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US-China Relations: The Big Chill

Next week is the Golden Week holiday on the Chinese mainland so likely a slow week for China news. But as far as China’s dealings with the United States goes, no news can only be good news.

Relations between the world’s two most powerful nations grow frostier by the day, and seem to be settling into a deep chill. Conflicts over trade and technology have erupted into round after round of tit-for-tat tariffs. Now those tensions are spreading to matters of security and diplomacy.

China is seething over the Trump administration’s decision last week to slap sanctions on a Chinese military agency for buying fighter jets from Russia. On Tuesday, China denied a US request for a Navy warship to make a port call to Hong Kong. That same day, the US approved a $330 million arms sale to Taiwan. On Wednesday, President Trump accused Beijing of plotting to interfere in US congressional elections in an attempt to punish him and the Republican Party for taking a tough line with China on trade. Now Reuters reports Beijing may cancel plans for Secretary of State Mike Pompeo and Defense Secretary James Mattis to visit Beijing next month for the US-China Diplomatic and Security Dialogue.

Meanwhile, China has become far less supportive of US efforts to pressure North Korea to dismantle its nuclear arsenal, and Chinese president Xi Jinping has stepped up his appeal to countrymen to reduce their nation’s dependence on US technology. In a carefully choreographed tour of China’s northeastern Heilonjiang province earlier this week, the Chinese leader, thronged by adoring workers and farmers, extolled the virtues of building an “invincible” and “self-reliant” China. China’s state-controlled press is pushing the idea that there’s no point in negotiating with the US on trade because Trump’s tariffs are part of a broader plot to “contain China,” stunt its development, and thwart its rise as a global power.

From my vantage, communications between Beijing and Washington haven’t felt this strained since 1999, when US-led forces in NATO mistakenly bombed the Chinese embassy in Belgrade, and 2001, when a Chinese jet fighter collided with a US spy plane forcing it to make an emergency landing on Hainan Island. For now, it’s hard to imagine how this destructive spiral might be reversed.

More China news below.

Clay Chandler
@claychandler
clay.chandler@timeinc.com

Economy and Trade

Trade woes. The latest tranche of U.S. tariffs on Chinese imports kicked in this week, prompting Beijing to cancel planned trade talks with Washington. China’s Vice Commerce Minister Wang Shouwen implied the U.S. was “holding a knife” to China’s throat, making negotiations impossible. On Monday, the Chinese government released a white paper on “U.S.-China Economic and Trade Friction”, accusing the U.S. of engaging in “economic intimidation”. On Wednesday, while addressing the U.N. Security Council, President Trump accused China of interfering with the upcoming midterm elections. Trump claimed China didn’t want him to “win” because he is “the first president ever to challenge China on trade”. Foreign Minister Wang Yi hit back on Friday, saying China “will not be blackmailed” on trade. Bloomberg

Belt and braces. The U.S. is establishing a $60 billion fund to counter China’s Belt and Road program, which some in Washington accuse China of using to wage “economic warfare”. Under the plan, the Overseas Private Investment Corporation will be folded into a new entity, the International Development Finance Corporation, and given the ability to invest in equities. Financial Times

FDI declines. China’s foreign direct investment outflows declined in 2017, the first recorded annual declines since 2002. China’s outward FDI dropped 19.3% last year to $158.29 billion, down from $196.5 billion in 2016. Investment in the U.S. contracted 62.1% while flows to the E.U. expanded 72.7%. In fairness, 2016 was a record year for outbound Chinese investment, driven by acquisitive (and highly leveraged) companies like HNA. CNBC

‘King of IPOs’ jailed. Yao Gang, the former vice-chairman of China’s security regulator, was sentenced to 18 years jail-time for bribery and insider trading. Yao was placed under investigation after the stock market rout in 2015 and this week was found guilty of taking $10 million in bribes. In addition to the jail sentence, Yao was fined $1.6 million and all his “illegal gains” were confiscated. South China Morning Post

