News: China can’t get what it really wants, by China Watcher of the week, Matt Turpin

Thursday, March 25, 2021

China can’t get what it really wants, by China Watcher of the week, Matt Turpin

Mar 25, 2021

Welcome, China Watchers. This week's guest host is Matt Turpin, former China director at the U.S. National Security Council and editor of the Hoover Institution's China Global Sharp Power Weekly Alert. Over to you, Matt! — Ben Pauker, world and national security editor

The Anchorage meeting is over and U.S.-China relations remain as frosty as the weather outside the Hotel Captain Cook. China Watcher readers likely observed the tense exchange at the start of the meeting as well as remarks by Secretary of State Antony Blinken and National Security Adviser Jake Sullivan at the conclusion. As your host listened to China's foreign affairs chief Yang Jiechi, it felt like he was channeling Tom Hardy's Bane to Christian Bale's Batman: "Victory has defeated you!"

Then on Monday, the EU approved sanctions on four Peoples Republic of China (PRC) officials connected with the internment of hundreds of thousands of Uyghurs in Xinjiang as well as a portion of the state-owned paramilitary organization, Xinjiang Production and Construction Corps — the same entity the Treasury Department sanctioned in July. Not to be left out, the U.K. announced matching sanctions and joined the U.S. and Canada in issuing a joint statement denouncing Beijing's human rights abuses. Hours later, China imposed a series of reciprocal sanctions on European parliamentarians, think tanks and scholars for interfering with the PRC.

Perhaps the most important context for the Anchorage meeting was that the Biden administration purposely placed it between high-level dialogues with allies in Asia and Europe. Those discussions involved Cabinet officials traveling to meet partners on their home turf and the optics of having the U.S. secretary of defense in Delhi during the meeting provided a strong reinforcement to the Quad Leaders' Summit held the previous week. This sophisticated choreography helps to reinforce President Joe Biden's approach to building international consensus in practical and symbolic ways, as both Beijing and Washington maneuver to achieve their objectives.

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Of course, Beijing can't get what it really wants: unhindered access to the benefits of a deeply interconnected world while rejecting any "interference" into issues the Party considers sensitive. This desire to be simultaneously part of the international system while avoiding accountability to international norms is a long-held fantasy of some PRC leaders. However, the experience of the last few weeks makes it clear that Beijing's confidence, as my colleague Jude Blanchette rightly pointed out in China Watcher two weeks ago, is at an all-time high.

Which brings us to a series of actions over the past few weeks — ranging from environmental concerns to corporate governance — that may seem unrelated but could have important consequences to the PRC's economic, technological and industrial trajectory.

— Two weeks ago, the U.S. Department of Labor issued a statement that it would revisit a Trump administration rule that would have prevented pension funds from using Environmental, Social and Corporate Governance (ESG) considerations when making investment decisions.

— Last week, the acting chair of the U.S. Securities and Exchange Commission (SEC) described how the SEC is "confronting the risks and opportunities that climate and ESG pose for investors, our financial system, and our economy." And during his confirmation hearing for chair of the SEC, Gary Gensler indicated that he supports greater corporate disclosures on ESG issues. Taken together, it appears the United States will expand ESG disclosure requirements that would potentially drive investment away from companies and jurisdictions that fall short of meeting these standards.

ESG and the PRC have a bad track record.

As the world's largest emitter of greenhouse gases (nearly equal to the United States, Europe and India combined), in just the last three years the PRC has permitted an additional 250 gigawatts of domestic coal-fired power plants, and in other countries it funds one-quarter of the world's new coal-fired power plants (an additional 102 GW). While Chairman Xi Jinping makes grand speeches about future net zero targets, this addition of greenhouse gasses represents more than the combined reductions by North America and Europe since the Paris climate agreement took effect in 2016. Last week, Chris Buckley described in a New York Times article the challenges Beijing faces to fulfill the reality of Xi's lofty rhetoric. There is a deep contradiction between the Party's political and economic objectives and its international climate commitments.

— The environmental concerns aren't limited to climate change: severe water pollution causes water scarcity for over half the population. The Party's hydropower dams cause significant harm to the ecology and economies of the PRC's neighbors. And three years ago, scientists discovered a spike in atmospheric ozone-destroying CFC gases. Investigations traced the origins to two Chinese provinces where factories were using CFCs in direct violation of the 1987 Montreal Protocol, a legally binding international treaty that the PRC ratified in 1991. The PRC assured the world that it was in full compliance in 2015.

— On social concerns, the PRC stands accused of genocide in Xinjiang, the repression of Hong Kong and on-going violations of human rights against Tibetan, Mongol, Manchu, Hui and other ethnic and religious groups. Companies in China and from other countries appear to be directly associated with these violations and Beijing has sought to deny and conceal these actions on a grand scale.

Two weeks ago, Norway's sovereign wealth fund began an investigation into whether any of its invested companies are involved in using forced Uyghur labor. This has been made more difficult, as the Wall Street Journal reports, as auditors have stopped inspecting factories in Xinjiang for forced labor abuses due to government restrictions. The U.S. has already imposed bans on the import of cotton from Xinjiang over human rights violations, which is fracturing global supply chains across the fashion industry. Just this week, H&M was removed from platforms across the Chinese internet for its decision to stop using Xinjiang cotton.

