SinoInsight 1
1. United States Trade Representative Katherine Tai outlined the Biden-Harris administration’s “New Approach to the U.S.-China Trade Relationship” in a speech at the Center for Strategic and International Studies.Tai said that the administration will have discussions with China about its performance under the “Phase One Agreement,” and she will have “frank conversations” with her counterpart in China in the coming days.
Tai also said that the Biden-Harris administration will restart a “targeted tariff exclusion process” and “keep open the potential for additional exclusion processes.” However, she did not provide further details on the subject.
Finally, Tai said that the administration will “continue to have serious concerns with China’s state-centered and non-market trade practices that were not addressed in the Phase One deal.” She also said that the U.S. will “use the full range of tools we have and develop new tools as needed to defend American economic interests from harmful policies and practices.”
Tai noted that while the administration plans to “directly engage with China on its industrial policies,” its objective is “not to inflame trade tensions with China. Durable coexistence requires accountability and respect for the enormous consequences of our actions,” she said. A USTR fact sheet stated that the Biden-Harris administration “objective is not to escalate trade tensions with China or double down on the previous Administration’s flawed strategy.”
Tai indicated that the Biden-Harris administration was moving away from the Trump administration’s trade policy. “We need to take a new, holistic, and pragmatic approach in our relationship with China that can actually further our strategic and economic objectives—for the near-term and the long-term,” she said. Also, “we must chart a new course to change the trajectory of our bilateral trade dynamic.”
When asked to comment on Sino-U.S. decoupling during the Q&A segment, Tai said that the U.S. and China should not stop trading with each other, and added that “one of the goals we’re looking for is a kind of recoupling.”
A day before Ambassador Tai’s speech, a senior administration official told reporters that the Biden-Harris administration recognized that “China simply may not change” and that “we have to have a strategy that deals with China as it is, rather than as we might wish it to be.”
2. The People’s Liberation Army flew a record 56 warplanes into Taiwan’s air defense zone. The PLA flew a total of nearly 150 aircraft into Taiwan’s air defense zone between Oct. 1 to Oct. 4.
The previous day, U.S. State Department spokesman Ned Price issued a statement saying that the U.S. is very concerned with the PRC’s “provocative military activity near Taiwan, which is destabilizing, risks miscalculations, and undermines regional peace and stability.”
“We urge Beijing to cease its military, diplomatic, and economic pressure and coercion against Taiwan,” Price said.
On Oct. 6, Secretary of State Antony Blinken expressed concern over China’s “provocative military activity near Taiwan” and “strongly urge[d] Beijing to cease its military, diplomatic and economic pressure and coercion directed at Taiwan.”
Oct. 5
1. The CCP reacted positively to Katherine Tai’s speech. A Xinhua report on her speech was neutral in tone, and cited Peterson Institute for International Economics nonresident fellow Gary Hufbauer as saying that Tai’s speech contained “positive factors” like “recoupling” instead of “decoupling,” how the U.S. and China must “coexist,” and tariff exclusions.
Xinhua also cited PRC foreign ministry spokeswoman Hua Chunying as saying recently that Sino-U.S. trade relations should be based on mutual benefit and win-win results, while fighting trade wars will only bring about a lose-lose situation.
2. The USTR began inviting public comments on reinstatement of tariff exclusions. “The exclusions process is a key part of the Biden-Harris Administration’s deliberative, long-term vision for realigning the U.S.-China trade relationship around our priorities and making trade work for American workers and businesses,” said a USTR statement.
3. In remarks to reporters at the White House, President Joe Biden said, “I’ve spoken with Xi [Jinping] about Taiwan. We agree … we’ll abide by the Taiwan agreement. We made it clear that I don’t think he should be doing anything other than abiding by the agreement.”
It is unclear what Biden was referring to because there is no “Taiwan agreement.” The Taiwan Foreign Ministry sought clarification from the United States and were reassured that America’s commitment to them was “rock solid,” according to news reports.
Media outlets suggested that Biden was referring to the Taiwan Relations Act and Washington’s “one China” policy, while some China scholars felt that the president’s lack of clarity was unhelpful.
4. In an article published by Foreign Affairs magazine, Taiwan leader Tsai Ing-wen promoted Taiwan as a “determined practitioner of democracy” and warned of the “regional ambitions of the Chinese Communist Party.”
Tsai wrote that countries “should remember that if Taiwan were to fall, the consequences would be catastrophic for regional peace and the democratic alliance system.” The fall of Taiwan would also “signal that in today’s global contest of values, authoritarianism has the upper hand over democracy.”
