The Investigator | No. 07/2026

What the 300 pages of the reports and the 15th Five-Year Plan (FYP) emanating from meetings of the National People’s Congress (NPC) and Chinese People’s Political Consultative Conference (CPPCC) do not highlight – and sometimes do not say – is often more interesting than the positive messages the meetings aim to promulgate. This piece amplifies the messages of this article, issued on the eve of the ‘Two Sessions’, and is a companion to this piece on the NPC.

The problems

Although now shorter than in the past, the ‘problem page’ of a report is often the most revealing. Xi Jinping, General Secretary of the Chinese Communist Party (CCP), has long talked about the external storms and waves that affect the People’s Republic of China (PRC) internally. Problems, as laid out in the National Development and Research Commission (NDRC) report, centre on weak investment, sluggish growth in consumption, ‘rat race competition’ between commercial enterprises, a slowdown in traditional growth drivers with emerging industries yet to replace them, weak employment and public services, environmental problems, local government debt, and a real estate market yet to pick itself up from the floor.

The ‘metadata’ of the reports not only illuminates the extent of these threats, but also raises others that are equally – or more – serious.

Threats to stability and to the CCP

The CCP’s primary aim is to stay in power: losing it would be existentially and personally dangerous. Remaining in power demands a lack of popular protest, alongside social stability and a measure of legitimacy to underpin the CCP’s monopoly on power. This notion has become commonplace, and for good reason.

Party legitimacy stems primarily from the promise of ever-growing prosperity. ‘Solidly Advancing Common Prosperity for all the People’ forms part of the title of section XII of the 15th FYP. ‘Chinese modernisation is characterised by common prosperity for all’, states the Work Report of Li Qiang, Premier of the PRC. But this is not a recent emphasis: for over a decade, Xi has made much of the concept of ‘common prosperity’. It loomed particularly large in 2021.

Furthermore, poverty and prosperity are as much relative terms as they are absolute. Inequality gaps cannot be allowed to grow too big, as Xi made clear in a speech in January 2021, in which he stated: ‘Realising common prosperity…is a major political issue that bears on our Party’s governance foundation…We cannot permit the wealth gap to become an unbridgeable gulf’.

Regional, urban-rural, and income disparities had to be resolved, as Xi said in a politburo study session in January 2021. Polarisation of the rich and poor and common prosperity were linked to maintaining social harmony and stability, as an October 2021 article in Qiushi, the CCP’s ideological magazine, stressed.

‘Common prosperity for all’ is a difficult target. In 2020, then-premier Li Keqiang revealed that 600 million people lived on less than CN¥1,000 (US$140; £110) per month, insufficient to cover rent in many cities. Since then, Covid-19, economic malaise, and rising unemployment will not have helped. Tackling unemployment is a particular concern for the CCP, given the more than 12 million graduates entering the job market each year – to say nothing of the 300 million rural migrants looking, with increasing difficulty, to earn a living.

Food, energy, and resource security also deeply concern the CCP, as the FYP and NPC reports emphasise. Beyond the immediate worries about local government debt and the real estate market are the problems of demographics, water shortages, and a mismatch of education and skill levels to meet the demands of a high-tech economy.

The reform agenda: What happened?

Dealing with these threats to stability was what lay behind the third plenum reforms of October 2013. A year earlier, Beijing announced a Gini coefficient of 0.474 (a measure of inequality, where 0.4 is considered a warning line). Xi, echoing ex-premier Wen Jiabao in 2007, declared the Chinese economic and social model to be ‘unbalanced, uncoordinated, and unsustainable’, hence the need for 380 reform measures.

Yet, almost 13 years later, progress on the backbone reforms has been glacial. Those include deepening reform of the household registration system and the provision of basic public services at the place of permanent residence (there were promises in 2021 and there are promises now in the 15th FYP); changes to the tax regime (particularly real estate tax) and personal income tax (the section on tax reform in the 15th FYP is thin); and changing the balance of local and central government shares of revenue and responsibilities (local governments receive around 50% of the former, while paying for over 80% of the latter).

‘Reform’ in the 15th FYP centres on the need to establish a unified national market, aimed at breaking down provincial and county barriers to company growth, and helping to deal with ‘involution’ or ‘rat race competition’, as the FYP puts it. Noticeably, it is the only reform objective that makes it into the ‘Overall Requirements, Main Objectives, and Policy Orientations for Economic and Social Development in 2026’. Breaking down internal market barriers has been a theme for over 40 years, indicating the difficulties of implementation and the need for a realignment of officials’ incentives.

