China ‘Foreign Relations Law’ to punish decoupling

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A year after the US-China chips war started in earnest and less than two months after G7 countries’ May 7 decision to de-risk from China, new legislation from Beijing authorizes authorities to punish any organization or individual for committing “acts that are detrimental to China’s national interests.”

Effective from Saturday, the Foreign Relations Law is aimed at issuing a warning to Western countries that promote “decoupling” from China and disrupt international order, according to Chinese officials and legal experts.

Some commentators say the vagueness of the law’s language defining the crime may fuel China-based foreign firms’ concerns about deteriorating Sino-United States relations. They note that relocating to Singapore or Dubai can be a way to minimize geopolitical risks.

“The law improves the relevant systems of our country’s foreign relations, and shows the world the image of our nation as a responsible major country that promotes peace, development, cooperation and mutual success through the rule of law,” an unnamed official of the National People’s Congress Standing Committee (NPCSC)’s Legal Affairs Commission, said Thursday in an official announcement.

The official stressed that the passage of this law is not aimed at setting up long-arm jurisdiction; China has already implemented the Unreliable Entity List in 2020 and the Anti-Foreign Sanctions Law and the Rules on Counteracting Unjustified Extra-territorial Application of Foreign Legislation and Other Measures in 2021.

The newly-passed Foreign Relations Law is considered an enhanced version of the Anti-Foreign-Sanctions Law, which was passed by the NPCSC on June 10, 2021.

On April 26 this year, Beijing also amended its Anti-Espionage Law by expanding the coverage of spying charges from stealing “state secrets” to the theft of “all data and items related to national security.” That amended law also is set to take effect on Saturday.

The US Chamber of Commerce said in a statement on April 28 that the amendment of China’s anti-spy law is “a matter of serious concern for the investor community and likely is as well for their local business partners in China.”

‘Attitude on the table’

Putting attitude on the table. Photo: Ranker

The NPCSC passed the Foreign Relations Law on Wednesday. The Global Times, a Chinese Communist Party’s mouthpiece, says in an editorial published Friday that the new law is aiming at “putting China’s attitude on the table.” 

“As China increasingly moves closer to the center stage of the world, it has become more necessary to establish comprehensive legislation in the field of foreign relations,” it says. “China advocates for the peaceful resolution of international disputes, opposes the use or threat of force in international relations and rejects hegemonism and power politics.”

“Some hegemonic countries in the West pursue unilateralism and zero-sum game thinking, and frequently use their domestic laws as a basis to impose unilateral sanctions and long-arm jurisdiction to the outside world,” Huo Zhengxin, a professor at the Faculty of International Law, the China University of Political Science and Law said on Chinese Central Television.

“They used some so-called legal means to exert extreme pressure, build walls and barriers and promote decoupling, seriously endangering the sovereignty and interests of other countries and threatening the international order and global development,” Huo said.

Top Chinese diplomat Wang Yi writes in an article published by the People’s Daily that by formulating the Foreign Relations Law, China highlighted its opposition against all hegemonism and power politics, as well as unilateralism, protectionism and bullying behavior. He says the law clearly defines China’s counteract and restrictive measures to establish deterrence.

Vague definition

According to Article 8 of the Foreign Relations Law, “any organization or individual who commits acts that are detrimental to China’s national interests” will be penalized.

Article 32 says that the State shall take law enforcement, judicial or other measures in accordance with the law to safeguard its sovereignty, national security and development interests and protect the lawful rights and interests of Chinese citizens and organizations.

Article 33 says China has the right to take counteractive or restrictive measures against acts that endanger its sovereignty, national security and development interests in violation of international law or fundamental norms governing international relations.

Some experts say the law negatively impacts foreign investors’ sentiment because its broad language lacks clear definitions of offenses and prescriptions of penalties.

“The new law does not seem to be a legal provision but more like a political statement to the world,” Dennis Weng, an associate professor in the Department of Political Science at Sam Houston State University, said in an interview with Taiwan’s TVBS. “Some people may feel that it’s a written expression of China’s ‘wolf-warrior’ diplomacy.”

Weng said the law may squeeze Taiwan’s diplomatic space as some countries may have to think twice about whether they want to form stronger ties with Taiwan and risk facing Beijing’s sanctions.
 
Chris Devonshire-Ellis, chairman of Dezan Shira & Associates and an advisor to foreign investors in China, says in a research note that the new law does not contain any aspects that are detrimental to foreign firms and foreigners in China.

However, he adds that businesses investing from the West (a reference to G7 countries) should assess the political risk inherent within their own governments’ attitudes towards China. He says some companies may try to maintain their presence in the Chinese markets by relocating to Singapore or Dubai, which are highly unlikely to impose sanctions on China.

On June 15, Siemens AG said it will build a new factory in Singapore for €200 million (US$218 million). Media reports said Siemens Chief Executive Roland Busch had originally favored China as a location for the new factory but he faced resistance from Siemens’s supervisory board, which had concerns over the growing geopolitical tensions.

Siemens China headquarters in Beijing. While branching out in Singapore, the company is careful to leave a substantial number of eggs in its China basket., Photo: Siemens

Official explanation

The unnamed NPCSC official quoted in the announcement said the new law, by clearly stating China’s diplomatic policy direction, allows the world to better understand and trust China and encourages international cooperation – and said it implemented Party General Secretary Xi Jinping’s “Thought on Socialism with Chinese Characteristics for a New Era.”

The official said that China as of the end of June has on its books 297 sets of laws, 52 of which specifically target foreign issues and 150 of which contain foreign-related clauses.

“Our foreign-related legal system still has some shortcomings, especially in the areas of safeguarding sovereignty, national security and development interests,” the official said, adding that the NPCSC had spent less than one year drafting and passing the Foreign Relations Law.

That timelline indicates that the law was in preparation months before the G7 offended Beijing with its May proclamation. A year ago, the US Commerce Department started sanctioning Chinese chipmakers and persuading allies such as Japan and the Netherlands to restrict their exports of chip making equipment to China.

Read: Tech giants ‘de-risk’ from China, but selectively

Read: US envoy worries about China anti-spy law overreach

Follow Jeff Pao on Twitter at @jeffpao3

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Are markets dead wrong about China?

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Many investors couldn’t help but suspect Premier Li Qiang had lost the plot when he declared that China will easily reach his government’s 5% economic growth target for 2023.

“From what we see this year, China’s economy shows a clear momentum of rebound and improvement,” Li told the audience on June 27 at the World Economic Forum’s annual meeting in the coastal Chinese city of Tianjin.

That’s news to economists at Bank of America, Goldman Sachs, JPMorgan, UBS and other investment banks scrambling to downgrade their earlier more optimistic forecasts for China’s 2023. 

Yet Li’s confidence raises a tantalizing question: what if global markets are completely wrong about where China is headed economically over the next six months?