Tsai also noted that while “Taiwan does not seek military confrontation,” it will “do whatever it takes to defend itself” if its “democracy and way of life are threatened.”
5. A Defense Department spokesperson confirmed to Politico magazine that the Pentagon will use “strategic competition” instead of “great power competition” to describe the Biden-Harris administration’s approach to China and differentiate itself from the Trump administration’s approach.
Oct. 6
1. U.S. National Security Advisor Jake Sullivan and Politburo member Yang Jiechi met in Zurich, Switzerland, for six hours of talks.
According to the U.S. readout of the meeting, they followed up on the Sept. 9 phone call between President Biden and Xi Jinping about “maintaining open lines of communication to responsibly manage the competition between the United States and the People’s Republic of China (PRC).” Sullivan also raised areas where both countries could work together “to address vital transnational challenges, and ways to manage risks in our relationship,” as well as areas of concern like “human rights, Xinjiang, Hong Kong, the South China Sea, and Taiwan.”
The White House also announced after the Sullivan-Yang meeting that Xi Jinping and President Biden are planning to have a virtual meeting by the end of the year.
Meanwhile, according to the PRC readout, Yang Jiechi said that both sides agreed to “strengthen strategic communication, properly manage differences, avoid conflict and confrontation, seek mutual benefit and win-win results, and work together to promote the return of US-China relations to the right track of healthy and stable development.”
Yang also said that the PRC “attaches importance to President Biden’s recent positive statements on China-U.S. relations” and has noted that “the U.S. side has expressed its intention not to contain China’s development and not to engage in a ‘new cold war.’” Yang added that the PRC “hopes that the U.S. side will adopt a rational and pragmatic policy towards China.”
PRC official media did not mention a Biden-Xi virtual meeting.
2. In an interview with Politico, NATO Secretary-General Jens Stoltenberg said, “We don’t regard China as an adversary or an enemy. We need to engage with China on important issues such as climate change—there’s no way to reduce emissions enough in the world without also including China. We need to discuss arms control with China. So, we need to engage politically with China.”
3. Taiwan defense minister Chiu Kuo-cheng told Taiwan’s legislature that the People’s Liberation Army would be able to launch a full-scale invasion of Taiwan with minimal losses by 2025. “For our military the current situation is really the grimmest in the more than 40 years since I joined the service,” he said.
OUR TAKE
1. The Biden-Harris administration is clearly signaling its intention to reverse the Trump administration’s China policies. U.S. Trade Representative Katherine Tai’s speech and statements by the USTR reflect the Biden-Harris administration’s disapproval of how the Trump administration handled trade with China. Tai’s call to “change the trajectory” of the Sino-U.S. trade relationship and talk of “recoupling,” as well as the Defense Department’s statement to Politico about “strategic competition” instead of “great power competition” with China, also indicate that the Biden-Harris administration is laying the groundwork to roll back rather than maintain (contrary to what many mainstream media outlets and commentators are claiming), the China policies of the previous administration.
We believe that the Biden-Harris administration’s restarting of the tariff exclusion process is suspect. Should the administration be lax on rejecting exclusion applications and cave to powerful lobbyists, then the end result would be the de facto removal of Trump’s tariffs even though they officially remain on the books. Other China watchers also share our suspicion that the USTR’s “tariff exclusion” is really another way of going about “tariff removal.”
The Biden-Harris administration’s “New Approach to the U.S.-China Trade Relationship” and various China actions since the Biden-Xi phone call on Sept. 9 affirm our earlier analysis that the administration is “substantial[ly] weakening … the U.S. stance towards the CCP and further adulterating of the ‘China challenge’ as laid out by the Trump administration.” Newspaper headlines and framing of the Biden-Harris administration as being “hardline” on China or essentially maintaining the Trump administration’s approach to China are contradicted by the former’s string of pro-PRC moves, including reaching a deal to release Huawei’s Meng Wanzhou, dropping Trump’s TikTok and WeChat ban, ignoring the ideological dimension of confronting the CCP, and being openly in opposition to the Trump administration’s China policies. Thus, while statements like the one by the senior Biden-Harris administration official to reporters a day before Katherine Tai’s speech (“China simply may not change” … “we have to have a strategy that deals with China as it is, rather than as we might wish it to be”) sound very similar to those issued by Trump officials, they actually signal the exact opposite approach to China when viewed in the larger context of what Washington has done to date.
