States of Play with Sam Olsen

Hello and welcome to Episode 23 of What China Wants, examining the potential impact on the world from China’s National Party Congress - now one of the most important events in the global calendar.

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Hello and welcome to Episode 22 of What China Wants, an interview with co-author Stefan Aust about his book "Xi Jinping: The Most Powerful Man in the World".

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Hello and welcome to Episode 21 of What China Wants.

In 2004 Sam attended, as a guest, the Republican National Convention in New York. The overwhelming feeling was that we were at the centre of the international political world, with the only potential competitor the Democrat Convention that had happened the week before. It was America Supreme.

In 2022, it is possible to argue that the most important political gathering in the world is in China. The five-yearly National Party Congress that begins on 16 October is the most important event of the Communist Party, and, given China’s weight, has the potential to change the world.

To understand what we might expect, Stewart and Sam talk to a leading Chinese academic based in the UK, someone who has been studying the run up to the Party Congress. Jinghan Zeng is Professor of China and International Studies at Lancaster University and a specialist on the politics and international relations of China.

Some highlights from our discussion:

* Stability is, and always has been, of primary importance to China. So the Party Congress is unlikely to do anything to knock this stability.

* We don’t know who will be on the new Standing Committee (the top branch of the Chinese Communist Party), but whoever it is will be unlikely to do anything too abrupt in terms of policy change (such as removing the zero-COVD policy), at least not yet.

* Where the impact of this Congress is important is in the mid to long term. The election of Xi Jinping led to a significant change in China’s trajectory but this wasn’t obvious for sometime after his first Congress.

* Re: Taiwan, it is likely that there will be a repeat of Beijing’s desire to reunite peacefully with Taiwan, but how realistic this is remains to be seen.

You can also listen to the podcast on Apple, Amazon, or Spotify.

As always please do share, comment, and subscribe. We’ll be back next week with more What China Wants, reporting on the actual Congress itself, including a look at Xi Pinping’s speech.

Many thanks for listening.

***

Here is the transcript:

Sam Olsen: Hello, and welcome back to What China Wants with Sam Olsen and Stewart Patterson. Now, as many of you will know, we have got the Chinese Communist Party's National Congress coming up very soon – starting this weekend in fact.

In order to go through this, we're excited to say that we've been joined by an academic, based here in the UK, who is going to help us to underastand what we might expect to see.

Professor Jinghan Zeng is professor of China and International Studies at Lancaster University. He is also the Academic Director of China Engagement and Director of Lancaster University Confucius Institute. He was educated at the University of Warwick and the University of Pittsburgh, and has also written extensively on China and surrounding fields, for example, 'Artificial intelligence with Chinese Characteristics: national strategy, security and authoritarian governance'.

Stewart Paterson: Well, thanks very much indeed, for joining us, Jinghan. Perhaps I can just start off by asking you to remind our listeners what exactly the Congress is, and why it potentially assumes such importance for the next few years in terms of the direction China might take.

Jinghan Zeng: Well, I think this might not be something very familiar to the western audience, but the Congress is the most important event in China's political calendar. It stands for the National Congress of the Chinese Communist Party, and is, theoretically speaking, the highest body in the Chinese Communist Party.

The Congress is important because it is a public venue for top level leadership succession in the Chinese Communist Party. And it's important because of the formal events for changes to the Chinese Communist Party's constitution. So, during these gatherings, I think there will be top level Party positions being re-appointed, and that can be up to the Secretary General level - the highest job of China - which makes it very significant to Chinese politics.

SO: Okay, so one of the things that people have been talking about for the last few months is that there have been some structural preparations within China to get the country and to get the Party ready for this Congress. The most obvious example of that is the zero COVID strategy. To what degree has zero COVID and other related policymaking decisions been put in place to make the approach to the Congress a smoother ride, or are these completely separate decisions that have been made?

JZ: Right. So I think in terms of preparation, normally, a preparation committee will be created by the Politburo before the Congress and usually chaired by the General Secretary of the CCP, and this will be saying about the personnel changes. We're seeing the Chinese Communist Party prepare, for example, a list of candidates to be elected to the Central Committee and its bodies and from the top two different kinds of bodies. At the same time, there'll be a drafting committee, which will draft the work reports, and will create groups that might propose amendments, for example, if there are changes of the Constitution to be considered. Those are the normal kind of preparations made before Party Congress.

And just now you mentioned COVID. I think there are probably two separate processes here, because Party Congress is the most important event in China's political calendar. So what is very crucial to the Chinese Communist Party is social stability. And this is why I think it has been widely anticipated that before the Party Congress, there'll be no changes to China's zero COVID policy, because it anticipates that if you significantly change that strategy - you drop zero COVID - it might create considerable consequences for the stability. And stability is very key for China's Party Congress because it involves key personnel decisions, it involves leadership transition.

So this is why the COVID strategy is so important. But I wouldn't say that a COVID strategy is one of the preparation for the party congress. The COVID strategy is being set there, trying to maintain the status quo to some extent, and to secure a successful Party Congress. And after the party congress, there might be some discussion about potential changes to the COVID strategy.

SP: That's very interesting, because I wanted to ask you about that, and also other policies. So in the aftermath of the Congress, or even during it, should our listeners expect to see major policy announcements about the future? Is it a time when, you know, if there were to be big structural reforms to the Constitution or the military, for example, that they would be announced around the Congress time?

JZ: Well, I would say the most important thing, probably for this Party Congress, and what we have all been observing, is about the third term of the Chinese President Xi Jinping. And this is very, very crucial, obviously, for lots of reasons this is something so very important. At same time, obviously, a lot of investors are now trying to understand maybe more of the changes and to interpret what might happen to the key policy shift. As you mentioned, for example, whether there is an indication of the end to zero COVID policy, or there might be some easing of regulation and the further stimulus, or there might be some changes in other area.

Regarding military aspects, I would say what is more important for now is about who is being selected as a leader in the Chinese army. So it's about succession of the military leader for now. Then if there are going to be significant changes, we can see probably some of that happening later, but might not be at this stage, given what is happening now. I think, clearly a lot of focus on this Party Congress will be Xi Jinping's third term, and how to ensure stability in the current kind of zero COVID policies also will be the be the part which will attract most attention.

SO: Okay, thank you for that. So I suppose the reason I was asking about zero COVID strategy is that there have been comments in the press, especially in the West, saying that basically, Beijing is trying to put stability above economic growth, and that as soon as the Congress is over, they will be able to go back to focusing on economic growth, rather than being ] by the political requirements for trying to maintain stability. It sounds like from what you're just saying that the stability side is actually more of a strategic angle, rather than just being a tactical and operational thing for the Congress. But of course, things may change there, but it's not guaranteed that we're going to see a move towards having economic growth policies at the expense of political stability. Is that fair to say in the light of the last few months?

JZ: Well, I think there are several points I want to highlight regarding that question. First of all, social stability has always been something the Chinese Communist Party has been focused on, it is always a constant concern for decades. So you can go back to Hu Jintao's time, Jiang Zemin's time, Deng Xiaoping's time, always saying that social stability is everything, right. And they are trying to make a balance that's trying to make sure that economic growth serves the wider needs to maintain social stability, because sometimes economic growth can create a lot of disruptions to social stability, right.

So it's not a new thing, it's not only because of COVID, that they do the social stability. And we have to bear in mind that the COVID travel restrictions and COVID restriction policy do have a significant impact on economic growth. But it is not only happening in China, it's happening all across the world. So I think for the Chinese Communist Party here is really trying to find a balance in which to control the COVID infection at the same time, cause minimal disruptions to its economic growth, and this has been proved to be very challenging.

Which one is more of a priority? I don't think there is a clear kind of order from the top. I think we're always going to see, I think if you lie down, you will find that there are very different practices in different province regarding how to handle the COVID cases. In some places, in Shanghai, I think the way they approach it will be very different from places like Guizhou, like all the southwest. So I think then, what the central really give, we want both. We want you as a governor, as a mayor to make sure you can have control of the COVID situation in your place. At the same time, we want to see economic growth. So basically there will be both indicators happening there. And it's left to the local governors a lot more, to say which is more of their priority, and whether they are confident they can do both. And that mixed with a lot of things about the desire of society. For example, in Shanghai, you see a lot of social resistance or criticism towards a government approach handling that, because people expect a lot more from social and public services.

So I wouldn't say there is a one size fits all approach to arms stability, or economic growth. I think a lot of variation we have seen in China so far, has been caused by that original autonomy. And we have seen different kinds of models or different kinds of approach to dealing with this case. Some focus more on economic growth. Some of them, especially in the areas which are more remote, which are economically less developed, less international, you kind of say, more arbitrary kind of control, travel restriction kind of system. But in internationalised places, and more developed places, or in a way, a city more championing liberalism like Shanghai, it's a lot more difficult to do that. So, we should really develop a new understanding that China is a huge country, and it has different kinds of practice across the provinces.

SO: I think that's a nuance that's certainly lost by people that don't know China and just how big it is. I mean, we've all travelled widely in China, and when you go on the train for, you know, 1000 miles, and you just see human habitation the entire way, you realise there's an awful lot of people. It's a trite thing to say, perhaps, but the old adage that "the emperor is far away and the hills are high" I think that still applies to China today, right?

