Shane Leary joins Miles Yu to discuss the upcoming presidential election in Taiwan. They then turn to China's latest economic woes, reflecting on the recent bankruptcy filing of China's largest "shadow bank," Zhongzhi, and what this reveals about corruption in the PRC's economy. Finally, Miles offers some broader observations and predictions on China for 2024.
China Insider is a weekly podcast project from Hudson Institute's China Center, hosted by Miles Yu, who provides weekly news that mainstream American outlets often miss, as well as in-depth commentary and analysis on the China challenge and the free world’s future.
Transcript
Miles Yu:
Welcome to China Insider, a podcast from Hudson Institute's China Center.
Shane Leary:
It's Tuesday, January 9th, and we have three topics this week. The first is Miles's take on the upcoming time when he's election. Second, we discussed the PRC’s continued economic issues with its largest shadow bank having declared bankruptcy this past Friday. And third, we get miles predictions on China heading into the new year. Miles, how are you?
Miles Yu:
Very good. Shane, welcome back.
Shane Leary:
Yeah, great to be here. Wonderful. So let's just jump right in. So Miles, we're now less than a week away from the election in Taiwan. Every election in democracy is consequential, but looking down the barrel of PRC aggression, it's all the more. So what are your thoughts and what are you watching for now that we're so close?
Miles Yu:
Well, every election in Taiwan is consequential in light of the existence of tensions between Taiwan and mainland China, the communist China. We don't know exactly how it's going to turn out because the three-way race is very, very close. But we can discuss some of the very important new developments coming out of this election cycle, which is different from four years ago or eight years ago. One of the very important development coming out of this intense campaigning and the presidential debates is the redefinition of the agency of the PRC-ROC tensions. That is who is actually responsible for the tensions between communist China and Taiwan. Well running for presidency are three candidates, first for the KMT, which is the largest opposition, the DPP, which is the incumbent, and of course there's the TPP, the Taiwan Peoples Party represented by the former mayor of Taipei, Mr. Ko. Now the KMT on this particular issue, who is responsible for the tensions for Taiwan's security crisis?
KMT blames the DPP, the incumbent for causing the tensions thing. They are just too Democratic, too empathetic about the Taiwan's independence. The DPP on the other hand counters that the CCP is the ultimate culprit for the tensions, not the DPP and the running candidate for presidency of DPP. Mr. Lai Ching-Te, William Lai, who is the incumbent Vice President, said in one of the three debates very famously, that in fact in the eyes of the CCP of the Chinese Communist Party, the fact that all three candidates are taking part in this truly democratic, free and open election is pro-independence. The voters will have to decide on that. This is a very, very important articulation of this key debate. The second very important development is that both KMT-DPP and the third-party candidate TPP, all agree that the future of Taiwan will be determined by the Taiwanese voters.
And this is very important because very keen on people's mind in Taiwan is the possibility that one of the three parties may engage in intense negotiation with the Chinese Communist Party about the future of Taiwan. And now all three parties agree that the future of Taiwan cannot be negotiated away in the backroom with Beijing, but they'll be determined by the Taiwanese voters. The third thing, which I think is probably the most important, is convergence of views on what exactly is the status quo. The most significant reality in Taiwan and in Taiwan's public landscape is that overwhelming majority of people in Taiwan, some were close to 90% or for status quo. In other words, in the past there were only two options. So the KMT is widely labeled as pro unification with China. The DPP has been known and has been charged by China mostly as the pro-independence. So it's a unification and independence. This fight has been going on for decades, but now this year this sort of a dichotomy between unification and independence has become less and less meaningful because there is a critical third factor that is status quo. All three parties agree, status quo is very important, and they're all endeavoring to maintain that. Now the question is what is status quo? So you have several options, right? One definition is that, well, status quo means that no unification with the PRC. Another one is, well no new declaration of Independence.
