The trillion dollar question

In 1893 an English engineer was carrying out a survey to build one of China’s earliest railways when he came across a fishing village called Beidaihe. Claude William Kinder immediately concluded it would make a great seaside resort.

Thanks to its promotion by Kinder, who is memorialised by a bronze statue in the town, foreign businessmen, missionaries and Manchurian noblemen flocked to Beidaihe, and luxury mansions were built along its 22km coastline.

All of this construction was nationalised in 1949 when the Communist Party took power, including 719 villas converted into sanatoriums for soldiers and “model workers”. Before long leaders including Mao Zedong were paying visits to Beidaihe as well. From 1953 the Party’s ruling Central Committee held its so-called “summer working system” there too. Come July or August, Beidaihe featured prominently on the front pages of the state-run newspapers and the coastal get-togethers has turned the tide in turbulent periods of Chinese politics. Mao was at Beidaihe in 1958, for instance, when he launched the Great Leap Forward.

The gatherings were suspended during the Cultural Revolution and when they resumed in the 1980s, the meetings at the resort never quite recaptured the heady atmosphere of the 1950s and 1960s.

In recent years, the annual retreat to Beidaihe has instead offered an occasion for China’s political leaders to holiday with their retired counterparts, as they prepare for the Party’s annual autumn plenums. More often than not, experts from different fields – depending on the government’s policy focus of the moment – are invited to chill out and chat too. That trend has seen the meetings become more consultative in recent years. Yet they still serve as a window on the agenda of the Beijing leadership. This month, with Chinese President Xi Jinping facing a worsening trade and tech showdown with the United States, Beidaihe is more in focus than usual, particularly when it emerged that the future of America’s first trillion dollar company – Apple – seems to have been one of the major topics up for discussion.

What was decided?

No matter what else is going on in the world, state broadcaster CCTV always begins its evening news bulletins with a look at the activities of China’s leaders.

So when they were absent from nightly newscasts earlier this month, it soon fed speculation that they had decamped to Beidaihe. This was confirmed last week when a couple of short reports by Xinhua carried a dateline from the seaside resort. China’s official news agency then reported that 62 scientists and experts had been invited for a six-day visit too. Representing leading lights in fields such as aerospace, high-speed rail and semiconductors, they had all promised their political masters that they would holiday with “a patriotic and hardworking spirit”, Xinhua said, so as to “make greater strides in science and technology to promote national and social development”.

Since 2001 more than 1,000 specialists and scholars have been invited to the resort, the newspaper claimed. The retreat this summer, however, was framed as a working break. The reason: Beijing’s ongoing trade clash with Washington, and the increasing number of Chinese policymakers coming to the conclusion that the real intent of Donald Trump’s administration is to slow their nation’s progress in developing key technologies.

This Achilles heel was badly exposed when ZTE was all but paralysed earlier this year by Washington’s ban on American chip sales to the state-backed telecoms equipment maker (see WiC406).

“Integrated circuits are the bloodline for industries, and a necessary factor for building a technologically advanced nation,” Huang Ru, a specialist on the computer processor, told Xinhua in Beidaihe. “Despite our recent progress, we still have a huge gap with other advanced countries. Therefore our generation has the huge responsibility of combining our research with national needs and overcoming obstacles.”

American smartphone giant Apple featured in the beachside debates. Just as participants were arriving at the resort this month, Apple became the first company in history to reach $1 trillion in market value. ThePaper.cn observed that the American firm was now worth more than Tencent, Alibaba and Baidu combined (aka China’s big internet trio, the BAT), or was equivalent in value to the entire GDP of Spain. “Only Rockefeller’s Standard Oil has attained a similar scale in history,” it said, suggesting that the Chinese needed to study how Apple has arrived at such a dominant position.

Apple’s awkward moment…

Not everyone in China is quite as admiring of Apple as ThePaper.cn (a news website run by Xinhua). The Global Times, for instance, believes that the Californian behemoth owes a big chunk of its $1 trillion valuation to strong sales of the iPhone in the Chinese market, and that the Chinese government should take full advantage of this situation when negotiating with the US in the unfolding trade war.

