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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China tightens Xi Jinping’s powers against the West with new law

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Chinese President Xi JinpingReuters
By Kelly Ng
BBC News

China is adding to Xi Jinping’s vast powers with a new law that will assert Beijing’s interests on the world stage.

The law threatens to punish entities that act in ways “detrimental” to China’s interests but does not specify which lines should not be crossed.

Experts say the law underscores China’s aggressive diplomacy, but how actively it will be enforced when it takes effect on 1 July remains to be seen.

After all, China has been keen to court foreign investments post Covid.

Jacques deLisle, a law and political science professor from the University of Pennsylvania, said much of the law is “relatively empty rhetoric and largely familiar” but it spells a more assertive foreign policy and stronger pushback against the US.

State media outlet The Global Times called the law a “key step to enrich the legal toolbox against Western hegemony”.

Dr Chong Ja-Ian, a non-resident scholar at Carnegie China, said it was a “signal” of Beijing’s intention to “actively pursue their interests in ways that include more coercion and pressure, even as they hold out the attraction of cooperation and economic gains”.

China’s leaders tread an “inherent tension” between their pursuit of economic development and protection of national security and interests, said Manoj Kewalramani, who leads the China Studies Programme at Indian think tank the Takshashila Institution.

“This push and pull is likely to continue,” he said.

Relations between Beijing and Washington in particular have been strained in recent years, with the two superpowers exchanging a series of tit-for-tat trade sanctions.

Chinese authorities have taken a series of actions against Western firms, including raiding and shuttering the local offices of several US-headquartered consulting firms this year.

These are widely perceived as retaliatory moves to growing trade and technology restrictions from the US.

Last month, it banned products made by US memory chip giant Micron.

Dr Chong said the new foreign relations law could result in more international compliance with China’s interests, but could also lead to pushback from other governments.

“Foreign businesses may wish to reconsider their exposure to the Chinese market or public positions they take, including political ones, if they haven’t already.

“The legislation provides more legal basis for the raids and investigations of foreign firms that have already been happening,” he said.

Still, the law does not guarantee that China will take these stronger actions.

Top business executives from the US, including Elon Musk and JPMorgan’s Jamie Dimon have visited China in recent weeks emphasising China’s importance to the US economy.

Experts say that how the law define China’s foreign relations in the context of ideology, is particularly striking.

“The People’s Republic of China conducts foreign relations to uphold its system of socialism with Chinese characteristics, safeguard its sovereignty, unification and territorial integrity, and promote its economic and social development,” the law states.

It adds that China conducts foreign relations “under the guidance of” the political ideologies of Xi Jinping, Mao Zedong, Deng Xiaoping and Marxism-Leninism, among others.

The law puts in writing for the first time that it is the ruling Communist Party, instead of the state, that directs foreign policy – It also represents Mr Xi’s tightening grip on power.

“[The law] is strikingly explicit on party leadership over foreign relations, underscoring the Xi era trends of migration of power – from the state to the party, and within the party, to Xi,” said Dr deLisle.

China’s top diplomat Wang Yi called it “an important measure to strengthen the Communist Party Central Committee’s centralized and unified leadership over foreign affairs,” according to an editorial published on Thursday in state-run newspaper People’s Daily.

Mr Kewalramani said the new law could also stifle discussion and disagreements on foreign policy issues.

But its overall implications can only be understood in time, depending on the courts’ interpretation of the legislation and the punitive costs that are imposed, he said.

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Cashing in on Syria’s crony capitalism

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A recent move by the Syrian government to seize the assets of 35 accused smugglers has raised questions about President Bashar al-Assad’s intentions and regional strategy. Beyond the unusually high number of people targeted simultaneously, the profiles and affiliations of those under scrutiny are turning heads in Damascus and beyond.

The seizure made headlines when a leaked list of suspects surfaced this month. In addition to Mudallal Omar al-Aziz, a member of parliament, the dragnet included several militia commanders with extensive connections to the Assad regime and its ally Iran.

Among them are Firas al-Jaham, also known as Firas al-Iraqi, commander of the National Defense militia, and Hassan al-Ghadban, a notable leader in the Fourth Armored Division, which is led by Maher al-Assad, the brother of the Syrian president.

On the surface, the seizures appear to be a resolute stance against illicit financial activities.