While the Biden-Harris administration insists on neatly separating its dealings with China along the lines of cooperation, competition, and confrontation, the CCP has made it clear that it would only go along with the U.S. if all its political demands are met. With the CCP not looking likely to compromise on its “all-or-nothing” stance to the bilateral relationship, we do not rule out Washington making more concessions to Beijing before the end of the year as it strives to show that its “cooperation, competition, confrontation” paradigm can deliver results, particularly in the arena of climate change and “maintaining open lines of communication” between the two countries. To that end, the Biden-Harris administration could look to “resolve” more items on the “two lists” that the PRC vice minister Xie Feng handed to U.S. Deputy Secretary of State Wendy Sherman in Tianjin in July. At least one of the major items—revoking Meng Wanzhou’s extradition request—was settled near the end of September.
The CCP could condition the Biden-Xi virtual meeting at the end of the year with how much progress the U.S. makes in addressing its “two lists” and other “concerns,” as well as “promoting the return of US-China relations to the right track of healthy and stable development,” i.e. reverting the U.S. to the “engagement” policy of the pre-Trump era. The lack of mention of the virtual meeting by PRC official media indicates that the CCP is prepared to pull back from the engagement if its demands are not met.
2. NATO Secretary-General Jens Stoltenberg’s “China is not an enemy” remark echoes the title of a 2019 open letter to the Trump administration by pro-engagement policy “China hands.” His remarks about engaging China on climate change and politically also echoes Washington, and is indicative of a shift towards rapprochement with the PRC by the U.S. and its allies.
We previously laid out the case for why the CCP, but not China, is an enemy of the U.S. and the rest of the world.
3. There are several likely factors behind the PLA’s recent mass incursion into Taiwan’s air defence identification zone (ADIZ).
First, the CCP is looking to assert its “quan wei” during the PRC National Day period with a show of military might against the ROC as a reminder of who’s boss.
Second, the CCP is looking to intimidate so-called “separatists” in Taiwan and advance its long-term agenda to achieve “reunification” via intimidation, subversion, and other non-kinetic means.
Third, the CCP is emboldened by growing U.S. weakness towards China, General Mark Milley’s “no conflict” assurances to General Li Zuocheng last October, and retreating American influence and prestige around the world in general after the Afghanistan withdrawal debacle. Put another way, the CCP dares to fly warplanes into Taiwan’s ADIZ with impunity because it knows that Washington has no appetite to challenge China and has reduced credibility as the “world’s policeman.” In contrast, the PRC was far less provocative in the South China Sea and the Taiwan Strait during the Trump era because it knew that President Donald Trump and senior administration officials like former Secretary of State Mike Pompeo were serious about dealing with the “China challenge.”
Finally, the CCP is looking for leverage in its upcoming meetings with U.S. officials. By doing what the Biden-Harris administration appears to fear most—possible conflict with China over Taiwan or other U.S. commitments in the Indo-Pacific with “escalating” PLA provocations—the CCP hopes to find U.S. officials coming to the negotiating table in a compromising mood and not speaking from a “position of strength.”
Meanwhile, the recent messaging by Tsai Ing-wen and the ROC government indicate that they are not assured by the Biden-Harris administration’s “rock solid” commitment to Taiwan given the obvious weakening of America’s stance towards the PRC, the Afghanistan debacle, and possibly even what seems like increased efforts by the U.S. and its allies to “offshore” Taiwan’s semiconductor technology (see here and here). As Taiwan searches for greater international support, the CCP could step up its influence operations and double down on intimidating the ROC and countries who support Taiwan.
4. Businesses, investors, and governments should be warned that Sino-U.S. rapprochement will not lower political risks in China or make the regime more “investable.” The CCP has never abandoned its Marxist-Leninist ideology and the PRC will not suddenly become a benign, responsible world power after its current demands have been “satisfied” because global domination is its ultimate agenda. Efforts to kowtow and curry favor with the CCP in the hopes of securing benefits and reprieve from Beijing’s wrath are misguided; as Lenin observed, “the capitalists will sell us the rope with which to hang them.”
Sino-U.S. rapprochement also gives Xi Jinping a golden opportunity to eliminate his factional rivals once and for all. A noticeable reduction in U.S. pressure towards the PRC allows Xi to focus on resolving domestic problems, including very tricky and volatile ones like factional struggle. Xi can also leverage the improving Sino-U.S. bilateral relationship to boost his “quan wei” and justify to the Party elite his persistence in what was earlier a “failed” strategy in dealing with America. Already, Xi has been stepping up his “rectification” of the financial sector and the political and legal affairs apparatus, including the recent high-profile takedowns of Sun Lijun and Fu Zhenghua.
