1 Kerry, Kissinger visit to Beijing deepens ‘Sino-US ‘deténte’
John Kerry, President Joe Biden’s climate envoy, traveled to China from July 16 to July 19. Kerry was the third senior U.S. official after Secretary of State Antony Blinken and Treasury Secretary Janet Yellen to visit Beijing in recent weeks.
While Kerry was in Beijing, former Secretary of State Henry Kissinger also visited China in his personal capacity.
No climate breakthrough
John Kerry and his team met with several PRC officials in Beijing, including PRC climate envoy Xie Zhenhua, CCP Foreign Affairs Commission Office director Wang Yi, PRC vice president Han Zheng, and PRC premier Li Qiang.
During a press briefing near the end of his trip, Kerry told reporters that while both sides had a “very extensive set of frank conversations,” they “realized that it’s going to take a little bit more work to break the new ground.” He added that both sides “agreed that we’re going to meet intensively in the next weeks.”
Kerry’s remarks and the official U.S. and PRC readouts of meetings that Kerry had on his trip indicated that the latest round of Sino-U.S. climate discussions did not achieve any immediate breakthroughs. Another sign that Kerry’s trip yielded no results was Xi Jinping’s remarks to a national conference on ecological and environmental protection that was held during the same period as Kerry’s visit. Xi said that while the PRC’s climate commitment is “unswerving,” the “path towards the goals as well as the manner, pace and intensity of efforts to achieve them should and must be determined by the country itself, rather than swayed by others.”
Some Republican lawmakers criticized Kerry and the Biden administration for the outcome of the climate talks.
House Foreign Affairs Committee chair Michael McCaul (R-Texas) said at a press conference, “Kerry returning from his China trip with nothing from the [Chinese Communist Party] beyond plans for future talks is just another example of how this administration has no China strategy.” He added, “Diplomacy can be effective but not from a position of weakness — the administration must have clear goals and asks when it comes to China.”
Senate Energy and Natural Resources Ranking Member John Barrasso (R-Wyo.) said, “Joe Biden’s playing right into China’s hands. China is not going to give up their economy for the environment.”
‘Never forget old friends’
Henry Kissinger met with PRC defense minister Li Shangfu, Wang Yi, and Xi Jinping during his China trip.
Li Shangfu
During their meeting on July 18, Li Shangfu said that “some people on the U.S. side have failed to move in the same direction as the Chinese side, resulting in China-U.S. relations hovering at a low point since the establishment of diplomatic relations,” according to a PRC defense ministry statement.
Li added that the PRC has “always been committed to building stable, predictable and constructive Sino-U.S. relations, and we hope that the U.S. will work with China to implement the consensus of the heads of state of the two countries and jointly promote the healthy and stable development of the relationship between the two militaries.”
Kissinger told Li: “The United States and China should eliminate misunderstandings, coexist peacefully and avoid confrontation. History and practice have continually proved that neither the United States nor China can afford to treat the other as an adversary.”
Wang Yi
At their meeting on July 19, Wang Yi hailed Kissinger as an “old friend” of China and said that the latter played an “irreplaceable role” in growing mutual understanding between the two sides. “U.S. policies towards China require Kissinger-style diplomatic wisdom and Nixon-style political courage,” according to a PRC foreign ministry readout of the meeting. Wang also brought up the Taiwan issue, Ukraine, artificial intelligence, and other topics with Kissinger.
The PRC foreign ministry readout had Kissinger telling Wang that “no matter how difficult it is, both sides should treat each other as equals and maintain contact. It is not acceptable to try to isolate or separate from the other side.” Kissinger also reportedly told Wang that “although he does not hold public office, he is concerned about U.S.-China relations and supports recent efforts made by both sides to improve relations.”
Xi Jinping
On July 20, Xi Jinping met Henry Kissinger at the Diaoyutai State Guesthouse, a diplomatic complex where senior PRC leaders hold receptions for foreign dignitaries. The meeting took place at Diaoyutai’s No. 5 Villa, or the same place where Kissinger met Zhou Enlai when he first visited China in 1971.