Count former International Monetary Fund bigwig Zhu Min in the camp that believes that negativity about China’s prospects is overdone.

“There are a lot of expectations on the Chinese government to have more stimulus policies,” Zhu, who until recently was the IMF’s deputy managing director, told the Tianjin forum. “I don’t think this is real.”

Sure, China may face some fiscal constraints, Zhu admits. Beijing, he points out, “has very high debt already,” as evidenced by a record debt-to-GDP ratio. Local governments, meantime, are scrambling to repay debt to ensure the overhaul doesn’t imperil China’s US$55 trillion banking system.

And a $2 trillion section of China’s local bond market is under strain as issuers struggle to refinance maturing debt. In the fourth quarter of 2022, net financing for China’s local government financing vehicles, or LGFVs, turned negative for the first time since 2018.

Analyst Laura Li at S&P Global Ratings speaks for many when she warns “there may be more debt repayment crises or even public bond defaults” if Beijing isn’t careful.

Yet, as Zhu explains, it’s also the case that Asia’s biggest economy doesn’t need additional stimulus jolts to confound the skeptics. As such, Zhu expects a choosier, more deliberate and reform-minded approach that boosts consumption while also accelerating China’s transition toward high-tech sectors and more green growth.

The most likely policy approach, Zhu said, is ensuring that household incomes grow faster than GDP this year while building better social safety nets via improved health care and pension systems for the longer run.

“I understand there is a lot of fear,” Zhu, the former IMF official, said. “We need, really, to take the fear away, rebuild the confidence. This is the most important thing.”

If Li and Zhu are right, it’s clear Beijing is doing a poor job on communications. Yet their efforts to convince global investors and mainland households alike should be more about showing than telling. 

A Chinese investor looks at stock index and prices of shares at a stock brokerage house in Hangzhou city, east China’s Zhejiang province. Photo: Shan he / Imaginechina / Imaginechina via AFP

China, in other words, “is in need of a credible economic recovery plan to boost confidence” that it can “revive animal spirits before labor market conditions deteriorate further,” said strategist Fiona Lim at Maybank.

In a report to clients this week, Citibank analysts said it’s high time Beijing addressed the “weak confidence prevalent across households, corporates and investors in China.”

Here, Kelvin Wong, analyst at OANDA, noted that Li this week “stopped short of revealing any details on the highly anticipated new fiscal stimulus measures” that the State Council discussed two weeks ago.

But, Wong said, Li’s “confidence boosting” speech “triggered a broad-based rally in key China’s proxies benchmark stock indices that snapped five consecutive days of losses.”

It makes investors wonder, too. This could be overconfidence or mere spin by a newish premier under pressure to regain the macroeconomic narrative. It also could be a sign that worries about China’s second half will prove unwarranted.

As such, it remains unclear whether this week’s market gains can be sustained. “Without any clear indication of the scope and implementation timing of the new fiscal stimulus measures,” Wong said, uncertainty may “dampen the short-term bullish mood and trigger another bout of downside pressure in China and Asian ex-Japan equities in general.”

Li, though, claims the Communist Party is on top of all things economic.

“We will launch more practical and effective measures in expanding the potential of domestic demand, activating market vitality, promoting coordinated development, accelerating green transition, and promoting high-level opening to the outside world,” Li said.

At the same time, Li urged world powers to lower the temperature. Since Li’s recent visit to France and Germany, sharp rhetoric toward China from European governments has only heightened tensions.

“Everyone knows some people in the West are hyping up this so-called ‘de-risking,’ and I think, to some extent, it’s a false proposition,” Li said. He added that the “invisible barriers put up by some people in recent years are becoming widespread and pushing the world into fragmentation and even confrontation.”

The bottom line, Li said, is that “we firmly oppose the artificial politicization of economic and trade issues.”

Yet Li’s relative optimism — and Beijing’s lack of haste so far to crank up major stimulus—has economists wondering what his team knows that markets don’t. Does the conventional wisdom about massive new stimulus moves require revision?

“Economic growth in China is likely to reach 5% this year, which is in line with government targets and consensus forecasts,” says analyst Aaron Costello at Cambridge Analytics. 

“Following a stronger-than-expected first quarter, recent economic data has softened, disappointing investor expectations of a sharper recovery after last year’s Covid-19 lockdown, but the Chinese economy is not on the verge of relapsing into recession.”

That’s not to say Chinese officials are sleeping on the job. Economist Wei He at Gavekal Research noted that “officials have whirred into action to bolster the slowing economic recovery, cutting rates and pledging more support to come.”

Yet, he added, “constraints will lead them to target support to favored industries and probably dial up infrastructure investment. Those measures are likely to underwhelm. Investors should buy the rumor, sell the fact.”

China’s yuan is gaining ground as an international currency. Photo: Facebook

Last week, President Xi Jinping’s Cabinet pledged to “take more effective measures to enhance the momentum of development, optimize the economic structure, and promote the sustained recovery of the economy” — and to do so “in a timely manner,” Wei noted.

In the meantime, odds are that the People’s Bank of China will continue to play the leading stimulus role. “Weak investments data suggest that authorities are unlikely to stop at the monetary easing we saw” last week, said economist Louise Loo at Oxford Economics.

Zhiwei Zhang, economist at Pinpoint Asset Management, added that “credit growth is weak, which is not surprising as other economic indicators such as purchasing managers’ indexes and exports also sent consistent signals. This explains why the PBOC cut the reverse repo rate … It is a small step in the right direction. I expect more policy actions to follow in coming weeks.”

Earlier this month, PBOC Governor Yi Gang said the central bank will enhance “counter-cyclical” policy adjustments to hasten growth in the real economy via policy tools that lower funding costs.”

In a note to clients, economists at Nomura wrote that “we believe these comments suggest that Beijing has now become seriously concerned over the potential for a double dip, and the PBOC may respond by stepping up stimulus measures in the near term.”

But, as Li’s team suggests, any government stimulus also will involve upgrades to China’s microeconomic structure. That includes moves to stabilize the fragile property market and alter incentives to reduce the risks of boom-bust cycles.

Lauren Gloudeman, analyst at Eurasia Group, observed that the National Development and Reform Commission, China’s economic planning body, indicated that “more effort will be spent on boosting auto sales, constructing charging facilities and renovating the grid for new energy vehicles.”

And “the supply side,” she added, “China’s financial regulators have pledged to provide more tax rebates and reduce transaction costs. In the property sector, Beijing is likely to take a differentiated approach across cities, including by significantly lifting administrative restrictions on home purchases and reducing associated costs such as down payment requirements to stimulate sales in cities with sluggish market conditions while maintaining restrictions elsewhere.”

