1 What the CCP probe of Foxconn says about the probability of a PLA invasion
PRC tax authorities investigate Foxconn
Oct. 22
Party mouthpiece Global Times cited “exclusive sources” as saying that the PRC tax authorities had carried out tax inspections on key enterprises of Foxconn in the provinces of Guangdong and Jiangsu, as well as in other places. Global Times’ sources added that the PRC natural resources department also conducted on-site investigations into the land use of key enterprises of Foxconn in Henan and Hubei.
Zhang Wensheng, deputy dean of Xiamen University’s Taiwan Research Institute, told Global Times that Foxconn and its enterprises are obligated to cooperate with the PRC authorities’ inspections and investigations. Zhang added that Foxconn should admit to their mistakes, accept punishment, and carry out rectifications if there are indeed violations of law and regulations.
Zhang also said that the relevant PRC departments have provided preferential measures to Taiwan-funded enterprises in recent years, and those enterprises who have invested and established factories in the mainland have “enjoyed the dividends of development.” As a leading company from Taiwan, Foxconn has reaped significant profits and expanded its presence in the mainland. Therefore, Foxconn should also shoulder corresponding social responsibilities, as well as “actively contribute to promoting peaceful cross-straits relations and play a positive role in their continuous development.”
The English edition of Global Times cited analysts from “both sides of the Taiwan Strait” as saying that Foxconn founder Terry Gou (郭台銘, Guo Taiming) running for Taiwan’s presidential election is likely to “further divide the island’s opposition camp” and will end up boosting Democratic Progressive Party’s (DPP) William Lai Ching-te.
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News of Foxconn being investigated on the mainland received widespread attention. Industries on both sides of the Taiwan Strait expressed shock at the development and Taiwanese politicians accused the PRC of interfering in Taiwan’s elections.
Oct. 24
Taiwanese media Up Media reported that Chen Wenqing, the secretary of the Central Political and Legal Affairs Commission, had directly ordered the “punitive inspections” into Foxconn. The report added that the PRC Ministry of State Security had directed the taxation and national resources authorities to investigate Foxconn, and local governments were excluded from the entire investigation process. Even mainland organs in charge of Taiwan affairs were excluded from the investigations and were merely “notified” that they were taking place.
Up Media said that it was rare for the MSS to assume a leading role in Taiwan matters. The report added that it was rumored that the top ranks of the CCP saw that the PRC’s Taiwan affairs system (涉台系統) were unable to stop Terry Gou from participating in Taiwan’s presidential election, and decided to take “forceful action” because they were concerned that the election situation would be difficult to reverse it it is allowed to drag on further and they no longer trusted the advice of the Taiwan affairs system. (Explainer: Up Media is hazy on what it means by “Taiwan affairs system.” But a range of CCP organs, departments, and personnel are involved to varying degrees with Taiwan matters, including the Taiwan Affairs Office, elements in the military, United Front groups, intelligence assets, etc.)
Up Media said that the MSS deliberately played up the news that Foxconn was being investigated to create a deterrent effect, citing people familiar with the matter. The people added that aside from compelling Terry Gou to withdraw his candidacy, the Foxconn investigation was also intended to “send a message” to Taiwanese businessmen and specific people who travel between the two sides of the Taiwan Strait. The relevant parties being cautioned have to take note that Beijing’s “orders” must be implemented and must not be left to chance or perfunctorily handled.
People familiar with the matter further pointed out that the MSS-overseen investigation Foxconn, aside from putting pressure on Terry Gou, also revealed that those in the CCP’s decision-making circles no longer trust the Taiwan affairs system. Meanwhile, the Taiwan affairs system, which frequently resorts to “carrot and stick” tactics to influence Taiwanese elections, is worried that MSS’s move could backfire and throw up more variables in the Taiwanese presidential election.
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After the publication of the Up Media piece, rumors started circulating online that Foxconn had been “thoroughly investigated” and would need to pay “180 billion yuan in taxes” and return “land equivalent to about 20,000 soccer fields” back to the state. Foxconn refuted the rumors on Nov. 3.
Background
Terry Gou announced on Aug. 28 that he would run as an independent candidate in the upcoming Taiwan presidential election in 2024. Gou would resign from Foxconn’s board of directors days after announcing his candidacy.
