New sanctions law + Bitcoin mining

Dear reader,

The idea of having to choose between the US market and the Chinese market sounds like an industry nightmare. The largest and second-largest economies, together with the EU home market, are the main pillars of export success. However, now German firms may find themselves in precisely this predicament, as Marcel Grzanna reports. If China really does apply its new anti-sanctions law, they will have to do without one of the major foreign markets. The BDI also believes that this means that “a sword of Damocles” hangs over the German economy. China is sealing itself off further as a result.

Meanwhile, the government is plugging the last loopholes for capital transfers abroad: Even an internet search for keywords related to Bitcoin now leads nowhere. The government now also pulls the plug on the so-called miners because the production of Bitcoin consumes a vast amount of electricity, which the country needs for more productive applications. In general, crypto enthusiasts have a hard time in China right now. The communist state does not allow itself to be wrested from control of the financial system so easily.

Xi Jinping has further consolidated his control over the party and the state in recent years. Yesterday, the general secretary and president turned 68. That’s still young for a communist leader, and Xi is known to make no plans to ever leave office. The new German government can confidently expect to have to deal with him for quite a while.

Your
Finn Mayer-Kuckuk

Anti-foreign sanctions law: with us or against us

By

Marcel Grzanna

For months, the US and China have been weakening their shared economic framework of global trade with mutual punitive measures. The anti-foreign sanctions law from Beijing, which was passed last week (China.Table reported), leads to scenarios in which European and other companies find themselves in a quandary. In the worst scenario, companies are forced to change course in their business strategy through no fault of their own. Namely, which market they will choose: China or the US and its allies in Europe.

The logic behind this stems from new legislation waved through by the Standing Committee of the National People’s Congress in Beijing. “At its core, the People’s Republic reserves the right to give companies the choice of whether or not to comply with possible sanctions against the country,” says China analyst Bernhard Bartsch of Berlin-based research institute Merics, which itself has been hit with Chinese sanctions, in an interview with China.Table. “The anti-foreign sanctions law thus provides the government with a tool to dodge sanctions and leverage to pressure foreign companies to violate.”

BDI: Law becomes ‘sword of Damocles’ for companies

The consequences for companies would be far-reaching. If they comply with the sanctions, they must expect to encounter significant problems in China. “The new law now gives Beijing the means to issue painful penalties. Affected companies could lose their access to the entire Chinese market,” Angela Zhang, an expert in Chinese law at Hong Kong University, told China.Table. If they did not comply with the sanctions, as Chinese law now requires, consequences in the US market and possibly in Europe would be hard to avoid.

To be sure, Zhang does not expect the Chinese government to immediately resort to its strongest weapon. “But I do believe that there will be a point in the spiral of reciprocal punitive measures when Beijing will make use of the new options,” says the lawyer. Should the application become widespread, it would probably not only affect trade but also the entire value creation of products as well as the areas of research and development.

The Federation of German Industries (BDI) had clear words to say about Beijing’s plan on Tuesday: “The new anti-foreign sanctions law comes at an inopportune time,” announced Wolfgang Niedermark, a member of the BDI’s executive board. “Instead of focusing on de-escalation, the Chinese government is creating new uncertainty. This damages China’s reputation as an investment location and trading partner.” The law threatens to become “a sword of Damocles for every company” that “does business in and with China”, Niedermark stressed. This would create a political minefield for companies.

Separation of value chains increases costs

European companies would have to make fundamental decisions about whether or not to forego one of the two markets or to set up alternative production – in other words, two different value chains that do not cross each other. The challenges of such a development are obvious. Firms’ costs would rise significantly because two supply chains each mean smaller production volumes, making them more expensive to acquire. New, suitable personnel would have to be found in a relatively short time and paid accordingly. Margins and profits would fall accordingly, and companies would have to ask themselves whether such a balancing act still makes economic sense for them at all.

Especially since research and development work would then also have to take place separately for two different markets. Because a strict separation of value creation on both sides would lead to a gradual decoupling of standards and technologies. “Instead of complementing each other at best, there would be increasing gaps between the markets, which companies, in particular, would have to deal with if they want to dance on two high tides in the long term,” says Merics analyst Bartsch. Europe, as a research location, could also pay the price if additional capacities for the companies’ research had to be withdrawn from the home market because, for example, an increase would be necessary for China.

So does this mean gloomy prospects for all companies that want to make US, European, and Chinese customers equally happy? At the very least, the new law casts a dark shadow over future prospects. But many companies have already proven in the past that they can survive crises and draw new strength from them. These include, above all, German companies that have been active abroad for decades. Since the end of the Second World War, industrial companies between the German cities of Flensburg and Garmisch have experienced a number of geopolitical changes and adapted their strategies accordingly. So companies won’t waste much time complaining but will start developing solutions now and perhaps even discover new opportunities.

