May 27, 2020

Axios China

Welcome back, Axios China readers. Today we're taking a close look at Hong Kong's future, U.S.-China trade ties and Hong Kong students abroad.

  • Exciting news: Axios is relaunching Codebook! The Aspen Institute's Zach Dorfman will be covering the intersections of cybersecurity, national security, espionage and technology. Sign up here.

⚡️Situational awareness: The House will vote this afternoon on the bipartisan Uyghur Human Rights Policy Act, which sanctions Chinese government officials complicit in China's mass detention of Muslim minorities.

Today's newsletter is 1,662 words, a 6-minute read.

1 big thing: Hong Kong's future as a financial hub

Illustration: Sarah Grillo/Axios

As Beijing forces a sweeping national security law on Hong Kong, the once semi-autonomous city's status as one of Asia's largest financial hubs is at risk.

Why it matters: Political freedoms and a strong rule of law helped make Hong Kong a thriving center for international banking and finance. But China's leaders may be betting that top firms in Hong Kong will trade some political freedoms for the economic prosperity Beijing can offer.

What's happening: Last week, the National People's Congress, China's rubber-stamp legislature, unveiled a new security law that will criminalize sedition, foreign influence and secession in Hong Kong.

The new national security law is already creating uncertainty and could undermine other pillars of Hong Kong's status:

Uncertainty: The law will affect whether companies decide to expand their Hong Kong operations, to not open up a new office there at all, or even make plans to relocate to another Asian city.

  • Or firms "could potentially adjust to political uncertainty," said Kyle Sullivan, China practice lead at Crumpton Group, a DC-based business intelligence firm.

Arbitration: International businesses prefer to conduct arbitration in Hong Kong rather than mainland China because the city has an independent legal system and a strong tradition of transparency.

  • If firms begin to see evidence that China's heavy security presence in Hong Kong is interfering with fair arbitration, they could take their arbitrations elsewhere.

Extradition: The U.S. signed an extradition treaty with Hong Kong — but not mainland China — in 1996.

  • Hong Kong's independent judiciary provided confidence to the U.S. that its extradition requests would be for legitimate criminal suspects who would receive a fair trial, not political targets who would be summarily imprisoned.
  • The intrusion of China's highly politicized and brutal security agencies into Hong Kong would likely change that.

If the U.S. curtails its extradition treaty with Hong Kong, the city could become a haven for financial criminals.

  • "If people were to believe that this is what Hong Kong is to become, Hong Kong is officially dead to global investors," said Junheng Li, founder and CEO of JL Warren Capital, a New York-based equity research firm.

The big picture: In the medium term, Beijing's goal is to tamp down on political freedoms in Hong Kong while convincing international investors that Hong Kong remains viable as a financial center.

  • Hong Kong Chief Executive Carrie Lam, who is close to Beijing, has downplayed the new law, saying the city remains a "very free society."
  • In the long term, the Chinese Communist Party is aiming to turn Shanghai and Shenzhen into alternative centers for international finance.

What to watch: The U.S. has long granted special status to Hong Kong, where more than 1,300 U.S. companies have operations.

  • Preferential trade agreements mean the U.S. and Hong Kong do $67 billion in bilateral trade each year.
  • Secretary of State Mike Pompeo has said that the erosion of Hong Kong's political and economic freedoms could cause the U.S. to revoke this special status.

But, but, but: It's possible Beijing's leaders may be counting on the reluctance of Western countries, especially the U.S., to take any immediate actions that will further damage U.S. trade along with companies already suffering from an extended trade war and the effects of the coronavirus shutdowns.

  • "With the new Hong Kong national security law, China has called the United States’ bluff," wrote Wilfred Chan for The Nation.
2. U.S.-China trade tensions are escalating again

Illustration: Sarah Grillo/Axios

As the coronavirus pandemic appears to be subsiding in China, it's becoming clear that China's targets for the phase one trade deal with the U.S. are unrealistic and there is so far no sign of a plan for renegotiation, writes Axios' Dion Rabouin.

What's happening: White House National Economic Council director Larry Kudlow said Thursday the trade deal was "intact, and China has every intent of implementing it."

  • Chinese Premier Li Keqiang said Friday that Beijing plans to "work with the United States to implement the phase one China-U.S. economic and trade agreement."

Background: China agreed to buy $200 billion more in U.S. goods over the next two years than it bought in 2017.

  • The deal paused further escalation in tariffs and helped spur bullish sentiment (even though it did not remove many of the already implemented tariffs).

Yes, but: While China has significantly stepped up its purchases of U.S. agriculture products so far this year, including corn, soybeans, wheat and cotton, it is far from the pace necessary to meet targets for purchases overall.

  • Thanks in large part to the pandemic shuttering much of its economy for two months, Chinese purchases of U.S. goods are down 23.5% from 2019 levels and China was $21.2 billion behind schedule for the first three months of the year, according to an analysis earlier this month from Panjiva, which is part of S&P Global Market Intelligence.
  • The biggest shortfall is in purchases of U.S. energy products, particularly liquefied natural gas, as energy demand has cratered and prices have dropped.

By the numbers: Given the lull in imports during the January to March period, China would need to buy an "impossible" $2.9 billion of energy per month from April to December, Jason Bordoff, a former senior director at the U.S. National Security Council, writes in Foreign Policy.

