Nov 9, 2018

Axios China

Situational awareness: Chinese President Xi Jinping and his team did not get the midterm wave they were hoping for. The Chinese side may once have had a fantasy that the midterm elections would force President Trump to back down on tariffs but there is little to nothing in the results that would lead Trump to change his approach to prosecuting his trade war with China, and in fact he may see reasons to redouble his efforts. 

Thanks for reading, and if you want a daily and deeper look at China, please check out my daily Sinocism China Newsletter, now with a special discount for Axios readers, and follow me on Twitter @niubi.

1 big thing: U.S. and China initiate round of dialogue

The U.S.-China Diplomatic and Security Dialogue at the State Department in Washington, DC. Photo: Mandel Ngan/AFP/Getty Images.

The U.S.-China Diplomatic and Security Dialogue (D&SD) is meeting in Washington, D.C., today.

Driving the news: U.S. Secretary of State Michael Pompeo and Secretary of Defense James Mattis are hosting two key diplomats, Yang Jiechi and Wei Fenghe.

  • Yang is the director of the Office of Foreign Affairs of the Central Commission of the Communist Party of China and Wei is the minister of National Defense.

My thought bubble:

  • The dialogue was supposed to convene last month in Beijing but was postponed, with each side blaming the other. From what I hear the Chinese made an October meeting pointless by saying Wei would be unavailable, in a fit of pique after the U.S. imposed Russia-related sanctions on the People's Liberation Army.
  • Expectations are low for an especially constructive or positive meeting.
  • North Korea and close encounters between the 2 militaries will likely be at the top of the agenda at the meeting. No matter how well or badly it goes, it's not clear what impact these talks may have on the trade dispute and the prospects for the Trump-Xi G20 meeting.

Go deeper:

2. Trump: "China got rid of their 'China '25'"

Trump caused a bit of a stir in his Wednesday press conference when he said that China has ended its Made in China 2025 program, which he called "China 25":

"China got rid of their China 25 because I found it very insulting ... I said that to them ... I said China 25 is very insulting because China 25 means in 2025 they're going to take over economically the world.. I said that's not happening”

Quick take: That comment led some to speculate that the U.S. and China have worked out a deal and the G20 will finalize it. I think that speculation is incorrect and that it is more likely he misspoke.

  • The New York Times fact-checked this comment and other China-related ones from the press conference and declared them"false."

A rumor to watch: I am hearing that top economic official Liu He may come to DC before the Trump-Xi G20 in late November if it looks like there is progress towards at least a framework deal at the G20. If Liu does schedule a DC visit expect markets to get excited. 

3. The Chinese art of substitution

Soy farming in Maryland, which already sells its crop to U.S. chicken farmers. Photo: Mark Wilson/Getty

Steve LeVine writes for his Axios Future newsletter (sign up here)...

Three weeks ahead of a meeting between Trump and Xi, Beijing is notching record exports and figuring out how to manage without American goods.

Why it matters: Despite tariffs on $250 billion in Chinese products, Trump has appeared to fail to budge Xi on his determination to do whatever it takes to dominate the technologies of the future.

In August, we flagged an upcoming yearlong trade war between the U.S. and China. Now, there is no indication that it will end even then.

  • Trump says he will tariff the rest of China's $510 billion in trade with the U.S. if he and Xi cannot strike a deal in Buenos Aires on Nov. 29.
  • In response, Xi indicated little flexibility, suggesting that Trump needs to respect China's strategic choices, Reuters reports.

Meanwhile, despite China's economy flagging a bit — in the third quarter, its GDP growth was 6.5% year-on-year, the slowest since the financial crash — it is still humming. Chinese exports keep rising, report the WSJ's Liyan Qi and Grace Zhu.

  • The acrimonious U.S.-China trade gap is up 15% from a year ago and China is on pace to post another record surplus.

The impact: One of the trade war's most immediate U.S. victims is Maine lobster fishing, writes Bloomberg's Shawn Donnan. In line with Trump's tariffs, China slapped 25% levies on $128 million-a-year in U.S. lobster imports, and Maine's industry — cultivated over a decade and more — got hit.

  • China is simply buying its lobsters elsewhere — such as just over the border in Nova Scotia, Canada.

Another impacted industry is soybeans, Parag Khanna, author of the forthcoming "The Future is Asian," tells Axios.

  • China has all but halted purchases of U.S. soybeans, buying them instead from Brazil and Argentina, Khanna says.
  • Brad Setser, an economist at the Council on Foreign Relations, says Russia could emerge as another soybean supplier.

Read more of Steve's story here.

4. Ministry of Public Security machinations

Lin Rui is now a vice minister of Public Security. He looks to replace Meng Hongwei, formerly a vice minister of Public Security and president of Interpol since 2016 but who was detained last month.