The leaked document states that the individuals were targeted because of their involvement in smuggling goods worth a staggering 16.6 billion Syrian pounds (about US$2 million). The potential fines could top 100 billion pounds, underscoring the severity.

But scratch the surface and an ulterior motive for the seizures emerges. In addition to securing regional political gains, President Assad’s move seems to be part of a larger strategy aimed at extracting money from cronies who have neglected their financial obligations.

The timing of the asset seizures strongly suggests a desire by the regime to bolster its political position in the region, specifically with Iraq. All 35 of those targeted are from Deir Ezzor, a governorate on the Syria-Iraq border that is known as a prominent hub for trafficking activities, particularly in narcotics.

Coming shortly before a visit to Iraq by Syrian Foreign Minister Faisal Mekdad, the moves were part of the government’s proactive measures to address border security and drug trafficking.

Taking a strong stance on these issues is important for Assad’s relationship with Iraq, but also in meeting the regional requirements to reintegrate Syria into the Arab community. 

After a meeting of Arab foreign ministers in Amman in May, Syria agreed to collaborate with Iraq in combating the drug trade.

Extortion campaign

But achieving geopolitical gains isn’t Assad’s only motivation. Since 2019, his regime has been extorting loyalist businessmen and war profiteers to pay its bills.

While Assad’s main supporters, Iran and Russia, were instrumental in helping the government prevail in the war, neither country has stepped in with enough financial support to help Syria emerge from its current economic crisis. As a result, the government has resorted to unconventional short-term tactics to keep its economy afloat.

Many of Syria’s business elites, particularly those who continued to operate during the conflict, have accumulated their wealth, directly or indirectly, through their connections to the government. With the war in essence won, Assad feels emboldened to call on them to help fund Syria’s recovery. Those who comply can continue their business activities as normal.

Those who refuse or fail to comply, however, face repercussions. They are either subjected to verbal threats or face punitive measures such as asset freezes on charges of tax evasion or corruption.

Prominent figures who have experienced shakedowns include Rami Makhlouf, Assad’s cousin, and Mohammad Hamsho and Wassim al-Qattan. But these extortion tactics have extended beyond high-profile individuals to include business owners and war profiteers at all levels.

In cases of alleged criminal activity, the government’s lack of interest in enforcing the rule of law is evidenced by its approach: Instead of facing the threat of imprisonment, those accused are merely required to pay fines. After targeted individuals fall in line, they typically return to operating as usual.

The most recent case is no exception. Most of the 35 people named in the leaked document have smuggled goods, oil and drugs between Syria and Iraq for years, and will likely continue doing so now.

The government doesn’t even seem worried about cutting off defendants’ access to wealth. Despite the widespread practice of using family members’ names to shield assets, none of those accused have been targeted in this way, suggesting that the seizures were more of a message than a genuine effort to end their illicit activities.

The evolving dynamics in Syria and its re-emergence from the cold will test regional allies in new and complex ways. Policymakers engaging with Assad must guard against seemingly innocuous policies and probe beneath the surface to understand the true motives behind his government’s actions.

This article was provided by Syndication Bureau, which holds copyright.

Follow Haid Haid on Twitter @HaidHaid22.

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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

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The makings of a yen vs yuan currency war

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TOKYO – The yen’s 10% tumble so far this year has the makings of the kind of wildcard that global investors hate.

Granted, Asian governments from Seoul to Jakarta are plenty used to Tokyo’s mercantilist predilections. Since the 1990s, the biggest consistency among the blur of Japanese leaders who came and went is maintaining a weak yen to juice exports. 

Today’s government headed by Prime Minister Fumio Kishida seems more than happy to keep this cycle going. Yet there is good reason to worry Tokyo is courting more trouble than ever before.

This is the first time, for example, that Tokyo is testing Asia’s tolerance for a weak yen at a moment when China’s economy is slowing. Reassurances Tuesday from Premier Li Qiang that China will hit this year’s 5% economic growth target were music to investors’ ears. Even so, big doubts remain as headwinds intensify.

Another reason: a US election cycle that’s sure to feature Asian trade like none before in an atmosphere of intense bickering between Democrats and Republicans. The odds that undervalued Chinese or Japanese currencies morph into politicized flashpoints on the US campaign trail are increasing fast.

