SinoInsight 1
International commentators and media outlets have been calling attention to the possibility of a sooner-than-expected PRC invasion of Taiwan in the lead up to the 20th Party Congress. Invasion concerns persisted after the key political conclave as pundits parsed Xi Jinping’s 20th Party Congress work report and personnel reshuffles, particularly the composition of the new Central Military Commission (CMC).
Common points of concern and arguments regarding an invasion that were raised include:
- Xi received “enthusiastic applause” and response at the opening ceremony of the 20th Party Congress when he pledged to “reunify” Taiwan with the mainland in his speech.
- Xi threatened to take Taiwan by force in his 20th Party Congress speech and urged the People’s Liberation Army to prepare to “win local wars.”
- Xi’s “total dominance” following the 20th Party Congress personnel reshuffle and his vast ambitions increase the probability that he will act soon to take Taiwan, the last major thing left to accomplish on his agenda.
- The PRC’s mounting domestic and foreign crises—especially a rapidly deteriorating economy, the Biden administration’s crippling chip export restrictions on China, and the Russia-Ukraine war seemingly not going well for Moscow—coupled with Xi’s “unlimited power” and lack of opposition in the regime, will lead Xi to take Taiwan as a distraction from his internal problems.
Concurrently, Washington has been signaling the possibility of an earlier-than-expected PRC invasion of Taiwan. In an interview with Bloomberg News on Oct. 26, Secretary of State Antony Blinken said: “What’s changed is this: the decision by the government in Beijing that that status quo is no longer acceptable, that they wanted to speed up the process by which they would pursue reunification. And they also, I think, have made decisions about how they would do that, including exerting more pressure on Taiwan, coercion, making life difficult in a variety of ways on Taiwan in the hopes that that would speed reunification, but also holding out the possibility if that didn’t work of using force to achieve their goals.” Previously on Oct. 17, Blinken said that Beijing believes that the “status quo was no longer acceptable” and is determined to pursue reunification on a much faster timeline.”
The Biden administration also appears to be planning more export curbs on China. Undersecretary of commerce for industry and security Alan Estevez told Washington-based think tank CNAS on Oct. 27 that the U.S. expects to have a deal with its allies “in the near term” on adopting export controls similar to those imposed by the administration on China to limit its access to advanced U.S. chips and chipmaking technology. On Oct. 31, Bloomberg cited people familiar with the matter as saying that Washington has sounded out its European allies on “drawing upon lessons from the export control regime they’re using to punish Russia to target China.”
Meanwhile, the U.S. has deployed a group of A-10C Thunderbolt II attack planes to Guam for training and is planning to send six B-52 bombers—a big increase in presence—to Australia’s Northern Territory as part of rotational bomber task forces that carry out exercises with allies.
OUR TAKE
1. State mouthpiece Xinhua noted in an article explaining how the new CCP leadership was picked that “political standard”—an oblique way of saying “loyalty to Xi Jinping”—was the Xi leadership’s foremost consideration in “selecting and deploying people” for the 20th Central Committee and CMC.
Beijing’s top selection criteria certainly hold true in our assessment of the career backgrounds of the new CMC members. These generals either have personal connections with Xi, rose only slowly up the ranks during the Jiang faction’s era of dominance (1997 to 2012), or performed meritoriously in helping Xi with his “rectification” of the military.
Zhang Youxia
Zhang Youxia (age 72), vice chairman of the CMC, is a close ally and personal friend of Xi’s. The fathers of both men served in the People’s Liberation Army’s Northwest Army Corps during the civil war between the CCP and the Kuomintang; Zhang Zongxun (father of Zhang Youxia) was corps commander and Xi Zhongxun (father of Xi Jinping) was political commissar.
Xi was likely able to justify breaking age restriction norms (“seven up, eight down”) to keep Zhang because the latter is a veteran of the Sino-Vietnamese War. During the war, Zhang was promoted from company commander to regiment commander in recognition of his excellent command ability.
Despite his early career performances, Zhang’s career stagnated when the Jiang faction dominated the CCP regime. Zhang was promoted to major general in 1997, but was only promoted to lieutenant general after a 10-year interval (2007). Zhang finally became a full general in July 2011, coincidentally during a period when rumors that Jiang Zemin had passed away went viral.
