Sunday, January 23, 2005


Given Taiwan President Chen’s personality, the assessment of the threat, the weakness of the PLA and the likelihood of US protection, now is a time fraught with danger. It is likely Chen will act precipitously and the China, even though desperate to maintain the status quo, will nonetheless give into the leadership bloc that is spoiling for war with Taiwan. Policymakers and operators should be conscious of the confluence of events and attitudes and be prepared to act decisively on short notice.

1) China’s recent belligerence towards Taiwan has many asking “why now?” What has happened in the near term to cause China’s leadership and leadership media outlets to become so hostile to Taiwan? The answer is two-fold: China’s precarious economic situation threatens to undermine the Communist regime. Therefore, China’s leaders, who are a decidedly un-imaginative group, have decided that their best gambit to remain in power is to stir nationalist sentiment on behalf of China and by extension, the Communist Party. The unprovoked nature of the rhetorical attacks on Taiwan (and Hong Kong) speak to the weakness, possibly fatal weakness in the structure of China’s government. And if one accepts the proposition that this is the end-game for China, then one must also face the proposition that this is an extra-ordinarily dangerous time in SE Asia, more dangerous even than the crisis in 1996.

2) The evidence of China’s fragile economy continues to mount. While official Chinese government statistics point to near double digit growth, these figures are increasingly dubious in the face of real world observations. China’s governmental economic figures are not subject to independent analysis, so are always suspect. The US government assesses China to having “between 170-250 million” unemployed persons. (Taipei Times 15 October 2003) That is roughly the entire population of the United States rattling around inside China, looking for work. Official Chinese unemployment statistics underestimate unemployment by a factor of 10. The Chinese government knows the danger this large army of employed represents. In 2000, word reached the Western press of a riot by 30,000 unemployed in NE China. (Associated Press, April 3, 2000) The riot took days to put down after a full-scale battle with riot police and troops. Since that time, the Communist government has moved quickly to crush gatherings of the unemployed and to shield their activities from the press. However, similar reports of uprisings and subsequent crushings by the government continue to trickle out via dissident and Christian networks. This determination by the government to crush gatherings of the unemployed is likely behind the recent oppression of Christian Churches that have served as a haven and succor to the unemployed. The Government is attempting to disperse the unemployed to prevent any coalescing of discontent that might result in a real uprising.

3) Other under-reported bad economic news for China include: a large number of imminent bank failures because state banks are forced to carry a disproportionate share of non-performing loans on their books. In the past, China’s banks were required to loan money on generous terms to state-controlled companies, many of which companies are headed by members of the Communist party. The loans were given for dubious economic reasons, often on little more than wishful thinking, and many have never been nor is there any intention to repay them. China itself recently admitted that the NPL rate in the largest bank was 40-50% of outstanding loans. (Beijing Review August 5, 2004) These loans stay on the books of these banks, artificially pumping up the asset value of the bank while in reality, these loans are worthless. With the coming of WTO’s full implementation in 2006 and that treaty’s demand for banking transparency, the Chinese banks with their bloated NPL portfolios, will be forced to call in the loans to compete with foreign banks who will be allowed into the China. Calling in the loans will bankrupt moribund state-owned businesses. These businesses will be forced to sell assets because they have no positive cash-flow. Once they businesses begin shutting down, even more people will be thrown out of work, thereby worsening an already desperate situation.

4) Recognizing what will happen once foreign banks are allowed to compete on the mainland, China has begun to strong-arm Hong Kong banks to assume some of the NPL’s at a major discount. On 1 Jan 2004, China signed a “free trade agreement” with Hong Kong. The agreement, called the CEPA (Closer Economic Partnership Arrangement), has been used by the Communists to bolster its claim to be coming under compliance with WTO rules. (Xinhua News Agency, 30 August 2004) In reality, China has used CEPA to compel well managed Hong Kong banks into “partnering” with Chinese banks in an attempt to shore up losses of Mainland banks and in some cases, even to give new loans to otherwise hopeless business. This policy of partnering will not forestall the bankruptcies and foreclosures that are in the offing and will ensure that Hong Kong’s economy will suffer the same effects that are coming for the Mainland economy.