When announcing his bid for the presidency at the Taipei Convention Center, Gou said that he wanted to unite the opposition and ensure that Taiwan does not become “the next Ukraine.” Gou said, “Under the DPP’s rule of more than seven years, they have dangerously led Taiwan toward war and their policies at home have been full of mistakes … Taiwan cannot become Ukraine and I will not let Taiwan become the next Ukraine.” Gou added that the era of entrepreneurial rule in governing Taiwan has begun.
Critics of Terry Gou said that his business interests in mainland China make him vulnerable to pressure from Beijing. Gou previously considered running for president in 2019, but ultimately did not run as an independent candidate after finishing second in the Kuomintang presidential primary.
Foxconn opened its first factory in China in 1988 and currently has more than 40 factory campuses on the mainland. At its peak, Foxconn’s factories on the mainland employed a million workers. Foxconn shifted some of its production lines out of mainland China in recent years following the straining of Sino-U.S. relations.
For instance, mainland media reported in mid-April 2023 that Foxconn reduced a great number of workers at its Zhengzhou campus in Henan Province as foreign companies accelerated their withdrawal from the mainland. This led to the demolishing of dormitories in the area that used to house hundreds of thousands, empty streets, and the closure of many local businesses. Previously, Zhengzhou Foxconn was the largest export trading company in China in 2020, with total exports totaling $31.6 billion. Zhengzhou Foxconn also contributed to 80 percent of the city’s total imports and exports, and 60 percent of Henan’s total imports and exports.
In 2022, Foxconn’s revenue increased by 10 percent from a year ago to 1.49 trillion yuan. That year, the company’s imports totaled 540 billion yuan (about 3 percent of the PRC’s total imports) and exports totaled 849 billion yuan (about 3.5 percent of the PRC’s total exports).
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Before Global Times published its report on the investigation of Foxconn, Apple CEO Tim Cook met with PRC Ministry of Industry and Information Technology Jin Zhuanglong and PRC vice premier Ding Xuexiang on Oct. 19 and Oct. 20 respectively. According to a PRC statement, Cook said that Apple would be actively involved in China’s “high-quality development” and contribute to building an eco-friendly and intelligent manufacturing industry in the mainland.
Current status of the Taiwanese presidential election
1. According to the 65th round of tracking polls released by Taiwanese media Formosa (美麗島電子報), the support levels for the current crop of presidential candidates are:
- William Lai (DPP): 36.9 percent.
- Hou Yu-ih (KMT): 21.8 percent.
- Ko Wen-je (Taiwan People’s Party [TPP]): 15.5 percent.
- Terry Gou (Independent): 6 percent.
2. The KMT (known colloquially as the “Blue Army”) candidate Hou Yu-ih and the TPP (known colloquially as the “White Army”) candidate Ko Wen-je recently launched cross-party negotiations for the first time to discuss the prospect of an opposition joint ticket for the presidency.
At the time this newsletter was published, the KMT and TPP had not reached a consensus on running an opposition joint ticket, which is being referred to as the “Blue and White Cooperation” (藍白合作), due to clashing interests of the two parties.
Per regulations issued by the Taiwan Central Election Commission, independent candidates have to gather sufficient petition signatures (at least 289,667 signatures) to qualify for an election run before Nov. 14, 2023. Meanwhile, registration applications for presidential, vice-presidential, and legislative candidates would be accepted between Nov. 20 to Nov. 24; Ko Wen-je has said that he considers Nov. 20 the cutoff date for whether he will go ahead with the opposition joint ticket or not. The total number of eligible voters in Taiwan’s general elections is expected to be as high as 19.5 million.
Our take
1. The CCP is almost certainly looking to draw the public’s attention to Foxconn and Terry Gou with the Global Times’ exclusive report on Foxconn being investigated. Meanwhile, Up Media’s report that the CCP’s top leadership had ordered that probe of Foxconn and that the MSS is directing the investigation does not seem to be completely groundless even though some of the details, especially Beijing’s lack of trust in the Taiwan affairs system, seem suspect.
We see two possible reasons why Beijing went after Foxconn.
