Analyzing the Biden-Xi summit in San Francisco; Xi wields ‘sticks’ to defuse financial risks but offers no ‘carrots,’ scaring investors

  1   Analyzing the Biden-Xi summit in San Francisco

On Nov. 15, President Joe Biden and PRC leader Xi Jinping held a summit at the Filoli Estate in Woodside, California on the sidelines of the Asia-Pacific Economic Cooperation summit in San Francisco.

The Biden-Xi meeting lasted for nearly four hours, according to news reports. Biden later described his talks with Xi as being “some of the most constructive and productive discussions we’ve had” and added that they made “real progress.”

  Official readouts

The White House readout of the Biden-Xi meeting indicated that President Biden mostly rehashed his administration’s current stance on China and other topics like Russia-Ukraine and Israel-Hamas. Noteworthy points in the readout include:

• Biden said that the “world expects the United States and China to manage competition responsibly to prevent it from veering into conflict, confrontation, or a new Cold War.”
• Biden raised concerns about the PRC’s human rights abuses, including in Xinjiang, Tibet, and Hong Kong.
• Biden said that the U.S. “one China” policy has not changed. He also said that the U.S. opposes any unilateral changes to the status quo from either side, expects cross-strait differences to be resolved peaceful, that the PRC should be restrained in its use of military activity in and around the Taiwan Strait, and that the world has an interest in peace and stability in the Taiwan Strait.
• Biden raised concerns about the PRC’s unfair trade policies, non-market economic practices, and punitive actions against U.S. firms.
• Biden emphasized that the U.S. will take necessary actions to prevent advanced U.S. technologies from being used to undermine American national security, but without “unduly limiting trade and investment.”
• Biden and Xi “stressed the importance of responsibly managing competitive aspects of the relationship, preventing conflict, maintaining open lines of communication, cooperating on areas of shared interest, upholding the UN Charter, and all countries treating each other with respect and finding a way to live alongside each other peacefully.”

The PRC foreign ministry readout of the meeting reiterated some current CCP propaganda and the regime’s stance on Sino-U.S. relations. Notable points in the readout include:

• Xi said that the “world is big enough to accommodate both countries.”
• Xi said that the PRC “will not take the old path of colonization and plundering, or the wrong path of seeking hegemony with growing strength” and has “no plan to surpass or unseat the United States.” Therefore, the U.S. “should not scheme to suppress and contain China.”
• Xi called for assuming a “new vision” (later referred to as the “San Francisco vision”) and “build together five pillars for China-U.S. relations,” including:
  • Jointly developing a right perception;
    • The PRC is “committed to having a stable, healthy and sustainable relationship” with the U.S., but the PRC also has “interests that must be safeguarded, principles that must be upheld, and red lines that must not be crossed.”
  • Jointly managing disagreements effectively;
    • Both sides should “appreciate each other’s principles and red lines, and refrain from flip-flopping, being provocative, and crossing the lines.”
  • Jointly advancing mutually beneficial cooperation;
  • Jointly shouldering responsibilities as major countries;
  • Jointly promoting people-to-people exchanges.
• Xi said that the Taiwan question “remains the most important and most sensitive issue in China-U.S. relations” and that the U.S. should “take real actions to honor its commitment of not supporting “Taiwan independence,” stop arming Taiwan, and support China’s peaceful reunification.” He added that the PRC will “realize reunification” and “this is unstoppable.”
• Xi criticized the U.S. for “seriously hurting China’s legitimate interests” through “export control, investment screening, and unilateral sanctions.” He added that the PRC’s “development and growth, driven by its own inherent logic, will not be stopped by external forces.”
• Xi and Biden “stressed the importance of all countries treating each other with respect and finding a way to live alongside each other peacefully, and of maintaining open lines of communication, preventing conflict, upholding the U.N. Charter, cooperating in areas of shared interest, and responsibly managing competitive aspects of the relationship.”