In the backdrop of the room where the pair met was a painting of plum blossoms, or flowers that bloom under tough conditions and symbolize longevity and resilience. PRC state media spotlighted a massive “longevity peach” (壽桃, or a Chinese bun filled with lotus paste or red bean paste) and 99 small “longevity peaches” that had been prepared at the luncheon Xi held for Kissinger after their meeting. State media also prominently covered the meeting (including lead articles on Xinhua’s website and a front page article in People’s Daily) and issued commentaries calling for the improvement of Sino-U.S. relations.
According to state mouthpiece Xinhua, Xi noted that Kissinger had marked his 100th birthday and visited China more than 100 times over the years. “These two 100s give this visit special significance,” Xi said.
Xi then recalled that Kissinger first visited China at a “crucial inflection point” for the U.S. and China, and Mao Zedong, Zhou Enlai, Richard Nixon, and Kissinger had “made the right decision for China-U.S. cooperation and launched the process of normalizing the China-U.S. relationship.”
“We never forget our old friends, nor your historic contributions to promoting the growth of China-U.S. relations and enhancing friendship between the two peoples,” Xi told Kissinger.
Xi said that the world is going through “great changes unseen in a century” and the “international landscape is going through major shifts.” He noted that the U.S. and China have “once again come to a crossroads” and both sides should follow “the three principles of mutual respect, peaceful coexistence, and win-win cooperation” to “help each other succeed and prosper.” Xi added, “China is ready, on this basis, to explore with the United States the right way for the two countries to get along and take their relations steadily forward, which will be good for both sides and deliver benefits to the world.”
Xinhua cited Kissinger as telling Xi that “the relationship between our two countries is a matter of world peace and the progress of human society.” Kissinger reportedly added, “Under the current circumstances, it is imperative to maintain the principles established by the Shanghai Communique, appreciate the utmost importance China attaches to the one-China principle, and move the relationship in a positive direction.”
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State Department spokesman Matthew Miller said on July 18 that the PRC had told Secretary Blinken in Beijing that Kissinger would be visiting. “I will say he was there under his own volition, not acting on behalf of the United States government,” Miller added.
Miller also said, “I don’t know of any conversations planned with [Kissinger], but I wouldn’t be surprised if at some point he briefs officials here on his conversations. He’s done that a number of times, dating back decades, is my understanding.”
On July 20, White House National Security Council spokesperson John Kirby said that it was “unfortunate that a private citizen can meet with the defense minister and have a communication and the United States can’t.”
Kirby added, “That is something that we want to solve. This is why we continue to try to get the military lines of communication back open because when they’re not open and you have a time like this when tensions are high, miscalculations also, then the risk goes high.”
Kirby also said that Biden administration officials “look forward to hearing from Secretary Kissinger when he returns, to hear what he heard, what he learned, what he saw.”
According to a South China Morning Post article published on July 20, Kissinger’s “private trip” was meant to “get a better understanding of the Chinese leadership’s thinking” and he will share his impressions with the U.S. government upon his return, according to a source familiar with the matter. Kissinger’s trip was also planned at least two months prior.
Washington keeps up pressure
July 17
Bloomberg News reported that the Biden administration’s plans to restrict U.S. investments in China will likely be ready by the end of August and possibly ban investment in China’s semiconductors, quantum-computing, and artificial intelligence sectors, citing people familiar with the matter. The restrictions will also likely apply only to new investments, while China’s biotechnology and energy sectors will be spared.
In an interview with Bloomberg TV, Janet Yellen said that the restrictions would be “narrowly targeted” to the aforementioned sectors. “These would not be broad controls that would affect US investment broadly in China, or in my opinion, have a fundamental impact on affecting the investment climate for China,” she added.
July 19
1. The U.S. Department of Health and Human Services suspended funding to the Wuhan Institute of Virology over the latter’s failure to provide documentation related to concerns over biosafety protocol violations at the facility.
2. The Wall Street Journal reported that the House Select Committee on the Chinese Communist Party notified GGV Capital, GSR Ventures, Walden International, and Qualcomm Ventures (Qualcomm’s investment arm) that the panel is examining many of their investments in Chinese companies involved in semiconductors, artificial intelligence, and quantum computing.
