(Preview) A US-China Trade Framework and Continuing Rare Earth Fun; The PRC and the War in Iran; Challenges in China's Car Industry?
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Hello and welcome to Sharp China. I'm Andrew Sharp and you are listening to a free preview of today's episode.

Time will tell. The adventures will continue. The truth social posts will continue and we'll see where things stand later this year. I don't know. I'm not holding my breath for anything to get dealt with before that August deadline. To keep it moving in the meantime, Wang Yi held a call with Iran's foreign minister and the Global Times provided notes on that call saying,

Wong, they write, stated that after Israel's attack on Iran, China immediately made its position clear. China explicitly condemned Israel for violating Iran's sovereignty, security, and territorial integrity.

Wang said China firmly opposes the brutal attacks targeting Iranian officials that have caused civilian casualties and supports Iran in safeguarding its national sovereignty, defending its legitimate rights and interests, and protecting the safety of its people.

Wang noted that Israel's actions severely violate the purposes and principles of the United Nations Charter and the basic norm of international relations, especially the attack on Iran's nuclear facilities, which sets a dangerous precedent and could lead to catastrophic consequences.

Wang said China supports the international community in upholding justice and speaking out promptly. He also urged countries with influence over Israel to make concrete efforts to restore peace. So beyond the sentiments expressed from Wang Yi on that call, do we have any other indications of how the leadership in Beijing interprets the exchange of attacks between Israel and Iran there?

So first, it's interesting that Wang Yi didn't seem to be able to find the same set of principles to condemn Russia's invasion of Ukraine. So I think that's important to compare the two languages, right? Because it's really not about principles. It's about interests, right? Of course it is. They're countries. They're not people. But I think when you look at it, I think the Chinese are trying to...

It's been happening for a few days. One, things are changing, so you have to be careful about drawing any conclusions because it's not really clear exactly what's happening or what the outcome is going to be. To the system beyond these sort of standard formulaic condemnations or statements, it takes a while to figure out what the messaging is. And so it's just not fully formed at this point. I think Iran is an important partner for China in the Middle East.

China also did a lot of things to support Syria and the Assad government. Assad visited China a couple of years ago, was treated very well, even though he was an international pariah. He obviously has fallen. China was not happy about that. And I think that China very much does not want to see the Iranian government weak into the point that perhaps it collapses as well. And then there's some sort of a...

Regime change.

other authoritarian countries, the governments fall. Interesting. Okay. But at the same time, while you can issue these statements, but the Chinese are effectively powerless. They are not players in the Middle East right now. They did their deal last year. They made a big deal about how they brokered this reconciliation between Saudi Arabia and Iran. I mean, they came in near the end and got it over the finish line.

But the reality is this war, this Israel-Iran war is happening and the Chinese just aren't players. Well, so in general, what should people know about China's relationship to Iran? Because Iran- They're the biggest buyer of their oil.

Yeah, I've read about how much oil they purchase. And there was a Wall Street Journal report a couple weeks ago that Iran has ordered thousands of ballistic missile ingredients from China. They sell the precursors, the chemicals to help them build rocket, the ballistic missile fuel, right? So they're effectively...

you know, if the Chinese have been shipping this to Iran, then Iran's building these missiles that are then killing people in Tel Aviv and other places, right? And so that is their involvement in this conflict. Are there other aspects of the relationship that are strategically relevant to China? Well, there's been a lot of talk. You know, there's been a fair amount of Chinese investment in Iran. It's certainly a key geopolitical country and it has good relations with China. They're

They're part of the BRI, right? Well, they're outside the U.S. orbit. And so that's useful, too, because the U.S. has good relations with most of the other countries in the Middle East. The Trump administration, you look at what happened with the rescinding of the AI diffusion rule that Biden team drafted. That was fantastic.

There are a lot of reasons for that part of it. One of the reasons was, again, to bind these countries in the Middle East closely to the US, especially around AI, as part of what the US government sees as a competition with China around AI and technology infrastructure. And I think also when you look at

And how much damage the Israelis have been able to inflict on Iran in a few days, I think it's pretty surprising to many outside observers how actually weak the Iranian military is, Iranian defenses are. And I think that also has, will potentially cause some concern and some thinking inside China. At the same time, you have lots of talk about

I think Chinese military industrial complex stocks were up because the thinking is, well, gee, the Iranians are going to need to rebuild their military. Also, they're going to probably want to buy Chinese weapons because look how well they performed for Pakistan when they shot down some old Indian planes, old French Indian planes. Again,

Yeah. I mean, if Iran comes out of this with enough money to sort of buy lots of weapons, they're not going to buy Russian weapons because of, one, how badly they performed in Ukraine, and two, because I don't think the

The Russians can't make any for export or not as many for export. And so China would be the likely source of new arms. And so that could be a benefit for Beijing, potentially. But I think also, again, it is, I think, important to just not overstate how much influence China has. China, they're going to issue condemnations. They're going to, you know, they represented the UN, condemned it. They'll vote against Israel at the UN. They'll blame the U.S.,

But they have, I think, limited to no ability to actually impact what is going on and what is going to continue to go on over the next period of time as Israel and Iran continue to fight. It does not sound like Israel is interested in backing down at any point. And, you know, we'll see. But it's an interesting, you know, China...