But the third option is that well, status quo is in fact independence on this particular issue that the DPP has a very clear answer. The KMT cannot really elaborate on this. That is the status quo is independence. So I think the KMT is struggling with that point. And the one final aspect of this, anybody who has been observing the Taiwanese election will be in awe of the institutional upgrade and advanced sort of nature of Taiwanese voting process. There are basically very different from the United States, which demonstrate to the point that Taiwan is mature and a very fair and open election. They have basically four particular measures that we don't have. One is that in order to maximize voter participation, all Taiwanese elections, particularly presidential elections, will take place on Saturdays, not Tuesdays as in the United States. So that will basically means that Saturday is the off day, most people don't work. So, and people participate more fully and therefore more democratic. The other part is in order to guarantee fairness. And there is a particular clause in the Taiwanese presidential election law that says that no polling results will be allowed to publish 10 days before the voting day. This is to prevent spinning and opinion inference. And the third aspect is the in order to prevent fraud, the election law in Taiwan says that there shall be no mail-in voting, all voting will take place in person and the results will be announced immediately after the election. This is very important. And finally, I will say the Taiwanese election is very, very fascinating because it is supervised by a respected central election commission. That central election commission is very tiny. It is small, but then the result will be certified by that the small and tiny central Election Commission and has basically been no controversy. That basically means that Taiwanese voters' confidence in fairness and judiciousness of the Taiwanese election processes.
Shane Leary:
I wanted to ask you a recent Reuters article by Michael Martinez and David Brunstrom. It began by saying Taiwan's election next week poses challenges for Washington no matter who wins. Their argument being that the DPP win could exacerbate tension with China while a KMT win might raise awkward questions about the islands’ defense policies. Do you agree with this characterization or do you think that there's a clear sort of preference from Washington's perspective?
Miles Yu:
No, again, I mean that's basically is the argument without nuance and without really sort of pay attention to some of the new developments that I just mentioned. For example, if the article supposes that if DPP incumbency wins, therefore will cause further tension, that again, that falls into the trap of who is actually to blame for the attention, they blame the DPP - they blame victims, right? So the real culprit causing tension actually is the Chinese Communist Party. I mean, that's why it is not going to be, unfortunately, some pretty much like deluded think tank policy makers in Washington DC are making the same argument. It's kind of silly as exemplified in the recent publication of the article in the magazine Foreign Affairs. So that has been widely rebutted and debunked. So I don't think that's going to be happen. The KMT obviously is a big opposition, but again, KMT agree with DPP on many things. There's more agreement, even though they don't openly admit it, disagreement between KMT and DPP because for example, the KMT actually agree very clearly that they do not endorse their one country two systems formula and KMT also agree the future of Taiwan will be determined by the Taiwanese voters. So there's no security dilemma here of any significant portion here. So I really don't buy that argument that is so obsolete and without really sort of a foresight.
Shane Leary:
No, that certainly makes sense. And I guess just as a last question, from a US perspective, the Taiwanese election is almost entirely about China and there might be a tendency to forget about their domestic concerns every day, kitchen table issues. Is this the case from the Taiwanese perspective? I mean, to what degree does the China question drive voters or I mean, is it the case that they're kind of just numb to the pressure they face from China and are more focused on sort of everyday issues than we might think?
Miles Yu:
Yeah, I think that's a very good question. I mean, I think it's a fair question. In the early stage of this presidential campaign, all of the candidates tend to focus more on the bread and butter issues. In other words, domestic economic performance and the future of Taiwanese technology, those kind of issues. But gradually, the particularly oppositions against the incumbency, they're running out of issues because that become a little bit less important to them because Taiwanese economy is doing very well. I mean Taiwanese overall, there are some mistakes, but I think Taiwanese economy has been sort of a very robust, for example, Taiwanese, GDP per capita is the highest in East Asia suppressing Japan and in South Korea, which is remarkable. But then in the middle course of the campaign and the later part of the campaign, the issue was shifted to security and not basically mainland China. I think opposition, KMT uses China's military threat, this pledge to use force to take over Taiwan as a sort of a campaign issue to scare the voters. And they labeled DPP two cantankerous too aggressive, and DPP said, hey listen, what we do, what we say, if CCP doesn't like you, they're going threaten you with force. So that's basically in the second part. And currently I think the issue of dealing with the mainland China has become dominant.
Shane Leary:
Now that makes perfect sense. So for our next topic, the prominent Chinese shadow bank Zhongzhi filed for bankruptcy this past weekend. This followed an investigation into the firm, launched in November of 2023 for suspected illegal crimes. Miles, can you give us some background here? What role does this firm play in the Chinese financial sector and how significant is this development?