A worker at the construction site of Raffles City Chongqing in southwest China’s Chongqing Municipality. Photo: AFP / Wang Zhao

In the upcoming weeks, Gloudeman said, these ministries are expected to develop specific policies that outline how to implement these ideas. 

Again, though, Beijing’s communication game needs work. It’s clear that Li’s team favors “more targeted support directed at weak spots, including real estate,” said economist Arjen van Dijkhuizen at ABN Amro.

What’s less clear, though, is that global investors trust that this more surgical approach to stimulus will get China to 5% GDP growth, as Li insists is in the offing. Perhaps Li is right. But it’s high time Beijing worked harder to convince international investor skeptics.

Follow William Pesek on Twitter at @WilliamPesek

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How Russia keeps its oil exports afloat

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In January 2023, Russian President Vladimir Putin instructed senior Kremlin officials to find solutions to something he termed the “diskont” — a problem he feared could “cause issues with the budget.” Putin was referring to the deep price reductions or “discounts” Russian oil exporters have been forced to offer to willing buyers amid Western sanctions.

With oil exports the largest contributor to Russian state revenues, these discounts are a cause for concern. They are largely to blame for a 25% year-on-year contraction in Russia’s budget revenues for January and February.

That period also saw a 52% spending increase, mostly caused by Russia’s full-scale invasion of Ukraine. The result is a mushrooming deficit that threatens to erode Moscow’s economic resilience.

These discounts are a direct result of the European Union and G7 oil sanctions against Russia and have proven more challenging for Moscow than many anticipated. They have reduced Russia’s current revenue and can also curb future windfalls should prices rally.

But the Kremlin has been developing countermeasures to thwart sanctions. Chief among them is assembling a “shadow fleet” of tankers able to transport Russian oil with impunity. Though Moscow’s shadow fleet has been steadily expanding, it will likely be years before it is large enough to shield all Russia’s exports from sanctions. 

But as the shadow fleet expands, these tankers — many aging and poorly maintained — pose an increased risk of oil spills in coastal regions from the Baltic to the Sea of Japan. To counter these threats, coalition policymakers and coastal states will need to take robust action.

Russian oil sanctions consist of two separate embargos. The first is an EU/G7 ban on Russian oil imports, which has forced Moscow to find new buyers for nearly three-quarters of its oil exports. For an exporter of Russia’s size, this has proven a challenge. 

A worker checks monitoring equipment at the Slavyanskaya compressor station, the starting point of Russia’s Nord Stream 2 pipeline. Photo: TASS

For 140 years, Russia has looked to Europe as its principal export market. Its sprawling oil infrastructure is primarily designed to move oil westward, with over 80% of seaborne exports plying European waters. Sanctions are forcing these cargoes to be shipped to less familiar markets that are more constrained and remote.

Only two large buyers remain for Russian crude — China and India. Before February 2022, China was buying nearly 20% of Russia’s exports and it has since stepped up imports modestly. The big buyer of Russia’s crude — absorbing more than half — has been India, which previously imported almost no Russian oil. 

Lack of competition at scale has given Indian traders powerful bargaining leverage to extract the deep discounts that are worrying Putin. The longer distances to market have also boosted Russian freight costs, further shrinking Moscow’s bottom line.

Moscow has taken two measures to combat the discounts. One is to ease the glut of Russian crude by announcing a cut in exports. The other is to sell more to China to regain pricing leverage. But additional deliveries to China must come from Russia’s distant Baltic and Black Sea ports because China-bound exports from its Pacific ports are close to capacity.

This means higher freight costs and an undesirable increase in Russia’s tanker needs. That makes Russia even more vulnerable to the second EU/G7 embargo — a so-called “price cap” which bans EU and G7 entities from providing shipping services for any Russian seaborne oil priced above a certain value. 

For crude oil, this capped price is currently US$60 a barrel. The price cap seeks to limit Russia’s ability to reap windfall revenues from high oil prices while avoiding the supply shock an unconditional ban on shipping services would cause.

Russia’s tanker needs are immense and meeting them without relying on European marine services is a challenge. From vessel finance to fleet ownership, Europe plays an outsized role in all aspects of global oil shipping, particularly in the complex area of mandatory oil spill liability insurance. 

Some 95% of the global fleet is insured by a sophisticated not-for-profit network of mutual assurance societies called the International Group of P&I Clubs (IG).

The IG insures industry-wide liabilities that are too large for the commercial insurance sector to cover. Because it is based in Europe, the IG requires insured vessels to comply with the price cap as a condition of coverage. Complying with sanctions is the trade-off that shipowners take for what is an indispensable part of their business model.

Russia has increasingly turned to a marginal group of tankers – the so-called “shadow fleet” – to reduce its IG-insured fleet dependence. Shadow tankers normally spend most of their service life as IG-insured vessels in the mainstream fleet. But in the final years before they are retired, many tankers are sold to second-tier operators who sweat them for cash.

Some operators are anonymous “shadow” investors based outside EU/G7 countries and pursue a risk-friendly business model where IG policies are replaced with coverage from niche, low-transparency insurers.

While some insurers are reportedly undercapitalized and offer inferior policies, they compensate shadow-tanker shipowners through relaxed insurance standards and a laissez-faire approach to sanctions that allows them to pursue lucrative business in Iran, Russia and elsewhere.

Since the summer of 2022, the number of shadow tankers transporting oil from Russia has been growing. Over the coming months, these vessels will pass through crowded maritime chokepoints in Europe and Asia laden with oil.

A September 2022 collision in the Singapore Strait highlights the danger they pose. As their numbers continue to grow, so too does the risk of a catastrophic spill.

Russian President Vladimir Putin has leveraged the country’s oil exports to strategic effect. Image: Twitter

Despite its swelling shadow fleet, Russia still relied on IG-insured tankers for over 60% of its exports in March 2023. So far, this has cost Russia little, since most of its oil continues to trade below the price cap. 

But if prices rally, Russia may have to choose between cutting exports or prices. It may try to avoid this choice altogether by underreporting transaction prices — a scheme it appears to be pilot-testing on some cargoes already.

Oil sanctions continue to take a toll on Russian revenues, but Moscow is stepping up its evasion efforts. Coalition policymakers can counter these efforts by ratcheting down the price cap and enhancing oversight. 

Coalition countries should also encourage Russia’s remaining large importers to resist Russian pressure for kickbacks, offsets or other compensation lest such practices increase pressure for secondary sanctions.

Finally, to combat the heightened risk of a catastrophic spill, coastal states will need to push for an end to lax enforcement of safety regulations for shadow tankers.

Craig Kennedy is a former Vice Chairman at Bank of America Merrill Lynch, a Center Associate at Harvard’s Davis Center for Russian and Eurasian Studies, and author of the Substack newsletter Navigating Russia.

This article was originally published by East Asia Forum and is republished under a Creative Commons license.

