This is the level in USD to which China’s foreign exchange reserves dropped in September. The reserves fell more than expected to a 14 month low, along with a weakened yuan. Amid an escalating trade war and higher interest rates in the US, Beijing will struggle to maintain currency and exchange reserve stability. A depreciated yuan could boost exports, but it could lead to an outflow of capital. So far, the government’s tight controls have successfully prevented capital flight.
Topic of the week: Detention of Interpol president
The detention of the Chinese president of Interpol in China has raised doubts over Beijing’s international trustworthiness. The Ministry of Public Security confirmed on October 8 that Meng Hongwei is under investigation for corruption accusations. The former vice-minister of public security had disappeared on September 25 while traveling from the Interpol headquarters in Lyon to China. China’s anti-corruption body, the National Supervisory Commission, is handling the case.
The secretive detention of Meng has little precedence in international affairs. Under normal procedures, China would have started official investigations and asked French authorities to extradite the suspect. In this case, Meng’s wife contacted the police in Lyon after her husband disappeared. After his arrival in China, she had received a text message from his cell phone, which contained an emoji with a knife. On October 7, Interpol released a statement saying that it had received and accepted Meng’s request to resign.
The case is a setback for China’s efforts to gain more trust in international organizations. Over the past years, China has successfully pushed through Chinese candidates for leadership positions in international organizations. The heads of the International Court of Justice (ICJ), the International Civil Aviation Organization (ICAO) and the International Telecom Union (ITU), among others, are now Chinese.
China has also increased its law enforcement cooperation with other countries. Meng’s position at the head of Interpol was central to these efforts. The aim was partially to support China’s domestic anti-corruption fight by being able to go after economic fugitives abroad.
An official Chinese statementsuggested a link between Meng’s arrest and the case of Zhou Yongkang. The former minister for public security and member of the Politburo’s Standing Committee was arrested and tried for corruption in 2015. He was known as a powerful adversary of party and state leader Xi Jinping. Meng was his deputy in the Ministry of Public Security from 2004 to 2012.
The case has raised many questions why Xi Jinping, who most likely took the decision to arrest Meng, was willing to risk the damage to China’s international image by taking such drastic action. The international community is likely to consider Chinese appointments to the leadership of international organizations more carefully in the future.
MERICS analysis: "China's global law enforcement drive." China Monitor by Thomas S. Eder, Bertram Lang and Moritz Rudolf.
China and the World
Relations between the United States and China have soured further after an aggressive speech by US vice-president Mike Pence. In his address at the conservative Hudson Institute in Washington D.C. on October 4, Pence claimed that China attempted to influence US public opinion and the upcoming congressional elections with the goal to undermine US president Donald Trump. „Beijing is employing a whole-of-government approach, using political, economic, and military tools, as well as propaganda, to advance its influence and benefit its interests in the United States,” Pence said.
These remarks come as the US government, including President Donald Trump, have started ramping up their rhetoric against China. Just a week earlier, Trump accused China of interfering in the 2018 midterm elections during a speech at the UN. And in late September the United States imposed sanctions on the PLA Equipment Development Department for its weapons imports from Russia. This is all taking place against the backdrop of the US-China trade war.
China responded by calling Pence’s accusation of election interference “extremely ridiculous” and called on the United States to stop slandering China. Foreign Minister Wang Yi said that China would never interfere in other countries’ domestic affairs during US Secretary of State Mike Pompeo’s visit to Beijing on October 8. A meeting between US Secretary of Defense James Mattis and Chinese Defense Minister Wei Fenghe scheduled for mid-October in Beijing was also cancelled.
Pence’s remarks, along with China’s reaction, show that competition between the United States and China is likely to become the norm. Experts in both countries viewed the speech as an opening of a new Cold War. According to a report in the New York Times, Pence had made it clear that the era of Washington holding out a hand to Beijing to become a “responsible stakeholder” was over.
A report about an alleged Chinese hack into hardware used by US tech companies has reignited the debate about the risks of cyber espionage from China. Bloomberg Businessweek reported on October 4 that corrupted microchips had been found in motherboards used by companies including Amazon and Apple, as well as in secure government servers. Apple and Amazon issued strong denials of the report. The UK’s National Cyber Security Centre as well as the US Department of Homeland Security said they had no reason to doubt the companies’ assessments.
The report is difficult to verify at this point. Bloomberg cites 17 unnamed sources, among them Apple insiders and US government officials. Technology experts have however criticized the report for being unclear on the technical details.