JZ: Yes, well, I think that's always the case. Bearing in mind because China is such a huge country. It's not only that kind of central-local relation, and the how the central can ensure the local comply is a problem that has been there for thousands of years. If you go back to Chinese dynasty, you'll find lots of examples of how the local have their own agenda, and try to selectively advance their own agenda. And so this is why today, I see a lot of media reports talk about Xi Jinping, pushing towards the centralisation or one person rules and trying to give that kind of perception that everything is in line with what central wants, or it's a highly centralised, authoritarian system in which the central can easily mobilise everybody together to advance one single goal. I think for China experts, we just don't see it like that. That central local relation will always be there, it's not possible to be eliminated. And it's always also a bargaining process between the central and local, given it's such a huge bureaucracy

SP: Jinghan, maybe now's a good time to pick up on something that you mentioned earlier, which is the importance of personnel and appointments at the Congress. And obviously, there's potentially a slightly different sort of bargaining process going on at the moment. Perhaps you could just inform our listeners as to the construction of the Standing Committee for the Politburo. I think I'm right in saying that we're likely to lose two members of that seven-man committee because of age, which will create potentially two spaces. Although I think I'm right in saying that there's actually no requirement for it to be a seven-man committee, it could be smaller or larger. And I suppose what people will be really keen to hear is, if various people become appointed, how should we interpret that in terms of Xi Jinping's grip on power, or the degree to which he is compromised with other factions in order to produce a more inclusive Standing Committee?

JZ: Right, so first of all, the Standing Committee is the top leadership of the Chinese Communist Party, it's where the important decisions are supposed to be made. And you're right that there is no specific fix of the numbers. It can be five members, it can be 11 members, but we have to bear in mind that it was only in the past few decades, it has become institutionalised. If you go back to Mao Zedong's time, you can find that not even Party Congress were organised on a regular basis.

So to understand that, you have to go to understand about Deng Xiaoping's effort in what we call Four Modernisations of the Chinese Communist Party's leadership succession, in which Deng Xiaoping wants to have more of the leaders which are younger, more educated, more professional, and more revolutionary. So he considered that as a project trying to really improve the quality of the Chinese leadership succession and make it sustainable. So what we just talked about, of a regular kind of Party Congress, its membership, who is doing what, and conceptualise the power in the Politburo Standing Committee, the Four Modernisations [goals first set forth by Deng, to strengthen the fields of agriculture, industry, defence, and science and technology in China] were kind of the starting point, or one of the early starting points of that institutionalised process, and that's very important to understand that.

And then we come to the question you asked, which a lot of people ask today, about the age limit, is there really an age limit? And if we go back to see that, this is why the Four Modernisations are so important. If you go back to the early 1980s, then that formalisation and the process only have term limits. This would mean for the top position, you should only have two terms as limits. This is why I think the challenge to term limits attracted so many attentions, and that clearly indicates about what might be happening next. But in that constitution, there's no written rule, saying about the age limits. And how the age limits has been implemented, often what we talk about is seven up eight down, right? That's what we call it in English, in Chinese it's qi-shang, ba-xia. So I think a lot is about informal norms, informal rules of how things are supposed to go. But there is no kind of written down kind of thing saying it has to be followed, or in certain ways, and this is why we see that things are slightly different in the past few years.

And how does that help us to understand Xi's power? I think, to me, what matters more, is less about the age, in the longer run, I mean, the age will be important, how young is the leadership or number of membership? I think what is more important, is to look into the age of specific Politburo Standing Committee members. And why? Because that might be signalling who might be the next successor, or, again, there'll be no successor at all. And I think this is very crucial to find out who is the youngest one there, and what is their career in the past? And who are they are close to? I think that signals a lot about what might be happening in the future power succession, and help us to answer your question of how to interpret about Xi's power, or the degree of power, or how Xi has been really negotiating or bargaining with different kinds of factions.

But again, as a China expert, I will be very cautious using the term 'faction', because again, it depends on how we define it. The line between different factions is very difficult, it's not very clear at all, and they do not necessarily advocate a fundamentally different policy agenda. Also, a lot of that information is not available to outside so we should be very careful. And there are lots of rumours now. If you go to Google it, you can find lots of rumours saying different kinds of versions of who will be selected, and who will be not. I would be very cautious to claim I have a crystal ball. But I think what might be clear will be you can see further consolidation of Xi's power. I think that direction of travel is clear. And again, then I think beyond that what I am interested in more will be who is the youngest one, and does that signal about anything of Xi's successor.

SO: Now, I know you can't look into the future. But of all the people that could join the Standing Committee and basically join the wider Politburo. Does anyone in the running signal the potential for big policy shift after the Congress? Or is basically everyone that's in the running, going to help to continue China along the path is on now?

JZ: Well, I think there are two things we should be very careful about. The first is talk of a radical policy change. I think there is a lot of interpretation saying after the end of the Party Congress, there'll be a radical U-turn policy shift, as we have seen in the UK about how the new Prime Minister has been dropping something that she introduced a few days ago. I don't think that will be the approach of the Chinese Communist Party. Even if we're going to see the move getting away from zero COVID, it's going to be an incremental process. So it will not be radically happening after the Party Congress. It will be gradually you will see the propaganda machine will be working, and trying to talk a bit more about how the virus might be changed and less harmful to the human body, there will be more efforts to push people to get the vaccine. And then it will be an incremental, gradual process, to ease the COVID restrictions, rather than a U-turn or suddenly abandoned the zero COVID policy. I don't think that will be the approach of the Chinese Communist Party and what they're going to do. I think it's always a gradual, incremental process.

And regarding about the person who were being selected, will that bring a significant policy shift? Again, I think when it comes to some technical areas, for example, if we say who is in charge of the New People's Bank, or in economic policy, you might see some policy shifts, which might carry significant implications for international investors, I think, yes you can see that. But when it comes to really the big policy changes, I don't think this is a conference to do that. There are several reasons. One is even if they are going to do that, it's not going to be happening, or it's not going to be transparent in this Congress. And second, now is not a time to do that.

Before Xi Jinping officially became the General Secretary, he was selected as a successor back then. And he's played a very safe card, a very risk free card, until he officially become the Secretary General of the Chinese Communist Party. I think that they should be always the approach. If Xi Jinping selected a new successor, and I think that will be highly likely and to be politically smart to stay that course, not to try to drive a significant policy shift at this stage. So what we are going to see, I think, in some areas, like economic area and other areas, we might see some changes which have significant implication for investment in China, but in ideological areas or foreign policy areas, I don't think we are going to see a major policy shift. And even if it is going to happen, it's going to happen in the past dependence way, and being a gradual, incremental way.

SP: Jinghan this might be simplistic, but one of the ways that I've seen the current leadership sort of couch, particularly in the investment community is that you have Premier Li as being a kind of champion for pro growth, pro market economic policies, and President Xi, and some of his followers have really been the core driver behind common prosperity and what a lot of people in the capital markets at least see as policies that have impacted the profitability of investing in China to be frank. Now after this Congress, Premier Li will be gone, I believe, is there any individual who we should be looking at as potentially being the champion of a more market reform-orientated policy? Or does such a person not really exist anymore in the top echelons of the party?

JZ: Well, I wouldn't say they will not exist at all, I think definitely there will be someone there to champion for market reform, because ultimately, that's what China wants, right? China needs to continue to reform, needs to further be integrated into the global economy, not vice versa, and needs to maintain good relations with key Western countries such as the United States, and the European Union. So all of this agenda will still be there. But it's very difficult now to say, who will go out to do that? I think a lot of those things actually happening behind the curtain, and I wouldn’t over-interpret about this split between Xi and Li actually. It is Xi Jinping’s interests actually to have a strong China's economic growth. So I think the outside might be over interpreting a bit of that division. I think economic growth is definitely an agenda that Xi Jinping wants to see success. But it's more about how this can be achieved on the condition of social stability.

So to answer your question, I think for now, it might be too early to interpret anything, and we might run into a mistake. If you go back to 2012, there was a lot of interpretation, saying that Xi Jinping might be the pro market reform kind of person because of his experience, as the governor of Fujian, and by then, Li Keqiang hadn't really being signalling a clear pro market approach. So I think we should avoid interpreting something, I think, especially for outsiders, or the Western actors, there are some things that you want to see. But we should be avoiding interpreting something into something you want to see, rather than reality, I think that's something we should bear in mind. The Chinese politics has always been a black box, and we should acknowledge that a lot of things wouldn't become clear until a few years later. We wouldn't know back in 2012, nobody really had been predicting back in 2012 that Xi Jinping would make so many changes, so many kind of transformations to China's Party system. So I think we should really be careful of making provisional kind of judgement, that this is a pro market, the person who will be fighting against another faction. I always have doubts on that kind of claims.

SO: Just looking at the time, I think we've got time for one more question. And it's one that certainly our listeners would want to know, given the weight of feedback we get when we do podcasts around it. But what does the Congress hold for China's relationship with Taiwan?

JZ: Okay, so I think on that topic, clearly, that's been generating a lot of attention, I think, especially in Western society, on how that might reflect in a future approach to Taiwan. And I will say, several things of my own interpretation. I think currently that the peaceful reunification between Mainland China and Taiwan are not off the table. There were lots of international analysis trying to focus too much on military side of how China will militarily deal with Taiwan and how we should be preparing for that, and preparing for China being next Russia and punish China. And I do find that unhelpful. If your goal is to avoid a military conflict, then I don't think it helps to label China as a threat, or try to push China into that direction. I think this there is a lot of self-fulfilling prophecy here. The more the West, trying to defend against China, tries to label China as a threat, the higher the possibility of something happening. And this is not in the interest of anyone.

