Eye on China

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I. Coronavirus Update

There have been a bunch of developments related to the coronavirus outbreak in China. Like last week, I’ll try and compile some of the key aspects of the story, beginning with the numbers. 

In a nutshell: The numbers are likely to continue to keep going up for the moment, with Wuhan and other cities in Hubei facing difficult times ahead. The peak of the outbreak is still some way away. As expected, the central leadership is taking more visible command, replacing local officials and directing propaganda. It’s also clear that there is greater concern among central leaders about the economic impact of the outbreak. The political risk still remains rather high for local officials across the affected regions. They have the difficult task of ensuring growth, stabilising employment and meeting poverty reduction targets while ensuring that the outbreak doesn’t spread further.

Spike in Numbers: The past two days have witnessed a dramatic spike in reported infections and deaths in Hubei. At present, the death toll stands at 1380, with over 63000 cases of infection. The Hubei health commission said that the central government’s decision to change diagnostic guidelines led to the spike in cases. What this means is that now chest x-rays used alongside standard laboratory tests can be sufficient for diagnosis.

What’s interesting is that before this reclassification led to a surge in reported cases, Chinese media and officials had highlighted that the number of new cases had been declining. What should one make of the change in numbers? Michael Ryan, executive director of the World Health Organization’s Health Emergencies Program, says that “This does not represent a significant change in trajectory of the outbreak.” He called the jump in cases “an after-fact of reporting.” Zhong Nanshan, an 83-year-old epidemiologist who won fame for combating the SARS epidemic in 2003, told Reuters that the outbreak is likely to peak by middle or late February, with things coming under control by April.

In terms of the response, there’s a differentiated effort being rolled out, i.e., the central government isn’t adopting a blanket one-size-fits-all policy. For instance, in Huanggang in Hubei, there are strict controls on the movement of people from residential communities. Also, people’s daily necessities are being handed out by the community committees, and purchasing services will be provided for urgently-needed goods. Meanwhile, Xinhua reports that Chinese provinces of Anhui, Jiangsu and Jilin, as well as the cities of Shanghai, Chongqing and Hangzhou have announced putting individuals on a credit blacklist for concealing symptoms and violating quarantine. From a healthcare support perspective, state media reports that a total of 189 medical teams of 21,569 medical workers had been sent to Hubei.

Meanwhile, schools are being reopened gradually. Reuters reports that Wang Dengfeng, an official in charge of virus prevention at the Ministry of Education, told the press that local authorities are working to try to reduce the number of students returning at any one time. A number of cities have delayed the opening of schools to early March.

Central Leadership Actions: This week, Xi Jinping finally stepped out to visibly take the lead in the fight against the outbreak. Xinhua reported: “Xi is the commander of the people's war against the epidemic.” This came as wearing a mask, Xi visited a residential community, a hospital and a district center for disease control and prevention in Beijing. He also spoke to medical workers in Wuhan via video conferencing, hailing Wuhan as “a heroic city” and people of Hubei and Wuhan as “heroic people.” Unsurprisingly, state media focussed on how Xi’s visit had “injected enormous confidence into the battle against” the outbreak.

Later in the week, the Chinese president chaired a Politburo Standing Committee meeting. The statement coming out of that meeting suggested greater confidence in the leadership. Xinhua reports that Xi said the epidemic situation has shown positive changes. There’s also a plan that the meeting outlined:

raise the hospital admission capacity

reduce the infection rate by strengthening the prevention and control in communities

provide more medical resources in Hubei, especially in Wuhan

step up health monitoring of returning personnel in regions with large population inflows. 

efforts to ensure medical supplies as well as the supply of daily necessities

Xi also called on Party committees and governments at all levels to minimize the impact of the epidemic to maintain steady economic performance as well as social harmony and stability. Read this in the context of Reuters’ report on the February 3 PSC meeting. The report citing sources said: “After reviewing reports on the outbreak from the National Development and Reform Commission (NDRC) and other economic departments, Xi told local officials during a Feb 3 meeting of the Politburo’s Standing Committee that some of the actions taken to contain the virus are harming the economy, said two people familiar with the meeting, who declined to be named because of the sensitivity of the matter. He urged them to refrain from ‘more restrictive measures’, the two people said."

Premier Li Keqiang, meanwhile, also led two key meetings this week. Chairing the State Council’s meeting, Li praised the work done to control the epidemic. He further called for efforts towards orderly resumption of work and production by companies based on local conditions and the orderly return of migrant workers. He also promised support mechanisms and favorable measures like cutting loan interest rates and improving tax reduction policies to support enterprises, along with efforts to prevent large-scale layoffs, encouraging local authorities to take comprehensive measures to support employers and ensure a stable job market. The focus on employment comes amid new reports of job losses. Another key objective is ensuring that the objective of eradicating poverty by the end of this year isn’t derailed. The State Council Leading Group Office of Poverty Alleviation and Development said this week that “battles against poverty and the epidemic are major political tasks requiring equal attention and confidence should be enhanced in completing poverty reduction tasks as scheduled."

