Feb 15, 2019

Axios China

Happy Year of the Pig!

The U.S.-China trade talks continue back in D.C. next week, so we will all get to enjoy at least another week of leaks and speculation.

If you want a daily and deeper look at China, please check out my daily Sinocism China Newsletter and follow me on Twitter @niubi.

1 big thing: Trade talks are water torture

Chinese President Xi Jinping speaks as he meets with U.S. Trade Representative Lighthizer (2nd L) and U.S. Treasury Secretary Mnuchin (L) in Beijing on Feb. 15. Photo: Andy Wong/AFP/Getty Images

The U.S.-China trade talks in Beijing this week concluded without any sort of agreement and they will reconvene next week in Washington, D.C.

Background: The U.S. team, led by U.S. Trade Representative Robert Lighthizer and Treasury Secretary Steven Mnuchin, met with Chinese President Xi Jinping after two days of talks with Vice Premier Liu He and his team.

  • Given that President Trump met Liu in D.C. two weeks ago it would have been a very bad sign if Xi did not reciprocate.

What we're hearing: There was hope for a memorandum of understanding to result from this week's talks, but clearly there was not enough progress.

These detailed and intensive discussions led to progress between the two parties.  Much work remains, however.  Both sides will continue working on all outstanding issues in advance of the March 1, 2019, deadline for an increase in the 10 percent tariff on certain imported Chinese goods.  United States and Chinese officials have agreed that any commitments will be stated in a Memoranda of Understanding between the two countries...
Next week, discussions will continue in Washington at the ministerial and vice-ministerial levels.
  • The Wall Street Journal reports more detail from people briefed on the talks...
In the latest round, senior officials from both sides made some progress in sketching out the agreement, which would be in the form of a memorandum of understanding...
They described it as a bare-bones pact that both sides said could serve as the framework for a deal that President Trump and Chinese leader Xi Jinping later finalize at a summit...
The memorandum in the works is expected to cover issues related to Beijing's offers to purchase more American goods and services, accelerating China's market-opening efforts in sectors such as financial services and manufacturing, as well as improving its protection of U.S. intellectual-property rights...

The latest: In his press conference today, Trump affirmed a willingness to extend the discussions past the March 1 deadline if there is progress.

My thought bubble: The idea that Beijing is unable to move on the U.S. requests, most made 9 months or even years ago, and that another 60 days will be enough time for them, seems to go against the idea of seeking truth from fact.

  • Beijing will have more time to find and exploit various avenues to pressure Trump to agree to a lesser deal, and pushing the negotiations closer to the start of the 2020 U.S. election cycle may also increase the political pressure on the president to compromise.
  • It appears that there is momentum towards some sort of a framework deal to at least halt new or increased tariffs, but it is possible the markets and the Chinese are now too confident there will be a deal or at least an extension by March 1.

Go deeper:

2. Grading the impact of Trump's China tariffs

Illustration: Lazaro Gamio/Axios

From Dion Rabouin's Axios Markets newsletter ... New analysis shows that U.S. tariffs on Chinese goods are chipping away at the trade deficit with China.

1. Are they reducing the U.S.-China trade imbalance? Yes.

  • After accounting for frontloading to get out in front of the tariffs early in the year, the rate of tariffed goods exported from China slowed, a new report from the Institute of International Finance shows, and will likely continue to slow without a resolution.
  • China's reciprocal tariffs on U.S. goods are slowing American exporters' sales, too. But because the U.S. imports more from China than it exports there, tariffs should continue to lessen the trade deficit.

2. Are they helping American businesses? No.

  • Remember, U.S. companies that import Chinese goods pay the tariffs. The amount of tariffs paid by these American companies has doubled since May, including an increase of more than 30% from August to October.
  • Companies as varied as truck manufacturer Cummins, equipment maker Caterpillar, chipmaker Nvidia and washing machine manufacturer Whirlpool have all separately issued lower 2019 guidance citing the tariffs as a direct cause.

3. Are businesses moving back to the U.S.? No.

  • CNN Business reported in November that a recent survey by 2 American chambers of commerce in China showed a third of the companies surveyed were looking to leave China because of the trade war. However, only 6% said they were considering moving back to the U.S.

