April 16, 2021 – Stealth War Newsletter 33

Following this, new bipartisan legislation was introduced to the Senate Foreign Relations Committee on April 8, and is scheduled to vote on the bill on April 21. The 280-page bill, the “Strategic Competition Act of 2021,” squarely aims at countering the global influence of the Chinese Communist Party (CCP). The bill would allocate $655 million in funding for foreign militaries in the Indo-Pacific and $450 million toward an initiative that aims to ensure the U.S. and its partners are able to freely operate in the region. If passed, it would send a major signal of the United States’ determination to counter China.

As part of the United States’ “whole-of-government” approach to countering China, President Joe Biden sent an unofficial delegation of retired American politicians and diplomats to Taiwan to signal U.S. support for the embattled island country. The delegation went to Taiwan as the country experienced on Monday its largest incursion of Chinese People’s Liberation Army (PLA) aircraft to date, totaling 25 jets, bombers and anti-submarine aircraft. The United States has increased its support for Taiwan in the recent past, with the State Department this month loosening restrictions surrounding lower-level diplomatic meetings between U.S. and Taiwanese officials.

This week also saw rare signs of U.S.-China cooperation. U.S. Special Envoy for Climate John Kerry was in Shanghai yesterday to meet his Chinese counterpart, in an attempt to push Beijing to do more on climate change. And Chinese Premier Li Keqiang met with American business leaders—traditionally at the forefront of pushing closer U.S.-China ties—in a virtual dialogue chaired by former U.S. Treasury Secretary Hank Paulson. In the meeting, Li made the argument that the two countries have more to gain from cooperating, and that decoupling would bring “huge uncertainties” to the world. The Biden administration has made confronting climate change a priority, and the economic relationship remains deeply interconnected. But hopes to work with China on climate change, as well as the hopes of some businesses to maintain commercial ties, could suffer from friction in other sectors of the relationship.

Japanese Prime Minister Yoshihide Suga arrived in Washington, DC yesterday to meet with President Biden. Suga is the first foreign leader to meet with Biden since his inauguration. Suga and Biden are expected to reaffirm the two countries’ long-term relationship and discuss efforts to promote democratic values in the Indo-Pacific region and counter China’s growing confrontational behavior.

The talks come as Sino-Japanese relations worsen over China’s aggressive behavior in the region and territorial disagreements over the Senkaku Islands, which China claims and calls the Diaoyu Islands. In addition to deepening its relationship with the U.S., Japan recently also held foreign and defense “2+2” ministerial meetings with Germany, demonstrating that issues in the Indo-Pacific are of global importance. Last fall, Germany announced its plans to send a frigate to patrol in the Indo-Pacific and ramp up bilateral and multilateral security cooperation in the region.

China has taken an increasingly antagonistic approach to Japan in response, vocally criticizing Japan’s plans to release water contaminated by contact with the damaged reactors of the Fukushima nuclear power plant. Japanese officials say the water has been properly treated and diluted and could be safely released into the ocean. The Chinese foreign ministry spokesperson Zhao Lijian hit back memorably, saying, “The ocean is not Japan’s trash can; and [the] Pacific Ocean is not Japan’s sewer.”

Several policy developments from the past week indicate that the European Union’s (EU) is doubling down on technological independence from China. The European Parliament is reportedly considering a draft proposal banning the use of artificial intelligence (AI) from “indiscriminate surveillance” and the use of social credit scores—both key aspects of China’s digital authoritarianism that it has worked to export abroad. The proposed regulations would also create a European Artificial Intelligence Board to oversee the use of AI in “high-risk” systems affecting judicial decisions or job hiring. These stringent standards in the EU would contrast with China’s rapid rollout of AI for its social credit system and smart courts systems.

Member states in the EU have also taken steps this week to curb Chinese influence in the technology sphere. In Italy, Prime Minister Mario Draghi blocked Chinese takeover of a semiconductor company and seeks to extend its Golden Powers rules, designed to protect key industries from unwanted foreign influence in industries. Romania has taken the first steps to approve a bill to block Huawei and China from its 5G networks, confirming a 2019 memorandum of understanding signed between Romania and the United States committed to protecting national 5G networks from Chinese influence.

Diluting the EU’s more confrontational posture toward China, Hungary most recently blocked an EU statement criticizing the Hong Kong national security law. According to a senior EU diplomat, Hungary felt that “the EU already has too many issues with China.” Hungary is a major recipient of Chinese investment. The statement, which required unanimous approval from all 27 of the EU’s foreign ministers, would have come after the EU and China fought over tit-for-tat sanctions over human rights abuses in Xinjiang.

The Chinese Center for Disease Control and Prevention head Gao Fu appeared to acknowledge that China’s current coronavirus vaccines “don’t have very high protection rates.” Currently, China has released five COVID-19 vaccines to combat the pandemic, with effectiveness ranging from 50 to 79 percent. In comparison, the German- and American-made Pfizer and Moderna’s mRNA vaccines have about 95 percent effectiveness in protecting against COVID-19 according to studies. China has also just approved overseas clinical trials for its own mRNA vaccine, ARCoV, developed by Walvax Biotechnology, Abogen and the Academy of Military Technology. A publically available memorandum of understanding signals that clinical trials for the vaccine will be held in Mexico. By coincidence, Gao, who had previously been vocally skeptical of foreign mRNA vaccines, also stated his support for mRNA vaccine technology. “Everyone should consider the benefits mRNA vaccine technology can bring for humanity,” said Gao. “We must follow it carefully and not ignore it just because we already have several types of vaccines already.”

The financial technology company Ant Group released a corporate overhaul plan on Monday, following heavy pressure from Chinese financial regulators. Ant, whose services encompassed a complex ecosystem ranging from providing micro-loans to investment services and a popular digital payments platform, will now apply to be a financial holding company overseen by the central bank, marking a victory for the Chinese state’s efforts to crack down on big tech monopolies. Regulators have called on the company to stop certain monopolistic behaviors such as the “two pick one” (er xuan yi) practice which sought to lock out competitors’ services, and reduce the liquidity risk of some of its investment products. This follows after Ant’s parent company, the e-commerce giant Alibaba faced a record $2.8 billion antitrust fine last week. It’s likely that Ant’s changes will end practices that had long fueled its growth, leading investors to speculate that a future IPO—which at one point last year would have been the world’s largest—would have limited prospects for growth. At the same time, Alibaba shares rose 9.8 percent in New York and 3 percent in Hong Kong on Monday, as the restructuring plan appeared to remove a key source of uncertainty about the company’s future. Ant’s experience over the past few months has demonstrated the Chinese government’s outsize role in determining whether companies succeed or fail.

And the fate of China’s giant companies—state-owned or private—bears significant risks for global financial markets. Another current source of uncertainty is the China Huarong Asset Management Company, a distressed asset management company whose biggest shareholder is the Chinese Ministry of Finance. After Huarong missed a March 31 deadline to release its 2020 financial results following a major corruption scandal, foreign investors dumped their bond holdings, sending a tremor through the market for U.S. dollar bonds of Chinese companies as fears of a default rose. Huarong has about $22 billion of offshore debt and investment-grade ratings from global credit agencies. And Chinese regulators have been noticeably silent on the company’s fate, leading investors to conclude that the distressed company lacks official support. Chinese regulators have asked some banks not to withhold loans to Huarong as part of support measures to stabilize its cash flow  and reduce the risk of market contagion, but the company’s outlook remains far from certain.

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