Regarding this Party Congress, I think there will be the 'same old same old', how national integrity will be important to territorial integrity, national sovereignty will be important to all kinds of other things. I don't see anything new there. And they will also mention that China still wants to choose a peaceful way to work with the people in Taiwan for unification - but that we will not drop the military options. I think that will be standard Chinese foreign policy, I don't think there will be changes there.

But what will be really interesting to me, will be not on this Party Congress, but on the next five years of how to define Xi Jinping's legacy. And this matters, because ultimately it's about timing as well, right? If you think Xi Jinping now considers himself as a leader, which has a similar kind of status with Chairman Mao. And Chairman Mao has founded the People's Republic of China, as leader of a party with thousands of people into today's structure, so into millions. So that legacy is clearly there. For Xi Jinping what he wants to leave as his political legacy, that is something very interesting to see. And this is why a lot of things have been linking that unification with Taiwan can be something defining his historical status, can be his stamp on a Party, on the history. This is why this is important. And if that's the case, then we are going to see it's very interesting in how he's going to get that job done. I think that's the first thing. The second is the timing of getting that done. If it's not going to be done in five years' time, does this mean that it can justify another five years to get the job done? So I think those will be the things I find quite interesting to observe in the next few years, to see how things might develop in the issue regarding Taiwan. But I think in the next two or three years time, I don't think China is ready to deal with Taiwan through military options for now.

SO: We should definitely have another session on what Xi Jinping's legacy could be or should be. I think that would be really interesting to explore.

SP: Professor Zeng, thank you very much indeed for joining us on What China Wants. We'll be back next week with more.

SO: Thanks.

JZ: Thank you.

Get full access to States of Play by Sam Olsen at samolsen.substack.com/subscribe

Hello and welcome to Episode 20 of the What China Wants podcast.

The FT and others reported a few days ago that American banks would exit China if Beijing launched an attack on Taiwan. “Heads of BofA, Citi and JPMorgan say they will follow Washington’s orders in the event of conflict” warned the pink’un. The paper went on to quote JP Morgan’s Jamie Dimon as patriotically claiming that “We would absolutely salute and follow whatever the American government said” when it came to divesting from the PRC.

What’s perhaps strange about these statements is that these institutions know the risks - and Taiwan is only one of them - but still US financial firms plough money into China. To ask why, and to what end, we are joined by Anna Macdonald, a British investment manager with the firm Amati and a seasoned media commentator on the markets.

Some highlights from our discussion:

* Up until about two years ago there was plenty of Western enthusiasm for investing in China, thanks to belief in the opportunities there.

* There have always been concerns about investing in China - for example, the challenge of getting cash out of the country.

* Now there is more investor anxiety, driven in part by the ESG trend; ESG though can be a blunt tool unless properly used.

* Unfortunately being on the ground to check investments is not possible at the moment, making the risks higher.

You can also listen to the podcast on Apple, Amazon, or Spotify.

As always please do share, comment, and subscribe. We’ll be back next week with more What China Wants, analysing what the forthcoming Party Congress has in store for the world.

Many thanks for listening.

***

Here is the transcript:

Sam Olsen: Hello, and welcome to What China Wants with Sam Olsen and Stewart Paterson. I am going to read you a few quotes here that I've taken from newspaper articles over the last few months about the attitudes of banks, looking at investing in China:

23 June 2022, JP Morgan thinks the darkest days with China have passed.

9 June 2022, investment banks say it is time to get back into China, says CNBC.

31 January 2022, Goldman Sachs unveiled big plans for China.

So, Stewart, these quotes obviously show that there is still a lot of interest in investing in China. But as you have pointed out quite a lot in the podcast so far, and the newsletter before that, perhaps there are increasing risks to investing in China.

Today, we're going to be joined by someone who knows a lot about market sentiment about investing, not just in China, but in investing all over the world, Anna Macdonald. Anna works for Amati Global Investors, an independent specialist fund management business based in Edinburgh. Many of you, especially if you are an early bird like me, will know her as a market commentator for BBC Radio Four's Today, and Radio Five's Wake up to Money programs as well. Welcome, Anna.

Anna Macdonald: Thank you. And it's lovely to be here.

SO: So, I suppose Stewart, you are going to ask a lot of the questions here as this is much more up your street than mine. I thought I would just start off, if this is this okay, by asking you what's happened over the last couple of years, because I remember two years ago, when Alibaba was trading at USD 300 a share, there was still a lot of optimism about putting money into the mainland. But why was there that attitude? Why was there so much optimism about investing in China?

AM: Well, I look at this through the lens of the UK companies in which we invest in but from a broader point of view, I would say that alongside Goldman Sachs and JP Morgan, there was this tide of enthusiasm about riding a wave of this burgeoning middle class in China that were not only demanding goods from overseas and from Western companies that could provide them and perhaps build up supply chains in China to supply them, but also they were on a significant effort to try and boost their own domestic demand. And this is something that we thought that globally allocating investors got into that and kind of overcame any kind of issues that they had from an ESG point of view.

I always think it's quite interesting when you listen to Goldman Sachs and JP Morgan's podcasts about their general thoughts on the market, that they really do tread very carefully around discussions around China. That's probably because, as you say, they've invested a lot in their footprint there and they've tried to make investing in China, as kosher as investing in many other economies that we might perhaps know a little bit better or have more boots on the ground in.

Stewart Paterson: I was reading the other day that UBS, for example, have actually hired special editors for their China product to ensure that the verbiage that analysts use around sensitive issues is not deemed offensive to the authorities. So there's clearly quite a lot of self-censorship going on at the financial institutions, and obviously, there is a fine line between the way one couches and articulates an investment thesis and disinformation. Because at some point, you actually have to shy away from telling the truth to avoid offending the Chinese authorities, I would guess.

But I would say, Sam, I would just add that I think two years ago, there was a lot of optimism about the liberalisation of Chinese capital markets, that there were steps to induce foreign investment into the bond market directly, for example. And that prompted a huge swathe of reports and opinions from pension fund consultants, as well as big fund managers, pointing out the obvious that China is a large part of the global economy and a very small part of global capital markets, and that foreign investors were dramatically underrepresented in those capital markets. And therefore, you know, over time, there would be structural growth in those capital markets and investors had to get into it.

Anna, how would you describe the journey for those investors over the last two years? Because subsequent to that first wave of euphoria, we've seen some policy measures out of China - I'm thinking here of the sort of clamp down on the big tech and the Three Red Lines policy, which impacted the property companies - that have not exactly been investor friendly.

AM: Yes, I think you only have to look actually at how entrepreneurs - we talk about Alibaba, we have to think about how Jack Ma and others - are being treated to really reflect that even for homegrown entrepreneurs, there's been a complete change of attitude. I think that when you think about investments, you've got to think about the cost of capital of your investment. I would say that cost of capital has gone up, the risk has gone up of investing in China.

I think that it has become increasingly clear that as an overseas investor, you're almost a secondary investor. You become lower down the pecking order, should something go wrong, and actually, I think some companies have come to question how easy it is actually, for them to extract themselves for investment.

We invested in a company that had a cash balance in China, and when you actually talk about how you get that cash out of China, it is not nearly as simple as you might have thought; they can pay themselves a dividend out of China, but they can't actually just take everything out that they want. So, we cannot look upon that cash as being true cash, it's not freely available cash in the truest sense of the word. So those kinds of things have started to make people realize how much of a different environment it is, how authoritarian it is, and who the main person in control is, which is often not who you might think.

That has been overlaid by the crackdown on COVID that they have had, and the slower economic growth that they've been delivering - I think the World Bank this week reduced their expectations for GDP growth from 5% to 2.8%. That's also made it clear that perhaps things aren't going quite as swimmingly as the numbers might suggest. And I'm sure, Stewart, you would always think that you take those GDP expectations that China give you with a massive pinch of salt anyway?

SP: Yes, it's interesting because clearly, one of the things that differentiates China from any other investment - just purely looking at it from the economic side, rather than any ESG side - is the opacity and the lack of information, which you have alluded to. This has been known for a very long time, and when the focus in the tech companies suddenly re-emerged on variable interest entities as an example, and the fact that, foreign shareholders didn't actually own shares in the operating companies – they own shares in a company that had a series of contracts with the underlying company was a work around to, to basically break Chinese law.

That's been known, but of course, there's nothing like a cyclical downturn, to focus people's attention on the negatives, however well-known they were before. I suppose, wearing your ESG hat - which I know that you're very passionate about - when we look at this sort of sea change that is taking place amongst portfolio investors in China, as they've sort of metaphorically have had their heads handed to them, in terms of the financial losses that they've taken, is it possible to disentangle the two drivers of this change of opinion?

On the one hand, you have the pure economic loss that they've taken, which no one ever likes. But on the other hand, my sense is that people have become more aware and more alert to the ESG implications of investing in China. I'm thinking here of the UN reporting on Xinjiang, for example, where it's getting harder and harder now to ignore that and just dismiss it as rumour and hearsay.

AM: Yes, well, I spoke to a very small company in the UK that provides promotional goods and so on to big brands, such as Google or British Airways, and various big brands. And a lot of promotional goods, as you can imagine, are things like the coffee mugs, and the pens are sourced out of China. The primary aspect now when they're signing contracts with these big companies is: “we cannot have a scandal on our hands; these goods must come from proper manufacturers”. And they have invested a lot now at having people on the ground there who are able to check the supply chain, check the first-tier manufacturers, the second-tier manufacturers and that's giving them an absolute competitive advantage against some of their competitors because of the risks that these global brands face.