Miles Yu:
This is very significant. Zhongzhi is the largest non-state lending firm. And China's basically development model depends on a massive infusion of capital in infrastructure, construction, housing, for example, those things. And by normal standard, those loans would never have been given up because there is no collateral, there's no sort of financial due diligence. So the Chinese state banks both mostly just give all the money to all those development projects, but then that is not even enough. So there is a lot of, so-called private or non-state lending wealth management firms, Zhongzhi is the largest. Now I have to qualify immediately though that because China is communist country, there is really no private financial institution or private economy per se. And the so-called non-state sectors in Chinese economy, they're all share very intricate connection with Chinese communist party bureaucracy. For example, Zhongzhi was created by this guy from Chinese northeast, and he become very prominent because he has a brother who was the General Secretary and the General Manager of the Chinese Communist Party’s gigantic sovereign fund, central foreign exchange investment company, also known as Huijin in Chinese.
And he had this connection. So the Zhongzhi founder and a longtime president and CEO was a gentleman by the name of Xie Zhikun, and he suddenly died two years ago at the age of 60, which is very mysterious ever since this financial giant is in trouble because Xi Jinping realized that he would like to take charge of China's economic and particularly financial decision making. And that's why he went after these non-state sectors, companies such as Zhongzhi. And he wanted the Zhongzhi basically to give up his money and to support China's finance, but basically try to rob this particularly important bank to support China's finances, which is in trouble due to the collapse of the China's real estate empire.
But Zhongzhi said, listen, I really would like to help you, but I myself was in trouble because the entire lending and loaning industry in China is like a Ponzi scheme. So I'm actually in fact is going to default. So that's a problem. And now finally, this financial giant is declaring bankruptcy last week, and this is going to be a very, very big deal in China and similar financial empires in China with a very strong bureaucratic political connections were also in trouble. For example, the CEO of the Anbang Insurance Group, Wu Xiaohui is now serving 18 years in jail term in China – Wu Xiaohui was the grandson in-law of a former Chinese leader Deng Xiaoping now in trouble, Xiao Jianhua who is the CEO of the Mingtian Financial empire, the Tomorrow Financial Group also has deep tied with the Chinese Party Politburo Standing Committee member, and he's now in jail serving a 13 year term. And this guy, why he's even more bizarre. He was kidnapped in the Peninsula Hotel in Hong Kong by Chinese agent, and he went back to China for trial because he refused to cooperate with China by giving up basically his private wealth management firm. And this is all very, very Chinese style. The Chinese Communist Party can let you rise, but can also squeeze you to death if you cannot help a ton of crisis. And this is Zhongzhi’s bankruptcy is a perfect example.
Shane Leary:
This just seems like a recurring trend with China's financial ills that it is the party sticking its hand in economic activity, trying to get a piece or trying to sort of guide companies. To what degree is the Chinese Communist Party creating economic problems for itself, or is there merit to some of these investigations? And they do need to kind of reign in a corrupt economic sector.
Miles Yu:
Many people seem to suggest that the reason why Xi Jinping is going after all this non-state financial forums is because China does not have money. It's not that simple. Yes, China does not have enough money, but also simultaneously China has a lot of money. China is the world’s richest government. It has a foreign currency reserve of over $3 trillion, the largest of any government in the world. So Chinese Communist Party is extraordinarily rich. The problem is a lot of people in China are not rich, even though government is very rich, wealthy, they can build all kinds of skyscrapers in China sponsored by the government, but the people's income is pretty low, right? We talk about this on this program many times, the income per capita in China is among the lowest in the world. 40% of the people in China, in other words, about over 600 million people in China are making less than $5 a day.
96% of the people in China in now, 1.3 billion people in China make under $23 a day. This is according to China International Capital Corporation Limited, statistic analysis. But then people might ask, how did China spend money? The Communist Party has a lot of money. Where did the money go? Obviously not spending on people. In fact, China's money are spending on the following major projects. Number one, China has to spend a lot of money to maintain the world's largest police state surveillance system and enormous amount of security forces to guard against the dissidents guard against foreign spice, for example. So China's domestic political stability budget is larger than its defense budget, which is the second largest in the world. Just think about that. Another way of China spend money is global inference peddling projects, particularly Belt and Road Initiative projects. Most of them were not really based upon market mechanism, mostly based upon geopolitical purposes. So that's why the BRI projects are not doing really well right now, but it's very costly for China. Thirdly, of course, China spend a lot of money on its military. China's military right now is doing very well, and so that's very costly. Lastly, and this is not to be ignored, China's money, government money is basically eroded taken away by enormous corruption. Entire Chinese society from top to the bottom officials over 100 million strong Chinese Communist Party members, they control the major sinews of the society. Those officials spend enormous amount of money on banquets, right? They're expensive pressure events. And to be honest with you, and there was enormous amount of investment by officials, about half of the local government budgets in all of China goes to official extravaganza, mostly lavish banquets. And then of course, recently last week, there was a report about the corruption within the Chinese people celebration army. That is particularly the China's strategic force, the PLA rocket force is cutting corners in its long range missile development, putting a lot of water in there in lieu of liquid fuel in these rockets. And this is basically nothing new if you live in the Chinese political environment because this happening all the time. But then it's shocking to the outside the world. So the corruption is really stoking in China. That's where Chinese money is spent on. But instead of spending on governance on its people, the Chinese Communist Party has its own agenda.