  Summit agreements

According to the official readouts from both sides and news media reports, Xi Jinping and Biden agreed to:

• Have high-level communications with each other. “He and I agreed that each one of us can pick up the phone call directly and we’ll be heard immediately,” Biden said.
• Cooperate in combating global illicit drug manufacturing and trafficking, including fentanyl.
• Resume high-level military-to-military communication, including telephone conversations between theater commanders. “We’re back to direct, open clear direct communication on a direct basis,” Biden said.
• Address the risks of advanced artificial intelligence systems and improve AI safety through Sino-U.S. government talks.
• Work together to accelerate efforts to tackle climate change.
• Have their teams follow up on their discussions in San Francisco with continued high-level diplomacy and interactions. This includes visits in both directions and ongoing working-level consultations in key areas, including on commercial, economic, financial, Asia-Pacific, arms control and nonproliferation, maritime, export control enforcement, policy-planning, agriculture, and disability issues.
• Work towards significantly increasing scheduled passenger flights in early 2024, restore full implementation of the U.S.-China air transportation agreement, and encourage the expansion of educational, student, youth, cultural, sports, and business exchanges.
• Xi said that the PRC is ready to invite 50,000 young Americans to study in mainland China over the next five years.
• Xi said that China would send its giant pandas to the San Diego Zoo, but did not specify a date.

  ‘Substantial’ Taiwan discussion

Reuters reported that a U.S. official said President Biden argued to maintain the status quo and for the PRC to respect Taiwan’s electoral process. In response, Xi Jinping said, “Look, peace is all well and good, but at some point we need to move towards resolution more generally.”

Other media outlets (see here, here, and here) reported a senior U.S. official as saying that Biden and Xi had a “substantial exchange” about Taiwan and Xi noted that he had heard reports that China was planning military action against Taiwan in 2027 or 2035. “There seemed to be a slight amount of exasperation in [Xi’s] comments,” the official said, adding that Xi “basically said there are no such plans” and that no one had informed him about it.

  Xi ignores ‘trust’ question; Biden calls Xi a ‘dictator’ again

ABC News senior White House correspondent Selina Wang tweeted that she asked Xi Jinping in Mandarin, “Do you trust Biden?” after Biden and Xi made their opening remarks during the meeting. Wang said that Xi took out his translation earpiece to hear her question, but did not respond.

When asked by reporters about whether he trusts Xi at an event after their meeting, Biden said, “Trust but verify, as the old saying goes. That’s where I am.”

When asked whether he thought Xi was a dictator, Biden said, “He is.” Biden added, “Well, look, he’s a dictator in the sense that he is a guy who runs a country that is a communist country that’s based on a form of government totally different from ours.”

When asked about Biden’s latest “dictator” comment, PRC foreign ministry spokeswoman Mao Ning said it was “extremely erroneous” and an “irresponsible political maneuver, which China firmly opposes.” Mao added, “There are always ill-intentioned people who try to drive a wedge between China-U.S. relations, which will not succeed.”

  Xi’s entourage

Notable senior officials who accompanied Xi Jinping in San Francisco include:

• Cai Qi, Politburo Standing Committee member and CCP General Office director.
• Wang Yi, foreign affairs minister and director of the Office of the Central Foreign Affairs Commission.
• Jiang Jinquan, director of the Central Policy Research Office.
• Zheng Shanjie, director of the National Development and Reform Commission.
• Wang Wentao, commerce minister.
• Lan Fo’an, finance minister.
• Ma Zhaoxu, first vice minister of foreign affairs.
• Xie Feng, PRC ambassador to the United States.
• Hua Chunying, assistant foreign affairs minister and foreign ministry information department director.
• Lu Luhua, Xi’s secretary.

In comparison, the senior officials who accompanied Xi during his meeting with Biden in Bali in 2022 include:

• Ding Xuexiang, director of the CCP General Office.
• Wang Yi, foreign minister.
• He Lifeng, director of the National Development and Reform Commission.
• Ma Zhaoxu, vice foreign minister.
• Xie Feng, vice foreign minister.
• Hua Chunying, assistant foreign affairs minister and foreign ministry information department director.
• Lu Luhua, Xi’s secretary.

  Big picture

The Biden-Xi summit in San Francisco was held as the internal and external problems facing Xi Jinping and the CCP appeared to have worsened, including signs of a spreading financial crisis, deepening real estate sector woes, continued economic deterioration, and intensifying factional struggle.