He Weidong
He Weidong (65), the second CMC vice chairman, was likely acquainted with Xi when they were both serving in the localities. When Xi was a leading cadre in the provinces of Fujian and Zhejiang, he was also the deputy director of the National Defense Mobilization Committee in the former Nanjing Military Region (now part of the Eastern Theater Command) from 1999 to 2003. At the time, He was with the 31st Group Army (reorganized as the 73rd Group Army in April 2017) based in Xiamen, Fujian Province, and the 31st Group Army was one of three army groups under the Nanjing Military Region.
He Weidong’s promotion in the 31st Group Army was slow. In July 2008, he was promoted to major general and appointed deputy commander of the 31st Group Army. However, He stagnated in that position until Xi came to power. He was then quickly elevated up the ranks and transferred to various positions which indicated good career prospects. He Weidong was made a lieutenant general in July 2017, and received a “rocket promotion” to full general when he was appointed commander of the Eastern Theater Command in December 2019.
He Weidong’s familiarity with Taiwan operations is likely one of the key reasons behind Xi selecting him as CMC vice chair. He spent many years in the former 31st Group Army, and the army group is believed to be one of the PLA’s main forces that will be tasked to take Taiwan should an invasion be ordered given its location, capabilities, and training activities. He was also commander of the Eastern Theater Command, which includes the East China Sea and the Taiwan Strait as part of its area of responsibility.
Li Shangfu
Li Shangfu (64) will likely be appointed minister of defense at the 2023 Two Sessions.
Li rose slowly up the ranks before Xi took office. He started out at the Xichang Satellite Launch Center (under the former General Armaments Department) and eventually became its director in 2003. As director, Li oversaw several rocket launches, notably the Chang’e 2 lunar probe launch in October 2010.
After Xi came to power and implemented military reforms, Li Shangfu was appointed deputy commander and chief of staff of the PLA Strategic Support Force. Li was also promoted to lieutenant general, or 10 years after he became a major general in July 2006. In August 2017, Li succeeded Zhang Youxia as head of the CMC’s Equipment Development Department. In July 2019, Li received an exceptional promotion (破格提拔) to full general.
Li was sanctioned by the U.S. in September 2018 over the PLA’s purchase of Russian fighter jets and surface-to-air missiles. His elevation to the CMC appears to be the Xi leadership’s way of rewarding him for and encouraging other officials to “dare to struggle and be good at struggling,” as well as “have the courage and ability to struggle” against U.S. and Western sanctions in the name of “safeguarding national security.”
Liu Zhenli
Liu Zhenli (58), the chief of the CMC Joint Staff Department, is known for having fought with distinction (first-class merit) during the Sino-Vietnamese War and rising up the ranks from ground up to become commander of the 65th Group Army.
After Xi took office, Liu was transferred to the 38th Group Army in March 2014 to serve as the army group’s commander. The 38th Group Army is based in Hebei Province and tasked with defending the national capital of Beijing. Less than a year and a half later, Liu was transferred to the People’s Armed Police and appointed chief of staff. Following the implementation of military reforms, Liu became the first chief of staff of the newly reorganized PLA Ground Force (December 2015) and was promoted to lieutenant general in July 2016. In June 2021, he was promoted to commander of the army and full general the next month. All in all, Liu Zhenli rose from the corps leader rank to CMC member rank within a relatively short span of about eight years.
Xi likely favored Liu because he is one of few generals with actual combat experience (like Zhang Youxia) and worked his way up from humble beginnings. Liu’s experience in the localities could be useful in the event that Beijing has to deal with future social problems. Further, Liu appeared to be an ordinary commander who was not favored by the Jiang faction during the latter’s era of dominance, which suggests weak or non-existent factional ties.
Miao Hua
Miao Hua (57), the director of the CMC Political Work Department, also saw a slow progression up the ranks during the Jiang faction’s era of dominance. While Miao was promoted to major general as early as 2001, he was only elevated to lieutenant general 12 years later in July 2012. Coincidentally, Miao was promoted in 2012 after the Wang Lijun incident broke out in February 2012, Bo Xilai and Zhou Yongkang’s coup attempt was foiled, and the military was in the midst of conducting investigations.
