Good morning, today’s thread is for subscribers only. I will be in and out this morning, I have three questions I am most interested in but please chip in with whatever you want to talk about:
How much pressure might Xi Jinping be under from the economic mess inside China and the rapid deterioration of US-China relations?;
What percent fiscal deficit should China run this year to mitigate the impact from pandemic?;
In Thursday’s note I talked about “What might happen if the President decides to blow up the trade deal”:
“In many ways Trump is the ballast keeping those more hardline national security policies from moving forward, all because he has wanted to make the trade deal. If he now abandons that goal, do not be surprised to see movement around areas Beijing is going to get really upset about, like Magnitsky Act sanctions and Taiwan, as well as further efforts in the financial and technology sectors. So we would probably end with a trade war, tech war, information war, financial war and, best case in this scenario, cold war.
Is that the likely outcome? I am not going to predict that it is, but the odds of a sharp and significant increasing downward slope in the trajectory of US-China relations looks even more likely.”
What else might it look like? And what could change the trajectory?
Actually have more of a question to you - what is the US-China endgame the policy crowd in DC wants to achieve here? Some sort of "new normal / Cold War Lite" with China, a return to the "good old days" of 01-08 engagement and liberalization, or full-blown regime change?
In response to your first question: this article written by a Shanghai based political scientist outlines how Xi has fostered a greater sense of security amongst the nation and himself vis-a-vis COVID.
On a seperate note, I am concerned that the U.S. may be leveraging Taiwan in the name of political ideology against China. The U.S. needs to be cautious regarding their advocacy for Taiwan’s freedom of liberal democracy. Whilst it is important to uphold such freedoms, a miscalculation will ultimately have immediate effects on Taiwan more than it will the U.S.
Once again, an informative and valuable exchange, but also a bit dizzying in breadth and range. Would it be feasible or useful for Mr Bishop to summarize and comment on the views and ideas discussed here today, in the next issue of Sinocism?
I think the issue of Chinese companies listing on US stock exchanges is about to take center stage. It is an easy one - Chinese companies are not subject to the same regulatory rules as American companies. The area that gathers the most attention is the fact that China blocks the PCAOB from doing inspections of auditors (although it will cooperate on investigations of wrongdoing). This has been an issue for the 20 years since Sarbanes Oxley required inspections. The PCAOB has always had the power to fix the issue - by revoking the registration of Chinese accounting firms but has so far been unwilling to take the heat from the exchanges and other market participants. Several bills have been introduced (Rubio, Kennedy, etc) to kick Chinese companies off US exchanges unless inspections can take place. Those bills were not given much chance but now seem to have new life. Inspections would be nice, but they are unlikely to change much in terms of how audits are done or to uncover fraud earlier. I believe the accounting firms are actually trying to do good audits.
I think China will likely try to head off any effort to remove Chinese companies from US exchanges by compromising on inspections. We already see some Chinese movement on US listings, with China investigating recent frauds on US listed companies like Luckin Coffee. That is something China has not done before, even where it is clear that Chinese laws have been broken. While I believe China would prefer its companies list on Chinese stock exchanges, it is pragmatic enough to recognize that it needs US markets for a few more years.
A simple reform that will level the playing field and reduce fraud would be to remove the special privileges that foreign private issuers (FPIs) like Alibaba have on US exchanges. FPIs are not required to file quarterly reports reviewed by an auditor and are subject to relaxed disclosure requirements. Regulation FD, which leveled the playing field between investors, does not apply to FPIs, but it should. Some FPIs do not even hold annual shareholder meetings because the Cayman Islands, where most incorporate, does not require them. The relaxed rules were put in place to enable secondary listings of companies on US exchanges, and it was viewed that adding new disclosures to those required by home exchanges was too onerous. But in the case of China, most of the companies have their primary (and only) listing on the US exchanges, so the relaxed rules make no sense.
While Xi (and the CCP) is under pressure, we must remember how formidable he has been as a politician and leader. He is a true believer and he has the personal strength and resilience, stemming from his childhood experiences (in Shanxi during the cultural revolution) to endure and emerge stronger post-COVID. He had earlier merged his personal narrative with that of nationalism, Confucianism, Maoism, and his dream of rejuvenation of China’s greatness. This has now hardened but remains emblematic, in that Xi has now emphasized not only the China Dream, but paired it with aggressive, Wolf Warrior diplomacy. Xi and the CCP cannot afford to look weak or to back down. The opposite of rejuvenation is humiliation. Xi is playing the long game, and will carry on with Made in China 2025, and the upcoming centennial in 1921, with the goal of making China not only resurgent, but dominant by 249. So it doesn’t really matter whether Trump or Biden win the election. China’s path is secure. Xi can decouple, while maintaining regional alliances, and softening China’s trade posture w/r to the BRI in Africa, Central Asia, SE Asia, and Europe. Seeing Xi as weakened stems from a tendency to, as Kevin Rudd has said, project our realities/wishes onto China’s very different reality.
Hey Kenneth, When you say Xi’s path is “secure” I take that to mean “fixed” as in he knows which direction he wants to take the country and has the power to do so, right? Agree, and also agree with all your analysis of his character and how his experience shaped him, and I would emphasize even more he seems to be a dyed in the wool Marxist as Bill has said, plus I’ve imbibed a bit of the shanghai Chinese businessperson view that he has essentially a grade school education (since he stopped school after grade school then “attended” college) so we aren’t dealing with someone with a sophisticated view of economics. Hence you hear nothing anymore of rebalancing, and that problem hasn’t gone away (as a cursory look at consumption as a % of GDP will tell you) just as it didn’t go away for the literally two dozen other countries in the past century with the exact same growth model who ALL failed to sustain the growth rate (which again doesn’t mean collapse or that it’s not a huge strategic rival and anti-liberal threat) and had decades of stagnation. So his inability to create domestic competition and sustainable economic growth via asset transfer from govt to households and a real business rule of law will likely sink their growth just as it has for literally every other country in the same spot historically. As for alliances, they have only North Korea and Cambodia/Laos, although I agree se Asia could swing either way if they think we are out of the game and that’s a real risk. As for Europe, unless Europe decides to accept Chinese technology hegemony and the unfair non-commercial behavior of their Soe’s in Europe and lack of reciprocation for European companies in terms of fair treatment in China—and the Europeans certainly seem to be hardening not softening—I don’t see what “soften” would mean for China towards Europe as Xi will not undercut the centerpiece of his policy which is ironclad, zero-sum extra-judicial party control over all aspects of Chinese society and especially strategic industries. I more likely see a stagnant but still super strong Chinese bloc of China, n Korea, Cambodia Laos, Russia, and a few other countries like potentially Hungary or parts of Italy, with a fight especially for influence in se Asia and and Africa. Not sure about South America really but seems like it will not be very easy for China to bring it into its sphere of influence except Cuba and Venezuela so probably not a decisive factor either way. Imo if trump is re-elected though and we continue not to foster alliances, many more countries might decide to come to terms and accept Chinese hegemony and then the USA might be in real trouble.
Thank you for your thoughtful comment. The key is alliances, and whether China or the US will succeed here. China has since 1979 had periods where they utilized soft power with great skill diplomatically. Even Xi did this well early on. It is possible for China to soften its posture if Trump is not re-elected or after 2024 if he wins in November. As you point out, the sweet spots will be parts of Europe, Africa, Latin America and SE Asia. The US has struggled w/r to soft power projection and that makes China’s job a bit easier.
