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Adam Terenyi
Mar 2216 min read

Digest: Spring 2024 Issue 79

Welcome to the China Leadership Monitor's Spring 2024 Digest, which provides article summaries for those who have not yet explored our most recent issue.


Jump to each article summary here:

 


Joel Wuthnow:

Getting to World Class: Can China’s Military Persevere?


The Chinese military has set for itself progressive developmental targets and, facing slowing economic growth and targeted sanctions from the United States (US), some may view its military modernization strategy as doomed. Xi Jinping remains confident in his speeches, however, stating that the People’s Liberation Army (PLA) will modernize and innovate successfully. Taking a closer look at the PLA demonstrates Xi may be somewhat right to feel confident due to successful “domestic innovation” efforts, the PLA’s “long-term” strategizing, and China’s sustainable levels of investment in the PLA – all of which thwart the consequences of growth declines and technological embargoes.


Challenges to PLA Modernization

The PLA slates parity with “the world’s elite armed forces including, and perhaps especially, those of the United States” by 2049, phasing its development through milestones in 2027, 2035, and 2049 in its strategy from 2020. It has already made notable progress in nuclear technology, its navy, missiles, and air force readiness. Three challenges risk future progress: (1) slowing economic growth and demographic decline, which limit the ability to invest in the armed forces while frustrating societal resilience; (2) technological restrictions introduced by the United States, such as export and investment controls; and (3) the potential for strategic blunders and premature conflict instigation, especially within China’s nearby geography, amidst heightened economic and political confidence. China must navigate these risks successfully to continue uninterrupted along its path towards a modernized PLA.


Economic Performance

Contrary to the risk posed by slowing growth and the lower defense spending increases this provides, the PLA benefits from immense purchasing power advantages (to the tune of $100 billion), similar to Russia, while even small increases in its budget will likely continue to meet its modernization needs. China spends a much smaller portion of its GDP and central budget on its military than the US does. Comparing China’s spending to spending within the Soviet-American rivalry demonstrates this point. Defense spending as a percentage of GDP in China falls at 1.3 percent, while in the US this spending fell at 6 percent and, for the USSR, at 8-17 percent in the 1980s. As a portion of the government budget, today Chinese defense spending falls at 5-6 percent, while that of the United States falls at 12 percent.


Further, China can always increase funding as a share of GDP and budget if needed, while relying on civilian capabilities, which are broadly linked to the military-industrial sector, to guide progress. Xi has also made efforts to reduce graft within the PLA and streamlined the budgeting and planning process, albeit with limited effect on overall corruption. Even so, corruption has not limited the PLA’s overarching progress in the past.


Technology Acquisition

In light of Washington’s technological restrictions on Beijing, perhaps the greatest risk the PLA faces is an inability to acquire the requisite technologies for its modern force. There are three ways for the PLA to cope with these restrictions, however: (1) the PLA is “now almost completely self-sufficient in arms production,” demonstrated by the J-20s turbo-fan engines, which analysts had initially “pointed to . . . as a sign of potential weakness”; (2) with “military-civil fusion,” dual-use technologies, and determination and planning, China has in fact surpassed the US and the West in many technologies, including 5G and facial recognition, while steadily catching up in semiconductor manufacturing; and (3) US partners, such as EU member states, and enemies, such as Russia, desire to continue trade relations with China, allowing Beijing continued access to many technologies and manufacturing processes from economic cooperation.


Avoiding Blunders

The final major risk to PLA modernization is the possibility that China lashes out, a view presupposing Chinese decline will engender a willingness to act imprudently to maximize short-term gains in anticipation of negative long-term outlooks. China, however, maintains a more stable outlook with its security policy, focusing mostly on small-scale aggressions that blur the line for US response, while prioritizing stability in its diplomatic relations by avoiding alliances that would force its hand. With its “main strategic direction” focused on its southeast, as opposed to the northeast under Mao, China prioritizes Taiwan in its military buildup, leading it to avoid conflict in other theaters lest they distract from reunification. Most importantly, China hopes to avoid paying high costs for its ambitions. To do this, it must blur the lines necessitating a reaction by the West, as well as its exposure to unnecessary burdens – namely sanctions.