Miao would later carry out major rectification work in the military after he was transferred from the ground forces and promoted to navy political commissar in December 2014. Xi likely retained Miao Hua in the CMC in recognition of his rectification work and to reward his loyalty.
Zhang Shengmin
Zhang Shengmin (64), Party secretary of the CMC’s Commission for Discipline Inspection, is another general whose career remained stagnant during the Jiang faction’s era of dominance.
Zhang became a major general in July 2006 and would only progress to the next rank under Xi. After Xi implemented military reform, Zhang was appointed political commissar of the CMC’s Training and Administration Department. In July 2016, Zhang would be transferred to the CMC Logistic Support Department to serve as political commissar and was promoted to lieutenant general.
In January 2017, Zhang was appointed secretary of the CMC’s Commission for Discipline Inspection. In November 2017, he received a “rocket promotion” to full general.
2. Xi Jinping and the CCP both have ambitions of “reunifying” Taiwan and are undoubtedly looking to strengthen and modernize the PLA. Xi is also almost certainly making preparations for a “forceful reunification” of Taiwan if the situation calls for it. However, we see little indication that he is considering an invasion of Taiwan or speeding up the CCP’s “reunification” timeline from his 20th Party Congress personnel reshuffles and work report.
We already analyzed Xi’s language on Taiwan in his 20th Party Congress work report in our Oct. 20, 2022 newsletter. In adding to that, the CCP usually states that it will “never promise to renounce the use of force” with regard to Taiwan, so Xi reiterating this point is nothing out of the ordinary. Further, Xi said that the policies of “peaceful reunification” and the “one country, two systems” are “the best way to realize reunification across the Taiwan Strait,” and stressed that the PRC will only take “all measures necessary,” including the use of force, only when met with “interference by outside forces and the few separatists seeking ‘Taiwan independence’ and their separatist activities; it is by no means targeted at our Taiwan compatriots.” If Xi was looking to invade Taiwan soon, he would have issued far harsher and more belligerent language instead of trying to sound accommodating and reasonable.
Xi’s personnel arrangements also do not indicate that he is preparing to achieve “reunification” by force on a “faster timeline.” The bulk of the members of the CCP’s senior leadership was chosen for their loyalty to Xi first and foremost, including members of the CMC. As we earlier analyzed, Xi needs a loyal “group of politicians” around him so that he can better manage the “orders not leaving Zhongnanhai” problem and resolve “complex situations and arduous tasks” at home and abroad, of which Taiwan is just one problem and by no means the most urgent. Meanwhile, Xi appears to be valuing combat experience in his CMC because he is wary of the “severe and complex international situation and the enormous risks and challenges that follow,” including increasingly heated geopolitical tensions and the potential for regional conflicts to break out amid escalating “great power competition” with the U.S. and its allies.
As we observed at the start of this year, Xi will likely strive for “peaceful reunification” where possible leading up to the 2024 Taiwanese presidential election. We also noted that Xi would only consider accelerating the CCP’s timeline for “reunification” and invade Taiwan—even when the PLA is not fully ready—if compelled to by considerations of factional struggle. Xi, however, has already secured his 20th Party Congress political objectives and has a clear advantage in the struggle against his remaining rivals. Also, Xi has been signaling after the 20th Party Congress that his next political priority is rectifying the regime of remaining disloyal and corrupt elements; we believe that members and supporters of the Jiang faction are the most at risk of being purged under Xi’s “self-revolution” campaign. As such, the probability of Xi invading Taiwan before the PLA is prepared and the CCP resolves more pressing issues (rapidly deteriorating economy, “zero-COVID,” etc.) is now vanishingly low.
