Plenum communique and Party Congress chatter; Response to US semiconductor decoupling; Another defense of dynamic zero-Covid

The Seventh Plenum has concluded and now we await the start of the 20th Party Congress on Sunday. The Communique gave no details about personnel changes or the substance of the forthcoming amendment to the CPC Constitution. The lack of any credible leaks so close to the start of the Congress is remarkable.

The PRC response to the massive US escalation of technology decoupling last week have so far been quite muted, I think because policymakers are totally focused on the Party Congress, not because they will not respond. We are all still trying to understand the impacts of the new controls, and frankly I think many underestimate just how significant they are, both for technology supply chains and future developments but more broadly for the US-China relationship.

So how might the PRC respond, once we get past the Congress? Their options are limited as many seemingly obvious actions, like targeting Apple, would also do a lot of damage to the PRC economy. Boeing would make sense, but they already are being punished. I would not be surprised to see rare earths weaponized.

In May 2019, in the depths of the trade war, Xi paid a visit to Jiangxi, a key province for rare earths mining and processing. As I wrote in the May 20, 2019 newsletter:

Xi went on an inspection tour of Jiangxi and as is always the case with these tours there are key signals. The full propaganda packaging of Xi's Jiangxi inspection tour will likely hit Tuesday or Wednesday but from the brief online reports today we know that Xi visited a leading rare earths miner and manufacturer and laid a wreath at the monument marking the starting point of the Long March.

The rare earths visit sure looks like a signal from Xi that China may try to use RE export limits as a weapon in the trade war…

Xi regularly talks about every generation having its version of a "Long March", but this visit at this moment is also redolent with symbolism about the deepening struggle with the US.

In the days following Xi’s Jiangxi visit there were a series of articles and commentaries in official media about using rare earths to retaliate against the US, as noted in the May 29, 2019 newsletter. But even rare earths may not be the weapon against the US that Xi may think it is, as using them to retaliate against the US will also worry other countries. And ultimately the threats in 2019 turned out be empty.

The PRC appears to have adhered to the US red lines on exporting certain technology products to Russia since the invasion of Ukraine, and yet the US still, from their view, punishes them as part of the broader efforts to “keep China down”. At some point Xi has to respond much more forcefully.

I do not think they can just issue empty threats this time. Any guess as to what they may do?

Summary of today’s top items:

1. Seventh Plenum Communique - There were no surprises from the communique of the Seventh Plenum, and no hints as to the substance of the amendment to the CPC Constitution. The communique does likely give a good summary into what is in Xi's work report. I expect it be similar to much of what is in the historical resolution issued a year ago.

2. Party Congress chatter - As I mentioned above, the lack of reliable information or even credible rumors about personnel and Party charter changes at the Congress next week are quite remarkable. There are some useful articles looking at possible promotions, though we are all just guessing at this point.

3. "Lying flat is unacceptable, winning without effort is impossible" - People's Daily has a third "Zhong Yin" commentary this week on the correctness of Dynamic zero-Covid, this one titled "Lying flat is unacceptable, winning without effort is impossible". I will guess that they are running this series right before the Party Congress because they want to set expectations that there will be no sudden shift in the policy soon after the Congress, as many have been hoping.

4. Semiconductor controls - The new rules are already having an impact as some foreign companies remove personnel and stop support.

5. US National Security Strategy - The Biden Administration has released a public version of the long-delayed National Security Strategy. The PRC features prominently, and the section on China is titled “Out-competing China and Constraining Russia”. There are no surprises from the earlier strategy articulated by Secretary of State, and there still does not appear to be a definition of the desired end state from “out-competing China”. Maybe there is more in the full classified version, but this one reads like a bit of a mishmash of interagency agendas and compromises.

6. PSL lending for infrastructure not real estate - Caixin reports that the revived pledged supplemental lending (PSL) tool will be used to fund much of the 600 Billion RMB infrastructure announced over the summer, not for rescuing/stimulating real estate as some had hoped.

7. Water problems in Shanghai - The Shanghainese can not catch a break. The shutting of a couple of reservoirs due to saltwater tides is leading to frenzied buying of bottled water. The government said there is nothing to worry about, so people then buy even more, given the lessons learned from government statements about lockdown earlier this year. Harvard and Edelman really should re-run their surveys on citizen satisfaction that PRC officials love to cite, and if the PRC will not let them they should issue statements that the data are old and no longer valid since so much has changed since the pandemic…