Other countries are becoming more attractive

Marcin Adamczyk, head of Emerging Markets Debt at Dutch asset management firm NN Investment Partners, sees these opportunities primarily in other countries. He believes “the increasing competition between the two superpowers and the move towards a new power structure will benefit emerging markets, provided it is managed properly.” Those who are friends with the US or offer them key commodities will receive funds from the newly created pots for infrastructure. Those who are friends with China will receive funds from the Silk Road Initiative.

This also makes these other countries more interesting for foreign companies. Their increasing importance could translate into economic growth, which in turn makes them more attractive for foreign investment. A welcome side effect for the German economy would be diversification and, thus, less dependence on China. In recent years, discussions have become louder and louder as to whether Europe, and especially Germany, is not already relying far too much on demand and growth in the second-largest economy.

Bitcoin mines are forced to close by the dozen

China’s government is seeking absolute control over payment transactions in its own country. Strict rules have always ensured that Chinese citizens can only transfer a limited amount of the national currency, the yuan, abroad each year. Therefor, it is no surprise that decentralized cryptocurrencies like Bitcoin are a thorn in Beijing’s side.

China’s authorities began cracking down on crypto trading platforms four years ago. At the time, the internet currency was experiencing its first big boom, and the price of a Bitcoin had climbed from around $1,000 to an interim high of $19,000 in less than a year. China then banned so-called Initial Coin Offerings (ICO) in 2017 to protect investors and curb financial risks. Since then, financial and payment companies were no longer allowed to offer services for ICOs and cryptocurrencies – such as account openings, trading, registration or liquidation.

Since then, it has also been illegal to exchange legal tender for cryptocurrencies. This effectively banned the trading and use of Bitcoin. In fact, it has become difficult for Chinese people to buy Bitcoin and other cryptocurrencies today.

After the trade ban, speculation comes into focus

After the Bitcoin trade, the authorities have now set their sights on the miners. Up to three-quarters of the world’s newly mined Bitcoins recently came from China. However, that may now be over. The hunt for miners began when the Beijing State Council’s Financial Stability Commission ordered a crackdown on the industry a few weeks ago. For a long time, Chinese miners had benefited from cheap electricity in some regions of China in their hunger for market share. The mining of cryptocurrencies is particularly power-intensive because of the horrendous computing power involved.

In the mountainous provinces of Sichuan, Yunnan, and Qinghai, China’s miners set up computer-packed factories near dams whose turbines produce an abundance of electricity, especially during spring snowmelt and seasonal downpours. Then Bitcoin miners packed up their equipment during the winter and moved to China’s far west, to the Xinjiang region. There, electricity from coal-fired power plants is cheaper than anywhere else in the country. Until recently, Inner Mongolia has also been considered a popular mining region where coal is cheap.

Excessive power consumption becomes too much for Beijing

But provincial governments are now gradually enforcing the government’s orders and cracking down on miners. Inner Mongolia kicked things off by calling on the public to provide tips on where companies are engaging in illegal mining activities. At least 35 crypto operations have already been shut down by the end of April. Xinjiang and Qinghai also declared that a large number of miners in the provinces must close. Last week, authorities in Yunnan province also announced plans to cut off power to illegal miners.

China’s fledgling bitcoin industry has gone so far that, according to some estimates, at its peak, it consumed as much electricity as the whole of Italy. The industry has come under increasing international criticism for its extreme demand for electricity. And Beijing is also bristling at cryptocurrencies’ soaring energy demands. Their rampant power consumption is seen as a threat to the ambitious climate goals of the second-largest economy, which President Xi Jinping has personally set.

Panic in the Chinese crypto industry

There is panic in the industry. “Virtually all the big miners are thinking about relocating to other countries,” says Chinese bitcoin analyst Colin Wu. North America, Kazakhstan and Russia are particularly high on the list of new locations. Quite a few miners, Wu says, have started to get rid of their equipment at knockdown prices. As a result, he said, prices for the Antminer S19, a popular bitcoin mining machine in China, fell from the equivalent of €9,000 to €6,500 in just a few days. If nothing changes in the current policy, there is no future for miners in China, Wu says.

It does not look like Beijing is giving in at the moment. On the contrary: Authorities are tightening the course further. The censorship authorities blocked numerous accounts on China’s largest social network Weibo that discussed Bitcoin and cryptocurrencies in general. After trading and mining, Beijing is now also trying to stifle all discussions about the pros and cons of cryptocurrencies. Even searches for names of popular Bitcoin trading sites are now blocked by internet services such as Weibo or the search engine Baidu.