Background: Lin spent most of his career in Fujian, including as police chief and deputy mayor in Xiamen, and moved to Beijing in June as an assistant minister, a member of the ministry's Communist Party Committee, and head of the Cybersecurity Bureau.

Of note: Lin's promotions have come exceedingly quickly. Per SCMP:

Lin is also regarded as one of Xi’s trusted allies, having worked for many years in southeast China’s Fujian province, where the president spent 17 years during the earlier stages of his political career.
Three other vice-ministers at the pubic security ministry also worked in Fujian, namely Wang Xiaohong, the deputy secretary of the ministry’s Communist Party committee, Xu Ganlu, head of the State Administration of Immigration, and Deng Weiping, the anti-corruption chief.

Why it matters: I read Meng's downfall and Lin's promotion as another sign of Xi's success in consolidating control of the sources of hard power in the security services and the PLA. For all the rumors of pushback against Xi, it is difficult to map out a credible scenario for the grumblings turning into real action against him.

Go deeper: SCMP writes on the impact of China's removal of Meng...

In the eyes of China’s ruling Communist Party, the police force is a key component of the so-called knife handle, or daobazi, a euphemism for the party’s Central Politics and Law Commission, which also oversees the country’s judiciary and prosecutors...
Steve Tsang, director of the SOAS China Institute in London and author of China in the Xi Jinping Era, said the most basic tenet of Xi Jinping Thought is strengthening party control.  
“With such goals it is unexceptional that Xi seeks to tighten control over the security apparatus and put his own men [almost exclusively] in charge of them, be it the People’s Liberation Army or the Ministry of Public Security or, for that matter, the other security apparatus.”

Reading the tea leaves: It is possible (probable?) the removal of Meng was a major piece in Xi's final push to fully consolidate power over the MPS system. Of interest, is this piece by AP describing how Interpol is not allowed to probe into Meng's detention...

Interpol’s leader says the international police organization’s rules forbid him from probing into the fate of the man who served as Interpol president until he vanished in September on a trip to his native China.
In rare public remarks about the disappearance of Meng Hongwei, Interpol Secretary General Juergen Stock said Thursday that he has “encouraged” Chinese authorities to provide information about the case but can do no more.
5. DOJ's China cyber strategy after Sessions

Joe Uchill writes for his Axios Codebook newsletter (sign up here)...

Under Attorney General Jeff Sessions, the Department of Justice took a harder line against cyber espionage, particularly by China, than it ever had before.

Experts say the offensive against China's theft of billions of dollars in intellectual property is likely to continue under Matt Whitaker, the new acting attorney general.

The big picture: Press coverage is spotlighting the impact Sessions' departure may have on the Mueller investigation. But the DOJ is a big machine with many moving parts, and a change at the top could affect any or all of them.

Background: On Oct. 30, the U.S. announced the indictments of 10 Chinese spies and collaborators for hacking aerospace firms to steal intellectual property for the benefit of Chinese industry. On Nov. 1, the U.S. indicted three more Chinese citizens and two companies for similar charges related to computer chips.

  • These were the third and fourth sets of indictments since September against China's IP theft rings..

The cause and effect: Part of why Sessions was the first attorney general to go on a cyber espionage indictment spree was simple chronology.

  • The Obama administration indicted members of the Chinese army for economic espionage in 2015 around the time then- President Obama and Xi reached an agreement for China to stop stealing intellectual property via hacking.
  • That worked, briefly, meaning the Obama administration didn't have to go all in on a DOJ strategy. But when Trump took office, China cranked up the hacking again. That's when Sessions' department went full bore.

Read more of Joe's piece here.

Go deeper: The Wall Street Journal writes about how a U.S. official says China violated its cyber theft pact:

The 2015 bilateral agreement had significantly reduced the amount of Chinese cybertheft targeting American companies, but Beijing’s commitment to the deal has eroded, said Rob Joyce, senior adviser for cybersecurity strategy at the National Security Agency.
“It is clear they are well beyond the bounds of the agreement today that was forged between our two countries,” Mr. Joyce said during a panel conversation at the Aspen Cyber Summit.
6. China's influence swallows global criticism on human rights

David Lawler writes for from his Axios World newsletter (sign up here)...

China’s government is cracking down on dissent at an alarming pace and detaining up to 1 million Muslims in “re-education camps.”

Yes, but: At a UN Human Rights Council review this week, many countries saw fit to applaud China’s human rights record, rather than criticize it.

Why it matters: China’s economic power and investments around the world aren’t just increasing its global influence — they’re making countries far more reticent to speak out about Beijing's abuses at home. Sophie Richardson, China director at Human Rights Watch, tells Axios:

"We might be moving onto the next bad phase where we not only see how few countries are critical of China, but how many are willing to be cheerleaders.”

