◎ The external and domestic risks facing the CCP and Xi Jinping are coming to a head.
Recent political and geopolitical developments have substantially raised political risk levels for Chinese leader Xi Jinping and the Chinese Communist Party, leaving both vulnerable to regime-threatening Black Swans.
Below we list the main domestic and external risk threats that have recently surfaced for Xi and the Party. We also look at how domestic and external risks could shape the Hong Kong situation.
Domestic risks
We observed in late 2018 that factional struggle in the Party’s elite ranks is creating an unprecedented political crisis for the CCP regime (see here, here, and here). Key signs of factional struggle in recent weeks include:
1. The Fourth Plenum of the 19th Central Committee was held from Oct. 28 to Oct. 31 after more than a year’s delay. While Xi Jinping took the opportunity to boost his “quan wei” (權威) at the Fourth Plenum, neither he nor his political rivals seemed to have secured a significant enough advantage to break the stalemate in the factional struggle. (See here, here, and here.)
2. Several developments at the PRC anniversary celebrations on Oct. 1 and other related developments around the celebration period suggest that Xi had made concessions to his political opponents while simultaneously taking steps to increase his “quan wei.” We believe that Xi made political compromises with his opponents to ensure that the Fourth Plenum could be convened.
3. Escalating police violence in Hong Kong and other developments have resulted in the occurrence of near-Tiananmen incidents, such as the police shooting and critical wounding of a 21-year-old protester, and the police siege of the Chinese University of Hong Kong and the Hong Kong Polytechnic University (see here and here). We previously analyzed that Xi’s political rivals will benefit from Tiananmen or near-Tiananmen events in Hong Kong.
We consider the anti-extradition bill protests a Black Swan event for the CCP regime.
4. The recently leaked “Xinjiang Papers” hurt Xi Jinping and the CCP’s international image with their revelation of damaging information about the mass detention of Uyghur Muslims. The leak, however, benefits Xi’s political rivals. We believe that the leak of the “Xinjiang Papers” could later be viewed as a Black Swan event for the CCP.
In addition to political risks, official Chinese data and other financial and economic news indicate that the Chinese economy is continuing to worsen in the third quarter of the year. While the regime might still be some ways away from economic collapse, political crisis in the CCP could potentially trigger a regime-threatening financial crisis.
External risks
1. The United States has been ramping up “whole-of-government” measures to confront the CCP threat.
Of particular note is Secretary of State Mike Pompeo’s “China Challenge” speech at the Hudson Institute’s Herman Kahn Award Gala in New York City on Oct. 30 where he clearly laid out how the U.S. views the CCP and General-Secretary Xi Jinping. In analyzing Pompeo’s speech, we wrote, “if the U.S. continues along the trajectory as outlined in Pompeo’s speech, then the Sino-U.S. rivalry will shape out to be ‘not just a trade war or a tech war, but a critical battle of ideology, value systems, and morality.’”
Another recent and pivotal U.S. action is the near-unanimous passing of the 2019 Hong Kong Human Rights and Democracy Act by the U.S. Congress. The legislation, which is pending the signature of President Donald Trump at the time of writing, could decisively shape how the CCP handles the anti-extradition bill protests, which in turn threatens the regime.
2. The defecting of PRC spy Wang Liqiang to Australia directly threatens the CCP’s intelligence and political interference operations in Australia, Hong Kong, and Taiwan, and indirectly threatens the CCP’s external influence and interference operations on the whole. We believe that Wang’s defection and intel revelations could prove to be a Black Swan event for the CCP.
Hong Kong—the CCP’s ‘Berlin Wall’ moment?
The external and domestic risks facing the CCP and Xi Jinping are coming to a head in Hong Kong.
1. Speaking in Brazil on Nov. 14, Xi made it clear that the Hong Kong government’s priority is to end violence and restore order in the city. And starting in early November, the Hong Kong police have been making mass arrests and using increasingly hardline measures (brutal beatings, more tear gas and rubber bullets, threatening to fire live rounds, etc.) against the protesters.
We believe that there are several reasons why Beijing and the Hong Kong government are making more forceful efforts to suppress the anti-extradition bill protests:
1.1. The five-month-long protests have already plunged Hong Kong into a recession and are affecting the city’s status as an international trading hub. Based on our observation, the Hong Kong stock market has not been badly impacted by the unrest partially due to what appears to be PRC “assistance.” The PRC, however, cannot indefinitely prop up the Hong Kong market or economy, and a weak Hong Kong economy will affect the worsening Chinese economy. Thus, Beijing has a strong incentive to utilize increasingly hardline measures to quickly bring an end to the protests.
1.2. Popular support for the protest movement has not subsided five months after the demonstrations started. If anything, the Hong Kong people and protesters are becoming even more determined to secure the protesters’ five demands and resist the CCP. Since the suspicious death of Hong Kong student Alex Chow Tsz-lok in early November, slogans like “Hong Kong people, take revenge!” and “Heaven will destroy the CCP” (天滅中共) have become popular protest chants. The latter slogan is particularly worrisome for the CCP, which fears a full-blown revolution in Hong Kong and the spreading of the revolution into the mainland. Hence, the CCP now has an even stronger imperative to suppress the protests as quickly as possible, even if it means getting the Hong Kong police to use mainland-style “stability maintenance” methods.