Xi intensifying the purge of his rivals and “another Party Central,” however, dramatically increases Black Swan risks in China given the “you die, I live” nature of factional struggle in the CCP elite. Instead of weighing investing more in China or building better relations with the PRC, businesses, investors, and governments should be making contingencies for a potential “Berlin Wall moment” for the CCP between now and the 20th Party Congress in 2022. Countries should also stand up for Taiwan, and cultivate, maintain, or strengthen a tough stance towards the CCP regime to better protect their national interests and ensure self-preservation in the rapidly changing geopolitical climate.
SinoInsight 2
China’s domestic steel purchasing managers’ index (PMI) increased 3.2 percent from the previous month to 45.0 points in September 2021, according to a report by official index compiler CFLP Steel Logistics Professional Committee (CSLPC). The report noted that steel production declined due to restrictions on production and the implementation of “dual energy consumption control.”Lower steel production also affected iron ore purchases, with the purchasing index for the latter at 39.7 points in September 2021, the second consecutive month it was below 40 points. Meanwhile, iron ore prices continued to decline in September, with prices falling by 60 percent over the past three months.
The CSLPC report noted that while market demand was improving, the new orders index only rose 7.4 percentage points from the previous month to 39 points in September. The new export orders index was at 39.5 points, or the third consecutive month that the index was below 40 points.
The report also noted that coke prices remained high overall in September, meaning that costs for steel making companies rose rather than fell despite declines in iron ore prices. Meanwhile, the purchasing price index for steel in September increased 3.9 percentage points from the previous month to 51.6.
Analysis: The rising cost of steel despite reducing steel capacity, iron ore prices falling by 60 percent, and fewer new orders indicates that the prices of coal and other raw materials must be very high.
Oct. 4
1. China began unloading a small number of Australian coal shipments recently despite an unofficial import ban, according to a Financial Times report. Braemar ACM Shipbroking lead dry cargo analyst Nick Ristic told FT that a handful of Australian cargo waiting outside Chinese ports since the unofficial ban was enforced last year “headed into berth last month and draft change had been observed, indicating that the coal had been unloaded.”
Ristic said 450,000 tonnes of coal had been discharged. Energy research company Kpler said a total of five vessels waiting offshore had discharged 383,000 tonnes of Australian thermal coal into China in September. Traders told FT that it was unlikely that the discharged coal was resold to other countries “because of signals from Chinese authorities that it would be allowed to clear customs.”
2. State media China News Weekly published a lengthy special report titled “Why is There a Power Shortage in Northeastern China? Will it be Normalized?” (“特別報導|東北缺電何以至此？會常態化嗎?”) The article said that the electricity shortage in the three northeastern provinces of Liaoning, Jilin and Heilongjiang is very severe because local governments sought to control energy consumption targets previously and interfered with enterprises with high energy consumption through administrative means.
China News Weekly cited a Heilongjiang provincial Development and Reform Commission document dated Sept. 30 which stated, “The province’s orderly power consumption this time has not happened in 27 years. The lack of power is not the province’s own problems, but came about due to [lack of] balance in the power grid.”
The article added that under normal circumstances, power restrictions apply mainly to the secondary sector and not to residents, who make up only a small proportion of total energy consumption. Zhou Jinghong, deputy director of the Changchun Institute of Technology’s electrical engineering department and former long-time employee at the Jilin Power Grid, told China News Weekly that the power consumption of residents in Liaoning Province only accounts for about 10 percent of total power consumption, while the figure is slightly higher in Jilin Province.
However, residents in northeast China have been affected by the recent power crunch because there are not many industries there that can be subjected to electricity restrictions (“orderly power consumption”). A high proportion of electricity users in the northeast are from important industries (military, energy, steel, etc.), public services, and residential customers, while industries where power restrictions can apply are proportionately smaller. China News Weekly noted as an example that only 20 percent of industries in Heilongjiang can be subjected to “orderly power consumption.”
A person with the PRC’s State Grid Dispatch Center told China News Weekly that restrictions to residential electricity supply, which are forbidden in principle, have to be implemented as an emergency measure when the power grid is overstretched and is at risk of collapsing.
The China News Weekly article noted a connection between coal shortage in northeast China, the CCP’s energy policy, and anti-corruption work in Inner Mongolia. Yuan Jiahai, a professor at the North China Electric Power University’s School of Economics and Management, told the media outlet that northeastern China was never short on electricity and in fact was a power-rich area from 2007 until recently. However, the CCP’s capacity reduction policy saw annual coal output fall to 3.75 billion tons from 5 billion tons. Also, “20-year retroactive investigations” into coal industries in Inner Mongolia that began last year appeared to have impacted coal production, resulting in reduced coal capacity.