5) The Hong Kong people can see the writing on the wall. With the coming of CEPA and recent moves by the Central Committee in Beijing to curtain rights that has heretofore been enshrined in the Hong Kong Basic law, Hong Kong has become restive. A recent pro-democracy march in Hong Kong attracted upwards to 500,000 protestors. Chinese armed forces stayed in the background, but in a “conciliatory” gesture a few weeks later, China marched 3000 troops into Hong Kong in a parade that was designed to “soothe tensions.” (Straits Times August 2 2004) Unfortunately for the Chinese government, this gesture soothed tensions as effectively as banging a hammer on a toe would soothe a hangnail. But the significance of this lesson was not lost on those in the pro-democracy movement in Hong Kong, some of whom had first hand experience with Tiananmen in 1989. Nor was it lost on the people of Taiwan.

6) Further exacerbating the economic troubles in China is the absence of the rule of law and the lack of consistent electric power. First, the rule of law. Companies not affiliated with the Communist Chinese government always lose in court. It does not matter if the opposing litigant is a foreign company, a Taiwanese company or even a Chinese company without the appropriate “guanxi” (关系) or connections. The courts favor those in power. In an attempt to circumvent the corrupt courts, a consortium of Taiwanese and liberal minded Chinese corporations established of Taiwan companies came together to form an arbitration mechanism to resolve commercial and contractual disputes. Yet even this informal work-around has been subverted by the Communists who decreed that the arbitrators must be approved by the already corrupt judiciary. Predictably, once co-opted, the results of the arbitration panels began to mirror those in the officially constituted courts.

7) Recognizing the difficulties inherent in doing business on the Mainland, increasing numbers of Taiwanese companies have begun to return operations to Taiwan, abandoning China for the safer jurisprudence of Taiwan. This trend is especially worrisome for the Chinese economy because Taiwanese companies serve as the vanguard for Western investment into the Chinese economy with the advent of World Trade Organization membership. Taiwan’s overseas-focused businesses are well trained in Western business practices and many of the businessmen are educated in the West. Taiwan’s business leaders also have the advantage of cultural and linguistic commonality with those business leaders in the Shanghai business corridor. Also, Taiwan’s businesses are well capitalized with sophisticated banking support. Yet, the fact is, even with all these advantages, Taiwanese businesses have found the appeal of China to be a siren song, luring unwary businesses of the massive market with cheap labor only to be dashed by corruption and lack of power.

8) Believing government growth statistic and fueled by ridiculously easy credit terms, Chinese entrepreneurs have been on an infrastructure growth binge. There are so many huge buildings (many without tenants) consuming so much electricity that the creaking electrical generating and delivery systems cannot keep pace. Consequently, power to businesses unfavored is frequently interrupted. Organizations and activities favored by the government receive smooth, even power. One of these activities is the German engineered Magnetic Levitation (MagLev) High Speed Train in Shanghai. The train is a vanity project for the Communist government and sucks up an inordinate amount of electricity for almost no ridership. Nonetheless, the train continues to receive uninterrupted power, while many Taiwanese ex-patriot, tax paying companies receive 12 hours of power per day because they are Taiwanese companies. This policy makes no sense, is undermining the Chinese economy and is eroding the options that China has in dealing with Taiwan.

9) There are two opposing forces at work at the top level of Chinese Communist leadership. On one vector, the senior leaders crave the trappings of wealth. Men who could not balance a budget on a scale nonetheless traipse importantly in convoys of huge Mercedes reviewing high profile business ventures, the construction of which are controlled by their more fiscally astute family members. This pull of wealth also explain why Communists treat the state banks as their personal piggy banks to be raided to keep the party going.

10) The other vector is the desire of the Communists to be “laoban” (老板) or boss. In Chinese culture, you are not the boss unless you assert your authority. A good target on which to assert authority is the legion of Taiwanese-owned business Demanding ridiculous building requirements, onerous workplace rules and high taxation levels from which locally owned and favored companies are exempt, in addition to the electricity problems mentioned above, gives the Communists a chance to prove they are “laoban.” This attitude towards Taiwanese businesses also makes it clear to many Taiwanese businesses that they need to flee to where there is more likelihood of fairness. The Chinese fixation on being laoban is further eroding the business climate so necessary to Communist party rule.

11) The result of these contradictory forces working in China is the splitting of the country into three classes. At the top is a stratum of hyper-wealthy and corrupt leaders presiding over and wrecking an economy that is propped up on seriously underpaid workers and exploited foreign businesses. Below this maligned class are a quarter of a billion unemployed workers whose ranks will swell with the coming of WTO and the fleeing of Taiwan businesses. It is an overwhelming concern of those at the top to do what is necessary to prevent the two lower classes from expressing their economic discontent with a mass uprising. The upper class’ conundrum is that the tried and true way to distract the masses is to stir the nationalism inherent in the Chinese people by appealing to “reunify” Taiwan and China. However, the Chinese leadership is finding that when they allow the people to rally and protest against Taiwan, those protests often turn to more general protests for increased democracy. Since such a thing cannot be tolerated by the Communists, they are often out of ideas on how to rally the people otherwise.