  Our take

1. At a glance, the Biden administration appears to have emerged as the clear “winner” of the Biden-Xi summit. The concessions made by Beijing in some areas (military-to-military communications, leader-to-leader communications, etc.) allow the Biden administration to claim that its pressure on the PRC and “intense diplomacy” have led to the restoration of some “guardrails” to the bilateral relationship after Sino-U.S. tensions reached a low point following the PRC spy balloon incident. President Joe Biden also managed to improve his image of being “tough on China” by again calling Xi a “dictator” of a communist country right after establishing goodwill with him at their meeting.

Yet who actually came out ahead of the Xi-Biden summit will only become clearer in assessing how the Xi leadership goes about delivering on its concessions. The Trump administration soon found out after the Xi-Trump summit at the G20 meeting in Argentina that the Xi leadership could not follow through with its trade pledges, forcing President Donald Trump to increase tariffs the following year. Xi’s pledge to Trump to crack down on the fentanyl issue also did not appear to be effective, as seen from how fentanyl was again brought up by the Biden administration during the latest Biden-Xi meeting.

2. By both calling for “responsibly managing competitive aspects of the relationship,” the Biden administration and the Xi leadership have indirectly acknowledged in San Francisco that heightened Sino-U.S. competition (the “new cold war”), and not “engagement” as per the four decades after President Richard Nixon “normalized” relations with the PRC, is the status quo now and in the foreseeable future.

We previously wrote that we do not expect the Biden-Xi summit to “dramatically change the current deterioration of Sino-U.S. relations as both sides prioritize the safeguarding of their respective national security and remain unwavering in their respective ideological stances.” The summit and its aftermath further validate our earlier assessment.

Businesses, investors, and governments must recognize the present geopolitical reality and account for increased political risks in China as “great power competition” plays out over the long haul. Put another way, the current “improvement” in Sino-U.S. relations is very likely only a temporary “upswing” on a curve that is fluctuating downwards. Both sides are set to have more intense confrontations down the road as long as they remain committed to preserving national security and upholding their ideology. Hence, investors and businesses in particular should not presume that things are heading back to “business as usual” again following the “positive” Biden-Xi summit, and need to instead re-evaluate their plans in light of the current geopolitical climate.

3. Xi Jinping’s remarks, concessions, and entourage in San Francisco suggest that he was quite invested in restoring Sino-U.S. relations and securing a much-needed tactical pause in the “new cold war.” Xi needs the pause to gain time to fix the PRC’s economic crisis and other problems so that the CCP is better equipped to “delay and wait for change” (以拖待變) before advancing its domination agenda at a later date and when better opportunities are available.

The presence of the PRC commerce minister and finance minister at this Biden-Xi summit seems to be Xi Jinping’s way of signaling that he is serious about improving economic and financial ties with the United States. Xi’s gesture is almost certainly motivated in part by the rapidly deteriorating economic and financial situation in China and his need for foreign investments and trade to at least slow down the decline.

Xi’s remarks about having “no plan to surpass or unseat the United States” and assurance that the PRC “will not take the old path of colonization and plundering, or the wrong path of seeking hegemony with growing strength” are part of the CCP’s rhetorical strategy of portraying itself as a “peaceful” and “non-threatening” entity while it works to outflank its enemies. The CCP cannot be taken at face value with statements that seem “great, glorious, and correct” (偉光正) because it has always acted in accordance with “deception, perniciousness, and struggle” (假惡鬥).

Indeed, Xi and the CCP’s true intentions are obliquely revealed in other remarks by Xi in San Francisco. For one, Xi’s invitation to 50,000 young Americans to study in mainland China over the next five years, while appearing to be nothing more than a youth and cultural exchange on the surface, is almost certainly a disguised influence operation designed to artificially generate “goodwill” towards the PRC in the U.S. through the indoctrination of American youth in Chinese schools. Also, Xi’s claim that the PRC’s “development and growth, driven by its own inherent logic, will not be stopped by external forces” is really a declaration of intent that the CCP regime will vigorously improve its technological innovation, financial power, and self-sufficiency to overcome its current crises and eventually become strong enough to break free of U.S. “containment” and hegemony.

