Analysis

Lai’s victory dominated international headlines, but the DPP’s inability to secure a majority in Taiwan’s legislature will restrict the party’s ability to enact many of its legislative priorities. Much as policy was debated and negotiated issue-by-issue under President Tsai, so too will Lai’s leadership likely need constant bipartisan support–and therefore compromise–to pass legislation. How easy or challenging this process will be largely depends on who the next Speaker of the Legislative Yuan (LY) will be, with the KMT proposing their controversial former presidential candidate and recalled mayor Han Kuo-yu 韓國瑜 as candidate for Speaker. If Han wins enough votes to become speaker–as he likely will–then Taiwanese politics will be much more contentious between the executive and legislative branches because Han embraces a populist brand of politics that many of his supporters enthusiastically champion. Much will come down to the TPP, whose rise to frontline politics was largely championed by the party’s “quirky” presidential candidate Ko Wen-je 柯文哲, and who now effectively sits as kingmaker for the new legislative session, despite his continuing unsubstantiated claims of voter fraud. The DPP has stated that its priorities are tackling low incomes, high housing costs, and other social issues, each of which will likely feature in the next legislative cycle as both DPP and KMT lawmakers attempt to woo DPP votes in the LY. 

China’s response to Lai’s victory was predictably irate in tone. With the exception of strong-arming Nauru, however, Beijing’s ire was mostly limited to condemning foreign governments that congratulated Lai, which also included states like Singapore that often try to stay publicly quiet on the question of Taiwan for fear of crossing one of Beijing’s “red lines.” For the time being, Taiwan’s election will likely therefore maintain the uneasy status quo between Taipei, Washington, and Beijing rather than fundamentally alter the current situation. For businesses looking to mitigate uncertainty in their China strategy, China-Taiwan relations are likely to feature more of the same for at least the coming months. One notable exception to this status quo, however, will be for tech and communications companies looking towards the medium long-term, as Nauru’s switching will have consequences for the multiple deep-sea cable projects currently underway across the Pacific.

Analysis

The Biden Administration’s outreach efforts to the CCP have yielded a number of successes in terms of dialogues and “track-two” dialogues between the US and China, although many of these dialogues are still in their early stages and are yet to produce significant results. The overall point of this outreach is to control the competition so that it does not become a cold or even hot war.  

Like the US, the EU is following a similar approach of cautious engagement. Li’s visit to Davos and Brussels comes at a delicate time in Europe-China relations. An upcoming meeting with EU leaders may have been part of the reason why the EU’s response to Taiwan’s election was more muted than others like the Philippines. China’s snubbing of Ukrainian officials at Davos, however, also highlighted the limits of China’s new internationalist tone in Europe and that Beijing’s relationship with Russia still dominates its foreign policy priorities, Li’s message at Davos–delivered concurrently with Xi Jinping’s message to domestic audiences that China’s economy was “significantly different” from the West–was also vague and employed generalizations that are typical of a speech by a senior official, which will do little to attract European businesses to flock back to China amid a worsening business and geopolitical environment. 

During his trip to Europe, Li also stopped by Ireland, which he called a “good example” for cordial relations between China and Western partners, although the Irish Taoiseach, Leo Varadkar had to subsequently reiterate that Ireland’s policy on China and Taiwan was unchanged after Chinese reports came out to the contrary. Li’s visit to Ireland also implies that China sees a potentially more hospitable relationship, particularly for business and trade, in Europe than in North America, which is underscored by China’s recent unilateral moves to grant several European passports–now including Ireland–visa-free access to China for periods of up to 30 days. While this is good news for Europeans who do business in China, and for the Chinese economy as it tries to woo back foreign investors, it is challenging news for the Biden Administration as it tries to emphasize the national and economic security risks of continued engagement with China.

Analysis

Although China has ostensibly met its growth target of 5% in 2023, it is important to note the unreliability of Chinese statistics. China’s leaders, in the past, have even acknowledged the need to treat China’s economic statistics with caution, as both enterprises and provincial officials frequently pad their numbers, and this padding is reflected in the aggregate reporting. Even if we provisionally accept the announced statistics, economists still expect growth to slow to 4.6% in 2024 and 4.5% in 2025, and matching World Bank predictions also fear the regional chilling effect that the shadow of such sluggish growth might cast. Moreover, in-depth analysis of the new statistics continue to cast serious doubts on the reliability of the new statistics, with alternate numbers hovering as low as 3% and predictions of similar numbers for 2024. Despite the rosy picture Li paints and the measures Xi proposes, there are increasing signs of worry. The beleaguered property industry has been dragging down the economy since at least the middle of last year, and its continued decline is an important bellwether for economic recovery. For the first time since 2006, Mexico has replaced China as the top exporter to the United States, with US goods imported from China down more than 20% between Jan-Nov 2023. In broader terms, Chinese exports were down 4.6% overall dollar terms for 2023, which is the first time since 2016. The massive outflow of foreign direct investment, leading to declining numbers for the first time in 1998, also signals a negative outlook for the future as companies start looking elsewhere for more stable markets (although the potential for massive earnings will always draw some companies back in). 