The fact that Beijing is cracking down on Bitcoin and other cryptocurrencies does not mean that it is turning a blind eye to technological progress. On the contrary, the Chinese government is working flat out to introduce its own digital currency. In field trials, the “digital yuan” has already been tested since last year. It may represent technological progress, but it is nevertheless rather the exact opposite of the Bitcoin idea: Instead of offering anonymity, the e-CNY could take the traceability of payments to a whole new level. Tests with the new currency have met with correspondingly little interest among the population so far. Jörn Petring/Gregor Koppenburg

Beijing accuses NATO of ‘Cold War mentality’

China won’t accept NATO’s criticism of its defense policy. NATO is exaggerating the threat posed by the People’s Republic and thus creating confrontation, the Chinese representation to the EU stressed in a statement on Tuesday. It called on the defense alliance to “look at China’s development in a rational manner” and stop “hyping up in any form the so-called ‘China threat’”. It said NATO should no longer use China’s “legitimate interests and rights” as a pretext for manipulation and the “artificial” creation of a confrontation. This was a “continuation of a Cold War mentality”.

At their first summit with US President Joe Biden, Nato leaders took a clear stance on China for the first time on Monday in Brussels (China.Table reported). In the final declaration, the alliance described China as a “systemic challenge” and called on Beijing to “honor its international commitments”.

China is committed to a defensive defense policy, the EU message said. Meanwhile, Beijing’s foreign ministry accused Nato of applying “double standards”. On the one hand, member states would be asked to increase their military spending. However, China was already being criticized for military spending equivalent to 1.3 percent of its own gross domestic product, foreign ministry spokesman Zhao Lijian said on Tuesday. China’s military budget – the second-largest in the world after that of the United States – is set to increase by 6.8 percent this year. ck

Svolt warns of supply bottlenecks for EV batteries

First chips (China.Table reported), now batteries: Svolt President Yang Hongxin has warned of a shortage of EV batteries at an industry forum. Currently, only 60 to 80 percent of all orders can be fulfilled, Yang said, according to a report by business magazine Caixin on Tuesday. The reason is shortages of some raw materials that emerged last year. The materials in short supply included chemicals used in electrolytes for lithium cells, for example, according to research by China Merchants Securities, Caixin said. Svolt is one of China’s major battery manufacturers and is currently planning to invest billions in new battery factories in Saarland (China.Table reported).

Chinese EV manufacturers have been feeling the effects of battery and chip shortages for months. Electric startup NIO reported in April that its production capacity had dropped to 7,500 vehicles per month due to the shortage of battery cells and semiconductors, according to Caixin.

Despite shortages of these key components, 217,000 EVs, plug-in hybrids, and fuel cell cars were sold in the country in May, a new monthly record, according to data from the China Automobile Manufacturers Association (CAAM). That means some 950,000 EVs were sold in the first five months – more than three times the number sold in the same period of the weak COVID-19 year of 2020. ck

Raw materials and technology: EU deepens cooperation with USA and Canada

In the wake of G7 meetings and Nato summit, the European Union has toughened its tone towards China even after bilateral talks and thus cooperation with the US and Canada.”We Europeans want to diversify our imports away from producers like China,” EU Commission chief Ursula von der Leyen said in Brussels on Tuesday after a meeting with Canadian Prime Minister Justin Trudeau. To that end, the EU and Canada announced the establishment of a strategic partnership on raw materials. “Because we want more sustainability, less environmental damage and transparency on labor conditions,” von der Leyen said. For the first time, the Commission President linked the EU’s dependence on strategically important raw materials to problematic working conditions in China.

Cooperation between Canada and Brussels is to include, among other things, diversification of supply chains, technology and research, as well as cooperation on environmental and social standards. Raw materials such as strategically important industrial metals are indispensable for the green and digital transformation, stressed Ursula von der Leyen.

Brussels also wants to deepen its cooperation with the US to form a counterweight to China: Both sides will set up a Council for Trade and Technology, the EU announced after a meeting between von der Leyen and EU Council President Charles Michel with US President Joe Biden. Within the framework of the strategic alliance, trade and investment are to be further expanded and trade barriers such as punitive tariffs avoided. There is also to be more cooperation in the digital sector. The reform of the World Trade Organization was also a topic at the meeting, said EU Council President Michel.

Asked whether China had again been a topic in the bilateral talks with Biden, von der Leyen replied: “China was a major topic at the G7 summit.” She said there were areas in which cooperation with the People’s Republic was possible, such as climate protection.“As far as human rights are concerned, we are systemic rivals,” the EU Commission chief said. “Without any question.”