China can likely overcome obstacles to the PLA’s modernization, demonstrating its purchasing power and funding advantages, slyness in acquiring and innovating technology, and stable long-term outlook. Weaknesses still persist, most notably the PLA’s limited combat and “joint operations” experience. Ultimately, the PLA’s situation, when examined clearly, demonstrates significant challenges to US security policy; for example, the PLA’s financial advantage rules out the potency of an arms race, as a race to develop novel weaponry would drain US budgets, hearkening back to the Cold War, when the US bested the Soviet Union in spending efficiency.


 


Zongyuan Zoe Liu:

China’s Attempts to Reduce Its Strategic Vulnerabilities to Financial Sanctions


China feels increasingly pressured by the United States’ (US) containment strategy and its accompanying security and economic measures. Sanctions from the West targeting the Russian economy have also spooked Chinese scholars and politicians, who have formed a consensus that Beijing must seek alternatives to reliance on the US and its preeminent dollar by “decoupling.” Xi Jinping has proclaimed that China must prevent any “macro-risks” threatening its “rejuvenation,” acknowledging the overwhelming strategic risks of sanctions to China and its scope of action in the international system, especially towards Taiwan. It is for these reasons that China has continued to prioritize its “financial security” and has begun to connect it with national security. It has cautiously explored both partial exits from the dollar system and a greater role for the renminbi (RMB) through three strategies: by (1) building “non-Western partnerships” to facilitate alternative forms of “currency cooperation,” (2) augmenting RMB presence in cross-border trade flows and financial systems, and (3) “improv[ing] the role” of the RMB in pricing commodities.


Finding Avenues for Non-euro and -dollar Finance

Switching away from dollar-dependence requires developing alternative emergency liquidity arrangements and deepening collaboration across non-Western economic and diplomatic fora. China has done precisely this. Following the 1997 Asian Financial Crises, in collaboration with South Korea, Japan, and ASEAN, it set up currency-swap arrangements equivalent to hundreds of billions of dollars. More recently, at the 2022 G20 meeting, the People’s Bank of China (PBoC) governor Yi Gang launched the RMB Regional Liquidity Arrangement, with participants from around the Pacific Rim, including Indonesia, Malaysia and Chile. Beijing has also leveraged existing diplomatic fora and groupings, such as the Shanghai Cooperation Organization (SCO) and BRICS, to reframe de-dollarization within an anti-colonial rhetoric in an attempt to draw support from the Global South. Some of these efforts have brought success, demonstrated by a “roadmap” to expanding “trade in local currencies” in the SCO’s September 2022 meeting.


Expanding the Renminbi’s Global Presence

In addition to utilizing diplomatic fora and short-term currency swap structures, China has freed up certain regulations on capital flows and the yuan, as well. Promulgated in 2009, the “Administrative Rules on the Pilot Program for Renminbi Settlement of Cross-border Trade Transactions” have expanded the number of approved entities that can use RMB for cross-border trade. Beijing has also implemented the Cross-Border Interbank Payment System (CIPS), a semi-rival to the SWIFT system with 139 participants and roughly $94 billion transactions processed daily, as of January 2024. At the same time, however, China has “cooperated with SWIFT” to institute “localized services” to limit dangers posed by sanctions. While still negligible as a proportion of global trade, Beijing, through cross-border mechanisms that mostly circumvent the Western order, is building the flimsy bases upon which the RMB may become a reserve currency.


Improving Renminbi Pricing Power

China is the largest fossil fuel consumer, but its RMB has no “power” to price major commodities, especially oil. The US dollar currently holds the pricing power (90%) for “major commodities.” A 2023 policy notice from PBoC and the Ministry of Commerce demonstrate the priority China now places on settling more trade and investment in the RMB. 30 countries now trade commodities in the RMB with China, as do several oil-producing nations; these links may help it on its mission to establish a “gas-yuan” – emulating the petrodollar. China has also established two commodities trading platforms on the Shanghai International Energy Exchange.