4. Xi Jinping’s remarks about Taiwan—including his observation that Taiwan “remains the most important and most sensitive issue in China-U.S. relations” and his “exasperation” in declaring that he has no plans to invade the island per the dates suggested in reports—affirm our analysis that Xi presently prefers to achieve “peaceful reunification” with Taiwan and is concerned about being provoked into ordering military action that will disastrously impact his and the PRC regime’s interests.

Xi’s explicit statement of his intentions towards Taiwan, however, could embolden the international “anti-Xi, not anti-CCP” crowd to push him on this pressure point and create domestic political problems for Xi over this issue.

  2   Xi wields ‘sticks’ to defuse financial risks but offers no ‘carrots,’ scaring investors

  Tightening financial regulation

Nov. 3
The China Securities Regulatory Commission (CSRC) released a revised draft of regulations for calculating risk control indicators of securities companies (證券公司風險控制指標計算標準規定 [修訂稿]) for public comment.

Mainland media 21st Century Business Herald reported an insider at a leading securities firm as making the following comments on the adjustment of risk control indicators: “On the one hand, the risk control indicators need to be further adjusted upward for some businesses where the actual risk is found to be higher than the expected risk in practice, such as over-the-counter (OTC) derivatives. On the other hand, some mature business risk control indicators can be appropriately adjusted downward to enhance the efficiency of capital utilization.”

Nov. 11
The person in charge of a relevant department at the National Administration of Financial Regulation (NAFR) answered questions from reporters regarding measures for the prevention and control of risks in criminal cases involving banking and insurance institutions (銀行保險機構涉刑案件風險防控管理辦法) that were issued on Nov. 2.

The measures, whose document contained five chapters and 40 articles, sought to:

• Clarify the goals and basic principles for risk prevention and control in criminal cases.
• Highlight the main responsibilities of legal persons.
• Clarify the main tasks of risk prevention and control of criminal cases involving banking and insurance institutions.
• Clarify the relevant division of responsibilities of regulatory authorities.

A person in charge of a relevant department at the NAFR said that the measures emphasize the strengthening of risk prevention of criminal-related cases at the source, comprehensive prevention, and full-chain (i.e. the entire securities management and trading process) prevention. The person added that the measures further clarify the responsibilities and tasks of boards of directors, boards of supervisors, senior management, etc. in the prevention and control of risks in criminal cases, and fully mobilize their subjective initiative in risk prevention and control.

Nov. 14
Bloomberg News reported that PRC regulators have asked securities firms to stop expanding their OTC derivatives operations involving individual stocks, citing people familiar with the matter. The move limits a profitable business for the brokerage industry and creates another setback for hedge funds that deploy long-short strategies.

People with knowledge of the matter said that regulators told multiple major brokerages in the week of Nov. 6, 2023 to cap OTC businesses including total return swaps and options at the current levels. The people added that similar restrictions were imposed on lending shares for short selling and some proprietary trading activities. The people also said that contracts only linked to stock indices or exchange-traded funds were exempted.

The people said that in addition to the guidance on OTC derivatives, brokerages notified some quantitative hedge funds that they could not expand further the size of swap agreements that add leverage to the clients’ so-called market-neutral products. The caps limit “Direct Market Access,” an increasingly popular business, that has helped quants boost returns in a difficult market environment.

Nov. 16
Bloomberg reported that the PRC authorities told some nationwide lenders to cap interest rates on interbank funding, citing people familiar with the matter. The people said that at least two national banks were told by regulators in the week of Nov. 6 to offer rates on one-year negotiable certificates of deposit at no higher than 2.57 percent.

The People’s Bank of China said that “the market rumor is untrue” in responding to Bloomberg’s request for comment. The central bank previously made a sizable cash injection to calm the market after the unexpected liquidity crunch in October.

Nov. 17
The CSRC a draft of measures for the supervision and administration of derivatives trading (衍生性商品交易監督管理辦法 [二次徵求意見稿]) and solicited public comments for a second time (first time in March 2023). The measures seek to strictly crack down on the use of derivatives as a “channel” to circumvent the regulation of the securities and futures markets.

