Three Challenges for Xi


On the eve of the Communist Party Congress in the fall, China faces a sharp debate on the fallout of what in the West many see as a triple failure: Covid, the Russia-Ukraine invasion, and Taiwan since the visit to the island of the US House Speaker Nancy Pelosi.

This visit specifically touched a raw nerve in the People’s Republic of China (PRC). It has kindled wild nationalist voices calling for a war to reconquer the island, home of the Republic of China, de facto independent but de jure part of one China.

Yet despite the official bellicose rhetoric, actual war is complex for Beijing, and that paints the country in a corner. Then, in feeling cornered, Beijing could become very anxious and start fretting, spinning the situation out of control, as the Chinese government processes politics according to its own specific standards, which may not be like those of other countries.

We shall see first the difficulties of starting a war for China, then the triple failure, and finally Chinese standards for processing these situations.

Nancy Pelosi in Taiwan

No war for war

Beijing has pledged to reunify with Taiwan, a vibrant democracy, even by military means. The United States recognized the one China principle with the normalization of diplomatic ties with the PRC in 1979. Still, in the past decade, it warmed up to the cause of Taiwan, which wishes to swing away from Beijing’s embrace. Washington felt Beijing was changing the agreed status quo by building military bases on the South China Sea, trying to enforce its own claims on the sea area through which 30-40% of global trade passes, and cracking down on the agreed political liberties in Hong Kong after local pro-democracy protests.

Whereas it is possible that the PRC would mount a short and destructive attack on politically isolated Taiwan, it’s unlikely it would risk a massive war with the specific involvement of the United States and Japan.

Three sets of issues presently make war with China difficult, although not impossible. First, China imports most of its protein, soybeans, and meat, some 150 million tons per year. In case of war, there could be a total or partial embargo, and this would directly impact the Chinese diet. China has plenty of grain and massive reserves, but it has also been afflicted by a stubborn swine flu that since 2018 has been slaying half of its pigs, which in turn are half of the planet’s pigs. Therefore, an embargo on importing foreign proteins would double down on the present difficulties and heat up inflation on domestic foodstuffs.

The second set of issues is related to the structure of its economy. Domestic consumption is now under double constraints. The zero-Covid policy, with its rules for constant testing and its sudden and massive lockdowns, has crushed the service industry: restaurants, bars, coffee houses, cinemas, shopping malls, et cetera.

Moreover, China overbuilt apartments and offices, and people can’t buy anymore new homes. Millions of square feet of unsold properties have started a massive wave of bankruptcy, engulfing the baking system and the local governments. People in Beijing say that the top ten real estate developers have accumulated bad debts for about US $1 trillion, about 10% of the national GDP, in one go! This could be the tip of the iceberg. “The average housing vacancy rate in China’s 28 major cities reached 12%, higher than the average rate in the U.S., Canada, France, Australia, and Britain,” reported authoritative Caixin magazine.[1]

Beijing faces an impossible choice. If it lets the real estate developers go bust, this will even drag down many banks. If it consolidates the debt, Beijing would enable a complicitous murky, unsustainable business model between real estate, banks, and local governments.

In fact, in the past 25 years, local governments got over 50% of their taxes from land sales for real estate. Therefore, they conceded land to developers, who then got financing from local banks. The circle worked as long as houses got sold. If they didn’t sell the flats, the whole model would collapse. It happened in the past year.

With consumption down and private real estate stuck, the massive Chinese 800 million–strong middle class, the world miracle of the past 40 years, is already suffering. Its living standards are being partially knocked, and more importantly, their hopes are being geared down.

The only driver for internal development has been building infrastructure, which then makes up state or provincial debt. There are estimates that the accumulated total government debt, including central and local governments and State Owned Enterprises (SOEs), could be four or five times China’s total GDP. There is no official public estimate, and possibly even Beijing is not totally clear on the amount. Still, the situation is precarious, especially since the tax percentage is pretty low, slightly above 22% of GDP.

China can finance it all because its currency is not fully convertible, and its state-controlled banks impose a massive spread (from 2% to 15% or even above) between interests on deposit and loans. As the Chinese have over 50% of their income in savings and banks are de facto tax bureaus for the state, the whole internal debt situation may be sustainable even without overhauling its debt.