As Beijing expands its diplomatic presence and leverages the SCO and BRICS, both of which hold key players in fossil fuels and renewable energy minerals, it is exploring a number of avenues to reorient trade along the lines of the global energy transition. For example, with many to follow, March 2o24 marked the first cross-border liquefied natural gas “transaction settled using the renminbi.” Key players in lithium (Brazil and China itself) populate BRICS, demonstrating a potential avenue for further yuanization.


China faces major headwinds with its economic performance dwindling, the continued preeminence of the dollar, a hesitancy to liberalize its capital account, and its persistent addiction to current account surpluses. Its efforts are therefore piecemeal and purely “defensive,” as a likely hedge against US sanctions. Eventually, however, China may build out a proper base for a reserve currency, with significant ramifications for the stability of the financial order and US-China relations.


 


Syaru Shirley Lin, Caroline Fried, and Siwei Huang:

What Taiwan’s 2024 Election Means for China, the US, and the Future of Taiwan

Taiwan’s January 13, 2024 election marks several significant shifts for the country. First, debate focused primarily on domestic policy due to a general convergence by the three frontrunner parties – the Democratic Progressive Party (DPP), Kuomintang (KMT), and Taiwan People’s Party (TPP) – on foreign and China policy. Second, The DPP won “an unprecedented” third presidential term. Third, no party won a majority of seats, creating a hung Legislative Yuan (LY) and hampering the smooth implementation of domestic and foreign policies – and possibly increasing voter resentments if dysfunction in the LY becomes the norm. Finally, Taiwan will have a difficult time “balancing” between the United States and China.


Takeaways

Five key takeaways from the election follow: 


  1. First, the DPP’s winning of an unprecedented third presidential term means it will determine the overall tone of foreign policy. Specific numbers reflect polling averages fairly well, with the DPP’s Lai Ching-te winning a plurality at 40 percent of the vote, the KMT’s Hou You-ih achieving 33 percent, and the TPP’s Ko Wen-je, 26 percent. 

  2. Second, the incoming Lai administration will see a weakened governance mandate due to the hung LY. The LY’s composition sits at 51 seats for the DPP, 54 for the KMT caucus (52 specifically for the KMT), and 7 for the TPP – none meet the majority of 57. This weakened mandate means DPP representatives will have difficulty passing legislation initiated by their executive counterpart, requiring negotiation and furthering the likelihood of legislative dysfunction and voter dissatisfaction. 

  3. Third, because the Taiwan people share a “consolidated” Taiwanese identity (only 5 percent still identify as Chinese), China was no longer a hot campaign topic. That is not to say that the KMT and TPP haven’t kept a more accommodative stance vis-à-vis China than the DPP. 

  4. Fourth, the TPP gained tentative support from the electorate. The TPP’s strategy helped win votes for Ko Wen-je’s presidential campaign, but fewer for its legislative, meaning it needs more time to build up a local presence and that voters see it as an anti-establishment party.

  5. Fifth, “age and socioeconomic status played notable roles” in January. The DPP lost much of its youth base, while seeing greater support from poorer, older, and government-dependent workers alike. The TPP capitalized on youth disillusionment from the DPP, gaining many votes from “young professionals.” The KMT, however, won in no demographic group other than housewives, signaling a stagnating electoral strategy and lower appeal. 


The divided mandates in the LY, as well as these demographic shifts, will likely engender a paralysis of the LY that can only be broken by difficult collaborations and negotiations between the three parties.