  Financial sector corruption

Nov. 7
An Qingsong (age 54), the former Party Secretary and president of the China Futures Association, was placed under review and investigation.

According to publicly available information, An joined the CSRC in November 1995 and worked there for 28 years. At the CSRC, An served in its various departments, local bureaus, and management units. An was also one of three persons in charge of the CSRC’s comprehensive deepening capital market reform office at the Shanghai Stock Exchange STAR Market when it was established in 2019.

Nov. 10
1. Chen Gongyan (61, retired in July 2022), the former Party Secretary and chairman of China Galaxy Securities, was placed under investigation.

China Galaxy Securities ranks 326th on the 2023 Fortune China 500 list. Chen previously served at the CSRC for 17 years.

2. Listed company Hangzhou Zhongheng Electric announced that the company’s actual controller Zhu Guoding had been placed under residential surveillance by the public security organs on suspicion of manipulating the securities and futures market.

  Capital outflows

Nov. 10
Mainland media Yicai reported that Vanguard Group confirmed to it that news of Vanguard’s withdrawal from the Chinese market is true and it will shut down its offices in China.

Nov. 16
1. Alibaba founder Jack Ma’s family trusts JC Properties and JSP Investment plan to sell 10 million American Depositary Shares of Alibaba Group Holdings for about $871 million, according to regulatory filings.

On the same day, Alibaba announced that it had reversed a plan to fully spin off its cloud unit (Cloud Intelligence Group) and that it was putting on hold plans for an initial public offering of its Freshippo groceries business.

In the evening of Nov. 17, a lawyer from Jack Ma’s office told media outlets that the family trusts’ plan to sell Alibaba shares was a “long-term plan” and Ma is firmly optimistic about Alibaba. The lawyer added that Alibaba’s current stock price was far lower than the actual value of the company and that Ma would firmly hold on to Alibaba shares.

***
Alibaba’s financial reports in recent years no longer provide data on Jack Ma’s shareholdings because Ma’s held less than 5 percent of shares (4.5 percent) in the company as of February 2022 and Alibaba is no longer required to disclose that information.

2. Semi-official mainland media The Paper cited unnamed sources as saying that Blackstone is selling off 11 logistic parks and other assets in China valued at over 10 billion yuan. The Paper said that Blackstone had not responded to its press inquiry about the sale before publication time.

  Xi speaks to business elites in San Francisco

Nov. 15
Xi Jinping attended a dinner event at a San Francisco hotel with more than 300 U.S. business executives and other guests.

Xi received a standing ovation before he spoke to the attendees. The attendees also applauded his speech several times. Notable parts of Xi’s speech include:

• Xi said, “I am convinced that once opened, the door of China-U.S. relations cannot be shut again.” He also said, “The more difficulties there are, the greater the need for us to forge a closer bond between our peoples and to open our hearts to each other … We must not erect barriers or create a chilling effect.”
• Xi said, “I have always had one question on my mind: How to steer the giant ship of China-U.S. relations clear of hidden rocks and shoals, navigate it through storms and waves without getting disoriented, losing speed or even having a collision?”
• Xi said, “China is ready to be a partner and friend of the United States.”
• Xi said, “Peaceful coexistence is a basic norm for international relations, and is even more of a baseline that China and the United States should hold on to as two major countries … China never bets against the United States, and never interferes in its internal affairs … Likewise, the United States should not bet against China, or interfere in China’s internal affairs.”
• Xi said, “China is pursuing high-quality development, and the United States is revitalizing its economy. There is plenty of room for our cooperation, and we are fully able to help each other succeed and achieve win-win outcomes.”
• Xi promoted the Belt and Road Initiative, as well as the Global Development Initiative, the Global Security Initiative, and the Global Civilization Initiative.
• Xi said, “China is both a super-large economy and a super-large market … Modernization for 1.4 billion Chinese is a huge opportunity that China provides to the world.”
• Xi said, “Our goal is not to have just a few wealthy people, but to realize common prosperity for all.”
• Xi said, “We are committed to peaceful development to build a community with a shared future for mankind … Aggression and expansion are not in our genes … We will never revert to the beaten path of war, colonization, plundering, or coercion.”

