The Chinese Communist Party’s 20th Congress saw the thorough consolidation of power by Xi Jinping, elected to a third term, with a leadership that is personally loyal to him. No leader since Mao consolidated this amount of political power. China’s importance as a trade partner and regional power means that this will be felt across Southeast Asia economically, politically, as well as in the diplomatic and security realm.
What may be good for Xi politically is not good for China economically. Xi stacked the Politburo and its Standing Committee with ideologues and loyalists; there are no pro-economic reform advocates left and corporate China is not represented.
Even before the 20th Congress, the Chinese economy had slowed as a result of the draconian zero-covid policy and Xi’s assault on the dynamic privately owned tech sector. But the markets reacted sharply to Xi’s consolidation of power.
The stock market index collapsed as soon as the markets opened on Monday. There was a major selloff on all indexes and some $2.47 billion of foreign funds immediately withdrew from the China market.
There’s a real concern that the informal tax on the wealthy, known as the “Common Prosperity” donations, will become larger and more compulsory.
Capital flight is skyrocketing as high-net-worth individuals seek to move their funds to the safety of foreign jurisdictions. Money is flowing out of China as fast as possible. The Financial Times reported that the number of private Chinese family investments in Singapore nearly doubled from 400 to 700 since late 2020.
No one will speak truth to power in China anymore. Surrounded by sycophants, Xi is more likely to pursue policies that cannot be reversed.
This has an immediate impact on Southeast Asia as every country’s largest trading partner is China, particularly those that are still largely dependent on the export of raw materials.
China, which has been a major source of foreign investment in the region is seeing its GDP growth continue to slow, now below 5 percent for the year.
While capital flight may help some sectors in Southeast Asia, the gains will be narrow, and not compensate for the loss of China as the driver of economic growth in the region.
A changing Belt and Road Initiative
While the Belt and Road Initiative (BRI) is still state policy, Xi’s signature program of infrastructure lending for projects to boost China’s trade with Asia and Africa is a diminished initiative. In 2018 and 2019, even before the pandemic, BRI lending dropped precipitously. The two state-owned development banks that were responsible for 75 percent of BRI funding, saw lending collapse. Overall lending in 2020 was 58 percent from its 2018 peak.
Very clearly, many BRI projects are underwater and debt servicing had slowed. In 2018-19, China quietly renegotiated the repayment terms of $16 billion in loans. The pandemic caused a further slowdown in lending.
Though BRI projects recommenced in 2020, they are considerably smaller in scale and amount.
Xi will not abandon the BRI. It’s his vanity project and too associated with him to dismantle. Indeed, it was mentioned five times in the Oct. 16 Political Report to the congress, compared to just twice in 2017.
The BRI will likely move away from physical infrastructure and focus on fiber optic cables, 5G and 6G, and the export of artificial intelligence/smart cities. Emphasizing the Digital Silk Road serves many of China’s interests. It deepens their control over the internet and protocols, routes more traffic through Chinese servers, and gets other countries to adopt Chinese software and norms. The export of their digital authoritarian model will be a key priority.
Analysts are still divided on what the Congress means for Taiwan, a major factor in region-wide stability. On the one hand, Xi’s report was fairly pragmatic and made clear that there would be no quick move to invade the island, though he refused to renounce the use of force. Taiwan was mentioned only nine times in the report, compared to 12 in 2017, and the report offered no change in the existing policy.
Although Xi remains focused on PLA modernization by 2027, which obviously includes all Taiwan contingencies, his personnel selection for the Central Military Commission (CMC) also suggest caution.
The CMC has little in the way of operational experience, in particular joint experience, with the exception of its two vice chairmen. While it includes the commander of the ground forces, the CMC is dominated by the army and lacks representation from the Strategic Rocket Forces, PLA-Navy, PLA-Air Force, i.e. the service arms that would be most involved in an invasion of or an attack on Taiwan.
Of course there’s always the chance of a miscalculation or uncontrolled escalation. China still sees a very narrow window of opportunity to reunify Taiwan.
But Xi and the CCP cannot afford anything other than a decisive military victory over Taiwan that does not escalate into a protracted conflict with the United States and others. The reputational cost to the regime for failing to achieve a clear-cut victory would be astronomical.
Downsides for security and the economy
That’s actually not good for Southeast Asia. A limited conflict in the South China Sea against a much weaker adversary, where they can control the escalatory cycle, far away from the prying eyes of their ultranationalist public, is a very good opportunity for the PLA to gain some joint warfighting experience.
As such, there will be a harder line and a more aggressive stance in the South China Sea.
But we’re in new territory here. Xi has absolute and unrestricted power; there are no institutional checks on him, which makes security in Southeast Asia far less predictable.
Foreign Minister Wang Yi, who successfully executed Xi Jinping’s “wolf warrior” diplomacy featuring combative, jingoistic envoys who hectored their host countries on social media, was elevated to the 24-man Politburo. He will replace Yang Jiechi as the director of the general office of the Central Foreign Affairs Commission.
On the Politburo Standing Committee is Wang Huning, the top ideology czar who ensured that “Xi Jinping Thought” was enshrined in the constitution. Wang is also a fervent nationalist and really the driving force behind the assertive nationalism and the BRI that were the hallmarks of Xi’s first decade in office.
Xi’s army of wolf warrior diplomats will continue their hawkish rhetoric, despite the fact that public opinion towards China across Southeast Asia is starting to harden.
It’s important that both the Minister of State Security and the Minister of Public Security, for the first time sit on the Politburo.
This underscores the regime’s obsession with security, but it also matters in Southeast Asia, where the long arm of China’s law has been felt, with demands for the repatriation of dissidents and Uyghurs.
The governments of Southeast Asia are clearly afraid of being pulled into great power competition between the United States and China. No state wants to be forced to chose sides, as both countries are critically important economic partners.
For the past several years, Southeast Asians have largely blamed Washington for destabilizing actions, including the U.S. Navy’s Freedom of Navigation operations (FONOPs) in the South China Sea or Speaker Nancy Pelosi’s July 2022 visit to Taiwan.
Now, however, Xi made clear that he is going to pursue a much more confrontational policy towards the United States. But most importantly, China looks set to continue to undermine the rules-based international order that has been the foundation for Southeast Asia’s spectacular economic growth.
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