Jun 29, 2018

Axios China

Happy Friday. ICYMI – Axios was named “Best Digital News Start-up” at the North American Digital Media Awards 2018, and I am happy to announce that this newsletter now has more than 50,000 subscribers.

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1 big thing: The WTO gap between China and Trump

Photo credit: Johannes Eisele/AFP/Getty Images

President Trump has repeatedly told top White House officials that he wants to withdraw the United States from the World Trade Organization, Axios' Jonathan Swan reported earlier today.

Between the lines: China on Thursday released a white paper "China and the World Trade Organization". As the foreword of the white paper explains:

Since its accession to the WTO, China has been a strong advocate for free trade. China has comprehensively fulfilled its commitments to the WTO, substantially opened its market to the world, and delivered mutually beneficial and win-win outcomes on a wider scale. Through these efforts, China has lived up to its responsibility as a major country
The Chinese government is publishing this white paper to give a full account of China’s fulfillment of its WTO commitments, to explain China’s principles, stances, policies, and propositions regarding the multilateral trading system, and to describe China’s vision and actions in advancing higher-level reform and opening-up.

My thought bubble: China has benefited enormously from its accession to the WTO and it does not want the global trading disrupted by anyone else. It also sees massive propaganda value in portraying itself as a responsible actor in contrast to the U.S. under President Trump, and it is finding many supporters among nations that in a different time would be on the U.S.' side.

Go deeper:

  • Read Axios' full report on Trump wanting to exit the WTO.
  • The EU agreed this week to work to shore up the global trading systems.
  • China announced Thursday the reduction of official curbs on foreign investment in a number of sectors.
2. China's "historical juncture"

Last weekend Xi Jinping chaired a Central Foreign Affairs Work Conference (CFAWC) in which he confidently and with a Marxist’s view of historical developments outlined China’s challenges and opportunities for advancing China’s global influence and expanding its role in the world.

Why it matters: This is Xi’s second CFAWC since he became General Secretary in 2012; his first was in 2014. His predecessor Hu Jintao only held one during his ten years as General Secretary.

  • Why these conferences matter: They set the overarching strategy for China's foreign policy and include every senior official and bureaucratic entity that touches foreign affairs. China wants to take a whole of government approach to foreign policy, and while the government has not always succeeded doing that, we should expect much more discipline and cohesion in foreign affairs work in the Xi Era.

Among the key takeaways:

  • The conference emphasized the centrality of the Communist Party and Xi Jinping Thought in China's foreign affairs;
  • China sees massive opportunities. According to the official Xinhua report on the meeting Xi said: "China has been in the best period of development since modern times, while the world is undergoing the most profound and unprecedented changes in a century... China enjoys many favorable external conditions to carry out work related to foreign affairs at present and in the years to come."

My thought bubble: The 2018 CFAWC repeatedly uses the term “历史交汇期 historical juncture” but not “period of strategic opportunity 战略机遇期”, which it had used since at least 2002. Changes to these long-standing strategic precepts are a big deal, and this shift may signal a belief that while China’s external challenges are more complicated, the opportunities for China are even greater than they were even just a year ago. I would read this less as a sign of concern from Beijing and more as one of confidence and a signal to expect more assertiveness.

Go deeper: Former Australian Prime Minister Kevin Rudd dissected the CFAWC report in a speech in Singapore earlier this week--Xi Jinping, China and the Global Order.

3. U.S. airlines not complying with Beijing on Taiwan

The PRC several months ago requested that foreign airlines list Taiwan on their websites not as a separate country but as "Taiwan, China". Many have complied, but several American ones have not, and the deadline from Beijing is July 25.

Reuters reported Thursday that the US government has requested talks but so far China has refused:

In late May, the U.S. State Department presented China’s Foreign Ministry with a diplomatic note requesting consultations on the matter, but the ministry has since refused it, two sources briefed on the situation told Reuters.
“This has definitely become a foreign policy issue,” one of the sources said on condition of anonymity, noting that the U.S. government did not view it as a technical matter for bilateral aviation cooperation...
China’s rebuff has left the U.S. government weighing its next move. The White House convened a staff-level meeting on the issue on Wednesday, but it is not clear what it plans to do.

Why it matters: This is another element of the PRC's intensifying campaign to restrict Taiwan's international space. The US government can not tell the airlines what to do, and Beijing is very likely to penalize them if they do not comply by the deadline. I personally care because I am flying to Beijing on one of the US airlines just days after the deadline.

  • Expect the Taiwan issue in US-China relations to become even more contentious than it already is.

