China in 2022: Omicron likely to hit PRC supply chains, Push-back against U.S. anti-forced labor law, Taiwan invited to RIMPAC & Xinjiang gets a new Party boss -- China Boss News 1.03.22
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The Big Story in China Business
Omicron likely to hit China trade with more supply chain disruptions
Welcome back to a new year of China watching. The Year of the Tiger won’t be official until February 1, but the beast already roaring at China business and related geopolitical issues in 2022 is the highly transmissible Omicron coronavirus variant.
Virologists have begun to express doubts as to whether China’s zero-Covid policy will be effective against Omicron. Tulio de Oliveira, director of the Center for Epidemic Response and Innovation (CERI) in South Africa and the scientist who first alerted global public health officials to Omicron, thinks China will fail to keep the virus from spreading:
Tulio de Oliveira, Twitter:
China will have great difficulty with #omicron and zero covid policy. They may need@ to join the rest of the world with mitigation strategies. #China should not punish its public health officials or citizens or foreigns because a more transmissible variant…
But instead of changing tack, Beijing is, again, doubling down on Covid zero. Chinese officials publicly reaffirmed their commitment to keeping all virus out even as they struggled to contain its spread in the Terra Cotta Warrior city of Xi’an - which Bloomberg has called “the biggest and most protracted outbreak since the virus emerged in Wuhan two years ago.”
Bloomberg:
Health officials vowed not to waver in their efforts to quash any domestic resurgence and to prevent the virus from crossing borders at a briefing in Beijing on Wednesday. The government limited entry into the capital city on Friday for anyone with a travel history to a border county within the previous two weeks, even if there haven’t been any cases in those places.
Authorities will act “at the fastest speed and with minimal cost,” said He Qinghua, an official with the National Health Commission.
New Covid-19 cases continued to emerge in the western Chinese city of Xi’an, which the government locked down last week. The numbers eased a bit after hitting a record on Tuesday, when repeat testing of its 13 million residents identified several previously undetected chains of transmission.
Officials have not released any information as to whether the infections are of the Omicron variant, but China is famously opaque on the minutiae of its pandemic, andForeign Policy deputy editor James Palmer thinks it's “reasonably likely” due to how quickly the strain can spread. He forecasts disruption in trade and daily life and the potential for a “psychological shock … that would have geopolitical consequences” as authorities try to cope with the disease.
Palmer, FP:
What happens next depends on the level of protection given by China’s vaccines against omicron. While the mRNA vaccines used in the West haven’t been as effective against omicron transmission compared with earlier variants, they continue to provide strong protection against hospitalization and death—especially with a booster shot. The data for the Chinese vaccines is very incomplete so far, but early studies, even on booster shots, aren’t promising.
Even in a vaccinated population, a recent (but pre-omicron) Chinese study estimated that an outbreak on the scale of that in the United Kingdom or the United States could cause upwards of 10,000 or 20,000 severe cases a day. A lot would then depend on hospital resources and experience. China was able to cope with the Wuhan outbreak in part because of its ability to divert medical resources from across the country to the stricken city. A superspreading omicron that hit the whole country within a few weeks would be a nightmare—especially given that Chinese doctors, although world leaders in early treatment, don’t have the nearly two years of experience dealing with COVID-19 that clinicians in other countries do.
Dan Harris of the Harris Bricken law firm and China Law Blog also predicts new supply chain disruptions in 2022, pointing out that "China's COVID history is a good indicator of its Omicron future," and that China's factories will continue to see a shortage of workers and closings. Reuters reported that Samsung Electronics and Micron Technology - two of the world's largest memory chip makers - are already warning that Xi’an’s draconian lockdown - where 13 million residents have been forbidden to leave their homes, even to buy groceries - may affect their manufacturing bases given the “uncertainties” over how the virus will evolve and how authorities will respond to it.
Reuters:
Samsung's Xian semiconductor facility is currently operating normally, Chinese media group Yicai reported on Thursday. Analysis provider TrendForce also said Samsung's Xian plant is manufacturing without significant disruptions for now and supply of raw materials seems sufficient, but there may be a slight decline in output if the pandemic is not controlled.