The unacceptability of the 2013 reform programme

Although Xi was General Secretary at the time, in 2013 he had yet to consolidate his power. In essence, the 2013 reforms contradicted his vision of how to achieve his goal of the ‘great rejuvenation of the Chinese nation’.

He required the economic and political system to devote itself to the struggle with the United States (US). This meant the CCP retaining control so that resources could be devoted to maintaining and modernising industrial production, winning the science and technology struggle, and avoiding dependencies on free and open nations while creating dependencies on the PRC. These priorities are explicit in recent Five-Year Plans.

Moreover, the path to economic prosperity – rebalancing the economic model from reliance on investment and exports to consumption – would mean empowering the private sector and giving choices to the people. Not only would this be deleterious to the pursuit of the CCP’s geopolitical aims, but economic power tends also to lead to demands for political representation and power – ‘no taxation without representation’. That might become an existential threat to the CCP’s monopoly on power. Political reform cannot be on the agenda.

While the ‘Two Sessions’ talked of devoting more resources to raising consumption, by using greater welfare spending to rein in the propensity of the Chinese people to save for rainy days, the actions proposed hardly match the rhetoric. The basic pension, already very low, particularly in rural areas – around CN¥200 (US$29; £22) monthly for farmers – was increased by 2%; under half the projected Gross Domestic Product (GDP) growth. A raise of CN¥20 (c. US$3; £2) per month for minimum old-age benefits for rural and non-working urban residents will shift no dials.

According to the Ministry of Finance report, ‘Basic medical insurance subsidies for rural and non-working urban residents and basic public health service subsidies were raised to CN¥700 [US$102; £76] and CN¥99 [US$14; £11] per person per year, respectively’.

Many fewer households than in the past receive the CCP’s minimum living standard guarantee (dibao). At CN¥400 (US$58; £44) – although the sum varies by area – it is well below Li Keqiang’s CN¥1,000 poverty line. Prioritising social security expenditure would move resources away from the priority areas outlined in the FYP, which are crucial to Xi’s vision of the great rejuvenation of the Chinese nation.

Making the PRC’s rise sustainable

Xi’s answer to staying in power and to resolving the ‘unbalanced, uncoordinated, and unsustainable’ economic and social model is fourfold:

1. ‘Security is a prerequisite for development, and development provides a guarantee for security’: They are ‘two wings of one body’. Security covers 20 areas, but the main ones are political security (the CCP staying in power), food, energy, and resources. These feature heavily in the reports and the FYP. It is worth noting the renewed emphasis in the FYP on civil-military fusion; a policy aimed at the sharing of developments in both spheres.

2. Domination of the sciences and technologies, and of the industries dependent on them: This will reinforce ‘self-reliance’, not only avoiding dependencies on the US and its allies, but also creating dependencies on the PRC by others, which, as in the case of rare earths, has been shown to be an effective method for fighting back against unwelcome foreign measures. Central budget spending on science and technology is set to rise by 10%. Programmes to attract talent are an integral part of the policy.

3. Increased social controls: Building technological totalitarianism progresses. ‘Improving the social governance system’ – a euphemism for control and maintaining the CCP’s power – mandates ‘improv[ing] the grassroots governance platform based on grid management, refined services, and information technology support’; building up the CCP’s presence in ‘emerging areas’; and maintaining social safety and stability.

4. Mobilising culture and ideology in support of the CCP: For the Party, culture is first and foremost about ideology. This is evident in part X of the FYP, where the first chapter is about CCP ‘ideals and beliefs’, and where, behind all sections, the assumption is that the Party will lead. If the going gets tough, ideology and patriotism are there to help.

Conclusions

In the ‘Two Sessions’ and the FYP, Xi is promising the PRC and the world more of the same. The political, economic, and social model will not change substantially. Instead, Xi will tighten existing systems, seek more efficient implementation, and appeal to ‘Party spirit’.

Above all, his gamble is that by modernising traditional industries and dominating new technologies and industries, he can cut the Gordian Knot, which the failure to implement the reforms of the 2013 third plenum has left intact. Internally, if the gamble pays off, the troika of ‘unbalanced, uncoordinated, and unsustainable’ will lose the negative prefixes.

Externally, this industrial modernisation and mastery of science and technology will reduce dependencies on the US and its allies, while increasing theirs on the PRC. For Xi, this is a win-win.

There will be no let-up in the pressure imposed on Europe and developing countries by Chinese exports. The conflict between good relations with the PRC, particularly in trade and investment, and security will sharpen. Governments that view their countries’ growth and investment as dependent on the PRC – the United Kingdom is an egregious example – will be disappointed.

