◎ We expect to see many of the forecasts made in our China 2020 outlook to be verified over the second half of the year.
In our China 2020 outlook published on Dec. 31, 2019, we identified six broad trends for the coming year. Most of the trends have either been verified or are on track to being verified by developments in the first half of 2020.
Below we revisit the six broad trends and highlight the important corroborating developments:
1. China’s economy will continue to deteriorate on the whole in downward fluctuations. Several economic Gray Rhinos could come charging in 2020. While the Chinese Communist Party will further open up China’s markets and liberalize its financial sector, it will be unable to stem China’s economic decline; in the short term, however, the markets and economy could show some false signs of “recovery.”
a) China’s GDP officially shrank by 6.8 percent in the first quarter of 2020, the worst economic performance for a single quarter since the People’s Republic of China began publishing those figures in 1992. China’s steep economic decline can be attributed to the Wuhan coronavirus pandemic, the Sino-U.S. trade war, and Beijing’s inability to push through economic reform.
b) Revelations and “admissions” by the CCP during the Two Sessions meeting and after indicate that the Chinese economy is in more dire straits than what the official figures show:
- PRC premier Li Keqiang did not set a GDP growth target for the year, an unprecedented move.
- Li said in his May 22 government work report that the PRC government will focus on the “six guarantees,” with a priority on guaranteeing employment and basic livelihood.
- Li said that the PRC government needs to “work to effectively prevent and control major financial risks.”
- Li said that government at all levels “must really tighten [their] belts.”
- Profits for state-owned enterprises fell 63 percent to 412.01 billion yuan in the first four months of 2020 as compared to the same period from a year ago, according to data released by the PRC Ministry of Finance on May 25.
- On May 28, mainland media outlets reported that so-called “national civilized city” (全国文明城市) evaluation for 2020 will not include “road-side businesses, markets, and mobile hawkers” in its grading benchmarks.
- Also on May 28, Li Keqiang said during a press conference that China has 600 million people living on a monthly income of 1,000 yuan, a sum that is “hardly enough to cover monthly rent in a mid-sized Chinese city.”
c) Meanwhile, the CCP also took steps to open up China’s markets and liberalize its financial sector:
- On May 7, the People’s Bank of China (PBoC) and the State Administration of Foreign Exchange (SAFE) announced a new set of regulations that give foreign institutions unlimited access to Chinese stocks and bonds.
- Li Keqiang said in his government work report on May 22 that the PRC government will speed up the development of the Hainan free trade port, pilot economic zones in central and western China, and promote trade and investment “liberalization and facilitation.”
- On June 1, the PRC unveiled a master plan for the Hainan free trade port.
2. The CCP factional struggle will intensify and Xi Jinping will face increased personal political risks. Clashes in the CCP could lead to political Black Swans.
Based on our analysis, the coronavirus outbreak triggered another change in the political rules of the game in the CCP regime, resulting in a shift in the nature of the factional struggle between Xi Jinping and his political rivals from “you die, I live” (你死我活) to “perish together” (同歸於盡). We believe that the continually escalating factional struggle will produce political Black Swans that will have far-reaching implications for the PRC and the world.
3. The situation in Hong Kong will not quiet down. The PRC’s pernicious strategies and tactics to quell protests will anger the people of Hong Kong and inspire more unrest. Unrest in Hong Kong could potentially spread to the mainland.
a) The people of Hong Kong have been holding protests and rallies on a fairly regular basis since the start of 2020, including a protest march on Jan. 1 that drew an estimated 1.03 million participants. The Hong Kong people continued to hold small-scale protests and rallies after the coronavirus outbreak. Near the end of May, thousands of people took to the streets to protest the PRC National People’s Congress’s proposed national security law for Hong Kong.
b) During the Two Sessions, the NPC voted overwhelmingly in favor of the decision to allow its standing committee to draft national security legislation for the Hong Kong Special Administrative Region. The PRC’s decision angered many in Hong Kong and has led many (including United States President Donald Trump) to observe that Beijing has replaced “one country, two systems” with “one country, one system.”
4. The PRC could attempt a “Fourth Taiwan Strait Crisis.” While we believe that the chances of a war breaking out are extremely low, we do not rule out the occurrence of minor or “near miss” military incidents (擦槍走火). A PRC-ROC crisis will likely bring America, Taiwan, and Japan closer and boost Taiwan’s international profile.
a) Starting in January, the CCP stepped up military maneuvers in the Taiwan Strait and used rhetoric that indicated it was paving the way to provoke a “Fourth Taiwan Strait Crisis” around the period of ROC president Tsai Ing-wen’s inauguration ceremony on May 20 (see here and here for analysis).
The CCP, however, later reduced its military activity and reined in its belligerent rhetoric around the end of April to May, likely due to increased U.S. military activity in the region. Most prominently, the U.S. Pacific Fleet announced on May 11 that it had dispatched all of its forward-deployed submarines in the Western Pacific region, an unusual step because the location of U.S. submarines is usually kept secret. It is likely that the Pentagon was looking to warn adversaries that the U.S. is prepared to counter or deter the PRC from making moves in the Taiwan Strait or in the South China Sea by making public where the U.S. Pacific Fleet’s submarines were deployed.
b) On March 18, American Institute in Taiwan (AIT) Director Brent Christensen and Taiwanese foreign minister Joseph Wu signed a U.S.-Taiwan Joint Statement “to further strengthen U.S.-Taiwan consultation and cooperation on combating the COVID-19 virus.” In April, the U.S. State Department said in a statement that high-level officials from the AIT, the State Department, the Taiwan Economic and Cultural Representative Office, and the Taiwan Ministry of Foreign Affairs had convened a virtual forum on expanding Taiwan’s participation on the global stage on March 31.
