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.
1 big thing: A rough week for U.S.-China relations
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:
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:
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
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.
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
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:
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:
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:
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
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.