China Center Program Manager Shane Leary joins Miles Yu to discuss the diplomatic and security implications of this past weekend's trilateral Camp David summit between President Joe Biden, Prime Minister Fumio Kishida, and President Yoon Suk Yeol. They then examine Biden's latest executive orders against China, which ban investments on key technologies and enact export controls on semiconductors. Finally, Miles offers his thoughts on Xi Jinping's latest anti-corruption campaign targeting the medical sector in China. Follow the China Center's work at https://www.hudson.org/china-center
China Center Program Manager Shane Leary joins Miles Yu to discuss the diplomatic and security implications of this past weekend's trilateral Camp David summit between President Joe Biden, Prime Minister Fumio Kishida, and President Yoon Suk Yeol. They then examine Biden's latest executive orders against China, which ban investments on key technologies and enact export controls on semiconductors. Finally, Miles offers his thoughts on Xi Jinping's latest anti-corruption campaign targeting the medical sector in China.
Follow the China Center's work at https://www.hudson.org/china-center and subscribe to our newsletter China Digest.
Miles Yu:
Welcome to China Insider, a podcast from Hudson Institute's China Center.
Shane Leary:
It's Tuesday, August 22nd, and we have three topics this week. The first is the recent Trilateral summit at Camp David and its implications for security in the Asia Pacific. The second is Miles Reflections on President Biden's recent export controls and investment restrictions on semiconductors and other technologies in China. And third is Xi Jinping's latest anti-corruption campaign on the medical sector in China. Miles. How are you?
Miles Yu: Very good, Shane.
Shane Leary:
Wonderful. So last Friday kicked off the Trilateral Leaders Summit at Camp David. We spoke about last week, president Biden met with Japanese Prime Minister Kaita and South Korean President Yung Biden has called for a new era of cooperation in response to the threats pose by North Korea, but in particular a rising and increasingly aggressive China announcements. After the summit included a new commitment to consult one another, in particular the formation of a three-way crisis hotline, a commitment to conduct annual military exercises and share intelligence and the continuation of meetings like this one with a new annual trilateral summit. Miles. What are your reflections on this summit? How momentous is this as a step diplomatically and for the security of our allies in the region? Is there anything that surprised you or that you expected to come out of this that didn't?
Miles Yu:
It didn't surprise me yet, it did surprise me in a way because the cornerstone of peace and stability in Northeast Asia is this tripartite alliance led by the United States, includes Japan and South Korea. It has been going on for over seven decades, so it's very important. However, there is the issue there that is it's fundamentally bilateral alliance system. In other words, it's US Japan and US Korea. Japan and Korea themselves do not have a mutual defense arrangement. So that's created very interesting dynamics. So none of the issues you mentioned earlier in the White House readout about the joint exercise, sharing intelligence and all those things. None of this is new because it's been there all these years. United States was conduct a joint drill with Japan and also with Korea, and also not on a regular basis, more or less. So this Camp David Summit is very important because for the first time to bring Japan and South Korea together in Camp David to reach a deal and President Biden said he wants to institutionalize this arrangement.
In other words, it becomes sort of a trilateral rather than bilateral. So the three now act together to pursue same agenda of security for peace. So that's why it's very important because Korea and Japan, for historical reason for leadership or statesmanship reason, there have always been some kind of trivial arguments, disagreements on history, on mutual export control, and that has escalated two points of crisis throughout the decades. It's very unfortunate that this very important defense alliance led by the United States has this kind of internal division between Korea and Japan. So this is for the first time two leaders come to Camp David and transcend trivial disagreements and for the better purpose of self-protection.