July 20
The U.S. Senate voted 85 to 14 in favor of adding an amendment to the National Defense Authorization Act that would ban exports of oil from the Strategic Petroleum Reserve to China.
July 21
At a press conference on board an Australian navy ship, U.S. Navy Secretary Carlos Del Toro said that the “most important message” that the PRC can take from the Talisman Sabre exercise in Australia and “anything that our allies and partners do together is that we are extremely tied by the core values that exist among our many nations together.” He added, “We are prepared to actually operate together in defense of our national security interests and in defense of the core values that we all share.”
Talisman Sabre began in 2005 as a biennial joint exercise between Australia and the U.S., but expanded in 2023 to 13 nations (including Japan, Germany, Papua New Guinea, Fiji, and Tongaand) and more than 30,000 military personnel. The soldiers will practice ground maneuvers, amphibious landings, air combat and maritime operations, and will also focus on logistics. Four nations, including India, sent observers.
Our take
The Xi leadership’s warm embrace and adulation of Henry Kissinger — especially allowing a mere “private citizen” to meet with the PRC defense minister while rejecting the ruling U.S. government’s frequent entreaties for its senior officials to gain an audience — stands in stark contrast to its lukewarm and sterile climate meetings with John Kerry.
Beijing’s difference in treating Kerry and Kissinger sends a clear message to the Biden administration and Western establishment elites — the CCP will only “normalize” its dealings with the U.S. if Washington returns Sino-U.S. relations back to the pre-Trump, pro-China “engagement” era that Kissinger ushered in with covert diplomacy in 1971.
The Xi leadership’s treatment of Kissinger is also likely intended to signal to the CCP’s “old friends” on Wall Street and elsewhere that the regime very much still welcomes them and their “friendship.” Beijing would be hoping that Wall Street and China-friend foreign investors will continue talking up China’s growth and recovery prospects, pouring funds into China, and lobbying the Biden administration to roll back “anti-China” efforts so as to prop up the regime in a crucial period (investors losing confidence in China after dismal Q2 figures, the PRC’s “economic shield” losing efficacy amid efforts in the West to “diversify” and “de-risk” from China, etc.). Beijing’s gesture, however, may not be enough to convince Wall Street and foreign investors given the current state of the Chinese economy and increasing concerns about the CCP’s efforts to tighten national security (including revisions to the anti-espionage law).
Party and national interests dictate that neither the CCP nor the Biden administration can afford to allow U.S.-China relations to return to “engagement.” The CCP regime is already facing unprecedented crises at home and abroad, and cannot afford to show more weakness in dealing with the U.S. lest it loses even more political legitimacy. Yet Beijing cannot wholly shut off Washington for fear that bilateral tensions will escalate and worsen its deeply unpleasant situation. The Xi leadership looks set to tough it out in “protracted struggle” with the U.S., and will correspondingly toughen or “weaken” its attitude towards Washington as it “delays and waits for change” for future opportunities that it can seize upon to advance its agenda of domination.
Meanwhile, the Biden administration has to take certain actions (restricting China’s access to advanced technologies, etc.) that would alienate the CCP but are necessary to safeguard U.S. national security interests and maintain America’s position as the preeminent global power. The administration is also under pressure from Congress and the American people to at least keep up the semblance of being “tough on China.” The Biden administration’s efforts to challenge China and protect U.S. interests, however, run up against the CCP’s own regime interests, forcing Beijing to stay passive-aggressive towards Washington and ensuring that any “thaw” in the “new cold war” would be temporary and likely short-lived.
What’s next
While some observers have been talking up the current Sino-U.S. “deténte,” this state of affairs is at best illusory and very fragile as neither the Biden administration nor the Xi leadership has shifted in actuality from their respective positions towards each other despite the Biden administration’s “intense diplomacy.”
We believe that Sino-U.S. tensions remain at an elevated state and could suddenly take a turn for the worse as both sides probe each others’ weaknesses and look to take advantage of various developments (changes in the Russia-Ukraine war; political, economic, and social problems in the U.S. and China; etc.) to secure their respective interests.
