Overthrowing Xi Could Mean The End Of The World

I assume this is obvious, but what’s obvious to me isn’t always clear to the rest of humanity, so it’s worth a mention: In the highly unlikely event that widespread protests in China resulted in a change of government, local equities would almost surely collapse, spreads would likely explode wider and government debt would be at risk of outright repudiation.

Note that Mainland markets would probably implode even in the event of a relatively orderly transition to democratic governance. And any such transition would be the furthest thing from orderly.

Replacing the Party’s sprawling bureaucracy would be impossible. Some areas of the country might well become semi-sovereign principalities, many of which would almost surely be controlled by former Party bosses. Mountains of local government debt previously backed by the state would be in default overnight. The offshore yuan would collapse because there wouldn’t be an onshore yuan anymore and even if there was, there wouldn’t be anyone around to set the reference rate or manage the band without the PBoC. State-owned enterprises would face an existential crisis assuming any new democratic government expressed an affinity for a transition away from a command economy. In short: Chinese markets as we know them today would unravel entirely. In addition, the US would have to somehow freeze the Party’s US Treasury holdings. Financing made available through Xi’s Belt and Road initiative would be in limbo. The Asian Infrastructure Investment Bank would face some kind of oblivion. The Russian economy would be thrown into a new crisis. I could go on, but you get the idea.

Of course, those would actually be the least of anyone’s concerns. The PLA would probably remain loyal to the Party until the bitter end. China, along with India, is a rare example of a state where the population is too large even for a modern, advanced military to subdue in a situation where a sizable majority decides it’s time for a change. You can’t nuke yourself, but nukes would be the only way to stop a billion and a half people from taking over the government if they decided that’s what they wanted to do.

This is all so unlikely as to be barely worth mentioning, but after a weekend of nationwide protests, the prospect of a popular uprising in China managed to supplant existential turmoil in the crypto space as the top story across US financial media portals — no small feat! The protests were likewise elbowing for space above the fold on the websites of every major media outlet on Earth, financial and otherwise.

It’ll be (very) tempting for the US and other Western democracies to express solidarity with the protesters and to otherwise fan the proverbial flames. The longer the unrest lasts, the more such international support the protesters will invariably receive. If Xi cracks down on the protests, an outpouring of international sympathies with the Chinese people is guaranteed — and also guaranteed to infuriate the Party, which chafes at the appearance of external “meddling” in the country’s internal affairs. The more irritable the Party, the worse the crackdown. The worse the crackdown, the more restive the populace, and so on, in a perilous spiral.

The world needs to be very cautious about this particular powder keg. A democratic China might sound like a great idea — an epoch-making moment with the potential to usher in a new era of peace, prosperity and cooperation, led by a US-China democratic alliance.

That’s a nice story, but it’s highly unlikely to play out that way. The dissolution of the Communist Party would be followed immediately by chaos on an unimaginable scale. As noted above, the currency would disintegrate, Mainland equities would stop trading at least temporarily, local currency bonds would be assumed to be in default absent a compelling reason to think otherwise and because every major bank in China is a state bank, bank failures are a foregone conclusion.

At the same time, the near-term ramifications for the global economy are unfathomable. The protests in Zhengzhou alone will “result in a production shortfall of close to six million iPhone Pro units this year,” Bloomberg reported on Monday. That’s just the fallout from a few hundred people clashing with a few dozen security personnel at one factory. Can you imagine the fallout from a billion people clashing with the Party itself on a national scale? All trade and commerce into and out of China would probably cease until the internal conflict was resolved.

And what would happen if, God forbid, the Party, in retreat, holed up somewhere with the nukes and proceeded to hold everybody (the Chinese people and the rest of the world) hostage, pending some mutually agreed settlement that restores them to power or gives them all amnesty?

You’re not going to hear about those hypotheticals from analysts, and you won’t hear them couched in the stark terms I employed above from mainstream financial media outlets either. But it’s worth pondering this tail risk.

Bottom line: The long-term implications for the world of a successful democratic revolution in China may well be utopian. The near-term implications, though, could be catastrophic. Indeed, I’d wager that the odds of making it to the long-term in such a scenario aren’t great.

On Monday, The New York Times put together a compilation of protest footage. In one scene, protesters screamed, “We don’t need an emperor!”


 

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16 thoughts on “Overthrowing Xi Could Mean The End Of The World

  1. It was not all that long ago that China was a patchwork of fiefdoms run by warlords whose only goal was self-enrichment. If push came to shove, how many Chinese really want to return to those glorious days?

  2. TBF, letting people yell in the streets is working fine for Iran. As long as the army/security apparatus remains faithful to the power in place, it’s hard for that power to ‘lose’ even if they don’t really control things anymore.

  3. That is indeed a tail risk. Such regimes are very experienced in dealing with dissent, the current situation in China is nowhere near critical for CCP.

  4. The most likely outcome I can see coming out of sustained protests is Xi shifting gears on Covid zero basing it on the “science” that Covid-19 is no longer considered pandemic but endemic. It’ll give the people what they want and end the protests. He’ll follow that up by arresting and prosecuting as many protestors as he possibly can to threaten the populous from ever protesting his policies again.

    1. indeed, most likely. this is exactly how Putin dealt with mass protests in the past. first, appease the masses. second, prosecute the activists.

    2. Yes, that’s the playbook. Also, quarantines may be limited to the elderly and others that are most at risk. The rest will be allowed movement with constant rigorous surveillance which is what every totalitarian autocrat craves.

  5. The biggest threat to Xi is if one way or another he botches handling the protests- then he will face internal CCP dissent and could be ousted from inside the CCP. The protests are unlikely to directly lead to regime change. The internal leadership will oust Xi and then blame his poor leadership for the difficulties- thus sacrificing him in order to maintain their own power. Machievelli outlined this process hundreds of years ago- the only difference is M suggested ousting a number 2 or 3 to achieve this rather than the number 1 leader.

    1. In that vein, he can push the decision making on Covid measures down to regional leaders. It can be a poisoned chalice for the recipients of those generous gifts.

      This is a pretty typical maneuver on his part.

      1. And …. that’s what he did.

        Do it well, maybe earn a promotion. “Fail” = you’ll be hauled in for a little chat with some anti-corruption body.

  6. RIA is, I think, correct in saying that the biggest threat Xi faces is from the CCP if, for example, he decides to unleash a heavy-handed response to the protests similar to the response to the Tienanmen protests in 1989. But even without that, Xi is very aware of the way the West has responded to Putin’s invasion of Ukraine, with a unanimity the NATO countries have rarely — if ever — shown. Whether the West would respond in a comparable manner to the Chinese government brutally cracking down on its own populace is an open question. But reinforcing that uncertainty in Xi’s mind doesn’t seem like such a terrible idea.

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