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Analysis

Although it is possible that Xi postponed the Third Plenum in favor of the Biden-Xi summit, the appearance is that Xi has put political concerns in front of  continued Dengist-style economic reform. Continuing a push by the CCP leadership for the securitization of Chinese society - in part, an extension of experiments in social control in Xinjiang and Hong Kong - Xi’s appointment of a new defense minister, Dong Jun 董军, to replace the defenestrated Li Shangfu 李尚福, as well as the removal of several high-ranking military officials as delegates to the National People's Congress, signals that Xi continues to clear house in favor of his own loyalists.  

There is increasing evidence, however, that not everyone is on board with Xi’s centralization of power. An article recently published by Caixin, for example, called for a revisiting of Deng Xiaoping’s “seeking truth from fact” before it was quickly taken down by censors, suggesting that Deng’s legacy is considered antithetical to Xi’s new direction. Some reports that prominent business analysts on Chinese social media have recently closed their accounts or have stopped posting new content further suggests that increased government paranoia over its monopoly on information is encroaching on all forms of expression outside official channels. As officials increasingly self-censor to avoid falling foul of the center’s shifting definitions of acceptability, this will also likely erode the capacity for effective economic and administrative governance. This means that China’s economic news will likely continue to be poor for the foreseeable future as internal feedback mechanisms are constricted within China’s political system.

Xi’s New Year speech to diplomats also ramped up Xi’s anti-West rhetoric and chastised criticisms from the EU that China was a “systemic rival.” Despite a successful meeting with President Biden late last year, Xi therefore still publicly labels the West as an existential threat to China’s future prosperity and that recent industrial policy decisions and moves to restrict foreign businesses in China are therefore likely to stay.

Analysis

Some positive results emerged from last year’s Biden-Xi summit, with China curtailing “dangerous” fighter jet maneuvers that had become a common occurrence prior to the two leaders’ meeting. The appointment of Dong Jun as the new defense minister also removes an obstacle in US-China military communication, as Dong’s predecessor, Li Shangfu, was sanctioned by the US and therefore refused to meet with US counterparts in protest. This month, staff-level military dialogues will resume between the US and China in a sign of progress compared to the frozen state of dialogues in the past few years. 

Despite these improvements to military ties, however, economic relations between the two countries remain tense. While the Biden Administration’s line is that it does not wish to see the US “decouple” from China entirely, many in DC do not share this view. Pressure from various groups within both China and the US continue to influence a fraying of business ties between the two states. In one recent example, US rights organizations and Congress forced Thermo Fisher Scientific to stop selling DNA kits in Tibet under accusations that the Chinese government is using the kits to build a database of ethnically Tibetan individuals as part of its societal control objectives. 

Most foreign enterprises that deal with China are less concerned about targeted sanctions and more nervous about China’s worsening business environment. China’s slow approval of data exports by foreign businesses, a result of the amended National Security Law, continues to hamper current business operations of foreign corporations operating in China. (See above on the fraying of communication and effective governance.) These restrictions are likely to continue for the foreseeable future as part of a broader crackdown on independent economic data and CCP’s securitization of its economy. 

Analysis

Economists eleventh-hour renewal of their confidence in the Chinese economy should be taken with a grain of salt for three reasons. First, while it is true that Beijing has announced a potentially powerful range of policy measures to jump-start the economy, how local elites implement these changes is the key to any effect. Second, Beijing has a reputation for making swift and drastic changes, if not reversals to announced policies, and so such sweeping overhauls of government guidance such as those announced in December might themselves be swept away in the coming months if they prove ineffective. Third, China’s economic statistics have always been generally rosier than reality, and this trend will likely only increase as managers and bureaucrats become more afraid to report bad news up the chain. Nevertheless, the key take-away from this eruption of new policies should simply be that Beijing is deeply aware that its economy is in decline and is seeking measures that will reverse this trend (with the unspoken caveat that it must also not compromise Party control).