On Thursday, Li also chaired a meeting of the leading group on epidemic control. The meeting called for differentiated measures for different regions to control the outbreak. The leading group instructed hard-hit cities in Hubei such as Xiaogan and Huanggang to carry out equally strict measures as in Wuhan in surveillance, quarantine and treatment. The meeting also highlighted the importance of speeding up the clinical trial of drugs.

Local Leadership Change: At the same time, this week, the central leadership took control in terms of purging local officials in Hubei. Hubei party secretary Jiang Chaoliang was replaced by Shanghai mayor Ying Yong, believed to be a close ally of Xi. Wuhan CPC leader Ma Guoqiang has been replaced by Wang Zhonglin, party secretary of Jinan. And most importantly, Chen Yixin, chief of the Central Political and Legal Affairs Commission, flew into Hubei to take charge of the fight against the virus, as the deputy chief of the task force handling the crisis. Chen’s immediate assessment of the situation was rather sobering, at least for Wuhan where the number of cases is still unclear and could keep rising. Xinhua’s Zichen Wang has a good Twitter thread on this.

II. Modi's Letter to Xi

Indian Prime Minister Narendra Modi sent a letter to President Xi, expressing solidarity and offering assistance to deal with the coronavirus outbreak. The letter seemed to be received well, with the foreign ministry saying that “India’s acts of goodwill fully demonstrate its friendship with China.” Discussing India’s response to the outbreak in China, Qian Feng, director of research department of National Strategy Institute of Tsinghua University, writes for Global Times: “At this critical point as China fights the epidemic, any country that offers understanding, support and aid will be appreciated. The Chinese people will remember their support and translate their gratitude into a strong driving force for the promotion of bilateral relations."

There were two important developments diplomatically apart from the letter. First, India revoked a ban on the export of medical gear and accessories such as masks, albeit with certain caveats. The Indian government had earlier banned export of personal protective equipment, including surgical masks, gloves and N95 respirators. However, on February 8, it lifted the restriction on gloves and surgical masks, but continued with the ban on N95 masks. Subsequently, reports state the first batch of medical supplies such as gloves, surgical masks, disposable masks, rubber gloves, latex gloves, boot covers, medical work caps, surgical suits and protective facial screen (disposable) will be sent to China this week.

Further from an Indian perspective, the coronavirus outbreak presents economic challenges and opportunities. I’ve covered some of this over the past two weeks, but let’s just take a look at what’s developed over this week. India’s Chief Economic Advisor Krishnamurthy Subramanian said this week that the outbreak provides “a good opportunity to India to expand trade and follow an export-driven model.” Suneera Tandon, Prasid Banerjee and Biman Mukherji report in Mint that Indian businesses see potential benefits over the longer term from the novel coronavirus epidemic as companies focus more on local sourcing to offset supply disruptions in the future. But that doesn’t imply that there won’t be short term challenges. Their piece discusses the electronics and automobile industries. Both of these sectors are heavily dependent on imports of Chinese components.

One clear positive from an Indian perspective, however, are the deals in the oil market. Distressed oil supplies, owing to a slump in demand in China, are being pitched to Indian buyers at discounted rates. Also Saikat Das reports for ET that Indian companies selling dollar bonds are getting good rates owing to limited competition for funds from Chinese enterprises. In the past two weeks, Indian companies that had lined up $1.55 billion of issues received bids for about $11 billion.

But then there are significant challenges too for a host of sectors in India, ranging from pharma to solar power. Himani Chandna reports for ThePrint that pharmaceutical companies have given the Narendra Modi government a list of 57 medicines that are likely to go out of stock following the shutdown in China. This is because India imports over 70 percent of its API requirement from China. The report adds that the list was shared on Monday, with a warning that stocks of APIs will get over within the next three months. This, however, means that a shortage of drugs is still some way away, if it even occurs. Likewise, the solar power sector is likely to be hit if the economic situation in China worsens, given that India imports 90% of its solar modules and panels requirement from China and Malaysia.

III. Indo-Pacific, Huawei & Espionage

The Trump administration has proposed $1.5 billion in budgetary allocation for 2021 fiscal for the Indo-Pacific region. “The future of the Indo-Pacific, which contains roughly half the world's population and many of the fastest-growing economies, is critical to US security and long-term economic interests,” the White House said, adding that “The Budget provides $1.5 billion for the Indo-Pacific, reflecting a strong Administration commitment to ensuring that the region remains free, open, and independent of malign Chinese influence.” 