2 CCP ‘hard-sells’ 31-point private sector plan to drown out skepticism
On July 19, the CCP Central Committee and the PRC State Council issued an opinion on promoting the development and growth of the private economy (關於促進民營經濟發展壯大的意見).
The opinion stated in its opening segment that the private economy is “an important force for promoting Chinese-style modernization, an important foundation for high-quality development, and an important force for promoting [the PRC’s] comprehensive completion of socialist modernization and the realization of the second centenary goals.” This was the first time that the CCP came up with the phrasing of the private economy being an “important force for promoting Chinese-style modernization.”
The opinion then put forth a 31-point action plan in support of the private economy. Some of the measures listed include eliminating barriers to market access, financing support policies, clearing up the mechanism for delinquent accounts, improving the judicial and law enforcement system (to benefit private enterprises), strengthening policy communication and guidance, setting up “traffic lights” to regulate capital, promoting the healthy growth of members of the private sector, and creating a social atmosphere that cares for the development of the private economy.
The opinion added that, while adhering to the “two unwaverings,” the PRC must also “firmly resist and promptly refute and clarify erroneous statements and practices that call into question the basic socialist economic system, as well as negate and weaken the private economy,” and “promptly respond to concerns and dispel misgivings in a timely manner.” The PRC must further “give understanding, tolerance, and assistance to the failures and mistakes made by members of the private sector in their course of legitimate business operations.”
Private entrepreneurs publicly ‘back’ the 31-point plan
Prominent private entrepreneurs and companies publicly expressed their support for the 31-point action plan a day after it was released:
- Pony Ma, the founder and chairman of Tencent Holdings, said in a state media editorial that he was “extremely excited and deeply inspired.” Ma added that Party Central attaches “great importance to the private economy and private enterprises,” and always “regards private enterprises and private entrepreneurs as one of their own.”
- Lei Jun, the founder, chairman, and CEO of Xiaomi Group, said that the plan was a “clear policy signal” for companies to push ahead with “high-quality development and contribute to the modernization of science and technology.” Lei added that he “deeply felt” the “unprecedented concern and attention” that Party Central and the State Council had attached to the private economy after studying the opinion on promoting and developing the private economy.
- Wanda Group expressed its firm support for the opinion on its official website.
- Zong Qinghou, the founder, chairman, and CEO of China’s leading soft drinks company Hangzhou Wahaha Group, said in a statement published by a Zhejiang province industry group in a social media post that his company would “take the path of serving the country” and “not let down the Party or the state. The Zhejiang province industry group’s social media post also contained praise for the 31-point action plan from 13 other local entrepreneurs, including Geely chairman Li Shufu and ZTO Express founder Lai Meisong.
- In an article published in state media, Ma Guangyuan, deputy director of the China National Democratic Construction Association and a commentator on state broadcaster CCTV’s financial channel, said that the 31-point plan had newly defined the status and role of the private economy in Chinese-style modernization. Ma added that the publication of the opinion meant that the “private economy withdrawal theory” (民營經濟退出論) is a serious distortion of Party policy, is “completely wrong,” and those who promote it should be severely “punished.” However, Ma also cast doubt about the operability of the 31-point plan in a roundabout way in noting that there would really be “no more worries” with regard to the development of the private sector if there are no more policies issued in support of the private economy in the future.
Past CCP policies in support of the private sector
2005: The State Council issued several opinions on “encouraging, supporting, and guiding the development of the individual, private, and non-public economies” (關於鼓勵支持和引導個體私營等非公有製經濟發展的若干意見). Also known as the “36 articles on the non-public economy,” the opinion was the first national-level document on promoting the development of the non-public sector since the founding of the PRC.
2010: The State Council issued several opinions on “encouraging and guiding the healthy development of private investment” (關於鼓勵和引導民間投資健康發展的若干意見), which was later known as the “36 articles on private investment.” The document came about after people realized that so-called “investment areas open to the private sector” were in fact areas that some state-owned capital were unwilling to enter, or areas with meager profits, or areas that were in urgent need of capital.