But then in this hazardous domestic market, its politically sensitive trade surplus is a colossal pillar of internal stability.

It surged to $676.4 billion in 2021, likely the highest ever for any country, as exports jumped 29.9% over a year earlier despite semiconductor shortages that disrupted manufacturing. The surplus with the United States, one of the irritants behind the lingering U.S.-Chinese trade war, rose 25.1% in 2021 over a year earlier to $396.6 billion.

China’s trade surplus with the 27-nation European Union, its second-largest trading partner, swelled 57.4% in 2021 over a year earlier to $208.4 billion.[2]

In 2021, Canada’s trade deficit with China had reached 57 billion Canadian dollars, an increase from around 51.2 billion Canadian dollars in the previous year.[3] The surplus with the UK was some £40 billion,[4] and that with Japan logged U.S. $42.4 billion in 2021.[5]

That is, an expanded G7 provides all of China’s surplus. To cut China out of the supply chain won’t be easy for anybody; all would suffer, but Chinese goods are even more replaceable than Russian gas, which travels on convenient and cheap pipelines.

A war would not automatically cancel the surplus but could dent it significantly, making the whole PRC economic system sputter.

To top it off, Russia had most of its foreign reserves frozen by the U.S. after the invasion of Ukraine. China owns a bigger war chest in reserves, over U.S. $3 trillion. But they are also mostly in G7 currencies and are subject to freeze in case of war.

Indeed, China could survive an economic downturn, but its middle class, the basis of social consensus for the party in the past 40 years, would have to change its lifestyle and expectations.

It is very different from Russia, which has a minimal middle class and a group of ultra-rich whose fortunes depend almost exclusively on Moscow’s goodwill.

In China, the ultra-rich have already been hit by the anti-corruption campaign, which started a decade ago, and the basis of political consensus is the middle class and the poor betting they’ll improve their lives. If that stops, many things could become more complex.

The third element is the size of young men ready to field a war.

According to some estimates,[6] China’s population has been decreasing for some years, and it could be now hovering around 1.2 billion people with no sign of picking up. Yet even according to official statistics,[7] the population is shrinking from its peak of some 1.4 billion people.

Moreover, for 40 years, Chinese families had only one child. Therefore, a soldier in his late teens or early twenties will have two parents and four grandparents looking after him. If he dies, six people will have lost everything. It would be 12-13 people if he has a spouse or a girlfriend. Then, if a few dozen kids are killed in a war, things can be manageable; if thousands die, it could become a social tragedy.

In the patriarchal families of the past, a grandfather with a score of grandchildren could send half of them to war. If any of them returned home, they brought glory and prized awards from the emperor to the family, and the family and the survivors would be better off.

But in nuclear families with four grandparents and one grandchild, if the heir dies, everything is lost. State awards and prizes can hardly make up for the loss.

Furthermore, air force pilots and navy sailors, the ones supposed to fight first for Taiwan, are not just expendable cannon fodder. They are highly trained people; they are the best in Chinese society. Their loss could hit close to Beijing’s political heart.

These three sets of challenges do not make war impossible, especially if Beijing feels the survival of its state is at stake. But they make decisions to go to war more complicated than leaner state structures, like Russia, with simpler economies and social systems.

Besides, the Chinese are good traders; they do not have a massive martial tradition, unlike the Russians.

Short and long term

These are long-term issues, but rest on some short-term errors in evaluation.

The first was about Covid. In early 2020, the Western press saw Covid as China’s Chornobyl moment, the 1986 incident at the nuclear power plant that showed the world the inefficiency of the Soviet system. Just a few weeks after the first outbreak, China had brought Covid under control thanks to relentless lockdowns and social control measures, while the pandemic ran wild in the Western world, unable to apply the same drastic curbs. Then Covid became an ideological issue. The Chinese propaganda machine used Beijing’s success and Western failures with the disease to “prove” to its own people the superiority of the Chinese political system vis-a-vis the inefficient, anarchic democracy.