It’s worth considering how Tokyo’s beggar-thy-neighbor strategy might play out in South Korea or Southeast Asian economies still harboring PTSD from the late 1990s. Back then, the US Federal Reserve’s aggressive rate hikes boosted dollar-yen exchange rates to levels that forced officials in Bangkok, Jakarta and Seoul to abandon currency pegs. 

Those competitive devaluations set in motion the 1997-98 Asian financial crisis. In the decades since, governments strengthened banking systems, increased transparency, created bigger and more vibrant private sectors and amassed foreign exchange reserves to better shield their economies from global shocks.

Yet the Covid-19 crisis demonstrated that Asia is still too reliant on exports for economic growth. Over the last 18 months, as Asia exited the pandemic era, global inflation and the most assertive US Fed tightening since the 1990s stymied recoveries.

The yen’s slide and its implications for China is a complicating factor of the highest order.

Yi Gang, the governor of the People's Bank of China, has tried to reassure investors. Photo: AFP / Wang Zhao
PBOC Governor Yi Gang must keep a close eye on the yen. Photo: AFP / Wang Zhao

At People’s Bank of China (PBOC) headquarters, Governor Yi Gang has stepped up the pace of rate cuts as the economy slows. For Beijing, any competitive advantage it can derive from exchange rates is welcome in 2023.

“One-way traffic in the currency is not something the PBOC will want to see,” says economist Robert Carnell at ING Bank. “But we don’t believe they will be totally averse to seeing the Chinese yuan weaken further if it does so in a controlled fashion, especially as we doubt that they are done with cutting rates just yet.”

Within reason, though, given that Xi’s team had been working for years to increase international trust in the yuan (it’s down nearly 5% so far this year). An unstable exchange rate might squander that progress.

“Right now,” Carnell adds, “China is bucking the global trend and cutting, not raising rates, reflecting what is a very mediocre and rather disappointing reopening following zero-Covid.”

And “one of the upshots of this,” he explains, “is that the yuan has been weakening, with the PBOC seemingly quite tolerant of such weakness with all policy levers being considered to help offset the economy’s weakness.”

Yet the yen’s trajectory is surely turning up the heat on Asian governments and foreign exchange managers. That goes, too, for Ministry of Finance officials in Tokyo.

“As things currently stand, physical intervention to support the Japanese yen looks increasingly likely,” says Stephen Gallo, global currency strategist at BMO Capital Markets.

On the one hand, a weaker yen is exacerbating Japan’s inflation troubles, increasing the risk that price gains become permanent. On the other, Tokyo is loath to run afoul of US Treasury Secretary Janet Yellen’s team.

Earlier this month, Yellen’s team removed Japan from its currency watch list for the first time since 2016. It’s the list on which no trade-reliant economy wants to find itself. 

In its twice-a-year report to the US Congress, the Treasury placed seven economies on its “monitoring list” — China, Germany, Malaysia, Singapore, South Korea, Switzerland and Taiwan.

It surprised many that Tokyo avoided a reprimand for foreign exchange interventions in September and October. Many observers surmised it’s because President Joe Biden’s team sees Tokyo as a vital partner in the “decoupling” effort vis-a-vis China.

At a June 16 press briefing, a top Treasury official said that FX interventions should only be conducted in “very exceptional circumstances” after consultations with other countries. China, by contrast, is being monitored as “an outlier among major economies” thanks to Beijing’s lack of transparency.

For Kishida and Japanese Finance Minister Shunichi Suzuki, this is an indulgence that Tokyo doesn’t want to lose. One concern from Suzuki and BOJ leader Ueda is that the yen’s downdraft might get away from them, taking on a life of its own that is hard to reverse.

Bank of Japan Governor Kazuo Ueda is making no sudden movements on QE. Image: Twitter / Screengrab

The specter of additional US Fed tightening moves hardly helps. The good news is that US inflation pressures are easing. In May, consumer prices rose roughly 4% year on year, the slowest in two years and down from 4.9% in April.

Overall, “the trend has become very encouraging,” says economist Stephen Juneau at Bank of America about US inflation rates. “We should continue to see improvement in core” consumer prices, which exclude erratic food and energy costs.