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Healthcare, sustainability among key markets as more Singapore firms invest in Sichuan

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”As Singapore and China tackle the challenges of an ageing society, this new venture can contribute to Sichuan by offering a one-stop international medical and healthcare plus concierge to all ages,” said Dr Tan, who is the co-chair of the Singapore-Sichuan Trade and Investment Committee.

“I believe this would significantly complement Chengdu’s effort in developing itself to become a liveable city and international gateway to West China.”

Perennial Holdings is also building similar integrated medical hubs in three other Chinese cities, Tianjin, Kunming and Xi’an.

SUSTAINABILITY PUSH

Amid an escalating climate crisis, Sichuan is also pushing for sustainable development.

Singapore energy firm SP Group has partnered Wuhou district, the largest of Chengdu’s five districts, to transform it into a smart eco-district.

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AI chip bans cloud US-China trade talks

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Top Chinese and United States economic officials may meet in Beijing in early July but the potential meeting is now clouded by chip ban threats from both sides.

Treasury Secretary Janet Yellen said in a TV interview on Wednesday that she hopes to visit China and re-establish contact with new leaders despite differences between Beijing and Washington. As of Thursday night, Beijing had not yet confirmed Yellen’s trip.

China’s May sanctions against Micron have not helped smooth the fraught relationship.

Meanwhile, the US is mulling strengthening of its export bans to prevent China from using its AI chips to make weapons or abuse human rights, media reported.

Nvidia, a graphic processing chip (GPU) maker, will not be able to ship its A800 and H800 artificial intelligence (AI) chips to China if the US tightens its export controls, the reports said. The company tailor-made the two products for the Chinese markets after it was banned by the US government from exporting its A100 and H100 chips to China last August.

The decision will probably be announced after Yellen’s visit to Beijing, according to the Wall Street Journal.

Chinese commentators said it’s ridiculous that the US is strengthening its sanctions against China while seeking to hold talks in Beijing. They said China should consider further penalizing US memory chipmaker Micron Technology.

“China and the US are in touch about dialogue and exchange at various levels,” Mao Ning, a spokesperson of the Chinese Foreign Ministry, said in a regular media briefing on Thursday when being asked about Yellen’s China trip.

At the same time, Mao criticised US Secretary of State Antony Blinken – who visited Beijing on June 18-19 – for smearing China in a recent speech.

“We are dissatisfied with Blinken’s remarks. Out of a wrong perception of China, the US pursues a wrong policy toward China by containing and suppressing it, discrediting it for no reason and wantonly interfering in its internal affairs,” Mao said. “The words and actions of the US side violate the basic norms governing international relations. Of course, China firmly opposes them.”

She said the US should stop making irresponsible remarks and take concrete actions to honor the promises it made.

In a review of his recent trip to Beijing, Blinken told CBS on Wednesday that both the US and China have obligations to manage their bilateral relationship responsibly and make sure that their profound differences don’t veer into conflict.

“One of the things that I said to my Chinese counterparts during this trip was that we are going to continue to do things, and say things that you don’t like, just as you’re no doubt going to continue to do and say things that we don’t like,” he said.

Investment curbs

Since US media reported in April that US President Joe Biden was set to sign an executive order that would restrict US funds from investing in China’s high technology sector, Beijing has shown more willingness to communicate with Washington.

Biden originally planned to announce the investment curbs before Japan hosted the G7 Summit on May 19-21. However, he did not do so. Nikkei reported on June 10 that the White House is still trying to get key allies on board and navigate domestic pushback in Congress and on Wall Street.

On Monday, Bloomberg reported that Yellen is planning to visit Beijing in early July and seeking to meet Chinese Vice Premier He Lifeng, who assumed his position in March. It said the Biden administration’s investment curbs are nearing completion and will be ready as soon as late July.

In early July, the US Commerce Department will announce its decision to halt chip exports “by Nvidia and other chipmakers to customers in China and other countries of concern without first obtaining a license,” according to the Wall Street Journal.

Gao Lingyun, a researcher at the Institute of world economics and politics, Chinese Academy of Social Sciences, told the Global Times that the potential expansion of chip export bans will hurt the interests of US chipmakers, which have been selling about 30% of their products to the Chinese markets.

Gao said Yellen, who has a fair understanding of Sino-US economic and trade relations, is supposed to persuade China to buy more US national debt during her trip but it’s regretful that she has been caught by broadsides from anti-China hawks in Washington.

Colette Kress, chief financial officer of Nvidia, said Wednesday that the company is aware that it may be restricted from shipping A800 and H800 chips to China.
 
“Over the long term, restrictions prohibiting the sale of our data center GPUs to China, if implemented, would result in a permanent loss of opportunities for the US industry to compete and lead in one of the world’s largest markets and impact on our future business and financial results,” she said.
 
Nvidia’s shares closed down 1.8% at US$411.17. The shares have gained 187% so far this year as the company decided to invest in AI technology. Last month, Nvidia said it will build one of the world’s fastest AI cloud supercomputers in Israel and also an AI research center in Taiwan to accelerate its Omniverse project, a computing platform that supports 3D applications.

Good cop, bad cop

A meeting between Chinese President Xi Jinping and Blinken on June 19 has eased the political tensions between China and the US but failed to stop Washington from unveiling more curbs.
 
Blinken said in a media briefing after the meeting that the US government will continue to prevent its technologies from being used against the American people – for example, in making hypersonic weapons, or in human rights abuses in China. He said more US officials would visit China in the following weeks.

A Shanxi-based columnist on Wednesday published an article with the title, “Yellen wants to visit China but Biden is busily preparing sanctions. Can the US show some sincerity?” 

“Undeniably, the US government’s moves are ridiculous,” the writer says. “The US threatens to impose more curbs in an attempt to force China to compromise in talks. This is an old trick, the same as what it did before Blinken’s China trip.”

“The US Treasury Department is playing good cop while the Commerce Department is playing bad cop. No matter what, they are pushing forward the so-called America First strategy,” he says.

He says Beijing must stay vigilant towards the coming actions of the US, which has so far remained hostile against China.

“Last month China forbade its key infrastructure operators to purchase products from Micron. If the Biden administration imposes new chip export bans on China, will the China side launch countermeasures?” Ren Chiming, a host of Phoenix TV, says in a video on Wednesday. “It’s likely that the chip war between China and the US will continue to intensify.”

Shortly after the G7 Summit ended on May 21, the Cybersecurity Review Office, a unit of the Cyberspace Administration of China, sanctioned Micron for posing network security risk. Chinese media criticized Micron for having downsized its production in China in recent years.

On June 16, Micron said it would invest 4.3 billion yuan (US$603 million) in its chip packaging facility in Xian over the coming few years. The investment is to include buying equipment from a unit of Taiwan’s Powertech Technology. 