Indirectly, China may now also have led to a breakthrough in a years-old EU-US trade dispute: The two sides have reached a compromise in the dispute over punitive tariffs on subsidies for Airbus and Boeing – to coincide with Biden’s visit to Brussels – and thus defused one of their most difficult trade conflicts. European aircraft maker Airbus had recently warned of growing competition from China (China.Table reported). Von der Leyen said the agreement on the punitive tariffs “shows the new spirit of cooperation between the EU and the US”. Both sides agreed to suspend the tariffs for five years, Biden said, according to a Reuters report.

There was also agreement that the EU and the US wanted to address “China’s non-market-oriented practices in this sector that give China’s companies an unfair advantage”, the US President said. The cooperation in the Trade and Technology Council could also serve as a model for further cooperation in the face of “other challenges posed by the Chinese economic model”, said Biden. ari

Virologist dismisses the ‘laboratory theory’

Chinese virologist Shi Zhengli has dismissed the “laboratory theory”, which has recently picked up steam, that COVID-19 may have escaped from her lab. “I don’t know how the world has come to this, constantly pouring filth on an innocent scientist,” she wrote in a text message to the American newspaper New York Times. Shi has been researching coronaviruses in bats at the Wuhan Institute of Virology (WIV) for many years, and she doesn’t actually give interviews anymore.

Shi, according to the newspaper, also denied via email a Wall Street Journal report that three employees at the lab had fallen ill with COVID-19-like symptoms in late 2019. Laboratory director Yuan Zhiming also recently stressed that no employees at the high-security lab were infected with Sars-CoV-2, according to a report in the state-run Global Times newspaper. The lab kept samples of the employees for a year and retrospectively tested them again in January 2020, the newspaper quoted Yuan as saying.

US President Joe Biden had ordered his intelligence agencies at the end of May to present him with a report on the origin issue within 90 days. Most scientists agree that there is still no direct evidence to support the theory of a lab leak. However, there is a growing number of those who now think the hypothesis was dismissed too hastily – not least because it was pushed by former US President Donald Trump’s entourage. Christian Drosten also thinks a laboratory accident is unlikely. The German virologist recently told the Swiss magazine “Republik” that he rather believes in a chain of infection via Chinese fur animal production (China.Table reported). ck

Growing interest in car subscriptions

More and more drivers can imagine subscribing to their car instead of buying it for expensive money. This was shown in a survey by the management consultancy Bain. Not surprisingly, interest in this innovative business model is particularly high in China. A whopping 64 percent of those surveyed could imagine a car subscription model. In the USA, according to Bain, the figure is 30 percent, and in Germany 21 percent. For the survey, Bain had outlined a model that includes insurance, maintenance, and taxes in the car subscription.

It is foreseeable that subscriptions will account for a significant proportion of vehicle sales in the future, study author Eric Zayer said on Tuesday, according to DPA. The good news for German carmakers is that, according to the Bain study, drivers are “more likely to opt for larger, higher-quality or EVs with subscriptions than with a purchase.” However, according to Bain, car subscription providers have so far found it difficult to convert the rising subscription demand into long-term profitable customer relationships. Today’s offers usually only include new cars. But in fact, the vast majority of respondents are open to young used cars, Bain said. In the US and China, a low price was the most important factor. In Germany, 44 percent also found flexible returns important.

Chinese brand Lynk & Co is offering the Model 01 on a subscription basis as it enters Europe (China.Table reports). Exactly €500 subscription fee per month is the 01 supposed to cost – tax, insurance, maintenance and tire change included. Interesting: In China, the Lynk 01 is only available for purchase. ck

German China research must not isolate itself

By Katja Levy

*Katja Levy researches at the University of Manchester*

In his opinion piece in the Tagesspiegel of May 11, Thorsten Benner takes up a very important question regarding China. Should a scientist still travel for research purposes to a country whose domestic political control has tightened significantly in recent years? Should one still conduct field research in a country where foreigners are no longer automatically privileged and exempt from many penalties (as was once the case)? And should one keep up the exchange with scientists in a country, even if one has to be careful not to get one’s interlocutors into trouble by thoughtless statements? The answer is: Yes, absolutely! For the following reasons:

1. Research on China cannot be conducted solely on the basis of internet research and travel to Taiwan. The People’s Republic of China is far too large, its society far too complex, its political developments far too rapid and disruptive to be viewed from the outside alone. It is necessary to do research on the ground and interpret the results – preferably against the background of many years of experience in China. You have to talk to the people. You have to hear how they see things, what results the research there produces and how social and political developments are justified there. This does not mean adopting Chinese interpretations and explanations as one’s own. But scientific honesty demands that a complete picture be formed. Incidentally, a knowledge of Chinese is certainly helpful for this because only a fraction of the information about China – even on the Internet – is translated into other languages.

