Interpol chief’s arrest and the CCP factional struggle; on correctly predicting trends in China-US relations

China Week in Review
Week of Oct. 1, 2018

China and the world

• Sino-U.S. tensions continue to rise. The U.S. Navy “show of force” in the South China Sea in November, if carried out as reported, is almost certainly a response to a near-collision last week.
• U.S. Vice President Mike Pence’s speech at the Hudson Institute is the Trump administration’s strongest and clearest statement yet on the People’s Republic of China. Pence’s speech signals that the U.S. is going to counter decades of Chinese Communist Party interference and influence in America, yet still leaves ample room for friendly relations between China and the United States going forward.

Sept. 29:

• In a speech at the Chinese embassy in Washington, Matthew Pottinger, the senior director for Asia at the U.S. National Security Council, said: “We at the Trump administration have updated our China policy to bring the concept of competition to the forefront. It’s right there at the top of the president’s national security strategy.” Pottinger was attending an event to mark China’s National Day.

Sept. 30:

• U.S. Navy destroyer USS Decatur and a Chinese Navy warship were involved in a near-collision around Gaven Reef in the Spratly Islands. The Chinese warship made an aggressive move and came within 45 yards of Decatur’s bow, after which the U.S. ship maneuvered away to avoid a collision.

Oct. 1:

• The Pentagon canceled a trip by U.S. Defense Secretary James Mattis to China later in October.
• The Kaga helicopter carrier, Japan’s largest warship, visits Sri Lanka.

Oct. 2:

• The U.S. State Department announced that Secretary of State Mike Pompeo would visit Tokyo, Pyongyang, Seoul and Beijing from Oct. 6 to Oct. 8.
• At the 2018 Cybersecurity Summit, U.S. Homeland Security Secretary Kirstjen Nielsen noted that the PRC is focused on a “more holistic approach to influence the American public in favor of China.”

Oct. 3:

• The U.S. Senate passed the Better Utilization of Investments Leading to Development (BUILD) Act by 93 to 6. President Donald Trump is expected to sign the bill into law. The BUILD Act, which will overhaul the way in which the federal government lends money for foreign development, is meant to provide an alternative to the PRC’s Belt and Road infrastructure project.

Oct. 4:

• Vice President Mike Pence gives a speech about the Trump administration’s policy toward China at the Hudson Institute. Pence talked about the friendly historic relations between the U.S. and China, the CCP’s efforts to interfere and influence America, and the communist regime’s human rights abuses in China.
• Bloomberg News reported that China had inserted tiny microchips in the motherboard of servers used by nearly 30 U.S. companies, including Apple and Amazon.
• The U.S. Navy is recommending a global show of force in the South China Sea and the Taiwan Strait in November, according to CNN.

Oct. 5:

• According to a new Pentagon report, “China represents a significant and growing risk to the supply of materials and technologies deemed strategic and critical to U.S. national security.” Also, the PRC’s “trade dominance and its willingness to use trade as a weapon of soft power increases the risks America’s manufacturing and defense industrial base faces in relying on a strategic competitor for critical goods, services, and commodities.”

Oct. 7:

• Secretary Pompeo meets with North Korean leader Kim Jong Un in Pyongyang. They agreed to form a working group to discuss the denuclearization process and the second summit between Kim and President Trump “at an early date.” Pompeo and Kim agreed that the second Trump-Kim summit should be held “as soon as possible.” The potential U.S. inspection of North Korean nuclear sites was also discussed. Later in Seoul, Pompeo described his meeting as “another step forward” and “a good outcome for all of us.”
• According to a State Department statement, Trump “looks forward to continuing building upon the trust established with Chairman Kim in Singapore and anticipates meeting again soon.” (See our article on the importance of trust to the denuclearization and peace process.)

Sino-U.S. trade war

• The new USMCA, or “NAFTA 2.0,” prevents China from circumventing U.S. tariffs while uniting America’s allies in opposition to the PRC’s abusive and unfair trading practices.
• The PRC signals that it is ready to negotiate trade with America. But President Trump has indicated at rallies and in speeches that “China is not ready” yet to make a deal, a sign that Trump is confident in winning the trade war.

Sept. 30:

• The U.S. and Canada reached a trade deal before midnight, and the NAFTA trade agreement made way for the new United States-Mexico-Canada (USMCA) agreement. The USMCA contains a clause that allows signatories to leave the deal if any party enters into trade talks with a country with a “non-market economy,” a move that has been widely seen as targeting China.

Oct. 2:

• White House economic advisor Larry Kudlow said at a securities industry conference in Washington that while there are no formal plans to hold trade talks with China, U.S. officials are ready to negotiate if China is serious. He also said that there could be talks in December when officials meet in Buenos Aires for the G20 meeting.

Oct. 3:

• Cui Tiankai, the PRC ambassador to the U.S., said in an interview with NPR that China is “ready to make a deal” to end the trade war. However, Cui noted that “the U.S. position keeps changing all the time, so we don’t know exactly what the U.S. would want as priorities.”

