U.S.-China decoupling fractures global economy; plus Xi to meet business chiefs in US and China fires flares at Canadian military -- China Boss News 11.10.23
Newsletter
What happened
China is now trading more with developing markets than with the US, Europe, and Japan combined, and its trade with Russia continues to climb.
“Latin America, Africa and developing markets in Asia now account for 36% of overall Chinese trade, compared with 33% for its trade with the U.S., Europe and Japan,” the Wall Street Journal reported last week, citing an analysis of Chinese customs data.
"China now trades more with Russia than it does with Germany, and soon will be able to say the same about Brazil," news staff added.
The fracturing of China’s trade relations with the West is also occurring at an extraordinary pace, as Washington and Beijing accelerate efforts to mutually decouple their economies and investors flee China’s ailing economy and national security crackdowns.
The Biden administration, over the past year, has issued a series of extensive export curbs to prohibit advanced semiconductors and other sensitive technology from export to China.
More recently, it has placed dozens of Chinese firms on a government export control entity list due to their support of the Russian military’s attacks on Ukraine. From President Trump’s time in office until now, over 600 Chinese firms have been added to the US Department of Commerce’s blacklist for humanrights and trade violations.
Beijing has also stepped up its efforts at decoupling.
Not convinced? Track the frequency with which propagandists in state media belabor initiatives like “dual circulation,” “food security,” and “self-sustainment."
That linguistic coding is the way Beijing explains why mass mobilization efforts in sanction-proofing are taking place when the country is also reeling from a self-made debt crisis.
And last week, lawyers and investors raised alarm over the vagueness of "a dozen new clauses ... added to the Law on Guarding State Secrets."
Not to be confused with recent broadenings of espionage and data protection laws also causing heartburn in China's business communities, the state secret law has been repurposed to meet the perceived security challenges of state employees going abroad for pleasure and work.
Beijing's new rules have now banned those same workers from travel, of course. Stopped them dead cold from making holiday plans outside China and registering for foreign conferences.
No one has a clue how far the scope of the law extends. But we can all imagine the endless millions in China’s top-heavy and increasingly wary system unsure about who - for the law’s purpose - is a state employee with access to state secrets.
Why it matters
Ripple effect of Beijing’s focus on security
As China, under Xi Jinping’s leadership, battens down the hatches, the government’s policies are turning further and further away from the open and tolerant regulatory attitudes that prevailed earlier in the reform era.
But China today is anchored more deeply into the global economy, and Beijing’s reversal of the previous era’s “opening-up” polices will have ripple effects abroad.
Last week’s news that China’s foreign direct investment outflows exceeded inflows for the first time since the State Administration of Foreign Exchange began releasing balance-of-payments data is one example.
All that cash has to go somewhere. According to a recent Bank of America survey, some of it is being repatriated to the U.S. and Europe. It’s also going to near- and friend-shoring places, like Mexico and India.
Another Xi-thought move bound to cause waves is the steering of China’s financial sector towards backing semiconductors and other advanced AI which has enormous implications for geopolitics by enhancing China’s civil-military fusion.
In light of such steady commitments to modernize China’s military so it can flaunt might in the Indo-Pacific, Washington has been churning out export controls on advanced tech like there’s no tomorrow, and increasingly wary regional actors, like Japan and the Philippines, are aligning to protect themselves.
Last Friday, Japanese Prime Minister Fumio Kishida announced Tokyo "would start formal talks with the Philippines to allow the deployment of Japanese troops to the Southeast Asian country," if needed to prevent Beijing’s "attempt to unilaterally change the status quo by force," New York Times said. Recall that the U.S. has defense treaties with both Tokyo and Manila.
Synergy in splitting the world economy
And yet, what’s truly awe-inspiring is to watch the ripple effects of Xi Jinping’s policies develop their own synergies in dividing the world economy.
Last week, the New York Times reported on the billions now due to China that is owed by financially struggling Belt and Road participating countries.
The BRI was an economic security policy designed to give China’s politically powerful vested interests new markets for their construction and auxiliary industries since China’s had become saturated. An equally important advantage, from Beijing’s perspective, would be the grand making of the Chinese Communist Party’s global influence on a scale that far exceeded what traditional manufacturing could provide and something that, it was hoped, would one day replace it.
But - as with China’s own real estate development - the project soon grew out of hand for lack of oversight. It also became heavily criticized internationally for debt-trap diplomacy, unfinished and cancelled projects, and corruption.
“China provided the money almost entirely as loans, not grants, and the loans tended to be at adjustable interest rates. As global interest rates have soared for the past two years, poor countries have found themselves owing far higher payments to Beijing than they expected,” NYT staff said.
When China and the U.S. were on better terms, the world could coalesce around a single global economy and more easily trade with both. Unfortunately, those days are gone, and the risk of fragmented trading spheres is rising.
The principal sums due across the developing world are likely to further upset the delicate balance, and countries will orbit either towards Beijing - the creditor holding a noose - or back into the arms of the West, outraged over their debt-laden predicaments.
“In this increasingly divided world economy, Washington continues to raise the heat on China with investment curbs and export bans, while China reorients large parts of its economy away from the West toward the developing world,” WSJ analysts Jason Douglas and Tom Fairless wrote.
“Benefits for the U.S. and Europe include less reliance on Chinese supply chains and more jobs for Americans and Europeans that otherwise might go to China. But there are major risks, such as slower global growth—and many economists worry the costs for both the West and China will outweigh the advantages,” they added.
This Week’s China News
The Big Story in China Business
Keep reading with a 7-day free trial
Subscribe to China Boss News to keep reading this post and get 7 days of free access to the full post archives.