2. China research today is an empirical science that is no longer conducted only about China, but also with China. At the time of the Cold War, when Mao’s China was isolating itself in foreign policy terms, there were in principle two types of sinology. The philological branch, strong in Germany, turned away from the People’s Republic of China and concentrated entirely on the study of the classical philosophical writings of antiquity. The other, regional studies branch, particularly influenced by the United States, was interested in the China of the time (for military-strategic reasons) but also had no direct access to the isolated People’s Republic. By interpreting documents smuggled abroad as well as photographs and by interviewing refugees outside the country, Sinology tried to fathom what was going on in the country. Parallel to “Kremlin astrology” about the Soviet Union, “Zhongnanhaiology,” the “teaching about Zhongnanhai,” named after the Chinese seat of government in Beijing, emerged about China. This early form of political interpretation was very prone to error.

In the meantime, research on China has developed considerably, partly because the country has opened up. The humanities branch is, by its very nature, still primarily attached to the study of texts and documents. But social science research on China has long since become a strongly empirical science, methodologically and theoretically trained in sociology, political science and human geography. It is by no means intellectually too simplistic (as sometimes portrayed) to form its own critical and fact-based picture of reality in China. Both branches of China research have been characterized by intensive exchange with Chinese scholars since the 1980s at the latest. In 2021, the German Rectors’ Conference alone counted more than 1,400 German-Chinese university cooperations. This does not even include the countless individual research projects and collaborations, study visits, and dissertation projects with Chinese research partners.

3. Exchanges with Chinese academics and on-site research are important (primary) sources of information about China as a world power, also beyond academia, for example, for political decision-makers and economic actors. The number of foreign journalists in China has recently been radically reduced (incidentally, in response to similar actions in the US under the Trump administration). The work of political foundations there has also been severely restricted by China’s strict 2017 NGO law. This leaves us without important first-hand sources of information on the ground. With not even scholars going to China now, we are completely reliant on the Internet and secondary literature. A balanced image of China that does justice to the pluralism of this complex and diverse society and should be the basis for wise foreign policy and economic decisions can no longer be obtained in this way.

4. China research, like research in general, is a reciprocal process. Contact with Chinese colleagues is ultimately not only a question of information for us but also for the Chinese scientists there. They may be subject to their own political and social constraints, but they are still interested in exchanges with other countries and open to new ideas, especially in times of restricted Internet and media access. It is important for Western scientists to cooperate with Chinese colleagues in those areas in which China is conducting, or will soon conduct, cutting-edge research. Knowledge production has become a global and networked process. If Germany’s scientists were to really isolate themselves from China, German scientific and technological development would be hit hard in many areas.

5. China researchers, like other regional scholars, have a mediating function. They not only convey information, but explain, promote understanding between cultures and societies, and build trust. This is an incremental process that takes decades and has great potential for conflict resolution. It would be a great loss to jeopardize the social and cultural capital built up over decades of cooperation by breaking off or interrupting scientific contacts.

In his article, Thorsten Benner warns against the mistake of excluding researchers sanctioned by China, who, for the time being, can no longer travel to China, from parliamentary hearings or expert meetings, among other things. This is, of course, true, but looking at the agendas of the upcoming events, one does not get the impression that this is the case. In the current situation, characterized by alienation and a lack of information, it would, however, be equally foolish to ignore China scholars, who still have the opportunity to get a picture of the situation on the ground.

Dr. Katja Levy was Junior Professor of Politics and Law of China at the FU Berlin from 2012 to 2019 and is currently conducting research at the University of Manchester.

Admittedly, we are repeating ourselves. But the herd of elephants moving through Yunnan is now the topic of the month – also in the Chinese media and social networks. Little dramas are taking place: A young male animal has strayed from the herd and is now limping 17 kilometers behind. The others are therefore slowing down and treating themselves to extra naps. Meanwhile, the entire People’s Republic is puzzling over what prompted the animals to set off from the subtropical forests of the nature reserve in Xishuangbanna and what their route might be. Social media sites such as Weibo also joke that the elephants have set out on a “long march” like the communist revolutionaries once did in the 1930s, perhaps to take part in the grand celebrations of the party’s 100th birthday in Beijing on July 1.

CHINA.TABLE EDITORIAL OFFICE

Amelie
Richter

Marcel
Grzanna

Fabian
Peltsch

Julia
Fiedler

Angela
Köckritz

Jörn
Petring