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— On corporate governance, Communist Party officials seem intent on violating the basic precepts of independent boards of directors, corporate transparency and employee relations that provide confidence to investors. Last year, the PRC announced that it would place government officials inside 100 private companies and it derailed Ant's $34 billion IPO. It now appears that the Party intends to move against Alibaba and Tencent in ways that violate their independence. The PRC's decision to end Hong Kong's autonomy means that foreign investors and companies that once relied on the city's independent judiciary and robust rule of law can no longer feel confident in those protections.

Undermining corporate governance has a long history in China's short experience with publicly listed companies. Without public notice in 2015, the PRC shuffled the CEOs of the country's three largest telecom operators, some of which were listed on foreign stock exchanges like the NYSE. Investors are starting to take notice of these risks. At the end of February, the French food group Danone took steps to sell its stake in a PRC dairy after pressure from its shareholders over concerns about governance.

ESG rests on transparency and universally accepted standards. For years in his annual letter to CEOs, BlackRock's Larry Fink stressed the importance of investors having "access to consistent, high-quality, and material public information," as well as his support for "moving to a single global standard" for climate and ESG risks. Given the unwillingness of the PRC to provide access to that kind of information (they treat audits of publicly listed companies as "state secrets") and the expulsion of independent journalists who could bring these risks to light, it is difficult to see how the PRC will silence the growing chorus of voices demanding greater transparency and accountability.

What does this all mean? The Biden administration, Wall Street and the American people have two options: apply ESG considerations narrowly to just those jurisdictions that have high degree of transparency or apply them globally and hold everyone to the same standards.

The first option leads to regulatory arbitrage that shifts capital to jurisdictions like the PRC where the "costs" of complying with high standards aren't imposed and away from jurisdictions like the United States and its allies that enforce high standards through transparency, a free press and an independent judiciary.

The second option creates leverage over the PRC to be transparent and comply with ESG considerations while pushing capital to places where investors have a much higher degree of certainty. The PRC will use threats and inducements to get American investors and companies to lobby against this hard line. But the second option plays to the strengths of the U.S. and its allies while exploiting the inherent weaknesses of the PRC's system.

Unfortunately, the default is to pick the former. We have seen this option play out with labor standards; thus it's commendable that EU Commission President Jean-Claude Junker criticized the EU-China investment agreement last month. We also have seen this option play out with social considerations: in early 2020, Goldman Sachs announced that its diversity pledge would not apply to IPOs in Asia. And we have seen this option play out with vague international commitments to a green future, while the PRC increasingly invests in carbon-intensive energy, infrastructure and manufacturing projects.

It's unclear which option the Biden administration will pick or whether it has the will to implement it. The debate over these options will involve many more voices than just the national security and foreign policy communities, but if the administration's overall approach is to Build Back Better, then the choice seems clear.

And now, back to your regular programming...

TRANSLATING WASHINGTON

Last week's gathering of top U.S. and Chinese officials was even more tense than anticipated. But the topics of discussion that seemed to inflame the talks, including human rights abuses and democratic principles, did not include trade, POLITICO's Steven Overly reported. The Biden administration's strategy is to defer discussion of tariffs and export controls until after Beijing shows progress in other controversial areas.

— A tech update from Protocol | China. Protocol | China, backed by Robert Allbritton, publisher of Protocol and POLITICO, tracks the intersection of technology and policy in the world's largest country. Sign up for the newsletter and learn more about Protocol's research here. This week's coverage includes Beijing's paradoxical attitude toward facial recognition technology, an exclusive profile of China's first all-women mobile esports team and the misogyny they face, a possible breakthrough in China's vicious, often shady platform wars.

Translating China

The Alaska talks were followed by coordinated European sanctions against Beijing, which sent Chinese social media into overdrive, China Watcher contributor Shirley Martey Hargis reports.

Many users shared a viral image that compared the meeting to the 1901 Boxer Protocol, an agreement that many felt left China humiliated. "China is in 2021 and America is in 1901," one user said on Weibo.

Another popular image in red, white and blue stated, "America can't force this down China's throat!" Within the image was a list of tension points between the world's two top economic powers: Xinjiang, Taiwan and Hong Kong.

Some of the quotes, such as "This won't work on us, because you can't force what we don't want down our throats" were printed on T-shirts, infant clothing, bags, phone cases and even cigarette lighters. Also printed on T-shirts were the words of China's top diplomat, Wang Yi: "The United States isn't qualified to speak to China from a position of strength." If you're so inclined, you can buy yours here.

The response to the meeting "shows that the U.S. and China are dealing with one another as equals which is really an important objective of Chinese policymakers, diplomats and probably the public for a very long time," said Susan Shirk, chair of the 21st Century China Center at UC-San Diego. "[It's] not so much about power. It's about status and respect."

Thanks to: Editor John Yearwood, Ben Pauker, Shirley Martey Hargis, Steven Overly, Blake Hounshell, Luiza Ch. Savage and Matt Kaminski.

Do you have tips? Chinese-language stories we might have missed? Would you like to contribute to China Watcher? Email us at chinawatcher at politico dot com.

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