Oct. 5:

• In an interview with Reuters, U.S. Commerce Secretary Wilbur Ross said that the “non-market economy” provision in the USMCA could be replicated in subsequent U.S. trade agreements. “It’s logical, it’s a kind of a poison pill,” Ross said. The U.S. is currently in trade talks with Japan and the European Union. (See our article on the U.S. reshaping the CCP-hijacked global order)

Politics

• The PRC might be recalling the children of high-ranking officials, according to some reports. See our analysis in the Oct. 4 edition of the newsletter.
  The vanishing of Interpol chief Meng Hongwei suggests that the scrubbing of the CCP’s domestic security apparatus’ upper rungs, which started in Xi Jinping’s first term, is still ongoing. Before Xi took office, the domestic security apparatus was under the sway of the Jiang Zemin faction.

Oct. 1:

• The CCP issued a “secret document” ordering the children of all high-ranking officials who are studying in the United States to return home within this year, and forbids the officials from sending their children for overseas studies, according to a report in the Japanese media outlet Business Journal.

Oct. 5:

• Meng Hongwei, the Interpol chief, went missing after a trip to China in September, according to French police. Meng is a vice minister of China’s Ministry of Public Security, but lost his seat on the ministry’s Party Committee in April. According to the South China Morning Post, he was “taken away” by the CCP discipline inspection authorities after lending at an airport in China.

Oct. 7:

• The Central Commission for Discipline Inspection officially announced an investigation into Meng Hongwei. On the same day, the Interpol received Meng’s resignation, effective immediately.

Economy

• The new USMCA causes the renminbi to devalue further.
  China’s manufacturing sector shrinks, a likely result of the Sino-U.S. trade war.
• The People’s Bank of China (PBoC) likely cut reserve requirement ratios (RRR) to preempt shocks to the market after the end of the week-long National Day holiday.
• The Bloomberg report on PRC spy microchips appears to have caused Chinese tech stocks to plummet.

Sept. 30:

• China’s manufacturing purchasing managers index stood at 50.8 percent in September, down from 51.3 percent in August and the lowest in 24 months. Meanwhile, the gauge for new export orders in the manufacturing PMI report fell to 48 percent, the fifth consecutive month of contraction and fourth month below the 50 percent mark.

Oct. 1:

• Jack Ma, Alibaba’s executive chairman, will be stepping away from the company’s variable interest entities (VIE), according to securities filings in July. Alibaba explained that the move was done to curb risks stemming from key personnel.

Oct. 2:

• The offshore renminbi weakened beyond the 6.9 mark (6.9032), the lowest point in six weeks.

Oct. 5:

• Chinese tech company stocks listed on the Hong Kong exchanged fell by 21 percent in the wake of the Bloomberg microchip article. ZTE stocks fell by 11 percent, while microchip makers Semiconductor Manufacturing International Corporation and Hua Hong Semiconductor fell by 4 percent.

Oct. 7:

• The PBoC cut the RRR of large financial institutions (15.5 percent) and smaller banks (13.5 percent) by 100 basis points effective Oct. 15, 2018. The central bank will inject a net 750 billion yuan in cash into the banking system with the RRR cut.

Society

The Chinese authorities hand Fan Bingbing a huge fine, but she manages to escape other punishment.
Protesting military veterans are becoming a common sight in China.
After reorganizing financial news channels, the CCP goes after radio and television advertising.
Homeowners protest price cuts by property developers, who in turn seem to be responding to an inflection point in the housing market.

Sept. 30:

• Many Chinese military veterans gather at cemeteries across China (Hebei, Sichuan, Henan, etc.) to mark Martyrs’ Day. Local police panic, and large numbers of police were mobilized to surround the veterans.
• In a WeChat message, China’s National Radio and Television Administration announced that radio and television advertising will undergo “special rectification” until the end of the year.

Oct. 1:

• A widely circulated video on Chinese social media shows a mother and her child leaping off the roof of a children’s hospital in Hebei’s Shijiazhuang City. According to commentary, the mother had no money to pay for her child’s medical treatment.

Oct. 3:

• Chinese film star Fan Bingbing is made to pay about 884 million yuan in overdue taxes and fines, according to state media.

Oct. 4:

• A branch of property developer Country Garden in Jiangxi’s Shangrao City lowers property prices from 10,000 yuan per square meter to 7,000 yuan per square meter. Many homeowners protested the move, and some even smashed up the developer’s sales department.

Oct. 5:

• The Country Garden branch in Shanghai’s Huinan County lowers the average price of property from 35,000 yuan per square meter (the government’s filing price) to between 26,000 to 28,000 yuan per square meter. The move sparked a huge protest and requests by customers to back out from their property deals. According to Shanghai local government policy, an apartment can only be sold at one price, and cannot be offered at a price range.
• Hundreds of military veterans from around the country gathered in the square in front of the cultural center in Shangdong’s Pingdu City to protest brutal police action on Oct. 4 that led to the wounding of six veterans. Small skirmishes between veterans and the local authorities broke out that night.