Risks & Trends

by Malcolm Riddell

After Xi
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After Xi: A Succession Crisis to Rock the World

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Malcolm Riddell
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Founder of CHINADebate

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May 15, 2021
After Xi: A Succession Crisis to Rock the World
After Xi: A Succession Crisis to Rock the World
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After Xi

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A new risk to add to your analyses and strategic planning: A succession crisis in China.

  • By removing term limits on his stay in office and by not naming a successor, Secretary General Xi Jinping ‘has pushed China towards a potential destabilising succession crisis, one with profound implications for the international order and global commerce,’ writes Richard McGregor of the Lowy Institute and Jude Blanchette of the Center for Strategic & International Studies

Let’s start with a very possible scenario: Xi dies.

  • ‘If Xi passed away in office [through natural causes or assassination], or became seriously ill – without have a named successor in place - the transition process, on paper, at least, is straightforward.’
  • ‘According to the party’s constitution, the general-secretary is chosen during a full session of the Central Committee, and from the existing members of the Politburo’s inner circle.’

‘In practice, the choice of a new leader would be decided through a process of informal consultation and horse trading, before being approved by the Central Committee.’

  • But also likely in this power vacuum, the process could break down into infighting and a power struggle within the Politburo, a nightmare scenario for the Chinese Communist Party.’

Depending on how fast the process goes, China could be without a leader for some time, with all the uncertainty that implies.

  • If modern Chinese history is a guide, the new leader may not be in power very long.
  • This means that we won’t know how to factor China into geopolitical analyses until we have some assurance that he is there to stay.

The Party elite may see Mr. Xi’s death as an opportunity to change course.

  • They could pick a new leader who would mend fences with the U.S., the EU, India, and other countries with whom China has clashed.
  • One who would dial down tension in flashpoints like Taiwan and South China Sea.
  • A new leader who would provide a level playing field to foreign companies and abide by the letter and spirit of the international trade regime.

More likely, they would pick a new leader who continues along Mr. Xi’s path with a few tweaks.

  • While the many in the Party elite may feel that Mr. Xi went too far, the general direction from the start was set – and tacitly or explicitly - supported by them.

A much less likely and potentially vastly more destabilizing scenario would be a coup that ousted Mr. Xi.

  • ‘Plots to overthrow Xi and his administration are not the product of fevered imaginations but rather have been widely spoken of by senior Chinese officials, including Xi Jinping himself.’

‘It is true that Xi has a host of enemies in the party.’

  • ‘It is equally true that the barriers to organising against him are near insurmountable.’
  • ‘So the chances of a coup being mounted against Xi at the moment, absent a systemic crisis, are exceedingly small.’

But as small as the chances are, it is worth considering outcomes absent a new leader quickly and firmly put in place.

  • Xi, thanks to a magnificent and ongoing PR effort, is popular with the people of China who could mount massive, widespread protests and demonstrations.
  • Xi’s supporters among the political elite and the military could mount a countercoup to put Mr. Xi back in power.
  • The plotters themselves could splinter, fight among themselves, and be unable to put a new leader in place or in place for very long.
  • And the plotters and the establishment could face off in a civil war that could lead China into another fragmented, 1920s-style, Warlord period.

In the face of these dire possibilities is a more optimistic outcome suggested by Roger Garside in his new book, China Coup.

  • I just finished reading China Coup and loved it.
  • I also recently spoke with Mr. Garside for more than an hour and a half and will post an edit version of our conversation soon.

The book’s premise is a coup that replaces Xi Jinping as China’s leader and introduces democracy, transparency, and human rights.

  • Unlikely? Sure. But by posing a provocative ‘what if,’ Mr. Garside expands the terms of our debate on China.

In the same way the ‘Longer Telegram’ suggested that the U.S. and its allies should encourage the replacement of General Secretary Xi, Mr. Garside, calls for supporting the officials backing a complete regime change toward a freer and more open China.

  • It is difficult to argue that whenever Chinese elites aspire to the country’s becoming, in Robert Zeollick’s words, a ‘responsible stakeholder,’ we shouldn’t support them.

Beyond death, incapacitation, or coup, is the possibility that Mr. Xi will name a successor and in five or ten years turn over his titles (while, no doubt like Mr. Deng, remaining a major force.)

  • 'Given Xi’s extensive purges, whomever he selected as his replacement would have to be steadfastly and publicly loyal.'
  • 'Only with such reassurances would Xi feel that he, and his family and associates, will be safe in retirement.'  

Which scenario plays out will have an impact - or not - on global business and markets.

  • Each should be factored into your risk analyses and strategies.
  • Be prepared.

And be sure to have a look at the upcoming online Flash Talk by our friends at Trivium China (info below) - and register!

Bloomberg

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Matt Levine | Bloomberg
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VIEs
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Part 1 | 'Owning Chinese Companies Is Complicated'

‘ “Variable interest entities”(VIEs): The problem with this is that it sort of sounds like you’re kidding. But this is a standard method for mainland Chinese internet companies to go public, and the market has come to accept it.’
7/22/2021

Bloomberg

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Matt Levine | Bloomberg
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VIEs
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Part 2 | The DiDi VIE (as an example)

‘The prospectus has a diagram, above, of the corporate structure, which looks almost normal. But everything below the double arrow — the actual ride-hailing business, etc. — is slightly askew.’
7/22/2021

Bloomberg

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Matt Levine | Bloomberg
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VIEs
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Part 3 | Revising the Rules

‘The Chinese government could declare “all these VIE contracts are actually a disguised form of foreign ownership, which is not allowed by the rules, so they are all void and your Didi and Alibaba shares are worthless.” ’
7/22/2021

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Malcolm Riddell
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VIEs
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China: Signals Blinking Red & Oops, We Missed the Risks

I had intended to make this issue all about ‘Variable Interest Entities’ (VIEs) and the emerging risks to about $1.8 trillion dollars’ worth of Chinese shares listed on U.S. exchanges – that is, 4% of the capitalization of the U.S. stock markets.
7/22/2021

Nikkei Asia

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VIEs
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'Crackdown on US listings: Will China close $1.6tn VIE loophole?'

