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Brief #2: decoupling, US-China trade deal, 2020 economic agenda, burning books, hostages

Hi all, this week while Yun was counting herself lucky for not immersing in Australia’s bushfire smoke, Adam was in a wet and rainy DC talking about China’s military. We got some constructive feedback for the first issue of Neican Brief. Thanks for that, keep them coming, and thanks for reading!

This week we look at US-China decoupling; the Phase One trade deal; China’s 2020 economic priorities; book-burning; and hostage diplomacy.

1. Decoupling: independence or interdependence?

The Chinese Government has ordered all government institutions to remove foreign computer hardware and software within three years, hastening the technology decoupling with the US.

Self-sufficiency has traditionally been the goal of the Chinese Communist Party. However, the party recognises that accessing, buying, or stealing foreign technology makes it easier to get to the technological frontier. Yet, China was not fully integrated into the global information and innovation ecosystems. The party-state has deliberately put up barriers, in fact.

From the US, since it designated China as a strategic competitor, the trend has changed from integration to decoupling, at least in science and technology.

Earlier this year, the US Government banned US companies from selling to Huawei, except with Government approval. In response, Huawei has developed its own operating system, Harmony.

For other countries, decoupling means they may have to choose between the US or the Chinese technology system. Untangling the supply chain will take a while. Initially, this may benefit other countries, as the two systems compete with each other. However, over the long run, dividing the world into two blocs may be a dangerous path.

To what degree should the US and China try to be “independent” in technology, and more broadly across their interactions? To what extent should they allow for “interdependence”? These tough questions are still being debated fiercely in both countries.

2. Trade deal: questionable efficacy

The US and China have agreed on a Phase One trade deal 第一阶段经贸协议. This supposedly requires structural reforms for China in a range of areas, including intellectual property, technology transfer, and currency. China has also committed to importing more US goods and services. The deal also establishes a dispute resolution system for enforcement.

However, no details on structural reforms or enforcement mechanisms have been released. It is therefore hard to make a judgement on what impact the deal will have or if it is likely to be implemented or enforced.

The commitment to purchase US products welcoming news for farmers in the US, a key constituency for Trump. But it is likely to distort global trade, rather than substantially increase China’s imports. Countries that are competitors to the US in certain industries, such as Australia for agricultural produce, is likely to lose out from this trade deal.

It remains to be seen if more details will be released for “Phase One” and what “Phase Two” would entail. So far, the details that would help Trump (purchase of agricultural goods) have been released while the more important aspects of the deal from the standpoint of the global economy (structural changes) have been withheld.

Essentially, many US grievances are rooted in the role played by the party-state in the Chinese economy, which is vital for the party’s survival. The current trade pressures are not going to force a fundamental transformation of China’s political economy. And because of this, even if China and the US come to an agreement on trade, long-term economic and strategic competition is here to stay.

3. China’s 2020 economic agenda: stability amid flux

The annual Central Economic Work Conference 中央经济工作会议 was held this week. This is China’s highest-level, and most authoritative economic policy conference with three functions:

  1. Evaluate that year’s economic policy.
  2. Outline Central Committee’s view on the economic situation.
  3. Set economic policy, including macroeconomic policy, for the next year.

This conference is usually held at the end of every year, following a Politburo meeting that would provide high-level guidance for it, which occurred last Friday.

This year, the conference focused on the theme of prioritising stability 稳字当头 in an environment of rising risks and challenges, both internally in China (slowing economic growth and financial risks) and externally (trade war and global economic slowdown). The conference points out that the goal of achieving a “moderately prosperous society小康社会 by the end of 2020 is “the priority of utmost importance” 重中之重.

There is a huge tension between, on the one hand, the need for a steady ship at a time of flux, and on the other, ambitious goals and urgent reform needs facing China. How well policymakers can navigate this tension will be vital to China’s economy.

The conference outlined six priorities for China’s economy in 2020:

  1. Implementation of the “new development concept” 新发展理念, characterised by innovation and balanced development.
  2. Successful fight the “three major battles” 三大攻坚战 against poverty, pollution and financial instability.
  3. “Ensure the people’s livelihood” 确保民生, especially by guaranteeing and improving the basic living conditions of the poor.
  4. Continue to implement a “proactive fiscal policy” 积极的财政政策 and a “prudent monetary policy” 稳健的货币政策.
  5. Drive high-quality development and improve China’s overall economic competitiveness through innovation, and reform and opening up.
  6. Deepen reform of the economic system: accelerate the development of a high-standard market system and state-owned asset/enterprise reform.

4. Book burning: what it tells us

Staff from a county library in Gansu Province burned “illegal publications” in front of the library. This occurred in October, right after a pronouncement from the Chinese Ministry of Education to schools to clean out illegal books from their libraries.

After the photo of book burning became popular this week, the county government has started an investigation on why the burning was done publicly.

This episode immediately conjured up the idiom 焚书坑儒 on social media, referring to Qin Shi Huang burning Confucian books and burying Confucian scholars. The spectre of China’s Maoist past is alive and well in Chinese imaginings today.

China’s censorship has been longstanding, but such public burning is quite rare. The backlash on Chinese social media indicates that although people in China has been living with censorship all their lives, they are not necessarily supportive of such efforts when it is brought to light.

What this episode does highlight is, in fact, the problems in central-local relations. Directives from Beijing are often frustrated by local cadres due to local intransigence, over-zealousness, formalism 形式主义, bureaucratism 官僚主义, competing interests and local politics. Some of these dynamics played out tragically during the Great Leap Forward. Today, far from a monolithic red dragon bent of world domination, Beijing still faces challenges in getting local cadres to act in accordance with its intentions.

The Belt and Road Initiative, Military-Civil Fusion, Made in China 2025 all look very different from some village in Guangxi or the thousands of small towns across China’s vast hinterland.

5. Hostage diplomacy: it tells us something

This week marks one year since Canadian citizens Michael Kovrig and Michael Spavor were taken into custody by Chinese authorities. This act of revenge for the arrest of Huawei CFO Meng Wanzhou in Canada is, essentially, diplomatic hostage-taking. Beijing has linked the fate of the two Michaels to the fate of Meng.

The two cases highlight a fundamental difference: Canada, and liberal west in general, adheres to the rule of law, while the Chinese party-state is only using the rule of law as a political tool. Under the Chinese system, there is no fair trial — the party determines the outcome in advance, according to its calculus.

While the two Michaels continue to languish in China’s secretive detention system, Meng is free to wander the streets of Vancouver on bail. This vast difference is a pretty persuasive argument for safeguarding democracy.

A number of Canadians, Americans, Japanese, Taiwanese, Australians, Swedes and others have been arbitrarily detained in China in recent years. Some have been tortured and made to falsely confess under duress.

Beijing’s appalling behaviour deserves international condemnation and coordinated action. Without a real cost, its behaviour will not change.

In recent years, China has invested heavily in expanding its foreign media presence in order to “tell the China Story well” 讲好中国故事. But Beijing should know that nothing speaks louder than actions.