China’s commercial relevance for the San Cupertino-based firm is twofold. It provides many of the manufacturing capabilities (via firms like Foxconn and a host of local components makers) that have enabled Apple to design its smartphones and other devices at a cost that allows for the industry’s highest margins. Over the past decade China also became the world’s biggest smartphone market and now makes up about a fifth of Apple’s sales.

Apple’s latest financial report (for its fiscal third-quarter ended June) saw sales to the greater China region rise 19% to $9.6 billion. The Global Times commented that this was better than expected and propelled much of the rally in Apple’s share price – helping its market capitalisation top the $1 trillion threshold. “China is by far the most important overseas market for Apple, leaving it exposed if the Chinese people make it a target of anger and nationalist sentiment,” it warned in an editorial published at the beginning of August. “China doesn’t want to close its doors to Apple despite the trade conflict, but if the US company wants to earn good money in China, its needs to share its development dividends with the Chinese people.”

Adding weight to the speculation that Beijing might identify Apple as a point of leverage in responding to Donald Trump’s administration, the People’s Daily reran the Global Times editorial last week in its overseas edition.

“It seems US companies doing business in China are the biggest winners from China-US trade. The Chinese market is vital for many top US brands, giving Beijing more leeway to play hardball in the trade conflict,” it concluded.

This is the second warning in the last two months to be fired in Apple’s direction by officially-backed media outlets. In late July, state television accused it of failing to do enough to block prohibited content, including pornography and advertisements for counterfeit goods, on its various platforms including the iMessage service.

According to the New York Times, Apple’s chief executive Tim Cook visited the Oval Office two months earlier to warn Trump that Beijing could take advantage of Apple’s reliance on China to take a tougher line. And as the trade row worsens, the chances of Apple becoming collateral damage must be increasing.

If Beijing wanted to provoke a retaliatory market crash on Wall Street – in response to Trump loading on more tariffs – efforts to disrupt Apple’s Chinese supply chain would be a decent start. Consider what would happen if the authorities engineered a shutdown of Apple’s Chinese manufacturing facilities for a few months. Apple shops around the world would soon run out of hardware to sell. Nor can skilled manufacturing on this scale be moved quickly elsewhere.

How is the trade war shaping up?

China has been trying to find common cause with countries in Europe to fend off Trump’s tariff threats, while positioning itself as a champion of global multilateralism (see WiC418). But the strategy doesn’t appear to have worked out. The US and the EU stepped back from the brink of their own trade war by sketching out a deal last month (despite China’s foreign minister Wang Yi urging his European counterparts not to “stab China in the back”).

Meanwhile trade tensions between the world’s biggest two economies have gone from bad to worse. After imposing tariffs on $34 billion worth of Chinese goods last month, Trump’s administration will begin collecting 25% tariffs on another $16 billion in Chinese imports on August 23. Trump has also threatened the same levy on another $200 billion of goods from China, and possibly $300 billion more, should Beijing refuse to adhere to Washington’s demands on improved protection of US intellectual property, better market access for foreign firms, and a reduction in state subsidies.

Xi Jinping’s administration has so far retaliated in kind. Less than a day after the US Trade Representative’s office published the final list of 279 Chinese products facing tariffs last week, Beijing warned it was ready to impose the same 25% tariffs on 333 types of American goods, ranging from cars to Vaseline to recyclables (worth an identical $16 billion in total).

But should Trump raise the stakes again by slapping tariffs on $500 billion of Chinese imports, a dollar-for-dollar retaliation won’t work (China only imported $130 billion worth of American goods last year).

Plus Chinese reliance on some imports classed as strategic, such as computer chips and oil, makes it unlikely that they will make it onto any list of targeted goods either. Oil has been conspicuously absent from the lists compiled so far, the Wall Street Journal noted (a fifth of China’s oil imports last year came from the US).

