Situational awareness: January 1, 2019 is the 40th anniversary of the establishment of diplomatic relations between the US and the PRC. The relationship in the coming year may be more contentious and friction-filled than it has been since 1979.
Happy Holidays. and see you in January!
1 big thing: Chinese commit to juicing their economy
The annual Central Economic Work Conference (CEWC) that sets the overall direction for the next year's economic policies just concluded in Beijing. The signals from this meeting suggest, among other things, increased efforts to stimulate the economy and work out a trade deal with the U.S.
Caixin has the details — Top Economic Meeting Ends With Pledges of ‘Greater’ Tax Cuts, ‘Reasonably Ample’ Liquidity:
"The leaders pledged to cut taxes and fees “on a greater scale,” increase the issuance of special-purpose local government bonds by “a relatively large margin,” and strike a balance between monetary tightening and easing to ensure “reasonably ample liquidity,” as they promised to continue to take measures to address the financing difficulties faced by private and small companies. The measures are part of official efforts to “strengthen counter-cyclical policy adjustments,” which refers to government support to boost economic growth, according to Xinhua. Proceeds from sales of special-purpose local government bonds are often used to fund infrastructure investment, a key driver of economic expansion."
"They noted that the world is facing a “once-in-a-century” change that entails both crisis and opportunities. They urged the nation to “turn crisis into opportunities” by improving its technology and innovation capabilities, deepening reforms and opening up further, participating in global economic governance system overhaul, and speeding up a transition to high-quality growth, the report said."
My thoughts: The Chinese economy is struggling, the debt mess is unresolved and the impact from the U.S. tariffs has barely begun. There are obvious downside risks but there is also the risk of being too bearish going into 2019.
- The Communist Party will do everything it can to juice the economy and the message out of this meeting appears to confirm that multiple forms of stimuli will be forthcoming. Whether or not significant economic reforms will now also be forthcoming, and not just more promises, is the trillion dollar question.
2. Reading the trade talk tea leaves
Another round of face-to-face US-China trade talks is expected in mid-January.
What I am hearing: China's top economic policymaker Liu He may be coming to D.C. for the January discussions. So far the Chinese side has not offered any detailed concessions that come close to meeting the expectations out of the Trump-Xi meeting in Argentina but that may change now that the Central Economic Work Conference (CEWC) has set the economic priorities for 2019. The statement from the CEWC specifically said:
Optimistic take: The Chinese side is serious about making significant structural changes to open its economy more to and level the playing field for foreign firms, in effect using the US demands to deepen long promised domestic reforms.
Pessimistic take: The Chinese side has no intention of agreeing to most of the US demands for structural changes and instead will try to buy time with promises of more headline purchase deals and vague and unenforceable commitments to deeper changes; i.e. business as usual.
The wildcard: How badly does President Trump want a deal? Do not be surprised if he is willing to overrule his more hawkish advisors to settle for a deal that has happy headlines but falls far short of some of the structural changes the US is demanding.
- The Chinese will be more than happy with such an outcome, as their goal is to reduce frictions while buying as much time as possible to capitalize on a shifting global environment, as described in the work conference statement:
3. U.S. response to Chinese hacking dulled by trade concerns
As harsh as Thursday's hacking indictments seem, the U.S. government is signaling to Beijing that it does not want this move to upset the trade negotiations. As I and multiple news organizations reported Thursday, the U.S. backed down from expected sanctions in addition to the indictments because Treasury Secretary Mnuchin was worried about the impact on the trade discussions.
Axios' Joe Uchill has the details on the indictments:
The Department of Justice unsealed indictments against 2 Chinese hackers affiliated with the Ministry of State Security Friday.
Why it matters: The group known as APT 10, running a campaign nicknamed Operation Cloud Hopper, recently attacked managed IT services, providing a gateway to intellectual property and trade secrets worldwide. The group has attacked biotech, healthcare, NASA, oil and gas exploration, and other industries.
Details: The two hackers, Zhu Hua and Zhang Shilon, are said in the indictment to have attacked more than 45 technology companies in at least a dozen U.S. states as well as U.S. government agencies — including obtaining the personal information of more than 100,000 naval service members.
- The DOJ alleges the pair worked for Huaying Haitai Science and Technology Development Company and were contracted by China as cyber mercenaries.
- Per the indictment, APT 10 has been active since at least 2006 and has been attacking managed service providers since 2014.
- Other nations with APT 10 targets included Brazil, Canada, Finland, France, Germany, India, Japan, Sweden, Switzerland, the United Arab Emirates, and the United Kingdom.
Background: "Cloud Hopper is one of the most aggressive of Chinese groups," said Ben Read, senior manager for cyber intelligence at FireEye.
- FireEye has seen the group involved in a great deal of economic espionage, ranging from hacking internet service providers to targeting a pharmaceutical firm.
- "An indictment might pause operations, but probably won't stop them," said Read, noting an array of other Chinese groups involved in seemingly state-sanctioned commercial espionage.
The Department of Justice has been on a recent tear of filing charges against Chinese officials.
- Then-Attorney General Jeff Sessions announced a new DOJ China initiative on Nov. 1 while discussing the indictment of a Taiwanese, state-owned company for theft of trade secrets from U.S.-based Micron.
- But even before the initiative, Chinese intellectual property theft was on the DOJ's radar for quite a while. Prosecutions can take years to develop, and former officials believe the current flurry of indictments is the fruit of a strategy that began back in the Obama administration.
- At a Senate Judiciary Committee hearing last week, John Demers, assistant attorney general for the National Security Division, said 90% of intellectual property theft that involved a foreign country came out of China, which Rosenstein echoed Thursday.
The trade war with China is notionally a separate issue than intellectual property theft, as is the arrest of a Huawei executive for trade sanctions violations, the penalizing of ZTE for similar trade sanctions violations and the U.S. accusations of election interference. But all these issues combine to form a slurry of discord between the Trump administration and China.
4. Car racing in China
This is a fun read from Jalopnik's Alanis King. Carmaker Geely invited her to join a race in Shanghai:
Read the whole thing here.
5. Worthy of your time
South China Morning Post - ‘Mad Dog was one of the sane ones’: why China will miss James Mattis when he quits Trump’s White House
The Washington Post - Michael Kovrig: Canadian detained in China kept in cell with lights always on
WSJ -Some Global Banks Break Ties With Huawei
China Media Project - Qian Gang - Reading Xi’s Reform Anniversary Speech
The Information - Chinese Chip Deals Shift to Europe as U.S. Clamps Down
South China Morning Post - Chinese tech under the microscope: US agencies step up reviews of research activity on American campuses
AP - Indonesian Muslims protest China's detention of Uighurs
The New York Times - Trump Signs Law Punishing Chinese Officials Who Restrict Access to Tibet
Texas National Security Review - Xi's Vision for Transforming Global Governance: A Strategic Challenge for Washington and Its Allies
Quartz - China's 2018 internet memes from Peppa Pig to an imperial drama
TechNode - China resumes approvals of video games
TechCrunch - TikTok parent ByteDance sues Chinese news site that exposed fake news problem
The New York Times - Ofo, Pioneer of China’s Bike-Sharing Boom, Is in a Crisis
This week's issues of my Sinocism China Newsletter, now with a special 20% discount for Axios readers.