It backfired when America and the EU started producing effective vaccines, and China failed to do so, thus “proving” the superiority of Western technology. Plus, the anarchic Western societies sowed the necessary seeds of herd immunity. Lastly, the virus mutated and became ultra-infective, limiting the use of social controls or increasing its costs.

In early 2022, these three realities de facto put the world out of Covid, restarting everyday life and exchanges. China, which had made Covid an ideological issue, has a hard time backpedaling from it. To import the US vaccine would concede that Chinese technology is still behind American technology, and that America will save China from itself. Giving up on social controls would be admitting the limits of the authoritarian leviathan; common people know better than the few enlightened ones in the capital.

Third, there is a practical element. For almost three years, many people have been shielded by the zero-Covid policy and fear getting infected; opening up now would expose many older people to the disease when national health infrastructure is not as efficient as in the West. Yet insisting on zero-Covid would cut China off from world trade and tank its economy.

The error with the Russian invasion of Ukraine is more straightforward and possibly shows an even bigger fault line. China simply bought the Russian narrative that it would win over Ukraine easily, the EU would be split apart, and the US would be expelled politically from Europe. The belief was so strong that in the first hours of the invasion, the official Xinhua news agency recommended all Chinese in Kyiv place a Chinese flag on their cars or windows and said that nothing would happen to them.

Russians believed they would just mop up the capital. When that didn’t happen, they were simply lost. It shows two things: poor intelligence (they didn’t see Ukraine’s resistance and determination) and poor judgment (war is always uncertain, and despite what you may think or wish, you need to hedge your bets).

These elements, plus the difficulties of going to war over Taiwan while the island is drifting away from the mainland, might cause fissures in the party debate.

Still, there could be a different spin on the Chinese narrative. With Covid, the Chinese government shows it is willing to sacrifice economic results to save millions of lives. In contrast, greedy capitalist democracies are irresponsible, can’t impose social control, and put the economy before people’s lives.

If so framed, the issue can come down to a gnoseological topic: Who knows best, a few chosen representatives in the government or ordinary people in the streets? Here different traditions play differently. In the West, with centuries of diffidence in the government, the answer is undoubtedly “common people are better.” In China, with a very different tradition, a compassionate, responsible government is the answer. Meanwhile, Beijing knows full well that, as Deng quipped, 经济是硬道理 (the economy is the hard truth).

This may match developments in the Ukrainian war, where things are even more complex, despite initial flops. It could also spin the official narrative in different directions.

It goes with an Italian twist.

Always the Italians!

The resignation of Mario Draghi as Prime Minister of Italy in July helped to spin a different story in China about Russian results in Europe and Ukraine, despite Russian President Vladimir Putin’s current failures in securing a sure victory on the battlefields.

Russian propaganda claims it caused the fall of Boris Johnson in the UK, thanks to Moscow’s plotting. In France, pro-Russian forces like far-rightist Marine Le Pen and communist Jean-Luc Melenchon gained the parliamentary majority and de facto knee-capped the pro-NATO policy of President Emmanuel Macron. In Germany, the failure of Merkel’s policies with Russia to promote change through business “Wandel durch Handel” is causing a massive systemic rethinking that paralyzes the country. Then in Italy, Draghi was brought down by a seemingly coordinated plot by Giuseppe Conte’s M5s, Matteo Salvini’s Lega, and Silvio Berlusconi’s Forza Italia. All of them have special ties with Putin. Each development has its own domestic reasons, but it also has a Moscow’s flair in it.

Is it all by chance, or is the FSB (the Russian secret service), building on the old roots of the KGB’s Dezinformatsia (disinformation) political plotting and scheming in Western Europe, scoring great political results? It is hard to verify whether Moscow’s claims are true or far-fetched. But in China, where most people are in the thrall of all conspiracy theories, these claims have an audience, especially if Ukraine fails to win decisively against Russia.

Is Moscow dragging on the war to gain time to destabilize Western Europe and split it from the ex-Soviet satellites and the United States? Is America in full control of its politics, or is it on the verge of self-destructive chaos? Joseph Biden has the lowest approval rating of any incumbent president in 50 years.

