The U.S.-China Economic and Security Review Commission’s annual report was more exciting this year. It’s a must read for China nerds, like me, but also very useful for anyone who wants to know what kinds of China proposals are being kicked around in Washington. The USCC’s report contains 32 recommendations to Congress across a wide range of economic and security topics, like:
Beijing’s triumphant Covid19 propaganda and disinformation campaigns
Chinese influence in Latin America and the Caribbean
the state of China’s economy
President Xi’s technological ambitions
trade and foreign investment
nuclear buildup and military strategies for war with Taiwan, and
the emergence of a police state in Hong Kong.
I’ve tried to draw out the highlights and main ideas, as well as a few special mentions, from a quick partial read and scan (the report is over 500 pages) of individual chapters. If you get a chance to read the report - or a section of it - in full and think I’ve missed something critical or interesting, please don’t hesitate to let me know.
U.S.-China Global Competition
Chapter 1 Section 1 - The Chinese Communist Party's Ambitions and Challenges at Its Centennial
Key findings: Read for insight into the Chinese Communist Party's “triumphalism” and the key economic and political challenges that undermine its narrative.
Economically, China faces a set of structural problems, including growing debt, income inequality, demographic decline, and technological dependence on the United States and other advanced democracies that policymakers have been only partly willing or able to address. Politically, the CCP is concerned about internal disunity, corruption, and a lack of ideological conviction within its ranks.
The Commission also finds that "external pressure" from foreign governments and organizations pushing back against the CCP’s"policies in Xinjiang and Hong Kong, its handling of the novel coronavirus (COVID-19) pandemic, economic coercion, and Chinese diplomats’ aggressive approach to foreign policy,” has "increased CCP paranoia" about internal dissent and division in a way that is making it more, not less, aggressive.
Recommendations: The Commission urged Congress "to explore the advisability of forming an economic defense coalition with allies and partners" that would deter or mitigate the effects of China's economic coercion, and to direct US Customs and Border Protection to impose "a region-wide" ban (Withhold Release Order) on all imports from Xinjiang.
China Boss particularly appreciated the section detailing CCP’s propaganda themes. These are useful for me as I separate the amateur from the professional “red troll guard” who attack my LinkedIn news shares online. Tip: The professionals do a better job of toeing the Party’s propaganda line.
Chapter 1 Section 2 - China's Influence in Latin America and the Caribbean
Key findings: Read for more insight into China's economic and political expansion into Latin America and the Caribbean (LAC), especially its close collaborations with authoritarians in the region. The Commission notes that China is enabling authoritarians, as well as "democratic backsliding" with its sales of digital and surveillance technologies.
China aspires to deepen its military engagement in Latin America and the Caribbean, although its current security activities in the region are limited in scope. Beijing has previously leveraged its economic and political influence in Argentina to establish a space tracking station operated by the People’s Liberation Army (PLA). Influence gained by financing and constructing potential dual-use infrastructure, such as ports, and supporting space programs throughout the region positions China to further increase its military presence in the future
Recommendations: Congress should help fund Latin American and Caribbean infrastructure to provide an alternative to China's loan programs. It should also support LAC vaccination programs, and expand educational exchanges, while supporting the establishment of "inbound foreign investment review processes for sectors critical to national security" in Latin American countries. But Congress should also ask national intelligence and other government departments and agencies to assess and report on "Chinese investment in port infrastructure" and "any known Chinese interest in establishing a military presence" near ports in the region and give priority to proposed legislation that would "assist" LAC to "combat illegal, unreported, and unregulated fishing by Chinese vessels."
U.S.-China Economic and Trade Relations
Chapter 2 Section 1 - Year in Review: Economics and Trade
Key Findings: Read for a summary of China's overall economic health. The Commission, rightly, points out that China's Covid "economic rebound in 2020 into 2021 does not represent a fundamental departure from a decade-long slowdown trend," and '[e]scalating defaults by Chinese property developers" are posing a significant challenge to Beijing’s crackdown on over-leveraging. The Commission also reports that "U.S.-China economic integration is strengthening in some areas but weakening in others”: Trade flows and U.S. portfolio investment into China are up, while FDI flows are down.
Key findings: Read for a sense of the tension between the CCP's aim of "achieving technological self-sufficiency" that it considers "essential for both economic growth and political survival,” and, the resulting “drag on productivity,” that one expert testified has worsened over the past fifteen years with increased state control. The Party’s 14th Fifth Year Plan (FYP) was “formulated…in view of near-term difficulties and [the CCP’s] ability to deliver on longterm guarantees.”
Foreign criticism and pushback against the CCP’s policies and practices, along with growing domestic challenges, clouded the outlook for 2021 and helped to strengthen the internal push for self-sufficiency. Demographic decline, environmental degradation, income inequality, and a growing debt burden remain pressing challenges to China’s economic growth and social stability while inherently testing CCP control. (For more on these challenges, see Chapter 1, Section 1, “The Chinese Communist Party’s Ambitions and Challenges at Its Centennial.”) Chinese policymakers formulated the 14th FYP in view of near-term difficulties and their ability to deliver on longterm guarantees of CCP economic management. While these considerations did not drive a departure from previous economic planning and tools, they did push the CCP into a deeper reassessment of China’s links to the global economy. In addition to its domestic objectives for technology, the CCP wants to gain international leadership in key technologies to both promote Chinese companies abroad and benefit from controlling the path of global innovation. The 14th FYP outlines the CCP’s strengthened commitment to a top-down approach and strategy for realigning China’s economic relationships to insulate against disruptions from foreign policies and other external shocks.