Even so, Fed Chairman Jerome Powell’s team is hinting at another rate hike or two in the months ahead. That adds to the BOJ’s challenges as it attempts to slow the yen’s drop without upending markets.

Economist Kristina Clifton at Commonwealth Bank of Australia notes the “stark contrast between the dovish Bank of Japan and other major central banks suggests the yen looks set to fall further in the near term. The weak yen may prompt some further verbal intervention from Japanese authorities.”

The trouble is, though, the gap between rate policy in Tokyo and Washington is becoming more and more extreme. “The yen is suffering from a big negative yield gap versus other G10 currencies,” says strategist Vassili Serebriakov at UBS. That’s why UBS thinks a change in the BOJ’s “yield curve control” policies at the upcoming July 28 meeting “is much more likely.”

A big risk is that the weak yen could backfire this time. Historically, says Charu Chanana, market strategist at Saxo Group, Japanese authorities have had a preference for a weak yen to boost exports and support the industrialization of the economy. Therefore, intervention moves mostly happen when the yen becomes too strong.

Yet the dynamics have changed, Chanana says. “A lot of Japanese companies have now shifted their production overseas and that means that a weaker yen isn’t benefiting export companies as much as it once did,” she explains. “Japan is also reliant on importing a lot of resources, mainly energy, and a very weak yen makes that expensive.”

Still, old habits die hard. Bank of Japan Governor Kazuo Ueda has only been in the job for 80s days yet bets that he might act quickly to exit Tokyo’s 23-year quantitative easing experiment have been dashed.

Now, economist Richard Katz, publisher of the Japan Economy Watch newsletter, thinks the yen’s drop could accelerate. He notes that the “gap between Japanese and American 10-year government bond rates, with a supremely high 97% correlation. The bigger the gap, the weaker the yen.”

Earlier in the year, Katz says, many market players believed that the gap would lessen as the BOJ raised interest rates and the Fed began cutting them toward year’s end. 

“Now,” he adds, “far fewer market participants still believe that; so fewer are willing to buy the yen at prices as high as they were a few months ago. The decreased demand for the yen causes it to weaken.”

Demand for Japan’s yen is falling. Image: Facebook

The BOJ remains AWOL, though. Analysts say Ueda may be gun-shy following his predecessor’s attempt at tweaking yield levels on December 20. That day, then-BOJ leader Haruhiko Kuroda announced that 20-year bond rates could rise as high as 0.5%. All hell broke loose in world markets as the yen surged. The BOJ has largely gone silent since then.

“Any signs of BOJ tightening could lead to massive liquidity drain on the global economy as the carry trades that use the Japanese yen as the funding currency could start to be reversed,” Saxo Group’s Chanana says. “This explains the market’s nervousness.”

Geopolitical risks abound, too, adding fresh elements of uncertainty. In his Tuesday speech at the annual World Economic Forum meeting in the coastal city of Tianjin, Chinese Premier Li said global efforts to “de-risk” supply chains from China are a clear and present danger to global stability.

“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, apparently referring to European Commission President Ursula von der Leyen’s views on the issue. “The invisible barriers put up by some people in recent years are becoming widespread and pushing the world into fragmentation and even confrontation.”

Li added that “we firmly oppose the artificial politicization of economic and trade issues.”

The premier also reassured markets that Beijing is on top of risks to China achieving this year’s 5% gross domestic product target. “We 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 margin, a weaker yuan might help China get closer to 5% by way of an export spurt. Yet Li and Yi’s PBOC must ensure any such move is an orderly one. With the MSCI’s index of Chinese equities down almost 20% from a 2023 high in January, exacerbating capital flight is the last thing Beijing needs.

On Tuesday, the state-run China Securities Journal newspaper argued that national growth will soon stabilize – just as Li said it would – as the pro-growth moves of the last month kick in. In the interim, though, the yen’s decline may have the teams overseen by both Li and Yi and wonder why China, too, shouldn’t be maximizing trade advantage with a softer yuan.

If you are South Korean President Yoon Suk-yeol, Indonesian President Joko Widodo or Singapore Prime Minister Lee Hsien Loong, why wouldn’t you be tempted to join the fray and weaken exchange rates, too?

