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Tensions between London and Beijing

Democracy and security issues increasingly define UK relations with China

The facts: Signs of continued deterioration in Sino-British relations have been on full display lately as the UK takes steps to safeguard democracy and national security. On February 4, the UK’s communications regulator, Ofcom, withdrew China Global Television Network’s (CGTN) license to broadcast in the UK, after concluding that CGTN is ultimately controlled by the Chinese Communist Party. The same day, it was reported that three Chinese spies posing as journalists had been expelled from the UK.

The UK government is also investigating British universities and academics who might have unwittingly breached export control laws by transferring sensitive research to China. And last month it adopted measures to ensure that British organizations are not complicit in human rights abuses in Xinjiang through their supply chains. Manchester University terminated a collaboration with China Electronics Technology Corporation, which provides mass surveillance technology used by Chinese authorities in Xinjiang.

What to watch: Sparked by allegations that China is committing genocide against the Uighurs in Xinjiang, the UK parliament is currently debating an amendment to its forthcoming trade bill that would block post-Brexit free trade deals with countries that have committed genocide. Although the amendment narrowly failed to pass during a reading in the House of Commons this week, it is likely to be reinserted when the Bill returns to the House of Lords.

MERICS analysis: With Brexit in mind, Prime Minister Boris Johnson has been enthusiastic about economic cooperation with China. But he has been under growing pressure from an increasingly bipartisan group of MPs to take (geo-)politics into account – a view that Beijing’s international assertiveness and behavior in Hong Kong has only reinforced. Last year, for example, they successfully pushed Johnson to make a U-turn on Huawei, ultimately leading to an order to phase out Huawei components from 5G by 2023. Now, as it prepares a “Global Britain” agenda for post-Brexit UK, the British government wants to work closely with US President Biden and like-minded democracies to address the challenges posed by a rising China.

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US-China trade deal phase one shows limited success but too soon to draw conclusions

The facts: China has so far failed to live up to commitments it made under the phase one trade agreement signed with the United States a year ago. Chinese imports of US goods fell short of the USD 159 billion 2020 target, reaching just USD 94 billion. The impact of the Corona pandemic on China’s economy may have contributed to targets being missed across most sectors, especially agricultural goods, semiconductors and medical products. China also committed to opening-up in the financial sector, making structural efforts on intellectual property rights, and reducing coercive technology transfers and exchange rate manipulation. Reform in these areas has been significant over 2020 for the most part, as confirmed in the IMF’s latest annual report on China.

What to watch: With 2021 expected to deliver a return to something closer to business-as-usual, the first half year trade data should tell if China is living up to its commitments on imports. If it does, US allies’ reactions towards the Biden administration will be interesting to follow, as they are most likely to suffer from Chinese demand shifting towards US imports. If, on the other hand, China fails to meet its commitments, the Biden administration will have to decide between pressuring China using murky Trump-made leverage or abiding by multilateral rules. So far, the new US administration has only said that it will include the deal in a broader review of its China strategy.

MERICS analysis: “The pandemic makes it difficult to draw conclusions on China’s willingness to meet its international commitments. The 2021 numbers should quickly tell whether the EU, with the CAI in mind, should worry once again about China’s track record in living up to its international commitments. On structural commitments, “successes” fit too neatly into the official narrative of its development model. As this model has been in play since 2017, it suggests that China only commits to reforms it has already intended.” says Merics Analyst François Chimits.

More on the topic: Read our new China Monitor “Towards 'extreme competition': Mapping the contours of US-China relations under the Biden administration” by Matt Ferchen.

Related expert analysis:

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China launches new national emission trading system

The facts: As part of the commitment to decarbonizing its economy, China launched its National Emission Trade System (NETS) on February 1. The system, still in a very early phase, will be rolled out over the next few years. Currently only covering large energy producers, it will eventually include all major polluting sectors, such as steel and cement, making NETS the largest carbon market in the world by far.

The system is intensity based, setting a baseline for how much CO2 per produced unit of energy is allowed. In this it differs from the European system, which uses an absolute target of CO2 emissions (cap and trade). The NETS will cover 2,225 power companies in its first phase, amounting to one third of China’s CO2 emissions. This figure could eventually rise to 80 percent. The cities of Wuhan and Shanghai are both establishing a registry and trade center for CO2 permits, building on existing institutions from local pilots.

