Welcome to the 195th edition of Trade War.
To celebrate the start of the new year, I am leaving this issue unpaywalled and free for all to access. I hope you enjoy reading some of the latest, most important China news in this week’s Trade War.
Taiwan’s high-stakes presidential election approaches in less than a week. Candidates of the three vying parties, the DPP, KMT, and TPP speak out on China and cross strait tensions. And Beijing uses disinformation and other means to try to undermine Taiwan’s democracy.
How Wall Street got everything wrong in 2023 and predicted a China boom that never happened. And close to 90% of foreign money that entered the China market last year left by yearend.
Xi Jinping strikes bullish note in New Year’s speech calling economy “resilient and dynamic.” December Central Economic Work Conference offered few specifics on how to address mounting challenges. Middle-class Chinese have little confidence in the year ahead.
Could China experience “lost decades” a la Japan?
Youth depression accompanies high joblessness.
China’s MSS - the FBI and CIA rolled into one
And I reminisce below about some time spent with just-deceased 95-year-old AIDS activist Gao Yaojie, in Beijing over two decades earlier.
Taiwan’s imminent high-stakes election
Hsiao Bi-khim struck a somber note when I interviewed her in Taipei in April 2000 just after the historic first win by the Democratic Progressive Party (DPP). “We did not open the champagne bottles or cut the cake the night of the victory,” she said, then an advisor to new president Chen Shui-bian. “Most of us are having difficulty even smiling today.”
When Taiwan goes to the polls for another presidential election on Saturday January 13, 2024 Hsiao will be running as vice president with presidential candidate William Lai. If the DPP wins—and the odds aren’t clear yet—the celebrations may again be muted. That’s because the same existential question faces Taiwan today as it did then: how to maintain its independent status from China while avoiding military conflict.
As Lev Nachman and Wen-Ti Sung, nonresident fellows at the Atlantic Council Global China Hub, write: “What makes Taiwan different . . . is that the fundamental political question is not about social issues, redistribution, or traditional left-right issues. Instead, voters care most about Taiwan’s future, its relationship to China, and which candidate is going to keep Taiwan safe”—the other two candidates are Hou Yu-ih of the Kuomintang (KMT) and Ko Wen-je of the Taiwan People’s Party (TPP).
While Taiwan’s economic reliance on China is well known, fewer realize how much the reverse is also true. “An uneasy economic equilibrium [has] constrained Beijing’s worst impulses,” write Atlantic Council Geoeconomics Center’s Jeremy Mark and Niels Graham in “Relying on old enemies: The challenge of Taiwan’s economic ties to China.”
“Cross strait relations are anchored in global supply chains built around Taiwan-made semiconductors and Taiwanese electronics manufacturers’ investments on the mainland, Mark and Graham write.
Read more on the imminent Taiwan election—with a link to an article on the historic 2000 election reported by yours truly—in the latest Atlantic Council Global China Newsletter, “Staying on track? Girding for a challenging year in US-China relations.”
The three candidates speak
KMT’s Hou: “Never had an unrealistic idea” about China’s attitude
“I’ve never had an unrealistic idea about mainland China’s attitude toward us,” the KMT presidential candidate, Hou Yu-ih, said in a recent interview, one of three the Wall Street Journal did with the leading candidates. “The most important thing is to handle our defense and economy in a way that at least prevents the other side from casually launching a war.”
That’s sounds a lot different from the KMT of the past, when the party seemed focused on bringing Taiwan ever closer to China. And with Taiwanese less and less identifying as Chinese—the proportion has now fallen below three percent—the KMT wants to lose its reputation as the party most pro-Beijing.
“Young people in Taiwan neither feel they are Chinese, nor do they have affection for anything Chinese—quite the contrary,” said Andrew Hsia, deputy head of the KMT.
DPP’s Lai: “People view this situation with calmness and reason”
Despite China’s intimidation of Taiwan with its military jets regularly buzzing the self-ruling island—and most recently, with Chinese balloons floating over—DPP candidate Lai Ching-te has been at pains to stress that life continues as normal. Lai is also working to downplay the reputation he had as a supporter of Taiwan independence.