Decoupling is a CCP concept and aim – policies such as ‘Made in China 2025’, self-reliance, dual circulation, and the creation of dependencies should have made it clear that hopes of growth by alignment with Beijing will wither on the vine. Read the FYP and the ‘Two Sessions’ reports: foreign countries have been warned.

Charles Parton OBE is Chief Adviser to the China Observatory at the Council on Geostrategy.

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The Investigator | No. 06/2026

At the National People’s Congress (NPC) earlier this month, the Chinese Communist Party (CCP) set out its economic goals for 2026, and for the period of the 15th Five-Year Plan (FYP) – 2026-2030. The customary reports and speeches, presented after protracted and detailed drafting, are tightly scripted. It is not surprising therefore that barely a week after the outbreak of hostilities surrounding Iran, some of the messaging at least appears anachronistic.

There were no formal references to the aggravation of geopolitical tensions, and the challenges to the People’s Republic of China’s (PRC) interests in the Middle East. There was no mention of the important economic threats that the PRC could face in the coming year regarding energy security, the significance of exports to the rest of the world, and the impact of higher cost inflation on under-pressure consumers. No one acknowledged that the CCP’s best-laid economic plans could be blown off course by a long and costly conflict, or how important it was for Beijing to prepare for such risks. Instead, the content of the NPC and the new plan, as one would expect, had a predominantly domestic, Pollyanna-ish focus.

The reports and speeches, however, do recognise gathering, domestic problems – including overproduction and deflation; fiscal, local government, and real estate dislocations; and protectionism and the weaponisation of trade and finance. Yet, official policy prescriptions are unlikely to be effective if leaders persist in setting economic growth targets that are too high, and in not acknowledging the policy contradictions regarding the laser focus on industry and manufacturing on the one hand, and the larger 85-90% of the economy on the other.

This article examines the economic implications of the NPC and the 15th FYP, and is a companion to this piece.

Industry and manufacturing in pole position

No one was surprised that the PRC’s priorities would continue to emphasise industrial policy, advanced manufacturing, and self-reliance. ‘New productive forces’, which Xi Jinping, General Secretary of the CCP, first referred to in public in 2023, and which are straight out of the writings of Karl Marx, were formalised as the PRC’s foremost priority a few months later by Li Qiang, Premier of the PRC, at the 2024 NPC.

For Xi, whose ambition is for the PRC to dominate the so-called ‘fourth industrial revolution’, these new forces are the sectors now in the vanguard of scientific and technological development, including alternative energy, electrification, semiconductors, robotics, life sciences and biotechnology, and, above all, Artificial Intelligence (AI). These – AI especially – and other industries figure prominently in the FYP.

While the PRC has been pursuing the development of strategic emerging industries for over 15 years, this year brought a shift in focus, spurred perhaps by the authorities’ angst about ‘involution competition’ – including in Electric Vehicles (EVs) – in which aggressive competition has destructive rather than generative outcomes – for example, overproduction and the destruction of prices and profits. Since the CCP itself is also an agent in this process, it is not clear to what extent curbing involution will succeed.

Now, the PRC wants to accelerate the development of the ‘smart economy’, in which advanced technologies such as AI, sensors, robots, and the ‘Internet of Things’ (IoT) are deployed to augment and improve the digital economy of connectivity. The latter, accounting for 10.5% of Chinese Gross Domestic Product (GDP), is targeted to expand to 12.5% by 2030. Activities such as integrated circuits, aerospace, biopharmaceuticals, and the low-altitude economy have been elevated to pillar industries, and industries for the future include hydrogen and fusion energy, quantum technology, embodied AI, brain-computer interfaces, and 6G technology.

Macroeconomic shadows

Compared to the industrial agenda, the Work Report’s economic focus for 2026 looks rather tame, and in many ways vulnerable. With conflict raging in the Middle East, the surge in oil and gas prices, and the shipping traffic standstill in the Straits of Hormuz – through which the PRC gets up to half of its oil imports – the CCP’s forecasts and projections could already be out of date. The major risks relate to an adverse hit to growth, higher inflation, and weaker demand for Chinese exports as higher energy prices ‘tax’ demand in other countries. Much depends on how long current dislocations persist.

To nobody’s surprise, the main 2026 forecast for real GDP was confirmed at 4.5-5%, and other forecasts were unremarkable. Even so, setting and then meeting a target growth rate significantly higher than the PRC’s underlying economic growth (itself closer to 2-3%) is the source of many of the problems running through the arteries of the Chinese economy.