Re 1) unemployment must be an enormous pressure on Xi and the CCP. Perhaps the SOEs can stave off unemployment but the private sector might be starved for funds. It would be interesting to analyze unemployment by demography and sector as those under 40 probably never saw the hardship of their parents or grandparents. Which group would give the biggest pressure? Is the urban, web-savvy young unemployed who previously never had it so good or the migrant workers who never had it good but at least had improved lives and could send money back to their families? Could unemployment change the behavior of the CCP, i.e. even tighter controls on the populace?
On Q1. I d say none. The virus already provides cover for economic woes, especially relatively. Certain American politicians and policies provide further cover, as if it is needed. Nothing inspires solidarity like the spectre of collective scapegoating/punishment.
The aspect of deteriorating China-U.S. relations that affects me most directly at the moment is the issue of when and how China’s door will re-open for visitors from the U.S. I realize that this is somewhat of a “crystal ball” question with no definitive answers possible because the course of the COVID-19 epidemic cannot be mapped out with complete certainty.
I lived most of the last several years in China and would like to go back when feasible. I do not qualify for priority treatment as a diplomat or high-ranking business leader. I do, however, have a valid tourist visa with several years remaining.
Air flights from U.S. to China are currently available in July, August and beyond, even though they are fewer in number and some are more expensive than they were at this time last year. That being said, does anyone have thoughts on the most likely timing for more relaxed quarantine-on-arrival requirements?
Any other factors that might affect my thinking on when I might be able to return? I realize that the “new normal” probably will not be as welcoming or desirable as it was several years ago.
Thank you in advance for any constructive comments.
1) Is "pressure" on Xi even a thing? I would be curious for those who actually know the top few hundred families in Beijing or their associates (I met like 2-3 associates of the top people over the years for various business things but that's it) to understand their thinking, it certainly seems like the course of China's relations with the rest of the world has been disastrous from any perspective except the ultra-nationalist one in which nationalist triumphalism is the only good anyone wants or needs, and will lead to all elites being essentially cut off from the West economically and perhaps even physically, which can't be their preferred outcome given the precarious nature of leaving all assets at home subject to the turning of their elite politics, yet there seems to have been essentially zero pushback on Xi, ever, from an outside perspective (assuming one discounts rumors of "reformers" objecting but actually never really objecting). What's going on with those families?
2) In line with the Pettis analysis, the higher the deficit, the less the short-term pain, but the greater the long-term pain. As long as no rebalancing occurs, it's a catch 22.
3) My question is, is it even feasible for the US to go for a sudden and rapid decoupling, or would there have to be a concerted, multi-year effort with massive gov't assistance for large companies to get key supply chains/manufacturing in things like medical and military (!) out of China before we did? Would there be like actual economic collapse for the US if it were done suddenly, or would there just be a ton of pain and would the companies (again, likely with massive gov't assistance) be able to ramp up other operations pretty quickly? I ask this not from the perspective of the markets or market analysts, who always seem to say it would be a complete disaster because they're ultra-sensitive to short-term pain since it causes stock prices to go down, but from the actual perspective of feasibility of maintaining supplies of crucial goods etc and assuming big gov't support.
Great question. Most things economic are doable if managed, as war time economic policies have demonstrated. However this great undertaking by definition requires huge centralised intervention and coordination. The economically illiterate Trump advisors/supporters are about to learn a lesson on 'suboptimal' (from their point of view) equilibrium. That is, what they want cannot be achieved through the self-interested actions of individual economic agents within the neoliberal framework. They need chicom/socialist economic managment techniques and policies in order to accomplish it (with still plenty of pain but no collapse). Therein lies the irony. But however it is done, it d require more competittive employees, i.e. longer hours, lower wages, more people doing boring tedious yet highly stressful jobs. Is the population ready and willing? Who knows. Again, the irony is, that it requires American employees to be more Chinese.
Hey Ken, The first part definitely makes sense, and completely agree about the irony! On the second part about employment, whether moving out of China would result in onshoring vs just moving to other countries would seem to depend on US policy, i.e. the trade deficit as a whole hasn't shrunk essentially at all since the China tariffs went up, even though our deficit vis a vis China has shrunk significantly, so companies just went elsewhere (and/or goods were redirected through other countries) and we really didn't bring any jobs home. Again, this analysis assumes that most other countries explicitly make exporting to the US market part of their industrial policy (albeit not as aggressively or destructively as the CCP has), which does in fact seem to be the case. If the US were really to go after the source of the difficulties--the dollar as the reserve currency which puts horrible pressure on the working class here by allowing other countries to move almost their entire surpluses into dollars increasing the capital account which by definition decreases the current account i.e. trade deficit. i.e. no manufacturing or export jobs are available here--consumer prices would rise in the US but much more like working class and lower middle class employment would be available in the manufacturing and export industries, and I think that's a tradeoff most Americans would be willing to make (just as most other governments have decided that's a tradeoff they're willing to make).
Agreed. Inflation seems part of any scenario that involves decoupling/transfer. Also people need to be aware of the scale of the task. E.g. climate change, the population has been fed the fantasy of painfree and even joyous transition to low carbon green economy, which lie has been made plausible thanks to shipping polution and waste (often literally) to China etc. The impact of decoupling would be profound. People need to be realistic. It s a decade plus project with a lot of difficulties. Replacing the productivity and consumption of 1 bln workers...the mind boggles. And if you add other self-interested actors i.e. rest of the world, and Chinese counter actions...
The trade war and trade deal are side shows to the total geopolitical rivalry. I recommend you read Stealth War by Robert Spalding. Covid19 is crystallizing the problems with US over reliance on China as well as the weaknesses of the US society and it’s economy. It’s like a 9/11 and 2008 financial crisis on steroids combined into one. Time is in China’s side over the next decade. I think the US knows that, so risk of conflicts will be very great until the situation is more stable.
I’m curious what you all think is a realistic timeline for China to relax its border restrictions, especially on those with work visas. How much internal pressure might there be from business interests to get this done, or is the impact on things minimal? My guess is they may go country by country; so we’ll see NZ and Oz nationals who are coming from there be able to get back in first, followed by select Asian countries, then Germany, with United States residents may be waiting the longest, possibly even until next year. I do know they have already fast-tracked some business folks within Asia but I am talking about run-of-the-mill Z visa-holders. Or do you think they will instead ask for some sort of immunity certificate or virus free test result, plus a return to their original system of testing everyone who arrives, plus the quarantine?
"what could change the trajectory" invites wishful thinking.
a Covid cure jointly developed by Chinese and American scientists could give both sides a chance to de-escalate and join hands in triumph over the virus, if they wanted to... sad thing is they probably don't even want to
3. Unfortunately the trade deal was hanging on a thread the minute Phase I was announced. Even in the best of circumstances - absent covid-19 impacts - China would have been very hard pressed to meet the agriculture component of the deal. Now with oil prices nearly half what it was at the beginning of the year, the energy purchase commitment part of the deal, even if China needed more imports, looks to be a grand slam home run for the PRC. Today with the economic malaise we are in, this administration cannot look for the trade deal to resolve anything. Certainly not with more tariffs which were designed to stop at intermediary goods, thus additional tariffs would cut deep into consumers and the economy at the worst time possible. The hawks in the WH have the upper hand now, and unfortunately Trump has no choice but to go along even if he inherently is more predisposed to economic stability. Election positioning requires the Dems/Biden to even out-Trump Trump on China.
And in the backdrop, the whole-of-state initiative to counter China in other ways is in full swing... the State Dept's involvement in initiating TSMC to build a cutting edge semi foundry in AZ (industrial policy) is the clearest example, yet.
The direction is clear, but whether the US chooses to confront with unfettered bombast that takes on cultural tropes and stereotypes, or tries to engage with firm nuance based on clear principles, will dictate how ugly this will get. Unfortunately if we are banking on Trump to be the 'ballast' against hardliners, we are in for a very rough ride.