Brand names want to make sure that they aren't being associated with any contentious areas, whether that's the Uyghur Muslims or poor environmental practices and things like that in China. So, as I say, having people on the ground and being able to investigate those supply chains is seen as a significant advantage.

SO: So, Anna, just picking up on a few things you said in the last few minutes, what is fascinating to me, as someone who's worked in China for a long time, is that many of the things that you've mentioned have been things that needed to be worried about for a long time, for example, getting money out of the country. I've had many clients over the years who've complained about the fact that they've made money in China, but what do they do with the cash? Getting it out and repatriating it has been a challenge for a long, long time.

And then the issue around the Uyghurs and other potential human rights issues within China, whether it's prisoners, or whether it's huge amounts of people that are executed each year, obviously, that's different now than it was a while ago. But the fact is, is that all of the things come together and making it a difficult place to look at from a business point of view, if you want to take into account all of the ethics that the West demands of its own companies. So, my question is, if these things have been an issue for a while, why is it only now that companies are beginning to make a fuss about it, in the sense of actually changing their investment strategy to deal with China?

AM: I think it's because from an investor's point of view, so many more dollars are flowing into ESG style funds. Now, I don't think that the way they screen their investments is altogether the right way, we do it quite differently at Amati we do it very much on an individual basis. We look at the Freedom House score. So basically how free a country is to express the free press and to express their points of view, because it’s inversely correlated with how autocratic a country is. So the freer country is, the higher the Freedom House score, the more likely to be more democratic it is.

So, we think that's a very powerful way of looking at whether the people in that country are actually getting the benefit of the investments, or, for example, for a resource rich country, will those riches likely flow down to all citizens? It's pretty much true that the less democratic a country is, the less this is likely to happen, that the mass will benefit. So, that's just the way we look at ESG investment. But there are many more ESG dollars, there are companies that want to be seen as ESG, they've got to show improving scores and various different metrics. So that so by paying more attention to it, they can show that they're doing that and they will then show often it's the Delta, it's how much are you improving on your ESG score that makes that can drive investors.

The other aspect is that companies are now seeing that there is an economic advantage to be gained to providing alternatives. Whether that's alternatives sourcing of goods and services that's outside China, so that companies can de-risk their supply chains, or it's that they can see - as I mentioned with that company earlier - they can they can show their investment in making sure that their supply chains are clean, that they can therefore have an economic advantage in doing that whether they can charge higher prices and deliver better margins or however it is. So, I think those are the those are the main factors behind that.

SP: One of the interesting things you alluded to there was the difference between your approach and maybe other people's. Some of our listeners, I think, will probably be confused by the fact that there doesn't seem to be any standardisation as to what constitutes an ESG friendly investment. So, who is making up the rules and setting the standards? Is there a framework emerging, a standard setting body that is accrediting a fund, or certifying it and saying, that these people follow best practice in selecting their investments from an ESG perspective?

AM: There are several different screening services that you can subscribe to. Even if you have something like a Bloomberg or Reuters terminal, you can subscribe to these additional layers of screening, and they can give you scores for each aspect.

We very much drive our own process and our own screening because we think different things are important. For example, if I tell you that that shortly after the invasion of Ukraine, Refinitiv said that Rosneft and Gazprom had higher ESG ratings than Serica, which is a UK based company providing about 5% of the UK’s natural gas. Now this makes absolutely zero sense to us, that investing in Gazprom was somehow better from an ESG point of view than investing in something that was going to domestically ensure our own gas supply.

So, there are a lot of contradictions in the way the ESG screens are run and often one ESG provider will give quite a different score from another. But the main factor for not only thinking that we could do it on a more thoughtful basis, but most smaller companies are not really even covered yet by these screening factors. So, it was essential that we developed our own model for it. Bigger asset managers have huge departments doing this, and they will work alongside the analysts on individual stocks, and they will often still use a lot of these screening services.

So no, there's no definitive approach to it. And I think that's probably the right thing, because it means that you do have to consider each company on its on its own basis. I am sure that there probably are index funds that just overlay an index with an ESG score. But I would argue that this probably isn't going to drive the best forms of allocation in a thoughtful ESG-focused way - or "ESG H" we call it, with H meaning human capital. They won’t drive quite the right outcomes.

That was seen in earlier this year, when I received an email from Jeffries asking if I wanted to join a call listening to their experts talking about whether defence stocks were now the new ESG holding. Most investors had shied away from defence stocks and then realised that perhaps it was quite sensible to be able to protect your own country first. So, it's a tremendously complicated area. And it's got lots of different views in it. There have been huge developments in it, huge strides forward, and you can understand the motivation of a lot of the ESG funds. But at the same time, we know that there's been quite a lot of what we call “greenwashing” with companies or funds saying that they are very much focused on ESG. It is sometimes just seen as a way to charge slightly more on your fund management charge because you say you've got an ESG overlay. We've seen quite recently that Morningstar has slashed the number of funds that they describe as properly sustainable, and that's, that's quite interesting in itself.

SP: So Anna, that's very interesting about the ESG standards and what have you, but when you're looking at potential investments and looking at companies to potentially buy stakes in, are you seeing an increased amount of evidence to support the What China Wants view that the global economy is bifurcating along ideological lines between China and the West? Is that something that's a concern for corporates and are you seeing action on that?

AM: Yes, we are actually. There is a company that floated on the UK stock market about 18 months ago. It is based really out of Toronto, but they felt that a UK listing would be of benefit, get them good visibility. They license IP for chip design. And we all know how important the market is for semiconductor chips, and the demand for smaller and smaller chips is growing ever greater. And this company is right at the front end of designing the smallest three/four nanometre chip designs.

They had a joint venture in China, as well as having their Toronto base. And they felt this gave them a foot in both camps really, that they would be able to grow their business in the US and Europe, as well as benefiting from China, where we all know that they've really wanted to be able to grow their own semiconductor capacity on the mainland. However, Alphawave raised quite a lot of capital, on flotation for acquisitions, and they found a good acquisition in the US called OpenFive. Now, this meant it had to go to approval. CFIUS is the US regulator for that, and they have approved the deal. But it means ultimately that as part of the approval their JV in China will have to somehow be extricated from. And this really is something that has their view in terms of the opportunity that they would have in China, they will fully admit since flotation has meaningfully changed. And they would also say that it's interesting for them that Chinese companies in return do not want to be so reliant on Western companies.

So actually, it is something that's coming to a kind of natural conclusion in a way, but something that very much has changed over the last 18 months. I think that companies really are assessing their exposures in all sorts of different ways. Another example, I suppose I could give us a is a small company listed in the UK. It makes spectacles and lenses, and it kind of wants to become the next Essilor Luxottica. Most spectacles, I think it's around 90% of components come from China. So, it's a hugely, hugely efficient supply chain. And so, what this company is doing is urged by its customers such as Specsavers, and Boots, and Grandvision in the US, they are really ramping up capacity in Vietnam, and actually now in Portugal to try and diversify away from those supply chains. And it's being given really high priority by those, those big opticians, those big chains.

SO: So, one of the things that I would ask is - looking at our research on the complexities of global supply chains - it is all very well just set up new facilities in Portugal, but where do they get their inputs from? Are all those inputs coming from China? So therefore, an effect you haven't really diversified away from issues that could occur on the mainland?

AM: Absolutely. I mean, that is still some of the main issues is that the components do still come from China. So, they need to start thinking about not just the final steps of the manufacturing process, but then thinking about the components that are going into that. So yes, it is a big issue. The problem is that China has built up hugely efficient supply chains. Okay, they may have been a bit logjammed over the last 24 months, but those supply chains are very difficult to replicate. So, this is not an easy fix. Whilst we might think that nearshoring or “friendshoring” is going to provide the answers, I would say, we've hardly begun the process.

SP: Anna, thank you very much indeed for joining us today and giving us your insights. It's particularly useful, I think, for our audience and ourselves to hear the anecdotes from the front line as it were, as to (you know) what corporates are facing in their struggle to diversify away from China. So, thank you very much, and that's all from What China Wants and we'll be back next week. Thanks very much.

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Hello and welcome to Episode 19 of the What China Wants podcast.

With false reports of a coup against Xi Jinping ringing around the newspapers last weekend, we look at who could have been responsible for this disinformation - and dig into how China uses disinformation for its own purposes too. We interview friend of the show Alex Neill, a leading expert on Chinese influence abroad.

Some highlights from our discussion:

* There is a lot of disinformation about China. Specific to the recent rumours of a coup, this seems to have been promulgated by people linked to the Falun Gong, an organisation proscribed by Beijing.

* China is also responsible for spreading its own disinformation, for example about the supposed US-origins of COVID. Much of this is aimed at Chinese nationals abroad.

* Control of information is vital for the Communist Party, especially in the run up to important events like this autumn’s Congress.

You can also listen to the podcast on Apple, Amazon, or Spotify.

As always please do share, comment, and subscribe. We’ll be back next week with more What China Wants.

Many thanks for listening.

***

Here is the transcript:

Sam Olsen: Hello, and welcome back to What China Wants with me, Sam Olsen, and Stewart Paterson, as always. Now, many of you will have seen this last weekend, lots of news buzz about an apparent coup against Xi Jinping in China. My phone was certainly taking a lot of incoming messages and emails from people wondering whether this was happening or not, and I'm sure yours was too Stewart. But it didn't take very much digging to realise there was hardly any proper news associated with these rumours. So for all intents and purposes, that's all they were, rumours.