Read: China, US resume talks but ‘de-risking’ lingers

Follow Jeff Pao on Twitter at @jeffpao3

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US agencies buying your personal data on open markets

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Numerous government agencies, including the FBI, Department of Defense, National Security Agency, Treasury Department, Defense Intelligence Agency, Navy and Coast Guard, have purchased vast amounts of US citizens’ personal information from commercial data brokers.

The revelation was published in a partially declassified, internal Office of the Director of National Intelligence report released on June 9, 2023.

The report shows the breathtaking scale and invasive nature of the consumer data market and how that market directly enables wholesale surveillance of people. The data includes not only where you’ve been and who you’re connected to, but the nature of your beliefs and predictions about what you might do in the future.

The report underscores the grave risks the purchase of this data poses, and urges the intelligence community to adopt internal guidelines to address these problems.

As a privacy, electronic surveillance and technology law attorney, researcher and law professor, I have spent years researching, writing and advising about the legal issues the report highlights.

These issues are increasingly urgent. Today’s commercially available information, coupled with the now-ubiquitous decision-making artificial intelligence and generative AI like ChatGPT, significantly increases the threat to privacy and civil liberties by giving the government access to sensitive personal information beyond even what it could collect through court-authorized surveillance.

What is commercially available information?

The drafters of the report take the position that commercially available information is a subset of publicly available information. The distinction between the two is significant from a legal perspective. Publicly available information is information that is already in the public domain. You could find it by doing a little online searching.

Commercially available information is different. It is personal information collected from a dizzying array of sources by commercial data brokers that aggregate and analyze it, then make it available for purchase by others, including governments. Some of that information is private, confidential or otherwise legally protected.

A chart with four columns and three rows
The commercial data market collects and packages vast amounts of data and sells it for various commercial, private and government uses. Government Accounting Office

The sources and types of data for commercially available information are mind-bogglingly vast. They include public records and other publicly available information. But far more information comes from the nearly ubiquitous internet-connected devices in people’s lives, like cellphones, smart home systems, cars and fitness trackers. These all harness data from sophisticated, embedded sensors, cameras and microphones. Sources also include data from apps, online activity, texts and emails, and even health care provider websites.

Types of data include location, gender and sexual orientation, religious and political views and affiliations, weight and blood pressure, speech patterns, emotional states, behavioral information about myriad activities, shopping patterns and family and friends.

This data provides companies and governments a window into the “Internet of Behaviors,” a combination of data collection and analysis aimed at understanding and predicting people’s behavior.

It pulls together a wide range of data, including location and activities, and uses scientific and technological approaches, including psychology and machine learning, to analyze that data. The Internet of Behaviors provides a map of what each person has done, is doing and is expected to do, and provides a means to influence a person’s behavior.

YouTube video

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Smart homes could be good for your wallet and good for the environment, but really bad for your privacy.

Better, cheaper and unrestricted

The rich depths of commercially available information, analyzed with powerful AI, provide unprecedented power, intelligence and investigative insights. The information is a cost-effective way to surveil virtually everyone, plus it provides far more sophisticated data than traditional electronic surveillance tools or methods like wiretapping and location tracking.

Government use of electronic surveillance tools is extensively regulated by federal and state laws. The US Supreme Court has ruled that the Constitution’s Fourth Amendment, which prohibits unreasonable searches and seizures, requires a warrant for a wide range of digital searches. These include wiretapping or intercepting a person’s calls, texts or emails; using GPS or cellular location information to track a person; or searching a person’s cellphone.

Complying with these laws takes time and money, plus electronic surveillance law restricts what, when and how data can be collected. Commercially available information is cheaper to obtain, provides far richer data and analysis, and is subject to little oversight or restriction compared to when the same data is collected directly by the government.

The threats

Technology and the burgeoning volume of commercially available information allow various forms of the information to be combined and analyzed in new ways to understand all aspects of your life, including preferences and desires.

YouTube video

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How the collection, aggregation and sale of your data violates your privacy.

The Office of the Director of National Intelligence report warns that the increasing volume and widespread availability of commercially available information poses “significant threats to privacy and civil liberties.”

It increases the power of the government to surveil its citizens outside the bounds of law, and it opens the door to the government using that data in potentially unlawful ways. This could include using location data obtained via commercially available information rather than a warrant to investigate and prosecute someone for abortion.

The report also captures both how widespread government purchases of commercially available information are and how haphazard government practices around the use of the information are.

The purchases are so pervasive and agencies’ practices so poorly documented that the Office of the Director of National Intelligence cannot even fully determine how much and what types of information agencies are purchasing, and what the various agencies are doing with the data.

Is it legal?

The question of whether it’s legal for government agencies to purchase commercially available information is complicated by the array of sources and complex mix of data it contains.

There is no legal prohibition on the government collecting information already disclosed to the public or otherwise publicly available. But the nonpublic information listed in the declassified report includes data that US law typically protects. The nonpublic information’s mix of private, sensitive, confidential or otherwise lawfully protected data makes collection a legal gray area.

Despite decades of increasingly sophisticated and invasive commercial data aggregation, Congress has not passed a federal data privacy law. The lack of federal regulation around data creates a loophole for government agencies to evade electronic surveillance law.

It also allows agencies to amass enormous databases that AI systems learn from and use in often unrestricted ways. The resulting erosion of privacy has been a concern for more than a decade.

Throttling the data pipeline

The Office of the Director of National Intelligence report acknowledges the stunning loophole that commercially available information provides for government surveillance:

“The government would never have been permitted to compel billions of people to carry location tracking devices on their persons at all times, to log and track most of their social interactions, or to keep flawless records of all their reading habits. Yet smartphones, connected cars, web tracking technologies, the Internet of Things, and other innovations have had this effect without government participation.”

You’re being watched by your appliances and devices. Image: Twitter

However, it isn’t entirely correct to say “without government participation.” The legislative branch could have prevented this situation by enacting data privacy laws, more tightly regulating commercial data practices, and providing oversight in AI development.

Congress could yet address the problem. Representative Ted Lieu has introduced the a bipartisan proposal for a National AI Commission, and Senator Chuck Schumer has proposed an AI regulation framework.

Effective data privacy laws would keep your personal information safer from government agencies and corporations, and responsible AI regulation would block them from manipulating you.

Anne Toomey McKenna is Visiting Professor of Law, University of Richmond

This article is republished from The Conversation under a Creative Commons license. Read the original article.

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Overuse of sanctions hasn’t hit the dollar, yet

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After a record-breaking wave of new sanctions on Russia, a longstanding debate on whether the overuse of sanctions “endangers the dollar’s reign” has resurfaced. There is no easy answer, as the basic premise of whether sanctions are being overused is subjective and depends as much on politics as economics.

Even if there is widespread agreement that overuse is occurring, it is not clear that the costs and risks of future sanctions justify creating an alternative to the well-oiled global dollar machine.