c) Japan’s annual foreign policy report submitted on May 19 described Taiwan as an “extremely important partner,” an upgrade in status from the previous year’s description of “crucial partner and an important friend,” according to a Nikkei Asian Review report. The 2020 report also gave a full page to Taiwan, or twice as much space as the 2019 report.
d) On June 1, Taiwan, Japan, and the United States marked the fifth anniversary of the Global Cooperation and Training Framework, a platform that was established to allow Taiwan to “contribute to global problem solving and share its expertise with partners across the region,” according to the AIT website. AIT director Brent Christensen said at the event that the U.S. has always supported Taiwan’s participation in international organizations and has fought to increase Taiwan’s international space. Japan-Taiwan Exchange Association chief representative Hiroyasu Izumi said, “Japan will not leave Taiwan and cannot leave Taiwan. Japan and Taiwan must go together.”
5. The signing of trade deals between China and the United States will not alter the overall trajectory of escalation in the Sino-U.S. rivalry.
a) On May 20, the White House issued the “U.S. Strategic Approach to the People’s Republic of China,” a 16-page document that recognizes the failures of America’s previous engagement policy and presents a new “competitive approach” to China “based on a clear-eyed assessment of the CCP’s intentions and actions, a reappraisal of the United States’ many strategic advantages and shortfalls, and a tolerance of greater bilateral friction.”
b) On May 29, U.S. President Donald Trump announces a series of actions against China, including suspending the entry of PRC graduate students and researchers involved in the PRC’s “military-civil fusion strategy,” eliminating U.S. preferential treatments for Hong Kong, and the sanctioning of PRC and Hong Kong officials who are directly or indirectly involved in eroding Hong Kong’s autonomy and freedom.
6. American leadership, pressure, and influence will give rise to a global “anti-CCP bloc.” U.S. foreign policy could create a new international order and world economic system.
a) On May 9, the U.S. invited 25 countries to participate in its Rim of the Pacific exercises in Hawaii in mid-August. The participating countries are Australia, Brunei, Canada, Chile, Colombia, France, Germany, India, Indonesia, Israel, Japan, Malaysia, Mexico, Netherlands, New Zealand, Peru, South Korea, Philippines, Singapore, Sri Lanka, Thailand, Tonga, United Kingdom, United States and Vietnam. Noticeably, the PRC was not invited to RIMPAC.
b) In announcing actions against China on May 29, President Trump said that the U.S. would be terminating its relationship with the World Health Organization and would be redirecting funds to the WHO “to other worldwide and deserving, urgent, global public health needs.”
c) On May 30, Trump said that he was postponing a Group of Seven summit to September or later and was also looking to invite Australia, Russia, South Korea and India to the meeting.
2020 Second Half Trends
We expect to see many of the forecasts made in our China 2020 outlook to be verified over the second half of the year. The coronavirus outbreak, the ramping up of the Sino-U.S. “new cold war,” and the Hong Kong situation will almost certainly affect the pace of the trends which we identified earlier and seriously threaten the CCP regime.
Below we present additional forecasts for the second half of 2020 (some of the forecasts were first made in a May 23, 2020 livestream event [Chinese language only]).
1. A second wave of coronavirus or other deadly infectious diseases could break out in mainland China towards the late summer to fall period (after mid-August) as PRC and global epidemic control measures relax. If the second wave is deadlier than COVID-19, the number of people infected globally could be in the tens of millions or even hundreds of millions range. Senior CCP officials will unlikely escape the second wave unscathed (there could be a number of infections or deaths in the senior official ranks).
2. China’s economy will deteriorate more rapidly if there is a second wave of coronavirus or other deadly infectious diseases. Under these circumstances, the PRC central government will not be able to adequately aid local governments, and a degree of “decentralization” or local government “autonomous rule” could emerge.
Local government “autonomous rule,” however, does not necessarily mean that China will see a return of the “warlordism” that plagued the Republican era because the military (People’s Liberation Army) is under the CCP’s control. That being said, it cannot be ruled out that local PLA units will act “autonomously” on occasion to secure food and supplies in the event of a second deadly epidemic.
3. The United States and the world will continue to press the CCP for greater transparency over the COVID-19 outbreak and to allow an international investigation into the origins of the coronavirus. The Trump administration will likely impose sanctions on the PRC and take other retaliatory actions to hold the regime accountable for the coronavirus pandemic. A second wave of coronavirus or other deadly infectious diseases will strengthen the Trump administration’s resolve and inspire quicker and stronger action to hold the PRC accountable. U.S. and even global sanctions will worsen China’s economic decline and other PRC domestic woes.
4. The CCP’s move to impose a national security law on Hong Kong and effort to secure the passage of Article 23 of the Basic Law will inspire greater resistance in Hong Kong and convince the U.S. and other countries to ramp up pressure on the CCP regime. The harder and faster the CCP clamps down on Hong Kong, the sooner its “Berlin Wall” moment will arrive. Once the “Berlin Wall” moment is here, it cannot be ruled out that Hong Kong will “break away” from the PRC central government’s control and govern itself autonomously.
5. The CCP factional struggle will intensify over the Hong Kong issue, other geopolitical problems, and worsening domestic conditions on the mainland. A second wave of coronavirus or other deadly infectious diseases could create the conditions that push the factional struggle to a breaking point, resulting in the emergence of political Black Swans.
6. The CCP is beset with a “perfect storm” of problems that are creating conditions which could result in regime collapse. At the time of this article’s publication, we estimate that there is a 30 percent chance that the CCP regime will collapse by the end of 2020, and a 50 percent chance of regime collapse before June 2021.