A mournful Thai holds a Thai baht note. Photo: NurPhoto via AFP Forum/Anusak Laowilas
A mournful Thai holds a Thai baht note. Photo: NurPhoto via AFP Forum / Anusak Laowilas

The same goes for Philippine President Ferdinand Marcos Jr, Malaysian Prime Minister Anwar Ibrahim, Vietnamese Prime Minister Phạm Minh Chính or Thailand’s soon-to-be-determined leadership.

Even if it’s only Japan and China pushing the beggar-thy-neighbor envelope, politicians in Washington are sure to take note. As Biden runs for reelection, Republican challengers – many itching to investigate China over the origins of Covid-19 and suspicious of Asia in general – are sure to accuse Beijing and Tokyo of unfair currency manipulation.

It’s but one of the many ways Japan’s two-decades-plus obsession with a weak yen might backfire spectacularly this time. Nowhere more so than in Beijing, which can’t be happy about Tokyo’s benign neglect.

Follow William Pesek on Twitter at @WilliamPesek

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US Navy’s DDG(X) destroyer design is full of holes

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The US is expediting development of its DDG(X) next-generation destroyer, a design that will replace its aging Ticonderoga-class cruisers and maxed-out Arleigh Burke-class destroyers.

This month, National Defense Magazine reported that the US Navy had requested US$187.4 million in funding for DDG(X) research and development. The report notes that the destroyer’s initial design prescribes a displacement of 13,500 tons, nearly 40% larger than its Arleigh Burke predecessor. 

It also mentions that the DDG(X) will initially have the same weapons as the Arleigh Burke Flight III ships, including the Aegis missile defense system and two 21-cell Rolling Airframe Missile launchers.

National Defense Magazine notes that upgradeability is a significant design consideration for the DDG(X), with the class envisioned to operate lasers and hypersonic missiles.

The report notes that the class will use an Integrated Power System (IPS) to power those weapons, with the added capability for the ship’s crew to allocate power to either propulsion or weapons systems in real time. 

The source mentions that DDG(X) will begin production in 2030, with an average cost ranging from US$3.1 billion to US$3.4 billion, according to US Congressional Budget Office (CBO), and US$2.3 billion to US$2.4 billion according to US Navy estimates. 

The US Navy’s aging Ticonderoga-class cruisers and maxed-out Arleigh Burke-class destroyers may be long overdue their replacements, considering China’s rapid naval modernization and expansion. 

The US Navy wants to retire its 22-ship Ticonderoga-class cruiser fleet in five years despite their formidable armament and the strategic fact that they are the only ships capable of acting as a central operations center for US carrier strike group’s air warfare commander, Howard Atman writes in an April 2022 article for The Warzone. 

Altman writes that, on average, Ticonderoga-class cruisers are 35-years-old and are deteriorating, suffering from cracking and structural issues, obsolescence and supportability issues, with the substantial cost of repairing the ships outweighing their remaining war-fighting value.

A Ticonderoga-class cruiser. Photo: Wikimedia Commons / US Navy

Meanwhile, Caleb Larson notes in a June 2020 article for The National Interest that Arleigh Burke-class destroyers have been improved to the maximum. Larson notes that the Arleigh Burke’s internal space limitations don’t allow for improved power generation onboard, meaning newer communications, radar, directed energy weapons and propulsion systems cannot be installed.

While the DDG(X) aims to solve the problems associated with Ticonderoga-class cruisers and Arleigh Burke-class destroyers, there are concerns about the project’s strategic value, operational viability and sustainability. 

Ronald O’Rourke opines in a February 2022 article for National Defense Magazine that the US Navy should provide clarification on the DDG(X)’s proposed new capabilities and enlarged payload capacity, especially as game-changing technologies such as lasers and hypersonic weapons are still in an immature development phase. 

Meanwhile, a March 2023 Congressional Research Service (CRS) report outlines the DDG(X) project’s operational challenges. 

The report asks whether a large surface combatant like the DDG(X) would be compatible with the US Navy’s Distributed Maritime Operations (DMO) concept, which envisions a future fleet with a force mix with a smaller proportion of larger ships and a bigger proportion of smaller ships. 

Andrew Davies notes in January 2022 article for The Strategist that the rational response to increased lethality on the battlefield, including the naval domain, is greater dispersion of forces. However, the DDG(X) moves in the opposite direction by putting so much capability into one potentially vulnerable asset.