The EU and the USA have gained a large economic advantage with the virus getting into the wild in their respective countries. All of these countries except Germany are running large trade deficits with the developed countries in Asia( incl China)/Oceania (OZ/NZ) that have contained the virus. How will we (I’m from Australia) trade efficiently with USA/EU what every time we travel 14 day quarantine + testing - extra costs etc. I have heard China is thinking of a work around, but human nature will be to avoid these potential “virus carriers”. I would imagine these trade debt nations will just seek partners that have the virus allowing for more frictionless trade.
Answer to 3) As someone who viewed Xi and Lui He as entering into trade negotiations under sufferance because the way trade was working for the PRC before Trump suited China down to the ground.
So forcing Xi into trade negotiations by Trump using his bully tactics and making the PRC lose face before the world was a sensitivity that bore serious resentment and in my view was always an undercurrent in the negotiations. That China dragged the negotiations over two and a half years is testimony to the hostility most of China's governing elite have towards the US administration.
I remind folks when Lui Hu in the Oval Office read China's acceptance of the trade deal earlier this year the proviso that he read that the Americans either missed or chose to ignore allowed for the fact that if no one wanted to buy the mandated agreed to commodities or manufactured goods then China wasn't going to buy them. What I gather is that China hasn't been buying some grains or pork or oil in the specified quantities the US had agreed to. Demand tapering off in China largely due to the pandemic and that proviso Lui Hu stated has been driving Robert Lighthizer and Bob Navarro.
My view at the time of the signing this year was that the deal wouldn't last and as push is now coming to shove Trump has realized what he signed up for didn't give him the overriding advantage he expected. You gotta read the fine print but Trump didn't do that in my view and so I am expecting he will find reasons to dump the deal. I actually think this outcome will suit China more than the Liberal Democratic pundits have been fretting over.
As I expect this will get more hostile, I expect China to off-load — if it hasn't already begun to do so — the US treasury paper it holds. When somebody in the White House publicly muttered that the US will not make good on it's promissory notes/interest payments a few weeks back, it's a signal that Beijing probably didn't miss.
If Trump threatens to cut all economic ties with China as he tweeted today, he should just do it and see how Wall Street handles that.
To your first question, I think Xi will weather any criticism from the economic mess inside China. His handling of the pandemic, coming as late as it did, as draconian as it appeared, when compared to the US numbers and Trump's glaring mismanagement and incompetence, makes him come out smelling like a rose. Anyway we will see come May 21.
Based on what I know, if the US further blocks key technology supply to Huawei, China will activate the "unreliable entity list", restrict or investigate US companies such as Qualcomm, Cisco and Apple, and suspend the purchase of Boeing airplanes.
Seems like this is some crazy brinksmanship because doesn't the US essentially have the power to kill Huawei if it cuts it off from the most advanced chips? The stuff from like a year or two back, when tariffs started coming out, about Huawei developing its own internal substitutions and stuff never seemed to pan out 100%. Yet losing the China market doesn't kill those US companies, just significantly reduces their profits. Total destruction seems to equal not significant profit reduction. The CCP/Xi seems to be rolling the dice again and again and again that the US won't take the most drastic action, essentially ever.
David, There is unfortunately another line of brinkmanship. While the recent COVID-19 pandemic and trade issues are dominating world news today, the PRC has other fish to fry, as it were.
The PLA have been very busy initiating a variety of military activities. I would take note of the ongoing military encounters -- both between: 1) the Peoples Liberation Army Navy and Air Force and US forces under the US Indo-Pacific Command regarding our FONOPS activities throughout the East and South China seas; and 2) the PLAN and the navies of the USA and several ASEAN nations regarding their resource-development operations--e.g., Vietnam, Malaysia and the Philippines, et al. India is heating up as well.
While there some information is available from USINDOPACOM regarding US longer-term strategic military objectives for the Indo-Pacific region, it would seem that a more immediate, clear-and-present-danger exists at the tactical level. Are US present levels and types of military activities sensible and appropriate -- given the situation in the South and East China sea that China presents to the world today, or would alternative or additional or actions be appropriate in the face of the present Chinese portfolio of military operations?
I remember the old Air Force SAC motto, "Peace is our Profession." Hopefully, keeping this in mind, balanced heads will prevail.
Hey Stephe, Yea the military stuff does seem to be heating up, super scary. One interesting (and depressing, from a US/Western perspective) thing to read on this once it's out is this, https://www.amazon.com/gp/product/031653353X/ref=as_li_qf_asin_il_tl?ie=UTF8&tag=thewaspos09-20&creative=9325&linkCode=as2&creativeASIN=031653353X&linkId=7e5e3f91d0f740e8aa89ac7468effa99, via Marginal Revolution (Tyler Cowen's prolific blog) about how the. US has lost basically every simulated war in China's near abroad in war games we've done recently, mainly because they just inundate Guam and Japan with medium range missiles, shoot down/disrupt our satellites, and destroy refueling planes so the F35's can't get near there. Not a military expert at all but the military experts seem to agree this is the likely scenario currently :(...
I've already ordered the Christian Brose book, and you are right that recent relevant war games don't look good -- and remember the Clancy-like Ghost Fleet. Plus, I found Benjamen DoVale's comment today especially noteworthy: "Scary stuff. I’m feeling faint echos of when the US cut off Japan from oil exports in the lead-up to WWII."
The Bureau of Industry and Security (BIS) today announced plans to protect U.S. national security by restricting Huawei’s ability to use U.S. technology and software to design and manufacture its semiconductors abroad. This announcement cuts off Huawei’s efforts to undermine U.S. export controls. BIS is amending its longstanding foreign-produced direct product rule and the Entity List to narrowly and strategically target Huawei’s acquisition of semiconductors that are the direct product of certain U.S. software and technology.
Since 2019 when BIS added Huawei Technologies and 114 of its overseas-related affiliates to the Entity List, companies wishing to export U.S. items were required to obtain a license.[1] However, Huawei has continued to use U.S. software and technology to design semiconductors, undermining the national security and foreign policy purposes of the Entity List by commissioning their production in overseas foundries using U.S. equipment.
I don't understand, what the endgame should be. If the US handles it like this, Huawei will simply morph into something different, then no longer be an easy target. Meanwhile, US companies lose an XL customer. Exercise in futility.
So it looks as if the “pick sides” moment has come for the world, not least Asian economies that are part of the electronics supply chain. If I’m understanding the Commerce announcement correctly, does this mean that US export restrictions are effectively rolled out to allied countries (i.e, Taiwan)?
"Also on Friday morning, the Commerce Department extended for another 90 days a license that has allowed American companies to continue doing business with Huawei temporarily. It warned this would be the final extension."
This article specifically notes the big Taiwan supplier wouldn't be able to supply Huawei anymore, and it's basically that supplier or ours with the most advanced stuff Huawei needs, right? And there's no way Taiwan would keep doing it if we banned it given their national security reliance on the US.
How much pressure might Xi Jinping be under from the economic mess inside China and the rapid deterioration of US-China relations?
I think he must be under a lot of pressure. Part of his ability to continue to remain in power is the promise of increased standard of living and economic expansion. If he cannot help the economy grow back to previous levels, he could face politcal mutiny.
I read Peter Zeihan’s newsletter on China today. He has a very pessimistic view that the party sees all its delay tactics on debt and economic growth collapsing. They are going wolf warrior to gear up for an all out fight for survival. Go full nationalist to survive the economic disaster. Curious how other knowledgeable people react to that view. Is he going way over the top?