What to watch: With the NETS, China has introduced an important mechanism, although the current standards are too low to make a dent in emitters’ budgets. This can change fast, however, if efficiency standards become stricter. Meanwhile, Beijing has announced a new public platform for tracking emissions and reporting environmental violations, showing a more open approach to supervising violators that have proven hard to monitor. The Chinese leadership will also push green policy in the coming five-year plan, but still needs to balance domestic growth and painful restructuring away from polluting industries. Large new investments in coal send mixed messages about Beijing’s ability to decarbonize, and more consequential policy for phasing out fossil fuel will be crucial.

MERICS analysis: “In the short term, the NETS does not have sufficient teeth to rein in emissions. It attempts to use a market mechanism to regulate emitters that do not have to follow a market logic in their investment behavior, especially in energy. But it clearly shows Beijing’s intention to push sustainability. China sees climate change as a real threat and intends to be a global leader on the issue. With the Biden administration rejoining the climate action table, competition for global climate leadership and standards has become tougher again. Reinstating retired 71-year-old Xie Zhenhua as special envoy on climate sends a clear signal to the world that China does not want to lose ground on climate diplomacy,” says MERICS Senior Analyst Nis Grünberg.

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China tries to stay out of the fray after the military coup in Myanmar

The facts: Beijing has gone to extraordinary lengths to avoid criticizing either the coup in Myanmar or the generals involved. Whereas other countries have strongly condemned the coup, Beijing’s reaction has so far been muted. China blocked efforts at the UN Security Council to issue a statement condemning the coup and the state-owned news agency Xinhua even described the development as no more than a “major cabinet reshuffle”. The Ministry of Foreign Affairs (MFA) claimed that China was still trying to understand the situation and called for calm and stability - ostensibly following the principle of non-interference in other countries’ internal affairs.

What to watch: The coup isn’t entirely good news for China. China has clear strategic and economic interests in Myanmar – not least the China-Myanmar Economic Corridor, part of the BRI – and it wants the country to be stable and relatively integrated into the international community. Beijing had also cultivated close ties with Aung San Suu Kyi and her party over the last few years. Now, China must forge a new alliance with the military, which has historically been a complicated partner.   

MERICS analysis: “China’s relationship with and involvement in Myanmar does not depend on who is in power – Beijing is ready to deal with the generals and its muted response to the coup most likely reveals a belief that the military is not going to reverse course. However, ongoing instability, along with the possibility that Myanmar may once again be sanctioned and isolated on the international stage, may be costly for Beijing.” Helena Legarda, Senior Analyst at MERICS.

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17+1 summit brings mixed results for China

The facts: For the first time since the launch of the 17+1 (previously 16+1) format, China’s President Xi Jinping himself took part in the virtual summit with representatives from Central and Eastern European (CEE) countries on February 9. The summit would normally be attended by Premier Li Keqiang, making Xi’s decision to take his place a boost to the meeting’s importance. Xi voiced China’s readiness to cooperate on vaccine distribution and coordinate customs clearance. He also expressed the intention to import USD 170 billion worth of goods from CEE over the next five years. The participants did not manage to agree on a joint statement including robust political language, instead they released a simple “activity plan” for the coming year.

What to watch for: Although the summit was attended by five CEE heads of state and six prime ministers, several countries sent lower-level ministers. China’s intense efforts to encourage high-ranking participation did not convince three Baltic states plus Bulgaria, Slovenia, and Romania. In the history of this format, it was the lowest turn-out of top-level government representatives. Averting the ongoing 17+1’s deterioration seems even more challenging than before the summit.

MERICS analysis: ”The fact that the summit took place allowed Beijing to bolster its narrative of China’s partnership with Europe. But Xi’s proposals will be measured by CEE governments against past undelivered economic pledges. This may not be enough to revert the trend in CEE of increasingly viewing their China relations through a security lens,” says MERICS analyst Grzegorz Stec.  

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This analysis is part of the February 10, 2021 issue of MERICS EU-China Weekly Review. You can subscribe for free here. In this issue, Grzegorz Stec also looked at China Three Gorges plans to go big in Spain and a high-level dialogue between European business leaders and Chinese Premier Li Keqiang.

METRIX

161 billion RMB

The profitability of China’s privately-owned steel mills surpassed that of state-owned steel mills for the first time in 2020. According to Caixin, major privately-owned steel mills increased profits by 6.1 percent year-on-year to RMB 161 billion (USD 24.9 billion) largely due to greater management flexibility. The average operating margin of privately-owned mills was 4.8 percent, while state-owned steel mills saw their margins fall to 4.41 percent.

REVIEW: Welfare for Autocrats: How Social Assistance in China Cares for its Rulers, Jennifer Pan (Oxford University Press, 2020)

That the Chinese Communist Party maintains an extensive domestic surveillance apparatus should come as no surprise to anyone. Maintaining political stability is the clear number one priority for the Chinese authorities and plenty has been written on this subject. But Jennifer Pan’s Welfare for Autocrats sheds a unique light on this issue by analyzing how the provision of welfare can be appropriated for surveillance and social control.