4. Have they hurt China? Sort of.

  • IIF's analysis of 7,000 individual products subject to new tariffs shows that there has been a measurable slowdown in purchases from both nations. However, both Chinese and American firms are largely finding substitutes or eating the price increases instead of passing them on to consumers, IIF economists tell Axios.

Go deeper: Read Dion's full story here.

3. Pentagon's siren song on artificial intelligence

Illustration: Sarah Grillo/Axios

From Kaveh Waddell in the Axios Future newsletter ... On the heels of a sweeping new U.S. plan to retain dominance in artificial intelligence, the Pentagon has cast Chinese development of intelligent weapons as an existential threat to the international order.

A day after the release of an executive order by Trump that omits naming China, the Defense Department, in a new AI strategy document, speaks in stark terms of a "destabilizing" Chinese threat. It states...

"Failure to adopt AI will result in legacy systems irrelevant to the defense of our people, eroding cohesion among allies and partners, reduced access to markets that will contribute to a decline in our prosperity and standard of living, and growing challenges to societies that have been built upon individual freedoms."

Details: The new document, a public summary of a classified strategy developed last year, calls for the Pentagon to realign itself drastically. The DOD paper promises to deploy AI "rapidly" and "iteratively," and to enable "decentralized development and experimentation."

But, but, but: This realignment is a tall order. The Pentagon is not an agile software team but an enormous, slow-moving beast, hobbled with the inertia of outdated technologies and strategies, as Axios reported previously.

"There remains an obvious tension between the deliberate and sometimes slow processes required to develop ethical principles for AI's use in military contexts and the kind of rapid iteration and experimentation with 'forward edge' technologies that the strategy also champions."
— Charlotte Stanton, fellow in technology and international affairs, Carnegie Endowment

Silicon Valley, not just the old-school military-industrial complex, is a vital audience for the document.

  • Working with tech companies and startups is essential to the military's AI strategy, says Larry Lewis, director of the Center for Autonomy and AI at CNA, a research organization.

What's next: Forthcoming ethical guidelines from the Pentagon for military use of AI.

4. Possible leak of Xinjiang surveillance database

Dutch security researcher Victor Gevers says he discovered what appears to be a facial recognition database of more than 2.5 million users in the Xinjinag region, exposed online in one of SenseNets' MongoDB databases before it was placed behind a firewall.

He documented his find on Twitter and also talked to ZDNet:

Gevers told ZDNet that the database contained information on 2,565,724 users, along with a stream of GPS coordinates that came in at a rapid pace.
The user data wasn't just benign usernames, but highly detailed and highly sensitive information that someone would usually find on an ID card, Gevers said...
The database also contained a list of "trackers" and associated GPS coordinates. Based on the company's website, these trackers appear to be the locations of public cameras from where video had been captured and was being analyzed.
Some of the descriptive names associated with the "trackers" contained terms such as "mosque," "hotel," "police station," "internet cafe," "restaurant," and other places where public cameras would normally be found.
Gevers told ZDNet that these coordinates were all located in China's Xinjiang province, the home of China's Uyghur Muslim minority population.

Why it matters: This is another reminder of the scale of surveillance, and the use of global tools to power that surveillance. The Mongo DB database was developed by NASDAQ-listed MongoDB.

Go deeper:

5. China's stock market starting the year well

2018 was a terrible year for China's stock markets but so far in 2019 the CSI 300 index of companies listed in Shanghai and Shenzhen is the world's top performer this year, according to the Financial Times.

More money may pour in this year, per CNBC:

China's bond and stock markets experienced inflows of $120 billion last year and that amount could reach $200 billion this year, boosted by the inclusion of Chinese assets in benchmark indexes, according to a report by Citi.

One of the catalysts for the increased flow is that MSCI, the world's largest index provider, is expected to decide by Feb. 28 whether it will raise the inclusion factor for China A shares in all MSCI indexes from 5% to 20%.

The bottom line: A recent Goldman Sachs report gives more detail...

