CEO Daily: Saturday January 20, 2018

In the first year of his presidency Donald Trump took a soft line on China, belying his strident “China, China, China” rhetoric on the campaign trail. But a flurry of recent reports suggest that in 2018 Trump’s bromance with Chinese leader Xi Jinping is headed for a breakup.

At long last, we’re told, Trump has had enough. He’s ready to seize the Chinese dragon by its whiskers on a host of issues ranging from North Korea and the South China Sea, to intellectual property rights and immigration. There are signs of a fundamental policy shift.

On Friday, the U.S. Defense Department released an 11 page summary of its 2018 National Defense Strategy identifying competition with China and Russia as “principal priorities” for the US military. The report, distilled from a more detailed classified document submitted to Congress last year, warns that America’s two authoritarian rivals are actively seeking to “co-opt or replace the free and open order that has enabled global security and prosperity in since World War II.” Henceforth, “great-power competition,” not terrorism, must be the primary focus of U.S. national security, the report declares: “The central challenge to U.S. prosperity and security is the reemergence of long-term strategic competition,” primarily from China and Russia.

That same day my old Wall Street Journal colleague Jake Schlesinger reported that the Trump administration intends to be “more focused in the coming year on countering China”—unlike last year, when it sparred with a broad range of allies in North America, Europe and Asia. From here on, Jake reported, quoting unnamed officials “designated by the White House to speak about coming trade enforcement decisions and negotiations,” the Trump administration will emphasize “enforcement over negotiations” when dealing with China, and give up on trying to resolve disputes through the World Trade Organization.

Journal columnist Andrew Browne, similarly, says the White House is readying “a mix of tariffs and quotas” to deter Chinese imports of “everything from steel to solar panels and washing machines.” Last year’s record Chinese trade surplus with the US, Browne notes, is a “potential catalyst for hostilities after a year of bluster.”

Rhodium Group founding partner Daniel Rosen, a veteran China expert, argues in an essay this week that the US-China relationship has entered a “post-engagement” phase. After a year of empty fulmination, Rosen writes, Trump’s China threats have grown “real teeth…Many in China think this is a rough patch and will blow over. It won’t.”

And there are plenty of other ominous portents. On Monday, the FBI arrested Jerry Chun Shing Lee, a prime suspect in a high stakes espionage battle with China, as he stepped off a Cathay Pacific flight at Kennedy International Airport. US official allege Lee, a former CIA agent employed by Christie’s in Hong Kong, was double agent who ratted out U.S. intelligence operatives in China, many of whom were imprisoned or executed.

Also this week, the Wall Street Journal reported that U.S. counterintelligence officials in early 2017 warned Trump son-in-law and senior adviser Jared Kushner that Wendi Deng Murdoch, the ex-wife of Journal owner Rupert Murdoch, might be using her friendship with Kushner and his wife, Ivanka Trump, to “further the interests of the Chinese government.” In the New Yorker, Adam Entous and Evan Osnos suggest Jared and Ivanka naively allowed themselves to be manipulated by China’s ambassador the US, Cui Tiankai.

All that intrigue swirls in the wake of U.S. congressional moves against attempted U.S. investments by two high-profile Chinese companies. In early January, Ant Financial, the electronics payment affiliate of China’s Alibaba Group, and MoneyGram, a Texas-based money transfer company, announced that it had been forced to abandon a proposed deal after failing to win approval from the Committee on Foreign Investment in the United States (CFIUS), a congressional panel that reviews foreign purchases of American companies. Last week, a proposed alliance between China telecom manufacturer Huawei Technologies and U.S. carrier AT&T collapsed after members of the U.S. Senate and House intelligence committees dispatched a letter to the Federal Communications Commission citing concerns about “Chinese espionage in general, and Huawei’s role in that espionage in particular.”

Are the world’s two largest economies finally headed for a showdown? It certainly looks that way. But it’s impossible to be sure. As always, the wild card in the Age of Trump is Trump himself, who remains as inconsistent, contradictory and unpredictable as ever.

More China news below.

Clay Chandler

@claychandler

clay.chandler@timeinc.com

Technology and Investment

Facebook's new look: made in China? Did Mark Zuckerberg deemphasize media content on Facebook's newsfeed to boost his chances of getting into the China? Wired

Facebook's China whisperer bows out Wang-Li Moser, Facebook's lead liaison with Beijing has left the company in December, complicating the social network's long-running effort to gain greater access to the China market. New York Times

Google drops a pin in Shenzhen A month after announcing plans to launch an artificial intelligence lab in China, Google has opened an office in Shenzhen. Google's search engine service remains banned in China, but the firm has a joint investment in Chinese live-streaming mobile game platform and mobile apps with map functions based on Google data can now be accessed in the country. TechNode

Blacklisted again The US Trade Representative has added Alibaba’s Taobao to its annual blacklist of the world’s most “notorious markets” for sales of pirated and counterfeit goods for the second year. Alibaba says the blacklisting doesn't reflect its IP-protection efforts. Reuters

New funding for JD Logistics Ahead of a possible overseas IPO, Chinese e-commerce firm JD.com has started a US$2 billion fundraising round for its logistics spin-off, JD Logistics. The minimum investment for the round is reportedly set at US$100 million and the funding round will value JD Logistics at around US$10 billion. Hillhouse Capital and Sequoia Capital China will likely be lead investors in the funding round. China Money Network

Pining for Chinese scientists Chinese venture capital firm Shenzhen Green Pine Capital Partners has launched a RMB1 billion (US$155 million) fund to lure overseas Chinese scientists to launch businesses in the southern city of Shenzhen. The firm has also set up a start-up incubator for returnees, which will provide free office space, business partner matchmaking, and business consulting in areas like equity structuring, corporate finance and property rights. China Money Network

Crypto crackdown China, home to the world’s biggest community of Bitcoin miners, is cracking down on cryptocurrency activity, haling trade of virtual currencies on domestic exchanges and banning initial currency offerings. Fortune

Trade and Economy

GDP growth gains Beijing said China's economic grow 6.9% in 2017, the first uptick the world's second-largest economy has seen since 2010. South China Morning Post

Births decline China's national statistics bureau said the number of births in fell to 17.23 million in 2017, down from 17.86 million the previous year. The decline came despite a policy change that took effect last year allowing Chinese families to have two children rather than just one. Financial Times

Punishing China bigly Trump and his administration are about to impose a "big fine" on China for the alleged theft of intellectual property, according to Trump economic adviser Gary Cohn. Reuters

Trump vs Trumpchi Washington has blocked Guangzhou Automobile Group's plan to export cars to the US. Senator Chuck Schumer and Trump separately criticized Chinese trade practices, particularly the 25% tariff levied on U.S.-built cars in China. Reuters

Losing credit China's most prominent ratings firm, Dagong Credit Rating, has cut the local and foreign currency sovereign ratings of the United States to BBB+ from A-, and placed them on a negative outlook. The U.S.'s increasing debt-driven mode of growth will erode the federal government's solvency, the agency said. Reuters