Taiwan?

The internal fight in China can become an external war over Taiwan for purely internal reasons. It is also possible that Taiwan becomes the Dog that Doesn’t Bark. China has flown 555 sorties into Taiwan’s ADIZ (Air Identification Zone) this year alone.  Many suspect this is meant to wear down Taiwan’s responses, so they are not ready for the Chinese sortie with a real mission. But, China knows exactly how much firepower and trouble the US can bring to that party. Is it possible that we wake up one day to simply see a continuation of the same thing except that nobody responds at all? In other words, they wait until a deal is reached with the US and with Taiwan’s leadership that allows China to be present without being a threat. That would be a bit like what happened with Hong Kong. 25 years of creeping presence preceded the actual takeover there. In Taiwan, it might take 100 years. Between now and then, it’s just a cost of jet fuel, sand dredgers, and manpower to keep the intimidation going. Sand dredgers? Yes, China has literally found a way to erode Taiwan by taking away ever more of the precious sand it’s built on. See, China is Stealing Taiwan’s Sand. But, if Xi feels he cannot fend off the Politburo, he may try to provoke a conflict that gives him a freer hand in the domestic fight. It brings new meaning to fight or flight. He may be calculating how much of a foreign spat is needed to get the Politburo to back down.

It could be that something like what happened in 2001 would work in Xi’s favor. A little fighter jet clash with a US spy plane could be quite valuable and easy to manage. There is a clear precedent. Xi could silence his internal critics and gather valuable intel all in one go if he manages to catch the debris from a US spy plane. This would seriously disrupt the markets and yet allow for the markets to then calm as well. It would also allow Xi to further enhance his capacity to deploy his military, internationally, which he is clearly doing. The US and its allies like Japan are definitely responding to China’s sorties despite warnings to back off. But a deal might be crafted over time that would leave Taiwan alone in exchange for protection for Japan? Could the assassination of Shinzo Abe be perceived as the beginning of a negotiation process? Even if it was a lone gunman, Japan will now be operating from a position of paranoia that may prove helpful to China’s efforts to cut deals over Taiwan. China is still planning to arrive in Taiwan via a bridge. The highway is expected to be completed in 2035. China continues to court both North and South Korea. Deals here would also make it easier to slide Taiwan into a One Country, One System situation without ever needing to fight. Let’s not forget that the mothers in China will not be very happy if their only sons have to be sacrificed.

This is one reason why the Communist Party is less and less comfortable with how Xi has the top brass of the People Liberation Army Navy reporting to him personally, which started in about 2016. It matters even more now that Xi has recently introduced new rules that allow the PLAN to undertake “special military operations” abroad (sound familiar?). China now has assets abroad that need to be protected. Xi has increasingly relied on collaboration with President Putin’s security firms to ensure that the gold/bananas/abalone/raw materials etc. coming from places like Africa, make it home to China safely. Someone must protect those assets and ensure they get onto China’s new Belt and Road trains or ships. That’s a job for Russian allies. China is also now taking control of foreign assets when the local owner defaults or where China can secure valuable rights in lieu of defaults. That means Xi (and China) have more troops, peacekeepers, and bases abroad. This includes Xi’s mission to build a base on the Moon. China has not had to deal with an expansionist Imperial Emperor since before the Opium Wars, so it is not at all clear who wins in the argument between Xi and the Politburo. His history of purging non-loyal party members is pretty brutal. His motto was known as “Drive the Blade In” with good reason. Geography is no barrier. He went after non-loyalists abroad in Operation Foxhunt as well. Remember that the intelligence services report to Xi these days rather than the Politburo. That’s why the Head of Mi5 and the US FBI made their first joint statement ever together. Mi5’s Director, Ken McCallum, said, “The most game-changing challenge we face comes from an increasingly authoritarian Chinese Communist Party that’s applying covert pressure across the globe”. “This might feel abstract, but it’s real, and it’s pressing. We need to talk about it. We need to act.”

Xi is in trouble because the economy is faltering so profoundly. This is not a temporary cyclical issue. Fundamentally, China cannot deliver on the promises it made its citizens. It cannot make people get rich before they get old. It is no longer the cheapest or best place to manufacture things. It’s no longer much fun because the Social Credit System is recording and prescribing every little thing you can do in China. And, now there are lockdowns. Are the lockdowns really only for COVID? Or, are they also an easy way to keep the public from protesting as the economy goes negative and starts to raise questions as it destroys savings? It was easy for Xi to consolidate his grip on power when the Chinese economy was not just doing well but perceived to be “the future” of the world economy. But, the cracks in the social contract are now overwhelming. It changes the complexion of China’s future to the point that there may be no recovery in China even if the world economy settles down. China is no longer the cheapest or the best place to make things. It can no longer attract foreign capital for its industry or foreign buyers for its output. China is extremely vulnerable to inflation, which is already ripping through the economy, fuelling protests, and increasing the need to prevent protests. Would a confrontation over Taiwan help Xi retain his grip on power? He may think so. Why? Because nothing allows a leader to align the citizens behind them and wrest power from challengers like war. If the Social Credit System isn’t enough to keep Xi’s opponents quiet, the mere threat of war will. The new aircraft carriers might not scare the US Navy. But they might scare China’s citizens.

