The Official Chinese 🇨🇳 Espionage & Cold War Thread

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A new world energy order is taking shape
Global oil trade is de-dollarising slowly but surely

13 hours ago
Illustration of an oil production equipment set against a red sky with stars in the shape of those on the Chinese flag
© Matt Kenyon
On Valentine’s Day in 1945, US president Franklin Delano Roosevelt met Saudi King Abdul Aziz Ibn Saud on the American cruiser USS Quincy. It was the beginning of one of the most important geopolitical alliances of the past 70 years, in which US security in the Middle East was bartered for oil pegged in dollars.

But times change, and 2023 may be remembered as the year that this grand bargain began to shift, as a new world energy order between China and the Middle East took shape.

While China has for some time been buying increasing amounts of oil and liquefied natural gas from Iran, Venezuela, Russia and parts of Africa in its own currency, President Xi Jinping’s meeting with Saudi and Gulf Co-operation Council leaders in December marked “the birth of the petroyuan”, as Credit Suisse analyst Zoltan Pozsar put it in a note to clients.

According to Pozsar, “China wants to rewrite the rules of the global energy market”, as part of a larger effort to de-dollarise the so-called Bric countries of Brazil, Russia, India and China, and many other parts of the world after the weaponisation of dollar foreign exchange reserves following Russia’s invasion of Ukraine.

What does that mean in practice? For starters, a lot more oil trade will be done in renminbi. Xi announced that, over the next three to five years, China would not only dramatically increase imports from GCC countries, but work towards “all-dimensional energy co-operation”. This could potentially involve joint exploration and production in places such as the South China Sea, as well as investments in refineries, chemicals and plastics. Beijing’s hope is that all of it will be paid for in renminbi, on the Shanghai Petroleum and Natural Gas Exchange, as early as 2025.

That would mark a massive shift in the global energy trade. As Pozsar points out, Russia, Iran and Venezuela account for 40 per cent of Opec+ proven oil reserves, and all of them are selling oil to China at a steep discount while the GCC countries account for another 40 per cent of proven reserves. The remaining 20 per cent are in regions within the Russian and Chinese orbit.

Those who doubt the rise of the petroyuan, and the diminution of the dollar-based financial system in general, often point out that China doesn’t enjoy the same level of global trust, rule of law or reserve currency liquidity that the US does, making other countries unlikely to want to do business in renminbi.

Perhaps, although the oil marketplace is dominated by countries that have more in common with China (at least in terms of their political economies) than with the US. What’s more, the Chinese have offered up something of a financial safety-net by making the renminbi convertible to gold on the Shanghai and Hong Kong gold exchanges.

While this doesn’t make the renminbi a substitute for the dollar as a reserve currency, the petroyuan trade nonetheless comes with important economic and financial implications for policymakers and investors.

For one thing, the prospect of cheap energy is already luring western industrial businesses to China. Consider the recent move of Germany’s BASF to downsize its main plant in Ludwigshafen and shift chemical operations to Zhanjiang. This could be the beginning of what Pozsar calls a “farm to table” trend in which China tries to capture more value-added production locally, using cheap energy as a lure. (A number of European manufacturers have also increased jobs in the US because of lower energy costs there.)

Petropolitics come with financial risks as well as upsides. It’s worth remembering that the recycling of petrodollars by oil-rich nations into emerging markets such as Mexico, Brazil, Argentina, Zaire, Turkey and others by US commercial banks from the late 1970s onwards led to several emerging market debt crises. Petrodollars also accelerated the creation of a more speculative, debt-fuelled economy in the US, as banks flush with cash created all sorts of new financial “innovations”, and an influx of foreign capital allowed the US to maintain a larger deficit.

That trend may now start to go into reverse. Already, there are fewer foreign buyers for US Treasuries. If the petroyuan takes off, it would feed the fire of de-dollarisation. China’s control of more energy reserves and the products that spring from them could be an important new contributor to inflation in the west. It’s a slow-burn problem, but perhaps not as slow as some market participants think.

What should policymakers and business leaders do? If I were chief executive of a multinational company, I’d be looking to regionalise and localise as much production as possible to hedge against a multipolar energy market. I’d also do more vertical integration to offset increased inflation in supply chains.