First, the CCP authorities could be looking to “kill the chicken to scare the monkeys” and intimidate other Taiwanese and foreign companies into not pulling out from the mainland (or at least not exiting too quickly or too completely) lest they face a similar fate as Foxconn. The CCP desperately needs supply chains and foreign firms to stay in China so that it can find employment for local economies, as well as help the localities preserve their revenue streams and economic growth amid very tough times for the Chinese economy. By going after Foxconn, the CCP is signaling to Taiwanese and foreign companies that they stand to lose more than they would gain (through tax investigations, lawsuits, and other measures) from leaving China instead of “shouldering corresponding social responsibilities” with the PRC during this less “peaceful” period of economic development.
Second, the CCP is likely looking to influence the Taiwanese presidential election in 2024 by investigating Foxconn and boosting its chances of getting an outcome that is more “favorable” to its “peaceful reunification” agenda. Beijing does not want a DPP president or a strong DPP majority in the ROC legislature due to the DPP’s support of Taiwan independence. To that end, Beijing needs to improve the election odds of candidates from the opposition.
Terry Gou’s candidacy will inevitably be viewed with suspicion by most Taiwanese voters given his long history of working with the PRC through Foxconn. The high-profile CCP probe of Foxconn, however, could reduce skepticism towards Gou for being “pro-PRC” and improve his electability now that he has become a victim of CCP oppression and not someone who solely benefits from his business on the mainland.
However, the CCP is not likely to be banking on a Terry Gou victory given that he is dead last in favorability polls and is unlikely to gain significant ground against the other candidates even if the Taiwanese public becomes less suspicious of his bid for the presidency. Rather, Beijing could be looking to blackmail Gou into eventually giving up his campaign so that votes that would go to him could instead go to the other more viable opposition candidates and deny the DPP the presidency and legislative seats. Put another way, the CCP could be betting that the political outcomes of probing Foxconn (possibly ousting the DPP from power and improving the conditions for “peaceful reunification”) would be worth the economic and reputational trade offs that the move has brought to the PRC.
2. We believe that the CCP’s move against Foxconn is ultimately self-defeating and could end up benefiting William Lai’s candidacy instead of the opposition. Also, Taiwanese and foreign businessmen could decide to step up their withdrawal from mainland China regardless of the economic consequences, or become very wary of investing in China, as they increasingly account for the high levels of political risk in the PRC.
3. The CCP’s persistent and high-profile efforts to interfere in Taiwan’s elections show that Beijing still prefers to use non-military means to achieve its “reunification” goals. In other words, the probability of an unprovoked PRC invasion of Taiwan in the short term is very low. We have noted on several occasions that contrary to popular views, the CCP dares not resort to aggression to take Taiwan when the Chinese economy is in very bad shape because to do so would be very destabilizing to the regime and could trigger its collapse.
2 MSS says ‘some countries,’ ‘short sellers’ are shaking investor confidence in China
Nov. 3
The PRC Ministry of State Security published a post on its official WeChat account about how maintaining financial security is a strategic and fundamental matter for the overall economic and social development of China.
The MSS accused “some countries” of using the financial market as a “tool for geopolitical games, playing with their monetary hegemony repeatedly, and wielding the big stick of financial sanctions at others.”
The MSS also said that “some people with ulterior motives” are trying to “stir up trouble and profit from the chaos.” These people “are not only short sellers, but also people who spread bearish sentiment and help to steal China’s financial assets, trying to shake the international community’s investor confidence in China and triggering domestic financial turmoil in our country.” All this has brought “new challenges to maintaining financial security under the new situation.”
In concluding, the MSS said that the PRC’s state security agencies should “proactively participate in the construction of national security systems in the economic, financial, and other fields,” as well as “closely monitor and effectively prevent national security risks in the financial sector, and crack down on and punish illegal and criminal activities that endanger national security in the financial sector.”
Background
Oct. 7, 2023: Data released by the State Administration of Foreign Exchange (SAFE) showed that China’s foreign exchange reserves had decreased by 1.42 percent ($45 billion) to $3.1151 trillion at the end of September from a month ago.
Oct. 20: Data released by the PRC Ministry of Commerce showed that China’s actual use of foreign capital from January to September 2023 fell year-on-year by 8.4 percent to 919.97 billion yuan.
