Caught in the crossfire: the weekly recap

My big focus this week – while I try to distract myself from the non-stop US election coverage – is on China’s recent efforts to put the pinch on US companies through its increasingly robust economic lawfare toolkit.

Some context: For the past two years – ever since the US first introduced export controls on semiconductor technology sales to China in late 2022 – companies have been waiting for the retaliatory shoe to drop.

• But rather than hitting back aggressively, the Chinese side has slowly and methodically built up capabilities to combat the US economic coercion regime.
• And now the Chinese are testing out their new tools.

The latest: In October, the Chinese hit the largest US drone maker – Skydio – with a designation under the Anti-Foreign Sanctions Law, restricting sales of key battery components to the company.

• According to Beijing, Skydio received this designation because it sold arms to Taiwan, and because it lobbied against Chinese drone maker DJI in Washington.
• Skydio’s CEO did argue for a DJI ban in Washington, but according to Skydio, its only customer in Taiwan is the national firefighting agency.

The result: Skydio is now being forced to ration batteries – for which it was reliant on China-based sources – while it seeks alternative suppliers.

And Skydio is just the latest example.

In late September, the commerce ministry (MofCom) announced an investigation into PVH Group, the US parent company of Calvin Klein and Tommy Hilfiger, under its Unreliable Entity List (UEL) mechanism.

• At issue: PVH removed Xinjiang cotton from its supply chain to comply with the US Uyghur Forced Labor Protection Act (UFLPA) – a decision that injured PVH’s Chinese partners, including Esquel Group, according to Chinese officials.

In mid-October, the Cybersecurity Association of China (CSAC) released an article calling for regulators to launch a cybersecurity review against Intel.

• In the article, CSAC argued that Intel’s CPUs are full of cybersecurity vulnerabilities and that Intel acts against China’s interests – citing the benefits Intel is gaining from the US Chips and Science Act (which requires caps on investment and production in China).
• While it’s unclear whether regulators will actually launch a cybersecurity review into Intel, the company is definitely in the hotseat.

And Intel has good reason to be concerned.

• In March, officials conducted a cybersecurity review of US chipmaker Micron’s products in China.
• The review was widely regarded as being driven by Micron’s lobbying for export controls on China in Washington, DC.
• Micron failed the review, and officials began requiring all critical information infrastructure operators to stop purchasing Micron products.

Then just two weeks ago, Chinese officials signaled that they are ready to expand their use of export controls.

• On October 19, the State Council released new regulations on export controls for dual-use items.

These regs will bolster the export control regime that has already led to controls on critical tech mineral inputs including, gallium, germanium, graphite, and antimony.

The upshot: Chinese officials now look set to further ramp up their countersanctions and reciprocal export control regimes going forward.

• That means more and more foreign companies are going to be caught in the crossfire between the US (alongside its allies) and Chinese legal regimes.
• And specifically, companies that are complying with US sanctions will increasingly be held liable in China for doing so.

We’ve long expected this dynamic to play out.

• While the 2022 US export controls clearly focused some minds in China, the wider push to combat US long-arm jurisdiction has been in train since 2019, when China first announced it was developing the Unreliable Entity List.

So this is the new reality.

• Foreign companies will increasingly need to navigate a legal minefield of competing US and Chinese laws – both meant to restrict or punish certain transactions in the other jurisdiction.

The big question: Will companies react to China’s countersanctions strategy by bifurcating their supply chains?

• Or will Chinese legal retaliation simply lead to accelerated decoupling from Chinese supply chains by the most vulnerable foreign companies?

-Andrew Polk, Co-founder, Trivium China

What you missed

Corporates

The odds of China and the EU reaching a deal to roll back new tariffs of up to 35.3% on Chinese electric vehicle (EV) imports are looking increasingly slim.

• On Sunday, Commerce Minister Wang Wentao urged France to play “an active role” in trade negotiations during a meeting with French junior trade minister Sophie Primas, who was in Shanghai to challenge China over duties on French brandy.
• Primas responded that France is open to negotiation but would “not yield to pressure on the essential points.”

Tech

On Monday, WSJ reported that US semiconductor equipment firms Applied Materials and Lam Research are quietly pressuring suppliers to decouple from China.

• According to unnamed sources, “Chip toolmakers are telling suppliers that they need to find alternatives to certain components obtained from China or risk losing their vendor status.”
• Our take: Given rising US-China tensions, it should come as no surprise that most hardware firms are quietly attempting to de-risk their supply chains to the greatest extent possible.

China is making it easier for startups to access funding and services.

• On Friday, the industrial ministry (MIIT) released draft regulations that specify qualifications and assessment metrics for tech incubators.
• As MIIT takes over as primary regulator of the incubator ecosystem, it wants to galvanize the launch of new incubators by drastically lowering the requirements for incubator certification.

Econ and finance

It looks like the central government is opting not to bail out local governments from their hidden debt loads as part of the incoming fiscal support package.

• ICYMI: In mid-October, the finance ministry (MoF) indicated that the legislature (NPCSC) would approve a one-off “relatively large” issuance of government debt to help pay off hidden local government debts, like those of local government financing vehicles (LGFVs).
• Now it looks like it will fall to local governments to do the borrowing, according to a Monday readout of the ongoing NPCSC session.

Regulators are making it easier for foreigners to become strategic investors in Chinese listed companies.

• On Friday, the securities regulator, commerce ministry, and six other government agencies jointly published measures reducing the threshold for foreigners to take strategic stakes in listed companies.
• The measures take effect on December 2.

Politics

On Wednesday, Xi Jinping concluded his three-day tour of Hubei province.

• On the trip, Xi’s talking points were right in line with other recent trips and speeches, heavily featuring innovation-driven growth and tech self-reliance.

Premier Li Qiang canceled his customary meeting with the incoming Macau chief executive this week.

• On Friday, Xi Jinping met with Macau’s incoming chief executive, Sam Hou Fai, in Beijing.
• What wasn’t routine: Premier Li Qiang joined Xi’s meeting but failed to have a separate meeting of his own with Sam. That breaks a 25-year tradition of premiers holding their own meetings with incoming chief execs.

Foreign affairs

On Monday, top diplomat Wang Yi met with Japan’s national security adviser, Akiba Takeo, in Beijing.

• The pair met in advance of a meeting between Xi Jinping and Japan’s new Prime Minister Ishiba Shigeru due to take place on the sidelines of the APEC Summit later this month.
• Get smart: China’s friendly overtures to Japan are strategically timed. A new government in Tokyo gives Beijing cover to improve ties without appearing weak.

On Friday, Xi Jinping met with Slovakian Prime Minister Robert Fico in Beijing.

• Slovakia is courting Chinese electric vehicle (EV) expertise to support its local industry in shifting to EVs, recently securing two major investments – from Chinese EV battery giant Gotion and Chinese-majority-owned Swedish automaker Volvo.
• Xi wants more of the same, encouraging Chinese firms to invest in Slovakia and calling for the two countries to “strengthen coordination in areas such as new energy [and] transportation logistics.”

As always, it was a busy week in China.

• Thank goodness Trivium China is here to make sure you don’t miss any of the developments that matter.