ChinaWatch Vol. 1 No. 5

A regular feature of Taiwan Sentinel, ChinaWatch examines developments in China in the areas of internal politics, economics and trade, geopolitics and Taiwan engagement and analyzes their advantages or disadvantages for Taiwan’s standing in the region and the world. This feature is based on the premise that what happens in China has direct relevance for the durability of Taiwan’s de facto independence. ChinaWatch is updated monthly.

Economics and Trade

Globalization of RMB Hits Strong Headwinds

It is no secret that Taiwan’s major problem in creating more international space for itself lies in its inability to counteract one of the most persistent geopolitical narratives of the 21^st century — that China is strong and getting stronger, and that it doesn’t pay to offend it, including on issues relating to Taiwan itself, which it sees as part of its territory.

A recent reflection of the narrative is the seemingly implacable rise in the international importance of the renminbi. Over the past decade, the currency has morphed from international afterthought to accepted settlement vehicle for international trade, this as China’s commercial juggernaut has moved — seemingly — from strength to strength.

Now, however, a persuasive new analysis from the New York-based Council on Foreign Relations has cast serious doubt on the notion of the RMB’s global acceptability, raising the prospect that the overall China narrative may not be as solid as once was believed. The analysis found that the sharp rise in the RMB’s use as an international settlement currency that occurred in 2015 — from about 2 percent of the total to almost 3 percent of the total — has now been more than reversed, and at present stands at about 1.7 percent. Moreover, the analysis found, the use of the RMB in global bond markets was almost 25 percent lower in 2016 than it was at its peak in 2014, and seems set to decline even further in 2017.

The Council on Foreign Relations identified three primary reasons for the decreasing use of the RMB as an international settlement currency:

The value of the RMB vis a vis the U.S. dollar has been falling steadily. While it rose nearly every year from 2005 to 2013 — in total, by 36.7 percent — it has declined every year since then, falling by nearly 13 percent at the end of 2016 from its peak levels. While international speculators once bet on a rising RMB, they have long since abandoned that belief, even as Chinese residents and companies look for new and innovative ways of moving their money out of China.
China’s once relentless export juggernaut has fallen on hard times. While its share of global exports grew from 1 percent in 1980 to 14 percent in 2015, it has since declined, and now sits at about 13.5 percent. This is still a healthy proportion, but given rising Chinese wages and increasing foreign competition, a further contraction now seems likely.
Globalization, the main engine for China’s rapid economic ascent, is hitting the skids. Capital flows in the form of equity and bond purchases, foreign direct investment and lending fell by two-thirds from 2007 to 2015. Merchandise trade is receding — down 10 percent from 2011 to 2015 — amid rising instances of discriminatory trade practices all around the world. China, says the Council on Foreign Relations analysis “is therefore not only losing export-market share, but is doing so in a shrinking global market.”

The bottom line, the Council on Foreign Relations analysis found, is that the globalization of the RMB, is no longer “remorseless and unstoppable” as the U.K.’s Economist pronounced it in April of 2014. Rather, it says “it appears to be well and truly over,” this as foreigners and others find less and less reason to hold onto the currency over any term at all.

Geopolitics

Taiwan Takes Back Seat During Trump-Xi Summit

Taiwan is not believed to have been a major topic between U.S. President Donald Trump and Chinese leader Xi Jinping during their recently concluded summit meeting at Trump’s Mar-a-Lago resort in Palm Beach, Florida. According to reports of the meeting, they spent most of their time discussing Sino-American trade relations, and Trump’s demand that China move more forcefully to rein in North Korea’s nuclear development program, which the United States views as a serious security threat. One possible exception: according to a report in Taiwan’s UDN newspaper, the meeting resulted in Trump’s agreement to delay the sale of an estimated US$1 billion in American armaments to Taipei. There was no Taiwan government confirmation of the report, which was sourced to parliamentary testimony by the head of Taiwan’s National Security Bureau.

Taiwan’s relative absence from the Trump-Xi agenda should by no means be seen as an indication that Xi is now satisfied with Trump’s public reversal on his once ambivalent attitude toward the one-China policy, or other aspects of U.S.-Taiwan relations. On the contrary, Xi remains concerned that the United States will continue to support Taiwan’s de facto independence, and could eventually push for closer ties with Taipei. The Chinese leader’s apparent willingness not to emphasize Taiwan issues at Mar-a-Lago probably reflected his belief that those issues will come up soon enough anyway, and that any event, the trade and North Korean issues are more important now.