The Work Report acknowledged that the PRC was experiencing supply and demand imbalances, which are contributing to falling prices and other dislocations, more problematic employment and income growth conditions, tensions in local government fiscal accounts, and a still-adjusting real estate sector. The National Development and Reform Commission (NDRC) report, by contrast, did not mince its words, stating that:

The imbalance between strong supply and weak demand is acute; real-estate development investment continues to decline; infrastructure investment growth has turned from positive to negative; manufacturing investment growth has slowed further; overall investment faces mounting downward pressure; consumption growth lacks momentum; and the price level continues to run low.

These problems are, in many respects, the outcome of slowing economic growth and productivity, but they also derive from the CCP’s handling of the downturn in the real estate sector and, more generally, from the economic model in which Beijing prioritises the industrial and manufacturing sectors over consumption and services.

Limited policy responses

Monetary policy options are, and have been, limited for a considerable time. Lower interest rates and bank reserve requirements mean additional reductions will have limited effectiveness. The problem, instead, is a financial system that is poorly capitalised, allocates capital poorly, is not profitable, and lends mainly to local governments and state enterprises for fiscal purposes.

Fiscal policy offers more scope, but while the bias is towards ease, the CCP’s approach remains conservative. The general budget shortfall is predicted to remain at 4% of GDP, but adding in transfers from and deficits of other funds, and off-budget local government liabilities, the general governmental deficit is almost 14% of GDP.

Despite this, the CCP will issue – as it did last year – CN¥6 trillion (£65.5 billion) of special purpose bonds (for infrastructure and local governments) and ultra-long treasury bonds (including for bank recapitalisation and national projects). Additionally, there will be an assortment of other facilities to fund consumer subsidies, financing guarantees, and more consumer trade-in programmes, and new policy financial instruments to spur the flow of equity capital into the digital economy.

Social policy gets extra emphasis. This is not only because of the low employment intensity of advanced manufacturing and the otherwise weaker economy, but also anxiety about the structural consequences of automation and AI. The Work Report highlights an emphasis on vocational retraining programmes, social safety nets for gig or flexible workers, and a range of pro-family policies, including subsidies for medical care and public health, long-term care, pre-school education, childcare, and pensions. These payments will support consumption to a degree, but they fall well short of what is required to change under-consumption in the Chinese economy.

The consumption perennial

For some time now, the rhetoric on the need to raise consumption has been pronounced. There had been speculation that the new FYP might include a target to raise the consumption share of GDP – 40% for private consumption – by up to ten percentage points, but no such reference was made. The rhetoric remains, but in practice, the CCP’s initiatives have not really moved the dial, and do little to suggest the consumption share of GDP will rise a lot. Proposals include extending the consumer subsidies for the trade-in of goods, minor increases in welfare payments, and policies to boost the supply of (not the demand for) consumer services – for example in culture, tourism, sports events, and healthcare.

One of the biggest drags on consumer confidence and spending has been the continuing real estate downturn, which seems likely to linger for some time yet. Another more deeply embedded problem is the political reluctance to reverse an array of policies for fear that the benefits to households will have to entail disadvantage for firms and the state sector. These would include higher wages, interest rates, social welfare payments and the exchange rate, and private sector-friendly changes in financial policies.

Five-year guidelines and faultlines

The FYP details 109 projects, of which nearly three quarters are designed to enhance industrial capacity and strength (especially in and around the use of AI), modernise infrastructure, expand rural-urban development, and promote green and low carbon growth. There are 20 measurement indicators, most of which comprise economic development, security and resilience, urbanisation, Research and Development (R&D), emissions, and the digital economy, but seven relate to employment, incomes, education, and healthcare.

Recognising the new emphasis on people’s livelihoods, these span things such as average life expectancy, the share of nursing care beds in long-term care, the pre-school enrolment rate for under-3s, the number of practising doctors and registered nurses, average years of schooling for the labour force, coverage of unemployment and work-related injury insurance, and basic pensions.

There is no GDP target for the plan period, but there will be targets set annually. The plan’s goal is defined as doubling GDP per capita between 2020 and 2035 to about US$21,000 (£15,800), or roughly where countries such as Turkey and Romania are now. This means compound growth from 2026 of about 4.2% per year. Such growth is still high relative to the PRC’s trend growth rate, suggesting that, absent more radical change, reforms to rebalance the economy will remain elusive.