Hotpot served warm. Haidilao, one of China’s most popular restaurant chains, debuted on the Hong Kong exchange Wednesday, raising almost $1 billion, valuing the brand at $12 billion. The hotpot restaurant achieved popularity for its commitment to customer service, offering guest perks such as manicures while waiting for a table. Haidilao’s share price rose 10% during trading Wednesday, but closed just HK$0.02 above its IPO price. CNBC

Innovation and Tech

Google search censor. Keith Enright, Google’s chief privacy officer, confirmed during a Senate hearing Wednesday the existence of “Project Dragonfly”, an initiative engaged in creating a censored search engine for the Chinese market. Details of Project Dragonfly leaked last month. Enright avoided confirming any facts about the operation but claimed Google is “not close to launching a search product in China.” Financial Times

Blockchain goes mainstream. Bitmain, the Chinese company responsible for roughly 30% of the world’s Bitcoin mining operations, has filed for a Hong Kong IPO, revealing details about the company’s earnings. The company reported profit of $742.7 million for H1 this year, almost eight times growth on the same period last year, but analysts suggest the company suffered a massive decline in Q2 this year. A huge percentage of Bitmain’s assets are highly volatile cryptocurrencies, many of which have plummeted in value this year. TechCrunch

Bytedance balloons. Bytedance, the start-up behind news aggregator Toutiao and short video app Tik Tok, is reportedly seeking to raise $3 billion from investors including SoftBank to achieve a valuation of $75 billion. That would make the Chinese company one of the world’s most valuable private companies, nestling behind Uber’s recent $76 billion valuation. The Wall Street Journal

Didi rolls out in Japan. Didi Chuxing launched its ride hailing service in Japan on Thursday, partnering with investor SoftBank, debuting in Osaka. Japan is a popular destination for Chinese tourists and Didi’s expansion comes just ahead of China’s week long national holiday, starting October 1. Daiichi Kotsu Sangyo, Japan’s largest taxi operator, will utilize Didi’s fleet management and dispatch system and Chinese visitors will be able to hail local taxis though the Didi app. Nikkei Asian Review

In Case You Missed It

U.S. Army Reservist Is Accused Of Spying For China New York Times

Scientists look to Chinese soup ingredients to slow down progression of dementia The Straits Times

Pakistani businessmen demand release of wives trapped in China Financial Times

Chinese flight bookings to US ‘down 42 per cent for National Day holidays’ SCMP

China says Rohingya issue should not be ‘internationalized’ Reuters

China #MeToo: Why one woman is being sued by the TV star she accused BBC

U.S. to make ‘counter offer’ to stop Huawei in Pacific Financial Times

Politics and Policy

Pope on the ropes. Pope Francis has faced criticism over a deal the Vatican reached with Beijing last weekend. The Pope recognized seven Beijing-appointed bishops whom the Holy See had previously excommunicated. The Vatican traditionally maintains a monopoly on appointing Catholic leaders. On Wednesday, the Pope issued an open letter to China’s Catholics admitting the deal had led to “certain confusion” and asked them to trust in the Vatican’s decision. New York Times

Rough seas. China denied a U.S. warship’s request for a port visit to Hong Kong, days after the U.S. sanctioned China’s military for purchasing Russian weapons. Beijing also recalled its top naval officer to China, forcing a meeting with his U.S. counterpart to be cancelled. Beijing is not only displeased with U.S. sanctions but has also objected to Washington’s continued arms trade with Taiwan. Just this week, the U.S. approved a $330 million weapons deal with Taipei, the seat of Taiwan’s independent government. Bloomberg

Shifting sands. Voters in the Maldives ousted former president Abdulla Yameen and replaced him with Ibrahim Mohamed Solih. The former ruler had grown hostile towards India and more welcoming towards China, while the new president is the opposite. Solih has already affirmed India as the Maldives’ closest ally. India is wary of China’s growing clout in what the subcontinent considers its natural sphere of influence. Financial Times

 

This edition of CEO Daily was edited by Eamon Barrett. Find previous editions here, and sign up for other Fortune newsletters here.