Updated on Dec. 1, 2021.
SinoInsight 1
Last week, U.S.-PRC relations continued to spiral downwards, while U.S.-ROC relations strengthened.
Sept. 14
- U.S. Ambassador to China Terry Branstad announced that he was stepping down. The U.S. Embassy in Beijing said in a statement that Branstad would “retire from his position as U.S. envoy and depart Beijing in early October.”
Sept. 15
- In an interview with Atlantic Council President and CEO Frederick Kempe, U.S. Secretary of State Mike Pompeo said that his major China policy speech at the Nixon Library is “central to the Trump administration’s foreign policy” and “central to every administration’s foreign policy for years to come.” When asked about the end state of the Trump administration’s China strategy, Pompeo said that “the Chinese people will get a heavy say” on how “it will look like inside of China” and “the Chinese Communist Party will ultimately have to make some very difficult decisions for themselves.”
Sept. 17
- U.S. Ambassador to the United Nations Kelly Craft met with Taipei Economic and Cultural Office in New York director James Lee. They discussed different ways to “best help Taiwan become more engaged within the U.N.” and other matters.
- U.S. Under Secretary of State Keith Krach arrived in Taiwan for a three day trip. Krach is the second high-level U.S. official to visit Taiwan in recent months.
Sept. 18
- Under Secretary Krach and his delegation met with key business and political leaders in Taiwan, including Republic of China president Tsai Ing-wen. According to Chinese language news reports, the U.S. delegation spoke with key supply chain individuals over a luncheon. In the afternoon, U.S. Assistant Secretary of State for Democracy, Human Rights, and Labor Robert Destro chaired a “democracy dialogue” with officials, politicians, and scholars. SinoInsider Senior Researcher Chu-cheng Ming was invited to the dialogue, and said that human rights and democracy in China were among the issues discussed.
- Taiwan’s defense ministry said that 18 People’s Liberation Army combat aircraft—two H-6 bombers, eight J-16 fighters, four J-10 fighters and four J-11 fighters—crossed the midline of the Taiwan Strait and entered Taiwan’s southwest air defense identification zone. The Pentagon said that “the PLA’s aggressive and destabilizing reactions reflect a continued attempt to alter the status quo and rewrite history.” Meanwhile, Global Times editor-in-chief Hu Xijin wrote in a social media post that the PLA “should fly over Taiwan island” if “the U.S. secretary of state or defense secretary visits Taiwan.”
- PRC defense ministry spokesman Ren Guoqiang the PLA’s Eastern Theatre Command would begin combat drills in the Taiwan Strait. That day, the Eastern Theater Command’s official Weibo account posted, “abandon fantasies and prepare for battle!” (丟掉幻想，準備戰鬥!)
Sept. 19
- U.S. Under Secretary of State Keith Krach attended former ROC president Lee Teng-hui’s memorial service.
- Taiwan’s defense ministry said that 19 PRC aircraft approached the island, including 12 J-16 fighters, two J-10 fighters, two J-11 fighters, two H-6 bombers and one Y-8 anti-submarine aircraft. Some of the aircraft crossed the Taiwan Strait midline, while others flew into Taiwan’s air defense identification zone off its southwest coast.
Sept. 20
- Taiwan’s economic affairs minister Wang Mei-hua said that the ROC and the U.S. will begin a high-level economic dialogue “as soon as possible.” Wang also said that the Taiwanese delegation and the U.S delegation led by Under Secretary Krach discussed “5G clean networks, supply chain realignment, strategy in the Indo-Pacific region, the New Southbound Policy, infrastructure, energy, investment review policies, and women’s economic empowerment.” She added that the U.S. delegation spoke about a U.S. “Economic Prosperity Network” initiative revolving around economic security and the promotion of “economic freedom, openness, transparency, and fairness.”
OUR TAKE
1. Relations between the U.S. and the PRC are rapidly worsening even if both parties do not explicitly say so. For instance, Chinese commentators widely view the stepping down of Ambassador Terry Branstad during a period of high Sino-U.S. tensions as a sign that America has “downgraded” relations with the PRC. The fact that Branstad’s departure follows the U.S. closure of the PRC’s Houston consulate further skews the optics.
