China Steps Back from the Edge and Opens Dialogue
The world's two largest economies and military powers have initiated high-level talks, announcing somewhat modest, if not technical, agreements. While this marks a positive first step, it falls short of easing tensions completely. This is the takeaway from the publicly disclosed details of negotiations between China's leader, Xi Jinping, and U.S. President Joe Biden, held on the sidelines of the Asia-Pacific Economic Cooperation summit in the suburbs of San Francisco.
Ahead of the summit, Beijing took an unfriendly step, particularly concerning Washington, with a new export regime for critical metals, as reported by The Gaze a few days ago. This move was in response to Washington's restrictions on supplying high-tech items to China, particularly those related to artificial intelligence and powerful computing systems, both of which China actively employs in military advancements. Therefore, the restrictions were both expected and appropriate.
Beijing also remained indifferent to pleas from Washington and Brussels regarding the inadmissibility of military use of technologies acquired from developed countries and the direct or indirect sale of dual-use and military-purpose goods to Russia. An additional point of contention in Beijing-Washington contacts is interference with Taiwan.
The accumulation of such substantial contradictions led analysts to consider that these tensions could signal a threat of a Third World War. Something needed to be done about all of this.
Photos: Chinese people in the U.S. warmly welcomed China's leader Xi Jinping as he headed to the meeting with U.S. President Joe Biden. Source: Getty Images
Money – the Most Candid Language
Immediately after the hours-long meeting between Xi and Biden, the Hang Seng stock index in China fell by 1.4%. While expectations of a breakthrough in the talks had boosted the index by 4% the day before the meeting, the lack of substantial progress in the tense negotiations led to this correction. There were high hopes before the Xi-Biden meeting that their conversation would be a turning point in the deep geopolitical strain. At least since the end of 2022, this tension had been dragging Chinese stocks downward. There was little positive news to show for the outcome. Foreign investors perceived these remarks as a signal to further sell stocks of mainland Chinese companies. This played out on November 16.
"The investment landscape in China is likely to remain challenging in the near term," said Manish Bhargava, manager of the Straits Investment Holdings fund in Singapore, adding that the meeting is a step in the right direction. Biden's comments, calling Xi Jinping a dictator, contributed to the current decline in the Chinese stock market, according to Manish Bhargava.
Indeed, this characterization, what Biden referred to as a dictator during his own press conference in response to a question, fairly vividly describes the progress achieved by both sides in the difficult negotiations. Business and international investors had already been turning away from investments in China, not only due to Beijing's foreign policy issues.
Specifically, the real estate sector in China still generates negative news, accounting for about 30% of the country's GDP. On November 16, data was released indicating that housing prices in October had fallen the most in eight years. Thus, the deepening decline of perhaps the most crucial sector in China was on the table. While some sectors are recovering in China, the last month, according to Bloomberg Intelligence, showed a 1.1% contraction in developers.
The economic troubles in China are underscored by the data on the decline in foreign direct investment in the country. Foreign direct investment in China fell to only $4.9 billion in the second quarter of 2023 (more recent data from China's State Administration of Foreign Exchange has not been released yet). This is 87% less than the same period in 2022, before the U.S. took actions to restrict China's access to advanced technologies. And this figure is the lowest for any quarter since 1998. Currently, China is experiencing the slowest inflow of foreign investment in the last 25 years.
This backdrop should, of course, prompt Beijing to reconsider its global ambitions in favor of pragmatic interests. However, we do not yet observe this, judging by the initial results of high-level contacts.
Photos: Immediately after the talks, the key stock index of China, the Hang Seng Index, significantly and demonstratively declined. Source: The Gaze, Getty Images
What Have They Agreed On?
The most significant agreements are on narcotics trafficking and operational contacts between the military forces of both countries to reduce tensions, particularly in the South China Sea. There is also an agreement to increase the density of direct aviation links between the two countries in 2024.
"We are in competitive relations, China and the United States," announced Biden at the press conference after more than four hours of talks with Xi. "But my responsibility is to make it rational and manageable so that it does not lead to conflict. That's what I'm doing," added the U.S. President, opening the door to further contacts and agreements.
What Lay on the Table at the Start of the Talks?
Primarily, the meeting of the two leaders in the suburbs of San Francisco was meant to defuse the risk under a tense diplomatic duel. This duel aimed to salvage relations between two superpowers that had nearly completely unraveled due to a trade war, Russia's full-scale invasion of Ukraine, clashes in the South China Sea, and a Chinese spy incident where a spy balloon flew over U.S. territory in January 2023.
China is greatly bothered by the restrictions imposed by the U.S. on microchip exports. Additionally, American tariffs on imports from China pose challenges. The tension in the South China Sea, where U.S. and Chinese ships and aircraft had some undesirable encounters, is also a cause for concern. The military contacts between the two countries were intended to ease this tension, but Beijing scaled down these contacts after then-Speaker of the House Nancy Pelosi visited Taiwan in 2022.
A crisis not too loud but sensitive for Washington is the fentanyl-related crisis—a synthetic drug that has led to many casualties and is trafficked into the U.S. from China. Therefore, during Biden's meeting with Xi, agreements were reached on more robust measures by China regarding fentanyl trafficking. It's worth noting that certain agreements existed earlier, but, as we see, were not very effective.
"To keep communication channels open, including between President Xi and me, we agreed that each should answer the phone and be immediately available," Biden also announced to journalists after the meeting with Xi Jinping.
Photos: Joe Biden firmly defends U.S. positions in competition with China. Source: Getty Images
More Tough Negotiations Ahead
As we can see, Biden didn't go so far as to indicate that dealing with Beijing is "business as usual." During the press conference after the opening remarks, Biden responded quite firmly to a reporter's question about whether he still considers Xi a dictator. "Well, look, he is," Biden said in conclusion. "I mean, he is a dictator in the sense that he runs a communist country, which has a form of government that is absolutely different from ours."
In other words, Biden demonstrated that he is not thrilled with the question but is ready to point out things that are important to the American voter less than a year before the U.S. presidential elections. Polls have shown that a record number of Americans view China's development as a "critical threat" to vital U.S. interests. Of course, these arguments are used by Republicans during the ongoing election campaign when criticizing the diplomatic efforts of the Biden administration.
It's a different situation for Xi Jinping, who last year outpaced internal party rivals and secured a third term as the head of the Communist Party. He can afford not to heed criticism from compatriots, so he can use softer language when needed. He avoids the taste of open stiff competition in U.S.-China relations. But Biden is steadfast in his course.
"We are in competitive relations between China and the United States," said Biden at his press conference after the talks. "But my responsibility is to make it rational and managed, so that it does not lead to conflict. That's what I'm doing. That's what it's about. To find a place where we can come together and find common interests," noted the U.S. President.
Beijing is engaged in a quiet competition for dominance in the world, but at the same time, Xi says that China wants to be friends with the U.S. and desires peaceful relations. Therefore, Chinese leaders seemingly attempted to use the high-level meeting to persuade Washington to adopt a softer policy towards Beijing's ambitions. In particular, Xi Jinping reiterated this idea of no competition during a speech at the CEOs' dinner at the APEC summit in San Francisco on November 15. "For us, the number one question is: are we adversaries or partners?" Xi said during the dinner. "If someone sees the other side as the main competitor, the most significant geopolitical challenge and a rapid threat, it will only lead to misinformed policies, wrong actions, and unwanted results," he added.
So, grounds for very cautious optimism exist; the prospect of a Third World War has somewhat receded, but there are many new tough negotiations ahead.