One thing I am watching regarding Xi's staying power is China's efforts to go global and establish itself as the "center country" it once was. I see this as part of Xi's China Dream. If there is a backlash against China for the virus or for the increasingly aggressive stance of Chinese diplomats internationally, or if the BRI initiative stalls out, Xi will find it hard to argue that China is becoming a great nation. I wonder whether that could undermine him. Any answers?
Just some explanation for the increasing military activity around Taiwan. In the Taiwanese magazine Commonwealth (天下), scholar Lin Ying-you wrote about the increase in PLA activity. He argues that it is not just for domestic reasons, but also to compensate for Taiwan’s growing international profile. I think that is a fair point. Just as Taiwanese are rightfully scared that Beijing might see an opportunity to make some moves in the rapidly shifting international situation, China probably also fears that Taiwan will use the current fluidity to strengthen its position and maybe achieve a few breakthroughs. At least part of the aggressiveness towards Taiwan can be seen as compensation for that. Then, we also should not forget that 20 May is the inauguration of Tsai Ing-wen’s second term, and inaugurations of DPP presidents are beloved targets of PLA pressure. It looks like her inauguration speech will demonstrate Tsai’s usual balancing to strengthen a cautious status quo on Cross-Strait relations, but that is not good enough for Beijing.
Still, the Kyodo report of the alleged plans by the PLA to practice a simulation of taking over the Taiwan-controlled Pratas/Dongsha Islands in August is something to keep an eye on, certainly because it is not impossible to redirect an exercise to actually do something.
2. In order to get ahead of the curve, and also stabilise its neighbours, 3.5 seems too conservative so I would go with 4 or higher, if they really want to get the markets going. This sounds scary and who knows if they can afford it, but at least it is not 'unlimited everything', which is the Fed's current prescription. And I'm not crossing streams, as fiscal and monetary are pretty much the same thing.
Maybe more interesting is slow release, or 长跑? Like if, instead of an eye catching number upfront, a targeted, sustained release over the course of the next few years - a lot less sexy but a lot less wasteful, and more sensible?
Thank you. Liu Kun says this now, but China's leaders may feel compelled to blow through such constraints. I think they would abandon policies that were designed to hold the structural deficit to 3.5 percent of GDP if unemployment rates go up too quickly. Unemployed people soon become hungry people, homeless people and thus resentful people.
Both Xi Jinping and Donald Trump face considerable domestic pressure. Both seem inclined to look for opportunities to redirect popular domestic discontent towards the other. As long as this dynamic prevails (until November in the case of the United States?), the prospects for Sino-US relations will probably remain grim.
Frustration with "on again, off again" pandemic suppression (whether localized or more wide spread). We know that experts in the United States, in European countries, in Canada and elsewhere worry about the disruptions caused by poorly implemented "economic reopening" that leads to spikes in COVID-19 deaths and further spread of the disease. What social and political effects might this cause in China?
"Snowballing" criticism online. We know that a number of people have been "disappeared" (or silenced) for having criticized the regime's response to COVID-19 or offering direct criticism of Xi Jinping's leadership, but will this be enough to dissuade others from doing the same?
The willingness of grass-roots officials to continue serving as the "lightning rods" for popular discontent with failures on the part of the regime. Will we see any sign of en masse disobedience (to top-level directives from the Communist Party / State) among police and "grid administrators" in particular jurisdictions?
China increasingly looks good compared to other countries, also economically. The IP numbers suggest a relatively rapid recovery, even though services and investment are lagging a bit, and more negative news is ahead from the external side. But I don’t think that this makes China/Xi look bad in comparison.
As to how much stimulus is needed, that of course depends on what growth one is targeting. Assuming that no policy makers believes in 5.5 percent growth anymore, and really the objective is to restore employment, and that real unemployment is closed to 12-15 percent rather than the official 5.9 you would still need a significant boost from the policy side. Currently, announcements already done have added up to something like 4-5 percent of GDP. The minister of finance’s open in People’s daily suggest that a lot more fiscal action is in the pipeline. So it I were to make a bet, the IMF estimate of last month of a structural deficit of 12 percent this year (compared to 6 last year) seems in the ballpark.
Hey Bert, I think it would be really good to get the ideas/analysis of Michael Pettis (and again as I've mentioned, they are endorsed by notable non-fresh water economists like Krugman, Martin Wolf, Olivier Blanchard, Barry Eichengreen and many others) out into the mainstream of the China watching community. If you don't know him, he used to run Bear Stearns Asia bond trading I think during the Asian Financial Crisis then became an Econ prof at Beida, been there since like '06 or something way back. I became convinced by him because in his older blog posts from 06 to around 2013 when he was still bothering to argue with the China bulls pre-Xi era, he went point by point through the perma bullish arguments and essentially dismantled them it seems to me (dismantled defined as, he criticizes the view that China can grow at 10% forever because xyz factor, i.e. because Western China is undeveloped, or because China's per capita investment is 1/10th that of the US so they can invest up to US level for a few more decades etc, or because infrastructure is never a bad thing etc, then that side makes their case, and he responds point by point in a clear and logical manner, and then the other side... just repeats their original argument). His view is that as China has followed the investment led growth model common to around two dozen countries in the past century (including Japan until the late 80's, Soviet Union until the late 80's, Brazil in the 60's and 70's, etc), a model very well understood by economic historians, but with much greater imbalances even than Japan by the late 80's, it will have an even worse economic stagnation and time rebalancing and dealing with the fallout of all the debt than Japan did. Recall that Japan went from 19% of global GDP in 1989 to 6% today, with 0.5% growth a year for 3 decades (although 1.5% growth a year roughly in household income, so they managed to rebalance somewhat over an ultra long and painful period, and their household income as a % of GDP was never as low as China's 33%). Also remember that when economics, not ultra-nationalist ideology, reigned in China up to around 2013-2015, rebalancing was the watchword, but you never hear that anymore despite the fact that very little rebalancing has been achieved since Wen Jiabao's famous imbalance speech over a decade ago (they've probably increased consumption as a % of GDP from 33% [!] to 40% over more than a decade, implying a rate of less than 1% a year so they still need 2 or 3 decades to get consumption to a level which can sustain economic growth without debt-fueled, unproductive infrastructure investment). So in that analysis, China's GDP is vastly overstated as is because bad debt for SOE's and local governments is never written off for political reasons, and rebalancing defined as transferring state-owned assets especially those of local governments to the household sector never happens therefore the only way there can be enough economic activity to create GDP "growth" (really defined in China as in an input not an output) is unproductive infrastructure spending which ultimately creates more debt and exacerbates the problem. I bring this up not to claim that there will be an imminent collapse in China or anything like that, nor to say that the US and those who believe in liberal values shouldn't absolutely want to take strong and well-calculated action in defense of them, and nor again to say that the US response to Covid or militarily or economically has been at all good the past 2-3 decades, but to say that China has its own massive internal problems and likely will have it's share of global GDP decline dramatically in coming decades as it fails to rebalance just like almost every other country with its growth model (hence the term middle-income trap). So that is one piece of favorable news from the perspective of those who strongly believe in liberal values.
David, thanks. I know Michael very wel (having lived in Beijing on and off from 2004). And I agree with much of what he writes. In fact, in 2005 I wrote about China’s demand side issue. The issue remains to a significant extent the same, though social safety nets have become stronger. The structural solutions are hard to do though, and basically require a lot of income/wealth redistribution among people, between people and enterprises and between generations. that involves SOE reforms, pension systems radomes and fiscal and intergovernmental fiscal reforms. All very hard, and basically not tackled since there 1990s.
Actually have more of a question to you - what is the US-China endgame the policy crowd in DC wants to achieve here? Some sort of "new normal / Cold War Lite" with China, a return to the "good old days" of 01-08 engagement and liberalization, or full-blown regime change?
