Asia Communique: The Tech and Economy Play
Biden is set to unveil new measures targeting China to cement legacy
Hello Readers,
The US and China are locked in a tech and economy competition and we got to see new measures this week by both sides to remain ahead in the competition.
Biden Administration Targets Chinese Auto Imports Over Security Concerns
The Biden administration has unveiled proposed regulations to block the sale or import of connected vehicle software originating from "countries of concern," chiefly targeting China. This action would effectively ban all auto imports from China into the United States, marking a significant escalation in trade restrictions between the two nations.
National Security at the Forefront
In an official statement, the White House emphasized that vehicles equipped with hardware and software from China pose an "acute" threat to U.S. national security. The administration cited risks of "sabotage and surveillance, such as remotely disabling a vehicle in the middle of the road." The proposed rules aim to cover all technologies that connect a vehicle to external networks, including Bluetooth, Wi-Fi, cellular, and satellite components. There are also concerns that devices like cameras, sensors, and onboard computers could be exploited by foreign adversaries to gather sensitive data on American citizens and critical infrastructure.
Impact on Automakers and Suppliers
The new regulations stem from an investigation launched earlier this year by the Commerce Department into connected vehicle software produced in China and other nations considered antagonistic to the U.S. If implemented, these rules would require American automakers and suppliers to phase out Chinese-made software and hardware from their vehicles in the coming years.
Earlier this month, the administration solidified new tariffs on Chinese imports, including a 100% duty on electric vehicles and increased levies on Chinese-made batteries and key minerals. These measures add to the ongoing trade restrictions affecting Chinese-made light-duty vehicles and component parts like computers and batteries.
China's Rising Automotive Influence
These developments come at a time when China has become the world's leading auto exporter, producing more vehicles than ever before. Notably, China has excelled in manufacturing budget-friendly, highly affordable electric vehicles (EVs), a sector where U.S. and European manufacturers have struggled to compete. For instance, the BYD Seagull was China's bestselling vehicle in August, offering approximately 190 miles of range at a price point around $10,000. Even with a 100% tariff, the Seagull would still be priced significantly lower than most domestically produced EVs in the U.S.
Industry Reactions and Future Implications
U.S. officials have expressed concerns that allowing Chinese EVs into the American market could severely impact domestic manufacturers—a sentiment echoed by industry leaders. Tesla CEO Elon Musk has offered differing views, initially stating that China would "demolish" the U.S. auto industry without trade barriers, but later expressing opposition to tariffs.
In response to the U.S. actions, China has accused the United States of repeatedly misusing "the concept of national security" to unjustly target Chinese companies and hinder competition in global markets.
China's Central Bank Unveils Major Economic Stimulus
Amid escalating trade tensions with the United States, China's central bank, the People's Bank of China (PBOC), has announced a significant package of measures aimed at reviving the country's slowing economy. PBOC Governor Pan Gongsheng revealed plans to lower borrowing costs and enable banks to increase their lending capacities.
Monetary Policy Adjustments
Speaking at a rare news conference alongside officials from two other financial regulators, Mr. Pan announced that the central bank would cut the reserve requirement ratio (RRR) for banks by half a percentage point. This move is expected to free up about 1 trillion yuan ($142 billion) in liquidity. He added that another cut might be implemented later in the year.
The PBOC's decision to lower the RRR aims to stimulate lending by reducing the amount of cash banks are required to hold in reserve. This action is expected to increase the money supply, encouraging businesses and consumers to borrow and spend more.
Support for the Real Estate Sector
Further measures include reducing interest rates for existing mortgages and lowering minimum down payments on all types of homes to 15%. China's real estate industry has been struggling since 2021, with several developers collapsing and numerous unsold homes and unfinished building projects. By making mortgages more affordable and reducing down payment requirements, the PBOC hopes to reinvigorate the property market, which is a crucial component of China's economy.
Stock Markets React Positively
The announcement had an immediate impact on financial markets. Leading stock indexes in Shanghai and Hong Kong surged, ending the day more than 4% higher. The plans also included measures to support the stock market, further boosting investor confidence.
Analysis: The State of China's Economy
Challenges to Sustained Growth
China's recent economic data has been disappointing, increasing expectations that the world's second-largest economy might miss its own 5% growth target this year. The slowdown is attributed to several factors:
Real Estate Downturn: The property sector has been in crisis since 2021, affecting not just developers but also related industries like construction and materials.
Decreased Consumer Confidence: Economic uncertainties have led to reduced consumer spending, further slowing growth.
Export Pressures: Global demand for Chinese goods has softened, and trade tensions with the U.S. have introduced new barriers.