“Taiwan is relatively calm—the stock market is going up and everyone’s living a normal life,” Lai said. “People view this situation with calmness and reason.”
TPP’s Ko: The KMT is “too submissive to China.”
Meanwhile, third party candidate Ko Wen-je of the TPP, a doctor and former mayor of Taipei who is trying to appeal to Taiwan’s youth, has criticized both of the leading parties, including by calling the KMT “too submissive to China.”
China disinformation: Taiwan democracy is a mess
“As Taiwan gears up for the presidential and legislative election on 13 [of] January, the Chinese government is also ramping up its efforts to interfere. From sponsored trips to China for local leaders, economic coercion, fake opinion polls, and disinformation campaigns, some analysts say the wide-ranging tactics that Beijing has unleashed will have an impact on the election’s outcome,” writes William Yang for the Index on Censorship.
The primary aim of China’s disinformation campaign is “to show the Taiwanese public that Taiwan’s democracy is a mess and that while the DPP claims to protect democracy and freedom, in the end, it is not democratic and free at all,” says Puma Shen, chairperson of Taipei-based research group Doublethink Lab.
Last polling shows another DPP win
The last polls show the DPP likely winning what would their third term in power, with a statistically-significant lead of from three to eleven percent over the KMT. As of January 2, no further polling is allowed, as per Taiwan’s ban on all polling of candidate popularity for the ten days preceding an election.
“If the DPP is able to sustain its lead right now and gets re-elected, we should expect closer watch from both Beijing and Washington on Lai,” says National Chengchi University professor Huang Kwei-bo. “There’s a possibility for cross strait tensions to deteriorate further.”
How Wall Street got it wrong
If one ever needed a reminder of how wrong Wall Street can be, last year was made for it. Witness the calls being made at the end of 2022:
“Over at Morgan Stanley, Mike Wilson, the bearish stock strategist who was rapidly becoming a market darling, was predicting the S&P 500 Index was about to tumble. A few blocks away at Bank of America, Meghan Swiber and her colleagues were telling clients to prepare for a plunge in Treasury bond yields. And at Goldman Sachs, strategists including Kamakshya Trivedi were talking up Chinese assets as the economy there finally roared back from Covid lockdowns,” reports Bloomberg News.
“Blended together, these three calls—sell US stocks, buy Treasuries, buy Chinese stocks—formed the consensus view on Wall Street.”
“And, once again, the consensus was dead wrong. What was supposed to go up went down, or listed sideways, and what was supposed to go down went up—and up and up. The S&P 500 climbed more than 20% and the Nasdaq 100 soared over 50%, the biggest annual gain since the go-go days of the dot-com boom.”
A little back-patting if I may: If you were reading Trade War at the end of 2022, or beginning of 2023, or actually anytime last year, you would have NOT have been snapping up China stocks in anticipation of a long-running bull market.
Money flows in … money flows out
Close to 90 percent of the international money that entered China’s stock market last year has departed. After reaching a peak of 235 billion yuan ($33 billion) in August, net investment has dropped to only 30.7 billion yuan, reports the Financial Times.
“The confidence issue goes beyond real estate, although real estate is key,” says Hong Kong-based UOB Kay Hian’s Wang Qi. “I’m referring to consumer confidence, business confidence and investor confidence—both from domestic and foreign investors.”
“The question I get from clients [about Chinese equities] is ‘Which sectors?’” says Alicia García-Herrero, chief Asia-Pacific economist at Natixis. “But when they push me, I don’t know what to tell them, because there is no sector.”
Xi: China is ‘resilient and dynamic’
In his annual New Year’s address broadcast on national television on December 31, Xi Jinping struck a bullish note, heralding China’s “resilient and dynamic” economy, while also vowing that the country would “surely be reunified” with Taiwan.
“The motherland will surely be reunified,” Xi said, and “compatriots on both sides of the (Taiwan) Strait should be bound by a common sense of purpose to share in the glory of national rejuvenation.”