PTI reports that as per the White House, this funding supports democracy programs, strengthens security cooperation, improves economic governance and facilitates private sector-led economic growth. $30 million is included in the budget for the global engagement centre dedicated to countering foreign state and non-state propaganda and disinformation from China. $0.8 billion for the International Development Finance Corporation for private sector development internationally to support corporate growth in less-developed countries and to provide a transparent, high-quality alternative to “predatory Chinese international lending” in the Indo-Pacific and other strategic regions, it said.

Meanwhile, Admiral Philip Davidson, commander of the US Indo-Pacific Command, delivered a speech in Australia this week. He said that the US “was all in” to counter China in the Pacific, citing its “excessive territorial claims, debt trap diplomacy, violations of international agreements, theft of international property, military intimidation and outright corruption.” Davidson added: “The Communist Party of China seeks to control the flow of trade, finance, communications, politics and the way of life in the Indo-Pacific."

From the Indo-Pacific to technology frictions, this week Huawei and two of its US subsidiaries were charged with racketeering conspiracy and conspiracy to steal trade secrets in a federal indictment. WSJ reports that “federal prosecutors in Brooklyn said the new charges related to a decadeslong effort by Huawei and its subsidiaries, in the U.S. and China, to steal intellectual property, including from six U.S. technology companies...Prosecutors said Huawei’s efforts were successful and resulted in the company obtaining nonpublic intellectual property about robotics, cellular-antenna technology and internet-router source code. The alleged thefts allowed the company to cut costs and research-and-development delays, giving it an unfair competitive advantage, according to prosecutors. Huawei called the new charges against it and U.S. units Huawei Device USA Inc. and Futurewei Technologies, Inc. unfounded and unfair."

Politico, meanwhile, reports that the Pentagon is poised to reverse its opposition to a proposal that would further crack down on US exports to Huawei. Recall that Huawei is on the entity list, which restricts US exports. But American firms had found a loophole in a rule that a foreign-produced good that contains upto 25 percent U.S.-origin content can be exported to a company on the entity list. The US Commerce Department reportedly wanted to cut that threshold down to 10%, but the Pentagon had opposed this. Now, it appears that there’s a rethink taking place. Yet, while this might happen, in the meantime, Huawei is getting a 45-day reprieve from the Commerce Department, which announced on Thursday that it is extending a temporary general license allowing American companies to do business with it. The reprieve is half the period of its prior extensions -- Huawei previously got 90-day reprieves in May, in August and in November.

At the same time, US officials are also saying that they have evidence now that Huawei can covertly access mobile-phone networks around the world through “back doors.” WSJ reports: “When telecom-equipment makers sell hardware such as switching gear, base stations and antennas to cellphone carriers—which assemble the networks that enable mobile communication and computing—they are required by law to build in ways for authorities to tap into the networks for lawful purposes. These companies also are required to make sure they themselves can’t gain access without the consent of the network operator. Only law-enforcement officials or authorized officials at carriers are allowed into these ‘lawful interception interfaces.’ Such access is governed by laws and protocols in each country. U.S. officials said Huawei has built equipment that secretly preserves its ability to access networks through these interfaces, without the carriers’ knowledge. The officials didn’t provide details of where they believe Huawei is able to do so. Other telecom-equipment manufacturers don’t have the same ability, they said."

While on the tech competition, there’s a wonderful interactive assessment that Nikkei Asian Review has put together, mapping patent competition between the US and China over the decade. They look at competition across 10 domains: AI, Quantum computing, Regenerative medicine, Autonomous driving, Blockchain, Cybersecurity, Virtual reality, Lithium-ion batteries, Drones, and Conductive polymers.

Here’s what their assessment concludes:

"China and the U.S. are competing to be the world's technological master 10 years from now. After analyzing patent application data in 10 categories, including artificial intelligence and quantum computing, Nikkei has concluded that China will reign supreme in nine categories. Chinese tech giants Baidu and Alibaba Group will be the major innovators. Meanwhile, 64 of the global top 100 companies in terms of patent quality will be American.”

Finally, in another indictment this week, four PLA members have been charged with hacking in the 2017 Equifax Inc hacking case, which saw sensitive data on nearly 150 million Americans being compromised. The four defendants— Wu Zhiyong, Wang Qian, Xu Ke and Liu Lei —are allegedly members of the People’s Liberation Army’s 54th Research Institute, according to the indictment, and are believed to be residing in China. After 2015, the 54th Research Institute was moved under the aegis of the PLA’s Strategic Support Force’s Network Systems Department.

The indictment alleges that the defendants used 34 servers located in nearly 20 countries to infiltrate the company’s network. It lays out details of the operation in which hackers allegedly maintained persistent access to Equifax’s systems for weeks, stole login credentials and ultimately ran about 9,000 queries for data, which were masked through encrypted channels, before being detected and booted out. The Equifax data breach had far-reaching implications for Equifax and the consumer credit industry. The company eventually agreed to pay up to $700 million to settle claims that it broke the law during the data breach and to repay harmed consumers.