One exception would be the risk of sanctions that the United States might impose on mainland China in the case of a military action related to Taiwan—as it and a coalition of countries imposed sanctions on Russia in the wake of its invasion of Ukraine—which would force countries to choose between connecting with the global dollar system or with China. 

Countries may try to build alternatives to the US dollar system to avoid being forced to make such a choice—whether or not they would succeed. US sanctions apply beyond its borders, leading most firms to abandon sanctioned entities rather than risk being sanctioned themselves. 

Despite a flood of sanctions on Russia in 2022, it is hard to see much of a dent in dollar dominance. The dollar is near its historical peak—88% of foreign exchange transactions involve the dollar on one side. The RMB’s jump from 4% to 7% in the past three years has come at the expense of other currencies, not by eroding the dollar’s share.

Almost 58% of global reserves were held in dollars at the end of 2022, nearly the same as before the Russian invasion of Ukraine. Powerful network effects mutually reinforce the dollar’s role. 

Trade in dollars and borrowing in dollars means that actors want to accumulate dollar reserves to ensure that even on a rainy day, they can afford their imports and interest payments. The United States has the deepest capital markets in the world, accessible through an open capital account.

A cashier counts dollar bills at a restaurant in the US. Photo: Asia Times Files / AFP

China is less reliable due to controls that keep capital within its borders. For most countries, the US dollar’s liquidity means that it is often cheaper, safer and more efficient to handle trade in US dollars.

The ecosystem around the dollar means that risks to exposure can be easily hedged and there are plenty of good assets in US dollars to invest in before they are needed. Despite the US debt ceiling mess and other issues with US institutions, the US treasury market is considered a “risk-free” asset.

Sanctions are the textbook example of “weaponized interdependence” when the central node of a network exploits that position for its own interests. But it is difficult to say how weaponized sanctions really are. The impacts of different sanctions vary widely and not all sanctions create frictions that make others question use of the dollar.

Cases like North Korea and Syria have involved a high degree of international consensus. But US unilateral action in other cases have created friction, even with allies. When the United States backed out of the Iran nuclear deal and reimposed sanctions, European countries were furious that Washington could stop their firms from doing business with Iran. 

And, despite strong political will, efforts to create a sanction-proof financial institution for business with Iran proved fruitless. Daniel McDowell’s book on sanctions and the US dollar, “Bucking the buck”, concludes that “dollar dependence remains the reality, even for sanctioned regimes.”

Sanctions on Russia send a mixed message. They seem to weaken the US dollar, leading countries who fear future sanctions to diversify their currency choices. While many countries have not joined the sanctions, the major reserve currency issuers have, even Switzerland. Countries that fear sanctions may learn from Russia’s case that diversification away from the US dollar does not provide the protection they might hope.

Barry Eichengreen and others have found that while reserves are gradually being diversified away from the US dollar, only a small share has gone into RMB. Throughout Asia, countries are developing more ways to trade and invest using their own currencies, but that trade tends to be small and expensive. 

Though the People’s Bank of China sees a future with directly connected central bank digital currencies, these are in their infancy. It is not clear whether they can reduce dollar use enough to be impervious to sanctions.

Even if Washington shelved sanctions, currency diversification would continue because it is largely driven by other concerns like the global impact of US monetary policy. One can liken the thinking on currency to the global discussion on supply chains, where there is an increased willingness to incur costs to reduce excessive reliance on one supplier or country.

While not unique to US dollar transactions, concerns about global financial infrastructures like the SWIFT messaging system, which, though located outside the United States, ejects sanctioned entities from its network, have not led to viable alternatives. China’s Cross-Border Interbank Payment System is not a real substitute for SWIFT and relies on SWIFT for much of its messaging.

China has grand plans for internationalizing the yuan but it’s not there yet. Image: Getty/iStock

The greatest threat to the global currency system is the possibility of sanctions on China, a dog that mostly has not barked so far in the US-China trade and technology war. 

While many of China’s top technology companies—like Huawei—find themselves on export control and investment ban lists, the US treasury department has declined to put them on the sanctions list. Being sanctioned would make them radioactive for global business and spark a backlash from countries suddenly unable to service their networks.

Some countries might disagree, but current US policy has rightly been careful to avoid using excessive unilateral sanctions, especially on China. Such sanctions might make building and moving to a real alternative to the US dollar actually worthwhile. 

Large-scale China sanctions would be far costlier and less likely to enjoy the widespread international support that the Russia sanctions have. US policymakers need to be very clear-eyed that broader China sanctions would prove an important risk to the international role of the dollar.

Martin Chorzempa is Senior Fellow at the Peterson Institute for International Economics.

This article was originally published by East Asia Forum and is republished under a Creative Commons license.

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Sri Lanka: Five-day bank holiday for domestic debt restructuring

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A labourer carries a sack of green beans at a market in Colombo.Getty Images
By Annabelle Liang
Business reporter

Sri Lanka began a five-day bank holiday from Thursday to allow the crisis-hit nation to restructure $42bn (£33.2bn) in domestic debt.

The country is facing its worst economic crisis since it won independence from the British in 1948.

There are fears that the government’s restructuring plan could lead to volatility in financial markets.

Debt restructuring can involve the extension of the period over which a loan is repaid.

“The government’s action to call an extended public holiday means it obviously saw the risk of bank runs,” Alex Holmes, a senior economist at Oxford Economics, told the BBC.

Local media also quoted analysts as saying that the holiday was announced to provide a suitable buffer for any potential market reactions to significant financial announcements.

Earlier this week, Sri Lanka President Ranil Wickremesinghe reassured the public that the restructuring would “not lead to a collapse of the banking system”.

On Wednesday, Mr Wickremesinghe’s office said his cabinet had approved a restructuring proposal by the country’s central bank. The plan will be submitted to parliament for approval over the weekend.

“(The) government expects the entire process to conclude while the markets are closed during these five days,” Sri Lanka central bank chief Nandalal Weerasinghe said.

Mr Weerasinghe added that “local depositors are assured of the safety of their deposits and interests will not be affected”.

The move to restructure domestic debt comes as the country is struggling to come out of its worst economic crisis.

Last year, Sri Lanka defaulted on its debt with international lenders for the first time in its post-independence history.

However, there have been several important lifelines extended to the country in recent months.

The World Bank has just granted it $700m, following a $3bn bailout package from the International Monetary Fund (IMF).

The World Bank said in a statement on Thursday that it would provide support in a “phased approach”.

The organisation added that it has allocated $500m to budgetary support, while the remaining $200m would be used to “provide better-targeted income and livelihood opportunities to the poor and vulnerable”.

The IMF’s bailout in March, which was nearly a year in the making, was viewed as a massive lifeline for Sri Lanka.