Hi Bill,
In response to your first question: this article written by a Shanghai based political scientist outlines how Xi has fostered a greater sense of security amongst the nation and himself vis-a-vis COVID.
Xi Jinping Is a 'Good Emperor' https://foreignpolicy.com/2020/05/14/xi-jinping-good-emperor-coronavirus/
On a seperate note, I am concerned that the U.S. may be leveraging Taiwan in the name of political ideology against China. The U.S. needs to be cautious regarding their advocacy for Taiwan’s freedom of liberal democracy. Whilst it is important to uphold such freedoms, a miscalculation will ultimately have immediate effects on Taiwan more than it will the U.S.
Once again, an informative and valuable exchange, but also a bit dizzying in breadth and range. Would it be feasible or useful for Mr Bishop to summarize and comment on the views and ideas discussed here today, in the next issue of Sinocism?
I think the issue of Chinese companies listing on US stock exchanges is about to take center stage. It is an easy one - Chinese companies are not subject to the same regulatory rules as American companies. The area that gathers the most attention is the fact that China blocks the PCAOB from doing inspections of auditors (although it will cooperate on investigations of wrongdoing). This has been an issue for the 20 years since Sarbanes Oxley required inspections. The PCAOB has always had the power to fix the issue - by revoking the registration of Chinese accounting firms but has so far been unwilling to take the heat from the exchanges and other market participants. Several bills have been introduced (Rubio, Kennedy, etc) to kick Chinese companies off US exchanges unless inspections can take place. Those bills were not given much chance but now seem to have new life. Inspections would be nice, but they are unlikely to change much in terms of how audits are done or to uncover fraud earlier. I believe the accounting firms are actually trying to do good audits.
I think China will likely try to head off any effort to remove Chinese companies from US exchanges by compromising on inspections. We already see some Chinese movement on US listings, with China investigating recent frauds on US listed companies like Luckin Coffee. That is something China has not done before, even where it is clear that Chinese laws have been broken. While I believe China would prefer its companies list on Chinese stock exchanges, it is pragmatic enough to recognize that it needs US markets for a few more years.
A simple reform that will level the playing field and reduce fraud would be to remove the special privileges that foreign private issuers (FPIs) like Alibaba have on US exchanges. FPIs are not required to file quarterly reports reviewed by an auditor and are subject to relaxed disclosure requirements. Regulation FD, which leveled the playing field between investors, does not apply to FPIs, but it should. Some FPIs do not even hold annual shareholder meetings because the Cayman Islands, where most incorporate, does not require them. The relaxed rules were put in place to enable secondary listings of companies on US exchanges, and it was viewed that adding new disclosures to those required by home exchanges was too onerous. But in the case of China, most of the companies have their primary (and only) listing on the US exchanges, so the relaxed rules make no sense.
While Xi (and the CCP) is under pressure, we must remember how formidable he has been as a politician and leader. He is a true believer and he has the personal strength and resilience, stemming from his childhood experiences (in Shanxi during the cultural revolution) to endure and emerge stronger post-COVID. He had earlier merged his personal narrative with that of nationalism, Confucianism, Maoism, and his dream of rejuvenation of China’s greatness. This has now hardened but remains emblematic, in that Xi has now emphasized not only the China Dream, but paired it with aggressive, Wolf Warrior diplomacy. Xi and the CCP cannot afford to look weak or to back down. The opposite of rejuvenation is humiliation. Xi is playing the long game, and will carry on with Made in China 2025, and the upcoming centennial in 1921, with the goal of making China not only resurgent, but dominant by 249. So it doesn’t really matter whether Trump or Biden win the election. China’s path is secure. Xi can decouple, while maintaining regional alliances, and softening China’s trade posture w/r to the BRI in Africa, Central Asia, SE Asia, and Europe. Seeing Xi as weakened stems from a tendency to, as Kevin Rudd has said, project our realities/wishes onto China’s very different reality.
Hey Kenneth, When you say Xi’s path is “secure” I take that to mean “fixed” as in he knows which direction he wants to take the country and has the power to do so, right? Agree, and also agree with all your analysis of his character and how his experience shaped him, and I would emphasize even more he seems to be a dyed in the wool Marxist as Bill has said, plus I’ve imbibed a bit of the shanghai Chinese businessperson view that he has essentially a grade school education (since he stopped school after grade school then “attended” college) so we aren’t dealing with someone with a sophisticated view of economics. Hence you hear nothing anymore of rebalancing, and that problem hasn’t gone away (as a cursory look at consumption as a % of GDP will tell you) just as it didn’t go away for the literally two dozen other countries in the past century with the exact same growth model who ALL failed to sustain the growth rate (which again doesn’t mean collapse or that it’s not a huge strategic rival and anti-liberal threat) and had decades of stagnation. So his inability to create domestic competition and sustainable economic growth via asset transfer from govt to households and a real business rule of law will likely sink their growth just as it has for literally every other country in the same spot historically. As for alliances, they have only North Korea and Cambodia/Laos, although I agree se Asia could swing either way if they think we are out of the game and that’s a real risk. As for Europe, unless Europe decides to accept Chinese technology hegemony and the unfair non-commercial behavior of their Soe’s in Europe and lack of reciprocation for European companies in terms of fair treatment in China—and the Europeans certainly seem to be hardening not softening—I don’t see what “soften” would mean for China towards Europe as Xi will not undercut the centerpiece of his policy which is ironclad, zero-sum extra-judicial party control over all aspects of Chinese society and especially strategic industries. I more likely see a stagnant but still super strong Chinese bloc of China, n Korea, Cambodia Laos, Russia, and a few other countries like potentially Hungary or parts of Italy, with a fight especially for influence in se Asia and and Africa. Not sure about South America really but seems like it will not be very easy for China to bring it into its sphere of influence except Cuba and Venezuela so probably not a decisive factor either way. Imo if trump is re-elected though and we continue not to foster alliances, many more countries might decide to come to terms and accept Chinese hegemony and then the USA might be in real trouble.
Thank you for your thoughtful comment. The key is alliances, and whether China or the US will succeed here. China has since 1979 had periods where they utilized soft power with great skill diplomatically. Even Xi did this well early on. It is possible for China to soften its posture if Trump is not re-elected or after 2024 if he wins in November. As you point out, the sweet spots will be parts of Europe, Africa, Latin America and SE Asia. The US has struggled w/r to soft power projection and that makes China’s job a bit easier.
Re 1) unemployment must be an enormous pressure on Xi and the CCP. Perhaps the SOEs can stave off unemployment but the private sector might be starved for funds. It would be interesting to analyze unemployment by demography and sector as those under 40 probably never saw the hardship of their parents or grandparents. Which group would give the biggest pressure? Is the urban, web-savvy young unemployed who previously never had it so good or the migrant workers who never had it good but at least had improved lives and could send money back to their families? Could unemployment change the behavior of the CCP, i.e. even tighter controls on the populace?
I have no answers so perhaps others know better.
On Q1. I d say none. The virus already provides cover for economic woes, especially relatively. Certain American politicians and policies provide further cover, as if it is needed. Nothing inspires solidarity like the spectre of collective scapegoating/punishment.
The aspect of deteriorating China-U.S. relations that affects me most directly at the moment is the issue of when and how China’s door will re-open for visitors from the U.S. I realize that this is somewhat of a “crystal ball” question with no definitive answers possible because the course of the COVID-19 epidemic cannot be mapped out with complete certainty.
I lived most of the last several years in China and would like to go back when feasible. I do not qualify for priority treatment as a diplomat or high-ranking business leader. I do, however, have a valid tourist visa with several years remaining.
Air flights from U.S. to China are currently available in July, August and beyond, even though they are fewer in number and some are more expensive than they were at this time last year. That being said, does anyone have thoughts on the most likely timing for more relaxed quarantine-on-arrival requirements?