Businesses, investors, and governments who are still concerned about the prospect of an early PRC invasion of Taiwan should consider the CCP’s “survival-dominance” dynamic. Xi and the CCP would have learned from Russia’s faltering invasion of Ukraine and the Biden administration’s export controls that the PRC is currently no match for the U.S. and its allies militarily, technologically, and economically. Xi will not risk the regime’s and his own ruin by taking Taiwan prematurely. Rather, Xi will look to “delay and wait for change” (以拖待變), prioritize fixing the CCP’s problems and build up strength, and wait for significant changes in the international environment (i.e. America experiencing visible and irreversibly economic decline, global depression, etc.) before invading Taiwan if he really has to; Xi will still want to achieve a “peaceful reunification” of Taiwan and accomplish the CCP’s global domination agenda through non-kinetic means where possible. But until the CCP is in a strong enough position to see through its “the East is Rising, the West is in decline” assessment, Xi will likely attempt to steer clear of forceful “reunification” and strive to avoid conflict with the U.S. and its allies. Conflict avoidance, however, does not mean that Xi and the CCP will abandon military maneuvers around Taiwan, “wolf warrior” diplomacy, and the occasional belligerent language, though such measures could be toned down if they are deemed unnecessarily risky.
SinoInsight 2
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Oct. 24
1. The Wall Street Journal reported that the Nasdaq Golden Dragon China Index fell more than 14 percent to its lowest close since April 2012, erasing $73.4 billion in market cap since markets closed on Oct. 21 till Oct. 24. The index fell more than 20 percent at one point during trading. Alibaba fell more than 19 percent at one point, hitting a 52-week low, before closing down more than 12 percent. Tencent Music Entertainment fell as much as 18 percent during the session before closing at 5 percent. And Pinduoduo fell 34 percent during trading before closing down 24.6 percent.
2. Bernstein sales trading desk’s Mark Schilsky wrote in a note that “Stocks based in the world’s second largest economy are ‘uninvestable’ again.”
Oct. 25
1. According to Bloomberg, overseas investors sold a record net 17.9 billion yuan of mainland shares via trading links with Hong Kong on Oct. 24, moving the year-to-date level into a small net outflow. Bloomberg added that the stock connect program would see its first annual decline since it launched in 2014 if the net outflow holds through the end of the year.
2. Ken Cheung, chief Asian forex strategist at Mizuho bank, said, “It appears that the leadership reshuffle spooked foreign investors to offload their Chinese investment, sparking heavy sell-offs in Hong Kong-listed Chinese equities.”
3. Marvin Chen, an analyst with Bloomberg Intelligence, said, “Foreign sentiment on Chinese stocks is low now” as the 20th Party Congress did not appear to sign an imminent change in the “zero-COVID” policy. “Markets may need to wait to closer to the Central Economic Work Conference in December to see how the new leadership will address China’s economic challenges.”
Oct. 27
The American Chamber of Commerce (AmCham China) in Shanghai released its China Business Report survey. The survey, which featured 307 respondents, saw the number of companies expecting annual revenue growth fall by 29 percentage points to 47 percent in 2022. One out of three respondents said that they redirected investments planned for China elsewhere in the past year. Meanwhile, 85 percent of respondents said that while the “zero-COVID” policy affected their decision-making and supply chains, U.S.-China relations were a primary reason for their redirecting of business.
Sean Stein, chairman of AmCham China, said “China is becoming less competitive for foreign investments. It needs to act soon to rebuild confidence from companies. Otherwise, investment can and will go elsewhere.”
Oct. 28
The Wall Street Journal reported that foreign investors’ total holdings of Chinese government bonds and other yuan-denominated debt in mainland China fell to 3.4 trillion yuan in September. That was the lowest level since December 2020 according to data released by the China Central Depository & Clearing Co. and the Shanghai Clearing House.
The bond selldown in September was the eighth consecutive month of net outflows that started in February when Russia invaded Ukraine. Since that period, international investors have reduced their holdings of Chinese bonds by about $92 billion. Also, net outflows in September were nearly twice the total for August.
Oct. 31
Foreign investors net sold $7.9 billion of Chinese A-shares in October, the most since March 2020. Also in October, the Shanghai and Shenzhen stock indexes fell 4.3 percent and 3.5 percent respectively, while the Hong Kong index declined 15 percent for its worst monthly performance since October 2008.
Nov. 1
The Hong Kong, Shanghai, and Shenzhen stock markets soared after an unverified social media post circulated online the previous day claimed that Beijing was setting up a committee to assess scenarios on how to ease “zero-COVID.” The post claimed that Wang Huning was heading the committee, which would be reviewing U.S., Hong Kong, and Singapore COVID data in considering scenarios, including reopening China in March 2023.