However, the bailout came with conditions, such as requiring the country to make “swift progress” on restructuring its debts.

In March, the IMF said Sri Lanka had secured financing assurances from all its major creditors, including China and India, which paved the way for the bailout.

The IMF has so far released around $330m in funds to Sri Lanka, with the rest due in disbursements over four years.

The economic crisis

Sri Lanka’s economy has been hit hard by the pandemic, rising energy prices, populist tax cuts and inflation of more than 50%.

A shortage of medicines, fuel and other essentials also helped to push the cost of living to record highs, triggering nationwide protests which overthrew the ruling government in 2022.

Sri Lanka’s central bank outlined the extent of the country’s economic crisis earlier this year.

According to its latest annual report, “several inherent weaknesses” and “policy lapses” helped to trigger the severe economic problems that engulfed the South Asian nation.

The central bank also forecast that the Sri Lankan economy would shrink by 2% this year, but expand by 3.3% in 2024.

Its prediction is more optimistic than that of the IMF, which forecast economic growth of 1.5% in Sri Lanka next year.

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The great chatbot bubble

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NEW YORK – Microsoft has added about US$1.5 trillion to its market capitalization this year after the launch of ChatGPT. Nvidia has added about $640 billion. Overall, the market value of generative AI models has increased by several trillions of dollars. What is supposed to justify this kind of valuation?

Market research firms claim that the market for generative AI will reach $126.5 billion by 2031. That’s not a lot of revenue compared to the market valuation. Microsoft now sells at about 12 times sales, and that’s a natural monopoly.

Even if that estimate were correct, market valuations are three to five times higher than $126 billion of revenue would justify. And I don’t see how generative AI can throw off that level of revenue, not by an order of magnitude.

Just what is generative AI supposed to do? Supposedly it can answer customer queries, replace low-level programmers and produce better online search results. But how much revenue can that bring in?

Let’s do some back-of-envelope calculations.

Suppose that chatbots replaced every employee of every help desk in the United States. There are 38,808 help desk employees who earn on average $43,275 a year. Replace them all, and you save $1.68 billion a year. Of course, you can’t replace all of them, and chatbots cost something, so I’ll guess that potential savings are $1 billion a year, provided that the gizmo actually works.

Markets are bumping up chatbot valuations on faulty projections. Photo: Twitter / Getty Images

Then there are computer programmers. ChatGPT can write basic code. There are 132,740 programmers in the US, so lets guesstimate that generative AI can replace the bottom quarter of them, or 33,185 programmers. The bottom quartile of programmers makes $34.84 an hour, according to the Bureau of Labor Statistics. That would save $2.312 billion, minus the cost of the AI program.

So far we’ve wiped out two major areas of employment, and saved a bit over $3 billion in paychecks. I don’t know where the marketing surveys came up with a $125 billion number, but it seems as if they are off by an order of magnitude.

There are plenty of other generative AI applications, for example, for medical diagnostics. But we’ve heard that story before. AI was supposed to read X-rays faster and more accurately than a human radiologist, but that turned out to be a bust.

“Radiologists have more reason than most to be disappointed, because CAD [computer-aided detection] in medical imaging was more than an unrealized promise. Almost uniquely across the world of technology, medical or otherwise, the hype and optimism around second-era AI led to the widespread utilization of CAD in clinical imaging. This use was most obvious in screening mammography, where it has been estimated that by 2010 more than 74% of mammograms in the United States were read with CAD assistance. Unfortunately, CAD’s benefit has been questionable. Several large trials came to the conclusion that CAD has at best delivered no benefit and at worst has actually reduced radiologist accuracy, resulting in higher recall and biopsy rates,” according to one study.

This isn’t the first instance of AI hype ballooning stock valuations.

Remember autonomous vehicles? Ford put $1 billion into an AV startup called Argo AI, valued at $12.4 billion in 2021, and at zero in October 2022, when it shut down. Driverless cars are the technology of a future that won’t come anytime soon, at least not in the United States.

The dirty little secret of AVs is that they require an enormous amount of data with a very short transmission time (low latency). America’s so-called 5G network doesn’t have the low latency required for AVs. It’s only a hyped-up 4G with a slow response time.

China already has autonomous taxi services in some cities. China’s 5G network is not only the world’s largest, but also offers a nearly instantaneous response time made possible by the new technology. AVs are a great idea when you have broad and straight roads (as in some Chinese cities), but not in the jumble of American urban landscapes.

Mark Zuckerberg’s Meta put $100 billion into a virtual reality world that couldn’t find enough visitors willing to wear heavy and expensive headsets. Meta’s stock price collapsed in the wake of the metaverse fiasco, but soared along with other tech companies in the AI bubble.

The hypothetical calculations above really are beside the point. Chat GPT interacts very badly with real human beings. By the standards of a human 10-year-old, it’s really, really dumb. It can’t make the kind of mental connections that make humor possible. In a recent essay for Law&Liberty, I reported some less-than-satisfactory exchanges with OpenAI’s chatbot on the subject of self-referential humor.

Joking aside, generative AI simply can’t fathom how human beings think and talk. Mental associations that come naturally to human beings are incomprehensible to generative AI models, unless the models happen to have been trained on an identical case in the past.

Better Images of AI / Alan Warburton / CC BY-SA Creative Commons

They won’t replace help desk representatives any time soon, let alone radiologists. And the trillions of stock market valuations that mushroomed in anticipation of generative AI will vanish like the other AI bubbles of the past few years.

AI, to be sure, works wonders when it is applied to routine tasks, for example, picking defective items off a conveyor belt, or manipulating autonomous cranes and trucks at a port. America’s largest port at Long Beach, California, is one of the world’s least efficient (it ranks number 300 on the World Bank list). It takes roughly 48 hours to unload a large container ship.

At China’s most modern port, Tianjin, a 5G network using AI systems designed by Huawei can unload the same ship in 15 minutes. Smart cranes find bar codes on containers, move them to autonomous trucks and go on to the next.

AI is there to free humans from mechanical tasks, not to make machines imitate humans. That’s where AI will add economic value.

Follow David P Goldman on Twitter at @davidpgoldman

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Decoupling not on Europe’s agenda, Li visit shows

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MUNICH: Chinese Premier Li Qiang’s European tour last week made clear that Europe is not about to decouple from China. If anything, Sino-European cooperation will deepen on technology and, critically, on development issues in the Global South

Li is not only China’s second-ranking official but also Xi Jinping’s closest political associate since the time when the two worked together in Zhejiang Province, more than two decades ago. As Shanghai party chief, he expedited the Tesla Motors mega-factory that helped make China the world’s top auto exporter.

His visit included meetings with Chancellor Olaf Scholz and top German industrial leaders, as well as the up-and-coming prime minister of the state of Bavaria, and finished with an address to a Paris conference on development financing convened by President Emmanuel Macron.

