Welcome back to What’s Happening in China, your weekly China brief.
I hope you’ve had a great week.
Treasury Secretary Scott Bessent and U.S. Trade Representative Jamieson Greer are meeting with the PRC’s economic tsar, Vice Premier He Lifeng, this Saturday and Sunday in neutral-ground Geneva. The talks appear to be a preamble to formal negotiations, and expectations are low. According to Reuters, “Internally, China has downgraded the talks from a higher level to merely a meeting, reflecting its view that the discussions will be mostly about finding out Washington's demands and red lines after weeks of contradictory messages by Trump and other senior U.S. officials.”
Despite the PRC’s claim this week that “this meeting is requested by the U.S. side” and that its economy has “a stable foundation, numerous strengths, remarkable resilience and vast potential,” economic pain seems to have been a key factor bringing Beijing to the table.
The U.S. team is expected to press for tariff reductions, an easing of rare earth export restrictions, and tighter controls on exports of chemicals used to produce fentanyl.
In what may be a signal of concession—or perhaps just another erratic Trump moment—he posted on Truth Social Friday: “80% Tariff on China seems right! Up to Scott B.”
Meanwhile, in the same week the PRC and the EU exchanged messages marking 50 years of diplomatic ties, Xi Jinping traveled to Moscow to mark the 80th anniversary of the end of World War II in Europe, a symbolic show of alignment with Russia that undercuts Beijing’s charm offensive toward the EU.
Let’s jump into it.
— PC
Through the Lens
In Focus
I. Let’s talk trade
The U.S. economy contracted 0.3% in the first quarter this year amid mounting concerns that the economy will slip into a recession with higher inflation and unemployment. And while the Chinese economy grew a better-than-expected 5.4% in the first three months this year, major banks have slashed their full-year growth forecasts for the country to just around 4% — below the government’s target of around 5%.
Trump still might have more to lose, as the Chinese political system grants the country’s leadership a “higher pain threshold” and a “greater degree of control over macro policy support in the short term,” said Dan Wang, China director at political risk consultancy firm Eurasia Group.
Vice Premier He’s main mission will simply be seeking clarity on what Trump wants and assessing whether the U.S. intends to hurt China’s interests, Wang said.
In what appeared to be a confidence boost ahead of the meeting, China released trade data that showed its exports surged 8.1% year on year in April on the back of a jump in shipments to Southeast Asian nations, shrugging off the 21% drop in outbound goods to the U.S.
And on Friday, China’s Commerce Ministry launched a “special operation” to combat the smuggling of strategic minerals, including gallium, germanium, antimony, tungsten and medium and heavy rare earths.
Read: What to expect from U.S. and China's icebreaker trade talks (CNBC)
Related:
China can play hardball at looming trade talks with US: analysts (France 24)
Trump Team Seeks Tariff Cuts, Rare Earths Relief in China Talks (Bloomberg)
China announces sweeping measures to ease policy in bid to shore up trade-war hit economy (CNBC)
China’s latest stimulus measures fail to impress as investors focus on U.S. trade talks (CNBC)
Chinese goods hit by Trump 145% tariffs begin arriving at U.S. ports (CNBC)
II. Putin-Xi bromance
Chinese President Xi Jinping has told Russian leader Vladimir Putin that his country will stand with Moscow against “unilateralism and hegemonic bullying” during a visit to the country to commemorate the defeat of Nazi Germany in World War II.
Arriving in Moscow on Thursday at the start of a four-day visit, Xi hailed the “deeper” trust developing between the two countries, appearing to take a swipe at Western critics of Russia’s continuing offensive in Ukraine, which Putin has characterised as a war against latter-day Nazis.
“In the face of the international counter-current of unilateralism and hegemonic bullying behaviour, China will work with Russia to shoulder the special responsibilities of major world powers,” Xi told Putin.
Greeting Xi as a “dear friend” in the Kremlin, Putin took the opportunity to underline Moscow’s role in WWII, which he has long accused the West of minimising, and to reinforce his narrative of the Ukraine war as a new battle against Nazis.
“Together with our Chinese friends, we firmly stand guard over historical truth, protect the memory of the events of the war years and counteract modern manifestations of neo-Nazism and militarism,” he said.
Read: China’s Xi vows to stand with friend Putin against ‘hegemonic bullying’ (Al Jazeera)
Related:
Xi in Moscow: China's role in Russia's economic survival (DW)
Xi shows he wants to be close to Putin - but not too close (BBC)
Chinese troops march with Russian forces as Xi joins Putin for Victory Day parade (The Guardian)
H.E. Xi Jinping President of the People’s Republic of China for the Russian Gazette (Ministry of Foreign Affairs of the People's Republic of China)
Xi Jinping’s Moscow visit highlights China’s strategic vulnerabilities (Brookings)
III. Did “Made in China 2025” work?
An industrial plan China rolled out a decade ago that was criticized by the U.S. as protectionist has been highly successful in narrowing China’s technological gap with the West, a new study finds.
The study, commissioned by the U.S. Chamber of Commerce, is set to intensify the debate in Washington and elsewhere over how to counter China’s use of state subsidies and other strategies to bolster its competitiveness.
To placate President Trump during his first-term trade war with China, Beijing dropped mentions of the “Made in China 2025” plan,” leader Xi Jinping’s signature industrial strategy, from public discourse. But the policy stayed in place.
The study, released Monday, shows that enormous state support unleashed under the strategy has enabled China to eliminate or reduce its dependence on imports such as rail and power equipment, medical devices and renewable-energy products. In addition, Chinese companies have become more competitive globally, gaining market share from foreign companies in sectors including shipbuilding and robotics.
The findings in the study, conducted by economic consulting firm Rhodium Group, highlight the stakes for the U.S. and other advanced economies as Beijing continues to advance Xi’s blueprint to make China a leader in high-tech industries.
“China today is very different from China in 2015, and that has a lot to do with an industrial policy that has been predicated upon unprecedented state funding,” said Camille Boullenois, an associate director at Rhodium and lead author of the report. “There is no doubt that China will continue to narrow the gap and increase its competitiveness.”
[…]
The new study details how government support for the policy has intensified since its inception. Tax benefits to companies in favored sectors surged by an average annual rate of nearly 29% between 2018 and 2022 and reached 1.3 trillion yuan, equivalent to about $185 billion, in 2022—representing more than half of overall corporate spending on research and development.
The proportion of companies enjoying tax deductions and other benefits more than quadrupled between 2015 and 2023, according to the study. In addition, based on available government data, it finds that investment through state-directed funds soared more than fivefold between 2015 and 2020, to $52 billion five years ago.
Meanwhile, according to the report, authorities have increasingly used access to the Chinese market as a way to compel foreign companies to set up production and research centers in China. Such practices have helped the country build up supply chains for products ranging from smartphones to electric vehicles.
As a result, every sector targeted by Made in China 2025, including information technology, high-end machine and medical tools and new materials, has experienced a “substantial reduction” in import dependencies, the study found. For instance, imports as a share of the market for medical devices dropped to 14% in 2023 from 24% in 2015.
“China has been very good at leveraging foreign companies and pressuring them to localize their production and research,” Boullenois said.
Read: Beijing’s ‘Made in China’ Plan Is Narrowing Tech Gap, Study Finds (WSJ)
Related: Was Made in China 2025 Successful? (Rhodium Group)
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