"The impact on global supply is controllable, though there are uncertainties," said Yan Chengyin, consultant and manager at Beijing-based Bayes Consulting.
"The uncertainty is how soon the spread of the virus can be stopped and factories can return to work as normal. In our experience, clusters of cases will be under control very soon in China. Also I think the local government will try to support large foreign companies like Samsung."
Seoul-based analysts said chips made in Samsung's Xian NAND plant mainly go to China with limited shipments heading overseas. Some of the biggest demand for the kind of chips made in the plant come from Chinese server companies, they added.
For the rest of Bloomberg’s article, China Recommits to Covid Zero Amid Festering Xi’an Outbreak, click here. For Financial Times’ China tightens lockdown measures in Xi’an as Covid cases rise, click here.
For James Palmer’s Foreign Policy analysis of best, worst, and most probable scenarios for China’s handling of the Omicron variant, China Reckons With Omicron’s Specter, click here. For Dan Harris’s post on how Omicron will potentially impact China’s supply chains, Omicron and Supply Chains: Buckle Up, click here.
For Reuters’ report, Samsung, Micron warn Xian lockdown may disrupt memory chip manufacturing, click here.
Law and International Xi
New U.S. Xinjiang forced labor law to face push-back from businesses
On Thursday, December 23rd, U.S. President Joe Biden signed the Uyghur Forced Labor Prevention Act into law, banning all goods from Xinjiang where human rights organizations have said ethnic Muslim minorities are held in detention camps and used as slave labor.
The legislation contains a rebuttable presumption that Xinjiang products are made or harvested with forced labor unless businesses can prove otherwise, and certain products, like cotton, tomatoes, and polysilicon used in solar-panel manufacturing, are a high priority for enforcement.
Biden is expected to face stiff lobbying against the law - which the New York Times describes as "far-reaching” - while his administration holds hearings over the coming months to assess its impact.
NYT:
If the law is enforced as written, it could force many companies to rework how they do business or risk having products blocked at the U.S. border. Those high stakes are expected to set off a crush of lobbying by companies trying to ease the burden on their industries as the government writes the guidelines that importers must follow.
Laura Murphy, an expert on contemporary slavery at Sheffield Hallam University in the UK, told NYT that she expected “many companies — even entire industries” to be “taken by surprise when they realize that their supply chains can also be traced back to the Uyghur region.”
But businesses are likely to face more anti-forced labor legislation in 2022, as countries around the world follow the U.S. example. U.K. Trade Minister Penny Mordaunt recently "hinted" that the British government is currently reviewing such moves, Politico reported.
Politico:
Britain last year announced fines for large firms that fail to show their products aren’t linked to forced labor. But critics dismissed the move as a bureaucratic exercise lacking teeth.
Trade Minister Penny Mordaunt hinted that the U.K. could go further in the wake of the U.S. move. “We keep these things under review all the time,” she told POLITICO. “I think there are some new moves afoot in that space, and it’s something I know that [the Foreign, Commonwealth and Development Office] are looking very, very carefully at.”
Europe, on the other hand, is sending mixed signals. Last month, the European Parliament adopted a resolution "with an overwhelming majority” against forced labor in a Chinese factory in Serbia, Euractiv said. MEP’s had been calling for the European Commission to propose a law that would ban Xinjiang imports prior to that. In September, European Commission president Ursula von der Leyen appeared to acquiesce to their demands only to have a top trade official walk back her announcement of plans for a “ban on products in our market that have been made by forced labour” right before Christmas, the Financial Times said.
FT:
Valdis Dombrovskis, EU executive vice-president for trade, has written to MEPs warning that the European Commission will not rush into proposing a law on forced labour. He said it would require more than a year to produce and questioned whether a ban on products entering the EU market is an effective way to stop human rights abuses.
… Dombrovskis’ comments signal that Brussels is stepping away from explicit import bans, for fear they will be seen as discriminatory trade measures. An EU official said a ban would require the bloc to drastically amend its customs code and would be difficult to enforce in a bloc where all 27 member states have their own customs authorities.
