In this week's edition:

• The Big Picture
• Pentagon Awards $238 Million to 8 Hubs for Military Chips
• Commerce Department Releases National Security Guardrails for Semiconductor Funding
• Commerce Secretary Warns Shutdown Will Harm Chips and Export Control
• China Stops Exporting Chip Minerals
• China Accuses U.S. of Invading and Monitoring Huawei’s Server
• China to Strengthen Ties with Russia
• Will China’s Relationship with Vietnam Shift after Agreements Signed Between Vietnam and U.S. Businesses?
• House Trade Hearing on GSP Reform
• Survey Reveals U.S. Business Optimism in China at Record Low
• Chinese Government Faces Instability
• China Strikes Fear of DNA Arms Race

The Treasury Department and China’s Ministry of Finance have established a pair of new economic working groups in an attempt to ease tensions between the nations. The working groups will be divided into economic and financial segments to “establish a durable channel of communication between the world’s two largest economies,” said Treasury Secretary Janet Yellen. Yellen and Vice Premier He Lifeng will lead the working groups and meet with a “regular cadence.” Yellen traveled to China earlier this year and has prioritized keeping the relationship constructive, at least with respect to the global economy. As further evidence of the Biden Administration’s commitment to a better relationship, it has reportedly asked U.S. Ambassador to Japan, Rahm Emanuel, to stop posting provocative messages about China on social media. Even Foreign Minister Wang Yi’s trip to Russia last week immediately after meeting with National Security Adviser Jake Sullivan failed to elicit a substantial U.S. response.

The announcement of these working groups, and the more regular consistency of high-level meetings, set the stage for a potential meeting between President Joe Biden and President Xi Jinping in November at an Asia-Pacific Economic Cooperation (APEC) conference in San Francisco. Of course, this comes as private sector optimism about the outlook for business in China reaches record lows. The pessimism is reflective of months of lackluster economic news despite the government’s best efforts to implement piecemeal stimulus. As noted above, China’s relationship with the United States has improved at the same time as it addresses the economy. The business outlook is likely to remain pessimistic, even if the market rewards Chinese assets as it begins to believe the Chinese Communist Party’s (CCP) sincerity in shoring up the economy. International companies continue to look to reduce exposure to China, regardless of the CCP’s next moves.

The Pentagon has split $238 million in funding between 8 regional semiconductor technology hubs under the CHIPS Act to increase U.S. production of advanced electronic components for military equipment. Deputy Secretary of Defense Kathleen Hicks emphasized that this will help secure U.S. supply chains.

The hubs will be located in Massachusetts, Indiana, North Carolina, Arizona, Ohio, New York, and California and marks the first major investment from the CHIPS Act. President Biden has been under pressure to speed up investments into CHIPS programs due to recent advancements in China’s chipmaking ability.

The Commerce Department released natural security guardrails for businesses aiming to receive Federal funding from the CHIPS Act. One guideline prohibits companies from “expanding material semiconductor manufacturing capacity in foreign countries of concern,” such as China and Russia, for 10 years. Another, limits recipients of CHIPS funding from “engaging in certain joint research or technology licensing efforts with a foreign entity of concern that relates to a technology or product that raises national security concerns.”

The rules hope to prevent technology funded by the program from being misused by foreign adversaries. The Department warned that those who violate the rules could have their Federal dollars revoked.

Commerce Secretary Gina Raimondo warned the House Committee on Science, Space, and Technology during a hearing that a government shutdown would threaten national security, hinder the Commerce Department’s ability to enforce export control, and halt progress made under the CHIPS Act.

She stated, “If there is a shutdown, it’ll come to a grinding halt. I mean, there is there is no question in my mind, this shutdown will hurt America’s national security…At least as it relates to my work, export control enforcement, export control work, investment of the CHIPS money, investment of the Tech Hub money, it all stops.”

Raimondo also spoke about the release of Huawei’s new Mate 60 Pro phone with a Kirin 9000s chip. She said she was “upset” over the release but added that the U.S. has no evidence that China is capable of making those components “at scale.” Earlier this month, the Commerce Department’s Bureau of Industry and Security opened an investigation into Huawei’s phone and the 7-nanometer chip. This investigation could take weeks to conclude.

China did not export any gallium and germanium, rare minerals needed for manufacturing semiconductors, in August after Beijing imposed restrictions on sales overseas. China produces about 80% of the world’s gallium and 60% of germanium, according to the Critical Raw Materials Alliance.

In July, Beijing announced its intention to impose export controls on the minerals to safeguard the nation’s “national security and interests.” Beginning on August 1^st, exporters would be required to apply for permission to ship them out of the country.

A spokesperson from China’s commerce ministry told press that the department had received applications from companies to export the minerals, and some had been approved.

An article from the Chinese Ministry of State Security has accused the U.S. National Security Agency of invading Huawei’s servers and continued monitoring through systematic attacks in 2009. China claims it discovered in September 2022 that the American agency had engaged in tens of thousands of cyberattacks against China, including Northwestern Polytechnical University.

Foreign Minister Wang Yi has promised to strengthen China’s “strategic coordination” with Russia ahead of President Xi Jinping’s meeting with President Vladimir Putin in China next month. It marks President Putin’s first foreign trip since the International Criminal Court issued a warrant for his arrest on alleged war crimes.

China has been Russia’s primary supporter since the invasion of Ukraine, extending both economic and diplomatic support.

During President Biden’s visit to Vietnam, he pledged more cooperation between the countries in technological development, while U.S. businesses signed deals with Vietnamese companies and the government. These agreements could allow Vietnam to move up the manufacturing value chain and threaten Chinese industry dominance in the long run. Vietnam signed billion-dollar deals with American companies including Boeing, Microsoft, and Nvidia. Beijing’s strategy of using Vietnam as a re-export center could now come under further scrutiny.

The House Ways and Means Subcommittee on Trade held a hearing on Wednesday to discuss reforming the Generalized System of Preferences (GSP) to protect U.S. supply chains and combat China.

In his opening remarks, Chairman Adrian Smith (R-NE) stated that the GSP program has achieved many of its goals but requires reforms to make the program more effective. He added that GSP also has the potential to shift key supply chains out of China. Ranking Member Earl Blumenauer (D-OR) advocated for common sense and equitable reforms to GSP, specifically for an addition of environmental criterion into GSP.

U.S. companies surveyed about their confidence in business outlook in China over the next five years fell to an all-time low of 52%, according to a survey conducted by the American Chamber of Commerce (AmCham). Political tensions between the U.S. and China and a slowing economy have caused firms to feel the least optimistic since the survey was introduced in 1999. Concerns have also been raised over U.S. policies and the transparency of China’s regulatory environment.

President Xi Jinping’s government is facing turmoil after the abrupt removal of his Foreign Minister in July, followed by the reported dismissal of his Defense Minister less than 2 months later. There have also been substantial changes in the leadership within the Rocket Force, which is responsible for overseeing China’s nuclear arsenal. Several of these individuals were hand-picked by Xi and their fall from grace reflects poorly on him.

Western intelligence agencies are raising concerns over China’s Fire-Eye labs. Numerous Fire-Eye labs were donated or sold to foreign countries during the pandemic to detect COVID-19 from genetic fragments left behind from the pathogen. Unease is growing about China’s intentions, and some analysts fear Fire-Eye labs could assist in providing China with new sources of valuable human DNA data from countries around the world.

A spokesman for the Chinese Embassy in Washington stated that no Chinese company had improperly gained access to genetic data and that the Fire-Eye labs helped many countries fight the pandemic.

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