But it did start Stewart and I thinking, to what degree is disinformation playing a big part of China's campaigns abroad, but also with China's relationship with its own people. And to that extent, we thought that it would be very useful to bring in a definite friend of the show, Alex Neill. He has been studying the use of information with regard to China for many years, and to ask him what he thinks about the latest news, or rumours I should say, about Xi Jinping's coup, but also the general attitude to information and disinformation from China. So without further ado, welcome, Alex.

Alex Neill: Thanks very much, Sam. Great to be back and greetings Stewart.

Stewart Paterson: Well, thank you, Alex. Maybe we should just kick off with a black and white question, although nothing's ever quite black and white with regards to China. Clearly, Alex, there has been no coup by any stretch of the definition. Is that correct?

AN: I think that it is a very safe bet to say there has been no coup.

SP: And in fact, looking at some of the activity in China over the last few day, one could argue that if anything, Xi Jinping has been very active in solidifying his position. I'm referring here to a number of recent imprisonments that have taken place. Although the charges that have levied against these individuals are serious ones to do with corruption and other crimes of that nature, there is inevitably a suspicion that politics has played a part in them.

So for example, Sun Lijun, who is a former Vice Minister of Public Security has received a death sentence, which is likely to be commuted to life imprisonment without parole after two years. Fu Zhenghua, the former Justice Minister, has also been imprisoned on charges of accepting bribes, and Liu Xinyun, who is former vice governor and Head of Public Security in Shanxi province, was sentenced to 14 years and also Gong Daoan, a former Deputy Mayor of Shanghai, has also received a life prison sentence for accepting bribes.

So the anti-corruption campaign - if one wants to call it that - seems to be ongoing. And, Alex, in your view, is there anything that you're seeing coming out of China that suggests that Xi Jinping's situation is in any way precarious? Or should we read these events as being indications of the solidity of his position?

AN: No, I don't think there's anything to indicate that Xi Jinping's situation has become precarious in any way. If anything, these are cases which will set an example on the run up to the 20th Party Congress, a selection of corrupt characters who have been subjected to the same internal party process of investigation and who are now in public being vilified and there will be a process of them. Well, first of all, they were stripped from their party positions, and now they have been sentenced. But I think this is a signal that, with expectation that Xi Jinping will be moving into a third term - that seems to be the received wisdom - at the 20th Party Congress in a couple of weeks’ time, that initiative of continuing to target both the 'tigers' and the 'flies' as part of his corruption campaign will be ongoing.

But if you drill into it, I would not dismiss speculation that the sentencing of some of these individuals may be linked to last minute jockeying or horse-trading or factional rivalries or betrayals. It could be that, but we simply don't know. I think all we can say is that Party resilience and the integrity of the Party and Xi's determination to continue the anti-corruption campaign is ongoing and it is sort of a demonstration of business as normal, if you like.

SP: So Alex, one of the issues that this all raises is, how can it be the case that in a country as large and as important as China, these rumours, which are disinformation effectively, can spread so rapidly? I mean, why is there so much disinformation around China?

AN: Well, I think we need to consider the Great Firewall. We are all talking about disinformation promulgating and propagating and accelerating around the world, around social media. But I think we need to consider that none of this really is probably surfacing inside China itself. This is something that has been flying around Western social media platforms, and around Western networks.

Inside China, I think that the picture is likely to be very different. The censorship system in China is basically operated by artificial intelligence now, it's almost automated. And of course, there will be challenges or discussion about the outcomes of the 20th Party Congress. But this will all be in veiled language. It will be in cryptic language designed to defeat the artificial intelligence and the automated censorship mechanisms that the Great Firewall operates or at least domestically within China.

But externally, what has been allowed to happen is the dissident movement, particularly the Falun Gong, has transmitted a stream of disinformation which has become a meme and has accelerated around the globe, and has created almost a hysteria if you like about rumours of a coup taking place and all kinds of outlandish ideas about what might have happened to Xi Jinping.

The Falun Gong movement is ostensibly founded in some rather quirky Buddhist theory. I think in some interpretations, it could be regarded as a cult movement. But what is interesting is 20-odd years ago, the Communist Party realised that the Falun Gong had infiltrated society, not just in a populist way, but it had also permeated the ranks of the Communist Party. And eventually, there was a sit-in protest around the Zhongnanhai compound, of Falun Gong practitioners. This hugely unnerved the Chinese leadership at the time, and therein commenced a campaign of really quite vicious prosecution of this organisation. I suppose the interesting thing about it is that it has endured. There are funders and outposts of the Falun Gong outside of China, the organisation has endured, and it has created media outlets such as the Epoch Times, for example.

This disinformation campaign is one example of how they are trying to get back at the Chinese leadership. I think it's been quite interesting, the ability to mount disinformation campaigns outside of China's borders, but internally, I don't think it's really had an impact.

SO: So Alex, this is a very interesting point you raise about the Falun Gong. And, you and I were speaking before this, and there is certainly a suggestion that people within Falun Gong, who are obviously notable domestic opponents of Xi Jinping and the Communist Party, that this organisation has been instrumental, as far as your research goes, in helping to promulgate the rumours of the coup.

One of the other things I think it is important to discuss is the way that people that wanted to believe there was a coup were so readily involved in spreading that disinformation. For example, it has been suggested in some of the sources I've read online, that a lot of the people pushing the coup headline were based in India. Of course, Indian nationalists have been having a bit of a to-do with Chinese Nationalists over the last few years, specifically around the border issues which has led to the deaths of quite a few on both sides a few years ago.

What is your view, Alex? I mean, is this something, the coup, is it part of a wider programme of people opposed to China trying to create disinformation around Chinese hierarchies, specifically around the stability of Xi Jinping? Or do you think this is a one off?

AN: Well, I think you're right, Sam, it is a really important juncture in Chinese politics. This is a 10 year cycle we are watching, and movements like the Falun Gong, they have got a huge amount of anxiety which stems from almost 20 years ago when the organisation was persecuted by Chinese authorities, and that persecution has been relentless. After the Falun Gong, became a proscribed organisation in China, they developed a very well-constructed and well-organised organisation outside of China, well-funded as well, including media organisations and key exiled figures. The Falun Gong movement clearly wants to exploit this time of political change in China to highlight their own plight, but also some of the injustices and well, you could call it pretty draconian measures, used against their organisation over the last two decades.

SP: Sam, we have talked a little bit there about disinformation about China. But China itself obviously has been at the forefront of a number of disinformation campaigns aimed at us hasn't it, in the recent past? Perhaps you would like to elaborate on some of those? Because it seems to me that we are in this information war or disinformation war, where narratives are being created with pernicious ends in sight.

SO: Yes, Stewart, you are completely right. Although there will be people, obviously, that say that China really is not doing much in the disinformation base, it is quite clear to most that there has been an awful lot of work done by Chinese authorities, specifically in thinking around COVID. If you remember, just shortly after the COVID pandemic became a real thing in the West. There were already rumours coming out from China suggesting that it was US servicemen who had brought the virus wittingly or unwittingly from America, to handle it as part of some exercise, when it was quite clear that the origin was far more likely to be in China.

But what is interesting is that I don't know if you saw it in the Sunday Times a few days ago, but Dominic Lawson, the columnist was talking about an American professor called Jeffrey Sachs, who has been quite instrumental in working out the origins of COVID. And it's quite clear that he is someone that feels very strongly affiliated with the Communist Party, at least in terms of its messaging, because he's been quite clear in saying that the COVID virus originated in America and is America's fault, and America is trying to deflect the blame. And in fact, Jeffrey Sachs was part of, or in fact, I think, Chairman of a commission put together by the Lancet magazine, the preeminent medical magazine, looking at the COVID origin. He was quoted saying "the origin of the virus remains unknown". So that is better than saying specifically around America, but I think it is still quite disingenuous to say that we don't really know much about the origins of the virus when China is presumed by almost every single intelligence official that I have spoken to, to be the origin. That doesn't mean that it was specifically released by China, that's probably very doubtful, but it could have been quite easily an accident or something like that.

Nonetheless, the fact that China has done very well in convincing, as Dominic Lawson calls them 'useful idiots' in the West to promulgate the China line on this, it's been quite a success for them. Alex, a lot of your career has been spent looking at the way that China uses information and uses its agents on the ground around the world to spread information. How successful do you think China has been in in the COVID origin story, in trying to get the world to believe its side rather than sort of admitting any mistake it has made?

AN: Well, the Fort Detrick disinformation campaign, I think, has largely been unsuccessful. You will have a whole range of agitators across the world who may have sympathies with China or may have antipathy towards some kind of Western conspiracy in the post-Cold War world. But the notion that a virus was brought in from Fort Detrick, where allegedly virological experimentation was taking place.. it's become quite farcical, to be honest.

But it's still there in Chinese propaganda. If you look at Chinese newspapers, there are cartoons depicting fort Detrick leaking out microbes and being carried over to the Wuhan games which happened I think, in October, prior to the Wuhan outbreak. Clearly that storyline came out of China's propaganda machine in the wake of accusations of leaks from a PLA laboratory in Wuhan, or at least a military-backed biological warfare centre. There is some pretty blunt and shoddy propaganda machinery operating. But yes, there are individuals and societies around the world that are prepared to swallow that.