If I were a US policymaker, I’d think about ways to increase North American shale production over the short to medium term (and offer Europeans a discount for it), while also speeding up the green transition. That’s yet another reason why Europeans shouldn’t be complaining about the Inflation Reduction Act, which subsidises clean energy production in the US. The rise of the petroyuan should be an incentive for both the US and Europe to move away from fossil fuels as quickly as they can.

rana.foroohar@ft.com

This article has been amended to clarify that Zoltan Pozsar was referring to OPEC+ proven oil reserves
 

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U.S., Japan to Extend Security Cooperation to Space
Move aims to bolster Japan’s new military strategy amid worries about China

By Michael R. GordonFollow
and William MauldinFollow
Jan. 11, 2023 at 12:06 pm ET

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Other moves include endorsing Tokyo’s decision to acquire American Tomahawk cruise missiles to give Japan the capability to strike targets on the Chinese mainland and in North Korea in the event of aggression.

Another significant, if long-planned, step is the stationing by 2025 of a U.S. Marine Littoral Regiment in Okinawa. That regiment, which will number up to 2,200 personnel, would be equipped with antiship missiles to defend Japanese islands.

The array of potential threats to Japan have resurfaced in recent months. To coerce Taiwan, China fired missiles that landed in waters part of Japan’s exclusive economic zone. North Korea has test fired a ballistic missile over Japan for the first time since 2017.

Russia’s invasion of Ukraine has also worried many Japanese, given concerns about close ties between Beijing and Moscow as well as the longstanding dispute Tokyo has over islands seized by Soviet forces at the end of World War II.

Write to Michael R. Gordon at michael.gordon@wsj.com
 

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Opinion Japan’s prime minister warns of a historic — and dangerous —moment in Asia
Members of Japan's Self-Defense Forces and soldiers of the British army take part in a joint field exercise on Nov. 26, 2022, in Shinto Village, Japan. (Tomohiro Ohsumi/Getty Images)
TOKYO — As fears of war grow in East Asia, the United States’ chief Pacific ally, Japan, is moving away from decades of self-imposed restraint and launching its largest military buildup since World War II. As regional tensions increase, Japan’s Prime Minister Fumio Kishida is urging the United States to grasp the urgency and gravity of this historic but dangerous moment.

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“The global security environment is going through a major change,” Kishida told me in a long interview in his official residence just before departing for a five-country tour that will end with him meeting President Biden at the White House on Friday. “Japan has made a major, huge decision to strengthen our defensive capability. And for that purpose, we also wish to deepen the bilateral cooperation with the United States even further.”

Emerging from three years of covid isolation, Japan confronts a neighborhood where China and North Korea are expanding their military arsenals and advancing their missile capabilities, the prime minister told me. Adm. John C. Aquilino, the head of U.S. Indo-Pacific Command, has described Beijing’s expanding armament as “the largest military buildup in history.” North Korea fired more than 90 cruise and ballistic missiles in 2022, often sending Japanese citizens scrambling for cover.

In December, Kishida’s government completed the rewriting of three core documents that make up Japan’s national security strategy. For the first time since 1976, Japan will no longer limit its defense spending to 1 percent of gross domestic product. Under the accompanying five-year defense budget plan, Japan is now set to nearly double its defense outlay to 2 percent of GDP by 2027. This would make Japan’s military budget the world’s third largest, behind only the United States and China.

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The objective is to raise deterrence against China and North Korea, in the hopes of stopping leaders in Beijing and Pyongyang from contemplating the use of violent aggression of the kind Russian President Vladimir Putin has unleashed in Ukraine.

“This was a major a decision that we had to make,” Kishida said. “We have had to question whether we will be able to defend the lives, the livelihood and the industry of the Japanese people and the country.”

Japan had previously pursued a conciliatory policy toward Russia, hoping to resolve long-lingering territorial disputes. Yet after Moscow’s Feb. 24 invasion of Ukraine, Kishida has completely reversed that approach; Japan is now the Asian country most supportive of Ukraine. Russia’s unprovoked attack and nuclear threats should send a warning to those facing the growing aggressiveness of dictatorships in Asia, the prime minister told me.