The book focuses its attention on the Chinese dibao system – the Minimum Living Standard Assistance that provides cash transfers to the poorest. In theory, anyone below a certain income threshold is eligible for these transfers. However, because the system is severely underfunded, just 16 percent of eligible citizens actually receive the dibao.

Drawing on extensive fieldwork in China and test requests to local authorities, Pan demonstrates that, through the allocation of these funds, stability maintenance “seeps” into the welfare system. Pan shows how the Chinese authorities prioritize groups that pose a potential threat to the political order – usually former prisoners and those with a history of stirring up social or political unrest. By providing cash transfers to these targets, the authorities create opportunities for repeated contact during which community cadres can talk to the target and learn about potential concerns. This way, social welfare is used to deter recipients from engaging in “problematic” activities.

Welfare for Autocrats is a great read for anyone interested in the more subtle mechanisms of political control in China. The only minor weakness is the reflection in the last chapter on the government's broader quest for digitized surveillance. Pan discusses all initiatives in the same breath, whereas a more differentiated analysis of how these systems work and interact, and how digitized they actually are, would have been preferable.

Review by Vincent Brussee, Associate Analyst at MERICS

PROFILE: Guo Shuqing – the regulator set on de-risking China’s fintech sector

China’s top banking regulator, Guo Shuqing, is on a mission to rein in the country’s growing fintech sector. As opposed to the traditional banking sector, China’s fintech sector is dominated by private companies. As chairman of the China Banking and Insurance Regulatory Commission (CBIRC), he is attracting attention as he takes on the task of de-risking and regulating the financial sector.

In November last year, he was at the helm when the CBIRC when the decision was taken to halt Ant Group’s USD 37 billion initial public offering, and last month he was behind the issuance of new draft rules that could force the break-up of the company’s online payment arm on antitrust grounds. Taking on Jack Ma has important symbolic value - Guo is quoted as saying no fintech company should be allowed to become “too big to fail”.

Guo has been in his current position since 2017 and is also the vice governor of the People’s Bank of China (PBOC), where he heads the bank’s Communist Party committee. Giving these two roles to one person is new - the previous governor of PBOC did not have to deal with a vice governor like Guo.

He is famously sceptical of internet finance and led the clampdown on China’s peer-to-peer lending industry. While he is said to see the benefit of some payment apps that are “helpful to the real economy”, he says people should be very wary of any investment that promises returns that are too good to be true.

The 65-year-old was born in Inner Mongolia and studied philosophy and Marxism before focussing on economics. His studies took him to Oxford University where he was a visiting scholar. But Guo is first and foremost a party guy. He has built a reputation for fixing complex issues, having previously pushed through reforms to prevent insider trading and market manipulation in the stock market. With experience running the China Construction Bank and a spell as governor of the province of Shandong, he is clearly trusted by President Xi Jinping to de-risk China’s rapidly evolving financial sector by means of regulation.

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PROFILE: Agora: The Chinese technology provider behind Clubhouse

Clubhouse hit headlines recently as the invitation-only audio social networking app surged in popularity. In China it attracted users too, hosting discussions on such topics as Xinjiang, Hong Kong and Taiwan. Some of those who took part described it as a brief experience of how dialogue in China could be in the absence of state censorship - that was before the Chinese authorities blocked Clubhouse on February 8.

As interesting as the Clubhouse phenomenon is, just as intriguing is Agora, the company that created the technology on which Clubhouse and other real-time audio and video apps are based. Founded in Guangzhou, in 2012, by former Webex engineer Tony Zhao (赵斌), Agora (上海兆言网络科技有限公司) provides developers a platform to build apps with real-time video and voice, like virtual classrooms, concerts, doctor visits and dinner parties. Essentially, it is an enabler of online public gatherings, as its name suggests. It offers two improvements over traditional voice and video transmission software: quality and consistency, even with low-bandwidth networks and lower-powered devices.

Agora has seen hundredfold growth in usage in the past five years, with around 80 percent of revenue coming from China. Its technology has been integrated in Oppo, the world’s fourth biggest phone brand, and is used by the education services company New Oriental.

Agora’s association with Clubhouse will do it no harm – when rumors of the cooperation got out, its shares soared 30 percent in one day. While Clubhouse has now been closed in China, Agora may still provide a space for other Chinese discussion groups. Several Chinese Clubhouse imitators have appeared since February 8, all of which are built on Agora.

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