If the decision is a “Yes”, the change will be implemented in two batches (rebalancing windows) — end-May and end-Aug. — with a 7.5% increment each;
The justifications are in place: China A remains significantly under-represented in global indexes relative to its market cap/liquidity profile, and China’s economic size globally; market accessibility has continued to improve (Connect, QFII, stock suspension); and its current weight in MSCI EM (0.7%) is lower than the proposed weight in the FTSE (5.6%) and S&P (5.5%) EM indexes.
We estimate that US$61 [billion] of international capital could be allocated to A shares

Go deeper:

6. RIP Professor Roderick MacFarquhar

The China studies field lost a giant. Harvard Professor Roderick MacFarquhar passed away over the weekend. From the New York Times obituary:

Roderick MacFarquhar, a consummate scholar of Communist China whose writing on Mao’s power politics influenced how people around the world understood China, died on Sunday in Cambridge, Mass., where he had long taught at Harvard University. He was 88...
MacFarquhar specialized in the origins of the Cultural Revolution, the decade of turmoil that terrorized China beginning in 1966. His three-volume work, “The Origins of the Cultural Revolution,” came to be considered a classic...
At Harvard, Professor MacFarquhar taught history and political science and was known for his wit and informality. In one class he asked his teaching assistants to pose as Red Guards, Mao’s paramilitary youth, and act out boisterous self-criticism sessions.
He then coaxed the class to shout over and over, “Mao Zedong, Wan Sui!” — “10,000 years for Mao!” — so that everyone felt the fervor of the movement that shook China. The “CultRev” class packed the biggest lecture hall on campus.

We all benefited from his scholarship. RIP Professor MacFarquhar.

Go deeper: Roderick MacFarquhar Article Collection - China Quarterly, outside the paywall

7. 1 big read: Student Marxists challenge party

The Financial Times has an excellent, long story on the Marxist student activists and the wave of detentions.

My thought bubble: This is far from the first time the party has cracked down on Marxists who were pursuing an incorrect line. In fact, the party's history is filled with brutal purges of people who thought they were more Marxist and politically correct than those in power.

Details, per FT:

Luke, an undergraduate student at one of China’s elite universities, recalls the day he became a committed Marxist. It was not in the countless hours of compulsory Marxism lectures he endured as part of the undergraduate curriculum, but during his first-year winter break in Beijing.
Along with 20 other young workers, he squeezed into a minivan with nine seats and was driven to a small workshop on the outskirts of the city. There, he put together cardboard packages for 12 hours in a below-freezing room with no heating.
What startled him most were the hands of the dozen young women living in the workshop, which were “swollen like radishes” from the cold. Unlike him, they had not had the opportunity to finish school. The boss of the workshop had brought them there from their hometown, and they did not know when they could go back.
“They were like slaves. I thought, this capitalist mode of production can turn people into feudal serfs,” says Luke (not his real name)...
“The students’ commitment to a purer form of Marxism only serves to highlight the CCP’s own drift from its roots,” says Jude Blanchette, author of a forthcoming book on China’s neo-Maoists. “This, crucially, has been why the left in China has always presented more of a challenge to the party leadership than the right.”

Go deeper:

8. Worthy of your time

China Media Project The Dawn of the Little Red Phone

Caixin — China Wants to Plant More Cash in Rural Areas

Asia Society — Course Correction: Toward an Effective and Sustainable China Policy

The New York Times — Huawei Was a Czech Favorite. Now? It’s a National Security Threat

Center for Advanced China Research — Securing the Digital Silk Road

WSJ — How the Pentagon Countered China’s Designs on Greenland

SCMP — How official Chinese propaganda is adapting to the social media age as disaffection spreads among millennials

Chublic Opinion — Anxieties of development: emerging voices in Chinese social media

CBC News 'China is your daddy': Backlash against Tibetan student's election prompts questions about foreign influence

Bloomberg — Fan Bingbing's $100 Million Tax Bill Stuns China's Movie Industry

Global Times — Billionaire political donor Huang Xiangmo decries cancelation of his permanent visa by Australia

Variety — Himalaya Launches Podcast Platform With $100 Million Funding

Center for the Study of Contemporary China Podcast Ep. 10: Taiwan and the Global Order – Shelley Rigger

China HeritageSic transit gloria mundi — Ten Years of A Prosperous Age

This week's issues of my Sinocism China Newsletter