For CNN’s report, Biden signs bill banning goods from China's Xinjiang over forced labor, click here. For NYT’s update, U.S. Effort to Combat Forced Labor Targets Corporate China Ties, click here.
For Politico’s story, UK hints at banning Chinese imports with forced labor links, click here. For FT’s update, EU urges caution on any ban on imports made with forced labour, click here.
To sample the business lobby’s arguments, check out this exclusive from the South China Morning Post, US farm brand John Deere at forefront of surging cotton machinery sales to Xinjiang, as human rights sanctions loom, here.
Biden signs bill calling on Taiwan’s participation in RIMPAC
President Biden signed a defense spending bill inviting Taiwan to participate in the 2022 Rim of the Pacific Exercise (RIMPAC), Taiwan News reported. The National Defense Authorization Act for fiscal year 2022 “also calls for intelligence on Chinese efforts to subvert Taiwan,” and “increased cooperation with US National Guard.”
Taiwan News:
First started in 1971 and held every two years, the U.S.-led RIMPAC is the largest international maritime warfare exercise. The U.S. Pacific Fleet now considers the exercise crucial to safeguarding "vital shipping lanes" and "freedom of navigation through international waters."
Section 1247 obligates the U.S. to resist a "fait accompli" in the Taiwan Strait. The act defines "fait accompli" as the use of force by China to "invade and seize control of Taiwan before the United States can respond effectively.
Section 1248 recommends building up Taiwan's asymmetric defenses, including "coastal defense missiles, naval mines, anti-aircraft capabilities, cyber defenses, and special operations forces." It also calls for an intelligence assessment on Chinese military threats toward Taiwan and "irregular warfare activities" such as influence operations, that are designed to subvert the "peace and stability in the Taiwan Strait."
Section 1249 calls on the secretary of defense to submit a report by Feb. 15, 2022, on the "feasibility and advisability" of enhanced cooperation between the U.S. National Guard and Taiwan.
For the rest of Taiwan News’ update, Biden signs act inviting Taiwan to RIMPAC, boosting asymmetric defenses, click here.
Geopolitics
EU Trade threatens WTO action as China blockade of Lithuania hits other EU member states
Germany's influential commercial lobby has "lashed out at China after the communist country blocked imports from German manufacturers in Lithuania," according to the Financial Times.
FT:
The BDI accused Beijing of a “devastating own goal” after companies from other EU member states were caught by China’s decision to ban imports from the Baltic country.
“The latest measures China has adopted against Lithuania amount to a trade boycott that will impact the whole of the EU,” it said. “Imports from China, which are needed in German manufacturing facilities in Lithuania, are also being affected, as are exports from Germany to China which contain Lithuanian components.”
“In the long term, the escalation by China is a devastating own goal. It shows that China is prepared to decouple economically from “politically undesirable” partners. It’s clear to the BDI that any damage to the value chains that are at the heart of the EU single market, is not to be tolerated.”
But the group also took aim at Lithuania, criticizing "individual states that were 'out of step' with EU policy” and saying: “It remains important to maintain economic relations with China on a high level."
Lithuania has accused China of telling multinationals to cut ties with the country else they risk losing access to China's market.
Reuters:
Lithuania's direct trade with China is modest, but its export-based economy is home to hundreds of companies that make products such as furniture, lasers, food and clothing for multinationals that sell to China.
"They (China) have been sending messages to multinationals that if they use parts and supplies from Lithuania, they will no longer be allowed to sell to the Chinese market or get supplies there," Mantas Adomenas, Lithuania's vice-minister for foreign affairs, told Reuters.
"We have seen some companies cancel contracts with Lithuanian suppliers."
George Magnus of Oxford University's China Centre told Reuters that "while there was a 'constant drumbeat of toys being thrown out of the pram' by China, targeting third-party companies was unusual and had not been seen previously." But I think his remarks may be more accurate when speaking of the malicious scale of China’s current actions, rather than as a comment on past incidences of economic coercion. As Taiwan expert Bonnie Glaser noted in her Statement before the Congressional-Executive Commission on China in September:
Unlike traditional economic sanctions, Beijing’s economic coercion usually relies on informal measures that provide plausible deniability and enable China to ratchet pressure up or down as needed.