What we really need is empirical data, and as we have seen from the UN delegation that visited Wuhan and described obfuscation and concealment and all of the frustrations around that, I think we need to wait for empirical data about the provenance of the virus.

SO: Do you think that's likely? I don't think anyone in the West is holding their breath of empirical evidence coming out from China.

AN: No, it's not going to happen, I think. But to answer your original question about China's disinformation campaigns, China has become quite adroit at using social media platforms within the Chinese language speaking community around the world. Some of this is funded by the United Front Work Department, and its fronts around the world. That has gained traction. In parts of Southeast Asia and other areas where overseas Chinese communities or ethnic Chinese communities are concentrated, you will find more traction with the Chinese narrative. I think that is where disinformation and the question of the use of influence and whether or not that develops on to interference, that's a really important question. So things like COVID diplomacy, agitation propaganda, which the Chinese Communist Party is able to do, they all come into play.

SO: So you might have seen that the Centre for European Policy Analysis produced a report, I think last year, talking about how Russia and China have started to combine their disinformation or information campaigns from their point of view around the world. And so going back to what Alex was saying, looking at specific communities, it's not just the Chinese community around the world, though, it's sort of anyone that can sort of be used to stir up issues within Western societies have been reached.

But this is notable that since that report was published in December, obviously, we've had the war in Ukraine. And in the recent months, you have seen Chinese officials, and a lot on Chinese social media, amplifying Russian claims about, for example, US bioweapons being in Ukraine, and in many of the denials made by Russia, about any war crimes, etc. So I suppose the question is, to what degree are Russia and China now in a tangible information partnership, is it Russia and China versus the West online, as well now?

AN: I think, you know, what we have seen in the in the recent Shanghai Cooperation Organisation meetings and engagement between Russia and China, Li Zhanshu, the number three on the Standing Committee, the current Standing Committee, he expressed synergy, if you like on the position of Ukraine and Russia. He basically said that China was with Russia on this. The narrative coming from China is very much that NATO, particularly America, fomented the conditions for the outbreak of war in Ukraine.

And the narrative is, is that Russia has been targeted by the United States and NATO through the vector of Ukraine, and that China is next. That is definitely a narrative which has been propagated within the Chinese leadership, and we heard that from Li Zhanshu. But if you read it, in journals or on People's Daily, the narrative is very much that the war in Ukraine is viewed as a proxy war for the West in its rivalry with Russia to take Russia down, and that China could be next, and that the link between US and allied activities in the Indo Pacific is similar to what is going on in Ukraine.

SP: Alex, can you perhaps just give our audience some sort of indication as to how the domestic Chinese population living behind the Great Firewall access alternative viewpoints. To what extent is that actually possible? And is there any way to judge the extent to which the official Party line is actually swallowed and believed by the public at large in China?

AN: I think the educated classes in China, the elites, they will all have access to VPN technologies one way or another. VPN technologies, of course, they are illegal, so there is a risk of being detected and facing prosecution by the Chinese authorities. But I think it's fair to say that Chinese middle-class society and the elites as well, if they want to get an alternative view, if they want to understand Western perspectives, they can do that.

The other question I would raise is there is a very significant expat population, if you want to call that economic migrants, wealthy Chinese, middle class Chinese around the world, who are residing in places where there is free media, and they will be watching Western news feeds, and looking at Western social media, and seeing the realities of what's going on. I don't think we can dismiss that.

Privately, I think Chinese society and its interaction within China and without, is a really important factor. So I don't think we can say that there is this sort of bifurcated world where China behind the Great Firewall is a sort of naive, isolated society, and China without is somehow exposed to this broader narrative. I think it is more complicated than that. But also playing into this is simple Chinese nationalism, and pride in China and anxiety about pressures that the West is exerting on China, and, of course, things like Taiwan, come into play as well on that front.

SO: So just bringing us back to where we were at the beginning of the podcast. In terms of the Party Congress, there's no way, no cat in hell's chance, that China is going to relax any of its information controls internally over the next few weeks as the Party Congress ramps up, right. But what sort of information or controlled communication messaging do you think we are going to see ahead of the Party Congress around the world, Alex?

AN: Well, I think Chinese embassies and missions and organisations around the world will have certainly been unnerved by what appears to be a Falun Gong initiated disinformation campaign, which has been propagated and become a meme. They will be concerned about that, and they will have been alerted by central authorities to be aware of other possible disinformation campaigns, which may accelerate on the approach to October 16th [the date of the Party Congress].

But we are going to see an ever more tightening grip on information flows within China and the state media outside of China. And also, I think, certainly, the Chinese community abroad, will be under more scrutiny from Chinese embassies abroad, to make sure that they fall in-line with their patriotic duties, but also the wishes of the Party over the next couple of weeks.

SP: Alex, thank you very much indeed for your insights into the information war that is obviously an ongoing part of great power rivalry. And we look forward to interviewing you again shortly, particularly I think probably Sam, the best time for that would be after the Congress in mid-October.

SO: I hope you're going to be taking lots of notes, Alex.

AN: Yes, I will be. I will be watching it intently. But thank you very much to both for hosting me again. I think a sort of wash up session within a few weeks after the Party Congress would be fascinating to discuss and I look forward to speaking to your audience again.

SO: Great. Well, thanks, Alex. And we will be back next week with more What China Wants, goodbye.

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In today's What China Wants we ask Luke Patey whether China is deliberately targeting Europe's technology companies with unfair competition, and if so, what can Europe do about it?

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Hello and welcome to Episode 17 of the What China Wants podcast. Today we pay tribute to the impact of Queen Elizabeth II on Sino-British ties.

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Hello and welcome to Episode 16 of the What China Wants podcast.

In the back and forth over climate change, something that doesn’t get mentioned too much in the rain-sufficient West is a lack of water (California and parts of Australia aside). But in China, the recent drought that has hit large swathes of the country has laid bare the immense threat presented by drying rivers and lakes. Agriculture, manufacturing, energy production - all have been badly hit, and already-fragile growth rates will likely have been further damaged.

To discuss this we interviewed two experts on the matter. Gabriel Collins is an academic specialising in water at Rice University's Baker Institute, and Gopal Reddy, the founder of Ready for Climate, a platform for cutting-edge research focused on the national security and macroeconomic risks of the climate crisis.

Some highlights from our discussion:

* China normally experiences a dry north and a wet south, but this year both regions are dry.

* This is on top of an already difficult water situation across the country, which suffers in part from water scarcity worse than Egypt.

* Even though China is spending heavily on infrastructure to ease the water scarcity burden, there is a long way to go given how bad the situation has become (and not just during this drought).

* With 60% of water used for agriculture and 20% for industry, there are concerns about how water issues will impact China’s growth and its social stability.

* Not only that, but the country relies on hydroelectricity for 20% of its generating capacity, so power outputs are now down.

* Water shortages are likely to impact China’s domestic policies but also its international ones too, including arguing with its neighbours over watersheds and trying to secure more food sources in case agricultural yields collapse.

You can access Gopal Reddy’s report on China’s water shortage here.

You can also listen to the podcast on Apple, Amazon, or Spotify.

As always please do share, comment, and subscribe. We’ll be back next week with more What China Wants.

Many thanks for listening.

***

Here is the transcript:

Sam Olsen: Hello, and welcome back to What China Wants with me, Sam Olsen, and with Stewart Paterson as always. So, Stewart, you and I have spoken quite a lot about resources regarding China, and in fact, we talked about a few of them last week, but none so more important than water. I thought I'd start today with a quote about the issues facing China with regard to H2O.

"China's water situation is particularly grim. The country possesses 20% of the world's population, but only 7% of its freshwater. Entire regions, especially in the north, suffer from water scarcity worse than that found in a parched Middle East. Thousands of rivers have disappeared, while industrialisation and pollution have spoiled much of the water that remains. By some estimates 80-90%, of China's groundwater, and half of its river water is too dirty to drink. More than half of its groundwater and one quarter of its river water cannot be used for industry or farming."

That, Stewart, does not look to me like a recipe for success, either economically or socially. I think it's best for us, rather than just to talk about it amongst ourselves, to get some guests on. And we have two expert guests on the very topic today, including the author of those words.

Stewart Paterson: Yes, Sam, indeed. It's always good to have some experts on we're lucky today to be joined by two leading experts on the environment,  and in particular where China is on water. Gabriel Collins is the Baker-Bots fellow in Energy and Environmental Regulatory Affairs at Rice University's Baker Institute, and the author of over 100 papers on the subject. And Gopal Reddy has a similar background to myself actually, having spent years in financial services, before leaving his hedge fund that he founded, Chakra, to set up the Ready For Climate organisation, which aims to provide its readers with the information required to make rational decisions and understand the process of climate change.

Thank you both very much, indeed, for joining us. It's a great pleasure for us to be hosting you. Gabriel, maybe I could turn to you first with a question. As Sam's quote implies, the water situation in China structurally appears to be pretty dire. Those statistics all came out rather quickly from Sam's mouth, perhaps you could just elaborate on it and try and explain to our listeners exactly how bad the situation is.

Gabriel Collins: The challenge is that there is a structural deficit of water that's been fairly long standing in northern China. To get a sense of what the North China Plain means within the country is, in terms of grain production, if you imagined what Iowa, what Illinois, what northern Missouri and some of these other areas in our corn and soybean belt mean, here in the United States, the North China Plain is the rough equivalent. The problem is it is far drier. They have been groundwater dependent for a long time, and you see the deficit steadily building.

