Axios China

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September 28, 2018

Happy last Friday of Q3.

China is on vacation for the National Day holiday, also known as "golden week" next week so unless there is big news there may be no newsletter next Friday.

Thanks for reading, and 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: A rough week for U.S.-China relations

Illustration of an American eagle attacking a Chinese dragon in muted grey colors

Illustration: Sarah Grillo/Axios

This last week may rank among the worst few days in U.S.-China relations in recent memory:

  • On Monday the latest round of reciprocal tariffs took effect and China rejected the U.S. invitation for trade talks in Washington.
  • In response to U.S. sanctions on a department in the People's Liberation Army and its head over Russian weapons purchases, China recalled its navy commander from his U.S. visit and postponed military talks scheduled for Sept. 25–27.
  • The U.S. approved a $300 million arms sale to Taiwan.
  • China denied a U.S. request for a Hong Kong port visit for the USS Wasp.
  • President Trump accused China of meddling in the upcoming U.S. election and said that he and Chinese President Xi Jinping may no longer be "friends."

My thought bubble: I can find no indications that the relationship is not going to experience even worse weeks going forward. As Axios' Jonathan Swan reported Sunday:

The Trump administration is planning to launch a major, "administration-wide," broadside against China, according to two sources briefed on the sensitive internal discussions. These sources, who weren't authorized to discuss the plans with the media, told me the effort is expected to launch in the next few weeks.

And if Trump thinks that he and Xi are no longer friends there could be a whole different level of deterioration in the U.S.-China relationship far beyond trade. They never were friends, but Trump believing they were seems to have provided some restraint on U.S. policies.

2. Xi preaches self-reliance ...

Xi went on an inspection tour of several northeastern provinces this week. Self-reliance is one of the key themes emerging from his trip. From the official China Daily:

President Xi Jinping underlined the importance of self-reliance in food security, the real economy and manufacturing on Wednesday as the country faces rising unilateralism and trade protectionism internationally.
Xi, also general secretary of the Communist Party of China Central Committee, said during a field inspection to Heilongjiang province that unilateralism and trade protectionism are forcing China to take a path of self-reliance, which, he said, “is not a bad thing”.
It is becoming increasingly difficult to gain access to leading technologies and key technologies internationally, and China will ultimately rely on itself, Xi said.
Xi noted that the country is closer than ever to making its two centenary goals a reality. Yet the last leg of a journey can be the most demanding part, and it has never before met so many challenges and difficulties as now.

My thought bubble: Regular readers know that I have been saying that Xi and his team had made a fundamental shift in their views of the trade war by August, from thinking it was a manageable dispute to now believing it is part of a broader American plan to keep China down.

Now that Xi and the CCP system have decided that America’s real goal in the trade war is to "thwart China's rise" we are starting to see a rollout of official reactions, with self-reliance as a key theme. We should expect the PRC under Xi to use all means at its disposal as it pursues that goal, however impossible it may be in today's global economy.

Even in the unlikely event there is a U.S.-China trade deal over the next few months, the Chinese side will only view that as a useful delaying action while they work increasingly hard to wean themselves from as much dependence and reliance on the U.S. as possible.

The bottom line: The fundamental assumptions around the U.S.-China relationship look to have been irreparably shattered.

Welcome to the New Era of U.S.-China relations.

3. ... but global supply lines are entangled

Photo of Huangpu port in China

Huangpu port in China. Photo: VCG/Getty Images

As Axios' Erica Pandey wrote earlier this week, the Trump administration is not only seeking what it calls fairer trade with Beijing, but much more — to upend the bedrock of the Chinese economy by forcing out the chain of manufacturing supply from the country, and pushing it elsewhere.

Why it matters: There are doubts about this end game of Trump's trade war. After decades of development and tens of millions of dollars of investment, few U.S. companies seem likely to move their manufacturing facilities out of China.

"It can’t be a replay of the Cold War division between the West and the Soviet Union — industries were nationally based back then and innovation wasn’t global.  All this changed after 1990."
— Jim Lewis of the Center for Strategic and International Studies

China has been the world's biggest exporter for almost two decades and has poured millions into its logistics network so global companies can quickly move goods from factories to cargo ships. China also has one of the best-trained manufacturing workforces in the world.

  • U.S. companies can consider moving production from China to Cambodia, Malaysia, Vietnam or elsewhere — both to dodge tariffs and avoid the threat of intellectual property theft, But elsewhere, they face other disadvantages like dirt roads between factories and ports and inexperienced workers, the New York Times reports.
  • And China has levers to make sure it isn't frozen out of global supply chains, Lewis says. For example, it could threaten to take away a foreign company's access to its massive market.

Yes, but: Some companies are at least putting a halt to new Chinese production capacity.

  • Feng Tay Enterprises, a Taiwanese footwear manufacturer that services Nike and Adidas, stopped building up Chinese production over 10 years ago, per Nikkei Asian Review. It's now adding capacity in India and Southeast Asia.
  • Foxconn, the iPhone and laptop maker, earned kudos from Washington for promising to bring a chunk of production to Wisconsin.