***
Among the attendees at the dinner event included Apple’s Tim Cook, BlackRock’s Larry Fink, Pfizer’s Albert Bourla, Bridgewater founder Ray Dalio, as well as leaders and senior executives from Qualcomm, Boeing, Blackstone, KKR, FedEx, and other companies. Tesla’s Elon Musk and Salesforce’s Marc Benioff met with Xi at a pre-dinner reception but did not stay for the dinner.

ExxonMobil CEO Darren Woods told reporters that he would not attend the dinner. “Chinese and the US government relationships are going to kind of ebb and flow with time. Both countries are too important to the global world order to not find some balance, although that balance will shift,” he said.

A San Francisco tech titan who wanted to remain anonymous told the Financial Times, “If you go through the list of the top 20 U.S., companies in China, they were all there.”

***
Reactions to Xi’s speech were mixed. Some welcomed Xi’s message on improving Sino-U.S. ties, but others expressed dismay at what was not said.

A senior American business executive who attended the dinner told The Wall Street Journal that Xi “offered no hints of concessions to business or even interest in more investment in the Chinese economy. The speech was propaganda at its finest.”

Matthews Asia investment strategist Andy Rothman said, “I, too, was disappointed that Xi didn’t take the opportunity to address the American business community’s concerns about the operating environment in China or to share his thoughts on how his domestic economic policies might evolve in the coming quarters.”

  Attracting foreign capital

Nov. 15
The capital accounts management department of the State Administration of Foreign Exchange issued a document noting that the Central Financial Work Conference had pointed out that efforts should be made to promote high-level financial opening up, including steadily expanding the systematic opening up of the financial sector, upgrading the facilitation of cross-border investment and financing, and attracting more foreign financial institutions and long-term capital to expand their business in China. The document added that more than 90 percent of capital accounts have been liberalized to varying degrees and positive progress has been made in the convertibility of renminbi capital accounts.

The document also listed some measures to liberalize and facilitate cross-border direct investment, cross-border portfolio investment, and cross-border financing and fund disbursement. The document stated, “The next step will be to continue steadily expanding the systematic opening up of the foreign exchange field.”

Nov. 16
Xi Jinping submitted a written speech to the APEC CEO summit. Notable points in Xi’s speech include:

• Xi said that the PRC remains “committed to pursuing development with our doors open.” The PRC also will expand its “high-standard opening up and further expand market access.”
• Xi said, “No matter how the international situation evolves, China’s resolve to foster a market-oriented, law-based and world-class business environment will not change” and the PRC’s “policy of providing equal and quality services to foreign investors will not change.”
• Xi said that the PRC will launch more “heart-warming” measures, including “improving the policies on entry and stay of foreign nationals in China and removing for them choke points in financial, medical, e-payment, and other services.”
• In concluding, Xi said that he hoped to see an “active part of the global business community in the Chinese modernization drive to benefit from the huge opportunities brought by China’s high-quality development.”

  Our take

1. Xi Jinping and the CCP are looking to have their cake and eat it by simultaneously promoting financial risk prevention and control while pursuing greater financial liberalization and “opening up” the Chinese economy to foreigners.

Based on earlier trends, we believe that the PRC authorities’ wielding of the authoritarian iron fist and various “administrative measures” to fix the worsening financial crisis in China will only intensify concerns among foreigners about China’s political risks. Growing financial authoritarianism will also dissuade both foreigners and locals from investing regardless of the favorable policies and propaganda that the CCP rolls out. Reduced investments will in turn impact the economy and create another vicious cycle.

2. The PRC authorities’ increasing need to intervene in the markets and the financial sector to ensure “stability” has been causing problems and will likely result in greater instability down the road.

It is likely that the PBoC had indeed instructed some of the big banks to cap interest rates on interbank funding as reported by Bloomberg. The PRC authorities need to keep a ceiling on interbank financing rates and ensure that the banks have sufficient liquidity (the central bank injected nearly 2 trillion yuan through the open market on Nov. 15) to prevent another money market distress event and curb the risk of financial institutions becoming technically bankrupt.