2018: Xi Jinping said at a symposium on private enterprises that “private enterprises and private entrepreneurs are like our own people.”
2019: The State Council issued an opinion on “creating a better development environment to support the reform and development of private enterprises” (關於營造更好發展環境支持民營企業改革發展的意見). The document was later known as the “28 articles on private enterprises.”
2022: The 20th Party Congress report reiterated the CCP’s commitment to upholding the “two unwaverings,” that is, unwaveringly consolidating and developing the public economy, and unwaveringly encouraging, supporting, and guiding the development of the private economy.
Big picture
China’s official second-quarter and June economic data fell short of expectations, reflecting the PRC’s struggles with post-“zero-COVID” recovery and serious economic deterioration.
Our take
1. The CCP has turned to the private sector and the market economy on multiple occasions in the history of the PRC as a means to ensure regime survival and build a foundation to advance its domination agenda at home and abroad. The Xi leadership’s 31-point action plan in support of the private economy is the latest “pragmatic” effort by the CCP to preserve the regime amid mounting internal and external crises.
There should be no illusions that the CCP is on the road to embracing genuine market reform or moving away from socialism this time with its 31-point plan. Beijing makes clear in its opinion that the development and growth of the private economy is for the “comprehensive completion of socialist modernization and the realization of the second centenary goals,” that is, to serve the Party’s ultimate aim of gradually moving China into a true communist society and achieving global dominance. Also, the PRC will “firmly resist and promptly refute and clarify erroneous statements and practices that call into question the basic socialist economic system.”
History has shown that the PRC’s actions in support of the private sector are mostly political gestures that do not help private enterprises and entrepreneurs much. For one, the CCP has never completely opened up access to important industries and economic fields in China to private companies. On the contrary, the CCP has sought to induce private companies into investing and provide financial “blood transfusions” to the regime and state-owned enterprises with policies (such as the “36 articles on private investment” rolled out in 2010) that were supposed to be beneficial to private enterprises.
The CCP has even appropriated the achievements of private companies in technological innovation. A recent example is the Xi leadership’s crackdown on tech companies, controlling of big data, and taking stakes in major internet companies in the name of national security.
There is also not much difference in the CCP’s earlier policies in support of the private economy. For instance, observers have noted that the “36 articles on private investment” introduced in 2010 encourages and supports the entry of private capital in areas that were basically covered in the “36 articles on the non-public economy” in 2005, albeit with greater operationalization. Observers further note that the “36 articles on private investment” appeared to be a soft policy response to popular demand for greater private sector support and did not actually do anything to aid private companies hoping to break into profitable sectors already monopolized by state-owned capital.
2. The CCP already appears to be struggling to generate enthusiasm for the 31-point action plan despite having recruited prominent entrepreneurs to publicly back it.
Hu Xijin, the former editor-in-chief of Party mouthpiece Global Times who had recently been posting about his stock trading experience and talking up the Chinese economy on social media, posted on July 21 that he “never thought that such a major policy would fail to immediately inspire confidence in the stock market.”
Meanwhile, Chinese netizens have remarked using indirect language (to escape CCP censorship and trouble with the authorities) that the CCP getting prominent private sector executives to publicly back the 31-point action plan is a move that defies market and economic logic, and in fact gives people a “scary” feeling of “nostalgia.” That is, netizens are saying that the CCP’s latest plan to support the private economy is nothing more than a political gesture, and the recruiting of top private sector executives to publicize the policy is akin to the period of “socialist transformation” (circa 1953 to 1957) in the PRC’s early years, when capitalists were made to hand over their assets and support the regime. Incidentally, Pony Ma’s Tencent, along with its payments subsidiary Tenpay, was fined about 3.06 billion yuan by the People’s Bank of China in early July over payment service regulatory breaches, yet has to sing the praises of the CCP’s efforts to support the private economy just a few short weeks later. Other netizens have expressed a lack of confidence in the 31-point plan, noting that a document may not restore a trade or industry but can end up destroying them.