The CRS report also asks whether a new variant of the Arleigh Burke-class destroyer would be more cost-effective than the DDG(X)’s all-new design. 

In a March 2023 article for Popular Mechanics, Kyle Mizokami notes that upgrade packages could keep the Arleigh Burke viable until 2031, with the latest Arleigh Burke Flight III ships sporting a more powerful SPY-6 radar, new Rolls-Royce generators capable of generating 33% more electricity and 96 vertical-launch system missile silos. 

Although an Arleigh Burke Flight IV was previously in the works, the type was canceled in 2014 as the US Navy prioritized building nuclear ballistic missile submarines (SSBN) over surface warships. The Arleigh Burke Flight IVs would have had the same air defense commander capability housed in the aging Ticonderoga-class cruisers. 

The CRS report meanwhile asks if the US Navy has fully considered the DDG(X)’s required operational capabilities aside from outmatching near-peer adversaries’ similar warships.

Bradley Martin notes in a January 2023 Naval News interview that the DDG(X) will require longer-ranged weapons, better command and control capability over dispersed units, the ability to replenish vertical launch systems at sea and an improved ability to use decoys and other deception systems. 

In addition, the CRS report also asks whether the US Navy has accounted for the transition from the Arleigh Burke-class to the DDG(X) in terms of procurement and industrial base.  Asia Times reported in February 2023 that while the US has seven naval shipyards, China has 13 facilities, each with more capacity than all seven US naval shipyards combined. 

The DDG(X) may not be the right design. Image: Ships Hub / Facebook / Screengrab

Such formidable shipbuilding prowess has made the People’s Liberation Army–Navy (PLA-N) the largest in the world with 340 ships, with the US Navy now the second-largest at 280 ships. The PLA-N is expected to grow to 400 ships by 2025 and 440 by 2030, with much of that growth coming from major combatants like cruisers and destroyers. 

In contrast, the Biden administration’s 2023 plan for naval ship purchases and retirements, under three alternative scenarios, would all see the US fleet size shrink over the next ten years before increasing in size, according to a Congress Budget Office report. 

Although US ships are more advanced, quality cannot replace quantity and physical presence, with the US Navy possibly placing too much faith in exorbitantly overpriced and unproven designs and technology.

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Court rejects MFP’s B24m lawsuit against Warong

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Thai Pakdee Party leader Warong Dechgitvigrom, centre, leads party-list candidates to register for the general election at City Hall on April 4. (Photo By Pattarapong Chatpattarasill)
Thai Pakdee Party leader Warong Dechgitvigrom, centre, leads party-list candidates to register for the general election at City Hall on April 4. (Photo By Pattarapong Chatpattarasill)

The Criminal Court on Wednesday dismissed a defamation lawsuit brought by the Move Forward Party against Thai Pakdee Party leader Warong Dechgitvigrom.

The court dropped the suit on the grounds the defendant had made honest criticism allowed under the constitution. 

The royalist Thai Pakdee Party leader was accused of defaming the MFP’s reputation during a media interview and through Facebook posts dated Jan 20, 2021 and Feb 3, 2021. 

It ws alleged that Mr Warong made false allegations against the plaintiff. He accused certain groups of ill-intentioned people of causing problems for the country by insulting the royal institution. He accused the Progressive Movement and the MFP of being behind moves by some protest groups allegedly aimed at overthrowing the highest institution.

In addition to asking for 24-million-baht compensation, the plaintiff asked the court to order Dr Warong to stop engaging in actions which damage the party’s reputation.

Dr Warong on Wednesday posted on his Facebook that the court dropped the suit against him because he made honest criticism and performed his duty as a citizen under the constitution to protect the institution.

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China crackdown pushes LGBT groups into the shadows

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A group poses for photos after taking part in a Pride run in Shanghai in 2017.Getty Images
By Annabelle Liang
BBC News

While celebrations were held around the world for Pride month, there were no major LGBT events in China.

The country’s largest Pride event has been suspended since 2021.

The organiser, a group named ShanghaiPride, did not give a reason for the move, saying at the time it was “cancelling all upcoming activities and taking a break from scheduling any future events.”

People taking part in political protests in China often face punishment, so instead of holding parades, ShanghaiPride had organised dance parties, community runs and film screenings in the city.