Go deeper:

  • In an interview with the AFP earlier this week Taiwan President Tsai Ing-wen said "We need to work together to reaffirm our values of democracy and freedom in order to constrain China and also minimise the expansion of their hegemonic influence".
  • CNN reports that State Department has requested Marine guards for the American Institute in Taiwan (AIT), America's de facto embassy there. The US diplomatic presence in Taiwan has not had Marine guards in decades.
4. U.S.-China standoff over South China Sea

China's militarization of the South China Sea was at the top of Defense Secretary James Mattis' agenda on his trip to Beijing this week, Axios' Erica Pandey reports, and Chinese state media reports President Xi Jinping told him China will not give up "any inch of territory passed down from ancestors."

Expand chart
Data: Center Strategic and International Studies' Asia Maritime Transparency Initiative; Map: Lazaro Gamio/Axios

Why it matters: The sea is a critical component of China's plan to build a military proportional to its economic power. Beijing has no intention of giving up its claim, while the U.S. has no intention of accepting it.

Go deeper: U.S.-China standoff over South China Sea

5. Xiaomi disappoints with $4.7B IPO

Axios' Dan Primack reported today in his excellent Pro Rata newsletter (subscribe here) that Xiaomi's IPO on Hong Kong has turned out be a bit of a disappointment.

Details: The Chinese smartphone maker "raised $4.7 billion in its Hong Kong IPO after pricing shares at the lowest end of its HK$17-HK$22 offering range. This gives it an initial market value of around $54 billion, which is just around half of what it originally sought but still above its most recent private mark of $46 billion."

  • Why it's a big deal: "Because Xiaomi was seen as a bellwether for other Chinese tech offerings that are expected in the second half, such as China Tower and Meituan Dianping, and its disappointing performance won't settle nerves that are already frayed from the Hang Seng index falling 6.5% in June."
  • Bottom line: "The company was also planning to raise funds from mainland Chinese investors nearly simultaneously with the Hong Kong IPO. It has since delayed the plan to float so-called Chinese depositary receipts in Shanghai, which reduced its overall fundraising target." — Crystal Tse, Bloomberg
6. The taxman cometh for China's TV/film stars

A scandal has been brewing over several weeks after public accusations that actress Fan Bingbing had evading taxes through the use of "ying-yang contracts"--one contract with a lower fee for the tax authorities and another with the real, much larger figure.

Now the authorities are paying attention, and look to be using the public revelations of longstanding industry practices to crackdown not only on tax evasion but also compensation and quite possibly content as well.

From the Hollywood Reporter:

The total pay for a film's cast should be capped at 40 percent of the total production budget, according to a joint directive signed by five government regulatory bodies, including the Propaganda Department and other film and tax authorities. Payments to stars also should not exceed 70 percent of the total wages paid to the cast, the notice said...
The statement added that illegal payment practices, such as the underreporting of star pay for the purpose of tax evasion, was inflating production costs and damaging the Chinese film industry

And in what is likely a signal of more censorship:

The document also chastised the entertainment industry for encouraging the "blind chasing of stars" and the "growing tendency toward money worship" among Chinese youth, as well as the "the distortion of social values."

Why it matters: China has the second largest annual film box office in the world while controlling the release of foreign films through quotas and content approvals. Hollywood will do just about anything to get its films approved, and if the official pushback against "the distortion of social values" intensifies then Hollywood may have even more challenges at the PRC box office.

7. 1 fun thing: Mr. Ding the fireworks king

Damian Paletta and Emily Rauhala of the Washington Post took a dive into the murky world of China's fireworks industry and discovered that one man-"Mr. Ding"-now controls almost the entire fireworks export industry to the US.

"The Fireworks King" notes that:

He has broadened his empire by consolidating power in China, expanding his reach into California and becoming the most important player in fireworks logistics on both sides of the Pacific Ocean.
Ding’s control of the fireworks delivery chain is nearly complete, according to two dozen shipping and fireworks executives, more than 40,000 fireworks shipping records, numerous court documents and other sources...
Ding’s volume and fees rose just as the spectacular fireworks he delivers do, and they are passed along to U.S. consumers

Go deeper: Read the entire piece. Happy Fourth of July!

8. Worthy of your time

Axios - The race to build a quantum economy

Council on Foreign Relations - What Would Happen if China Started Selling Off Its Treasury Portfolio? | Brad Setser

Beyondbrics - China’s top-down governance model is flawed

AidData - Ties That Bind: Quantifying China's public diplomacy and its "good neighbor" effect

Australian Strategic Policy Institute - China's Social Credit-Technology-enhanced authoritarian control with global consequences

Caixin - Livestreamed Suicide Raises Painful Questions in China

Reuters - China's penetration of Silicon Valley creates risks for startups | Reuters

Sinica Podcast - Kurt Campbell on U.S.-China diplomacy

NPR - Now That China Has Refused To Recycle The West's Plastics, Where Will They Go?

China Media Project - China’s New Science of Sycophantology

Stephen Platt - Imperial Twilight: The Opium War and the End of China's Last Golden Age. I just finished this excellent book that brings a crucial and still very relevant period of history to life.

This week's issues of my Sinocism China Newsletter