The general lack of enthusiasm for the CCP’s “major policy” in support of the private economy and lackluster market activity are starker considering that the authorities spent weeks leading up to the rollout of the 31-point plan talking about economic work and the need to support the private sector. For instance, PRC premier Li Qiang held a symposium on the economic situation on July 6 where he listened to what experts and scholars had to say on the matter, and held another symposium on July 12 where he heard the opinions and suggestions of top executives from platform companies and promoted the “healthy and sustainable development of the platform economy.” Subsequently, the National Development and Reform Commission held three back-to-back symposiums on private enterprises and formally established a mechanism for communication and exchange with private enterprises.
3. The CCP’s recent focus on the private economy obliquely indicates that China’s economic crisis is jeopardizing the regime. In particular, the CCP regime and state-owned enterprises have grown reliant on a healthy private sector for financial support and to sustain China’s economic growth in general.
The official fiscal and expenditure data for the first half of 2023 released on July 19 show signs that the Chinese economy has shrunk significantly and appears to be in a worse state than in 2022 when “zero-COVID” lockdowns were still in effect:
- Domestic consumption tax collected decreased by 13.4 percent year-on-year to 827.2 billion yuan (indicating insufficient demand).
- Corporate income tax collected decreased by 5.4 percent year-on-year to 2.6859 trillion yuan (indicating falling corporate profits).
- Personal income tax collected decreased by 0.6 percent year-on-year to 780 billion yuan (indicating that the number of people with a monthly income of over 5,000 yuan is decreasing).
- Value-added tax and consumption tax on imported goods collected decreased by 9.5 percent year-on-year to 923.4 billion yuan. Customs duties collected decreased by 13.6 percent year-on-year to 125.1 billion yuan (indicating reduced demand for luxury consumption).
- Export tax rebates issued decreased by 9.2 percent year-on-year to 994.8 billion yuan (indicating fewer exports).
- Stamp duty on securities transactions collected was down 30.7 percent year-on-year to 110.8 billion yuan (indicating fewer stock market transactions).
- Income from the transfer of state-owned land use rights decreased by 20.9 percent year-on-year to 1.8687 trillion yuan (indicating a contraction in investment by real estate companies).
4. We believe that there are at least two indicators to look out for to tell whether the CCP is sincere about supporting private enterprises and whether its policies are workable.
- Whether the CCP authorities are able to solve the problem of arrears owed to private enterprises. Many state-owned enterprises, institutions, and even administration organizations have defaulted on payments to private enterprises, and especially during the three pandemic years. In publicizing their financial and debt problems earlier this year, some local governments also mentioned that they are simply unable to make their payments.
- Whether the central government will censor or otherwise deal with radical leftists/Maoists who criticize private enterprises and promote the theory of the private economy’s “uselessness.”
Regardless of how the aforementioned indicators play out, we are very pessimistic about the CCP’s ability to be effective in supporting the private economy. The CCP’s adherence to Marxist-Leninist ideology aside, the Xi leadership is being severely constrained by the deficiencies of the CCP’s autocratic system (Party culture, etc.) and the long-ingrained bad habits of the officialdom (prefer left rather than right, “one-size-fits-all” approaches, placing local interests over broader regime interests, etc.). The distinct lack of popular enthusiasm for the 31-point action plan suggests that the CCP has fallen into the Tacitus Trap, and no amount of propaganda will substantially shift the public’s perception that Beijing’s latest private sector support plan is more than just another political gimmick.
Worsening external factors also make it harder for the CCP’s private economy policies to work even if they are sincerely implemented. Escalated Sino-U.S. tensions, shrinking global demand, growing recessionary pressures, and the relocation of supply chains out of China are affecting the confidence of private enterprises and changing their behavior. For instance, shrinking demand will make private enterprises more hesitant to make investments without good chances to make profits, and will make them more inclined to shift their earnings into paying off debts instead of making new investments.
Businesses, investors, and governments should be careful about being too optimistic about the CCP’s recent efforts to prop up the private economy, especially given the Party’s ideology, its history, and the current economic and geopolitical environment. If anything, Beijing’s vigorous attempt to support the private sector is a clear indication that the Chinese economy is experiencing serious difficulties, to the point that it imperils the regime.