While overall Xi’s comments on the Chinese economy were strongly positive, he also warned that “the path ahead”would experience, “winds and rains,” adding “some companies are facing business pressures; some people are running into difficulties finding jobs and in their daily living.”
“Everyone is very busy and the stresses of working and living are very great,” Xi said. “We need to create a warm and harmonious social atmosphere . . . and create convenient and comfortable living conditions.”
In 2024, China will “consolidate and enhance the positive trend of economic recovery, and achieve long-term economic stability,” he said.
“At the beginning of the year, optimism was high that 2023 would see a Chinese economy roaring back to life after stringent lockdowns,” writes the Wall Street Journal.
“A hoped-for consumer boom in China never really took off. Turmoil in the real-estate sector—visible in acres of unfinished apartment blocks and stricken developers—sapped consumers’ appetite for spending, with households opting to sock away savings instead.”
“What comes next? Another year of muddling through,” Rory Green, head of Asia economics at GlobalData.TSLombard, predicted in a report on China’s economy in 2024. “Growth is not going to collapse, but neither will it reaccelerate.”
‘Triumphalist rhetoric of perpetual progress'
“That so much of Xi’s speech wraps itself in the triumphalist rhetoric of perpetual progress underlines the ironclad commitment to achieving the goals that he has spelled out in numerous other speeches over the past decade. Nods to ‘Chinese-style modernization,’ the ‘new development concept,’ and ‘constructing a new development model’ are all redolent of the hubris of someone who sees China on the right track,” writes Jamestown China Brief editor Arran Hope.
“There are chinks in the armor of Xi Jinping’s China as this context and his brief mea culpa makes clear. But he is still unambiguous that China is a great country (“伟大的国度”), and that it will emerge stronger having weathered the current storm (“中国经济在风浪中强健了体魄、壮实了筋骨”).”
Here is the full text of the 12-min.-plus speech and you can watch the video of it here.
CEWC: ‘No surprises and few specifics’
China’s Central Economic Work Conference, an annual meeting of top Chinese Communist Party policymakers, met last month to “brainstorm solutions to economic ‘difficulties and challenges,’ . . . shorthand for multiplying economic challenges including high youth unemployment, a tanking property sector and the emergence of deflation,” reports Politico China Watcher.
“That’s unlikely to comfort either consumers or investors. The meeting produced ‘no surprises and few specifics,’ said Dexter Roberts, director of China affairs at the Mansfield Center at the University of Montana and an expert on the Chinese economy. The meeting’s readout ‘referenced the deeply damaging drop in consumer confidence, one reason China is now in deflationary territory, and the need to boost employment was mentioned, but with little detail how China will accomplish that,’ Roberts said.”
Middle and upper class confidence sags
An albeit small survey by Bloomberg News suggests confidence has badly sagged for middle and upper class Chinese affecting their willingness to spend on pricey items including homes, cars, and their children’s education.
Interviews with 20 college-educated people from five first-tier Chinese cities including Beijing, Shanghai, Hangzhou, Guangzhou and Shenzhen, show that most are delaying spending and are nervous about the future—even when less than half report their own incomes falling.
When asked whether they see the economy improving soon, 100 percent answered they did not, while 60 percent said they are saving more. Less than 40 percent reported seeing their family income take a hit, however.
“Some once-prolific shoppers are using that money to invest instead. Data released by the People’s Bank of China last month showed that Chinese households added 13.8 trillion yuan ($1.89 trillion) in savings in the first 10 months of the year, up 8.5 percent from a year earlier,” reports the financial news service.
“After an encouraging start in the first quarter of this year, second-quarter and third-quarter consumption data confirms what many in the industry have already come to accept: the era of double-digit growth in China’s retail sector is over,” declared McKinsey & Co., in a recent China consumption report.
Notable/In depth
The causes of youth depression
“China’s high youth unemployment rate and increasingly disillusioned young people—many of whom are ‘giving up’ on work—have attracted much attention from global media outlets and Chinese policymakers. The standard narrative is to associate the problem with the country’s recent growth slowdown. In fact, the issue goes much deeper,” writes Northwestern University economics professor Nancy Qian.