What really united all of the three is really about China. You mentioned very clearly both United States and Japan have stated in their official documents that China constitutes the number one national security threat to both countries. Korea has not said in such explicit way because Korea's right next to North Korea, which is also sort of a source of instability. But the President of South Korea, President Yoon is a visionary. He has said repeatedly, China problem is not a really original problem. It's not a Korea problem, it is a global issue. So there's a global vision there. So I think this Camp David meeting has the sort of resemblance of the Camp David core of 1970s brokered by the United States and finally bridged the two adversaries in the Middle East between Israel and Egypt. It will have a very long lasting impact in regional security. It may also pave the way for this fundamental transformation of American led alliance system in the Indo-Pacific. That is to transform the existing bilateral relationship to a multilateral collective NATO like Defense Pact in the Indo-Pacific. I can clearly see in the near future Korea and Japan would also sign some sort of mutual defense agreement.
In other words, attack on either will be a construed attack on both that will bring United States in. Having said this, if you read the White House announcement very carefully, president Biden right after the Camp David Summit announced that he's going to visit Vietnam. That's another very important step toward the American's global strategy, particularly the Indo-Pacific strategy. Because Vietnam is at the frontline of countering the China threat, no country in Indo-Pacific has been involved in more military conflicts than Vietnam with China in the last half a century. So this is a very important development in my view.
Shane Leary:
I want to press on something you said at the beginning there, that at least at the bilateral level, a lot of this cooperation is not necessarily new. Some commentators have framed the Biden administration's approach and this summit in particular as a reinvigoration of the US alliance system following what they perceive as the tumultuous Trump years having been in the last administration yourself. Could you speak to what our relationship with these allies was like during the Trump era? Is it fair to call this a tumultuous time or did the last administration lay some of the groundwork that culminated in this retreat?
Miles Yu:
I mean, the charges are largely based on emotion. Yes, President Trump has said somethings that are not really constructive to alliance confidence building, but in the end, the previous administration did a lot more in securing commitment to mutual defense in Asia Pacific, even in Europe as well. Look at what happened to NATO, right? NATO has reinvigorated itself in terms of its commitment to the alliance. I think timing is very different. At the time when we set China as the number one national security threat, most of the world were not with us, including our friends and allies in Asia and in Europe, and we had to work really, really hard to bring them into this kind of understanding. And gradually, by the time the Trump term was over, most countries actually had come to the agreement, but it was really difficult to work with. I'm very glad that the Biden administration continued our policy toward global strategy. That is we continue to treat China as a number one national security threat. That fundamental has not changed. So I think the issue really is about bipartisan and also I think the Biden team is able to work much better with our friends and allies based upon what we worked really hard to build up this kind of global consensus on China. Their consensus was not completed at the time when we left an office, but the foundation was led for the success of the Biden administration.
Shane Leary:
Just one last question on this summit. In response to the summit, the Chinese Ministry of Foreign Affairs spokesman Wang Wenbin said, no country should seek its own security at the expense of other countries security interests and regional peace and stability, and added that the Asia Pacific region should not be turned into a wrestling ground for geopolitical competition Miles. What is your response to Mr. Wang's statement?
Miles Yu:
It's a very anemic statement. It's typical PRC verbiage of the gobbledygook. It really doesn't have any persuasive power whatsoever. It assumes that all the countries that have a problem with China are manipulated by the United States. They were the puppets of the United States. They completely disrespect sovereign decisions by countries like Japan, Korea, Australia, Vietnam, India. They all believe every time those countries have a problem with China, they are basically agitated and abated by the United States, by Washington DC. This is a really, really sort of myopic and it's very untrue, and I think most country do not take China's statement very seriously. It's age old propaganda that really does not mean anything nowadays.
Shane Leary:
For our next topic, this past weekend, President Biden issued an executive order banning US investments in China's technology sectors, including semiconductors and microelectronics, quantum computing and artificial intelligence. The aim is to ensure US companies are not assisting or facilitating Beijing in gaining an advantage by developing technological applications, which could pose national security risks to the US and its allies. The ban applies not only to China, but its special administrative regions like Hong Kong and Macau, and this comes in conjunction with a series of export controls on high-end semiconductor chips going to China. This action has largely been praised, although some congressional members have noted it should have gone further. In particular, representative Michael McCaul from Texas who chairs the House Foreign Affairs Committee said while he was pleased with this, that it should have included restrictions on investments in biotech and energy as well. What is your estimation of these recent steps taken by the Biden administration?