If true, this report would describe an attack (PRC-sponsored or not) unprecedented in sophistication, raising intense fears about cyber security. The alleged attack exposes the vulnerability of global supply chains to cyber espionage efforts and provides fuel to the fire of those arguing for “decoupling” of the US economy from China. If the PRC government is capable of and willing to conduct such a sophisticated and deliberate backdoor operation against US companies, fears about allowing Chinese tech companies Huawei and ZTE access the US market would appear very sensible.
Cyber espionage has long been a contested issue in China’s relationship with the United States, but also with Europe. Also, on October 4, an article published by Politico claimed that the European Commission’s department for industry is drafting a document that would sum up Europe’s worries about Beijing-linked cyber espionage on European industry.
MERICS Policy Fellow Hauke Gierow: “China has engaged in industrial espionage for years and has repeatedly targeted companies through IT-based attacks. In theory, China should have the technological ability to carry out attacks on hardware, but the costs of such operations would be prohibitive. At least for now, phishing attacks and direct information-gathering from gullible employees are likely to remain the biggest threat international companies face from China.”
News in brief
- Washington votes to overhaul development finance as response to China’s growing influence
- Chinese vice president Wang Qishan attends innovation summit in Israel
- New EU strategy aims to enhance connectivity with Asia
- China reacts positively to EU Connectivity Strategy – sees more chances for cooperation
- Joint agreement bans fishing in the Arctic region for 16 years
- EU and China conclude first meeting on WTO reforms
Politics, Society and Media
For the first time two Chinese bishops are participating in a synod in Rome. Their participation is the first visible outcome of the “Provisional Agreement on the Appointment of Bishops” between the Vatican and China that was reached on September 22, 2018.
The agreement aims to regulate the appointment of bishops in a way that allows both Beijing and Rome to have a say in the process. Whereas the compromise was praised by supporters of the pope as a step towards the unification of the church, critics like the former archbishop of Hong Kong, Cardinal Joseph Zen, view it as a sellout of Catholics in China.
With about 12 million adherents, Catholicism is one of the minor religions in China. Of about 100 bishops in China 36 are only recognized by the Holy See, but not by the Chinese government. They are part of the so called “underground church.” The agreement has so far not changed their situation. On the other side, the Vatican has lifted the excommunication of seven state-appointed bishops and admitted them into the church.
The Vatican is also one of the last countries to hold diplomatic ties with Taiwan. The Taiwanese ambassador was given assurances that the new agreement with China was solely religious in nature and, thus, would not affect the Vatican’s diplomatic relationship with Taiwan. However, since the Chinese accession to the UN in 1971 the Holy See has only sent a temporary head of mission instead of a nuncio to Taiwan.
For the first time since Hong Kong became a part of China, Hong Kong authorities have denied a work visa renewal for a foreign journalist. Victor Mallet, Asia news editor of the Financial Times and vice president of the Foreign Correspondents’ Club Hong Kong (FCC) has to leave the former British crown colony within seven days.
Mainland China has frequently refused to prolong visa from journalists in the past years and expelled them from the country. A reporter for the US media platform Buzzfeed was the most recent victim. In the Chinese Special Administrative Region of Hong Kong, part of China since 1997 under the principle of “one country, two systems,” the report earned much attention as a precedent. Hong Kong was previously considered a safe place for journalists who did not meet Chinese visa requirements due to their critical reporting on China.
The Hong Kong Foreign Correspondents’ Club organized an event with the president of the Hong Kong National Party (HKNP) Andy Chan, who calls for Hong Kong’s independence from China, in mid-August – despite all resistance of Beijing. The party-state newspaper Global Times later accused the FCC of threatening China’s national security. A month later, the HKNP was banned – another premiere in Hong Kong.
The Financial Times, representatives of the United Kingdom as well as the United States protested Mallet’s expulsion, and 15,000 journalists signed a petition to the Hong Kong authorities, demanding an explanation of the visa rejection. A spokesperson for the Chinese Foreign Ministry emphasized that Beijing highly supports the decision of Hong Kong’s authorities and that no foreign country had the right to intervene in that matter.
According to Kristin Shi-Kupfer, MERICS: “The denial of visa renewal is another example of China’s attempts to expand Chinese control over Hong Kong. China’s action breaches the contract to respect Hong Kong’s autonomy. The Chinese Communist Party is testing how far it can go without provoking severe reactions by the international community.”
News in brief
- China changes law to recognize “re-education” camps in Xinjiang
- Modern Mulan or disturbing journalist of CGTN at annual UK Conservative Party conference
- Missing Fan Bingbing reveals unpaid taxes and fines – and serves as example
- Uyghur rap performer Aire wins popular mainstream show under Kris Wu for “west side”
Economy, Finance and Technology
Beijing strengthens its access to corporate data through new cyber security regulations. This increases the unease felt by foreign businesses in China. Starting on November 1, agents of the Ministry of Public Security and the police may conduct on-site inspections and remotely access networks of internet service providers to safeguard national security.
