Economic woes may squeeze Taiwan "reunification" plans, but Xi is relentless, Plus economies brace for China's slowdown & UK Parliament declares Taiwan independent -- China Boss New 9.01.23

Newsletter

What happened.

If you want to irritate Chinese leader Xi Jinping, try contrasting "morale" in China’s economy today with that under Deng Xiaoping, while making a prima facie case for the former's ouster.

That’s what writers at the Economist did last week.

“Morale used to respond to a strong signal from China’s leaders, such as Deng Xiaoping’s ‘southern tour’ of entrepreneurial cities in 1992 . . . But China today lacks a ruler with the requisite economic credibility,” they crackled.

Then they burned.

“Mr Xi lacks the credibility or focus of previous leaders. He now prizes greatness over growth, security over efficiency and resilience over comfort. He wants to fortify the economy, not gratify consumers. These competing priorities may prevent China’s rulers from doing whatever it takes to revive demand. Mr Xi no longer wants growth at all costs. And so the country has not had it.”

Recall that Xi Jinping has spent the better part of his life grimacing under the weight of Deng Xiaoping and his hallowed economic reform legacy. That all began when Deng “persecuted” Xi Zhongxun, Xi’s father, “because of his support for a novel about party history,” as historian Joseph Torrigan told last year in Foreign Policy.

The elder Xi was expelled from the Party for 16 long years and was not reinstated before the younger had been humiliated by Red Guards, forced to labor with farmhands in the countryside and passed over for critical opportunities that would secure his position for life in China’s top political circles.

This is not to say that a charge against Xi Jinping’s current policies is without merit.

On Saturday, Barron's published an interview with Charlene Chu, a former Fitch Ratings analyst who is considered the "go-to source for understanding China's opaque banking system and all things debt.”

When asked to assess the severity of China's situation, the financial pundit erupted:

“The macroeconomic climate is much worse than it’s ever been since reform and opening in the 1970s. It’s not just one issue, like the collapse of activity in the property sector. We have a cyclical and structural problem with weak exports, a confidence problem, and local governments, which were an important contributor of growth for China in the past as they were told to borrow money to prop up activity, focused this year on managing their ‘implicit debt burden.’”

Chu worries the worst lies ahead.

If a loss of confidence spreads to the financial sector, "investment products" would be in "run situation" because everyone in China’s $3 trillion-dollar "shadow credit space" will "want their money back," she said.

Why it matters

Raising the odds with influence and resilience

In a 2020 essay published by Carnegie Endowment for International Peace, Hal Brands and now National Security Advisor Jake Sullivan said if China wanted to be a superpower, it had to choose between "two paths to global domination."

The first - which they characterized as “conventional” - is to use "regional primacy as a springboard to global power.”

But the second plays more to China’s strengths. It would beat "the U.S. alliance system" at its own game, and, in the process, break down deterrents to the PRC’s expansion "by developing China’s economic, diplomatic, and political influence on a global scale."

“In this approach, China would grudgingly accept that it could not displace the United States from Asia or push the U.S. Navy beyond the Western Pacific’s first island chain, at least for the foreseeable future. It would instead put increasing emphasis on shaping the world’s economic rules, technology standards, and political institutions to its advantage and in its image,” they said.

Brands, now Professor of Global Affairs at Johns Hopkins University and author of Danger Zone: The Coming Conflict with China, told Voice of America earlier this month that "China's economic slowdown . . . is likely to worsen if other nations follow the U.S. lead in restricting investments.”

"This is why the danger of a war over Taiwan, for instance, is highest in this decade — because China will have more military capability than ever before, just as it peaks and starts to decline economically, relative to the United States,” he said.

But strategist and historian Edward Luttwak argued earlier this week that Xi is unlikely to roll the dice on Taiwan as a political diversion from China’s slowing economy. The better approach would be to put the odds for successfully annexing Taiwan in his favor by weakening US deterrents and strengthening China’s resilience against any escalated international response, like sanctions and conflict.

“If anything, it is the conflict in Ukraine that might encourage Xi to invade Taiwan, because it proves that wars can be fought without a nuclear Armageddon, and with many other limits too (a Russian will soon ascend to the International Space Station from Cape Canaveral),” Luttwak cautioned.

China’s unrelenting Chairman

For all his bad qualities, you’ve got to admire the way Xi Jinping can stick to things that might seem - to ordinary folks - outrageous.

In 2020, he openly and obtrusively waded into Hong Kong protests with a national security law allowing for locals and everyone else on the planet to be carted off to Mainland prisons for just about any type of criticism against the state. Today, Xi gets his kicks goading the formation of a police state in the Special Administrative Region, which, essentially, is like giving the bird to the international community who has condemned and sanctioned Hong Kong officials for carrying out his orders.

Against the advice of the scientific community and his own ministers, Xi stayed the course with his zero-Covid policy for three long years, often extolling its virtues. “Some foreign athletes told us that if there was a gold medal for epidemic response, it should be awarded to China," he boasted, upstaging award recipients at an Olympic ceremony.

Despite dramatically rising youth unemployment, Xi persists in undermining entrepreneurs who run small, medium, and large businesses with social policies that constrain their growth, says Wei Xiong, professor at Princeton University.

“The government has been pushing ambitious social agendas, from the stringent zero-covid policy to antitrust crackdowns on large tech firms and the pursuit of ‘common prosperity’. Many market participants read these as a signal that the state is prioritising social objectives over the interests of private businesses,” he says.

And for all the talk of a "drip-feed" stimulus that may be lowering investor confidence - in October 2021, Xi tried to force a country-wide property tax - that many saw as sudden death for China’s property market. Only after state-owned-industries, local governments, economists, provincial officials and Party elite collectively protested, did he budge, settling for “a limited tax plan” to be “piloted” in a few cities - Jack Ma's Hangzhou being one. Yeah, vindictive.

Doubling-down in Xinjiang over growing international outrage, expanding BRICS despite founding partners’ objections, and sticking by a war-mongering Russia despite its war crimes are just a few more examples of how uncompromising Xi can be when it suits him.

In other words, the pressures of China’s present economic status on grander strategies are unlikely to faze Xi. But if China can no longer afford to float sizable assistance packages to the many emerging economies strategically located along its BRI, it might make a difference, as the latter will be less likely to repay such favors with support at the UN or in other multilateral institutions.

That may already be happening, if Scott Kennedy, at the Center for Strategic and International Studies, is correct. He told Foreign Policy in February that BRI lending has near bottomed out to become “a shadow of its former self.”

But can China’s aging and paranoid leader, himself a political princeling, find the right yes-men in a top-heavy, prone-to-excess system, who can do more with less to take his aspirations for Taiwan forward?

Setting aside the improbabilities, there is a chilling continuity: An unrelenting Xi Jinping who promises “to transform the Chinese military into a ‘Great Wall of Steel’” that will “protect China’s interests abroad” and “bring Taiwan back into the fold” to fulfill what he sees as the nation’s destiny.

This Week’s China News

The Big Story in China Business

GLOBAL ECONOMY BRACES FOR CHINA SLOWDOWN: Policymakers across the world are "bracing for a hit to their economies as China's imports of everything from construction materials to electronics slide," Bloomberg news reported this week.

Asian economies have seen the largest trade drops, followed by Africa.