‘If Chinese authorities start to question “Variable interest entities”(VIEs), amid the crackdown that has already battered ride-hailing company Didi Global -- another VIE user -- the resulting loss of investor trust could send shock waves through global financial markets.’
7/22/2021

Financial Times

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Jamie Powell | Financial Times
7/22/2021

Foreign Policy

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Sulmaan Wasif Khan | The Fletcher School of Law & Diplomcy, Tufts University and the author of 'Haunted by Chaos: China’s Grand Strategy from Mao Zedong to Xi Jinping'
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China's Grand Strategy
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1 | 'Wolf Warriors Killed China’s Grand Strategy—and We'll All Come to Miss It'

‘The predominant feature of Chinese conduct today is not grand strategy but a belligerent, defensive nationalism that lashes out without heed of consequences.’ Sometime in 2020, China came unmoored from its grand strategy.
6/3/2021

Foreign Policy

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Sulmaan Wasif Khan | The Fletcher School of Law & Diplomcy, Tufts University and the author of 'Haunted by Chaos: China’s Grand Strategy from Mao Zedong to Xi Jinping'
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China's Grand Strategy
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2 | Blame It on Xi

‘In China’s case, the Xi era has seen the accumulation of somewhat counterproductive policies that catalyzed a breakdown.’
6/3/2021

Foreign Policy

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Sulmaan Wasif Khan | The Fletcher School of Law & Diplomcy, Tufts University and the author of 'Haunted by Chaos: China’s Grand Strategy from Mao Zedong to Xi Jinping'
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China's Grand Strategy
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3 | Enter the ‘Wolf Warriors’

‘What changed in 2020 was that nationalism for its own sake became the predominant motif of Chinese conduct.’
6/3/2021

Foreign Policy

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Sulmaan Wasif Khan | The Fletcher School of Law & Diplomcy, Tufts University and the author of 'Haunted by Chaos: China’s Grand Strategy from Mao Zedong to Xi Jinping'
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China's Grand Strategy
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4 | Why China Abandoned Its Grand Strategy

‘The most persuasive explanation is that China has poisoned itself through its own rhetoric.’
6/3/2021

Foreign Policy

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Sulmaan Wasif Khan | The Fletcher School of Law & Diplomcy, Tufts University and the author of 'Haunted by Chaos: China’s Grand Strategy from Mao Zedong to Xi Jinping'
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China's Grand Strategy
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5 | Two Caveats

‘Highlighting the strategic questionability of China’s policies doesn’t mean that Beijing’s fears of the outside world are completely unjustified.’
6/3/2021

Foreign Policy

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Sulmaan Wasif Khan | The Fletcher School of Law & Diplomcy, Tufts University and the author of 'Haunted by Chaos: China’s Grand Strategy from Mao Zedong to Xi Jinping'
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China's Grand Strategy
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6 | The Risks & the Dangers

‘The real danger is that once toxin has spread through the system, there is no knowing where it will end.’
6/3/2021

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Malcolm Riddell
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China's Grand Strategy
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Killing China's Grand Strategy

Trend: Under the Xi Jinping administration, China has amped up abrasive ‘Wolf Warrior’ diplomacy; cracked down within its borders, despite protests and criticisms from other countries; become increasing bellicose in responding to those protests and criticisms, and any other pushback it doesn’t like; and increased its aggressive rhetoric and actions against neighbors. Risks: If this sounds like a problem just for the world’s Ministries of Foreign Affairs, think again – the impact extends deep into business and finance.
6/3/2021

Project Syndicate

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Shang-Jin Wei
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Columbia University

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China's demographic challenges
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'Sex and the Chinese Economy'

‘A rise in China’s male-female ratio may have contributed to between one-third and one-half of the increase in its trade surplus with other countries.’ ‘The sex imbalance thus likely underpins an important source of tension between China and the US. Yet bilateral engagement has paid scant attention to this linkage.’
5/27/2021

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Malcolm Riddell
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CHINADebate

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China's demographic challenges
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'Demography + Technology is Destiny'

The census showed that the number of births nationwide fell to the lowest level since 1961, following a nationwide, manmade, famine caused by Mao’s “Great Leap Forward” that killed tens of millions of people, and that China’s total population could peak in the next few years.
5/27/2021

Bloomberg

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China's demographic challenges
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'China: Births Falling'

‘China’s total population could peak in the next few years, spurring profound changes for the world’s second-biggest economy.’
5/27/2021

Bloomberg

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China's demographic challenges
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'China Bets on Productivity Over Population to Drive Its Economy'

‘Beijing has a two-pronged approach to maintaining economic growth as its population shrinks.’ ‘First, it intends to slow the decline of the urban workforce by raising the retirement age and encouraging migration of more of the country’s 510 million rural residents to cities.’ ‘Second, it plans to raise productivity -- a measure of economic output per worker -- with the latest five-year plan emphasizing better vocational education and more investment in scientific research, automation and digital infrastructure.’ [see second chart above]
5/27/2021

Financial Times

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Gideon Rachman | Financial Times
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China's demographic challenges
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'Lousy demographics will not stop China’s rise'

‘The old maxim ‘demography is destiny’ no longer holds in the same way that it used to.’ ‘A shrinking and ageing population may not have the same gloomy implications in the 21st century.’
5/27/2021