driving the day
1. Can you hear me, DC?
Yesterday, Foreign Minister Wang Yi sat down for an interview with Xinhua to talk about worsening US-China relations.
Some context: As regular readers know, barely a day goes by without a new flash point emerging in the bilateral relationship (see entry #2)
According to Wang, we are on a path to a new Cold War (MoFA):
- “Ultimately, [some American politicians] want to drag China and the US into renewed conflict and confrontation and plunge the world into chaos and division again.”
Wang says Beijing wants conversation, not confrontation:
- “China will not allow these people to get ourway. We reject any attempt to create a so-called ‘new Cold War.’”
- “We are ready to restart the dialogue mechanisms with the US side at any level, in any area and at any time. All issues can be put on the table for discussion.”
To kickstart things, Wang proposed his three lists again (see July 9 Tip Sheet):
But he also underscoredChina’s bottom line:
- “[T]he US must abandon its fantasy of remodeling China to US needs.”
Get smart: This is the most comprehensive public statement from a senior official since bilateral relations devolved into all-out confrontation.
Get smarter: Senior leaders have shifted gears from tit-for-tat retaliation to carefully calibrated reaction to get their point across without further ramping up tensions.
What to watch: That strategy is unlikely to change before the US election in November.
2. Cleaning house
Speaking of flashpoints (see previous entry)…
On Wednesday, US Secretary of State Mike Pompeo released a statement calling for a “Clean Network to safeguard America’s assets” against the threat of Chinese infiltration.
Some context: The Clean Network program is an expansion of the Clean Path initiative, a State Department effort launched in April to form an “end-to-end communication path that does not use any transmission, control, computing, or storage equipment from untrusted IT vendors, such as Huawei and ZTE.”
The statement read in part (US State Department):
- “The Clean Network program is the Trump Administration’s comprehensive approach to guarding our citizens’ privacy and our companies’ most sensitive information from aggressive intrusions by malign actors, such as the Chinese Communist Party.”
Specifically, the program calls for:
- Building a coalition of “clean countries,”which only allow “trusted” vendors in their 5G networks
- Removing “untrusted” Chinese apps from US app stores
- Preventing Chinese smartphone manufacturers from offering “trusted” apps for download on their app stores
- Preventing sensitive information generated in the US from being stored on Chinese cloud-based systems
Get smart: There are a lot of question marks surrounding how the Clean Network will work in practice, but if you were looking for a decoupling manifesto, this is it.
3. Cleaning house (cont.)
In case its not obvious, Beijing is fully aware ofWashington’s proposed Clean Network (see previous entry)and isn’t exactly thrilled about it.
Chinese Foreign Minister Wang Yi addressed the programin his wide-ranging Xinhua interview (see Entry #1) (MoFA):
- “This is a textbook example of bullying. Everyone can see easily and clearly that the US goal is to keep its monopoly in science and technology but deny other countries the legitimate right to development.”
- “This not only violates the international rules of fair trade, but also hurts the free global market environment.”
- “I’d like to stress again that Huawei and many other Chinese companies, unilaterally sanctioned by the US, are innocent…[T]hey have never done any harm to any country.”
Wang also took Washington to task for the many panoptic, wire-tappy skeletons in its closet:
- “The US is behind such scandals as PRISM and ECHELON. It conducts wire-tapping and mass surveillance around the globe.”
- “The US is not qualified to build a coalition of ‘clean countries’ because itself is dirty allover (sic).”
Get smart: Wang is probably right to feel aggrieved. The State Department was pretty clear that the Clean Network program is all about sticking it to China first, and building a comprehensive network security framework second.
4. China’s chipmakers cheer new policy support
Surprise, surprise: Chinese semiconductor stocks are having a good run in the wake of Tuesday’s State Council announcement that it will do more to support the sector (see yesterday’s Tip Sheet).
Get smart: In case you didn’t know by now, government policy tends to lead market outcomes in China.
- Pssssst: That’s why we cover policy so closely.
Some context (Caixin):
- “Under the State Council’s new policy, qualifying [integrated circuit] projects and enterprises that have operated for more than 15 years will be exempt from corporate income tax for as many as 10 years if they employ the 28 nanometer (nm) chipmaking process…while projects from 65 nm to 28 nm can qualify for five years tax free and a 50% discount on the corporate tax rate for the subsequent five years.”
That was enough to get investors on board – with a small number of companies clocking in as the big winners.
- “China’s biggest chipmaker, Semiconductor Manufacturing International Corp. (SMIC), and Hua Hong Semiconductor Ltd. are the only two companies that can produce chips using the 28 nm process.”
- “SMIC’s Shanghai-listed shares closed up 2.37% Wednesday after a jump of as much as 7.3% intraday. The company’s Hong Kong-listed shares rose nearly 5%.”
But more companies may benefit soon:
- “Other semiconductor companies that can benefit from the new policy include Unic Memory, SK Hynix Semiconductor China Ltd. and Hangzhou Silan Microelectronics Co. Ltd.”
We’ll say it again: Government policy leads markets in China.
- Expect domestic chipmakers to continue outperforming.
5. Is it happening?
Here at Trivium, we closely track top leaders’ statements and activities.
And we’ve heard nothing but crickets for the past six days.
- Not one of the seven people on the Politburo Standing Committee (PBSC) has appeared in public since July 31.
- Likewise, the weekly State Council executive meeting that normally convenes on Wednesday didn’t happen yesterday.
We assume that means the Beidaihe meeting is happening.
Some context: Beidaihe is a beach town about 300km northeast of Beijing. Senior leaders hold informal meetings there for around two weeks every August.
More context: The Beidaihe meetings are shrouded in secrecy. Agendas and attendees are never confirmed, and there is likely to be little to no indication in official media that the gathering is even taking place.
This year, we expect top leaders will be mulling the runaway train of US-China relations and the Party’s long-term vision for the country (see July 31 Tip Sheet), among other issues.
But nothing leads us to believe that Xi Jinping will face any challenges from within the Party at Beidaihe, as some observers are arguing.
- For the uninitiated: The “Xi is losing his grip on power” rumors have been a Beidaihe staple in the China watching community for the past six years or so.
- Don’t put any stock in them.
What to watch: We’ll know for sure the meeting is happening when the media reports that leaders are “meeting with experts” in Beidaihe.
6. Flying back
This morning, the National Health Commission (NHC) dropped the latest COVID-19 numbers.
On Wednesday, China reported 37 newly confirmed cases – up from 27 on Tuesday (NHC):
- Seven of those were imported from abroad – up from five on Tuesday.
- The other 30 were domestically transmitted – up from 22 on Tuesday.
Additionally, on Wednesday (NHC):
- China reported 20 new asymptomatic cases – seven of which were imported from abroad.
Of the 30 domestically-transmittedcases (NHC):
- 27 were reported in Urumqi, Xinjiang – up from 22 on Tuesday.
- Three were reported in Dalian – up from zero on Tuesday.
As authorities grow more confident about their epidemic control measures at the borders, international travel has been allowed to pick up (Caixin):
- The number of international flight routes from both Japan and South Korea to China will be increased to 15 per week – up from 12 per week last month.
Get smart: We’ve heard that authorities want to hold the annual China International Import Expo (CIIE) in Shanghai sometime in November and want foreign participants to attend in person.
Get smarter: For that to happen, it stands to reason that the entry ban on foreigners imposed in March will need to be relaxed, at least somewhat, in the next couple of months.