Meanwhile, U.S. growing efforts to strengthen bilateral ties with Taiwan reinforce the perception that the U.S.-PRC relationship is on the rocks. The U.S. delegation’s discussion of economic issues with Taiwan, including supply chains, semiconductors, and a trade agreement, indicates that America is serious about decoupling from China. Also, the U.S. delegation’s dialogue with Taiwanese individuals, including a prominent local China expert who has long researched CCP affairs, on human rights and democracy in China is noteworthy in light of the Trump administration’s stance on the Chinese people and China’s internal politics (see Secretary Pompeo’s remarks above) and the CCP’s gross human rights abuses (a Sept. 17 PRC white paper on Xinjiang revealed the potential scope of forced labor in the region in noting that 1.288 million workers went through “vocational training” between 2014 and 2019).
The re-emerging U.S.-ROC alliance is boosting Taiwan’s international profile and will signal to other countries that it is safe to draw closer to Taipei despite Beijing’s incessant threats of invasion. In fact, the CCP’s heightened attempts at intimidation will likely produce the reverse result in the face of a strong U.S.-ROC alliance and inspire more countries to stand with Taiwan. As we forecasted in our China 2020 outlook: “Taiwan’s international standing will continue to improve amid growing Sino-U.S. rivalry. Taiwan could see unprecedented opportunities to gain diplomatic, military, economic, and intelligence support and cooperation.”
2. The CCP’s military action in the Taiwan Strait could yet result in a Fourth Taiwan Strait Crisis, especially if there are “near-miss” incidents (擦槍走火). Such a Crisis, however, will unlikely lead to war because the PLA cannot yet go toe-to-toe with the U.S. in the Indo-Pacific; meanwhile, the CCP currently faces a “perfect storm” of domestic and foreign problems and is in no position to provoke armed conflict with Taiwan.
The CCP’s lack of options on the sensitive Taiwan matter places Xi Jinping in a dilemma. Xi must menace Taiwan to put the ROC in its place, but the CCP’s ability to escalate provocations is constrained by economics, the PLA’s limitations, and renewed U.S. commitment to defending the island. Fail to adequately “punish” Taiwan, however, and Xi’s “strong military” (強軍) propaganda myth crumbles, affecting his “quan wei” (權威) in the Party. Over time, Xi and the CCP’s inability to resolve external problems will compound their domestic woes and worsen political instability in the CCP regime.
3. The CCP could again attempt to deflect attention from Taiwan by provoking tensions on the Sino-Indian border. Beijing’s border ploy, however, is dampened by the approach of winter and the difficulty of deploying troops in mountainous regions; the Indian Army recently observed PLA soldiers being evacuated on stretchers from the Pangong Tso region to a nearby field hospital due to complications resulting from the inhospitable high-altitude conditions.
SinoInsight 2
On Sept. 6, state media outlet News China published an exposé of “Deyu Holdings,” an informal collection of financial companies involved in fraudulent behavior in Shanxi Province. According to the report, “Deyu Holdings” created a de facto financial holding group in Shanxi after it started taking stakes in local small- and medium-sized banks in 2013. “Deyu Holdings” then proceeded to treat its banks like its personal “ATM,” leaving those banks to accrue huge amounts of bad debt and “even disrupted Shanxi’s financial system.” Several financial regulators and senior executives of financial institutions who were later purged under the anti-corruption campaign were found to be involved with “Deyu Holdings.”
On Sept. 7, the Bank of Wenzhou announced that it was planning to raise 7 billion yuan by issuing 2.373 billion units of shares at the price of 2.95 yuan per share. Existing shareholders will be given priority in share allocation, while the remaining shares will be sold as local government special bonds through an entity designated by the Wenzhou government. The issuance of the aforementioned special bonds will be subjected to the final approval of the China Banking and Insurance Regulatory Commission (CBIRC).
On Sept. 11, the People’s Bank of China (PBoC) announced trial measures for the “supervision and administration of financial holding companies.” The measures clarified the definition of a financial holding company in China, the conditions and procedures of its establishment, and the penalties for non-compliance.