Contrary to many expectations, Trump appears to have held his own during his conversations with the far more experienced Xi, largely because Trump put Xi on the defensive by ordering a wide ranging missile attack against a Syrian military installation just as the summit got underway. Chinese leaders traditionally abhor surprises in high level international diplomacy, much preferring to hew to a carefully choreographed script. There is no question but that the Syrian attack caught Xi badly off guard, not least because it appeared to send a strong signal that Washington is rapidly losing its patience on the North Korean issue. The last thing Xi needs is now a unilateral American strike against the Pyongyang regime. In China’s view it could easily unleash an unwanted flow of North Korean refugees across its relatively porous northeastern border, to say nothing of setting the stage for the establishment of an American-aligned government throughout the Korean Peninsula.

At the same time however, Xi also made some progress in convincing Trump that getting North Korea to rein in its nuclear development program is no easy matter. He also appears to have changed Trump’s mind on declaring China a currency manipulator — a step that could have set off a major crisis in Sino-American trade relations. Among other things, these two instances of Trump’s flexibility suggest that when the Taiwan question does eventually come up within the overall context of Sino-American relations, the American president may be far less willing to protect Taiwanese interests than once appeared to be the case.

Japan Scrambles Fighter Jets at Record Pace as Chinese Probing Escalates

Japan’s air force has said that it scrambled its fighter jets to chase away foreign aircraft at a record pace for the year ending March 31, 2017, amid a marked increase in Chinese military activity in and around the East China Sea.

The increased tension between China and Japan comes as Japan takes some tentative first steps to improve relations with Taiwan, which some Japanese defense analysts view as an asset in any possible confrontation with Beijing. These steps included changing the name of the Japanese representative office in Taipei to reflect closer ties between the sides, and the sanctioning of a visit by a Japanese state minister to Taiwan earlier this year. The visit by State Minister for Internal Affairs and Communications Jiro Akama made him the highest ranking Japanese to set foot on Taiwanese soil since Tokyo transferred its diplomatic recognition from Taipei to Beijing in 1972.

On the air force issue, Japan said it scrambled its fighters 1,168 times from April 1, 2016 to March 31, 2017, up from 873 instances the previous year. The vast majority of the episodes involved intruding Chinese aircraft, the government said. Japan has long feared that China’s probing of its air defenses reflects a Chinese attempt to extend its military influence in the East China Sea and the western Pacific, where Japan controls a 1,400 kilometer long island chain between the Japanese mainland and northern Taiwan.

Japan said it scrambled its fighters 1,168 times from April 1, 2016 to March 31, 2017, up from 873 instances the previous year. The vast majority of the episodes involved intruding Chinese aircraft.

According to Admiral Katsutoshi Kawano: “Recently we have seen Chinese military aircraft operating further south and that is bringing them closer to the main Okinawa island and other parts of the island chain.”

Okinawa is home to the largest concentration of U.S. Marines outside the United States, hosting the majority of the 50,000 American troops stationed in Japan.

The previous high for Japanese fighter scrambles was 944. It occurred in 1984, when the lion’s share of the intercepts were directed at Soviet, rather than Chinese aircraft.

Taiwan Engagement

China Detains Taiwan Activist

China has detained an activist from Taiwan’s ruling Democratic Progressive Party, possibly in response to Taiwan’s decision to hold a Chinese student on charges of spying for China. The State Council’s Taiwan Affairs Office identified the detained Taiwanese man as Lee Ming-che, a community college instructor, with close ties to the DPP. It said that Lee was being held for “suspected involvement in conducting activities harmful to national security.”

According to press reports, Lee was detained by Chinese security authorities not long after entering China from Macau on March 19. The president of the Taipei college where Lee worked said he may have attracted the attention of Chinese security officials after using the Chinese social media service WeChat to discuss China-Taiwan relations.

Lee’s detention followed by several weeks Taiwan’s detention of Zhou Hongxu, 29, who obtained a Master’s Degree from Taiwan’s National Chengchi University in July 2016. Taiwanese prosecutors allege that Zhou tried to recruit a Taiwanese Foreign Ministry official into a Chinese spy ring by offering him a free trip to Japan in exchange for providing classified materials.

The Lee-Zhou contretemps comes at a particularly delicate time in Taiwan-China relations, which have been on tenterhooks ever since the election of Taiwanese President Tsai Ing-wen in January of 2016. The main cause of the friction has been China’s continuing displeasure over Tsai’s refusal to abide by the precepts of the so-called “1992 Consensus,” under which Taiwan acknowledges that it is part of mainland China. China cut off all contact with the Taiwan government in June of 2016, just a month after Tsai’s inauguration.

