the side whose demands are met.
2. Despite newspaper headlines and official rhetoric, America’s approach to China has noticeably softened under the Biden-Harris administration and the current Congress. Meanwhile, the calamitous U.S. withdrawal from Afghanistan has weakened U.S. legitimacy on international affairs and allowed the CCP to “seize discourse power” (搶奪話語權) with a propaganda coup. The Biden-Harris administration’s reticence on China in meeting with Israeli officials also undermines its projected “tough on China” image.
We previously analyzed the two possible routes that the Biden-Harris administration could take to “restore America’s damaged credibility over Afghanistan and bolster its flagging domestic support.” Washington’s recent actions, including the recent climate talks and the issuing of an inconclusive coronavirus origins intelligence report (see here and here), indicate that the administration is presently prioritizing rapprochement rather than “serious competition” with the PRC.
However, Washington could suddenly shift gears if Black Swan events befall China. As we have been laying out in recent newsletters, the CCP is struggling with a “perfect storm” of problems, including defusing Evergrande’s debt bomb, dealing with the coronavirus and its associated troubles, and rescuing a deteriorating economy. Factional struggle in the CCP elite is also approaching a showdown, with Xi Jinping and his political rivals recently sending signals in a bid to rally support for their respective camps. If the Biden-Harris administration sees opportunities in a China Black Swan event to get “anti-Xi, not anti-CCP,” it could preserve Trump’s China tariffs and go after the PRC on human rights, including Xinjiang, Tibet, Taiwan, Hong Kong, and even “sensitive” issues like Falun Gong and forced organ harvesting.
SinoInsight 2
Sept. 2
Xi Jinping announced the formation of a new stock exchange in Beijing.
“We will continue to support the innovation-driven development of small- and medium-sized enterprises by deepening reform of the New Third Board and setting up a Beijing Stock Exchange as the primary platform serving innovation-oriented SMEs,” Xi said in a speech on services trade.
Sept. 3
1. In soliciting public opinion on the new Beijing Stock Exchange (BSE), the China Securities Regulatory Commission revealed the following details:
- Innovative companies that have been listed on the New Third Board (新三板) for a period of 12 months will be allowed to list on the BSE.
- A pilot registration system for listing on the BSE is being set up.
- The BSE will implement a diversified financing system, including common stocks, preferred stocks, convertible bonds, and other financial instruments. There will be no administrative intervention on issues related to price, scale, and other factors.
- No limits will be set on the rise and fall of new shares on the first day of listing, but a 30 percent limit in either direction will be set the following day.
- The BSE will adopt a “moderated” regulatory system (寬嚴適度) in deciding which companies can enter it. Determining factors include the quality of listed companies and the institutional arrangements of SMEs (corporate governance, share incentives, share reduction, etc.).
- The BSE is incorporated and funded by the National Equities Exchange and Quotations.
2. The People’s Bank of China released the PRC’s financial stability report for 2020 (中國金融穩定報告 [2021]). The report noted that the international situation has been “severe and complex” since 2020, while domestic development and stability tasks were “difficult and burdensome” (艱鉅繁重). In particular, the coronavirus pandemic had an “unprecedented impact,” resulting in the most severe global economic recession since the Second World War. The report added that the CCP “further deepened financial reform and opening up” in the face of “major tests and challenges” (重大驗和挑戰), and achieved important “milestones” (階段性成果) in the battle to prevent and resolve major financial risks.
The report added that the world is entering a period of turbulence and change due to the “intertwining and superimposing” of “the current century of change and the epidemic situation,” with instability and uncertainty rising significantly at home and abroad. In looking ahead, the report noted that the authorities need to “maintain the smooth operation of stock, bond, and exchange markets, and closely guard against the shock of external risks.”
OUR TAKE
Xi Jinping is likely looking to simultaneously address several domestic and external problems at once with the creation of the BSE:
Domestic
Xi’s top priority at present is securing a norm-breaking third term at the 20th Party Congress in 2022. To do so, Xi must boost his “quan wei” and pad his political achievements. Xi also needs to target his factional rivals and weaken their influence in the regime.
The establishment of a new stock exchange that is accessible to foreign investors allows Xi to claim that contrary to popular perception, he is not opposed to capital and is continuing in the tradition of Deng Xiaoping’s “reform and opening up.” Xi will also technically be better able to regulate its operations and oversee the healthy development of capital to benefit the regime by setting up the stock exchange in Beijing. If the BSE is able to nurture SMEs to become technology and innovation powerhouses like Google and Facebook, then the trading venue would bring fresh opportunities and vitality to China’s capital market. Should the ideal scenario unfold, Xi would be able to claim credit for the BSE’s success, sweep under the rug recent stock market losses over Beijing’s tech sector crackdown, and even “rehabilitate” his image as a Mao-like anti-reformer.
Having the BSE also allows Xi Jinping to erode his factional rivals’ grip over the financial sector and consolidate his control over it. The Jiang Zemin faction and Party princelings have long influenced the Shanghai and Shenzhen exchanges, and have proved hard to dislodge despite Xi’s campaign to regulate the financial sector since the 19th Party Congress. With the BSE, Xi appears to be finding a way to centralize control over the financial matters without being overly disruptive of existing arrangements, while gradually weakening the “anti-Xi coalition’s” ability to undermine his leadership. Simultaneously, Xi can use the new trading venue to cultivate new interest groups who will be loyal to his rule, potentially win over disgruntled Party princelings and other existing interest groups, and boost the Xi camp’s finances (stamp duty on equity transactions, etc.).
External
Xi Jinping and the CCP appear to have determined that Sino-U.S. confrontation, regardless of who is in the Oval Office, would eventually lead to partial decoupling between the two countries given rising anti-CCP sentiment in America and around the world. However, Xi is aware that the PRC still needs foreign investments to facilitate and accelerate innovation, industry, and other areas vital for regime development and survival.
The BSE, in the ideal scenario, is a solution to the two aforementioned problems. International investors shaken by the recent tech and private tuition crackdowns but who are hesitant about pulling capital out of China or channeling money into real estate now have a place to park their capital that is less politically risky (the BSE has Xi’s personal stamp of approval), at least on paper. Meanwhile, Chinese companies having trouble listing in the U.S. over stricter regulation (the SEC recently required Chinese companies to make greater disclosures of their VIE structure before being approved for listing) or CCP overseas listing restrictions on companies possessing sensitive data can instead secure funding by listing on the BSE.
Finally, Xi and the CCP could be preparing the BSE to eventually “replace” the Hong Kong Stock Exchange as the territory gradually loses its position as a global financial hub.
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We are pessimistic about the prospects of the Beijing Stock Exchange and whether Xi Jinping can realize his capital control goals. For one, the domestic and foreign “anti-Xi coalition” will not sit still and allow Xi to steal a march on them. Xi’s foreign foes could dissuade international investors from pouring capital into the BSE and the regime in general, while Xi’s factional rivals can take advantage of the Xi camp’s lack of familiarity with capital operations to sabotage the BSE, including offering “advice” that paves the way for another “financial coup.” Further, the CCP officialdom’s institutional corruption, blind pursuit of political achievements, and “prefer left rather than right” tendencies will hinder the proper implementation of Party Central’s orders and engender negative outcomes.
Businesses, investors, and governments must be wary of the BSE and not be taken in by surface prospects. The new trading venue’s success and political risks are tied with Xi’s, and the latter faces substantial personal political risks due to escalating factional struggle in the Party elite. Put another way, the BSE “opportunity” comes attached with tremendous political risk.