The article also pointed out the steep economic losses in the northeastern provinces resulting from the power crunch, citing Heilongjiang as an example. Power cuts in the province from Sept. 26 are expected to affect up to 1.05 billion yuan of Heilongjiang’s industrial output value. If power rationing in Heilongjiang continues until mid to late October, then an estimated 1.63 billion yuan of industrial output value and 610 million yuan of industrial added value will be impacted. Feng Yongsheng, an associate researcher at the Chinese Academy of Social Sciences’ Institute of Financial and Economic Strategy, believes that more extensive and severe power shortages will occur more frequently over the “14th Five-Year Plan” period.
The article added that the biggest problem at present is not the high price of coal, but the fact that coal is hard to come by elsewhere. An employee at a thermal power plant said that the plant is looking to “purchase coal with all its might” at the moment, with price not being a consideration. “A battle around guaranteeing supply and sourcing coal is starting,” China News Weekly wrote.
Near the conclusion, the article noted that there could be a cold winter this year and leading cadres are “more afraid of not being able to supply heat than being unable to supply electricity.” This is particularly so because leading cadres are accountable for providing heating in their area, but they may not be able to guarantee electrical heating (China is phasing out coal heating) because electricity is supplied by a unified power grid that is currently experiencing supply problems.
3. State media Zhejiang Daily reported that Zhejiang Province purchased 136,000 tons of coal from Kazakhstan for the first time. The coal arrived in Zhejiang after 30 days of shipping and a 8,501 nautical mile trip before arriving at Fuxing Fuel Company transfer terminal, according to the newspaper.
Meanwhile, other mainland media outlets reported that large-scale power cuts in the province meant that textile operations in Keqiao District, a major textile town in Zhejiang with nearly 200 printing and dyeing factories (a third of China’s printing and dyeing capacity), had to be scaled back. Also, printing and dyeing fees had increased by about 1,ooo yuan per ton, while the prices of apparel, curtains, and other products down the supply chain also raised across the board.
4. Australia showed a surplus on international trade in August owing to exports of liquefied natural gas and coal to Asia. The country’s international trade in August grew from A$12.7 billion in July to A$15.1 billion, the highest on record and exceeding analysts’ forecasts of a drop to A$10.3 billion.
Australia’s exports grew 4.1 percent from the previous month to A$48.5 billion in August, while Australia’s goods exports to China climbed 55 percent from a year earlier to A$18.6 billion.
OUR TAKE
1. The PRC has long experienced energy supply problems, and the key culprits of those problems are often the CCP authoritarian system and its bureaucracy. The usual culprits are at play in the recent power crunch, particularly with the CCP’s unofficial trade ban against Australia and boycott of Australian coal contributing to its energy crisis. The fact that the CCP has been importing Australian coal again recently is a blow to its “wolf warrior” diplomacy and Beijing’s prestige. Prolonged power problems will eat into whatever political gains Xi Jinping may have gotten with his energy strategy and create opportunities for his factional rivals to exploit.
The “anti-Xi coalition” and officials with lackluster performance (“passive resistance,” “prefer left rather than right,” “one-size fits all” approach, etc.) could look to blame the “retroactive investigations” in Inner Mongolia and reduced coal imports for the recent power crunch and shrug off personal responsibility for the crisis. Self-interest and inaction in the CCP bureaucracy worsens the “orders not leaving Zhongnanhai” problem plaguing the Xi leadership, and throws up another high hurdle for Xi Jinping to overcome ahead of the Sixth Plenum of the 19th Party Congress and the 20th Party Congress next year.
The China News Weekly report indicates that the Xi leadership is pulling out all stops to resolve the electricity shortage, even if it means spending more money to “purchase coal with all its might.” Failure to satisfactorily address the power issue in the short term, and especially before the onset of winter, will further set back China’s deteriorating economy, aggravate social contradictions and turbulence, and heighten political risks for Xi Jinping and the CCP regime.
2. The China News Weekly piece blames a shortage of coal supply for the current power problems in the PRC. However, China is the world’s largest producer of coal, and technically should not be running into supply trouble.
China’s coal supply problem can be traced back to CCP policy. To resolve overcapacity issues and advance its energy strategy, Beijing began cutting back on coal production from the second half of 2012. Around 2015, the CCP shut down a number of private power plants with safety issues along with carrying out supply side reforms to preserve large state-owned enterprises.
The CCP’s cutting back from coal in turn affected large coal-producing SOEs and their ability to secure investments. This eventually led to Yongcheng Coal & Electricity Holding Group Co defaulting on a 1 billion yuan bond last year. That Yongcheng, a large SOE in the coal-producing province of Henan, could default on a bond bodes ill for China’s coal production industry in general, with the latest power crunch likely being one of the outcomes of broader industry malaise.