The Hang Seng Index closed up more than 5.23 percent while the Hang Seng Technology Index rose nearly 8 percent. The Shanghai and Shenzhen indexes climbed 2.62 percent and 3.24 percent respectively, while the CSI 300 Index rose 3.4 percent. The markets were falling just a day before the unverified social media post made the rounds.
2. According to mainland media reports, several local governments issued notices stating that train, high-speed rail, and plane commuters traveling within China to places aside from Beijing are no longer required to possess a negative 48-hour nucleic acid test. Some local governments also issued notices stating that all residents except those in at-risk groups will be charged for nucleic acid testing from November.
Nov. 2
In pre-recorded remarks to a financial forum in Hong Kong organized by the city’s monetary authorities and attended by international bankers, Fang Xinghai, vice chairman of the China Securities Regulatory Commission, said, “I would advise international investors to find out what’s really going on in China and what’s the real intention of our government by themselves. Don’t read too much of the international media.”
1. Foreign businesses and investors have wisely assessed that it is time to redirect business, capital, and investments away from China. They have rightly ascertained that the PRC will see increased geopolitical risks due to worsening Sino-U.S. tensions. They have also experienced the many inconveniences and draconian horrors of “zero-COVID,” as well as the CCP’s Orwellian tightening control over all aspects of society in China, and have decided to “vote with their feet.”
Foreign businesses and investors, however, have not yet grasped what Xi Jinping is really up to with his personnel reshuffles, the 20th Party Congress report, and his focus on ideology. Yet they should not let their lack of understanding of CCP elite politics check their instincts to pull out from the mainland or prepare Black Swan contingencies; as we will examine in the second point, Xi’s efforts to right the sinking ship that is the CCP regime are likely to be futile or see very limited success at best.
As we explained on numerous occasions previously, Xi turned to ideology and promoted Party orthodoxy (not Marxist-Leninist orthodoxy, as we detailed here) to facilitate his power consolidation amid fierce factional fighting with the Jiang Zemin faction and other “anti-Xi” opponents. Likewise, Xi stacked the top leadership with his allies, trusted officials, and technocrats to strengthen his control over the regime, overcome bureaucratic obstacles to efficient and effective governance, and gain an overwhelming edge over his remaining factional foes in the Party elite. Put another way, Xi is currently embracing ideology as a means to boost his power and gain an edge over his enemies, not out of a personal desire to revert the PRC to a command economy or hasten China’s progress to a true communist society (although his motivations could change after Xi has conquered all his domestic and foreign enemies, as well as sufficiently resolved all of China’s crises). Meanwhile, Xi’s personnel arrangements are meant to shore up his political security and improve his governing ability.
To ensure the CCP regime’s continued survival and dominance, Xi has a strong incentive to find ways to help the Chinese economy recover and attract investments to the mainland. This means that Beijing will find ways to gradually move away from “zero-COVID” even though it may never remove the policy from its books. The Xi leadership will also attempt to court foreign capital and find ways to make China attractive to international businesses and investors again.
We previously noted signs in early October and during the 20th Party Congress period (see here and here) that Beijing is moving to ease COVID restrictions after Xi secures his political objectives at the key conclave. Also, just days after the 20th Party Congress on Oct. 25, the National Development and Reform Commission published on its website a notice (關於以製造業為重點促進外資擴增量穩存量提質量的若干政策措施) by six regulators (including the Ministry of Commerce and the Ministry of Industry and Information Technology) that listed policies aimed at courting more foreign investment into China’s manufacturing sector. The notice instructed local governments to facilitate the travel of multinational companies’ executives, technicians, and their families to the mainland, and encourage the bringing of world-class talent to China. The notice also called on local governments to support MNCs in setting up research and development centers on the mainland to deepen “scientific and technological openness and collaboration.” Further, the notice urged local governments to organize international investment events for the semiconductor sector and other sectors.