Shane Leary:
For our last question, I thought we'd go a bit broader. Now that we're at the beginning of 2024, Miles, it seems like it's a good time to ask you what are your thoughts and predictions heading into the new year? Do you have any sort of general trends you anticipate or things with respect to China?
Miles Yu:
Well, many of the things that have been going on in China's global outreach are going on, but you can see there's some new patterns emerging. Let's talk about BRICS for example. The BRICS initially started as a trade group, but now it's becoming more political and geopolitical China wants to be a leader of that. BRICS stands for Brazil, Russia, India, China, and South Africa. But now you expanding, but now that expansion has faced some headwinds starting with the new year, right? Very official. Important part of the BRICS project is a Sri Lanka. Sri Lanka has been heavily invested by the Chinese for its strategic political location, particularly as the maritime port. But the Sri Lanka is now under enormous pressure by one of the BRICS members, that is India. So India put a lot of pressure on Sri Lanka. So Sri Lanka now just issue a ban on all China ships to dock in Sri Lanka ports for a year. This is enormous development. China was taken by surprise. Not only that in its recent BRICS conference in South Africa has been announced that the scores of countries want to join, but one of the most important countries, Argentina has a new election and it has a different leadership team. So Argentina has openly announced that it has changed its mind. So Buenos Aires is going to basically decline the invitation to join BRICS. So it is a problem. But then of course, starting with the new year of 2024, you see this rapid halt of international investments going to China, causing panics. Most of the firms, major firms in the world are exiting China, so decoupling is happening. You might also see the continuation of the Biden administration's trade policy on China. That was started in the Trump administration. The US had decided to continue with the trade tariffs on Chinese imports, and this is going to stay. All sanctions on Chinese companies and entities that has human rights violations or violation of the US law. Sanction regimes remain unchanged. So there's even more sanctions added on a monthly basis.
On the war in Ukraine and Gaza. Obviously this is major developments in the world, but China's role of fake neutrality has been increasingly exposed as fake because we have discovered that China, even though there is no direct assistance of lethal weapons to either Russia or Hamas, but they have been playing a very important role. China has been playing a very important role in bolstering, the economic system of Russia, for example. China has shifted enormous amount of dual use equipment, trucks, cars, automobile cars and aircraft and drones, for example, I mean to Russia, to support Russia's war machine and also of course, buying Russia oil in violation of international sanction regimes. Now, we just saw the report last week. The Israelis have discovered huge cache of Chinese made weapons. We don't know whether those were directly shifted by China or China sent weapons to Hamas by a third party, by the fact that the Chinese are supporting Hamas directly or indirectly. So that's becoming a very, very new phenomenon. The most obvious one, of course, is the intensification of China's aggression in the South China Sea and Taiwan Strait, Persian Gulf, and the Red Sea. So Chinese and naval forces has been causing trouble. You can read that international news reporting. So all I think emerging out of all this new development in 2024, we can see two major narratives. This will emerge as dominant, I predict for 2024. That is number one, China has always tried to portray the United States as its only enemy, and that narrative is not going to work because it's increasingly clear that in 2024, the issue of the world is not China versus the United States. Rather it's going to be China versus the rest of the world. Number two, I think the new 2024 is that China will be further isolated internationally. So I'll just stop right there.
Shane Leary:
Well, I think that's a great note to end on. Miles, thanks so much. Look forward to doing this again next week.
Miles Yu:
Alright, thank you for having me and look forward to discussion next week.
Shane Leary:
Thanks for listening to this week's episode of China Insider. If you enjoy the show, please share with your friends and colleagues. And for our Chinese language audience, be sure to come back and check out our monthly Chinese language episodes, which are released on the same channel, as well as the Hudson Institute YouTube channels. For more research and analysis from the China Center, be sure to find Miles on X and then head on over to hudson.org where you can read and watch more on these and other pressing issues around the globe. Finally, please review and subscribe wherever you are listening from to help grow the show. From all of us at China Insider, we'll see you next week.