On Sept. 12, the state-linked 21st Century Business Herald reported that the Shaanxi provincial government will inform the CBIRC that it plans to allocate 4.6 billion yuan raised through the sale of local government bonds to replenish local small- and medium-sized banks.
OUR TAKE
1. The Xi Jinping leadership is attempting to mitigate systemic financial risks through central bank stimulus measures and the issue of government bonds. However, the “refinancing” of small- and medium-sized banks through the issuance of special government bonds comes with its own risks, which could be triggered at any time given the poor health of the Chinese economy and worsening Sino-U.S. relations.
2. In recent years, small- and medium-sized banks in China have come under serious risk of bankruptcy or bank runs, while some of their executives have been probed. A prominent case is Baoshang Bank, which was taken over by the authorities in May 2019. In August 2020, the PBoC announced that the bank will begin bankruptcy and liquidation procedure. Mainland media reports note that Baoshang Bank and many other small- and medium-sized banks piled on bad debts as they were treated as corporate slush funds by financial holding companies and their colluders in government, and the financial risks they represent are only the “tip of the iceberg” in China. Xiao Jianhua, the Chinese billionaire and owner of Baoshang Bank’s majority shareholder Tomorrow Group, was “vanished” from Hong Kong by PRC security elements in 2017. This August, the PBoC noted that Tomorrow Group illegally borrowed 156 billion yuan through loans and shell companies from Baoshang Bank from 2005 to 2019. As of July 2020, the PRC authorities have taken over nine financial institutions under Tomorrow Group.
Another prominent example of bank trouble is the case of former Bank of Wenzhou president Wu Hua. Wu was arrested on Aug. 22, 2019 for taking bribes, embezzlement, and other charges. Wu’s case involved illegal transactions with property developers totaling 7.4 billion yuan; incidentally, this amount is close to the 7 billion yuan that the Bank of Wenzhou is currently trying to raise through the sale of shares.
Indeed, the Bank of Wenzhou case suggests that government efforts to replenish capital of small- and medium-sized banks through the issuance of special local government bonds will be inadequate. On July 16, CBIRC deputy director of urban banking Liu Rong said that the issue of special local government bonds for the purpose of replenishing small- and medium-sized banks and risk mitigation will be capped at 200 billion yuan. This amount, however, is almost certainly insufficient in view of the scale of the problem at hand. Data disclosed by the PRC’s Financial Stability and Development Committee states that China’s 4,005 small- and medium-sized banks make up 25 percent of the entire banking sector and hold nearly 80 trillion yuan of assets in total. Of the 4,005 banks, 605 have capital adequacy ratios below the minimum standard of 10.5 percent, while 532 of the 605 banks are at even higher risk levels. If we assume that the 200 billion yuan raised by special local government bonds is intended to help all 605 of the at-risk banks, that means that each bank will only get around 330 million yuan on average—a drop in the bucket for financial institutions facing debt problems stretching to the billions.
3. The defusing of systemic risks in small- and medium-sized banks, which were accrued over a lengthy period, is not easy for Beijing to accomplish because it involves the interests of the CCP elite. In fact, Xi Jinping only began to tackle the problem in earnest after consolidating control over the military in 2016.
Notable examples include:
- In January 2017, Tomorrow Group’s Xiao Jianhua was abducted by the PRC authorities from his luxury apartment in Hong Kong. The authorities, however, only announced the takeover of nine financial institutions under the Tomorrow Group in July 2020.
- In June 2017, the PRC authorities opened an investigation into Anbang Insurance Group chairman and general manager Ng Siu Fai. On Sept. 14, 2020, Anbang Insurance Group applied to the authorities for dissolution and liquidation.
- In August 2017, Wanda Group chairman Wang Jianlin was restricted from leaving the country. Later, Wang kept selling his assets to pay off debts. Within a span of five years, Wang Jianlin went from the richest man in China per the 2015 Hurun Report to being the most in debt, owing 400 billion yuan in April 2020.
China’s financial risks are not simply financial problems for the country. Because the CCP elite is deeply involved in the financial sector, it is inevitable that Beijing’s financial derisking exercise becomes a crucial factional struggle issue. Thus, Xi Jinping’s attempts to mitigate financial risks could end up triggering them instead when his factional rivals act to preserve their interests.