Case in point: Pakistan and Kazakhstan have both been directly affected by China’s mass detentions in Xinjiang, an autonomous region of China.

  • Citizens or family members from both countries are being held there.
  • Both countries are also heavily reliant on Chinese investment and trade. Neither criticized China at this week’s review, the first since 2013, which featured comments from 150 countries.
  • Countries that did speak out included Japan, Germany and the U.S., which called on China to close the internment camps and free the “possibly millions” being held.
  • China’s vice foreign minister responded to the criticism:
“We will not accept the politically driven accusations from a few countries that are fraught with biases, with total disregard for facts. No country shall dictate the definition of democracy and human rights.”

Muslim countries, though, were notably silent on the treatment of China’s Muslim minority, Richardson notes. She put it this way:...

“If any other government in the world was credibly accused of detaining 1 million Muslims, I think we can reasonably conclude there would be calls for a debate in the UN Security Council. Demands for an investigation. Because China is so powerful both within and outside of the UN, that’s probably not going to happen. The net effect is that China may well get away with this.”

The bottom line: “It’s not just that the tone of the discussion is getting softer, or that the topics under discussion are softer, it’s that the institutions themselves are under threat from China,” Richardson says. "If you can’t have a conversation about what’s happening in Xinjiang [at the UN], you're not going to have that conversation anywhere.”

Go deeper:

7. China's AV ambitions pass through California

Illustration: Rebecca Zisser/Axios

Joann Muller writes for her Axios Autonomous Vehicles newsletter (sign up here)...

China technology giant Tencent Holdings is recruiting self-driving car engineers in Palo Alto, the latest in a crowd of Chinese companies flocking to Silicon Valley. Of the 60 companies that have permits to test autonomous vehicles in California, 14 of them are from China.

Why it matters: China's aspiration to dominate the AV field is heavily dependent on R&D centers in Silicon Valley, where Chinese companies employ hundreds of software engineers and partner with critical U.S. tech suppliers.

Even though some companies don't even plan to deploy self-driving vehicles in the U.S., there's a certain cachet that comes from validating their technology and securing investment in California — the epicenter of AV research.

"The reason they're testing in California is the talent’s here, the roads are generally good, the weather is generally good, and the financing is here as well."
— Reilly Brennan, founding general partner, Trucks Venture Capital

The 800-pound gorilla is Baidu, China's Google counterpart. Like Google, it has big ambitions in AVs. Baidu’s Intelligent Driving Group is based in Sunnyvale, Calif., and has 4 test vehicles on the road, with 2 more coming soon, a spokesperson tells Axios.

But there are others to watch, including Didi Chuxing, the Chinese ride-hailing service, employs more than 100 people at Didi Labs, its R&D center in Mountain View where they're developing AV technology.

The big picture: China aspires to have 30 million AVs by the end of the next decade and McKinsey estimates the market there could be worth $500 billion by 2030.

"What’s irresistible to VCs is the scale of China. They'll commercialize the technology first and the market will be bigger."
— Michael Dunne, CEO, auto tech advisory firm ZoZoGo

The big question: Do any of China's AV firms have the staying power to survive a global shakeout?

  • China's government typically picks one or two industry champions to lead the way. Baidu is the one to watch. With its Apollo open-source development program, it has lined up more than 130 partners. Just in the last week, Baidu announced deals with 3 automakers: Volvo, Ford and China's First Auto Works.
  • With so many companies working on self-driving car technology, consolidation is inevitable, Michael Ramsey, research director at Gartner Group, tells Axios.

The bottom line: China's leading self-driving startups are betting on leveraging talent and capital in Silicon Valley in order to grab those precious seats.

Go deeper: China races for global leadership in AVs

8. Worthy of your time

Los Angeles Times — How an island nation’s new leaders are trying to unravel a web of secret deals with China

Caixin -—Wu Jinglian and His Disciples Were The Key Brains Behind Reform

Financial Times -—Washington unnerved by China’s ‘military-civil fusion’

New America  — Xi Jinping Calls for ‘Healthy Development’ of AI (Translation of recent Politburo Study Session release)

Pandaily PodcastThe World’s Most Valuable Startup: Bytedance, Maker of Tik Tok & Toutiao

Carnegie Moscow Center — A Milestone, Not a Turning Point: How China Will Develop the Russian Far East

South China Morning Post — Chinese education officials sorry for announcing Mao-style political background check on students

The Washington Post — China is reaping the rewards of undermining Trump’s Iran strategy

Rhodium Group — Missing Link: Corporate Governance in China's State Sector

What's on Weibo — China's eSports Craze Reaches New Heights with the Victory of “Invictus Gaming” (IG)

Center for the Study of Contemporary China — Podcast - Ep. 8: Civil Society and Civic Engagement in China – Bin Xu

This week's issues of my Sinocism China Newsletter, now with a special 20% discount for Axios readers.