The regulations were published on the website of the Ministry of Public Security on September 30. They add more details to the vague and controversial Cyber Security Law that entered into force in the summer of 2017. The law mandates the storage of data in China as well as official approval of technology products supplied to the government and critical industries. Under the new regulations, internet service providers will also be held accountable for allowing prohibited information to circulate online. It is expected that Beijing will publish additional rules and regulations on cyber security that will further increase government control and jeopardize corporate as well as private data security.
China is opening its stock market to European financial markets. A link between the London and Shanghai stock exchanges is expected to be operative by December. Meanwhile, the home appliance maker Hai’er is set to be the first Chinese company to issue shares at the Frankfurt stock exchange in the coming days. The new programs are part of China’s cautious opening to global financial flows.
Chinese media have mentioned December 3 as the possible start date for the Shanghai-London stock link. The system would allow listed companies to issue depository receipts and enable investors to purchase these in either stock market.
The Frankfurt stock exchange has hosted the China Europe International Exchange (CEINEX) since 2015. CEINEX is mostly owned by Shanghai Stock Exchange and Deutsche Börse. Hai’er, which is already listed in Shanghai, now plans to sell 400 million so-called D-shares (D is for Deutschland) worth more than 800 million EUR.
Whereas these developments are an important step towards China’s deeper integration into global financial markets, investments into Chinese markets remain restricted and small in volume. The Chinese government aims to prevent unregulated capital outflows by maintaining these barriers.
News in brief
- China’s central bank cuts money banks have to hold in support of economy
- Five year plan on rural vitalization released
- CCP’s leadership of state-owned enterprises stressed by Xi
- Tencent stock crashes by 38%
- More proactive fiscal policy to come according to Ministry of Finance
- China launches first blockchain pilot zone in Hainan Province
The European View
After the formation of a right-wing populist coalition government in June, Italy has started to craft an unprecedentedly active China policy - as a balance to a perceived over-reliance on the EU.
A “China Task Force” led by the China-friendly expert Michele Geraci was established and mandated to give new impetus to Italian economic actors, especially public ones, to seek greater cooperation with Beijing. The government in Rome also announced that it will sign a Memorandum of Understanding on the Belt and Road Initiative (BRI) to attract more Chinese investment. Italy would be the first G7 member to take such a step.
While a more active China policy could bring economic benefits to Italy, the Italian government so far lacks a balanced assessment of a closer cooperation with Beijing. Geraci, the main architect of the new China strategy who was also appointed Undersecretary of State for Economic Development, is a controversial figure. His assumption that working with China might help solve Italy’s economic and societal problems feeds into the beliefs of Eurosceptics in Italy.
Critics ridiculed the government’s belief in a “Chinese panacea” as naïve. Geraci, however, seems determined to place all bets on China. This might further alienate the Italian government from its European partners and it could thwart German and French attempts to design a unified European China policy.
MERICS-Analysis: "Italy charts risky course with active but unbalanced China policy." Our latest blogpost by researcher Lucrezia Poggetti on Italy’s shifting China strategy.
Profile: Gui Congyou
Gui Congyou, the Chinese ambassador in Stockholm, has been in office for roughly one year. But he became well known to the Swedish people in September. An incident involving three Chinese tourists and the Swedish police had caused a diplomatic row - and Gui knew just what to do.
A Chinese tourist and his elderly parents had arrived at a Stockholm hotel late at night, but they had only made a reservation for the following day. The fully booked hotel could not accommodate them. Police removed them from the hotel lobby after they refused to leave. A video recording shows the father lying on the sidewalk as the mother sits by his side and clamors in Chinese, while the son denounces the treatment of his family in English.
A Swedish comedy show made a skit based on the incident. Gui, however, did not think the situation was funny. He criticized the “rough treatment of Chinese tourists by Swedish police.” He demanded an official apology and called on the Swedish government to “thoroughly investigate the incident.”
But Gui did not stop here: He also issued a travel warning for Sweden. And he gave various angry interviews to local Swedish newspapers and radio stations, including on the abductions of Gui Minhai and Peter Dahlin. The two Swedish citizens were abducted by Chinese authorities in 2015 and 2016 respectively. Only Dahlin has been released so far.
The ambassador previously worked at the policy research office of the CCP’s Central Committee and at the Chinese embassy in Russia. In the latter position, he defended the invasion of neighboring countries by Russian forces. He also gained first experience in media work in Moscow. For instance, he fought a bubble gum advertisement that used the Chinese national anthem. In the end, the Chinese embassy called for an apology by the Russian government.