SUMMARY
After US Secretary of State Antony Blinken’s meeting yesterday with General Secretary Xi Jinping, State Department spokesman Matthew Miller said the main objective of Blinken’s trip was to restore responsible management of US-China competition “so that the relationship does not veer into conflict. This can be accomplished by using diplomacy to raise areas of concern as well as areas of potential cooperation where our interests align.” However, the trip did not appear to resolve any of the core issues of substance in the relationship (nor should it have been expected to). For example, notably China did not agree to restore military-to-military channels, which was a key US objective of the visit amid an increasing willingness by China to challenge the US military in its navigations of the South China Sea and Taiwan Strait.
China and the US have yet to establish an agreed framework to manage the relationship. While the US sees a dynamic of intense competition managed through intense diplomacy, China takes exception to the notion that the US can challenge China on core issues such as Taiwan and promote “de-risking” from China while at the same time seeking to establish “guard rails.” Reopening dialogue is crucial, but expectations should remain muted for substantive or quick agreements. The US Congress will also be a source of pressure on the relationship. Investors should regard the visit as helpful in lowering near-term tail risks but should understand this will be limited in scope (it will not slow down “de-risking” actions) and likely in duration.
OUTLOOK
Blinken’s visit takes the US-China relationship back to where Biden and Xi left off in their Bali meeting in November, before the balloon episode and a flare-up in tensions over Taiwan scuttled efforts to reestablish channels for dialogue. But as we noted last month, the underlying dynamics in the relationship remain deeply contentious (please see: “Getting back to Bali, but no honeymoon,” 12 May 2023).
Our conclusion is fatalist but realistic. It is constructive that the two sides agreed to subsequent high-level meetings and to continue discussions on developing principles to guide the bilateral relationship through established channels (the joint Working Groups). The US highlighted a long list of priority issues with China, most of which are unlikely to be the subject of intense negotiation soon:
- Resolution to cases of wrongfully detained Americans
- Disruption to the global flow of synthetic drugs
- China’s unfair and nonmarket economic practices
- US concerns of human rights violations (Xinjiang, Tibet, and Hong Kong mentioned)
- Maintaining peace and stability across the Taiwan Strait
- Discussions of global and regional security issues, including Russia’s aggression against Ukraine, DPRK’s provocations, and China’s intelligence activities in Cuba
- Shared transnational challenges including climate change, global macroeconomic stability, food security, public health, and counter-narcotics
The trip clears the path for a resumption of channels and dialogues in the coming months, including trips to China by Secretaries Janet Yellen and Gina Raimondo as well as climate advisor John Kerry. Assuming no hiccups, it will also set up a Biden-Xi meeting at APEC in San Francisco in November. The result should be a five- to six-month period of a bit more certainty in the relationship and reduced tails risks. Most of the State Department readouts go directly to the bilateral relationship, touching on but not focusing on the summer congressional agenda imagined in bipartisan legislation focused on sanctions update, export controls revisions, CFIUS reforms, outward bound investment restrictions, and supply chain resilience.
Chinese leaders including but not limited to President Xi reiterated demands that the US de-escalate rhetoric and policy initiatives Beijing still suggests are designed to contain China’s growth and global influence. Outward bound investment restrictions and technology export controls animate each side’s public position and private sovereign interests not easily papered over by a handshake. To this point of deep contention, the US is likely to release the long-awaited Executive Order on outbound investment this summer, possibly next month. (That regime will implicate US corporate, private equity and venture capital in certain sectors but not most portfolio flows; see our earlier update HERE for more).
We believe it seems probable that re-engagement between the Xi and Biden could well run a parallel track to the much more bombastic Capitol Hill agenda. Each president and their teams of course will react to headlines, but we note that Blinken’s meetings happened despite the Cuba military installation revelations. This contrasts with the reaction to the Chinese balloon incidents earlier this year, in our view. Our sense is that China’s economic challenges, Biden’s re-election, and China’s refusal to allow military-to-military communications are some of the reasons pushing the sides to a table.
On Taiwan, the US restated the One China principle but there is not much more that either side will do in terms of accommodation. Taiwan’s January 2024 presidential election will be a key event in terms of the level of cross-strait tensions. Ukraine seems to have slipped down in the list of issues that the US is stressing with Beijing. This may reflect reduced concern that China will provide lethal assistance to Moscow, but such a conclusion would be very tentative. There was likely very little discussion of tech control issues, as Blinken is not the right interlocutor for this. That will wait for future Yellen and Raimondo visits. This “mini thaw” is likely to come under stress in 2024, given the Taiwan election and more importantly the US presidential election.