Miles Yu:
I think it is a step forward, and I'm actually pleased to see the announcement, and it is a very similar pattern, right when we were handling the China issue, and I think we got the criticism from the Democrats that said, we're not doing enough to curtail China's ambition and China's aggression. So here you see the same pattern again when the administration in power is doing something that's correct, and then the Republican said, you should do more. But I think this is actually is not a real criticism, it's just like some kind of a further agreement on the fact that China is really a big threat to the United States. I think this is the executive order focused on the right groups. That is private equity firms and the venture capital investment banks, particularly big banks that had huge dealings with China like BlackRock and Goldman Sachs. It tries to sell off a loophole in export control.
We already have a very strict export control in banking industry, for example, in some of the industrial manufacturing firms, they're heavily regulated, but not on private equity and venture capital investments in China. This is a huge loophole and I'm sure those groups are not going to be happy. I remember that they actually came to Washington DC to lobby the White House to make it easier for their transaction with China. In reality, this actually may help those firms because they can now tell the CCP, “Hey, listen bug off” and by citing the US federal ban. So it's not a real responsibility not to reinvest in China's critical industry like Chips Semiconductor, artificial intelligence and quantum computing is a US government. So that's the way that should be because I always say Twitter's problem should never be just Twitter's problem with China. Twitter's problem should be America's problem with China.
The same logic would apply. You mentioned about the ban that also includes Hong Kong and Macau. This is hugely important because Hong Kong play a very important role in transactions in high tech and the electronics import and export in and out of China. Over 70% of all transactions in high-end electronics into and out of China are going through Hong Kong. So Hong Kong is a hotbed of China's state sponsored illicit operations on massive scale, either through rogue banks such as HSBC or Hong Kong's unique financial ties to the free market system to conduct anti-market activities by China such as money laundering and other schemes on a massive scale. So Hong Kong's role as an accomplice to CCP regime should be severely punished, and I think this executive order aims precisely at that. My only criticism of this executive order, however, is this, it places the major role of implementation of this executive order on primarily the Treasury Department, which I think is not the best agency because Treasury Department is heavily susceptible to Wall Street influence, particularly private equity firms and venture capital sectors - the very sector this executive order is aimed at. So I would prefer it to be handled by the White House State Department, DOD, or even Commerce, but not Treasury based upon my own experience in my service in the government.
Shane Leary:
Last topic, we have a new anti-corruption campaign from Xi Jinping, this time focused on the PRCS healthcare sector. It has been described as the biggest crackdown on corruption in the history of the industry in China. Over 170 hospital executives and CCP secretaries have been placed under investigation so far. I'll cite a few examples which seem to have motivated this one. A hospital in the southwest province of Yunnan bought radiotherapy equipment for over double its import price with the hospital director pocketing the difference. And another, a plastic surgeon in Jiangsu was arrested and 40 million yuan in cash was found in his home. In general, the medical sector is seen as being especially corrupt in China. Miles, could you open this up a bit for our listeners? How widespread is this really? And if you could, I'd like to ask if you could connect this to what you mentioned last week when we talked about the economic troubles facing China, you mentioned that without being able to speculate on land as they normally would, the government is going after the rich for funds in particular in hospitals and in the immigration consultancy industry. To what degree are the party's actions here simply financially motivated?
Miles Yu:
Many people have said the corruption in hospital sector is nothing new. It's been there for decades. Why now? Because right now China has this money crunch. The government needs money to finance different levels of its operations, and hospitals are where the money is. So that's why they went after. You can see the scale, right? As of now, there were close to 200 hospital heads and the party secretaries have been investigated, and many of them were arrested. Billions of billions of Yuan have been returned. The Chinese government vow to go back to the books of many hospitals, some 20 years. So you can imagine how much money the government can extract from the hospitals. Now, every time you think about anti-corruption campaign in China, you always see this is some kind of pretext to cover up some of the underlying institutional reasons for the corruption. China always go after the symptoms of corruption, but never the roots of the corruption.