President Macron with Li Qiang. Photo: CGTN

Li called for a “global development partnership” to provide more resources to developing countries, and for “liberalization and facilitation of trade and investment” to “inject fresh growth impetus into developing countries,” rather than “trade protectionism and decoupling and severing supply and industrial chains in any form,” according to a Chinese government statement.

The 27 leaders of the European Community meanwhile will “resort to a soft tone on China” at their June 28-29 EU Council summit in Brussels, according to a draft resolution leaked to Politico.

“Despite their different political and economic systems, the European Union and China have a shared interest in pursuing constructive and stable relations, anchored in respect for the rules-based international order, balanced engagement and reciprocity,” the draft reads, adding that Europe “does not intend to decouple or to turn inwards” or adopt policies “to harm China, nor to thwart China’s economic progress and development.”

The draft language echoes Scholz’s comments to the German Bundestag.

China’s exports to the Global South have doubled since 2020 and now exceed its total exports to developed markets for the first time. China is also the largest lender to developing countries. As central banks in developed markets tighten credit conditions in response to inflation, bank lending in dollars and euros to developing countries has shrunk. Many countries of the Global South are turning to China’s renminbi for trade and development financing as a substitute.

China’s exports of digital and physical infrastructure to the developing world have enabled the Global South to increase its exports to developed markets. According to a forthcoming World Bank analysis, China’s exports of intermediate goods to East Asia-Pacific countries have risen in tandem with the exports of EAP countries to developed markets. That is the virtuous cycle of globalization of which Li Qiang spoke in his Paris address.

China’s role in building infrastructure in the Global South is important for Europe’s exporters, but European governments have a more urgent reason to cooperate with China. Immigration from the world’s poorest economies from Africa to South Asia is Europe’s most sensitive political issue. Without stabilizing the economies of the poorest countries, Europe can’t stop a tidal wave of migrants from seeking refuge on its shores. China is the only economy with sufficient resources and technology – especially in digital infrastructure – to make a difference in the Global South.

After Li departed for Paris, Scholz told the German Bundestag that he is striving for “a geopolitical Europe” – that is, a Europe that plays an independent geopolitical role – together with French President Macron.

Scholz also announced a November conference of the Group of 20 Compact with Africa in Berlin, to “strengthen economic cooperation with our neighboring continent.” In addition, the EU is scheduled to hold a summit meeting with the countries of Latin America and the Caribbean in July.

The German Chancellor added that before Li Qiang’s visit, he had held intensive exchanges with other European leaders in preparation for the European Council’s discussion of EU-China policy in the coming week. In this context, he stressed China’s role in food security, in helping heavily indebted states, in investing in future technologies, in the fight against poverty, and in the fight against climate change.

Li Qiang’s visit marked the first formal government consultation between Germany and China since 2018. Consultations of this kind are reserved for Germany’s closest partners, and the visit’s protocol was a clear indication that the German chancellor seems to have little interest in dismantling relations with China

Washington has urged Europe to “de-risk” its economic relationship with China – a euphemism for decoupling – but the facts on the ground point toward a deepening economic relationship with China

With its economy in recession, Germany’s economic relationship with China has taken on additional importance. China is Germany’s most important trading partner. Much more than other European countries, Germany has built up its trade relations with China over the last 20 years. The exchange of goods between China and Germany amounted to almost EUR 300 billion in 2022 – well ahead of the volume of EUR 249 billion exchanged with the United States. Conversely, Germany is also China’s most important trading partner in Europe.

Germany’s automakers—the country’s largest industry—sell nearly 40 percent of the 14.2 million cars they make annually in China,

Li Qiang with BMW boss Oliver Zipse. Photo: Xinhua

China also supplies indispensable intermediate products on which German chemical and electronics manufacturers depend. In addition, China has a quasi-monopoly on rare earths. These are required for batteries, solar modules or electric cars.

Germany’s business community, understandably, has expressed frustration with the hostility towards China of leaders of the Green Party and its ministers in the coalition government. Volker Treier, head of foreign trade at the German Chambers of Industry and Commerce (DIHK), recently said: “The business community is very angry about this ambiguous communication on the China strategy, given the importance of China for our economy.”

Li Qiang’s visit marked a departure from a confrontational tone that had been set by Green Party German Foreign Minister Annalena Baerbock in recent months. Baerbock’s trip to China in April raised political debates in Germany, with her critical remarks on issues such as Russia, Taiwan, and human rights drawing strong reactions from Chinese officials. Foreign Minister Qin Gang retorted, “We don’t need condescending lectures.” Baerbock characterized her trip as “shocking in parts” and claimed that China had become more aggressive internationally and repressive domestically, viewing it as a rival rather than a partner.

As the senior cabinet member for the Green Party, the second largest party in Berlin’s three-way coalition, Baerbock’s influence has waned along with support for the Greens, who won 22% of the national vote in last year’s federal elections but are now polling at just 13.5% of the voters.

By contrast, Li Qiang’s meeting with Bavarian Prime Minister Markus Söder in Munich underscores the political dynamics within Germany, where the governing parties face increasing pressure. Söder, a potential beneficiary of an early end to the governing coalition, previously aspired to the chancellorship in 2021. He organized for Li to meet with the heads of Siemens and BMW, leading German firms based in Bavaria, and arranged a gala dinner in the Munich Residence in Li’s honor.

Li Qiang with Bavarian Prime Minister Söder, Photo: bayern.de

Influential voices inside Scholz’s Social Democratic Party are urging more cooperation with China. The Seeheimer Circle, an official think tank inside the SPD, released a paper last April on Germany’s relationship with China calling for a “multi-dimensional” – that is, open – policy towards the Asian giant.

Within the center-left SPD, the Seeheimer group emphasizes the interests of industry and labor; it forms part of the personal support base of Chancellor Scholz. The Seeheim Circle has gained in importance within the SPD in recent months. It is known within the center-left SPD as a conservative group more interested in economic policy.

An “abrupt end to trade relations with China” would be “an economic disaster,” the paper argued, rejecting an “anti-China strategy.”

Before Li’s arrival, the German government rejected de facto a call from the European Commission to exclude Chinese companies like Huawei and ZTE from Germany’s telecommunications architecture.

In March, Germany’s Economics Ministry, controlled by the Green Party, warned of risks to the network from a future Chinese retrofit, but the Interior Ministry, under the aegis of the Social Democrats, announced only that it was monitoring the situation. Germany’s largest mobile phone provider Deutsche Telekom categorically rejected the charge that Chinese providers represented a security rest, stating that it had tested its networks exhaustively for such vulnerabilities.

Diego Fassnacht is an international economist and an investment advisor to individual clients and institutions. Prior to his work in finance, he served on the governing council (Deutschlandrat) of the youth organization (JU) of the main German opposition party, the CDU.

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