Any other factors that might affect my thinking on when I might be able to return? I realize that the “new normal” probably will not be as welcoming or desirable as it was several years ago.
Thank you in advance for any constructive comments.
1) Is "pressure" on Xi even a thing? I would be curious for those who actually know the top few hundred families in Beijing or their associates (I met like 2-3 associates of the top people over the years for various business things but that's it) to understand their thinking, it certainly seems like the course of China's relations with the rest of the world has been disastrous from any perspective except the ultra-nationalist one in which nationalist triumphalism is the only good anyone wants or needs, and will lead to all elites being essentially cut off from the West economically and perhaps even physically, which can't be their preferred outcome given the precarious nature of leaving all assets at home subject to the turning of their elite politics, yet there seems to have been essentially zero pushback on Xi, ever, from an outside perspective (assuming one discounts rumors of "reformers" objecting but actually never really objecting). What's going on with those families?
2) In line with the Pettis analysis, the higher the deficit, the less the short-term pain, but the greater the long-term pain. As long as no rebalancing occurs, it's a catch 22.
3) My question is, is it even feasible for the US to go for a sudden and rapid decoupling, or would there have to be a concerted, multi-year effort with massive gov't assistance for large companies to get key supply chains/manufacturing in things like medical and military (!) out of China before we did? Would there be like actual economic collapse for the US if it were done suddenly, or would there just be a ton of pain and would the companies (again, likely with massive gov't assistance) be able to ramp up other operations pretty quickly? I ask this not from the perspective of the markets or market analysts, who always seem to say it would be a complete disaster because they're ultra-sensitive to short-term pain since it causes stock prices to go down, but from the actual perspective of feasibility of maintaining supplies of crucial goods etc and assuming big gov't support.
Great question. Most things economic are doable if managed, as war time economic policies have demonstrated. However this great undertaking by definition requires huge centralised intervention and coordination. The economically illiterate Trump advisors/supporters are about to learn a lesson on 'suboptimal' (from their point of view) equilibrium. That is, what they want cannot be achieved through the self-interested actions of individual economic agents within the neoliberal framework. They need chicom/socialist economic managment techniques and policies in order to accomplish it (with still plenty of pain but no collapse). Therein lies the irony. But however it is done, it d require more competittive employees, i.e. longer hours, lower wages, more people doing boring tedious yet highly stressful jobs. Is the population ready and willing? Who knows. Again, the irony is, that it requires American employees to be more Chinese.
Hey Ken, The first part definitely makes sense, and completely agree about the irony! On the second part about employment, whether moving out of China would result in onshoring vs just moving to other countries would seem to depend on US policy, i.e. the trade deficit as a whole hasn't shrunk essentially at all since the China tariffs went up, even though our deficit vis a vis China has shrunk significantly, so companies just went elsewhere (and/or goods were redirected through other countries) and we really didn't bring any jobs home. Again, this analysis assumes that most other countries explicitly make exporting to the US market part of their industrial policy (albeit not as aggressively or destructively as the CCP has), which does in fact seem to be the case. If the US were really to go after the source of the difficulties--the dollar as the reserve currency which puts horrible pressure on the working class here by allowing other countries to move almost their entire surpluses into dollars increasing the capital account which by definition decreases the current account i.e. trade deficit. i.e. no manufacturing or export jobs are available here--consumer prices would rise in the US but much more like working class and lower middle class employment would be available in the manufacturing and export industries, and I think that's a tradeoff most Americans would be willing to make (just as most other governments have decided that's a tradeoff they're willing to make).
Agreed. Inflation seems part of any scenario that involves decoupling/transfer. Also people need to be aware of the scale of the task. E.g. climate change, the population has been fed the fantasy of painfree and even joyous transition to low carbon green economy, which lie has been made plausible thanks to shipping polution and waste (often literally) to China etc. The impact of decoupling would be profound. People need to be realistic. It s a decade plus project with a lot of difficulties. Replacing the productivity and consumption of 1 bln workers...the mind boggles. And if you add other self-interested actors i.e. rest of the world, and Chinese counter actions...
The trade war and trade deal are side shows to the total geopolitical rivalry. I recommend you read Stealth War by Robert Spalding. Covid19 is crystallizing the problems with US over reliance on China as well as the weaknesses of the US society and it’s economy. It’s like a 9/11 and 2008 financial crisis on steroids combined into one. Time is in China’s side over the next decade. I think the US knows that, so risk of conflicts will be very great until the situation is more stable.
I’m curious what you all think is a realistic timeline for China to relax its border restrictions, especially on those with work visas. How much internal pressure might there be from business interests to get this done, or is the impact on things minimal? My guess is they may go country by country; so we’ll see NZ and Oz nationals who are coming from there be able to get back in first, followed by select Asian countries, then Germany, with United States residents may be waiting the longest, possibly even until next year. I do know they have already fast-tracked some business folks within Asia but I am talking about run-of-the-mill Z visa-holders. Or do you think they will instead ask for some sort of immunity certificate or virus free test result, plus a return to their original system of testing everyone who arrives, plus the quarantine?
"what could change the trajectory" invites wishful thinking.
a Covid cure jointly developed by Chinese and American scientists could give both sides a chance to de-escalate and join hands in triumph over the virus, if they wanted to... sad thing is they probably don't even want to
3. Unfortunately the trade deal was hanging on a thread the minute Phase I was announced. Even in the best of circumstances - absent covid-19 impacts - China would have been very hard pressed to meet the agriculture component of the deal. Now with oil prices nearly half what it was at the beginning of the year, the energy purchase commitment part of the deal, even if China needed more imports, looks to be a grand slam home run for the PRC. Today with the economic malaise we are in, this administration cannot look for the trade deal to resolve anything. Certainly not with more tariffs which were designed to stop at intermediary goods, thus additional tariffs would cut deep into consumers and the economy at the worst time possible. The hawks in the WH have the upper hand now, and unfortunately Trump has no choice but to go along even if he inherently is more predisposed to economic stability. Election positioning requires the Dems/Biden to even out-Trump Trump on China.
And in the backdrop, the whole-of-state initiative to counter China in other ways is in full swing... the State Dept's involvement in initiating TSMC to build a cutting edge semi foundry in AZ (industrial policy) is the clearest example, yet.
The direction is clear, but whether the US chooses to confront with unfettered bombast that takes on cultural tropes and stereotypes, or tries to engage with firm nuance based on clear principles, will dictate how ugly this will get. Unfortunately if we are banking on Trump to be the 'ballast' against hardliners, we are in for a very rough ride.
The EU and the USA have gained a large economic advantage with the virus getting into the wild in their respective countries. All of these countries except Germany are running large trade deficits with the developed countries in Asia( incl China)/Oceania (OZ/NZ) that have contained the virus. How will we (I’m from Australia) trade efficiently with USA/EU what every time we travel 14 day quarantine + testing - extra costs etc. I have heard China is thinking of a work around, but human nature will be to avoid these potential “virus carriers”. I would imagine these trade debt nations will just seek partners that have the virus allowing for more frictionless trade.
Answer to 3) As someone who viewed Xi and Lui He as entering into trade negotiations under sufferance because the way trade was working for the PRC before Trump suited China down to the ground.
So forcing Xi into trade negotiations by Trump using his bully tactics and making the PRC lose face before the world was a sensitivity that bore serious resentment and in my view was always an undercurrent in the negotiations. That China dragged the negotiations over two and a half years is testimony to the hostility most of China's governing elite have towards the US administration.