12) Part of the lack of imagination in the Chinese Communist Central Committee is the hardening of factions there. There are four identifiable groups. One group is those of the “true believers” who see the phony government economic statistics, look at the gleaming buildings and watch Deng Xiao Ping hagiographies on TV. These people think that all is well with China and the future is a straight line from the present. This group can be counted on to continue the revolution and the fight against the “splittists” in Taiwan.

13) The other groups are more clear-eyed in their assessment of the current situation in China. The first of these groups are the reformers. This group sees the serious problems in the economy and in governance confronting China and seeks to enact changes that will prevent a debilitating economic crash that would be so destabilizing. These men are not democrats but could be likened to a combination of late 1980’s Gorbachev Russia and current day Singapore. These reformers would enact stringent banking transparency laws and crackdown severely on governmental corruption all the while attempting to maintain a firm grip on political power. This group is very leery about actually engaging in conflict with Taiwan because there is so much potential for economic disruption which could result in internal political upheaval. Both there results are unacceptable to this group, so they can be counted to resist the temptation to attack Taiwan.

14) The next group is the “saber-rattlers.” This group sees that the best way to deal with problems in the economy is prosecute “corruption” with big show trial and quick executions and to demonize Taiwan as “splittist.” This group knows that Taiwan is the engine of growth in China, but at the same time, is the easiest symbol to use to appeal to the mass of Chinese. The saber-rattlers attempt to rile the Chinese people against Taiwan independence, making that the sole focus of political dissatisfaction thereby deflecting the people’s ire away from the lack of democracy in China. Saber-rattlers hope that by threatening Taiwan, the Chinese people will patriotically rally behind the government and ignore economic problems in pursuit of the goal of re-unifying the motherland. At the same time, by only rattling and not USING the saber, the goal is to intimidate Taiwan politically but not completely end Taiwan’s desire to invest in China. These men are opportunists and ultimately only interested in staying in control of the government to enjoy the power and attendant luxury. If threatening Taiwan helps to accomplish their goals, fine. If accommodating Taiwan would also accomplish their goal of staying in power, that tact would also be used. They also are well aware that using popular passions as they do includes the real danger that those passions will spin off in a direction that the leadership cannot contain or control.

15) The last group is the “saber-users.” This is another group of true believers but they take Mao’s dictum that "Political power grows out of the barrel of a gun" literally. They are hegemonistic and expansionist. They believe that Taiwan must be retaken and the “splitists” must be crushed. This group is intent on asserting China’s standing in the world and craves to have China recognized as a super-power which they perceive would give China the same freedom to act in the world that the US has. This group is indifferent to the effects combat might have on the economy and even to the presence of the 2008 Olympics in Beijing. They believe that an assertive and aggressive China that is a world power will mean that people will come regardless. These men would be willing to violate the status quo to accomplish their political goal of making China a feared world power.

16) Currently, the second group of realists predominate and continue to hold power in China. There are three reasons they are still in control. 1) The communists are a collective leadership. As anyone who has been on a committee can attest, it is much easier to maintain the status quo than to muster support for any kind of change. 2) Policies that compete with the status quo are radical and to the collective mind, unthinkable. Consider, since 1917, the start of the Russian Revolution, communists have proved to be adept revolutionaries and for the first generation of leaders, they are aggressive expansionists. Witness Lenin/Stalin’s Soviet Union, Mao’s China, Kim’s Korea and Castro’s Cuba. However, subsequent leadership generations quickly become ensconced and comfortable in power, loathe to take precipitous action that might fail and lead to personal downfall. The status quo in China has prevailed for 50 years. There is no imperative in the minds of the collective to make changes, only to tinker at the margins. 3) Taiwan has acquiesced to the status quo. Even at his maximum belligerence, Chaing Kai Shek never seriously moved against China once CKS came to Taiwan. Even flare-ups like the reciprocal shelling of Kinmen and Xiamen in the 60’s and 70’s were orchestrated in such a way to prevent the war spreading more widely. Taiwan’s passive acceptance of the status quo has allowed China to raise and lower pressure on Taiwan without risking a major confrontation. Most of the angry rhetoric that comes out of China is for internal consumption, for the reasons mentioned above. Give the status quo seeking nature of the current leadership, we can assume that China’s recent ratcheting up of tensions to be for internal consumption. However, the real danger is that Taiwan will stop playing the game of passive acceptance of Chinese belligerence and thereby force China into a choice of backing up their rhetoric with action or backing down.