China is trying to become more influential in the Middle East. They don't want to intervene. You know, they're very much sort of, they figure out how to position and reap the benefits without sort of having to incur too much cost. Yep. And that could be beneficial at times, but when they're real crises like this, China really is more of a bystander.

They don't have the leverage to sway Iran. Yeah. Interesting. And we went over this to some degree about a year, year and a half ago when some of the Houthi attacks were beginning and people were calling on the PRC to lean on Iran.

to try to rein some of those attacks in. It just sounds like they just cut a deal with the Houthis to not target Chinese flagships. Yep. There have been some entertaining visuals where Chinese ships are just sailing through. So it is a reminder, and it'll be interesting to see how this feeds into the strategic thinking in PRC government and sort of the policy community, the think tank community, because...

But again, it's hard to say what it's going to be because we don't know what the outcome is going to be. I mean, it could be that Israel pounds Iran for a few more days and then says, "Okay, fine, we'll talk." And then they have to force through some sort of a deal where the Iranians really allow all their nuclear weapons development facilities to be inspected. Although, again, we'll see how much the Chinese want that to happen.

But it could also be that the Israelis just keep going and it causes so much internal friction inside Iran that then you start seeing, you know, there have been over the last several years, there have been occasional mass protests. And, you know, the Iranian regime has pretty high capacity to crack down. And so they were able to crack down. They may be losing some of that capacity as they get humiliated by the Israelis. We'll see. And again, that also, again, will inform, I think, how the Chinese really look at it because...

If the current Iranian government can survive, then the Chinese will come in and they'll want to support it more, sell them more weapons. But if it collapses like Syria collapsed, and I'm not saying it will, we are not Iran experts, but I'm just saying, I think if you're trying to imagine how the Chinese look at it, if it becomes more of like a Syria-like situation, that potentially is a very bad outcome for the Chinese.

Right. Because that's part of this sort of ongoing realignment in the Middle East where naturally these countries will, you know, not necessarily lean toward the U.S., but it is just, it's part, you know, but it also at the same time, think about what, go back to what Xi Jinping keeps talking about, you know, changes unseen in a century. These are massive changes that are underway in the Middle East since October 7th. And we just, we don't know how they're going to shake out. And the Chinese, I think in some ways,

why would they really want to intervene? Because everyone who intervenes, it becomes a complete quagmire. And then the other thing that is good for China is the U.S., multiple administrations keep saying they want to refocus on Asia. They want to get out of the Middle East. I was going to say, that would be the one silver lining in the midst of all this. The U.S. has just moved another carrier group from, I think it was the South China Sea. It's now heading towards the Middle East. And so it is, the U.S. is...

continuing to have to put more resources in the Middle East. The U.S. is resource constrained when it comes to its military. So that potentially opens up more space in the event of any sort of contingency or crisis in the Asia region, in the Indo-Pakistan region. And oh, guess what? You know, the U.S. is

sending weapons to Ukraine, sending weapons to Israel, expending stocks, shooting down these, helping the Israelis shoot down Iranian missiles. Don't those things all need like rare earth magnets when you want to rebuild them or make new ones? They might. I don't know how our samarium reserves are.

I mean, so in some ways, I mean, there's multiple dimensions to this. In some ways, it's like, yeah, let them fight. Let them expend their resources. Let them exhaust their resources. And we know that the industrial base is struggling and the U.S. keeps talking about how it needs to rebuild its defense industrial base.

And yet, you know, there have been some improvements because of the Russian invasion of Ukraine. But the U.S. still doesn't have the ability to produce enough ammunition to actually sustain any sort of a conflict with China. And those stocks are dwindling. And so, you know, I think, again...

Back to changes unseen in the century, from Xi Jinping's perspective, it's quite possible they see this as it's not great. It's got some bad things. It's got some good things. We're going to figure out how it's going to balance out and we're going to figure out where we can derive the most benefit. And they're pretty good at that. Yes. Well...

Honestly, it was a lot to ask for you to run through some of the positives and negatives and the various scenarios in play, given how imperfect our information is at this point. And I think you did an excellent job taking us through there and offering that primer. So thank you.

Wow. That's a little... Well, because I felt guilty putting you on the spot because as a consumer of information, I'm not even sure exactly what's happening right now and what the implications could be. It just is interesting how the...

you know, again, it's, it's sort of hedging, but at the same time, it's like, there is no easy answer. Like, this is great for China. This is bad for China. You know, they got, they're, but they're smart. And so, but I don't even know how effective Israel's attacks have been and how feckless the Iran counter attacks are, um, because it's sort of a fog of information. You can read a dozen different narratives on Twitter. So, so, um,

I don't know. But, you know, you think about now there are two major wars underway in Ukraine and over Iran. It's sort of... And a lot of resources on the American side certainly appear to be headed toward the Middle East right now. And we know that the Chinese are doing a lot for Russia's military and national base. If this becomes more of a sort of sustained conflict for Iran, you know, will the Chinese want to start helping the Iranians more too? We'll see.

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