Whereas there are many instances of Chinese officials and state media threatening to take punitive economic actions against countries and foreign firms, there are very few cases where the Chinese government has publicly acknowledged implementing coercive acts.
Yet staff at the Global Times, a Chinese state media publication, did just that when they beat their drums at “the unaffordable fallout on Lithuania's economy from its dangerous provocation against China by trampling on the One China principle.”
The most recent update from the Baltic Times is that Lithuanian goods are still stopped at the Chinese border, even though China “formally reinstated" the country back into its customs system after having removed it in early December. It also reports that some Lithuanian firms have been trying to export through neighboring Baltic ports as an alternative.
Baltic Times:
"Exports from Lithuania to China have come to a standstill," Vidmantas Janulevicius, president of the Lithuanian Confederation of Industrialists (LPK), has told BNS.
According to him, there are only isolated cases when Lithuanian businesses, mostly technology companies, manage to get their products to the Chinese market.
…"As a country, [Lithuania] has reemerged theoretically [in the Chinese customs systems]. It is possible to fill in declarations, but we receive no confirmation of the completed declarations," he told BNS.
Just before Christmas, RTE reported that the European Commission had been able to verify Lithuania's claims about the blockade, and that the EU Trade Commissioner Valdis Dombrovskis had also "warned" other EU countries were being affected, though he gave no examples.
RTE:
Mr Dombrovskis said the Commission was using political and diplomatic channels to try to resolve the dispute and that he had spoken directly with China's EU envoy about the matter.
But should those efforts fail, he said his staff was preparing a complaint with the World Trade Organization.
"We would prefer an amicable settlement for this problem, that's obvious," he said, adding "we have to be prepared for these efforts being unsuccessful".
For the rest of FT’s update, German business hits out at China after Lithuania trade row snares exports, click here. For Reuters’ report, Exclusive: Lithuania braces for China-led corporate boycott, click here.
For the Baltic Times update, Some Lithuanian firms ship goods via Riga, Gdansk and other ports amid China's blockade, click here. For RTE’s report, China's Lithuania blockade hits other EU exports, Dombrovskis says, click here.
The Week’s Best China Reads
On volatile border between India and China, a high-altitude military buildup is underway (Shams Irfan and Gerry Shih, The Washington Post)
Read for an update on the “tense standoff" in the Himalayas between the Chinese and Indian armies. India is building a "series of new tunnels and roads leading to the increasingly militarized border with China [to] safeguard the territorial integrity of [the] homeland,” while China has built "new helicopter pads, runways and railroads… on the Tibetan plateau." Excellent reporting from Shams Irfan and Gerry Shih at the Washington Post.
The U.S.-Taiwan Relationship Needs Alliance Management (Dan Blumenthal, The National Interest)
Read for Dan Blumenthal's explanation of why "China’s abrogation of the One China Policy” - or, as he describes it, the “straightforward deal” for a “peaceful resolution of [China’s] disputes with the ROC” in order to normalize Sino-American relations in 1979 - “opens up an opportunity to work with Taiwan to better deter war."
On the Horn of Africa, a tiny 'country' has Congress' ear (Phelim Kine, Politico)
Read for Phelim Kine's outstanding update on how tiny Somaliland is making the rounds in Washington with “a deal that it says could counter China's advance" in Africa.
Middle Kingdom Surreal
Xi replaces iron-fisted Xinjiang governor with Guangdong chief
Chinese president Xi Jinping has replaced Chen Quanguo with a new Xinjiang party chief. Chen has been Beijing's man in Xinjiang since August 2016, when he stepped-up the government's ongoing human rights abuses against the Uyghurs and other Muslim minorities.
Prior to that, he spent five years as “party boss in Tibet, where he built up security measures and surveillance, suppressed support for the Dalai Lama, Tibet’s spiritual leader whom Beijing accuses of being a separatist, and criminalized many ordinary religious and cultural activities,” Radio Free Asia said.
Chen will be replaced by Guangdong governor Ma Xingrui, who comes from the same hometown in Shandong Province as Xi's wife. Ma has been steadily ascending Communist Party ranks, with powerful positions as vice minister of Industry and Information Technology and secretary of high-tech hub Shenzhen’s CCP committee, before his appointment to the governorship of Guangdong in 2017.