Bonus chart: Republicans more critical of China's coronavirus handling
Reproduced from Pew Research Center; Chart: Axios Visuals

Americans overall have negative views of China's handling of the coronavirus epidemic, a feeling that is particularly prevalent among Republicans, according to a Pew Research survey released May 26.

Why it matters: The Trump campaign's strategy of being tough on China is likely to resonate well among voters.

3. Pro-Hong Kong resolution fails at British university

A protester waves the Hong Kong colonial flag during a July 2019 demonstration against the extradition law to China. Photo: Ivan Abreu/SOPA Images/LightRocket via Getty Images

A student resolution expressing support for the Hong Kong pro-democracy movement was voted down at the University of Warwick in England, after opposition from mainland Chinese students.

Why it matters: The charged politics of China's actions in Hong Kong are spilling over to university campuses thousands of miles away, raising questions for students and university administrators about how to protect democratic values.

Details: On Feb. 3, the University of Warwick student union met to discuss a motion that would condemn the "abhorrent human rights abuses of the Hong Kong Police Force and the Hong Kong SAR Government."

  • A student from Hong Kong said, "We have no choice but to seek help from the international community."
  • "I ask all students from the University of Warwick to stand with Hong Kong," said another Hong Kong student. "Today, we are trying to speak out against the Chinese government."

University of Warwick students who self-identified as coming from mainland China argued against the resolution.

  • "The student union should not take part in any political stance and should remain neutral," said one Chinese student.
  • "If you ask the students to vote tomorrow, because the number of Chinese students in this university is very large, I guess they will vote against it," said another.

The resolution was then voted down.

The big picture: Chinese international student organizations in several countries have courted controversy for attempting to harass dissidents or shut down activities perceived as critical of the Chinese Communist Party.

  • Chinese embassies and consulates maintain close relationships with Chinese student groups, providing funding, occasional political directives and even paying them to attend pro-China demonstrations.
  • Mainland Chinese students and Hong Kong students have faced off at numerous universities around the world in the past year, including in Australia and the U.S., as the protests in Hong Kong grew more heated.

Read the full story.

4. U.S.-China rivalry chips away at global order

Illustration: Sarah Grillo/Axios

A new sentiment is bubbling up in Washington: that the international system has been so toothless in the face of China's transgressions, and so warped by China's participation in it, that it's time for America to walk away from that system entirely, writes Axios' Dave Lawler.

What's happening: Blowing up multilateral agreements and institutions to thwart China has become central to American foreign policy.

Trump suspended funding to the World Health Organization in the midst of the worst pandemic in a century because the organization has refused to criticize China.

  • On trade, Sen. Josh Hawley (R-Mo.) argued in a speech on the Senate floor last week that the U.S. should withdraw from the World Trade Organization, contending that maintaining the current system would doom America to “second place to the imperialists in Beijing.”
  • On climate change, some argue the U.S. should not be constrained by international accords that seek sharper reductions from America than from China, which is still considered a developing nation.
  • On arms control, the U.S. is threatening to walk away from the lone remaining treaty constraining the world's two largest nuclear arsenals unless China — which has one-twentieth as many warheads as the U.S. or Russia — signs on.

The big picture: The U.S. largely led the world into the current global system. Few countries appear prepared to follow America out of it.

  • That may not matter to Trump. His withdrawal from the Paris Climate Accord and threats toward the WHO show he's willing to stand alone.

The bottom line: The stage is set for a momentous debate: Is abandoning the existing global order the only way to halt America's decline, as Hawley argues — or would it only hasten it?

5. What I'm reading

Taking the wheel: Norwegian Air's lessors take majority ownership (Reuters)

  • The Bank of China Aviation, which is controlled by the state-owned Bank of China, is now one of two controlling stakeholders in Norwegian Air, with 12.67% of the company's shares.

Eye on Paraguay: Taiwan's last stand in South America (Americas Quarterly)

  • In April, Paraguayan lawmakers introduced a bill urging the president to recognize Beijing, arguing that China could offer more medical assistance to fight COVID-19.
  • Taiwan upped its own aid to Paraguay in response, sending 280,000 masks. The bill failed, so Paraguay still recognizes Taipei — for now.

American awakening: Young Chinese in the U.S. find political activism during COVID-19 (SupChina)

  • "Since February, multiple Chinese alumni organizations and local Chinese advocacy groups have raised funds and leveraged their ties to procure personal protective equipment (PPE) from China to donate to local [U.S.] hospitals. ... Even though many of them came of age in a society and culture that discouraged them from politics, some are beginning to understand the importance of speaking up for their community."
6. 1 book thing: American as apple pie

Image: Twelve

The Hong Kong news from last week and the dramatic downtown in U.S.-China relations has me thinking of a happier time: 2008, the year I moved to China, the year of the Beijing Olympics, and the year this delightful book about American Chinese food was published.

In "The Fortune Cookie Chronicles: Adventure in the World of Chinese Food," Jennifer 8. Lee (yes, her middle initial is the number 8) goes in search of the roots of American Chinese food and its role in American society.

Food for thought: "There are some 40,000 Chinese restaurants in the United States, more than the number of McDonald's, Burger Kings, and KFCs combined.
... Our benchmark for Americanness is apple pie. But ask yourself: How often do you eat apple pie? How often do you eat Chinese food?"