With his attempted postmodern coup in Western Europe, Putin has raised the level of confrontation and changed the game’s rules. China is closely following the evolution of events in Ukraine and Europe. Indeed, a Russian success in Rome, Paris or Berlin could embolden Beijing’s hardliners, with risky fallout in Asia and the rest of the world. Then the pro-Russian choice could be right, and it would also lend support to the defective zero-Covid policy.

Here came another Italian, Nancy Pelosi, who decided to open a second front with China when the first one with Russia in Ukraine was not settled yet. Confrontations on two political fronts multiply risks. It was a bad choice for the US but possibly even worse for China.

Beijing is left with only ugly alternatives. If China backs down from a war, it will show weakness and show it is a “paper tiger,” using Mao’s definition. If it goes in a full-fledged attack, it will prove it is a real tiger deserving a cage or being put down. Neither is good.

So far, China has tried to work a middle path, starting military drills around the island, cutting exports, and closing down ultra-nationalist websites, like that of Global Times former editor Hu Xijin, to set the official propaganda tone. Beijing is well aware that traditionally in China, nationalist propaganda starts with blaming the foreigners and ends up blaming the government for being too weak with the foreigners.

In democracies, if governments fail, there is an election, a new government is chosen, and everything starts over again. In authoritarian regimes, if the head of government fails and steps down, the whole system falls apart. But no government, as no human, is always right. Then either the Chinese giant changes its regime or it changes its worldview—and possibly, it should do both.

The long-term moral is that Beijing should learn to put itself in situations where it has two or three good choices, not two or three choices that are all wrong. But it means a radical change of mental approach because it cannot put itself in positions of enormous difficulty where every choice it makes is ultimately wrong.

Who will win in Ukraine

But the real question boils down to, who will win in Ukraine and Europe?

Before Pelosi’s visit to Taiwan and after the initial enthusiasm for the Russian invasion, Beijing had reconsidered its options about Moscow.

Russian analyst Vladislav Inozemtsev argued that Beijing’s reaction highlights “the complete bankruptcy” of that alliance and those expectations.[8] Despite the break between Russia and the West, the Russian analyst says, China has not come to its aid, “preferring instead to conduct business as usual” rather than providing any military, economic, or technological assistance to its supposed partner and ally.

China has provided some rhetorical support to Russia, but its words have been less than fulsome, and they have not reflected any severe change in Beijing’s actions.

Moscow has increased its yuan holdings, China has bought more oil and gas but at cut-rate prices, and China has sold more high-tech items to Russia to fill in for the withdrawal of Western supplies. But China has not supported Putin’s “special operation,” not recognized the “sovereignty of the LDNR,” and “consistently called for stopping the war and starting talks.”

Moreover, the Russian economist says, Chinese banks have refused to finance deals with Russian oil companies, supply Russia with spare parts for Airbus planes, and offer Russians payment cards on its system. Instead, it has cut back investments in Russia, shifted its trade route preferences away from it, and told Moscow it couldn’t land leased planes on Chinese territory.

At the end of the day, the Chinese are very practical people. They chose communism one century ago not because they had such great admiration for Western egalitarianism but, as Liang Qiqiao argued at the time, because the Russian Revolution proved that communism was the latest, most effective “ideal technology” supplied by the West that could be used by the Chinese to improve their state system. The same logic was applied all along.

After the EP3 incident on April 1, 2001, the Chinese government was scared about the power and the pressure of the American forces. And therefore, the internal party debate was moving in the direction of possibly changing the political system and adapting the financial system around the time of the onset of the second Gulf War; in the party, perhaps 50% were in favor of political change and 90% were supportive of changes in the financial systems.

The tide started to turn with the failures in the Iraq war, starting around 2005 when the Americans showed they didn’t have an effective plan to stabilize the situation in Iraq and they were overwhelmed by uprisings left and right that were shaking both in Iraq and Afghanistan. It showed Beijing that American policies were not that efficient. They were random, subject to different ideas, and made without long deliberation and consultations. Chinese policy-making was deemed much more effective.

