KSG ExecBrief: Headlines vs Trend lines

KSG Executive Brief

KSG Intelligence Services

Jun 23, 2023

Trend lines paint a different picture of US-China relations than recent headlines would suggest.

Strategic Context: US Secretary of State Blinken’s recent visit to China generated some hopeful coverage of the US-China relationship. To be sure, the visit was a positive step towards better relations between the two countries, but it likely has little bearing on the risk trends changing the business environment.

Trend Lines:

Legal and Security Trends: Risks to foreign firms in China have grown over the last decade: the National Security Law, Cybersecurity Law, People’s Information Protection Law, and Data Security Law all increase the difficulty of operating in the PRC safely. Those risks culminated in this year’s raids of foreign consultancies, the passage of the newly revised Counter Foreign Espionage Law (that will go into effect on July 1), and the continuing disappearance of employees from financial services companies.

If the preceding two years of the crackdown on tech were any guide, scrutiny of financial firms and restrictions on external access to formerly open economic and corporate data sets won’t end soon. The promotion of the former chief of the civilian intelligence services to the CCP’s highest level body at the October 2022 Party Congress hints at a factional power grab over the security services and increases the risk of arbitrary investigations and rule by law (vice rule of law).

Business and Policy Trends: PRC policymakers view dependence on foreign inputs and key talent as chokepoints that can be used by the West to exert leverage over China. With a political history sensitive to foreign coercion and interference, Beijing is prioritizing the indigenous capabilities required to replace many foreign components and firms.

Elsewhere, Beijing is advocating for a new valuation system to determine the market value of companies, trying to imbue a value of “social good” in the stock price of publicly traded firms—it’s unclear how such market distortions will play out.

Overall:

The positive political signaling between Beijing and DC has taken an optimistic turn (that decreases the risk of aggressive policy spirals in the short term), but…
The structural “de-risking” trend (e.g., China+1 supply chain strategies, enterprise network architecture and cross-border data-flow segmentation, corporate travel policy changes, continued constricting investment and technology flows) are firmly in place and…
The possibility of an acute tail risk event (e.g., mil-mil accident) remain unchanged.

KSG welcomes the positive headlines, but we advise our clients to remain wary of these concerning trend lines.

For more information or assistance on these issues, please reach out to intel@ks.group.

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Global Scan

Geopolitics

White House to Host Indian Prime Minister Modi: China’s role in military, tech, and economic domains will be on the agenda, per the US National Security Adviser. Washington and Delhi are also poised to ink multi-billion dollar deals for General Electric jet engines and General Atomics drones during the visit.
Berlin Hosts Chinese Premier for High-Level Talks: The two sides agreed to cooperate on climate, while Berlin sought to dissuade Beijing from supporting Moscow’s war on Ukraine. Meanwhile, a senior European official quipped that German industry is “decoupling from the government,” as foreign direct investment into China reached an all-time high in 2022.
A Bank China Built to Challenge the Dollar Now Needs the Dollar: The BRICS-based (Brazil, Russia, India, China, and South Africa) New Development Bank – which aimed to supplant dollar-based global lending—is reportedly having trouble accessing dollar funds to repay debts, and has largely halted the issuance of new loans.

Cybersecurity

Microsoft Acknowledges Major DDoS Attacks: After previously blaming recent Azure, Outlook, and OneDrive web portal outages on “technical issues,” the company later attributed them to Layer 7 DDoS attacks against the company's services by a group dubbing itself Anonymous Sudan. However, threat researchers assert the group is more likely a Russian hacktivist collective.
Apple Releases Patches for Zero-Days Moscow Claims US Used to Spy: Russia-based cybersecurity firm Kaspersky Labs had reported the malware earlier this month.

Strategic and Emerging Technology

The ‘World’s First Space Factory’ Successfully Deployed: Varda Space Industries successfully deployed its first satellite, W-Series 1, into orbit, aiming to jumpstart mass production of drugs, proteins, and other materials in space – where microgravity is the key ingredient for speed, volume, and quality.
Intel finalizes deal for Landmark Expansion in Germany: The US-based chipmaker will dedicate $33 billion – and receive $10 billion in subsidies – to two plants in Magdeburg. The move follows other planned expansions in Poland and Israel. Taiwanese TSMC is also reportedly in talks with Berlin on new facilities.
World’s First “Space Leasing” Company Sets Up Ground Station in Arctic: Libra Group seeks to offer satellites, space ports, and other orbital infrastructure in the coming space economy, which Morgan Stanley estimates will reach over $1 trillion by 2040. The company plans another 20 ground stations over the next three years.

Policy/Regulation

European Union’s First-Ever Economic Security Strategy Comes into Focus: The political roadmap will aim to curb risks in critical telecommunications infrastructure, harmonize export controls among the 27-member bloc, and even establish an outbound investment screening mechanism by year’s end.
Bipartisan Support Grows in US Senate for Agrivoltaics: Two bills have advanced on Capitol Hill to boost the use of solar panels on farmland that could direct $75 million through 2028 on research and development. Agrivoltaics have gained favor as they enable farmers the dual-use of power-generation and habitat for pollinators like bees and insects which are critical for food crops.

Bookmarks

European Council on Foreign Relations: The EU Isn’t Even Running the Race for Techno-Industrial Leadership
Tech Policy Press: What is Secure? An Analysis of Popular Messaging Apps