We wrote in July that there is a low chance of the protest movement in Hong Kong “evolving into a full-blown revolution unless the CCP regime takes drastic action to suppress the city.” The implementation of mainland-style “stability maintenance” in Hong Kong, however, is precisely the sort of drastic action that ferments what the CCP fears most—a full-blown revolution.
1.3. The CCP factional struggle has a role in shaping the escalation of violence in Hong Kong.
Before late August, it seemed that Xi Jinping did not intend to adopt an overly aggressive and uncompromising approach to resolving the Hong Kong protests (see insider information from a CCP princeling), particularly because going full hardline was against his interests at the time. However, after America showed a willingness to tolerate police action (but not PLA intervention) in Hong Kong and persist with trade talks, and with the political stalemate in the CCP still unbroken after the Fourth Plenum, Xi now has incentives to approve and double-down on the Hong Kong government’s use of hardline tactics. We believe that Xi very likely hope that escalated police action and mass arrests are the way to go to end the protests in Hong Kong in the shortest time possible; the sooner the protests end, the faster the world will forget about the CCP-backed Hong Kong government’s brutal and controversial suppression.
1.4. Barring unforeseen circumstances, the 2019 Hong Kong Human Rights and Democracy Act will become law in December even if President Trump vetos or opts not to sign it. This gives the CCP and the Hong Kong government greater impetus to end the protests and return Hong Kong to normalcy as soon as possible to deny the U.S. reasons to sanction Hong Kong and Chinese officials for their role in suppressing the protests.
2. President Trump made it clear in a Nov. 22 interview on Fox and Friends that he does not want the Hong Kong situation to affect the signing of a Sino-U.S. trade deal. “We have to stand with Hong Kong, but I’m also standing with President Xi [Jinping], he’s a friend of mine. He’s an incredible guy, but we have to stand…I’d like to see them work it out, ok? I stand with freedom, I stand with all of the things that I want to do, but we are also in the process of making one of the largest trade deals in history. And if we could do that it would be great,” he said.
Trump faces two major hurdles to reaching a “phase one” trade deal with China. First, time is not on the side of Trump or Xi—the deal will likely have to be done before additional U.S. tariffs go into effect on Dec. 15 and before the Hong Kong Human Rights and Democracy Act, which the CCP has strongly condemned, is passed (in early December if Trump does not sign the bill in the 10 days after Congress passed it on Nov. 20). Second, Xi might not be able to overcome domestic political opposition and accede to the key U.S. demands required to seal the deal.
Should a Sino-U.S. deal prove impossible to attain, Trump could very possibly seek to turn the Hong Kong situation to his advantage, starting with the signing and using of the Hong Kong Human Rights and Democracy Act. The prospect of strong United States intervention in Hong Kong would weaken the CCP’s hand against the protesters and could bring about a “Berlin Wall” moment for the regime.
3. In a Nov. 20 article by The New York Times about the passage of the Hong Kong Human Rights and Democracy Act and the Sino-U.S. “phase one” trade agreement, Trump’s top external China advisor Michael Pillsbury said, “There’s an ongoing debate in Beijing between reformers who would like phase one and hard-liners who see themselves surrounded by hostile forces led by the United States, including in Hong Kong.”
Pillsbury’s remarks, along with Trump’s reluctance to go hard on the CCP over Hong Kong, his consistency in restating his friendship with Xi Jinping, and the timing of Vice President Mike Pence’s second China policy speech, suggest that the Trump administration is accounting for factional politics in the CCP when dealing with China. While the Trump administration has not identified who the “reformers” or “hard-liners” are in the CCP, we believe that the signals sent by the administration on Xi shows that Trump still trusts and believes that Xi does want reform but is being hampered by political opposition, particularly on issues like Hong Kong. Thus, by being friendly with Xi and refraining from overly criticizing Beijing over its handling of Hong Kong, Trump is likely looking at the long-term and the big picture—if Xi can ram through structural reforms, then many fundamental PRC and PRC-related world problems (including Hong Kong) can be resolved.
The Trump administration, however, can do much better if what we have identified in the previous paragraph is indeed its current strategy with regard to Xi Jinping and the CCP.
First, the Trump administration needs a deeper understanding of factionalism in the CCP; factionalism is far more complex than simply “reformers” and “hard-liners.”
Second, while Trump can show Xi tolerance, he still needs to get tough on the CCP at crucial times and on critical issues (for instance, when the Hong Kong police escalated violence against protesters in early November) to give Xi pressure to reform. Without sufficient pressure, even the most “genuine” reformer will get comfortable with the status quo and become less inclined to take action.
Third, the Trump administration can exploit factionalism in the CCP and use novel solutions to steer Xi Jinping into a position where implementing self-initiated reforms becomes his best option for self-preservation. Secretary of State Mike Pompeo suggested that the Trump administration could consider unorthodox approaches to tackling the CCP threat in his “China Challenge” speech. “We have to think anew, and unconventionally, about the People’s Republic of China,” he said.
What’s next
Both Xi Jinping and President Trump have short-term domestic reasons for wanting to sign a trade deal (commitment is another issue altogether), preferably before the year is out. However, we believe that the political crisis in the CCP would prevent Xi from reaching an agreement with Trump. And if a trade deal cannot be reached, then the Sino-U.S. “Battle of Waterloo” will likely begin in earnest.
Businesses, investors, and governments must closely track CCP factional struggle developments to turn Black Swans into Gray Rhinos, and avoid being caught off-guard by tremendous change in China.