Of course, there is this phenomenon of a population aging - with the aging population in China, you have a lot of older people who needs medical treatment, so that gives the hospital a lot of power. Doctors in China a very important group of people. They can save lives and they can also make your life miserable. It all depends on how you regulate and how the system is set up. Right? In China, there's some systemic flaws that make hospitals very, very likely to be corrupt. For example, you have this inadequate health insurance. China's healthcare current is actually quite widespread, but the insurance coverage is not really enough. When you have a major operation, you need hospitalization. It's never enough. So that's why people have the extreme anxiety, and if doctor says, you have this problem, you really have no other way just to pay off, right? More fundamentally, I think it is a government spending priority.
The Chinese government actually spends a lot of money on healthcare, but over 80% of PRCs, enormous healthcare spending is on the tiny group of CCP, senior cadres. They set up special hospitals almost like a resort like and sanitarian like hospitals with guards and rules. The hospitals, the service, the majority of the Chinese population are grossly underfunded. China's central government's healthcare spending on those hospitals serving the masses is about 10% of all hospitals expansions. So in other words, hospitals in China were responsible for 90% of their operational cost. Therefore, you have this gigantic incentive for corruption. Many hospitals are giving doctor even quota for profits. You have to make some money. How do you make profits? If you're a doctor, you can easily self-prescribe some medicines, very expensive, but not necessarily the best. Or you can recommend operations that are not necessary, but very costly.
That is where money and corruption started. So I think the government healthcare spending priority is the institutional problem. There's also this peculiar phenomenon of Chinese medical system, though in the United States, more or less that hospitals and pharmacies are separated, you go to see a doctor, doctor gives a prescription, and normally you go to the local pharmacy, which is unconnected with the hospital. China's different. The Chinese hospitals are normally the same as a pharmacy. So this basically give this pharmaceuticals enormous opportunity to inference doctors, to bribe doctors with, to use their drugs for profit. So there is a commercial reason for that, and this is a really, really institutional and systemic problem. I have to say this though, despite all this corruptions going on, I have seen some Chinese doctors and nurses, they're doing amazing job. They're taking care of the nation's patients, and they're doing really, really sort of human's work.
But again, the system is so inadequate, shall we say, and to create all these very unfortunate conditions for corruption to emerge and to thrive and to become so widespread. It's a very tragic story to look at all the things. And this, by the way, has created enormous national anxiety because many people do not trust the integrity of the healthcare system. Therefore, if you are desperate, you basically would voluntarily bribe the doctor in hope of getting the better, best treatment. And that also is another thing. So it is a public trust, the lack of which in China and not really created this problem of corruption and makes it even worse. And this is also politically destabilizing for Chinese government because so many people are so afraid of getting sick, particularly getting some kind of chronic diseases. They believe in some kind of a magic, some kind of a crack approaches, and really become very, very serious political problem because you have secret societies, you have some kind of a swindlers doing some terrible things to the people, so that is also a problem. It's kind of vicious cycle. So it's very unfortunate. Most important thing is to really establish public trust and credibility of the most critical group of people in the society. That is doctors, nurses, and because they can heal not only the people, but also the society.
Shane Leary:
Well, Miles, I think that's all the time we have for this week. Thank you so much for joining me, and I look forward to speaking to you next week.
Miles Yu:
Okay, looking forward to our discussion next week.
Thanks for listening to this week's episode of China Insider. For Chinese Language listeners, be sure to check out our monthly Chinese language episodes. And for those who prefer written analysis, subscribe to our weekly newsletter. China Digest, the best place to stay up to date on miles analysis and the latest news on China. As always, you can stay up to date on the China Center's activities at www.hudson.org.