October 25, 2023

Welcome back to Axios China. Today we're looking at China's oil links to the Middle East, Foxconn factories, graphite restrictions and lots more.

Today's newsletter is 1,914 words, a 7-minute read.

1 big thing: China's investigation of Foxconn is a warning to the U.S.

Photo: Jakub Porzycki/NurPhoto via Getty Images

Chinese authorities have launched tax and land-use investigations into Foxconn, the world's largest contract electronics maker, in what some experts say may be a warning to U.S. companies and the Biden administration.

Why it matters: Foxconn factories assemble about 70% of Apple iPhones. COVID lockdowns and a huge protest at a major Foxconn factory in November last year resulted in significant delays in iPhone deliveries.

  • "This is a shot across the bow — a message to Foxconn but also to Foxconn's customers, alerting them that if relations between China and the U.S. get worse, these companies could incur costs," said Chris Miller, associate professor of international history at Tufts University and author of "Chip War."
  • "The hope in Beijing would be that these companies would then lean on their governments to improve relations."
  • The move comes just as the U.S. announced further restrictions on technology exports to China and a month before President Biden and Chinese President Xi Jinping are expected to meet in San Francisco for APEC.

What's happening: Chinese state-backed media outlet Global Times reported on Sunday that Chinese tax and land-use authorities were scrutinizing Foxconn operations across several provinces.

  • The Global Times characterized the probes as "normal market supervision activities, which are reasonable and legal."
  • What they're saying: Foxconn "will actively cooperate with the relevant units on the related work and operations," the company wrote in a statement.

Between the lines: Reuters cited two sources close to Foxconn as saying that the disclosure of the investigation by the Global Times was politically motivated.

  • "Any investigation of a major foreign investor or foreign company in China would at least have to have political approval to move forward," Miller said. "And we've seen a trend over the past few months of investigations that are linked to political disputes."
  • Since numerous foreign firms beyond Apple rely on devices assembled in Foxconn factories, "this investigation could well be a signal to those companies that their operating model is at stake," he added.

The intrigue: Foxconn founder Terry Gou is currently running for president in Taiwan. He resigned from the company's board when he announced his candidacy last month.

  • The investigation of Foxconn could be intended to put pressure on Gou, or on Taiwan's broader political system, as the Chinese government claims sovereignty over Taiwan and opposes democratic elections there.
  • Gou has cast himself as friendlier to Beijing than the ruling Democratic Progressive Party, but he's also said he can't be coerced. "If the Chinese Communist party regime were to say, 'If you don't listen to me, I'll confiscate your assets from Foxconn,' I would say, 'Yes, please, do it!'" Gou said last month.

What to watch: Apple has already begun diversifying its iPhone manufacturing beyond China, including at a Foxconn factory in India, though it is still heavily dependent on Chinese factories for assembly.

  • Last month Apple launched its first made-in-India iPhones.

2: China's economy hinges on a peaceful Middle East

Illustration: Sarah Grillo/Axios

Broader conflict in the Middle East could jeopardize China's energy needs and economic interests in the region, analysts say, just as China's economy is facing its roughest headwinds in decades.

Why it matters: Beijing is making a big diplomatic push for peace in the region, where it has significant sway among Arab states and Hamas-backer Iran.

  • China "is highly exposed to the current instability in the Middle East, especially if it escalates," Philip Andrews-Speed, a specialist in China's oil policies at the National University of Singapore, told the New York Times.
  • Driving the news: Zhai Jun, China's special envoy to the Middle East, has just completed trips to Egypt and Qatar, where he promoted China's call for a ceasefire in the Israel-Hamas war.

Details: As the world's largest oil importer, China depends on stable energy markets to fuel its economy. About half of China's oil imports come from the Persian Gulf.

  • Saudi Arabia is China's No. 2 source of crude oil, and Qatar is one of China's top sources of liquefied natural gas.
  • This year, China's oil imports from Iran rose to more than 1 million barrels a day as the U.S. and other countries placed sanctions on Iran, Russia and Venezuela.
  • "China's economic interests in the region are primarily focused on energy supplies from the Gulf," as well as digital connectivity and infrastructure deals in several countries, Jean-Loup Samaan, a senior research fellow at the National University of Singapore's Middle East Institute, told CNN.
  • "Those interests would get hurt if the conflict escalates with Iran and challenges the stability of maritime waters in the Persian Gulf," he said.

The big picture: China has also placed a growing emphasis on including the Middle East in its Belt and Road Initiative.

  • Officials from China and six Gulf states held a trade and economic forum this week where all parties agreed to further align their development strategies with the BRI, per the South China Morning Post.
  • China's investment in Iran increased by 150% in 2022, according to Chinese officials. In a speech during his visit to Beijing in February, Iranian President Ebrahim Raisi said he supports the BRI and wants to see closer cooperation with China.

Yes, but: Beijing's emphasis on trying to avoid offending all sides could make it difficult to apply the kind of pressure that is needed for negotiations in the entrenched Israeli-Palestinian conflict, analysts say.

  • China has significant sway in Iran and could lean on Tehran to pressure Hamas to make concessions. But Beijing so far hasn't indicated it is willing to spend its diplomatic capital to resolve the current conflict.
  • "China under Xi wants to be respected and admired everywhere, including in the Middle East, but it is ultimately unwilling to do what it will take to resolve the really hard regional security issues," Steve Tsang, director of the SOAS China Institute in London, told Reuters.
  • "It goes for the low-hanging fruits and basically stops there."