Beijing has recently stepped up its financial risk prevention and control efforts by adjusting risk control indicators for securities companies, tightening supervision over and regulation of derivatives trading (including OTC derivatives operations), strengthening the risk prevention of criminal cases involving financial institutions, and cracking down on corrupt officials in the financial sector. These measures suggest that the Xi leadership is guarding against irregular financial activities that could potentially undermine the regime, including developments that led to the 2015 stock market turbulence that observers determined was a “financial coup” by the Jiang Zemin faction. The Xi leadership is also wary of people and institutions who might be looking to take advantage of China’s rapidly deteriorating economy to use various financial instruments to short China.

Strengthening governing control and intervention, however, appears to be having the effect of increasing pessimism about China in investors at home and abroad. Vanguard’s withdrawal from the Chinese market, Jack Ma’s selling of Alibaba shares, and Blackstone’s sale of Chinese assets are reflective of the pessimism. Ma’s share reduction is particularly ominous, and likely signals a bigger storm to come.

Another bad sign for investors is Xi Jinping’s speech to the business executives in San Francisco. Xi’s speech was lacking in tangible “carrots” to woo American companies and investors, and appeared to be more of a PR effort to assuage U.S. executives about worsening Sino-U.S. relations and the PRC’s commitment to economic and financial liberalization. Indeed, Xi’s tightening of national security and strengthening of financial risk prevention and control means that Wall Street and private entrepreneurs in China will not see a return to the Jiang-era climate of “making a fortune while keeping a low profile” (​​悶聲發大財).

3. Xi Jinping’s effort to continually strengthen the Party’s leadership over the financial sector and system is part of his long term effort to “rectify” the regime of the influence of Jiang Zemin and the Jiang faction, as well as other elite elements that earlier profited personally at the cost of endangering regime survival. The Xi leadership is likely also paving the way to eventually blame the regime’s economic and other ills on his lingering factional rivals while absolving himself of responsibility.

Recent administrative developments in Hong Kong could potentially be part of the Xi leadership’s effort to intensify factional struggle against his political rivals and take to task various financial and business elites in Hong Kong and the mainland. On Nov. 10, the Hong Kong government announced in its gazette that the Mainland Civil and Commercial Judgements (Mutual Enforcement) Ordinance (內地民商事判決 [互相強制執行] 條例) and the Mainland Civil and Commercial Judgements (Mutual Enforcement) Rules (內地民商事判決 [互相強制執行] 規則) would come into effect on Jan. 29, 2024. The Ordinance and Rules allow for civil and commercial judgments in mainland China to be requested for enforcement in Hong Kong, a development that allows the Xi leadership to confiscate the assets of corrupt officials and elites in Hong Kong as part of financial anti-corruption work.

We believe that the Xi leadership could move more vigorously against Party elites in 2024 and go after their assets in places like Hong Kong. However, CCP elites who have parked their funds and assets in Hong Kong have been steadily transferring them overseas since the anti-extradition movement in 2019; The Wall Street Journal previously reported that two co-founders (Sean Tong and Louis Cheung) of Boyu Capital, the company of Jiang Zemin’s grandson Alvin Jiang, had relocated to Singapore in late 2019 and also moved some of Boyu’s operations to the city-state.

4. Xi Jinping’s decision to strengthen the CCP’s grip over the financial system is also consistent with his efforts to rescue the regime from existential crises in the near term and lay the foundation for the Party’s long term goal of becoming the global hegemon. To that end, Xi elevated financial security to national security in 2017 and called for “building financial power” to serve the CCP’s “socialist construction” at the 2023 Central Financial Work Conference.

The Xi leadership is very likely aware that increasing the Party’s control over the financial sector and system will lead to the sacrifice of some economic growth. However, Xi is likely also betting that heightened central government control is warranted to ensure that the regime survives its domestic crises and can go the distance in the “new cold war” with the United States. This is the “inherent logic” of PRC growth that Xi was referring to in the readout of his meeting with President Joe Biden in San Francisco (see item one in this newsletter).