Priorities for the Government

All three parties agreed on the major domestic issues Taiwan faces, specifically housing inequality and expensiveness, long-term care restructuring, and healthcare reform. Taipei’s housing has become incredibly unaffordable for many and an aging population threatens long-term care and the overall healthcare system’s funding. Each party approaches these issues with its own ideological slant and even suffers intra-party divisions over how to solve each problem, portending legislative paralysis lest the parties innovate and negotiate in best faith. Three additional difficulties lie ahead: (1) expanding the adoption of renewable energy and climate targets is mired in difficulty, especially due to the DPP’s anti-nuclear stance and the remaining parties’ support of nuclear energy; (2) passing annual budgets and creating special budgets for new initiatives will face setbacks; and (3) the KMT and TPP will work to “hold the Lai administration accountable” by blocking hundreds of actions, meaning there is a high likelihood of total legislative paralysis at a time when Taiwan needs coherent policy and internal unity to tackle the existential challenges.


What Does this Election Mean for China and the United States?

Taiwan’s elections are partially overshadowed by increasing competition between the United States and China, a competitive spiral eroding the island's autonomy over time. Beijing has continued to use Air Defense Identification Zone violations, gray zone warfare, diplomatic pressure, and economic strategies to keep the island on its toes, while also continually proclaiming the reunification of the island with the mainland in its August 2022 white paper. Taiwan cannot fully decouple from China economically, meaning economic relations must be managed prudently, especially by using the cross-Strait Economic Cooperation Framework Agreement (ECFA) to its advantage. 


While distrust of China remains high among the population, this distrust does not correlate with an enhanced relationship with the United States. This relationship has flourished within the military-security realm, seeing many arms deals and symbolic acts, while the economic realm has been neglected. Trade deals and economic packages from the United States encounter difficulties in implementation, all while the United States hurts Taiwan’s strategic importance, and therefore its leverage, by attempting to onshore semiconductor manufacturing, albeit with limited success.


Taiwan faces a supremely difficult road ahead. International and domestic divisions press against the island’s democracy, populace, and economy. The population increasingly prefers status quo preservation, which is steadily shrinking in possibility due to great power competition and a hung LY.


 


Minxin Pei:

Piercing the Veil of Secrecy: The Surveillance Role of China’s MSS and MPS


Widespread media coverage emphasizes the high-tech aspects of Chinese surveillance, such as 18 million megapixel street cameras and facial recognition. This type of surveillance has significant gaps due to technical errors and human adaptation, highlighting a more pernicious and uniquely Chinese form of surveillance: a system of light-touch physical surveillance penetrating all aspects of society that is performed mainly by two ministries – the Ministries of Public and State Security (MPS and MSS, respectively). Moreover, the high level of manpower allotted to these ministries, even if it is lower compared to the past numbers within Soviet and socialist states, means the Chinese surveillance model may be difficult to replicate for other modern states.


The Ministry of Public Security’s Domestic Security Protection (DSP) Unit 

The MPS’s department for domestic surveillance is its DSP unit. It receives preeminent status and full policy prioritization due to its designation as the Ministry’s “first bureau.” On the provincial level, it is divided into divisions that are subdivided further into military-style grouping names – regiments at the county level and battalions at the district level. Data gathered from sporadic but freely-available yearbooks and textbooks allow for an estimation of the number of DSP officers as a proportion of the total police force: roughly 3-5 percent. This would mean plus-minus 80,000 DSP agents for every 18,500 citizens; compared to the former German Democratic Republic and the USSR – which had a ratio of 1:165 and 1:595, respectively – the Chinese ratio is far wider and demonstrates that China’s system is light-touch by comparison. To circumvent this inherent manpower limitation, DSP officers recruit community-based officers for more hands-on human intelligence gathering. To coordinate this ~80,000 mass of agents, the MPS holds regular conferences on domestic security to issue goals, guidance, and directives to local DSP bodies.


Demystifying DSP Investigation and Intelligence Operations

DSP units were established to safeguard party security, social stability, and national security by targeting potentially subversive groups and individuals. Units use several methods to surveil the foreign-born and native populations in China: (1) special investigations, which are especially useful for fighting highly-organized activities, subversive political and religious groups, and political dissidents and require a greater intelligence skillset; (2) information collection on “key targets” to create cohesive profiles for future intelligence work; and (3) recruiting of networks of civilian informants, who collect everyday data about citizen political preferences and activity on the ground with varying degrees of success. 


