In today’s issue:
1. China Tests Biden Over Taiwan
- 'Top Conflicts to Watch in 2021: The Danger of U.S.-China Confrontation Over Taiwan'
- ‘Analysis: China tests Biden on Taiwan, with eye on another island’
- 'Biden’s Nightmare May Be China,' by Nick Kristoff
2. The UK Stands Up, the U.S. Not So Much
- 'Hong Kong’s Escape Routes'
- 'U.K. Opens Its Doors to Five Million Hong Kong Residents'
- 'Ted Cruz, Chinese Communist Party Agree: Keep Hongkongers Trapped in China'
3. Why Impeding U.S.-China Capital Flows Isn't Easy
- 'China is exploiting U.S. capital markets and workers. Here's what Biden should do,' Marco Rubio’
- 'U.S.-China Capital Flows are Vastly Underestimated'
- 'Why U.S. Securities Investment in China is Vastly Underestimated'
China has tested President Biden during his first week in office.
- That’s not unusual – it’s become conventional wisdom that adversaries will test a new U.S. president.
- What makes this first test a little unusual is that it was over the U.S. and China’s most contentious issue: Taiwan
As explained in the Nikkei Asian Review’s ‘Analysis: China tests Biden on Taiwan’:
- ‘On Monday evening, as Chinese people were looking at their smartphones, watching their leader Xi Jinping talk about the importance of global cooperation at an online conference hosted by the World Economic Forum, alerts flashed across many screens.’
- ‘It was an analysis piece by Chinese media, mocking a U.S. State Department statement that urged China to "cease its military, diplomatic and economic pressure against Taiwan." ’
- ‘The State Department statement, issued spokesperson Ned Price on Saturday U.S. time, had taken issue with 13 Chinese military aircraft entering Taiwan's air defense identification zone earlier that day.’
‘The U.S. needed to respond.’
- ‘If Washington had stayed silent, it could have sent the wrong signal, leading China to believe the Biden administration may be hesitant to take action even if China made military maneuvers against Taiwan.’
‘ "Pressure?" the analysis piece asked. "As everybody knows, the People's Liberation Army's combat-readiness flights in the airspace of the Taiwan Strait have become a norm." ’
- ‘China needs nobody's permission to decide what and when to fly, it said.’
- ‘The headline called the U.S. statement a "joke." ’
- ‘On Sunday, another 15 Chinese aircraft flew into Taiwan's air defense identification zone, or ADIZ, according to the island's Defense Ministry.’
‘What is noteworthy is that the Chinese military planes flew between the main island of Taiwan and Pratas Island southwest of it.’
- ‘The island, which sits in a strategic location in the South China Sea, is closer to Hong Kong than to the rest of Taiwan, though it is under Taiwan's control.’
- ‘And it is at Pratas Island where a behind-the-scenes tug-of-war is being played out between the U.S. and China.’
Nick Kristoff of The New York Times picks up the theme in 'Biden’s Nightmare May Be China':
- 'The first thing to say is that a war with China probably won’t happen.’
- ‘Yet if it does, it might begin in an obscure place few have heard of, like Pratas or Kinmen’
- ‘Both are controlled by Taiwan but are closer to China, and some Chinese and Americans alike worry that Chinese President Xi Jinping might invade one island or the other to pressure Taiwan.’
‘Or Xi might send a submarine to snip undersea cables that carry the internet to Taiwan, or he could impede oil deliveries to Taiwan.’
- ‘Or he might order a cyberattack to bring down Taiwan’s banking system.’
‘Most experts don’t believe that such an assault is likely (an all-out invasion of Taiwan is even less probable), but it is a considerably greater risk than it had been for decades.’
- ‘And what began on Pratas or Kinmen wouldn’t end there:’
- ‘The United States would most likely be drawn into perhaps the most dangerous confrontation with another nuclear power since the Cuban missile crisis.’
‘The coming years represent the greatest risks since I began covering U.S.-China relations in the 1980s, partly because Xi is an overconfident, risk-taking bully who believes that the United States is in decline.’
- ‘ “I think it’s unlikely that there’ll be a military confrontation there, but I don’t rule it out,” said Bonnie Glaser of the Center for Strategic and International Studies.’
‘That seems right to me — but I also worry that we’re wrong.’
- ‘Few expected Xi to pick fights with India on their shared border, as he has several times in the past year, and heaven help us if he is similarly reckless toward Taiwan and sparks a war with the United States.’
Taiwan has been considered the leading flashpoint for so many years that perhaps we just take the possibility of war for granted.
- And that of course would be a colossal error.
But as Yun Sun explains in ‘Top Conflicts to Watch in 2021: The Danger of U.S.-China Confrontation Over Taiwan’:
- ‘While people appear to believe that the Biden administration will strive to avoid acute crisis with China over Taiwan, U.S. policy toward Taiwan only reflects half of the story.’
- ‘The other, and more important half is from China.’
‘At least two factors contribute to China’s increasingly destabilizing stance:’
- ‘the belief that DPP is seeking “Taiwan independence,” and’
- ‘the indispensability of unification for China’s rise and for Xi’s glory.’
‘In this sense, the trajectory of China’s coercion will only intensify rather than subside.’
So, China will likely continue to test Mr. Biden on Taiwan.
- And any of those tests could lead to the miscalculation that ends in war.
- If that happens, it will be no 'black swan' - but you can sure that is what those who didn't factor in the risk will call it.