I remind folks when Lui Hu in the Oval Office read China's acceptance of the trade deal earlier this year the proviso that he read that the Americans either missed or chose to ignore allowed for the fact that if no one wanted to buy the mandated agreed to commodities or manufactured goods then China wasn't going to buy them. What I gather is that China hasn't been buying some grains or pork or oil in the specified quantities the US had agreed to. Demand tapering off in China largely due to the pandemic and that proviso Lui Hu stated has been driving Robert Lighthizer and Bob Navarro.
My view at the time of the signing this year was that the deal wouldn't last and as push is now coming to shove Trump has realized what he signed up for didn't give him the overriding advantage he expected. You gotta read the fine print but Trump didn't do that in my view and so I am expecting he will find reasons to dump the deal. I actually think this outcome will suit China more than the Liberal Democratic pundits have been fretting over.
As I expect this will get more hostile, I expect China to off-load — if it hasn't already begun to do so — the US treasury paper it holds. When somebody in the White House publicly muttered that the US will not make good on it's promissory notes/interest payments a few weeks back, it's a signal that Beijing probably didn't miss.
If Trump threatens to cut all economic ties with China as he tweeted today, he should just do it and see how Wall Street handles that.
To your first question, I think Xi will weather any criticism from the economic mess inside China. His handling of the pandemic, coming as late as it did, as draconian as it appeared, when compared to the US numbers and Trump's glaring mismanagement and incompetence, makes him come out smelling like a rose. Anyway we will see come May 21.
This morning, I noted the following comment:
Hu Xijin 胡锡进
@HuXijin_GT·
3h
Based on what I know, if the US further blocks key technology supply to Huawei, China will activate the "unreliable entity list", restrict or investigate US companies such as Qualcomm, Cisco and Apple, and suspend the purchase of Boeing airplanes.
Seems like this is some crazy brinksmanship because doesn't the US essentially have the power to kill Huawei if it cuts it off from the most advanced chips? The stuff from like a year or two back, when tariffs started coming out, about Huawei developing its own internal substitutions and stuff never seemed to pan out 100%. Yet losing the China market doesn't kill those US companies, just significantly reduces their profits. Total destruction seems to equal not significant profit reduction. The CCP/Xi seems to be rolling the dice again and again and again that the US won't take the most drastic action, essentially ever.
David, There is unfortunately another line of brinkmanship. While the recent COVID-19 pandemic and trade issues are dominating world news today, the PRC has other fish to fry, as it were.
The PLA have been very busy initiating a variety of military activities. I would take note of the ongoing military encounters -- both between: 1) the Peoples Liberation Army Navy and Air Force and US forces under the US Indo-Pacific Command regarding our FONOPS activities throughout the East and South China seas; and 2) the PLAN and the navies of the USA and several ASEAN nations regarding their resource-development operations--e.g., Vietnam, Malaysia and the Philippines, et al. India is heating up as well.
While there some information is available from USINDOPACOM regarding US longer-term strategic military objectives for the Indo-Pacific region, it would seem that a more immediate, clear-and-present-danger exists at the tactical level. Are US present levels and types of military activities sensible and appropriate -- given the situation in the South and East China sea that China presents to the world today, or would alternative or additional or actions be appropriate in the face of the present Chinese portfolio of military operations?
I remember the old Air Force SAC motto, "Peace is our Profession." Hopefully, keeping this in mind, balanced heads will prevail.
Hey Stephe, Yea the military stuff does seem to be heating up, super scary. One interesting (and depressing, from a US/Western perspective) thing to read on this once it's out is this, https://www.amazon.com/gp/product/031653353X/ref=as_li_qf_asin_il_tl?ie=UTF8&tag=thewaspos09-20&creative=9325&linkCode=as2&creativeASIN=031653353X&linkId=7e5e3f91d0f740e8aa89ac7468effa99, via Marginal Revolution (Tyler Cowen's prolific blog) about how the. US has lost basically every simulated war in China's near abroad in war games we've done recently, mainly because they just inundate Guam and Japan with medium range missiles, shoot down/disrupt our satellites, and destroy refueling planes so the F35's can't get near there. Not a military expert at all but the military experts seem to agree this is the likely scenario currently :(...
I've already ordered the Christian Brose book, and you are right that recent relevant war games don't look good -- and remember the Clancy-like Ghost Fleet. Plus, I found Benjamen DoVale's comment today especially noteworthy: "Scary stuff. I’m feeling faint echos of when the US cut off Japan from oil exports in the lead-up to WWII."
we are going to find out/ us department of commerce dropped a bomb this am:
https://www.commerce.gov/news/press-releases/2020/05/commerce-addresses-huaweis-efforts-undermine-entity-list-restricts Commerce Addresses Huawei’s Efforts to Undermine Entity List, Restricts Products Designed and Produced with U.S. Technologies:
The Bureau of Industry and Security (BIS) today announced plans to protect U.S. national security by restricting Huawei’s ability to use U.S. technology and software to design and manufacture its semiconductors abroad. This announcement cuts off Huawei’s efforts to undermine U.S. export controls. BIS is amending its longstanding foreign-produced direct product rule and the Entity List to narrowly and strategically target Huawei’s acquisition of semiconductors that are the direct product of certain U.S. software and technology.
Since 2019 when BIS added Huawei Technologies and 114 of its overseas-related affiliates to the Entity List, companies wishing to export U.S. items were required to obtain a license.[1] However, Huawei has continued to use U.S. software and technology to design semiconductors, undermining the national security and foreign policy purposes of the Entity List by commissioning their production in overseas foundries using U.S. equipment.
Looks like Tim Cook is going to have a less-than-pleasant weekend.
I don't understand, what the endgame should be. If the US handles it like this, Huawei will simply morph into something different, then no longer be an easy target. Meanwhile, US companies lose an XL customer. Exercise in futility.
So it looks as if the “pick sides” moment has come for the world, not least Asian economies that are part of the electronics supply chain. If I’m understanding the Commerce announcement correctly, does this mean that US export restrictions are effectively rolled out to allied countries (i.e, Taiwan)?
Question: Doesn't this just kick the can?
"Also on Friday morning, the Commerce Department extended for another 90 days a license that has allowed American companies to continue doing business with Huawei temporarily. It warned this would be the final extension."
Seems so? The commerce wording isn't super straightforward for those not versed in this world, but that seems to be the case. See this: https://www.nytimes.com/2020/05/15/business/economy/commerce-department-huawei.html
This article specifically notes the big Taiwan supplier wouldn't be able to supply Huawei anymore, and it's basically that supplier or ours with the most advanced stuff Huawei needs, right? And there's no way Taiwan would keep doing it if we banned it given their national security reliance on the US.
How much pressure might Xi Jinping be under from the economic mess inside China and the rapid deterioration of US-China relations?
I think he must be under a lot of pressure. Part of his ability to continue to remain in power is the promise of increased standard of living and economic expansion. If he cannot help the economy grow back to previous levels, he could face politcal mutiny.
I read Peter Zeihan’s newsletter on China today. He has a very pessimistic view that the party sees all its delay tactics on debt and economic growth collapsing. They are going wolf warrior to gear up for an all out fight for survival. Go full nationalist to survive the economic disaster. Curious how other knowledgeable people react to that view. Is he going way over the top?
https://www.rfa.org/english/news/china/coronavirus-xijinping-03232020141057.html
One thing I am watching regarding Xi's staying power is China's efforts to go global and establish itself as the "center country" it once was. I see this as part of Xi's China Dream. If there is a backlash against China for the virus or for the increasingly aggressive stance of Chinese diplomats internationally, or if the BRI initiative stalls out, Xi will find it hard to argue that China is becoming a great nation. I wonder whether that could undermine him. Any answers?