“Ukraine today may be Asia tomorrow,” Kishida said. “Unilateral attempts to change the status quo by force are not acceptable.”

Although it is not explicitly stated in the strategy documents, Tokyo’s primary concern is a possible attack by China on Taiwan. Japan’s military reorganization shifts resources toward Japan’s southwest islands, near Taiwan. The Japanese military reform is focused not on buying lots of ships or planes, but rather on getting Japan’s already large Self-Defense Forces (Tokyo’s name for its armed forces) ready to fight in a Taiwan-related scenario.

Kishida emphasized the importance he places on peace and stability across the Taiwan directly to Chinese President Xi Jinping in their November meeting in Bangkok. In his meeting with me, Kishida said that “the peace and stability of Taiwan are also extremely important for the global community.”

U.S. Ambassador Rahm Emanuel told me that the Biden administration is helping Japan modernize and integrate with the U.S. military, boosting cooperation on the coast guard, cyberwarfare, space and undersea security. Washington and Tokyo are also pursuing more sophisticated coordination on economic security, in part by moving supply chains and onshoring critical manufacturing to ensure China can’t use its economic power to pressure democracies. Many in the region vividly recall how Beijing used its monopoly on critical public health supplies to blackmail other countries during the pandemic.

“Covid, coercion and conflict have all made everybody reassess their assumptions,” Emanuel said.

Japan is attempting to build up its diplomatic role along with that of its military. Kishida is hosting the Group of Seven Summit in May in his hometown of Hiroshima, where many of his own family members died in the United States’ nuclear attack there in August 1945. He is visiting five of the G-7 capitals this week to prepare for the summit.

When Kishida and Biden meet in Washington on Friday, they will likely discuss the plan for Japan to become only the second U.S. ally (after the United Kingdom) to be sold Tomahawk cruise missiles, which will give Japan the ability to strike ground targets. Tokyo intentionally avoided acquiring this “counterstrike” or “standoff” capability for decades — but no more.

Speaking with Japanese officials and experts in Tokyo, I repeatedly heard a solemn acknowledgment that Japan is sacrificing some of the soft power that came from its identity as a country that voluntarily gave up the ability to wage offensive war. But most Japanese genuinely fear that if China, Russia and North Korea are not shown a serious response to their escalating antagonism, conflict will come to Asia.

“Unfortunately, it’s an arms race,” said Yoichi Funabashi, founder of the Asia Pacific Initiative, part of the International House of Japan, a Tokyo think tank. “But, if you cannot acquire sufficient deterrence, you will end up paying more in the long run when the deterrence fails.”

There is irony in that Kishida, the leader of the more dovish wing of Japan’s ruling Liberal Democratic Party, is in power at the moment Japan emerges from its pacifist postwar stance. In fact, his liberal bona fides likely account for the lack of significant domestic opposition to these plans, which were set in motion by hawkish former prime minister Shinzo Abe, who was assassinated last July.

“The reality is that the leader of a country cannot choose the era in which the person takes that leadership position,” Kishida told me.

Japan has concluded that preparing for conflict is the only way to maximize the chance to avoid it. As a neighbor of both Russia and China, it doesn’t have the luxury of choosing to focus only on Europe or Asia. From Tokyo’s perspective, the fates of the two sides of the globe are interconnected and inseparable.

The biggest open question in Tokyo is this: Can a worried Japan count on a distracted and divided United States to increase its focus on Asia while preoccupied with a war in Europe? The truth is that nobody knows. But Japan has now bet its future on the hope that the United States will rise to stand beside it.

“I would like to ask the American people to be more interested and to be engaged in the Indo-Pacific region,” the prime minister told me. “And I’m convinced by doing so, that would ensure the peace and prosperity of this region.”
 

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With F.B.I. Search, U.S. Escalates Global Fight Over Chinese Police Outposts
Beijing says the outposts aren’t doing police work, but Chinese state media reports say they “collect intelligence” and solve crimes far outside their jurisdiction.