For companies comfortable with taking on high-risk projects and investments, the Chinese market will likely continue to deliver explosive – if unpredictable – growth opportunities, even as the economy declines on the whole. The growing EV industry, for instance, is an example of where Chinese companies have outperformed the flagging economy and will likely continue to deliver high returns. At the same time, companies must be careful not to get caught up in the increasing “friend-shoring” and “derisking” efforts, in addition to growing US export measures on advanced technologies. In short, while there is always opportunity, this is a time that may call for more caution than not.

Analysis

Nvidia’s chips are vital for China’s development of AI and machine learning. Their harvesting by Chinese entities demonstrates the lack of a domestic viable alternative available from China’s own tech companies. While Chinese entities are trying to develop indigenous AI technology, harvesting foreign chips allows for a cheaper and quicker solution in the short term to help bridge the current AI technology gap between the US and China. On the other hand, restrictions on US chips are helping to boost sales of Chinese chips in the short run, with sales at Chinese tech company Naura surging in part owing to a larger domestic market share now that US competitors are out of the game. A challenge for companies like Nvidia is that compliance with US export restrictions can be extremely challenging as chips are easily smuggled and repurposed. Tech companies should therefore be aware of the risk to their IP, to their reputations, and to increased regulation as the intensifying global AI race further incentivizes corporate espionage.

Analysis

Accusations of espionage and clandestine political influence have come to dominate China’s relations with states like Belgium, where political leaders in Brussels are under pressure to respond firmly to credible reports that Beijing recruited a far-right politician as an intelligence asset for several years. As espionage is not a crime in itself in Belgium, the individual in question is currently being investigated on corruption and cash-for-influence charges. The context of the case has sharpened Belgians’ vigilance about China’s potentially broad intelligence operations in the country. In the UK, calls for vigilance about the threat from China have intensified after journalists reported that former disastrous Prime Minister Liz Truss, a self-proclaimed China hawk who traveled to Taiwan to give a much-touted speech on China-Taiwan relations, was simultaneously lobbying on behalf of defense contractors to “expedite” arms sales to China. Furthermore, claims that a third party lobbied for the UK’s alleged Chinese spy to obtain a visa to remain in the UK have further clouded the British public’s sense of whether its political and business elites are prioritizing national security over personal financial gain when it comes to China. 

Espionage is not, of course, a new phenomenon, but three factors stand out for why companies doing business with China should pay attention to what happened in Belgium and the UK. First, this case highlights how negative public images of China mean that any hint of espionage or nefariousness by Beijing, whether against a foreign government or a business, will be politicized and rapidly become a PR crisis and possibly lead to sanctions or other restrictions on dealing with Chinese entities.  Second, the Belgian example underscores how even when pursuing a “pro-engagement” agenda, as Belgium’s Prime Minister has stated, popular pressure is increasingly hostile to such positions and will likely force politicians–and by extension businesses–to be both transparent about their dealings with China and to minimize exposure and risk of popular blowback. Finally, the uproar in the UK about the hypocrisy of Liz Truss and her lobbying client also shows the power of popular sentiment about China.

Analysis

Considering the intensity of conflicts involving Iran-backed Houthis in the Red Sea, Ukraine, Palestine, and Myanmar, geopolitics is taking center stage as we start this new year. Adding to the mix, North Korea watches are sounding alarms after the country’s leader, Kim Jong-un, made a series of public speeches at the Supreme People’s Assembly that significantly ramped up hostile rhetoric against South Korea and the West. This is perhaps an indication that Kim has decided against future unification with South Korea, opting instead to strengthen ties with China and Russia as part of a doubling-down strategy to lean towards its allies rather than pursue more cordial relations with Seoul. Adding to concerns in Seoul that North Korea is planning for a future conflict, heightened by the North’s recent missile tests, South Korea also noted that Pyongyang’s recent development of hypersonic missiles appears to be progressing. 

As tensions continue to rise in the region between China and the Philippines over the South China Sea–and the increasingly close alignment between Manila, Washington, and Tokyo–East Asia will be a crucial region for understanding geopolitical risk this year. US companies in the region should therefore look to mitigate the risk of any potential geopolitical fallout by continuing to diversify their markets, simplify supply chains, and ensure that business operations include partners of the US that will be better insulated from potential sanctions or asset freezes if diplomatic relations between the US and China continue to deteriorate, as we predict they will.