Xi has many opponents, but the central problem driving the bank runs and protests in Henan and elsewhere is a function of inflation. The worst enemy any Chinese leader ever faces is inflation. It is worth looking through the brilliant three-volume Brief History of Inflation in China by Zheng Qidong from 2013. Inflation takes out the leadership in China every single time. Its pathway is always insidious. Inflation sneaks up from behind. Why are there riots in Henan right now? As interest rates have fallen and inflation has risen, the banks, in desperation, started to find new ways to generate income. This seems to have included the creation of 3rd party marketing channels to attract new deposits, even though this is illegal in China. Of course, Chinese banks and local politicians have long used the property market as the means of enriching themselves, but that avenue died a sudden death once Evergrande, and some 30 other firms, which each had more than US$1t in debt, all defaulted on foreigners. Now Evergrande is heading towards a default on domestic savers. Now, as Stephen Bartholomeusz writes in an Op-Ed for the Sydney Morning Herald, “So dire is the plight of developers that some of them in rural China is now offering to accept garlic, wheat, barley, and even watermelons as payment for deposits.” This is in a country that cannot grow enough food to sustain the population at the best of times. One can see why Xi says China’s relationship with Russia is one of “unlimited friendship”.

Meanwhile, the Chinese are beginning to understand that they are already in a digital prison. The social credit system, which scores behaviors and allocates rewards and punishments based on behavior, is now a weapon the state can use to contain social unrest. Anyone who protests that they cannot get their savings out of the bank can now be arrested, denied the ability to buy a train, plane, or bus ticket, and prevented from buying groceries. Even worse, the mandatory COVID app, it seems, is being used to contain the protestors. To protest is to become a public health risk. The folks in Henan just want to get their cash out of the bank and stop local officials from absconding with their savings. But, if your app flashes red, you are required to enter quarantine. No question about it. All this raises real questions about why Shanghai experiences far more severe lockdowns than Beijing. Perhaps this has something to do with the fact that Xi’s main internal opposition comes from Shanghai? Fears of a new lockdown in Shanghai are accelerating again now.

The Social Credit System is not only for the general public. Now party members are being asked to watch party propaganda videos in an inescapable glass booth where cameras catch every single microfacial reaction. As one American publication put it, “The Institute of Artificial Intelligence in Hefei said the ‘Smart Political Education Bar’ analyses the user’s brainwaves and deploys facial recognition to “discern the level of acceptance for ideological and political education.” The device relies on “smart cameras and biometrics” to “then determine the members’ loyalty to the party.” This is facial recognition and brainwave detection at work. It’s not about identifying the person. It’s about identifying the persons’ emotional reactions to what they see. This is a test to see if you like the Kool-Aid. Drinking it in is not enough. No one can voluntarily manage or hide their micro facial movements because they reflect uncontrollable inner thoughts. This is a lie detector test for political loyalty. The Chinese are moving even further into mind reading by developing tools that will detect whether you are watching things you should not be watching, like pornography.

Pekingologists in the US and elsewhere once thought a people’s revolution in China was possible. But the advent of such a deep surveillance state means that people are locked into their digital prison cells before it even occurs to them to go to a protest. The question now is whether protests can ever gain any momentum given the true nature of the invisible digital constraints. Obviously, the economy suffers from lockdowns. But it suffers far more from the threat of personal lockdowns, which herd the public into ever more compliant behaviors. China cannot expect to generate the audacity needed to truly innovate when the threat of career arrests or actual arrests is inescapable.

Meanwhile, Xi is hoping that local governments' massive $220b fundraise will help. They have been permitted to issue “Special Bonds” to overseas investors this year. This sale has been pulled forward into 2022 rather than leaving it till 2023. We can take this as another indicator of severe stress.

The mess means Xi’s old nemesis is back - Deng Jiaoping’s extended family and the Shanghai crowd. Their “Haipai culture,” meaning their inclination towards entrepreneurship and social philosophy, has always put them at odds with the more bureaucratic and orthodox Beijingers. The progressives in China, however politically conservative they may be compared to the rest of the world, are not happy. The Chinese are not happy. That means Xi is under pressure. Watch for signs that he prefers fight to flight.

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