Human rights experts and other China watchers appear somewhat baffled at Beijing’s selection of Ma as Chen’s replacement. The position of Xinjiang party boss has been traditionally reserved for politburo chiefs - not officials with sophisticated economic experience - and the timing, they say, was unusual.
SupChina:
Though provincial leadership shuffles are common in the six months leading up to twice-decade Party congresses, this personnel change is notable. The timing of Chen Quanguo’s departure, in particular, left many experts perplexed. The move followed close on the heels of the Uyghur Forced Labor Prevention Act. Experts argue that by immediately removing Chen from his Xinjiang post within two days after Biden signed the legislation into law, Beijing would be leaving room for interpretation that it was bowing to external pressure, something inconceivable given Beijing leadership’s assertiveness.
Ma Xingrui’s meteoric rise as Chen’s successor also surprised veteran China watchers. The position of Xinjiang Party secretary has traditionally been reserved only for Politburo members. Analysts generally agree that Ma has effectively secured a seat on Politburo’s 25-member panel for next year.
My take is that Beijing is interested in moving away from forced labor as a primary means of making Xinjiang profitable. Caution - this is not to say that Xi will ease up on the Uyghurs or other ethnic minorities in the region. It only means that the Chinese leadership recognizes the enormous role that Xinjiang plays in China’s economy and how the anti-forced labor legislation and sanctions being implemented by China’s main export markets, like the U.S. and Europe, will put more downward pressure on prospects for China’s economic growth.
Provincial authorities have been investing heavily in automation in recent years. They are making steady progress in the mechanization of larger farms and factories, although, as experts warn, the risk of forced labor in Xinjiang remains present. Guangdong, as China’s leading manufacturing hub, has a a lot of experience with automation, as well as in liaising with foreign businesses, which may explain why Ma Xingrui was ultimately chosen to govern Xinjiang.
SupChina:
Ma is likely to be Xi’s lieutenant of choice to carry out his blueprint for Xinjiang as laid out in 2020. Experts believe Ma’s Guangdong experience will help him guide Xinjiang’s economic development. His previous interactions with foreign investors and international corporations should have provided him with ideas on how to address labor and human rights concerns as Western companies increasingly avoid products.
In general, China has been moving forward with automation to mitigate labor shortages due to migrants returning home and a looming aging population crisis, but authorities in Xinjiang are, likely, more concerned with trying to make Beijing’s immediate growth targets - an all but impossible feat if local products are banned in global markets due to forced labor concerns.
For RFA’s detailing of Chen’s abuses against Tibetans, Dread among Tibetans as ‘butcher of Xinjiang’ named new Tibet party boss, click here. For Nikkei Asia’s update, Xi tightens grip on power with Xinjiang appointment, click here. For SupChina’s attempt to decipher the move, What can we expect from Xinjiang’s new Party boss Ma Xingrui?, click here.
For the CSIS brief Addressing Forced Labor in the Xinjiang Uyghur Autonomous Region: Toward a Shared Agenda, click here. For further reading, check out Tristan Kenderdine’s June 2021 analysis for The Diplomat, Chen Quanguo, Architect of Xinjiang Crackdown, Likely to be Rewarded With Central Position in 2022, here.
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Thanks for reading the first China Boss issue of 2022. Please note that I’ve decided to discontinue the “What Everyone’s Reading on LinkedIn,” section of the newsletter, and will, instead (and only on occasion), include popular posts, here, in my concluding remarks. If you are opposed to the change, shoot me an e-mail or a LI message. For a fair number of objections in my inbox, I’ll reconsider. :)
Finally, I’m gearing up for 2022 with new questions about how China’s internal pressures - e.g. the pandemic, water and food security and economic problems - might inspire President Xi to wag the dog externally, and how that might impact Taiwan and the U.S. I’ll also be keeping an eye out for news on how Beijing is adjusting its Belt-and-Road Initiative policies, and how various governments are choosing to adapt to increasing tensions with China.
Happy New Year.