The trade conflict has also begun to take its toll on the Chinese economy. Take Shandong Sunrise, a major soybean importer. It was once one of China’s 500 biggest companies but it is one of the first local victims of the trade war – going bust earlier this month as a consequence of the rising price of imported soybeans.

More cases like this will increase the pressure on President Xi to take a softer stance and shelve some of the policies that Washington dislikes, such as the more provocative aspects of the ‘Made in China 2025’ industrial plan.“Beijing’s leaders should seek direct talks with Trump, and may have to swallow their pride,” Xu Yimiao, a researcher, told the South China Morning Post last week. “It is inappropriate, or at least premature, to send signals, intentionally or not, that China is about to build a new system to replace the existing one.”

Is Beijing divided over how to deal with the challenge from Trump?

International media outlets have speculated that Xi’s handling of the clash with Trump is generating heated debate at senior levels of the Party. In a report discussing what might have been going on in Beidaihe, The Economist noted this week that government advisers, business leaders, foreign diplomats and journalists “have spent weeks swapping rumours of bruising internal disputes” about how to handle the trade war and protect China’s slowing economy.

The magazine also cited insiders who suggested that Xi had been badly advised on strategy by “the wrong Americans, notably business titans with long China careers”. Such mistakes, it continued, meant that “Team Xi” may have misjudged Trump and wrongly assumed that the businessman-president could be bought off with “the sort of tactical concessions that China has long used to placate angry foreigners”.

The South China Morning Post has been carrying similar reports, with Deng Yuwen, a political commentator, describing the Beidaihe meeting as a chance to discuss a different approach behind closed doors

Of course, if there are rifts in the Chinese elite, the local media is hardly outlining them to the general public. Sometimes it is more a matter of reading between the lines. The People’s Daily published two articles this week under the name Xuan Yan (xuanyan means “declaration” in Chinese and serves as a collective alias for the Party’s propaganda department) calling for unity. In clumsier style it also warned that “certain people” who have been “waving around the stick of hegemonic power” (a reference to Trump, presumably) would end up “lifting a stone to drop on their own feet”.

But the signals from the mainland aren’t solely about Trump’s leadership. HK01, a news website in Hong Kong, has suggested that Party elders might be pushing to tone down the campaign to glorify Xi Jinping’s leadership, which seems to have fanned national feeling (and made the squabbling with the Americans more divisive).

Less mentioned was that the same campaign to lionise Xi makes him more exposed personally when things don’t go to plan. Certainly, his political rivals at home won’t mind if the current problems rein in his leadership style.

So will Beijing go after Apple?

The risk to Apple is that it is such an iconic American brand that it becomes a totemic target for retaliation. Recep Erdogan, the Turkish president, thinks so too,­ hence his call for a boycott of Apple’s products this week in his own row with Washington.

While Apple’s customers regard its product range as essential to their everyday lives, Chinese policymakers might see the company as a more expendable target. While the company’s supply chain undoubtedly contributes to job creation, the People’s Daily has noted that Chinese factories share a tiny 1.8% of the total profits created by the iPhone, for instance. For newspapers like the Global Times, that makes a threat to Apple a clear “bargaining chip” in the wider row.

“The trade war may be the start of a long slow death for Apple in China,” the Asia Times also predicted this month.

Turkey’s Erdogan may struggle to muster much enthusiasm for his boycott plan. But China has played the patriotic card quite effectively in disputes with nations such as South Korea and Japan. Often the restrictions on commercial activities by their companies have been unofficial, rather than formal policies. But they have led to declining sales of goods and services from a range of Korean and Japanese firms.

Perhaps that is the kind of risk that Tim Cook discussed with Trump at his Bedminster golf club earlier this month. The bigger question is whether – with key elections ahead – the mercurial president might push the pause button on the trade row. Or whether Beijing may make meaningful concessions in an effort to buy him off.

For Cook and Apple investors it constitutes a trillion dollar quandary. Should Trump escalate Apple is the US firm most vulnerable to Chinese retaliation.

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