China’s Poisoned Chalice

TAIWAN IS A flashpoint in the geopolitical contest between the US and China. A fullscale military invasion of the island of 23 million people, separated from mainland China by 100 miles of water in the Taiwan Strait, is no longer in the realm of theory. The question is when, not if.

The Taiwan crisis could not have come at a worse time for China’s President Xi Jinping. The 20th National Congress of the Chinese Communist Party (CCP) is scheduled to meet in November 2022 to ratify an unprecedented third five-year term for Xi.

Xi regards reunification of the island with China as a centrepiece of his legacy. The US commitment to protect Taiwan’s independence falls under the Taiwan Relations Act. But, crucially, the Act does not spell out how it will protect Taiwan.

One interpretation—favoured by Beijing—is that it means the US will provide Taiwan weapons to defend itself but not involve US ground troops, warships or fighter jets. That would be in line with the US position on Russia’s invasion of Ukraine where it has avoided direct military involvement but provided Ukraine with lethal weaponry.

Taiwan interprets the Act differently. It expects full US military intervention in the event of an attack by China. Much will depend on political developments. Taiwan will hold its next general election in early 2024. If the pro-China Kuomintang party wins, reunification could be achieved by Beijing without firing a bullet. If fiercely anti-China Tsai Ing-wen wins a third successive term as president, Beijing will tighten the noose around Taiwan with an economic blockade before launching an invasion.

However, as the Russia-Ukraine war has shown, it is not easy to occupy a country militarily even when there is a long land border. Taiwan has 100 miles of sea as a buffer. An attempted amphibious military assault by troops of the People’s Liberation Army (PLA) is fraught with uncertainty.

Apart from Taiwan, Xi confronts several structural domestic problems. Despite a record trade surplus of $101 billion in July 2022, the Chinese economy is expected to grow by just a little over 3 per cent in 2022-23. Xi’s zero-Covid lockdowns have disrupted supply chains in cities across China.

An ageing and shrinking population could herald a years-long, Japan-like economic slowdown in China. Between the 1960s and 1980s, Japan was the world’s fastest growing economy, widely tipped to challenge the US for global economic supremacy. Japanese automobile and electronics brands like Nissan and Sony dominated market share. It all began to fall apart in the early 1990s.

Over the past 30 years, Japan’s economy has barely grown at an average of 1 per cent a year. In 1990, Japan’s GDP was $3.13 trillion, nine times China’s GDP that year ($0.36 trillion) and over half of US GDP ($5.96 trillion). By the end of 2021, China’s GDP had soared to $17.7 trillion, nearly catching up with the US ($21.9 trillion) and more than triple Japan’s current GDP ($5.4 trillion).

Japan’s demographic decline in the early 1990s has worrying similarities with today’s China: falling productivity, an ageing workforce and a shrinking population.

There are striking dissimilarities too. Japan never aspired to be a global hegemon. China does. Beijing is not content with matching the US economically and technologically. The consensus in Beijing is that the People’s Republic of China should be the world’s leading superpower by 2049, the 100th anniversary of its founding.

By then, Hong Kong would legally have become a part of China. The Sino-British joint declaration of “one country-two systems” for Hong Kong ends in 2047. While absorbing a global financial powerhouse like Hong Kong may appear seductive to Beijing, the prize comes with thorns.

Hong Kong today hosts 70 of the world’s 100 largest global banks. Its stock market capitalisation is $4.97 trillion, seventh highest in the world (and higher than the NSE’s market capitalisation of $3.07 trillion).

But the prospect of being fully reunified with Communist China in the next 25 years is beginning to scare away global banks and financial institutions. Hong Kong under China could be very different from Hong Kong today where the national security law has already curtailed personal freedom. Many expatriate executives have left or are planning to leave.

Cooler heads in the CCP have advised patience over Taiwan while China builds its military and economic strength. Xi though is in a hurry to stamp his legacy. If the Chinese economy meanwhile catches the Japanese demographic disease, Xi may run out of time and patience.

AmericaChinaKuomintang partyTaiwanXi Jinping