We do not rule out the possibility that the unverified social media post about a “reopening committee” to examine the PRC’s exit from “zero-COVID” is in fact a trial balloon by Beijing to gauge public response to the news and generate international anticipation as it prepares to loosen restrictions. Also, local government notices that train, high-speed rail, and plane commuters no longer need to have a negative nucleic acid test and the charging for testing are signs that Beijing is preparing to relax its COVID-19 policy. Fang Xinghai’s remarks to global bankers at the Hong Kong financial forum further hint at Beijing’s plan to ease “zero-COVID” and roll out policies to attract international investment. Fang’s remarks and Beijing’s actions indirectly affirm our earlier assessment that Xi and the CCP could “let pragmatism trump politics” and make policy adjustments after Xi secures his 20th Party Congress political objectives as the regime looks to survive and dominate.
The inclusion of several technocrats in the Politburo (see our Oct. 31, 2022 newsletter) also indicate that Xi is not planning to end the PRC’s technological innovation and development efforts even as he considers “semi-isolationist” policies due to national security considerations. And if Xi is still interested in technological innovation and development, then he will almost certainly leave the door open to foreigners to invest in those areas and help the regime to grow its capabilities.
2. Xi faces a steep challenge in reconciling his economic and technological ideals with what he can practically hope to achieve in the current international environment and given the deficiencies of the CCP system.
For one, the U.S. and the international community are gradually awakening to the CCP threat and domination ambitions, and are moving to restrict exports of advanced semiconductors and technology to the PRC. When more and more governments impose export controls on China, Beijing will not be able to court investments and capital, as well as import technological know-how, regardless of how many investor and capital-friendly policies it rolls out. Meanwhile, Xi may have technocrats in the Politburo to guide the PRC’s technological development and march towards self-sufficiency, but he will still struggle to overcome the serious drag that corruption and the Party’s political culture will impose on those efforts.
Xi needs to ease “zero-COVID” to facilitate economic recovery efforts and alleviate the regime’s financial shortages. However, Beijing will find it difficult to move away from “zero-COVID” given the deficiencies of the CCP system:
- “Zero-COVID” is part of Xi’s political legacy and cannot be casually abandoned. Thus, the CCP must come up with various theories and propaganda if it is serious about transitioning from “resolutely and unwaveringly sticking with ‘zero-COVID’” to “re-opening.”
- The Xi leadership must find a way to explain to and convince local officials and the public that “re-opening” is both “safe” and “scientific,” and that the virus is somehow not as deadly or infectious as before. However, Beijing risks contradicting its previous propaganda and actions in doing so, and undermining its own political legitimacy in the process.
- “Zero-COVID” is an effective tool of “stability maintenance.” The Xi leadership must weigh whether it is worth giving up this tool just as crises are worsening for the PRC. Once Beijing attempts to downplay the severity of the virus and begins to ease restrictions in earnest, the Chinese people will not accept the re-imposition of draconian “zero-COVID” and serious “social instability” will likely ensue. Already, people in Guangzhou, Shanghai, Zhengzhou, and other areas that saw recent breakout cases are displaying great displeasure as “zero-COVID” policies are reimposed.
- Local governments and pharmaceutical businesses profited massively from mass nucleic acid testing and the lockdowns. “Zero-COVID” also led to the building of infrastructure like makeshift “fangcang” hospitals and testing points. Moving away from “zero-COVID” creates waste and harms interest groups, which will create headaches for the central government.
- The elevation of former Shanghai Party secretary Li Qiang to the second-rank member of the Politburo Standing Committee even after his disastrous rollout of “zero-COVID” in Shanghai signals to local officials that they should stick with the policy if they want to win promotion. As such, Beijing will find it hard to progressively ease “zero-COVID” because local officials will believe that being overzealous is the “politically correct” way to go about the policy. But if Beijing moves too fast in carrying out “reopening,” local officials will very likely go to the other extreme in pursuing that policy with little regard for epidemic prevention and control measures, which could result in a surge of COVID-19 cases across the country that could overwhelm local medical facilities.
- Officials steeped in Party culture will persist with “prefer left rather than right,” “one-size-fits-all,” “campaign-style,” and other deficient approaches in implementing central government policies. Such approaches will set back Beijing’s efforts in moving away from “zero-COVID” and even create new problems for the Xi leadership.
