PLA drill, Taiwan, Xi's symposium on reform - Week in Review #19

Hi folks, before this week’s review, let me do one last poll about re-naming this newsletter. So I have totally given up on the “Lost in Nanjing” idea. (As suggested by many of you, that sounds too much like a travel blog.) I think I will keep the “XXX in Translation” format, as “translating” the enigma called China to the world is indeed this newsletter’s main mission. There are some variations here, please vote on your favorite!

Now, for this week’s review of events that will have an impact beyond news cycles, I will only touch on two topics. One is the PLA drill around Taiwan, the other one is Xi’s symposium in Shandong on reform. The second part is behind a paywall for 5 days. Please consider to pay for my work, or otherwise you may come back and check in 5 days. (For paid subscribers of Baiguan, please DM me for complimentary access.)

#1 The PLA drill around Taiwan

It took 26 years between the first (1996) and the second (2022) PLA drill in the Taiwan Strait. Between the second and the third, it took only 2 years. Compared with the 2022 drill, this time the eastern area off the coast of Hualien is much closer to the coastline. There are also new drills around the outlying islands such as Kinmen and Matsu. However, unlike last time, care was taken to avoid areas claimed by Japan.

The fact that drill plans were not announced immediately after the Lai Ching-te “pro-independence” inauguration speech, but 3 days after, implies there was some hesitation involved here. I suspect the main hesitation is about the obvious chilling effect this drill will have on international business sentiment, which has barely started to warm. In the end, the top boss decided to go ahead with it, showing the “core interests” nature of the Taiwan question in China which takes precedence over economic affairs, and/or the economic situation is not judged to be too dire to warrant looking sideways this time.

The capital markets in China fell, but not by a huge amount. The Hang Seng Index in Hong Kong, a good barometer of international investor sentiment toward China, closed negative ~5% for the week at the time of writing this article, reversing, for now, a 4-week bull streak.

One thing is also obvious about this drill: This is China’s way of “salami-slicing”. It’s about the normalization of the feeling that Taiwan is under siege, something China tries to impress on the minds of people in Taiwan, that is more real than the actual missiles that are blasted in the drill. “The greatest victory is that which requires no battle,” said China’s ancient military strategist Sun Tzu. And if the PLA really has an active plan to embark on a military adventure in the near future, staying quiet and playing subterfuge is the more logical course of action than doing very loud drills. So ironically, it’s only by maintaining and dialing up pressure, that there is a fair chance that real military action can be avoided. So, expect more and more such drills with higher frequency in the future.

On the other hand, as long as there is more of this kind of reminder that the question of Taiwan remains looming, there will always be some “China risk premium” embedded in the valuation of China’s economic prospects.

It’s a fact we all have to live with.

#2 Xi’s symposium on reform

Xi chaired a symposium in the Shandong Province, with a key focus on “reform”. It is very likely that this is part of the fact-finding and consensus-building work in the run-up to the upcoming 3rd Plenum, which was already announced to place “reform” as the main topic.

Here are the things I find interesting about the official readout. The parts of the readout will be in quoted blocks (translation by

Geopolitechs

, emphasis is my own), while my comments will come below them.

During the meeting, representatives of nine companies and experts, including Liu Mingsheng, Chairman and Party Secretary of State Power Investment Corporation Limited,

Zuo Ding, Chairman and Party Secretary of Shenzhen Innovation Investment Group Limited Company,

Ding Shizhong, Chairman of the Board of Directors of ANTA Sports Products Limited,

Xu Guanju, Chairman of Zhejiang Transfer Group Limited Company,

Xu Daquan, President of Bosch (China) Investment Limited Company,

Feng Guojing, Chairman of Fung Group in Hong Kong,

Zhou Qiren, Professor at the National School of Development, Peking University,

Huang Hanquan, Director of the China Institute of Macroeconomic Research,

and Zhang Bin, Deputy Director of the Institute of World Economics and Politics of the Chinese Academy of Social Sciences, spoke successively.

I like this cohort. It is a good representation of SOE (SPIC), venture capital industry (Shenzhen Innovation Investment), private consumer businesses (Anta), private industrial businesses (Transfar), foreign businesses (Bosch), Hong Kong businesses (Fung Group), and academics.

The appearance of Zhou Qiren is notable. Zhou is a famous reform-minded scholar. For instance, in this article (in Chinese), he talked extensively about the “rising institutional cost” of China that urgently needs reform. But frankly, I seldom hear much from him in recent years. So his sudden appearance is a little surprising.

They presented suggestions on deepening power system reform, developing venture capital, using technology to transform and upgrade traditional industries, establishing and improving governance systems for private enterprises, optimizing the business environment for foreign-funded enterprises, promoting Hong Kong's better integration into the new development paradigm, enhancing the sense of reform gains among the people, promoting integrated urban and rural development, and improving the macroeconomic governance system.

All of these suggestions point to potential areas of future reform. The one I pay special attention to is “urban and rural development”. I see rural China as a largely untapped area, frozen in an institutional amber for decades. For instance, to this date, it’s still not legal to trade rural land, while urban people are not allowed to purchase rural land. This is one of the reasons that rural areas in China have been older and emptier. Will the 3rd Plenum introduce something revolutionary for rural reform? If so, it could easily be the next leg of development for China.

It’s also great to see venture capital occupying a major spot here. I wish there will be more concrete measures to ensure more “patient capital” is in place.

Generay Secretary Xi stated that the Party Central Committee makes major decisions and formulates important documents after conducting in-depth research and extensively soliciting opinions from all sides, which is the consistent practice and fine tradition of our party. Regarding the suggestions and proposals put forward by everyone for further comprehensively deepening reform, relevant parties should carefully study and incorporate them.

This sounds like a veiled rebuttal to the suggestion that the Party does not know what is going on with the economy.

Xi Jinping stressed that in reform, there should be both removal of outdated practices and establishment of new ones. If done correctly, reform will yield twice the results with half the effort, whereas doing it incorrectly will lead to half the results with double the effort, or even negative consequences. It is crucial to adhere to traditional principles while innovating. Regardless of the changes in reform, fundamental aspects such as the Party's overall leadership, adherence to Marxism, the path of socialism with Chinese characteristics, and the people's democratic dictatorship are principles that must not waver. At the same time, there needs to be courage for innovation, ensuring that necessary improvements are implemented firmly and effectively. Reform should place more emphasis on systematic integration, planning and implementing with a holistic view and system thinking, enhancing coordination among various reform measures, aligning efforts across all fields and aspects, building collective strength, boosting overall efficiency, and preventing and overcoming situations where actions are fragmented and impede each other. Planning is crucial in reform, but implementation is even more important. With a spirit of perseverance, reform implementation should be carried out actively and steadily, identifying priorities, timing, and efficacy, doing as much as possible within one's capacity, in line with reality.

I have the feeling that he is really concerned about the effectiveness of the future reform programs here. But here is the dilemma for any boss: how do you motivate people to be diligent AND “courageous” in their job, if they are not self-driven enough? Some real creativity in the final reform package is required to ensure stakeholders are aligned well and self-motivated to implement the program.