17) Commentators around the world purport to fear such a change from Taiwan. Leaders in the US, Australia, Singapore and from all over Europe have in the last month have implored Taiwan not to do anything rash to “provoke” China. What is their definition of “rash?” Chinese propaganda lays down this preposterous standard to which the world has agreed: if Taiwan’s leaders CEASE to claim to be leaders of all of China, then China will be forced to attack. So, China has pushed Taiwan into a corner, essentially daring Taiwan to TELL THE TRUTH about Taiwan’s standing in the world. The rest of the world will be called either to side with a small, truth telling democracy or a large, bullying, lying Communist dictatorship. Preposterous.

18) Given the gloomy economic outlook noted above, the very last thing that China
needs is some kind of incident that will inject uncertainty into its economy. Hence, the sway that the status quo pragmatists hold over the Chinese government. The underlying weakness of their position: though there are those on both sides of the Strait who favor the status quo, the continued maintenance of the status quo requires the active participation of the Taiwan leadership. Yet, paradoxically, China also needs Taiwan as a “pressure valve,” an issue that the Communists can give its restive malcontents to focus on instead of on their larger dissatisfaction with the government’s terrible economic policies. So long as Taiwan plays along, China reaps the benefits of a stable economy and retains Taiwan as a convenient punching bag.

19) The problem with maintaining an equilibrium as anyone who has ever been on a seesaw can attest, is that it takes the active participation of both parties. If one side ceases to play along, then the equilibrium is lost. It is new evident what China gets from this arrangement, the question is, what is in it for Taiwan and for President Chen?

20) The short answer and the conventional wisdom says: security from attack by China, which is offended by the presence of “splittists” on their sovereign territory. The conventional wisdom looks across the Strait at China and sees 600+ missiles, a large standing army and a billion and a half belligerents and worries from the prospects of Taiwan in the face of this arrayed enmity. Leave aside the notion that China would be incapable in real terms of attacking and defeating Taiwan, the perception among many here is that the PLA would be unstoppable once it gets moving. This popular perception fuels a fear and defeatism in Taiwan that China is eager to exploit, and has. The media here is all too willing to contribute to the defeatism, inflating rigged war game simulation results to the status of dead-solid-lock predictions. Foreign commentators with dubious credentials are routinely trotted out to confirm the pessimists’ worst fears.

21) There appears to be only one person in Taiwan in public life who unaffected by this general pessimism. That man is President Chen. He is consistently sanguine in the face of vicious ad hominem attacks and in the face of relentless Chinese belligerence. In contrast, Lien Chan, the KMT candidate for President in the last election, rushed to assure China that we would never do anything to antagonize them. Chen on the other hand, rejected Chinese demands to affirm their interpretation of “one China.” Most telling, when Representative Dana Rohrabacher, co-chairman of the Congressional Taiwan Caucus, and Representative Jim Ryun floated the idea that Taiwan should send 5000 Marines to Iraq, the entire government and 80% of Taiwan public opinion were against it. On the other hand, President Chen, blandly noted that if Taiwan sent troops, “Taiwan-U.S. ties would be upgraded to a quasi-military alliance relationship” and later noted in a televised interview that “sometimes small nations have to do what is unpleasant.” (Etaiwan News, 24 May 2004) Chen consistently displays real guts in the face of hostile, and sometimes violent political opposition.

22) To go along with his guts, Chen has three other traits worth noting. He is extremely smart as his academic successes all the way through law school attest. He is not afraid to gamble as he did as attorney for dissident during the KMT, as he did as an attorney for dissidents during KMT rule (although he was jailed for pushing his luck too many times during trials). And finally, he has a sense of his own unique place in history. He has spoken in private sessions of his realization that by his actions, he has the opportunity, he has the opportunity to set events in motion that could free a billion and half people from bondage.

23) This is an extremely important psychological insight. President Chen, with his combination of brains, guts and courage to gamble, also knows that he is now in a unique position, because of his electoral success, to press an agenda that could radically destabilize China. By his actions, he could force China into actions that could free ¼ of humanity. Few people in history have been in a similar position. Chen is unlikely to let this opportunity pass without at least trying to take advantage of it.

