Greetings from LAX. CEO Daily breaks late today because I am in transit to Brainstorm Tech in Aspen following a whirlwind trip across the Middle Kingdom with Alan Murray and other Fortune colleagues. This has been a banner week for Fortune in China. It began with a stop in Guangzhou, on China’s eastern coast, where we formally announced dates for the Fortune Global Tech Forum in that city. (November 29-30. Mark your calendars!) From there it was on to Yunnan province on China’s mountainous southwestern frontier to lay the groundwork for the Fortune Global Sustainability Forum, a new conference to explore solutions to the world’s environmental and energy challenges.
Usually I focus on the news in this space. But forgive me if, just for a moment, I don my brightest plaid jacket to extol the significance of these two new platforms. The Tech Forum, which I’ll co-chair with Adam Lashinsky, builds on the spectacular success of last year’s Brainstorm Tech International, also held in Guangzhou. The year’s theme is “Innovation in the Age of AI,” and already we’ve confirmed a stellar lineup of speakers that includes Sinovation Ventures’ Kaifu-Fu Lee, Sequoia Capital China’s Neil Shen, Ping An Insurance Group’s Jessica Tan and more. (You can register for Tech Forum, and check out our new video, on the Fortune Conference page.) The Sustainability Forum will convene in fall of 2019 at a spectacular venue on the shores of Fuxian Lake, one of China’s great ecological treasures. (More details about the Sustainability Forum here.)
Both of these conferences will be recurring annual gatherings connecting top executives, investors and government leaders from around the world with high-level Chinese counterparts. Already China issues loom large in the pages of Fortune magazine and, as diligent CEO Daily readers know, on the agendas of our established franchises like Brainstorm Tech and the Fortune Global Forum. (For example, in Aspen this week, Adam will interview Richard Liu, founder of Chinese e-commerce giant JD.com, while I’ll host an all-star roundtable on Chinese innovation.) With the addition of these two new China-based programs, no global media company comes close to Fortune in providing unique opportunities for the world’s business leaders to engage with China and gain first-hand insight into developments in a country that, for better or worse, now plays a pivotal role in virtually every major global challenge.
Which brings us to the news. The trade war between the world’s two biggest economies is staggering into its third week and both sides are sizing up the costs. On Tuesday, the Trump administration outlined tariffs on $200 billion worth of Chinese products, adding to the $34 billion worth of import tariffs that went into effect on July 6th. China promises to retaliate in kind. U.S. Treasury Secretary Steven Mnuchin acknowledged that trade talks between the two countries have broken down.” China blasted the U.S. for “acting erratically” and “blatantly abandoning” the established consensus on trade. And, for good measure, the Commerce Department said China’s monthly trade surplus with the U.S. widened in June to $29 billion, an all-time high. (The spike likely reflects exporters rushing to beat the July tariffs.)
How long will it all last, and which side will suffer most? Allianz economic advisor Mohammed El-Erian asserts the U.S. is “winning the trade war” and will emerge economically “better off” than the rest of the world when it’s all over. CNBC stock guru Jim Cramer thinks market movements suggest China already has “blinked” in the confrontation. Christopher Balding, an associate professor at the HSBC Business School in Shenzhen, says the prospect of a prolonged trade war “is causing growing alarm within China,” prompting key officials to worry that the ruling party has “made a significant miscalculation.”
Still, pessimism prevails. El-Erian’s blithe assessment is predicated on the assumption that tit-for-tat retaliations won’t “spin out of control” (which they seem already to be doing). And markets have underestimated the risks of this trade war from the outset.
Stephen S. Roach, former Morgan Stanley Asia chair and a senior fellow at Yale University, says the U.S. is “on track to lose” this face-off. Economists at UBS, who had previously dismissed the idea that a trade war would do significant damage to either economy, reversed tack Wednesday; they now see the potential for widespread supply-chain disruptions, rising inflation and slower U.S. growth. Washington Post columnist Catharine Rampell warns that Beijing’s next moves could include a propaganda campaign to get Chinese consumers to boycott American products, stricter environmental inspections and anti-monopoly rules for U.S. companies, and a host of other nasty punishments. Trump’s tariffs, she frets, have “backed China into a corner,” and may prompt Chinese leaders to “double down on the very bad behavior the United States has been trying to stop.”
