Over the weekend we put out a lengthy report on potential risks to China narratives in 2023 (please see China: What could go wrong in 2023?, 29 January 2023). Below is a shorter and less formal note on events in the headlines this week: (1) geopolitical risks involving Taiwan; and (2) gauging support for consumption as China returns from the lunar new year holiday and emerges from the Covid pivot.
Taiwan: Watch out for the Belichick Effect
The NFL reference above relates to a quote attributed to New England Patriots coach Bill Belichick, who said in regards to personnel moves that it is better to be ready a year early than a year late.
What does this have to do with Taiwan? Zachary Keck, a foreign policy commentator, referenced Belichick in regards to a leaked memo by General Mike Minihan, who runs the Air Force Mobility Command, telling his troops that “his gut” tells him that they must be ready to defend against a Chinese invasion of Taiwan in 2025 (see news coverage of the memo here).
That date is earlier than most expectations of a potential Taiwan conflict, to which Keck made the NFL analogy on Twitter:
Our ultimate goal is to deter war. To achieve this we should emulate Bill Belichick’s approach that it’s better to be a year early than a year late. If we prepare for 2025 and Beijing is planning 2027 we’ll be in an even better deterrence place in 2027.
In other words, Keck is saying that even if Minihan’s timeline is premature, it serves the useful purpose of ensuring that the US is prepared for a conflict that ends up coming later.
I bring this up because I do think this motivation is at work in some of the more alarming comments from US politicians and officials about the probability that China will invade Taiwan as well as the potential timing. Rep. Mike McCaul, the new chairman of the House Foreign Affairs Committee, told Fox News this weekend that he hopes Minihan is wrong but “thinks he is right.”
This is not to criticize Minihan (or McCaul), but simply to explain that I view their comments as “calls-to-action” rather than an objective forecasts.
My view is that the probability of a Chinese invasion of Taiwan in 2025 is quite low. We will lay this out in a forthcoming note, but a few key points are:
- An invasion of Taiwan by 2025 (or well after) would be extremely risky for China’s military, economy, political stability, and global role – Xi would be gambling his hold on power and his broader ambitions for China’s rise.
- Given those very high stakes, it is worth noting that Beijing’s official rhetoric continues to imply that China’s leadership does not feel an urgency to reunify Taiwan and that time is on China’s side. This could change in the future.
- President Biden, Secretary of Defense Lloyd Austin, and Chairman of the Joint Chiefs of Staff Mark Milley have in recent months all been much more measured about the probability and timeline for a potential Chinese invasion.
- The probability of an invasion does rise over time, particularly if the US flirts with changing its One China policy or if Taiwan moves towards declaring formal independence. Indeed, one downside of a US rush to increase political and military support for Taiwan is that, unless handled carefully, it could end up increasing those risks by making Beijing feel that the US is backing China into a corner.
This is not to dismiss risks around Taiwan, which is the most serious flashpoint between the US and China. The broader relationship is to a major extent held hostage by the level of tensions on the Taiwan issue, which will be very difficult to bring down.
Our note this weekend on China risks stressed that political risks involving Taiwan will rise in the run-up to January 2024 presidential elections in Taiwan as well as the US presidential election in 2024. But the more likely dangers are a foreign policy crisis and/or increased saber-rattling rather than full-scale invasion. There is also upside risk: if the KMT party’s candidate should win the presidential election, cross-Strait tensions are likely to lower as Beijing sees increased room for political engagement with Taiwan.
Consumption: High hopes, limited direct support
The conclusion of the lunar new year holiday this weekend has put a spotlight on household spending during the holiday and what it might mean for the prospects for a recovery in consumption, which Beijing is banking on to drive growth this year (see our 2023 outlook here).
Bloomberg News has a run-down of spending during the holiday (link here). Spending on services such as travel, sightseeing, and dining were broadly well above 2022 though still below pre-pandemic (2019) levels. Property and car sales in January were far more lackluster. There are limits to how much we can read into these figures, and high-frequency data will be noisy until March given the seasonal distortion from the holiday.
Still, these initial signs shouldn’t come as a surprise. We have noted a clear case for pent-up demand in services, which were repressed by three years of pandemic controls. But we are more cautious about the prospects of a boom in “revenge spending” on goods this year. That will likely require a gradual recovery in employment and income growth – don’t set expectations too high (please see Avoid excessive optimism about “excess saving”, 19 January 2023).
One reason to be cautious about households’ willingness and ability to spend is the lack of direct government support in the form of cash payments or consumer subsidies. We will be watching closely in coming weeks for signs of a potential shift in policy at the National People’s Congress in March, but remain skeptical.
Recent signals support that subdued outlook. At a State Council executive council meeting on 28 January, Premier Li Keqiang said that China must “take advantage of momentum to promote the accelerated recovery of consumption as the main driving force of the economy.” But the announcement didn’t provide much in the way of new measures on the demand side, which Beijing tends to view as unaffordable welfarism. Local governments are also pledging to support consumption but their finances are under heavy strain from the ongoing property downturn. As a result, much of the planned support for consumption is thus far on the supply-side, such as aiding firms in “contact consumption” sectors (like restaurants) quickly resume operations.
