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Geopolitical Monitoring Report | January 20, 2023
China | United States
High Profile US and Chinese Officials Meet in Davos as Tensions Between Beijing and Washington Continue to Rise
Background:
US Treasury Secretary Janet Yellen met with Chinese Vice Premier Liu He at the ongoing World Economic Forum in Davos, Switzerland this week, in a meeting that was described as positive for both sides. Reporters noted that Yellen appeared to use the meetings as a way of gaining insight into China’s increasingly opaque economic figures and data. Chinese officials spent the meeting assuring US Treasury officials that Beijing would be able to exit its restrictive COVID-19 policies and avoid a potential crisis in its real estate industry without damaging economic growth.
While there is hope that the recent mass travel connected to Lunar New Year celebrations will provide an economic boost to the country, there is a risk that rising COVID-19 cases stemming from the recent holiday travels will offset any economic gains. In addition, population figures showed that China’s population has officially decreased for the first time in six decades, which will place further pressure on China’s slowing economy.
Chinese Leader Xi Jinping’s increasingly arbitrary responses to China’s crisis – such as his sudden ending of “zero-COVID” – may be rooted in the fact that after he secured his third-term, he has surrounded himself with nothing but loyalists who will not weigh all of their options before enacting policy. This growing fear of arbitrary decision making was cited by a former Japanese General who stated this concern led to Japan making significant investments in its military in order to deter Beijing.
Impact:
The meeting between Yellen and Liu was a rare high-profile meeting between US and Chinese officials that ended on a positive note, however, it is unlikely to change the overall course of the relationship between Beijing and Washington. While the meeting did lead to Yellen being invited to visit China and continues the pattern of high profile talks between the two countries, the relationship between the US and China continues along a path of growing bifurcation between the two countries.
In addition to Japan moving to rebuild its military, US lawmakers on both sides of the political aisle are increasingly calling for the creation of a Pacific version of the NATO alliance due to fears that Xi’s increasingly arbitrary behavior may be setting the country on a course for an invasion of Taiwan. China’s falling population causing rising labor costs and the increasing geopolitical risks of doing business in the country have also led to European and American firms fleeing China for nations with lower manufacturing costs that also have governments that are perceived as “friendlier” to the West.
Mitigation:
Companies and organizations that have operations in China or rely on supply chains through the country must ensure they have adequate open-source intelligence monitoring and analysis capabilities that can enable them to track and forecast the growing divide between China and the West. This can prevent them from facing situations like those seen by Western businesses that had operations in Russia and were forced in some cases to take multi-billion dollar losses following Moscow’s invasion of Ukraine.
As the divide between China and the West deepens, China is likely to continue to engage in coordinated inauthentic behavior on Western social media platforms with the aim of setting the narrative and also attempting to encourage citizens in these countries to adopt more pro-China positions. Western sanctions on Chinese entities and individuals are also almost certain to increase as the divide between the two countries increases.
This will require all companies that do business with any Chinese entities to ensure they have proper due diligence to ensure they are not inadvertently doing business with sanctioned entities. The export bans on advanced computer chip technology that Washington recently enacted on Beijing and other similar measures also have the potential to encourage corporate espionage and other illicit efforts at gaining such technology targeting firms that are now prohibited from transferring technology to China.
Companies whose technology is covered by such restrictions should take concrete steps to ensure that they are not victims of such efforts by conducting proper due diligence on new hires to see if they have connections to companies that would seek to violate export bans. These companies also should also conduct due diligence on all new customers, in order to ensure that they are not inadvertently violating export bans by selling to a shell company set up to bypass them.
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