Risks & Trends

by Malcolm Riddell

After Xi
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'After Xi: China's potentially destabilising succession crisis'

Center for Strategic & International Studies (CSIS)

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Richard McGregor | Lowy Institute
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Jude Blanchette | Center for Strategic & International Studies

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May 15, 2021
'After Xi: China's potentially destabilising succession crisis'
'After Xi: China's potentially destabilising succession crisis'
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Mao's dead. Let the games begin. Spoiler: the little guy in the center wins.

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Richard McGregor | Lowy Institute

After Xi

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BIG IDEA | ‘By removing de jure term limits on the office of the presidency — and thus far refusing to nominate his successor for this and his other leadership positions — Xi has solidified his own authority at the expense of the most important political reform of the last four decades: the regular and peaceful transfer of power.’
‘In doing so, he has pushed China towards a potential destabilising succession crisis, one with profound implications for the international order and global commerce.’

'In early 2018, without public notice, Xi Jinping abruptly removed de facto term limits on the most senior position of power, the head of the Communist Party, and thus far has refused to nominate his successor.'

  • 'In doing so, Xi made himself leader in perpetuity, at the expense of the most important, and successful, political reform in China of the last four decades: the regular and peaceful transfer of power at the top.'

'Xi inherited all three top jobs from his predecessor, Hu Jintao – as General-Secretary of the Communist Party, chair of the Central Military Commission, and as State President – in late 2012 and early 2013.'

  • 'If Xi had followed the precedent set by Hu, he would be preparing to step down as head of the CCP and the military, and as president at the Party Congress - held every five years - in late 2022.'

‘While the topic of leadership succession is not something Chinese officials are willing to discuss in public, the world has a huge stake in how China addresses this emerging problem.’

  • ‘After nearly nine years in office, Xi Jinping now stands as the overwhelmingly dominant figure in China’s political system, having gained command of the military, the Chinese Communist Party (CCP) apparatus, and diplomatic and economic policymaking, all while sidelining or locking up rivals to his leadership.’

‘By removing de jure term limits on the office of the presidency — and thus far refusing to nominate his successor for this and his other leadership positions — Xi has solidified his own authority at the expense of the most important political reform of the last four decades: the regular and peaceful transfer of power.’

'Until Xi threw the process out, the new norms governing the handovers were seen as a turning point in Chinese politics.'

  • 'Indeed, the term limits in China were widely considered to have become entrenched, as they had worked so well in keeping the system stable while the economy grew.'  
  • 'The two - political stability and economic growth - seemed to reinforce each other.'

‘In doing so, he has pushed China towards a potential destabilising succession crisis, one with profound implications for the international order and global commerce.’

  • 'The longer he stays in office without preparing a successor, the greater the risk of a power struggle breaking out at the top of the party to take his place.'  

'How, then, might any succession play out, either in the short term, or later, if Xi stays in power for another decade?'

  • 'Is Xi akin to Stalin after the purges of the 1930s, a leader who has so thoroughly eliminated rivals and cowed the system that he will be in place until he can no longer perform the duties of office, leaving a succession battle in his wake?'
  • 'Or will the system produce a Newtonian reaction against his all-encompassing power, either pushing him out of office prematurely, or at least forcing him to set a timetable for his departure?'
  • Alternatively, is there a middle path, of an orderly succession in the next five to 10 years?'

'Xi has made enemies at home with the ruthless prosecution of his anti-corruption campaign, his crackdown on legal and media reformers, and his disdain for economic liberals.'

  • 'Nothing, however, angered his critics as much as his upending of the elite consensus governing power-sharing that had evolved over four decades and produced successive peaceful handovers of power.'  

Below are four scenarios, re-ordered to place them in order of destabilization.

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

CHINADebate

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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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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