The other dynamic that we are seeing play out, and it's been very much enforced this summer, is actually dryness in southern China. Historically, you have had a dry north and a wet south, and what we have seen this summer is dry in both areas. Particularly because a lot of the engineering schemes that China wants to use to compensate for the water deficit in the north are predicated on bringing water from the south, it's a real, systemic challenge. And it's a multi-region challenge in a way that I think hasn't been seen for a while there.

SP: Interesting. And of course, huge infrastructure projects in China aimed at redistributing water are not new, are they? That goes back, Sam, from your history - you'll remember that the big canal projects were a major part of Imperial China weren't they?

SO: Yes, Yu the Engineer and his ilk from earlier than 1000 BC. In fact, it is ironic that Xi Jinping recently was visiting parts of China which were devastated not by drought, but by flood. There he was referencing Yu the Engineer and previous generations of water tamers and said that "we have to tame the water before the water tames us" or words to that effect.

But it looks like now that the realities of the most critical situation are coming forth, and that is around drought.

In fact, I'm looking at your Ready for Climate website, Gopal, and you mentioned here that Wen Jiabao, who was China's premier in the mid 2000s said that water shortages, in fact threaten the survival of the Chinese nation. Is that hyperbole or do you think that there really is a big problem for China now and in the future?

Gopal Reddy: I don't think that is hyperbole at all. Again, I would emphasise that, based on his comments, as well as Xi's comments, and those of many other senior CCP party members, there is a clear understanding of the water shortage problem. Just to give you some sense of scale here when we were looking at China's major cities, and we're talking about Beijing, Shanghai, Shenzhen, Hong Kong, amongst others, the local water resource on a per capita basis is roughly half of what it is in Egypt. So we're talking about a seriously dry environment in terms of water resource available. And unlike Egypt, China is obviously running a lot of industrial processes and manufacturing facilities which further consume water.

So it is a very serious situation, and one thing I would point to is that China has made some significant investments to try to reroute water from South China to North China. Gabe touched on that a little bit, there's the South-North Water Transfer project, which was a $60 billion investment. Just last month, there was an announcement of a plan to build a new tunnel from the Three Gorges Dam up to Beijing, which would seem to imply that the South-North Water Transfer project, its water supply is not adequate to solve the problem.

SP: So is China reaching a point then where it's going to have to choose between using water for agricultural purposes or using water for industrial purposes? Because, as I understand it, China makes about a billion tonnes of steel a year, it's about half of the world's steel production. And yet, steel, if I remember rightly, is one of the most water-intensive industrial processes you could use. So that doesn't strike me as being a bright and intelligent use of what seems to be an incredibly scarce resource in China.

GC: One of the challenges I think, actually, is even if we step a little bit further back than steel, as you think of one of the most fundamental commodities of all for modern humanity - obviously, setting water itself aside, and food aside - is electricity. I think, actually the electricity and coal space, that's where we see perhaps some of the broadest non-agricultural effects of these water shortages. We have really seen it in spades this summer, with the hydropower shortages coming out of Sichuan.

There's a couple of dimensions to this, there is a political management dimension where you have a system that still much more ‘command and control’-based than some of the market-based approaches that we're used to in Western Europe or in the United States, for instance. But even taking some of the management element out of the equation, it is a massive fundamental challenge if you're getting 20% of your electricity, basically directly from water in the form of hydropower, and then when a lot of your coal-fired power plant fleet requires enormous amounts of water for cooling, and you also need water to process coal and prepare it for combustion. And also to move coal, if you think about the impacts on a river system on your barge traffic when water levels fall, they can be tremendous.

Again, these are things that are matters of physics. We see this happen sometimes in the United States, we have seen it this summer in the Rhine River Basin in Europe. So it's a whole interconnected set of challenges, and I think almost the entire basic materials class, whether it's direct water usage, as you have referred to as steel, or whether it's more indirect in terms of electricity-intensive industries being impacted by power shortages, that again, even before we get into food, it's a very systemically impactful set of events we're seeing unfold.

GR: Yes, and just to give some sense of this distribution of water consumption in China, roughly 60% is for the agricultural sector, 20% is for power generation and manufacturing. The rest is roughly split between just general use and household use. So when you when you look at from a country level standpoint, where are the opportunities for China to maybe find additional water savings?

The challenge in the agricultural sector, and this is something that Gabe, really highlighted in our published work, is that China has a long standing policy of food self-sufficiency to the highest extent that they can possibly get. So, if cutting back water for the agricultural sector would impact crop yields, I think that's a politically very, very difficult thing to push through.

When you're talking about household usage in China, households in China are actually very efficient in their water usage, especially compared to us in the US, so there's not a lot of savings to be had there. That really leaves the onus on the power generation sector and the manufacturing sector just to square the math when you have water shortages or power shortages resulting from water shortages. Over the course of the last 18 months, you've seen these periods of rolling blackouts in various regions within China, and inevitably what's getting impacted the hardest is the local manufacturing facilities as they're forced idle.

SO: Now, actually, I will just press you on one point there, which about agriculture and water savings. Because in the West, there's certainly been a lot of talk recently about how much saving of water within agriculture environment can be made, if you use technology. Two examples spring to mind. First of all, drip irrigation, and the use of more advanced tractors and more just general machinery on the farms. And secondly, is lab-grown meat, which according to one report published a couple of years ago, which suggested that lab-grown meat had 1% of the water requirements of normal, 'field-grown' meat.

So to what degree are we looking at China trying to adopt new technologies and new methodologies within the agricultural sector, specifically with water rations in mind, or has that actually not come to pass yet?

GC: If you are looking at some of the agricultural efficiency improvement technologies, I think one of the big barriers that we see to-date in China is that the scale of farming is typically much less than for instance, what you see in a lot of breadbasket regions of the world, the United States, Brazil, Argentina, Ukraine, Russia. Here, we tend to measure big farming operations, in terms of many thousands of hectares. In China, I'm forgetting what the average farm size is, but it is basically on the order of maybe a couple of hectares, they tend to be much smaller on average.

The problem with farm consolidation is again, that it becomes very politically tricky, because you have already had a big flow of people come off the land and into the cities as migrant workers. So you sort of ask, where would be the new places if you had another round of agricultural reform, and if you had real land consolidation? I think what would put an especially fine point on that question now is we see the real estate slowdown in China. If you look at the sectors that really absorb that groundswell of people coming off farms and into the cities, one was manufacturing, you have kind of your prototypical experience of somebody going to work in the Pearl River Delta factories or elsewhere. But the other big source of absorption, especially for male workers coming off the land, was going to work in the construction sector. So, if you have a real estate slowdown, and I think arguably an incipient slow-motion real estate crisis taking shape, and you're juxtaposing that against what people might do, if there is farm consolidation and less need for their labour there, I think, again, it really highlights the political tightrope that the government is walking.

And I think, probably to come back to some of the things we talked about earlier, engineering-based solutions, I think, are inherently attractive when you have a government with the technocratic bent that China's does and this long history of hydraulic engineering. But I think probably one of the other reasons that engineering-based approaches may appear attractive as they help you look like you're taking decisive action, but also without having to fully jump two feet into dealing with some of these politically tricky dimensions that we're talking about.

GR: Yes, and Sam, just to add on to that, you mentioned some of the opportunities maybe on the food side, whether it is reducing meat consumption or finding alternative ways. There are steps that can be taken in terms of reducing the water consumption by reducing meat consumption in China. But that becomes, again, a very politically difficult thing to message from the standpoint of the government. If you have to tell your citizens that they need to modify eating behaviours because of water shortages, I think it starts to raise a whole host of other questions, and this is something we've highlighted in the work. As far back as 2016, the Chinese government was asking people to switch from eating rice to eating potatoes because growing potatoes is far less water-intensive. But the messaging and the enforcement are two different things.

GC: I'll give you an anecdote even from my time in China. You could find potatoes on the menu, and actually when you stir-fry potato cubes with all the sauces and wonderful flavours they have there, it's superb. But I think I was the only one in the entire restaurant that was willing to order the potato. Everything else was rice.

SO: In all my travels in China, I have never seen potato stir-fry, but I might cook it tonight.

GC: Oh they're good.

SP: Gentlemen, we have talked mainly so far about the long-standing structural issues which are obviously getting worse, but in the last eight weeks or so, China has experienced some really horrific weather events in terms of heatwave and lack of rainfall. Perhaps you could, Gopal, just update us on what the situation is there, and just quantify a bit for our listeners, just how unusual this is in terms of records being broken, and for both heat and lack of rainfall.

GR: So what I would stress is, obviously, these are in recent history, unprecedented events in terms of the weather impacts, especially in central China. What I would point to is, when you look at the response to the Chinese government to this problem, again, what you're seeing happen is you're getting the immediate effects of power shutdowns here and there.

But, one of the more interesting aspects of how China is trying to manage through both acute and long term water shortages is through the use of what's called cloud seeding technology. If you are not familiar with it, or if your audience is not familiar with it, this is basically when you when you use rockets, or drones and you release silver iodide or carbon dioxide into the atmosphere to try to induce rainfall when the weather patterns are accommodative. China has already announced plans to cover half its landmass by 2025 with cloud seeding programmes, and in recent weeks, there's been a lot of announcements about stepped up activity on cloud seeding, particularly in Szechuan province.