While China was testing Mr. Biden on Taiwan, the UK was in one sense testing China on Hong Kong. As The Wall Street Journal reports:
- ‘In an unusual move that is exacerbating tensions with Beijing, Britain has opened its doors to as many as five million residents of its former colony.’
- ‘As of Sunday, holders of British National Overseas passports—which are available to Hong Kong citizens born in the territory before it was handed back to China in 1997—can move with their families to the U.K. on five-year visas.’
British Prime MinisterBoris Johnson said:“We have honored our profound ties of history and friendship with the people of Hong Kong, and we have stood up for freedom and autonomy—values both the U.K. and Hong Kong hold dear.”
- And The Wall Street Journal said: ‘To its eternal credit, the British government is honoring its promise to its former colonial subjects by offering a path to citizenship for Hong Kongers who hold British National (Overseas) passports and their family members.'
If only the same 'eternal credit' attached to the U.S.
- In December, the House passed the bipartisan ‘Hong Kong People's Freedom and Choice Act of 2020, which would grant political asylum to any resident of Hong Kong who arrives in the United States, allowing them to remain in the country legally after the expiration of any other visa.’
The bill died in the Senate thanks to Ted Cruz.
- First, he called the bill a Democratic plot to "advance their long-standing goals on changing immigration laws."
- Second, he argued that China would use the special immigration status to slip its agents into the United States.
The contradiction shown in Mr. Cruz’s own family history was pointed out in several commentaries. An essay in reason, ‘'Ted Cruz, Chinese Communist Party Agree: Keep Hongkongers Trapped in China,' noted:
- ‘Cruz's father, Rafael, fled Cuba in 1957 with little more than a student visa and $100 sewn into his underwear—an oft-repeated detail that effectively conveys both the fear and hopefulness of the refugee experience.’
- ‘Importantly, he was granted political asylum when his student visa expired.’
- ‘If not for that last detail, it's highly unlikely that Rafael's son would have ever had the chance to stand on the floor of the U.S. Senate and declare, as he did on Friday, that America ought to make it more difficult for individuals and families to flee other oppressive communist regimes.’
Making Mr. Cruz’s opposition even more problematic:
- ‘The United States already extends that special status to refugees from 10 other countries, and the bill would have merely added Hong Kong to the list.’
The U.S. financial markets have been targeted for decoupling for some time now. Part of the reason is explained by Senator Marco Rubio in his op-ed, 'China is exploiting U.S. capital markets and workers.'
- 'For decades, establishment elites in our nation’s two major political parties ignored — and oftentimes furthered — the Chinese Communist Party’s efforts to undermine our national security, industrial capacity and the well-being of American workers.’
- ‘The greatest example of this is China’s exploitation of U.S. capital markets and Wall Street’s role in facilitating the transactions that transfer American investment to malicious Chinese companies.’
‘China can finance its industrial ambitions with the deepest, most liquid capital markets in the world — our own.’
- ‘In Congress, we must continue our bipartisan efforts to stop China’s exploitation of U.S. finance. I will soon be reintroducing my American Financial Markets Integrity and Security Act, which would ban malicious Chinese companies from operating in U.S. capital markets.’
But Chinese companies ‘exploiting’ U.S. capital markets is only a part of the picture.
- There is also the matter of U.S. investment in Chinese securities.
Until the publication of ‘US-China Financial Investment: Current Scope and Future Potential, A Report by the US-China Investment Project,’ policymakers like Mr. Rubio underestimated the amount of bilateral capital flows.
- And equally important they were unaware of opaque conduits that make calculation difficult.
- Without this understanding, no way could they limit the capital invested in Chinese securities - they can't hit what they can't see. (Whether these efforts are good policy is another question.)
This 24-page report is a joint effort between the Rhodium Group and the National Committee on U.S.-China Relations.
- Here is just one highlight:
'The United States is China’s most important financial counterpart, save for Hong Kong. US markets have been critical to Chinese company fundraising.'
- 'We estimate there was as much as $3.3 trillion in US-China two-way equity and bond holdings (including securities held by central banks as reserves) at the end of 2020—nearly double the official figure of $1.8 trillion.'
- 'Official underreporting reflects the complex, multi-modal structures that are often used for international securities investments and the challenges statistical agencies have determining securities issuers’ and owners’ nationalities.'
'US holdings of Chinese securities neared $1.2 trillion at the end of 2020.'
- 'We estimate that US investors held $1.1 trillion in equity and $100 billion in debt securities issued by Chinese entities at the end of 2020.'
- 'That is about five times the holdings captured in official US data, which shows $211 billion in equity and $29 billion in debt holdings as of September 2020.'
- 'Most of the disparity is accounted for by firms from China using complex legal structures to issue shares out of tax havens that trade on US exchanges.'
‘Chinese holdings of US securities reached as much as $2.1 trillion.’
- ‘We estimate Chinese investors held $700 billion in equity and $1.4 trillion in debt securities issued by US entities at the end of 2020.’
- ‘In comparison, official US data report $240 billion of equity and $1.3 trillion of debt holdings as of September 2020.’
- ‘Most of this difference is accounted for by equity investments misclassified in official sources due to investor efforts to circumvent Beijing’s capital controls or the use of Hong Kong as an investment intermediary.’
This graphic summarizes the Project’s finding on this topic:
This analysis is spectacular – and, if absorbed by D.C. policymakers and think tank analysts alike, it will have a big impact on how we think about the U.S.-China investment relations.
- This is one you should definitely read carefully.