“The rise of youth depression has been decades in the making, and owes much to China’s rigid education system, past fertility policies and tight migration restrictions. Chinese youth are burned out from spending their childhood and adolescence engaged in ceaseless, intense study. Attending a good university is seen as necessary for securing a good job; and for rural children, a university degree is the only path to legal residence in cities under the hukou registration system. In a city, average household annual disposable income is US$6,446, which enables a middle-class lifestyle. By contrast, in rural areas, an income averaging only US$2,533 means living in relative poverty.”
Japan had ‘lost decades’ - ‘No reason to think differently about China’
”Systemic problems have over the years become features in China’s $19 trillion economy. The real estate market has tipped over after an almost unbroken 20-year boom, which the government itself encouraged . . . Stalled productivity growth, the politicization of regulation and the business environment, rapid ageing, high youth unemployment and inequality also figure prominently,” writes George Magnus, a research associate at Oxford University’s China Centre and Soas, and author of Red Flags: Why Xi’s China is in Jeopardy.
“It may seem churlish to draw attention to these things in the world’s second-largest economy, center of global exports, manufacturing and supply chains, and home to brands such as Alibaba, Tencent and TikTok. Yet Japan, 30 years ago, reminds us that it is quite possible to have islands of technological excellence and leadership, and also deep economic imbalances, deflating asset bubbles, over-indebtedness, and institutional weaknesses that compromise growth and prosperity. Technological prowess could not prevent Japan from succumbing to its proverbial lost decades, and there is no reason to think differently about China.”
MSS: the CIA and FBI rolled into one
“The Chinese agency, known as the M.S.S. [Ministry of State Security], once rife with agents whose main source of information was gossip at embassy dinner parties, is now going toe-to-toe with the Central Intelligence Agency in collection and subterfuge around the world,” report the New York Times’ Edward Wong, Julian E. Barnes, Muyi Xiao and Chris Buckley.
“The ministry has the foreign responsibilities of the C.I.A. and the domestic mandate of the F.B.I., combined with an authoritarian edge. The M.S.S. is charged with carrying out intelligence collection and operations overseas, as well as limiting foreign influence within China and clamping down on so-called subversive activities. Its mission is avowedly political: to defend the Communist Party against all perceived threats.”
RIP Gao Yaojie, AIDS activist
RIP Gao Yaojie - Noted AIDS activist and gynecologist dies on Dec. 10, aged 95
Here is what I wrote after interviewing Gao Yaojie over two decades ago in Beijing, when she was still actively working to stem China’s serious AIDS crisis, even as Beijing tried to stop her ~
“For most people her age, a comfortable retirement would be their top priority. But 74-year-old Dr. Gao Yaojie, a gynecologist and grandmother from Henan Province, has no intention of giving up her campaign against the AIDS crisis.”
"It has taken more than a decade to get Beijing to acknowledge the problem. Gao, who earned her medical degree from Henan University in 1954, first came across HIV patients at a Henan prison in the early 1990s.”
“She was shocked at how little these afflicted inmates knew about sexually transmitted diseases. Then, in 1996, she learned that the illegal sale of blood was also contributing to the rapid spread of AIDS through blood transfusions in rural China.”
“That's when Gao decided to devote herself full-time to informing hospitals, schools, factories, and farms about the disease. ‘As a doctor, I could receive a maximum of 10 patients a day,’ says Gao. ‘But with education, one can reach thousands a day.’”
“‘You can't put out a big fire with a cup of water,’ says Gao. That's why, she says ‘for the rest of my life, I'll keep giving AIDS-education lectures.’ Her latest cause: making sure children who lost a parent to AIDS get an education. For this doctor, retirement is not an option.”
I will always remember helping her up the stairs in Beijing's Great Hall of the People, and her astonishment at being honored there (as one of the 2002 Businessweek “Stars of Asia”) in that symbol of CCP power, after facing years of resistance for her work on AIDS from that same party.
Montana picture
First evening of 2024.