Oct. 24: Xi Jinping inspected the People’s Bank of China and SAFE, in part to better understand the PRC’s $3 trillion of currency reserves.
Oct. 30 to Oct. 31: The CCP authorities held the Central Financial Work Conference in Beijing. The meeting said that it was necessary for the regime to “build financial power, strengthen supervision, improve the financial system, optimize financial services, and prevent and defuse risks.”
Nov. 3: Balance-of-payments data for the July to September quarter released by SAFE showed that foreign direct investment in China came to minus $11.8 billion, the first negative figure in the data since 1998. In comparison, the FDI for the third quarter of 2022 was $13 billion and $46.1 billion in the second quarter of 2023.
As of Nov. 3, the Shanghai Composite Index had fallen 2.14 percent in the past month and 9.11 percent in the past six months. Also, the net outflow of northbound funds over the past month was 37.079 billion yuan and 113.882 billion yuan in the past six months.
Our take
1. The MSS’s WeChat post on maintaining financial security is an indirect indicator that the PRC is facing a financial crisis that is severe enough to seriously endanger regime security. In particular, the CCP authorities feel threatened enough by the financial trouble to call for the construction of “national security systems in the economic, financial, and other fields,” a move that appears to be intended to strengthen the Party’s control over the financial system so that it can intervene as needed in the financial sector and in society when crisis inevitably erupts.
2. The “some countries” in the MSS’s WeChat post is almost certainly an oblique reference to the United States, and appears to be partly an attempt by the CCP authorities to shift the blame for China’s financial woes to “hostile foreign forces” rather than the Party.
At a glance, the CCP’s accusation that the U.S. is impacting China by “playing with their monetary hegemony repeatedly” does not seem completely unwarranted. Monetary policy in the U.S. has indeed had an impact on the Chinese economy. The Federal Reserve has aggressively raised rates (11 rate increases to 5.25 percent to 5.5 percent) over the past year and a half, and has shrunk its balance sheet by $1.1 trillion as of Nov. 1, 2023 (from a peak of $8.92 trillion in March 2022). The Fed rate hike in particular increased downward pressure on China’s exports; China’s exports saw five consecutive months of negative growth as of October 2023, and the new export orders subindex of China’s purchasing managers’ index fell to 41.6 in April 2022 (the lowest since exports resumed after the pandemic lockdowns in 2020). The Fed rising rates while the People’s Bank of China has been cutting them is also one of the drivers behind the renminbi’s steep depreciation, and has also resulted in capital flight.
Changes in U.S. monetary policy, however, is a relatively recent development and cannot account for all the financial problems that the PRC has been experiencing. Rather, China’s current financial troubles have their roots in the Jiang-Hu era when financial regulation was lax, powerful Party and business elites established economic and financial monopolies, the real economy was hollowed out while the “financialized” economy thrived, property developers blew up the real estate bubble by using unsustainable growth models and practices, and the CCP authorities courted demographic disaster by passing the buck on ending the “one-child” policy.
3. The MSS’s warning about “short sellers” and people spreading “bearish sentiment” could be partly meant to signal that it is keeping an eye out on “anti-Xi” forces both inside and outside of China in case Xi Jinping’s enemies trigger another “financial coup” against him as was the case with the 2015 stock market crash.
The MSS could also be attempting to preempt the public to reduce panic and deflect blame from Beijing in the event of financial turmoil.
4. The MSS’s WeChat post on maintaining financial security is the ministry’s latest public commentary on notable matters (for earlier examples, see here and here) since Xi ally Chen Yixin took over as minister of state security and the MSS created its official WeChat account in July 2023.
We believe that this development is a manifestation of the Xi leadership promoting the Party apparatus over the state apparatus as Xi Jinping moves to strengthen the CCP’s and his “centralized and unified leadership” over the PRC and further marginalize the “collective leadership” model. While Xi likely believes that tightening his control over the Party and state governing apparatuses will improve his ability to rescue the regime from its many crises, we have pointed out on numerous occasions that Xi is unlikely to resolve the regime’s problems by clinging to the Party; the serious intrinsic deficiencies of the CCP authoritarian system will doom most of Xi’s attempts at saving the regime through “self-rectification ”