One of the side effects of cloud seeding is that it tends to induce much more severe storm events. So it will be interesting to see over the next weeks-to-months, whether you start to see heavier storm events occur within certain provinces. And this is something that, again, Gabe has highlighted. One of the big problems is when the ground itself is extremely dry, you may get a tonne of rain in a very short period of time, but it basically all just runs off into the ocean because the ground is too dry to absorb it.

SP: So not a solution of any sort of lasting nature?

GC: I'm not sure if we fully know that. I think part of what we're seeing play out in real time here, as Gopal's referring to with just the sheer scale of Chinese efforts, is this is basically real-time geoengineering in a way. I think one of the dimensions this actually highlights is there's so much focus in Western Europe, and I think, to an increasing extent in the United States on trying to do things to restrain emissions, and hopefully avoid different climate change impacts. I think what's really interesting in China, is that there's a really robust, not just conversation on adaptation, but I think there are a lot of things that we already see being put into place.

I think with this cloud seeding programme, one of the things you see is one of the larger scale ongoing experiments in geo-engineering. I don't think we fully know how it turns out if you're trying to manipulate weather patterns on that type of scale. Maybe it is something that is revolutionary, or maybe it turns into a modern version of Mao's campaign to have people kill sparrows in the late 1950s and early 1960s, which was a disaster. I think we don't fully know yet. But I have a suspicion that among other things, some of the neighbours who share rain sheds and weather sheds directly with China might be a little concerned. I think there is a potential that cloud seeding becomes just a wider spread form of some of the adverse impacts we already see from dams on the Mekong River and things like that for people who are downstream and in the same rain and weather shed. So, I think it's going to be very interesting to see how this ultimately plays out.

SO: That is actually a good segue to something that I'd like to talk to you about now, which is the effect of China's water shortages on his neighbours. Now, you must have been looking at this, perhaps more from the water point of view. But from a political point of view, and indeed a security point of view, what do you think the challenges are for China's neighbours when it comes to China's water issues?

GC: I think it starts with some of the shared river basins. I think the river basin that gets the most attention is the Mekong, and I also think some of the other rivers coming off the Himalayas, if you're living downstream, whether it's in India or Nepal, or Bhutan, or any of these other places, and in certainly in Southeast Asia, you'll have concerns about how the Chinese operate dams they are building upstream.

We have already seen, such as in the Mekong basin, for instance, that there has been water withholding. There is a whole series of dams on the upper reaches of the river in China, where you no longer see the normal seasonal flood patterns because they have been withholding water among other things to facilitate power generation. So, if you look downstream at Tonle Sap, the big lake in Cambodia, where you have seasonal flooding  - people will fish during that time and get a big chunk of their year's protein haul. It's starting to affect things like that.

I think the other area also that maybe doesn't get as much attention but probably deserves it are some of the shared river basins on China's western boundaries, particularly, for instance, the Irtysh River and others that arise in Kazakhstan and the Xinjiang area, and then flow north. You have big hydraulic engineering projects in Xinjiang that are being quietly worked on as well. I think we don't yet know what the impacts are, but I would suspect that parties in Kazakhstan and probably Russia, also downstream are watching these with some degree of unease, because I would surmise that they're realistic enough to guess that the Chinese will manage these projects entirely in their own self-interest once they're completed.

GR: Yes and one thing that I think is a really important variable over the next five to 10 years regarding this situation is that there is a big question regarding how long glacial flows will continue from some of the upper reaches. So, when you are looking at China's river supply, a lot of that's being fed from the Himalayas or the Tibetan region. There is actually a short-term benefit to water supply as temperatures warm because the glacial sheets start to melt. And then the question is longer term that, you know, you may reach a point where that starts to reverse and we actually see those glacially-fed rivers start to dry up. That is when we start talking about catastrophic outcomes for that region.

SP: Can I just come in there on that? Are you suggesting that the current level of water supply in China is in fact already being augmented by melting glaciers, and so that benefit is already being had, as it were, and at some point, we will move into a process of those rivers producing less water?

GR: Yes, I have seen academic estimates suggest that come 2035 or so that the benefit from glacial melt off will start to reverse. I am not 100% fully detailed on some of those aspects of it, but it is a serious worry, especially given how important those glacially-fed rivers are, both to China and also neighbouring countries in the region.

SO: Just to talk one final time about the international relations impact. You mentioned in your report as well about the issues on food security relating to water scarcity. You say there about the fact that the water sheds on the neighbouring boundaries of China might be impacted by hydro-engineering schemes.

But looking at food specifically, it seems to me that one of the things that China is going to need to do if it has got chronic water shortages, is to secure more electricity from abroad considering 20% of its electricity is hydro. And secondly, is to secure a lot more of its food from abroad, if they cannot reform their agricultural sectors. This is going to have a large economic impact, not only on China's domestic economy, but also its international economy. Stewart, wouldn't you agree with that?

SP: Well, yes, I would. But I suppose the issue that our water experts would probably raise here is that countries such as Brazil, Australia, Canada, the United States that are large food exporters themselves, are presumably facing climate challenges of their own. I know in the case of Australia, clearly with the Murray Darling Basin, there are big issues in terms of water supply to agriculture.

Perhaps, Gabe, you could elaborate on that? Are there large, surplus producing countries in the world who are capable of upping their production to compensate for a decline in China's food production in an order of magnitude that makes a difference?

GC: Since we have multiple current or former investment professionals on here, I think you will appreciate the idea that timing is everything. And for this one, it's really the adjustment period. I think if you are just looking on a purely theoretical basis, and you look at the combined potential output increases that you could see from the southern cone of South America that you could probably even see from parts of the United States, from Canada, from Kazakhstan, from Ukraine and from Russia, among others.

If you're looking on a four-to-five-year timeframe, you can probably start to meet a larger Chinese call for imported grain beyond what we already see today. But in terms of what goes on during that adjustment period, it can be massively tumultuous. Especially if you're looking at some of the countries that are being impacted by, for instance, closure of shipping in the Black Sea over the past six months as a result of Russia's war in Ukraine, and then you imagine a larger magnitude event that plays out over more time, you can see how things potentially get pretty dicey with that.

And then so I think China's scale makes things very challenging because Saudi Arabia, for instance, as we talked about in our paper, has made a move to basically go to imports in order to conserve domestic water resources and quit using them for grain, but it's 1/70th of China's size.

SP: Well, it's been a fascinating discussion, thank you both very much indeed, Gopal Reddy, and Gabriel Collins. Sam, this is a fascinating topic and my mind is slightly spinning in terms of the ramifications for manufacturing raw materials, and the impact that that's going to have on the rest of the world, if China has to substantially cut back on its production. Plus, of course, you know, the potential for influence operations that China needs to pursue on food surplus countries in order to ensure some sort of compliance with their exports. As we know, China pursues an aggressive geo-economic policy when it comes to pursuing its self-interest. So that leaves us with plenty of food for thought.

SO: Great, you have really woken us up to the issue of China's water shortages. I honestly believe that this is probably one of the most chronic issues facing the country. But not just the country, of course, because as Stewart said, its influence globally, as well. Have you got any final thoughts about how China can turn this around and change things to think about things more happily?

GC: I think there are ways you can start dealing with this problem. I do not know if 'happy' is necessarily a word you will associate with it, especially if you're a Chinese leadership that has a Party Congress looming, which is about six or seven weeks from now. Repricing water, in some instances, I think, both for agricultural use, and also for industrial use in ways that incentivise greater efficiency, I think is something that would probably be pretty politically controversial, because people have got used to cheap water. This is not just a Chinese problem. This is a challenge here in the United States and in many other places, as well. And then, I think one of the other things repricing does is it makes you rethink some of your agricultural, almost near autarky in certain staple grains. But I think given the geopolitical climate and the evolutions we've seen there, I would be surprised if the Chinese government was ready to take big steps.

Among other things, when you see the intensity of discussion of this dual circulation policy, where basically, China's almost this semi autarkic hub that takes in raw materials as it needs them, and then spits out manufactured products to its huge domestic market and also to the rest of the world. If you are thinking about relying more on a global market to compensate for your domestic water insecurity, I think there is a lot of contradiction between those. And at least, Gopal may disagree, but I don't get the sense that this is a conversation that is one that may be there yet ready to have in an action-oriented way, or if they are, it's occurring very, very privately, and at least I haven't seen many manifestations of that.

GR: I totally agree with Gabe, and I think the one thing that we would highlight is that the solutions to China's water shortages are pretty much all politically very difficult, whether it's making shifts to manufacturing policy or trying to change consumption patterns or other drastic steps. None of these are very simple tasks, internally within China.

What I would also stress is that given China's huge influence on global trade patterns, a China water problem is the world's problem. This is an issue that's going to be exported out to the rest of the world, and particularly when we look at China's manufacturing sector, I think Western companies have become very comfortable with the idea of being able to increase their output from China by 5% or 10% or 20%, every year, if they need to. The numbers suggest that it will be very, very difficult for China's manufacturing base to continue to support long term growth of that kind of demand, less solutions are found for the water-power problems.

Again, just to highlight some of the challenges involved, one of the nice things about wind and solar power is that they don't require water resources to operate. But the downside of wind and solar power is that it's not dependable enough to run industrial facilities. So this is a case where, you know, if there are technology breakthroughs that happen in the next three to five to 10 years that could make a meaningful difference, there are steps that can be taken. But right now, the decision tree facing China is not particularly attractive.

SP: Gentlemen, thank you very much indeed. Sam and l will be back next week with another episode of What China Wants. Thank you. Goodbye.

GC: Thank you.

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