The Chinese foreign ministry has, of course, denied the charges.

IV. Wang Yi in Germany

Chinese Foreign Minister Wang Yi is in Berlin this week. Meeting with his German counterpart Heiko Maas, Wang outlined the key agenda items for China-EU ties for the year. He said the two sides have agreed to strive to finish the talks on a China-EU investment agreement and initiate feasibility study on a free trade deal as part of key agendas for this year. The two sides will also work out a five-year plan for their cooperation and push for aligning the Belt and Road Initiative with the EU's Eurasia connectivity strategy. While in Germany, Wang will attend the Munich Security Conference over the weekend.

Huawei and 5G continue to be a sore spot in Sino-European ties. For instance, in Germany, lawmakers from Chancellor Angela Merkel’s ruling conservatives have backed a position paper on 5G mobile networks that recommends tougher rules on foreign vendors while stopping short of banning Huawei. Reuters reports that the the paper makes a clear distinction between access, transport and core networks that are especially sensitive, thus allowing different handling of Huawei components in the various parts of the 5G network. The paper suggests using products from several companies to avoid a “monoculture,” and calls for the concept of trustworthiness to be anchored in proposed tweaks to Germany’s telecoms and IT security laws. On the other hand, amid reports in French media that the government is considering restrictions on Huawei, the Chinese embassy in Paris lashed out with a dire warning.

Pointing out that China had used foreign companies such as Finland’s Nokia and Sweden’s Ericsson to equip its own domestic networks, the embassy said: “We do not wish to see the development of European companies in China affected due to discrimination against Huawei and protectionism in France and other European countries."

Meanwhile, the Munich Security Conference report has some interesting survey outputs with regard to China.

V. The Long & Short of It...

HKMAO’s New Chief: Beijing has removed Zhang Xiaoming as director of the Hong Kong and Macau Affairs Office, replacing him with Xia Baolong. The 67-year-old is currently the vice chairman of the Chinese People’s Political Consultative Conference. Xia earlier served as Xi’s deputy when he was Party secretary of Zhejiang province from 2003 to 2007. Earlier, in January, Luo Huining had replaced Wang Zhimin as the head of the HK Liaison Office. Jean-Pierre Cabestan, a professor of political science at the Hong Kong Baptist University, assesses that with the changes, “Xi now has his proteges in place over Hong Kong for the first time.”

China-Japan Bonhomie: Japan’s response to the coronavirus outbreak in China appears to be winning it some friends. Both Japanese and Chinese media have picked up the story of Tang dynasty poem written on boxes of relief materials sent by Japan winning Chinese social media praise. The eight-Kanji character piece reads: “Mountain, River, Different, Areas/ Wind, Moon, Same, Sky” (Even though we live at different places, we live under the same sky). According to an Asahi Shimbun report, since the outbreak last month, Chinese media have been extensively reporting on support coming from Japan. Japan’s central and local governments and Japanese companies have donated 2.72 million masks to China to prevent the infection from spreading, the Chinese Embassy in Tokyo announced on its website. As of Feb. 7, Japan had also sent 380,000 pairs of gloves, 150,000 protective suits, 75,000 protective glasses, thermometers and antiseptic solutions, according to the embassy. Monetary donations from Japan, including from the private sector, totaled 28.89 million yuan ($4.1 million). Meanwhile, Kyodo reports that China’s foreign policy chief Yang Jiechi will visit Japan on Feb. 28 and 29, with preparations for a Xi visit later this year on the agenda.

CPEC Authority’s Woes: The Express Tribune reports that a powerful group in Pakistan’s bureaucracy has blocked the appointment of chief executive officer of the China-Pakistan Economic Corridor (CPEC) Authority. The report says that CPEC Authority Chairman Lt Gen (Retd) Asim Saleem Bajwa, in consultation with Planning Minister Asad Umar, had decided to appoint Ghulam Dastgir Baloch as the CEO. But “certain top-level officers in the bureaucracy have approached the CPEC Authority chairman, asking him to pick someone from the Pakistan Administrative Service.” The report explains that CPEC Authority is to take charge of the corridor in entirety, but it remains dysfunctional due to administrative and financial constraints. Against the demand for a Rs 359-million budget to make the authority fully operational, the Ministry of Planning has given only Rs 121.4 million for now.

Meanwhile, Turkey’s Recep Tayyip Erdogan is in Pakistan this week, with Prime Minister Imran Khan likely to invite him to participate in CPEC projects. Meanwhile, Pakistan's National Assembly passed a resolution on Thursday to express solidarity with China over its battle against the novel coronavirus outbreak. At the same time, Islamabad has remained steadfast in its refusal to evacuate students from Wuhan.