Jan. 12, 2023
F.B.I. agents searched a suspected Chinese police outpost located at this glass building on East Broadway in New York’s Chinatown.
F.B.I. agents searched a suspected Chinese police outpost located at this glass building on East Broadway in New York’s Chinatown.Hilary Swift for The New York Times
By Megha Rajagopalan and William K. Rashbaum

Megha Rajagopalan, a former China correspondent, reported from London and countries across Europe. William K. Rashbaum reported from New York, where he has spent three decades covering crime.

The nondescript, six-story office building on a busy street in New York’s Chinatown lists several mundane businesses on its lobby directory, including an engineering company, an acupuncturist and an accounting firm.

A more remarkable enterprise, on the third floor, is unlisted: a Chinese outpost suspected of conducting police operations without jurisdiction or diplomatic approval — one of more than 100 such outfits around the world that are unnerving diplomats and intelligence agents.

F.B.I. counterintelligence agents searched the building last fall as part of a criminal investigation being conducted with the U.S. attorney’s office in Brooklyn, according to people with knowledge of the inquiry. The search represents an escalation in a global dispute over China’s efforts to police its diaspora far beyond its borders. Irish, Canadian and Dutch officials have called for China to shut down police operations in their countries. The F.B.I. raid is the first known example of the authorities seizing materials from one of the outposts.

Those who discussed the F.B.I. search did so on condition of anonymity because they were not authorized to discuss the matter. The Chinese Embassy in Washington on Wednesday played down the role of the outposts, saying they are staffed by volunteers who help Chinese nationals perform routine tasks like renewing their driver’s licenses back home.

But Chinese state news media reports reviewed by The New York Times cite police and local Chinese officials by name describing the operations very differently. They tout the effectiveness of the offices, which are frequently called overseas police service centers. Some reports describe the Chinese outposts “collecting intelligence” and solving crimes abroad without collaborating with local officials. The public statements leave it murky who exactly is running the offices. Sometimes they are referred to as volunteers; other times as staff members or, in at least one case, the director.

The Chinese Embassy in Washington, D.C., in 2019.
The Chinese Embassy in Washington, D.C., in 2019.Justin T. Gellerson for The New York Times
Some of those online articles have been deleted recently as Western officials and human rights groups have called attention to the police offices.

Western officials see the outposts as part of Beijing’s larger drive to keep tabs on Chinese nationals abroad, including dissidents. The most notorious such effort is known as Operation Fox Hunt, in which Chinese officials hunt down fugitives abroad and pressure them to return home.

At least four Chinese localities — Fuzhou, Qingtian, Nantong and Wenzhou — have set up dozens of police outposts, according to state media accounts and public statements published in China. They identify sites in Japan, Italy, France, Britain, Germany, Hungary, the Czech Republic and other nations.

“It’s extremely worrying from the human rights perspective. We’re essentially allowing the Chinese diaspora to be controlled by the P.R.C. rather than subject to our national laws,” said Igor Merheim-Eyre, an adviser to a Slovakian member of the European Parliament, using the acronym for the People’s Republic of China. “That obviously has a huge impact — not only for our relations with the Chinese diaspora across Europe, but also has huge implications for national sovereignty.”

The New York outpost, which was set up by the city of Fuzhou, is based in the offices of a Chinese community organization, the America Changle Association NY, according to the state-run China Youth Daily, which last year published a document listing various police outposts. Changle is a district in the city of Fuzhou. The article has since been deleted. Other addresses of Chinese police outposts match locations of private businesses, including Chinese restaurants and commercial associations. The Chinese embassy in Washington described the spaces as “provided by local overseas Chinese communities who would like to be helpful.”

The suspected Chinese outpost in New York’s Chinatown is one of more than 100 such locations around the world that are unnerving diplomats and intelligence agents.
The suspected Chinese outpost in New York’s Chinatown is one of more than 100 such locations around the world that are unnerving diplomats and intelligence agents.Hilary Swift for The New York Times
America Changle is headed by Lu Jianshun, known as Jimmy Lu, a donor to Mayor Eric Adams of New York. It is unclear whether he is a focus of the F.B.I.’s investigation. A spokesman for Mr. Adams said the mayor does not know him.
 
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