DSP Day-to-day

Because of the limited number of DSP agents, the MPS has adopted a complex human resourcing system whereby agents supervise local police stations to carry out day-to-day tasks, such that agents can devote time to the most pressing intelligence gathering. Local DSP units also establish ties with other government agencies, such as health and education departments, to create efficiency and informational width and depth. These structural innovations, coupled with the post-1990s state focus on “stability maintenance,” have meant that DSP units have been able to effectively target specific groups, such as Falun Gong, and even often preempt social unrest and protests due to their expanded power.


An Overview of the Ministry of State Security

Established in 1983 through a cross-ministry and -department merger, the MSS is mostly focused on counter-espionage and stability maintenance. New research uncovers its narrow but substantive role in domestic surveillance networks. Local governments have set up parallel MSS branches, also known as State Security Bureaus (SSBs), while varying by decades in their speed to do so. Internally, these sub-branches’ activities involve more secretive investigations than MPS DSP units. In addition, each SSB is more closely affiliated with party committees, such as political-legal committees, at its respective hierarchical level. SSBs have also established numerous “local ‘national security small groups.’” In Wuhan, for example, there were already 370 of these small groups by 1997.


MSS Activities

The MSS’s SSBs target religious groups, ethnic minorities, and foreign nationals more often. For example, in Diqing, Tibetan Autonomous Prefecture in Yunnan Province, an SSB forced 13 hotels to sign “security responsibility agreements” and share information on visitors, many of whom are likely foreign tourists. SSBs, like MPS DSP units, also recruit informants, such as for the aforementioned hotels in Diqing. Despite their counterespionage role, limited evidence suggests that SSBs report mostly horizontally to party committees without much upward mobility for their gathered intelligence. The MSS and its subunits also aid in fulfilling increases in demand for surveillance activity during contentious events, such as for the 2008 Beijing Olympics, when MSS agents kidnapped a prominent dissident and human rights lawyer, Teng Biao. MSS units often take over the important MPS surveillance cases, as well, especially those relating to Taiwan.


The MPS and MSS have separate formal roles, but these lines often blur, as demonstrated by their overlapping structures at the local levels and the handover of some cases from DSP units to SSBs. Most importantly, the Chinese surveillance system has a vast, but still relatively light-touch, surveillance system. While effective today, if dissent and unrest increase in the future, its system may be overwhelmed and struggle to increase its number of officers to cope with new targets and leads.


 


Guoguang Wu:

Xi Jinping’s Self-Defeating Governance: Policy Implications and Power Politics with the Rise of Military-Industrial Leaders


During the previous two years, Xi Jinping has appointed a multitude of key officials with ideological tilts favorable to his vision of a more self-reliant, statist, militarized, and “tech-driven” Chinese economy. A rift between his goals for the economy and what these appointments have actually accomplished has grown. Realizing a move to a semi-autarchic economy has necessitated a surge in “inputs” to newly-prioritized sectors, greatly increasing corruption. Sound governance therefore rubs against power preservation: Xi’s ironclad grip on power ultimately hampers his underlings’ ability to implement policy cleanly and effectively, limiting the scope of state action and his initiative’s success.


About faces in policy and appointments have riddled the recent past, such as the abrupt reversal of the zero-Covid policies and sackings of Foreign Minister Qin Gang and Defense Minister Li Shangfu, for example. These moves demonstrate Xi’s unprecedented grip on power, having direct “schizophrenic policy consequences” that this article will attempt to understand.


Xi’s Ideals for Policy: Statism and Militarization of the Economy

What are Xi’s ideal policies for the Chinese economy?

  1. Technology-led growth stemming from self-led high-tech innovation: In response to a more hostile international environment and China’s development challenges, Xi has begun stressing a development model focusing on solving “deep-seated contradictions” in economic development by building “endogenous” development capacity. This goal stems from successes in “endogenous” development seen in the military and security sectors, such as with aircraft carriers and telescopes. As such, the military sector will play a key role in realizing this policy.