…Over the last 15 years, the state’s hold on capital- and skill-intensive industries tightened. Education and skills among the workforce also did not progress enough to meet the demand of new high-tech industries.5 According to Dr. Brandt, the Chinese government’s return to a top-down approach has only exacerbated the drag on productivity, but the CCP sees a top-down approach as a necessity to direct resources into technologies that can boost productivity growth.6
Recommendations: The Commission urges Congress to direct relevant government agencies' "collection and sequencing of nonhuman genomic data, to "establish a model framework" for the collection of such data, and to"request a report from the Administration regarding data servicing operations owned by Chinese firms." It also asked Congress to "consider" and, with the appropriate governmental departments, "develop regulations limiting access for Chinese-owned firms developing autonomous vehicle capabilities to protect U.S.national and economic security interests" and to do the same to better screen "the offshoring of critical supply chains and production capabilities."
China Boss recommends Chapter 2, Section 2 (this section) if you want intricate knowledge on the nuances of the US-China technological competition.
Chapter 2 Section 3 - The Chinese Government's Evolving Control of the Nonstate Sector
Key findings: Read for insight into the U-turn Chinese authorities have taken on privatization and other economic reforms.
While China’s leadership claims its economy is becoming more open, better regulated, and less dominated by the state, the opposite is true. Since General Secretary Xi assumed power in 2012, the Party has deepened its presence in the nonstate sector and begun supplanting the regulatory and administrative functions of China’s bureaucracy in the name of improved market integrity. The CCP is also evolving and increasing means to monitor, exert influence over, and intervene in corporate affairs. China’s government is simultaneously becoming an increasingly active investor in nonstate firms and mobilizing broad segments of the nonstate economy to contribute to its technology ambitions.
Recommendations: The Commission recommends that Congress "direct" the SEC “to require that publicly traded U.S. companies with facilities in China report on an annual basis whether there is a CCP committee in their operations and summarize the actions and corporate decisions in which such committees may have participated," and to “direct the Bureau of Economic Analysis at the U.S. Department of Commerce to amend its surveys of U.S. multinational enterprise activity in China to report on the presence and actions of CCP committees in the foreign affiliates of U.S. firms operating in China.”
China Boss gives these recommendations two thumbs up.
Chapter 2 Section 4 - U.S.-China Financial Connectivity and Risks to U.S. National Security
Key findings: Read for an assessment of the national security risks of US-China "financial connectivity" - or, as Rana Foroorhar at the Financial Times called it, “Wall Street and the Chinese military industrial complex.” (premium subscription access)
A surge of U.S. investor participation in China’s markets is outpacing the U.S. government’s defense against the diverse threats to U.S. national and economic security posed by U.S. investment in some problematic Chinese companies. This inflow of U.S. capital into China’s economy is occurring as the Chinese government strengthens its ability to direct nonstate firms and resources toward advancing strategic priorities that may harm U.S. interests and as Beijing further fuses military and civilian corporate operations.
The Chinese government permits the participation of foreign firms and investors in the Chinese market only when it suits its national interest. As a result, nominal financial “opening” in China in reality is a carefully managed process designed to reinforce state control over capital markets and channel foreign funding toward fulfilling the Chinese government’s national development objectives.
China’s military-industrial ecosystem encompasses state and nonstate firms, research institutes, and investment funds, all acting in concert in service of China’s military modernization objectives. These coordinated efforts may advance an agenda that threatens U.S. national security but is not always evident at the level of individual entities or transactions. Traditional legal remedies, such as trade and investment restrictions, are limited in their ability to fully address these threats, and current tools may be inadequate.
Recommendations: The Commission urges Congress to consider legislation to
“ensure Chinese entities sanctioned under one U.S. authority be automatically sanctioned under other authorities unless a waiver is granted …
expand the jurisdiction of existing U.S. investment restrictions…
define categories of Chinese persons, Chinese entities, and Chinese Communist Party (CCP)-related persons and entities subject to full blocking sanctions and inclusion on the U.S. Department of the Treasury’s SDN list…
address risks to U.S. investors and U.S. interests from investments in Chinese… [and]
ensure the effective implementation of the Export Control Reform Act of 2018 and the Foreign Investment Risk Review Modernization Act of 2018."
China Boss says this is her favorite part of the report and that it also struck a chord with certain financial news analysts.
Rana Foroohar, FT:
…there was unusual consensus around this year’s report, which lays out the ways in which the Chinese Communist party (CCP) is building up global economic, political and military power to push forward a “new model for human advancement”. The party is doing so with plenty of help from Wall Street, as FT readers will know. The question is, how long will this divide last? Is it possible to have American financial institutions indefinitely funnelling capital in and out of a country that supports forced labour; has low environmental, social and governance standards; and is the US’s chief strategic adversary?
I think the answer is no, but I must say I’m gob smacked that the hypocrisy of American banks and asset managers pouring money into companies that might endanger US security isn’t getting more attention. It’s an issue raised by two of the commissioners, Jeffrey Fiedler and Michael R Wessel, in their additional comments towards the end of the report. While it’s not technically illegal for companies like BlackRock, Goldman Sachs, Charles Schwab and many others to invest in a firm such as AVIC Shenyang Aircraft Company, a primary producer of Chinese fighter jets, it’s hard to argue that it’s right, particularly in the current moment. As the commissioners put it: “One might be excused for thinking that a basic responsibility of American citizenship ought to be not to do anything to endanger US troops.”
U.S.-China Security, Politics, and Foreign Affairs
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