What to watch: If a few big names try to cut reliance on China — even if they don't move out entirely — Xi could make concessions to avoid disrupting the interconnected supply chain.

  • For now, that's unlikely to happen with Xi. "He’s overestimated China’s ability to make advanced technology without Western help, but it will take a while for him to admit this," Lewis says

4. Chen Quanguo, architect of Xinjiang camps

Photo of Chen Quanguo who's the architect of the Uighur camps in Xinjiang

Chen Quanguo at an October 2017 party meeting. Photo: Etienne Oliveau/Getty Images

Bloomberg has published a profile of Chen Quanguo, Politburo member since last year and Communist Party secretary of the Xinjiang Uighur Autonomous Region since 2016. Before taking on the Xinjiang job, Chen was the party secretary of the Tibet Autonomous Region, where he oversaw a massive security upgrade.

He appears to be applying what he learned in Tibet to Xinjiang. Under Chen's leadership Xinjiang has built a network of re-education camps that house hundreds of thousands of mostly Uighur Muslims.

Bloomberg writes that Chen is a "rising star" and that when he started in Xinjiang he:

...immediately set about replicating the system that brought him success in Tibet. He sent Communist Party officials to Uighur villages, created a network of checkpoints and facial-recognition cameras, and shuttered mosques in an effort to “Sinify” Islam in the region.
According to one Chinese-language profile, Chen drilled Xinjiang’s security forces using a technique perfected in Tibet: timing police to the second on responding to emergency calls...
Chen is the only person ever to have served as both party boss of both Xinjiang and Tibet, according to domestic media reports. His dual strategy of tough security measures and reeducation are designed to “take the ethnicity out of the people and lock them down,” said James Millward, a professor at Georgetown University’s School of Foreign Service.

Go deeper: Last month a bipartisan group of lawmakers called on the Trump administration to sanction Chen under the Global Magnitsky Act.

5. Another point of contention: China's fentanyl

The Trump administration repeatedly asks China to stem the flow of fentanyl to the U.S. — but China consistently responds that it's the U.S. that needs to halt its demand for the addictive synthetic opioid.

Buzz: ABC's "20/20" recently showed how easy it still is to buy the drug online. Correspondent Bob Woodruff was able to arrange a deal:

ABC News correspondent Bob Woodruff was even able to speak directly via Skype to a representative of one of the sites, a woman who called herself “Lucy.”
Lucy sent Woodruff video of what she said was raw fentanyl powder made by her company’s factory. She said the product was “guaranteed” to make it through customs, sending us photos of the vacuum sealed foil packages she said the fentanyl would be mailed in.

The other side: "20/20" spoke with Yu Haibin of the Ministry of Public Security's Narcotics Control Bureau. He remained consistent with the party line, blaming U.S. demand for the fentanyl trade.

Watch the segment here.

Why it matters: The opioid epidemic is worsening and given China's role as a key supplier, it is another point of friction in the U.S.-China relationship that may intensify quickly.

6. Chinese travel to U.S. drops 42% for holiday

The South China Morning Post that flight bookings from China to the U.S. for the upcoming golden week holiday are down significantly:

There has been a dramatic 42 per cent decrease in flight bookings from China to the US in next week’s holidays – known as “golden week” – compared with last year’s holiday week, according to travel fare search engine Skyscanner. Last year’s holiday period was one day longer...
The fall in Chinese bookings is echoed by a report last month by ForwardKeys, a European travel research agency, which found that decreases in flight bookings from China to the US appear to mirror the heightening trade tensions since April...
Overall, Chinese outbound travel worldwide stayed strong, growing at 5.5 per cent from the previous year, the ForwardKeys study found, based on 2018 data compiled from global airline booking databases.

Why it matters: Chinese visitors in the U.S. spend a lot, nearly $35 billion in 2016 according to the report.

7. Worthy of your time

Photo of thousands of visitors making their way to the Forbidden City in Beijing for Golden Week with a cute boy on someone's shoulders waving a Chinese flag

Thousands walking to the Forbidden City during Golden Week in 2011. Photo: STR/AFP/Getty Images

STAT — China embraces genetic testing, seeking answers on destiny and identity

Bloomberg — China Claims More Patents Than Any Country — Most Are Worthless

Xinhua — China to hold 5th World Internet Conference November 7-9

Sinica Podcast — Xi Jinping's long, hot summer

Deng Yuwen — Xi Jinping and the Communist Party of China: Why the theories that the Party is rapidly decaying and that Xi Jinping is incompetent are wrong

ECNS Beijing bans scooters and self-balancing transporters from roads

Global Times — Child prodigy becomes key architect of China’s next-generation fighter jets

CNN — China's Tiangong-2 space lab will fall to Earth in 2019, space agency says

China Money Network — China's Top 50 AI Companies

PingWest — Data is Not Oil: On AI and China's Mass of Data

Goldthread on YouTube — The Gold Rush For Mushrooms in Yunnan

This week's issues of my Sinocism China Newsletter, now with a special discount for Axios readers.