Now, only a few low-profile events are available for the LGBT community such as “voguing balls”, where dancers execute moves inspired by model poses.

And ShanghaiPride is not the only major LGBT group to cease operations.

In recent years, several others have had to shut down, raising fears of a crackdown on activism in the world’s second largest economy.

Dozens of accounts dealing with LGBT topics on the popular Chinese messaging app WeChat were reportedly deleted in 2021.

The same year, a group which filed lawsuits on behalf of members of the LGBT community closed down. There were reports that its founder was detained by authorities, with the closure of the group being a condition for his release.

And last month, the Beijing LGBT Center became the latest group to stop operations “due to forces beyond our control”.

“With the closure of the Beijing LGBT Center, the last large LGBT organisation in China has decided to take a break,” Raymond Phang, the co-founder of ShanghaiPride, told the BBC.

Mr Phang left China after his group cancelled an annual celebration in Shanghai.

“There was huge pressure on ShanghaiPride leaders and advocates and it became more and more challenging to organise events,” he said.

“After 12 years of operations, organisers agreed that we could take a break, recharge and wait for the situation to get better”.

A leader of another LGBT organisation, who has also left China, told the BBC that pressure from authorities has taken a toll on those pushing for social change.

“Organisers have been detained, and their friends and family members have been questioned by the police. This results in a lot of mental health pressure,” said the activist, who spoke on condition of anonymity.

“Before the pandemic, the environment for LGBT groups was great. We could speak out loud and we won some legal cases,” the activist added.

“I think we were too loud.”

Changing tides

Daxue Consulting, a China-focused market research firm, estimates that in 2019, there were 75 million people in China who identified as LGBT – making up around 5% of the total population.

LGBT groups have campaigned on a number of issues including same-sex marriage, which remains unrecognised in the country.

Homosexuality was decriminalised in China in 1997 and the Chinese Society of Psychiatry stopped classifying it as a mental disorder in 2001.

In 2019, the National People’s Congress, China’s top legislative body, acknowledged that the legalisation of same-sex marriage was one of the top requests from citizens.

But space for LGBT advocacy has shrunk in recent years, along with a clamping down of civil rights movements and online dissent.

In 2021, a notice from China’s education ministry caused a stir after it suggested that young Chinese men had become too “feminine”.

The ministry called on schools to fully reform their offerings on physical education and strengthen their recruitment of teachers.

It advised recruiting retired athletes and people from sporting backgrounds – and “vigorously developing” particular sports like football with a view to “cultivating students’ masculinity”.

Later that year, China’s broadcasting regulator said it would ban “effeminate” aesthetics in entertainment shows and that “vulgar influencers” should be avoided.

The National Radio and Television Administration also pledged to promote what it defined as more masculine images of men and criticised male celebrities who used lots of make up.

These developments come even as some LGBT individuals have grown in prominence.

Former police officer Ma Baoli who made headlines when he abandoned a nearly two-decade-long career in law enforcement to start a gay dating app, Blued, is one of them.

BlueCity's former chief executive Ma Baoli.

NOEL CELIS

Mr Ma’s technology company, BlueCity, debuted on the US-based Nasdaq stock exchange in 2020. It became the world’s first LGBT social network to become a publicly-traded company.

However, BlueCity was de-listed and privatised last August.

Mr Ma resigned as its chairman and chief executive, without naming a successor.

In a post on the popular WeChat messaging app, he hinted at the difficulties of running an LGBT business in China.

“We have turned ideals into reality and made something impossible possible,” Mr Ma wrote. “I feel content and unregretful as I’ve accomplished my mission.”

The app has more than 40 million users globally, according to its website. BlueCity and Mr Ma did not immediately respond to a BBC request for comment.

“These problems are exacerbated in countries where there is more societal and familial discrimination,” says Timothy Hildebrandt, an associate professor at the London School of Economics and Political Science.

Now living outside China, Mr Phang continues to support the country’s LGBT community from overseas.

“I have been organising ShanghaiPride for the last decade and now that it has very limited events, I have more opportunities to support other community organisations and participate in their events,” he says.

“Grassroots, individuals and corporates can still advocate within their own spaces and can be creative in reaching out to the community and allies,” Mr Phang adds.

“There is very limited space for advocacy right now but we shouldn’t stop trying.”

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