More China news below.
Economy and Trade
Trading blows. The first raft of tariffs on Chinese products went into effect last week, with levies of 25% imposed on $34 billion of exports. China retaliated immediately, implementing taxes on the same value of U.S. exports. This week the White House released a $200 billion list of Chinese exports that could be subject to a further 10% of tariffs if Beijing doesn’t back down. But China has promised to match future U.S. tariffs dollar-for-dollar, although it doesn’t actually import enough to do so. Fortune
Back to business. ZTE is on track to start production again, having been shut down by U.S. sanctions nearly three months ago. The Commerce Department inked a deal with the Chinese phone maker that would lift the production ban as soon as ZTE puts $400 million in escrow. ZTE has already paid a fine, replaced senior management staff and accepted an American compliance team on board. On news of this “final hurdle”, ZTE shares jumped 25%, but lawmakers on both sides of the aisle have objected to the reprieve. The Hill
Berlin bolster. Premier Li Keqiang and Chancellor Angela Merkel met in Berlin this week to discuss trade, at a time when both sides have been hit by U.S. tax hikes. In a move viewed as a ploy to gain allies against Washington as the trade war ensues, Beijing granted German chemical manufacturer BASF permission to build a $10 billion wholly-owned factory in China. Foreign firms normally have to partner with Chinese companies on such projects. South China Morning Post
Innovation and Tech
Solo project. Tencent announced last Sunday that it is planning to spin-off its music division and list it in the U.S. The parent company, Tencent, and its other spin-off, Tencent Literature, are both listed on the Hong Kong Stock Exchange. However, floating Tencent Music in the North American market will allow the subsidiary to compare directly with other popular music services, such as Spotify. Details of the IPO have not been finalised but the unit is expected to reach a valuation of over $30 billion. Variety
Silicon scrumping. A former Apple engineer was arrested and charged with stealing trade secrets as he boarded a plane to China. Zhang Xiaolong had previously worked with Apple’s auto department but left to take a new role with Chinese start-up Xiaopeng Motors. He returned to America to download confidential information related to Apple’s autonomous driving unit, allegedly to provide to his new employer. Xiaopeng has denied any knowledge of the theft and has promised to cooperate with investigators. Bloomberg
Room, please. Alibaba and Marriott International are working together to introduce automated check-in counters at two of the luxury hotel’s China locations. Guests at the Marriott in Hangzhou (Alibaba’s hometown) or in Sanya will be able to check-in using Alibaba’s facial-recognition tech. The smart machines will confirm the user’s identity and dispense the relevant room key, taking only a third the time of traditional check-in desks. Alibaba previously implemented this “smile-to-pay” technology in branches of KFC. Reuters
Musk on the move. Tesla will open a “gigafactory” in Shanghai, with an annual production capacity of 500,000 vehicles. The production facility will be the EV maker’s first factory outside of the US and only its second in the world. The plant, which has been in the pipeline for a year, will be China’s first foreign-owned auto manufacturer. Following the Tesla deal, Shanghai authorities announced they would expedite the removal of restrictions on foreign investment in the auto industry. Fortune
In Case You Missed It
Politics and Policy
Panama plan. China and Panama began talks on free trade this week. The two only began official relations last year, after the latter severed its political ties with Taiwan. Trade in the Central American country has traditionally been tied to Washington, as the Panama Canal was under American ownership until until just two years ago. China had previously considered building a rival canal through Nicaragua. Reuters
Liu Xia leaves home. Liu Xia, the wife of Nobel Peace Prize winner Liu Xiaobo, arrived in Berlin this week, ending eight years of de facto house arrest. Liu was detained in 2010 after her husband won the Nobel Prize for advocating political reform in China. Liu’s release (although undoubtedly planned for a while) came shortly after Premier Li Keqiang met with Chancellor Angela Merkel (see above). South China Morning Post