Taking a step back, we assess that economists are overly optimistic about the prospects for the Chinese economy in the New Year. While Beijing of course issued an optimistic outlook based on its selected data, China (claims it) has (only barely) met its economic goals for 2023. Moreover, the fact that China’s expected growth continues to trend downward (at least by all external evaluations) does not bode well for a government that has often justified its rule based on continued and, often, double-digit annual economic growth. One number to watch in 2024 will also be the amount of foreign investment into China. Last year, more than US$100 billion was either not reinvested or actively withdrawn from Chinese markets in the first three quarters alone, and confidence in the stability of Chinese investments continues to decline globally. As companies like Apple and Foxconn relocate their factories out of China or decide to rebalance their portfolios away from Chinese investments, this trend more likely signals long-term problems for China’s economic recovery even if there is a temporary upswing. 

Analysis

The chip manufacturing sector, and the tech world more broadly, is dividing into US-backed and China-backed camps. As national security considerations continue to underscore government approaches to the tech sector, this decoupling will continue. Tech companies should plan how to react if they are sanctioned or denied access to customers–be they individual consumers or larger organizations–either by Washington or Beijing. In part, this trend is accelerating China’s own development of home-grown technologies as the CCP pressures its tech giants to produce technologies that rival their Western counterparts. At the same time, countries like South Korea that find themselves in the middle of US-China tensions appear to be leaning towards the US in a good sign for Washington that it continues to hold influence among China’s neighbors. As techno-nationalism becomes increasingly mainstream in trade and geopolitics, companies in the tech sector will have to navigate an increasingly tense and aggressive regulatory environment, not to mention defend themselves from the ongoing threats of state-sponsored intellectual property theft.

Analysis

Much as technological races have determined geopolitical advantage in the past, superiority in AI development will likely define US-China competition in the coming decades. China’s demand for AI technology in intelligence gathering, however, often meets with a lack of technological know-how or capabilities by intelligence officials. This heightens the incentive for intellectual property theft in the tech sector, particularly among companies working on AI technologies. As employees of tech companies face increasing pressure to divulge corporate secrets or IP to Chinese state agents, the threat of corporate espionage will also increase to not only produce rival technologies, but also to weaponize these technologies for state security ambitions. 

With AI development central to Xi’s vision of an omniscient state apparatus capable of monitoring, predicting, and controlling individual and corporate behavior, companies operating in the tech sector should be extremely vigilant against potential IP and data theft, even if their products or IP do not necessarily fall under “traditional” targets of corporate espionage. While vigilance will help prevent future data breaches or IP theft, however, a further issue is how the US government can counter the use of data already obtained by China through hacking and other data breaches, which presents questions of national security as much as corporate losses.

Analysis

Future historians will view 2024 as a pivotal year, with key elections in countries that equal almost half of global GDP. Starting the cycle, Taiwan’s election this week will mark the first major geopolitical inflection point for 2024, with events in Taipei being closely watched by observers in Taiwan, the US, China, and around the world. 

Beijing is gearing up for disappointment despite its efforts to swing the election in favor of its preferred KMT presidential candidate Hou Yu-ih 侯友宜, although the KMT look likely to make gains in national legislative races happening concurrently with the presidential election. The latest polls, however, show a tight race that is subject to volatility as each campaign grasps for a last-minute advantage. 

If the KMT does prevail in what many observers would see as a surprising upset, it is unclear how the relationship between Taipei and Beijing would change. While the KMT is hoping that its victory might lead to decreased trade restrictions and a more cooperative business environment with China, no Taiwanese party will respond positively to Xi’s increasingly hostile rhetoric about Taiwan’s “reunification” through force if necessary. Therefore, Taiwan-China and US-China relations are unlikely to dramatically improve after the election, which means that the trade and business environment is also unlikely to improve and may well deteriorate as Taiwanese businesses operating in China are increasingly punished for their government’s policy decisions.