The US-China Cold War Has Begun

Vice President Pence’s speech to the Hudson Institute Thursday has been widely portrayed in the global press as an official declaration that the world’s two largest economies are engaged in a “New Cold War.” It’s hard to read it any other way.

The origin of the term “Cold War” is generally credited to George Orwell, who used it in a trenchant 1945 essay pondering the geo-strategic implications of the atomic bomb. The existence of a weapon so destructive, Orwell predicted, would put an end to overt shooting wars between great powers, and replace them instead with endless below-the-brink hostilities: espionage, subterfuge, influence-peddling, propaganda, and proxy wars. Conflict would stop short of direct combat—but drag on across many fronts without resolution; the bomb’s legacy, he warned, would be a “peace that is no peace.”

That proved a prescient description of the rivalry between the US and the Soviet Union from 1945 until the collapse of the Berlin Wall—and, in recent months, has become an apt characterization of the Sino-American relationship.

In his Hudson Institute address, Pence detailed a litany of Chinese offenses: meddling in domestic US elections; doling out unfair subsidies to state-owned companies; forcing US companies to surrender technology as the price of competing in the Chinese market; mounting cyber-attacks on US companies and government agencies; recklessly confronting the US naval forces in the South China Sea; bullying Taiwan; and trampling the rights of its own citizens.

China’s goal, Pence charged, was to thwart a second term for Donald Trump, “push the United States of America from the Western Pacific and attempt to prevent us from coming to the aid of our allies.”

Pence’s speech came two days after a Chinese warship sailed within 45 yards of a US destroyer in waters near one of the disputed islets China claims in the Spratly archipelago. On Thursday, as Pence delivered his address, Bloomberg published a blockbuster report alleging that microchips designed and manufactured by the Chinese military were planted in server motherboards at factories supplying San Jose-based Supermicro, and later made their way into data centers controlled by dozens of US companies including Amazon and Apple, a major bank, and US government contractors.

China’s response to Pence’s broadside was predictably apoplectic. The Chinese foreign ministry decried his remarks as “ridiculous,” “malicious slander,” and created out of “thin air.” But China’s leaders have to be taking note of the administration’s strident tone. A few weeks ago, Beijing began pushing the idea that there’s no point in holding trade talks with the US because the Trump administration’s larger goal is to stop China’s rise as a global power. The claim was mostly a pose—but is starting to look a lot more plausible.

More China news below.

Politics and Policy

All at sea. A U.S. warship and a Chinese destroyer averted a collision in the South China Sea on Sunday, sailing within 45 yards of each other. The destroyer was sent to intercept the U.S.S. Decatur, which was performing a Freedom of Navigation Operation near disputed island territories. The move by the PLA Navy was more aggressive than a normal response to FONOPs and comes amid heightened tensions between the two countries. The U.S. Navy is reportedly planning a major show of force in the South China Sea. South China Morning Post

Talks on, talks off. Secretary of State Mike Pompeo is due to arrive in China on Monday, as tensions over trade, cybersecurity and the South China Sea are on the rise. Earlier this week, a U.S. official claimed China had cancelled security talks due to be held between Secretary of Defense James Mattis and his Chinese counterparts. China’s Foreign Ministry spokesperson Hua Chunying issued a stern rebuke of that claim, asserting that the U.S. had requested to postpone the meeting. “China is extremely dissatisfied with this,” Hua said. The Washington Post

Fan Bingbing fined. Fan Bingbing, China’s highest paid actress, has re-emerged after several months of absence. Fan, who starred in X-men: Days of Future Past, was last seen publicly on July 1, before an accusation of tax evasion pre-empted her sudden disappearance from public life. On Wednesday, Fan’s Weibo account carried a message – her first post in months – expressing her ‘shame and guilt’ for skirting tax laws. Authorities have now fined Fan and other relevant companies $70 million, claiming she will avoid criminal prosecution if she pays on time. Financial Times

Innovation and Tech

Hardware hack? Chinese spies compromised America’s tech supply chain by hiding tiny chips on computing components sold in the U.S., in a covert operation that reached nearly 30 major companies, Bloomberg reports. The minuscule spy chips – no bigger than a sharpened pencil lead – were hidden on components sold to American motherboard supplier, Supermicro. The chips then found their way into products supplied to government contractors, a major bank, Apple and others. Apple, and implicated other companies, have denied the reports. Bloomberg

Tencent turns to business. Tencent announced its first restructuring in six years as a freeze on gaming approvals pressures the company to seek alternative revenue streams. The shake-up will create a new division to focus on business services, like cloud computing, where Tencent lags behind rival Alibaba. Tencent will also trim its business units to six, down from seven, by consolidating the responsibilities of its content-focused departments. Wall Street Journal

Breaking America. Tencent Music, China’s largest online music platform with over 800 million monthly active users, filed for its hotly awaited IPO in New York. Bankers expect the already profitable music arm of Tencent to raise $2 billion, valuing the unit at $30 billion. The bulk of Tencent Music’s revenue is derived from in-app social features – for example, users can pay to send virtual gifts to their friends. Financial Times

ZTE breaks probation. A U.S. judge has ordered ZTE to accept an additional two years of monitoring after finding the telecoms company in violation of probation. The Chinese manufacturer was originally compelled to accept a compliance monitor until 2020 but will now have to accept oversight until 2022. The probation was implemented in March after ZTE pleaded guilty to violating U.S. sanctions on Iran. It has been extended because the company was found to have lied about punishing executives involved in the violation. Reuters

In Case You Missed It

Alibaba’s Jack Ma is giving up ownership of Chinese entities SCMP

The Head of Interpol Is Missing After a Trip to China TIME

FT journalist’s visa renewal denied by Hong Kong Financial Times

Pence’s China speech seen as portent of ‘New Cold War’ NYT

US considered ban on student visas for Chinese nationals Financial Times

Pope gives Chinese bishops ‘warm welcome’ Channel NewsAsia

Steve Bannon, two Chinese military officers and the book that made him a China hawk SCMP

Economy and Trade

USMCA blocks China. A clause inserted in the USMCA – the intended successor to NAFTA – prohibits members from signing trade deals with ‘non-market’ countries. The condition is both an attempt to limit China’s growing relationship with Canada and Mexico and a tool to pressure China into opening its markets. Commerce Secretary Wilbur Ross indicated the ‘poison pill’ condition may be replicated in future U.S. trade deals with other countries. Reuters

Fuel for winter. Beijing won’t renew pollution-tackling curbs imposed on the coal and steel industry last year. The restrictions forced a number of factories to halve production during the winter months, when airborne pollution is typically worsened by the climate. The decision not to implement the limits this winter comes as China’s economy faces a slowdown due to trade tensions with the U.S. Financial Times

War wages on. J.P. Morgan has downgraded its rating for Chinese equities from overweight to neutral, predicting that a “full-blown trade war” will be the base case scenario for 2019. An emerging markets strategist at the bank warned that China’s GDP growth could decline a percentage point on the basis of the latest round of tariffs. CNBC

Dollar debt. China is planning to sell $3 billion in U.S. dollar bonds this month, its second such sale in a year. The country is apparently planning to become a regular issuer of sovereign debt, this time offering bonds with five, 10 and 30 year maturities. Nikkei Asian Review



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

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