Lee’s detention offers a stern test for the DPP, which will want to find a way to secure his release, without simultaneously compromising its principles on the “1992 consensus” issue. If a connection indeed exists between the Zhou and Lee detentions, a solution could lie in a one-for-one prisoner exchange, presumably brokered by Taiwan’s Straits Exchange Foundation, which is authorized to interface with its opposite number on the mainland, the Association for Relations Across the Taiwan Straits. But complications could arise if other issues besides the Zhou detention are involved on the Chinese side. These might include some sort of local power play in Guangdong province where Lee was reportedly under detention, or even worse, an effort by detractors of Chinese leader Xi Jinping to embarrass him ahead of the 19^th Congress of the Chinese Communist Party, which is set to meet in the fall.

Kushner Emerges as Key U.S. China Link: Bad News for Taiwan

Jared Kushner, the son-in-law of U.S. President Trump, has emerged as the administration’s go-to person on China, raising the prospect that Taiwan could eventually fall afoul of the transactional politics of the Sino-American relationship.

Kushner, 36, is a New York real estate developer with no previous government experience. Even before Trump’s inauguration on Jan. 20, he had established a crucial back channel to Cui Tiankai, China’s ambassador to the United States. The channel enabled Trump to mollify China’s concerns after Trump’s precedent breaking telephone conversation with President Tsai on Dec. 2, and his subsequent comments in a newspaper interview with the Wall Street Journal, that he did not necessarily feel bound by the longstanding constraints of the “one China” policy. The policy stipulates that the U.S. acknowledges China’s position that Taiwan is part of China, without necessarily agreeing with it.

Kushner, 36, is a New York real estate developer with no previous government experience. Even before Trump’s inauguration on Jan. 20, he had established a crucial back channel to Cui Tiankai, China’s ambassador to the United States.

Based on the Cui connection, it was Kushner who negotiated not only Trump’s fence-mending telephone conversation with Chinese President Xi in February, but also the modalities for Xi’s visit to the United States in early April. In doing so he seamlessly displaced U.S. Secretary of State Rex Tillerson from the China decision making pantheon in Washington, despite Tillerson’s ostensible role as dean of the U.S. foreign policy establishment. In addition to China, Kushner is also engaged in a number of other key assignments for his notoriously phlegmatic father-in-law, underscoring his growing White House influence.

Significantly, Kushner’s ties to China go far beyond just his good relations with Cui. They also include his now futile efforts to secure hundreds of millions of dollars in funding from China’s well-connected Anbang Insurance Group to re-develop his family’s flagship property at 666 Fifth Avenue in Manhattan. Those efforts provoked widespread criticism in the U.S. national security establishment and elsewhere in the country, largely because of their potential to make Kushner uncomfortably beholding to the Chinese leadership in Beijing.

The main problem for Taiwan in Kushner’s cozy relations with Beijing is his transparently transactional approach to problem solving — the same approach that characterizes his powerful father-in-law. Neither Trump nor Kushner has any particular predilection for Taiwan’s democratic values, which at the end of the day, is the main reason why the country has received such longstanding support from the United States, despite the intrinsically anti-Taiwan nature of the one-China policy. Sadly for Taiwan, this suggests that Trump and Kushner might eventually be tempted to use Taiwan as a bargaining chip to get what they most want from Beijing — concessions on China’s trade relations with the United States and a Chinese promise to ratchet up pressure on North Korea, whose rapidly developing nuclear program threatens American security.

Making the Kushner picture even more troubling is the fact that he is being tutored on China by no less a light than former Secretary of State Henry Kissinger, who has long dreamed of creating a U.S.-China condominium to run work affairs. Such a condominium, Kissinger believes, is intrinsically vital to world peace — so much so in fact that he would be perfectly fine with accepting the far-reaching compromises it would entail for American policy-makers — including reneging on longstanding American commitments to Taiwan.

One small ray of light in the gathering policy darkness: reports from Washington suggest that Randall Schriver could soon be named to a senior position in Trump’s Defense Department. Schriver, a former official in the George W. Bush State Department, is a close friend of Taiwan, who has consistently pushed for closer military and political relations between the sides. Particularly in light of the Kushner ascendance, he would bring needed balance to U.S.-Taiwan ties just when they appear to need it the most.

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