  2. Implementing a “new style whole-country” development system: Xi hearkens back to the Mao era, during which a “whole-country” system aided in developing nuclear technology due to the mobilization of assets from a plurality of domestic geographies. He hopes to implement an even more ambitious and wide-ranging version of Mao’s policy, demonstrated by his appointment of prominent military and industrial leaders to key positions.

  3. Finding synergies between civilian and military capabilities: This strategy of “military-civil fusion” involves technology and know-how transfers between military and civilian sectors. In this system, for example, military advances will fuel technology innovation in the civilian sector and technology acquisition in the civilian sector, often from foreign firms, will quickly benefit military capabilities. As a result, Xi has moved military and industrial leaders to civil positions abroad to facilitate technology acquisitions and transfers.

  4. Cementing CCP-led statism: With the military-industrial complex fully state-led, Xi hopes to expand this statism through his appointments of expert leaders from the sector to grow it beyond the size and reach of the private sector.

  5. Building a resilient “militarized economy”: Similar to Mao’s “third front” strategy, which prioritized military innovation and construction in anticipation of war, Xi hopes to fully realign the modern Chinese economy to a long-term war-footing.


Difficulties Implementing Autarchic Policy

Xi’s autarchic turn hopes to reduce dependence on the West and achieve foreign policy goals, such as the annexation of Taiwan, while weathering inevitable sanctions through self-reliant technological innovation. However China’s growth rates have slowed and its GDP relative to the United States has peaked, underscoring the country’s dependence on the outside world to fuel growth. Hoping to achieve higher growth rates and innovation, Xi has directed significant funding (e.g.: $45 billion in 2014 through the Big Fund) and appointed military-industrial leaders to technology sectors, but has been frustrated by corruption. For example, Xi sacked Xiao Waqing, minister of Industry and Information Technology (MIIT), due to his alleged role in rampant corruption in July 2022. Despite growing corruption within his initiative, Xi has replaced corrupt military-industrial leaders with more military-industrial leaders; Xiao Yaqing was replaced by former aerospace engineer Jin Zhuanglong, for example, who oversaw the development of closer military-civil ties. Even greater purges followed in 2023, such as with the People’s Liberation Army’s (PLA) Rocket Forces and numerous PLA generals. Continued removals demonstrate both the purge’s expansion and the rampant corruption miring Xi’s priorities.


Dilemmas Facing Xi’s Strategy

Xi has focused on increasing the presence of military-industrial individuals and institutions within the policymaking apparatus, but fears their expanded power. First, any type of “quasi-military” experience has increased CCP elites’ chances of key promotions. Second, military-industrial colleges’ and universities’ graduates have become a growing share of each cohort of the Chinese Academies for Sciences and Engineering, reaching 7.5% in 2023. Third, Xi has shown greater attention to MIIT-led universities in facilitating “military-civil fusion,” demonstrated by visits to such universities, including to the Harbin Institute of Technology. These three trends portend greater power for the military-industrial complex, pushing Xi toward the institutional governance dilemma of a positive correlation between untrammeled power and corruption. He feels he faces great risks of deposal from his underlings, all of whom are ever more skilled and technocratic and, more often than not, coming from military-industrial experience. He therefore limits their effectiveness by pitting them against each other, even if they have not shown a hunger for Xi’s throne.


Despite significant setbacks and increasing corruption, Xi will continue to implement his autarchic policy, having recently unveiled an additional $40 billion for the semiconductor sector. At the same time, by prioritizing his hold on power, Xi hampers the effectiveness of his new policies and leaders, all while corruption abounds. A dilemma thus emerges, whereby Xi’s power and paranoia, coupled alongside the CCP governance model, hurt a strategy to gain self-reliance amidst greater global competition and onshoring.


 

Quarterly digests compiled by Adam Terenyi.

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