24) Here is a possible scenario: Chen advances a constitutional change that makes it clear, if not explicitly so, that Taiwan is independent of China. Whether this is a name change for the country, a change in the flag, or a change in the governmental structure is really not relevant. China has objected in the past to any of the above moves. Chen will claim that nothing substantive is being changed, yet all the world will know that is not the case. Once Chen makes his move, China will then have an agonizing decision: make good on 50 years of threats to invade, or acquiesce. The PLA is clearly not up to the task of invading Taiwan, as will be discussed below. Shooting a nuclear bomb at Taiwan would definitely put an end to independence talk, but at a disproportionate cost to China and the world and threat of a much wider conflict. The people of China will see any result short of a successful invasion and occupation as a bitter and humiliating defeat, especially given generations of Chinese rhetoric about the ease with which the PLA would “reunify” with Taiwan. Military failure in Taiwan would result in uprisings throughout China by people seriously disillusioned by Communist lies. The PLA would at that point have a choice of its own: either violently put down the rebellions, or accede to them as happened in Gorbachev’s Russia. China’s leaders have spoken ominously of having learned the lessons of the failure of the USSR. However, whether the soldiers of the PLA would have the stomach to murder their countrymen in the large numbers that will be required is an open question.

25) Acquiescence to Taiwan’s de facto independence is the more likely result. After all, at the moment, Taiwan has a form of independence, (granting passports, convertible currency, diplomatic corps) and as of yet has not provoked the Chinese. The Chinese would likely use their formidable propaganda machine to convince their people that whatever has happened in Taiwan is not independence or actually anything at all worth mentioning. Should Taiwan make the heretofore impossible to contemplate changes, China will let them pass if the Communist leadership decides the economic benefit from a strong prosperous Taiwan would outweigh the loss of Taiwan as the “safety valve.” In other words, a strong economy would safeguard the regime.

26) Another open question is the efficacy of the People’s Liberation Army. In the last 50 years, the PLA has not fought anyone of consequence, except for border skirmishes with Vietnam and India. The PLA is now more akin to a heavily armed racketeering organization. It is adept at strong arming dissidents and Christians and at running legitimate and not-so-legitimate businesses. Are the PLA generals who achieve their positions by connections, guanxi and skills at managing black market activities really up to the Eisenhower-sized task of invading an island the size of Taiwan? There is no doubt that the PLA, should it attack Taiwan, would be able to inflict damage on the island. Realistically, however, the throw weight of the explosives on the missiles arrayed against Taiwan are equivalent to one day’s sortie of B-52’s during Operation Linebacker during the Vietnam War. The missiles are terror weapons, akin to the V2 of Nazi Germany, and not militarily significant. They are insufficient to prep landing zones for airborne insertions, nor are the sufficient to cover landing craft. The idea of a “decapitation strike” is fantasy, but what we would expect from the level of generalship in China. Taiwan has sufficient defensive capability to repel and initial Chinese attack, and would be especially tenacious knowing that a US counter-attack is imminent.

27) There is a common sentiment among line troops and officers in the Taiwan Army. All express real pessimism at the idea that Taiwan would have to defend itself in the event of a Chinese attack. I have heard many times that “哥哥保护弟弟“ (big brother protects little brother). These young men have little confidence in the competence and loyalty to Taiwan of the officers above them, but all are willing to fight knowing that America is at their back. The combination of the dubious quality of the PLA, the élan of the Taiwan defensive forces, and the likelihood of an American counter-attack would be sufficient to repel the Chinese Communists.

28) There are four reasons to expect America to intervene on behalf of Taiwan in the event of war with China. 1) Taiwan has a formidable lobby in Washington and would ensure that Congress would be firmly on the side of Taiwan in the conflict. 2) The American people are predisposed to defend a small democracy against a large communist bully. 3) No American president would want to face voters amid accusations of “cowardice” in confronting a bully. 4) Should America allow Chinese aggression to stand in Taiwan, allies throughout the region would expel American troops as irritants not worth the trouble of having them in their countries, especially if American is unwilling to confront the #1 enemy.

29) Given Chen’s personality, the assessment of the threat, the weakness of the PLA and the likelihood of US protection, now is a time fraught with danger. It is likely Chen will act precipitously and the China, even though desperate to maintain the status quo, will nonetheless give into the leadership bloc that is spoiling for war with Taiwan. Policymakers and operators should be conscious of the confluence of events and attitudes and be prepared to act decisively on short notice.