The 2008 financial crisis showed that the American financial system was also ineffective. Not only was Wall Street swept by an economic crisis unseen since 1929, but also in the aftermath of the crisis, Washington didn’t adopt radical measures to improve the financial architecture that allowed the crisis to occur in the first place.

Still, it asked China to lend money by buying up bonds from the Treasury and from endangered financial entities.

The two elements, the war in Iraq and the financial crisis, then started a mental change in China where Chinese conservatives started thinking that their system was working and didn’t need improvement. It was safer to keep on their track and not embark on complex and challenging choices where America was also proving weak.

Similarly, the failure of zero-Covid policies and the errors in the Ukrainian war could turn the tide again, triggering a rethinking in Chinese politics. That would work provided Ukraine somehow wins the war against Russia and Russia fails in its attempts to bring chaos to Western European politics.

China is watching to see if Putin’s policy is working or if America is faring better. The war in Ukraine is not only about Ukraine but also about China’s future.

At the end of World War II, regular Chinese and intellectuals saw how the Russians routed the Japanese from Manchuria in a matter of days. Conversely, the US-backed KMT nationalists failed to win against the Japanese for eight long years.

For practical people, this was evidence that there was something wrong with the KMT and maybe also about the Americans, while the Russians were far more effective. It was not about freedom, liberty, or ideals, but about success in war, the issue of life and death of a state, according to the first line of Sunzi.

The Ukrainian test for China

In modern times, the same can be confirmed by the Ukrainian war. If Russia manages to score some success in Ukraine and Europe that it can boast about in Asia and China, this could move the political debate in Beijing in one direction. At the same time, this could complicate ties between China and the United States, China and its neighbors, and China and Taiwan.

This brings up a clear possibility of confrontation despite all the difficulties we had exposed before. If Russia is taught a Ukrainian lesson, has an apparent defeat, and starts a profound rethinking of its system, this could spin the Chinese political debate in a different direction.

Of course, there are other agendas for the United States; on the one hand, America may want to contain Russia but also to forestall the dangerous implosion of Russia by giving it a modicum of success that could hold the country together.

In the last century, Russia underwent three massive political crises on the eve of three political war defeats. In 1905, with the Japanese, the Tsar conceded a constitution. The second crisis, in 1917, occurred with the defeat to the Germans and the Tsarist regime fell apart, setting up the Communist revolution. The third one was in the late 1980s; with the defeat in Afghanistan, the USSR empire crumbled away.

A Russian failure in Ukraine could trigger something similar, and Europe and the United States may not want to see it. Yet, if there is a victory by Russia, Chinese hardliners could be emboldened.


In this situation, the Russian and Chinese agendas appear at odds. Russia, facing a very difficult war in Ukraine that will not end in an easy victory, may hope to drag out the conflict, expand it, and create even more international confusion.

In this, Moscow may hope to get out of the present impossible predicament. Then Moscow needs a long and extensive war that could eventually draw China closer and create political results to show off to the Russian public.

China conversely needs to process its own issues. It needs a calm environment to avoid rash decisions in the spur of the moment, something that existed perhaps with Covid, Ukraine, and Taiwan. Therefore, Beijing needs to end the Ukrainian war soon to regain some peace of mind.

It is clear that the Ukrainian invasion is not a diversion for America that will draw attention away from China. The Russian invasion is conversely working as a reminder that the US and its allies need to concentrate on China before it becomes a threat like Russia. China may need to take the Ukrainian affair out of the picture as soon as possible in order not to be put in the same category as Russia.

Here there could always be the pall of the color revolutions and the start of pro-democracy protests, as Chris Buckley and Steven Myers have recently argued.[9] Perhaps here there could be a lesson to be drawn from the zero-Covid policy. It’s impossible to eliminate the spread of a contagious disease. A country then should promote and channel some kind of “herd immunity” not by avoiding contagion of democracy—something impossible in the long term and very costly and hard in the short term—but by promoting and guiding this contagion.

[2] See
[3] See
[4]  See UK trade with China: 2021 – Office for National Statistics › uktradewithchina2021
[5] See
[7]  See
[8] See and
[9] See

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