Policy Responses
The PBOC's stimulus measures are a response to these challenges:
Liquidity Injection: Lowering the RRR increases the funds available for banks to lend, aiming to stimulate business investment and consumer spending.
Mortgage Rate Cuts: Reducing interest rates on existing mortgages eases financial pressure on households, potentially increasing disposable income and consumption.
Lower Down Payments: Making it easier to purchase homes could revive the property market, absorbing unsold inventory and restarting stalled projects.
Impact of U.S.-China Trade Relations
The U.S. moves to impose tariffs and restrict imports of Chinese technology and automotive products add another layer of complexity:
Export Declines: New U.S. tariffs on electric vehicles and components could hurt China's automotive sector, which has been a bright spot in its economy.
Supply Chain Disruptions: Restrictions on technology imports may affect China's role in global supply chains, potentially leading to longer-term economic adjustments.
Global Economic Context
These developments occur against a backdrop of global economic uncertainty:
Monetary Policy Shifts: The U.S. Federal Reserve recently lowered interest rates for the first time in over four years, signaling concerns about economic growth.
Market Volatility: Financial markets worldwide are reacting to policy changes and geopolitical tensions, affecting investment flows and exchange rates.
Outlook and Considerations
Short-Term Relief vs. Long-Term Solutions: While the PBOC's measures may provide immediate economic stimulus, structural issues like high corporate debt levels and over-reliance on real estate investment remain.
Need for Structural Reforms: Economists suggest that China may need to implement deeper reforms, such as shifting towards a consumption-driven economy and improving transparency in financial markets.
International Cooperation: Resolving trade disputes with the U.S. could alleviate some economic pressures, but geopolitical considerations make quick resolutions unlikely.
Conclusion
The simultaneous actions by the U.S. and China highlight the intricate interplay between national security, economic policy, and global trade. The U.S. aims to protect its industries and national security interests, while China seeks to stimulate its economy amid internal and external challenges. These developments will have significant implications not only for both countries but also for the global economy, influencing trade patterns, investment decisions, and economic growth trajectories worldwide.
We are likely to see more China-targeted measures by President Biden in his last days as he seeks to cement his legacy. This is likely to include security and economic support for allies and parteners in Asia.
TIMELINE OF U.S. TECH RESTRICTIONS TARGETING CHINA
[August 2020]---------------------------------------------------------------------
- **Executive Orders on Chinese Apps**
- Aimed to ban U.S. transactions with TikTok and WeChat due to national security concerns.
- **Clean Network Initiative**
- Launched to exclude Chinese technology from U.S. telecommunications networks.
-----------------------------------------------------------------------------------
[November 2020]-------------------------------------------------------------------
- **Investment Restrictions on Military-Linked Companies**
- Prohibited U.S. investments in companies linked to China's military.
-----------------------------------------------------------------------------------
[December 2020]-------------------------------------------------------------------
- **Expansion of the Entity List**
- Added numerous Chinese companies, including SMIC, restricting access to U.S. technology.
-----------------------------------------------------------------------------------
[April 2021]----------------------------------------------------------------------
- **Cybersecurity Sanctions**
- Sanctioned Chinese firms involved in malicious cyber activities and espionage.
-----------------------------------------------------------------------------------
[June 2021]----------------------------------------------------------------------
- **Expansion of Investment Restrictions**
- Extended the list of companies under investment bans due to defense and surveillance links.
-----------------------------------------------------------------------------------
[December 2021]-------------------------------------------------------------------
- **Ban on Imports from Xinjiang Region**
- Enacted the Uyghur Forced Labor Prevention Act, banning imports unless proven free of forced labor.
-----------------------------------------------------------------------------------
[October 2022]--------------------------------------------------------------------
- **Export Controls on Semiconductor Technology**
- Implemented stringent controls on exporting advanced chips and equipment to China.
-----------------------------------------------------------------------------------
[November 2022]-------------------------------------------------------------------
- **Restrictions on Quantum Computing and AI Technology**
- Introduced export controls on technologies with potential military applications.
-----------------------------------------------------------------------------------
[May 2023]------------------------------------------------------------------------
- **Executive Order on Outbound Investments**
- Proposed screening and blocking U.S. investments in certain Chinese tech sectors.
-----------------------------------------------------------------------------------
[July 2023]-----------------------------------------------------------------------
- **Ban on Chinese-made Surveillance Equipment**
- FCC banned approvals of new telecom equipment from companies like Huawei and ZTE.
-----------------------------------------------------------------------------------
[September 2023]------------------------------------------------------------------
- **Sanctions on Companies Supporting China's Military**
- Added more firms to the Entity List, restricting access to U.S. technologies.
-----------------------------------------------------------------------------------