Just some explanation for the increasing military activity around Taiwan. In the Taiwanese magazine Commonwealth (天下), scholar Lin Ying-you wrote about the increase in PLA activity. He argues that it is not just for domestic reasons, but also to compensate for Taiwan’s growing international profile. I think that is a fair point. Just as Taiwanese are rightfully scared that Beijing might see an opportunity to make some moves in the rapidly shifting international situation, China probably also fears that Taiwan will use the current fluidity to strengthen its position and maybe achieve a few breakthroughs. At least part of the aggressiveness towards Taiwan can be seen as compensation for that. Then, we also should not forget that 20 May is the inauguration of Tsai Ing-wen’s second term, and inaugurations of DPP presidents are beloved targets of PLA pressure. It looks like her inauguration speech will demonstrate Tsai’s usual balancing to strengthen a cautious status quo on Cross-Strait relations, but that is not good enough for Beijing.
Still, the Kyodo report of the alleged plans by the PLA to practice a simulation of taking over the Taiwan-controlled Pratas/Dongsha Islands in August is something to keep an eye on, certainly because it is not impossible to redirect an exercise to actually do something.
2. In order to get ahead of the curve, and also stabilise its neighbours, 3.5 seems too conservative so I would go with 4 or higher, if they really want to get the markets going. This sounds scary and who knows if they can afford it, but at least it is not 'unlimited everything', which is the Fed's current prescription. And I'm not crossing streams, as fiscal and monetary are pretty much the same thing.
Maybe more interesting is slow release, or 长跑? Like if, instead of an eye catching number upfront, a targeted, sustained release over the course of the next few years - a lot less sexy but a lot less wasteful, and more sensible?
Forgive me, but would you mind clarifying what it was you meant by "3.5 seems to conservative, so I would go with 4 or higher"? Thank you.
via Trivium, Yicai reports Finance Minister Liu Kun is aiming for a fiscal deficit to GDP ratio of more than 3%, 3.5% according to market expectations
https://www.yicaiglobal.com/news/china-finance-minister-signals-rise-in-deficit-cap
Thank you. Liu Kun says this now, but China's leaders may feel compelled to blow through such constraints. I think they would abandon policies that were designed to hold the structural deficit to 3.5 percent of GDP if unemployment rates go up too quickly. Unemployed people soon become hungry people, homeless people and thus resentful people.
Both Xi Jinping and Donald Trump face considerable domestic pressure. Both seem inclined to look for opportunities to redirect popular domestic discontent towards the other. As long as this dynamic prevails (until November in the case of the United States?), the prospects for Sino-US relations will probably remain grim.
What will be worth watching for domestically (in China)?
Frustration with "on again, off again" pandemic suppression (whether localized or more wide spread). We know that experts in the United States, in European countries, in Canada and elsewhere worry about the disruptions caused by poorly implemented "economic reopening" that leads to spikes in COVID-19 deaths and further spread of the disease. What social and political effects might this cause in China?
"Snowballing" criticism online. We know that a number of people have been "disappeared" (or silenced) for having criticized the regime's response to COVID-19 or offering direct criticism of Xi Jinping's leadership, but will this be enough to dissuade others from doing the same?
The willingness of grass-roots officials to continue serving as the "lightning rods" for popular discontent with failures on the part of the regime. Will we see any sign of en masse disobedience (to top-level directives from the Communist Party / State) among police and "grid administrators" in particular jurisdictions?
China increasingly looks good compared to other countries, also economically. The IP numbers suggest a relatively rapid recovery, even though services and investment are lagging a bit, and more negative news is ahead from the external side. But I don’t think that this makes China/Xi look bad in comparison.
As to how much stimulus is needed, that of course depends on what growth one is targeting. Assuming that no policy makers believes in 5.5 percent growth anymore, and really the objective is to restore employment, and that real unemployment is closed to 12-15 percent rather than the official 5.9 you would still need a significant boost from the policy side. Currently, announcements already done have added up to something like 4-5 percent of GDP. The minister of finance’s open in People’s daily suggest that a lot more fiscal action is in the pipeline. So it I were to make a bet, the IMF estimate of last month of a structural deficit of 12 percent this year (compared to 6 last year) seems in the ballpark.
Hey Bert, I think it would be really good to get the ideas/analysis of Michael Pettis (and again as I've mentioned, they are endorsed by notable non-fresh water economists like Krugman, Martin Wolf, Olivier Blanchard, Barry Eichengreen and many others) out into the mainstream of the China watching community. If you don't know him, he used to run Bear Stearns Asia bond trading I think during the Asian Financial Crisis then became an Econ prof at Beida, been there since like '06 or something way back. I became convinced by him because in his older blog posts from 06 to around 2013 when he was still bothering to argue with the China bulls pre-Xi era, he went point by point through the perma bullish arguments and essentially dismantled them it seems to me (dismantled defined as, he criticizes the view that China can grow at 10% forever because xyz factor, i.e. because Western China is undeveloped, or because China's per capita investment is 1/10th that of the US so they can invest up to US level for a few more decades etc, or because infrastructure is never a bad thing etc, then that side makes their case, and he responds point by point in a clear and logical manner, and then the other side... just repeats their original argument). His view is that as China has followed the investment led growth model common to around two dozen countries in the past century (including Japan until the late 80's, Soviet Union until the late 80's, Brazil in the 60's and 70's, etc), a model very well understood by economic historians, but with much greater imbalances even than Japan by the late 80's, it will have an even worse economic stagnation and time rebalancing and dealing with the fallout of all the debt than Japan did. Recall that Japan went from 19% of global GDP in 1989 to 6% today, with 0.5% growth a year for 3 decades (although 1.5% growth a year roughly in household income, so they managed to rebalance somewhat over an ultra long and painful period, and their household income as a % of GDP was never as low as China's 33%). Also remember that when economics, not ultra-nationalist ideology, reigned in China up to around 2013-2015, rebalancing was the watchword, but you never hear that anymore despite the fact that very little rebalancing has been achieved since Wen Jiabao's famous imbalance speech over a decade ago (they've probably increased consumption as a % of GDP from 33% [!] to 40% over more than a decade, implying a rate of less than 1% a year so they still need 2 or 3 decades to get consumption to a level which can sustain economic growth without debt-fueled, unproductive infrastructure investment). So in that analysis, China's GDP is vastly overstated as is because bad debt for SOE's and local governments is never written off for political reasons, and rebalancing defined as transferring state-owned assets especially those of local governments to the household sector never happens therefore the only way there can be enough economic activity to create GDP "growth" (really defined in China as in an input not an output) is unproductive infrastructure spending which ultimately creates more debt and exacerbates the problem. I bring this up not to claim that there will be an imminent collapse in China or anything like that, nor to say that the US and those who believe in liberal values shouldn't absolutely want to take strong and well-calculated action in defense of them, and nor again to say that the US response to Covid or militarily or economically has been at all good the past 2-3 decades, but to say that China has its own massive internal problems and likely will have it's share of global GDP decline dramatically in coming decades as it fails to rebalance just like almost every other country with its growth model (hence the term middle-income trap). So that is one piece of favorable news from the perspective of those who strongly believe in liberal values.
David, thanks. I know Michael very wel (having lived in Beijing on and off from 2004). And I agree with much of what he writes. In fact, in 2005 I wrote about China’s demand side issue. The issue remains to a significant extent the same, though social safety nets have become stronger. The structural solutions are hard to do though, and basically require a lot of income/wealth redistribution among people, between people and enterprises and between generations. that involves SOE reforms, pension systems radomes and fiscal and intergovernmental fiscal reforms. All very hard, and basically not tackled since there 1990s.
I suggest an addition to Question 1: How much pressure might Xi be under given the apparent implosion of the US, leaving a power vacuum?