3. Catch up quick

1. The U.S. said it would defend the Philippines if needed after Chinese ships blocked two Filipino vessels near a contested shoal in the South China Sea, resulting in a collision, the Associated Press reports.

  • The 1951 U.S.-Philippines Mutual Defense Treaty obligates the U.S. to come to the Philippines' defense in case of armed attack.

2. Chinese President Xi Jinping made his first-ever trip to China's central bank, underscoring his growing emphasis on shoring up the economy, Bloomberg reports.

3. China formally removed Defense Minister Gen. Li Shangfu and former Foreign Minister Qin Gang from their state posts, after months of speculation and rumors, Reuters reports.

  • Chinese authorities have yet to give an explanation for the removals, though international news reports have said Qin is under investigation for an extramarital affair.

4. California Gov. Gavin Newsom is traveling in China this week as he seeks to expand climate cooperation between his state and Chinese localities, AP reports.

5. Chinese surveillance tech company Hikvision's latest software includes ethnic minority detection technology, despite claiming for years that it had stopped supporting the technology, IPVM reports.

4. China's new limit on battery metals could haunt the global EV boom

Illustration: Aïda Amer/Axios

China will now limit how much battery metal it exports, potentially casting a cloud over the future of the globe's transition toward electric vehicles, Axios' Jael Holzman writes.

Why it matters: It's difficult to make an EV today without metal from China, and China is using its mineral advantage to protect itself amidst escalating global conflicts.

  • China's announcement came after the U.S. blocked it from obtaining certain computer chips and Europe declared it would examine potential tariffs on Chinese steel and aluminum.

What's happening: China's Ministry of Commerce announced Friday it would require foreign companies to apply for permits to receive shipments of raw and synthetic graphite starting Dec. 1, citing national security concerns, per state media reports.

  • Chinese officials also recently limited the export of two minerals — gallium and germanium — used for military technologies, virtually cutting off all access to those supplies.
  • China produces about 65% of the world's mined graphite, according to the U.S. Geological Survey, and it dominates the market for synthetic graphite, which is made from coal or oil.
  • Graphite anodes are used in batteries to enable electric conductivity. Innovators are trying to replace graphite with silicon and other materials, but that technology is not used at mass commercial scale today.

Between the lines: China's move will impact the EV landscape depending on what regulators ask of companies in exchange for export permits and how long it takes for permits to be issued.

  • "It's not an outright ban. … It's too early to draw conclusions," said Caspar Rawles, chief data officer at Benchmark Mineral Intelligence. "[But] it could be a significant event if the first permits [are] in 18 months."

What they're saying: The White House is "assessing the measure and its potential effects," National Security Council spokesperson Adrienne Watson said in an emailed statement.

  • Meanwhile, China hawks in Congress see the graphite restrictions undergirding the need for further U.S. policy actions.
  • "This announcement reinforces the need to develop, together with our allies and partners, resilience in our critical supply chains to defend ourselves from this type of coercion," said House China select committee chair Mike Gallagher in a statement.

5. What I'm reading

South China Sea: Philippines confronts unlikely adversary in SCS row: Filipinos echoing "pro-Beijing" narratives (Philippine Center for Investigative Journalism)

  • "There's a small but vocal group of Filipinos echoing pro-Beijing narratives. Security officials fear that the public, who like to use social media and have shown vulnerability to disinformation, could be swayed by Beijing's narratives if they are not exposed and corrected."

Development as a tool of economic statecraft: A net assessment of U.S. and Chinese approaches (RAND)

  • "China's economic engagement in the developing world should not be conceptualized as aid because this leads to an overreliance on official U.S. aid agencies." They should instead "be conceptualized as economic engagement abroad to support China's domestic economy, foreign economic goals, and foreign political goals."
  • "Comprehensively accounting for the variety of economic statecraft tools available to U.S. policymakers requires greater consideration of the role of the U.S. private sector."

6. 🇹🇼 1 Taiwan thing: Two "bandits"

Photo: Bethany Allen-Ebrahimian/Azios

I saw this handwritten sign on the side of the road near a park in Taipei last week. I don't know who wrote it or why, but its brief account of 20th-century Chinese history still resonates in Taiwanese politics today:

"In China there appeared two bandits.
One was called the Communist bandits.
One was called the [Nationalist] bandits.
In 1949 the Communist bandits fought the [Nationalist] bandits.
The [Nationalist] bandits fled to Taiwan."

Details: "Tufei" here is a reference to the Kuominang (KMT), or the Nationalist Party, which ruled the Republic of China on the mainland until they lost the civil war to the Chinese Communist Party and fled to Taiwan, where the KMT set up the Republic of China government that rules Taiwan to this day.

Between the lines: As can be imagined, the terms "Communist bandits" and "Nationalist bandits" are not terms of endearment.

  • While it ruled China, the KMT was seen as corrupt and ineffective. When the KMT fled to Taiwan, its leader Chiang Kai-shek established a sometimes brutal dictatorship under martial law.
  • Though Taiwan transitioned to a multiparty democracy in the 1990s, some people continue to view the KMT with suspicion and resentment.
  • "Gongfei," meanwhile, is a term used by people who strongly oppose the Chinese Communist Party and view it as illegitimate.

Used together, the two terms could convey what poor political options the Chinese people had in the first half of the 20th century or it could refer, in a Taiwanese context, to a strong disapproval of the KMT and any Beijing-friendly policy.

A big thank you to Alison Snyder and Laurin-Whitney Gottbrath for edits, Sheryl Miller for copy edits, Aïda Amer and Sarah Grillo for visuals, and Jael Holzman for contributing.