While the PRC’s technology, science, and innovation can boast startling and enduring successes, it is important to remember that modern manufacturing and technology comprise a relatively small proportion of its US$20 trillion (£15 trillion) economy. Even within the modern and dynamic sector, inefficiency, large subsidisation, and waste exist in a paradoxical parallel.

Two other major constraints are also factors. Firstly, it is highly improbable that the PRC can continue to sustain or increase its already high share of global manufacturing and generate large trade surpluses based on exports without rising levels of trade conflict, as an increasing number of nations – including those in the so-called ‘Global South’, which Beijing wants to court – fear for their own competitiveness and industrialisation programmes. Secondly, the modern sector can probably fare well, but is not going to be able to compensate nor address the big problems in the much larger remainder of the economy.

Fundamentally, the PRC is compromised by a regressive fiscal system that does not raise enough tax, soft budget constraints in local governments and firms that perpetuate inefficiency and loss-making, and a financial system that does not recognise losses adequately or allocate capital efficiently.

The International Monetary Fund (IMF), in its recently published annual report on the Chinese economy, called on the CCP to scale back distortionary industrial policy; adopt a comprehensive and more forceful policy response to boost consumption and resolve deflationary and trade pressures; and act to ensure fiscal sustainability and bolster financial sector resilience. If and how Beijing addresses these issues will tell us more about the PRC’s future prospects than simply checking industrial policy boxes in the Five-Year Plan.

George Magnus is a member of the Advisory Council of the China Observatory at the Council on Geostrategy.

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The Investigator | No. 05/2026

One casualty of the strikes on Iran should be the ugly acronym ‘CRINK’ to refer to the People’s Republic of China (PRC), Russia, Iran and North Korea. Although the four countries share an opposition to the United States (US) and its allies and partners, there is little that unites the PRC to the others beyond the Chinese Communist Party’s (CCP) solipsistic pursuit of its own interests.

To the extent that such descriptions matter, Beijing describes relations with Iran as at the lower level of ‘comprehensive’ rather than as an ‘all-weather’ strategic partnership. The CCP has no inclination to venture out into the current storm. Overall, the scorecard of war is always negative, but not uniformly so – there are both upsides and downsides for the PRC.

The upsides

There are upsides which are already visible, and there are potential upsides.

The former include:

1. A propaganda gift: In its efforts to gain international support in its ‘struggle’ with the US, particularly with so-called ‘Global South’ nations, the CCP presents itself as a force for peace in contrast with a disruptive America. If Venezuela was exhibit number one, Iran and the resultant wider conflict in the Middle East allows the CCP to point out the contrast even more strongly: the US’ destructiveness is not just a phenomenon confined to its own hemisphere.

2. A disruption of unity between the US and its allies: America’s allies fail to see the rationale for the strikes on Iran, and resent the lack of warning and economic fallout. The attacks made by Donald Trump, President of the US, on Sir Keir Starmer, Prime Minister of the United Kingdom (UK), are the most obvious symptom.

Potential benefits to the CCP include:

1. A possible reduction in attention towards the Indo-Pacific: As well as this, there is the possibility of reduced resources for America in the region.

2. A possible reduction in arms for Taiwan: If the US gets bogged down in the Middle East, this may reduce the availability of arms for Taiwan – as well as undermine the willingness of the American people and US Government to defend Taiwan in the event of a crisis.

3. Economic opportunities: When the conflict ends and reconstruction in Iran and the Middle East commences, Chinese companies will gain considerable business.

The downsides

1. Energy supplies and prices: The PRC imports around 13% of its oil from Iran. US sanctions have meant a cheaper price, and trade is conducted in Chinese yuan – both to the PRC’s benefit. Around 54% of the PRC’s oil and gas comes from the Middle East via the Straits of Hormuz. If Iran continues to block those shipments, Beijing will eventually face an energy crisis, even if it has been wise in building up reserves.

2. Decrease in exports: While the Iranian market for Chinese goods is not enormous, perhaps around the equivalent of US$9 billion (£6.7 billion) in 2025 (although given shipments via third countries and measures to get around American sanctions, the figure is likely to be higher than official statistics report), exports will be down in 2026.

3. Threats to investments: While Chinese investments in Iran are relatively small – between US$2-3 billion (£1.5-2.2 billion) out of a promised US$400 billion (£297.2 billion – those in Saudi Arabia and the Gulf states are not. Iran’s attacks on Gulf states threaten these investments.

4. Decline in international image: Since the commencement of strikes by the US and Israel, the PRC has been shown not to be the influential global player it likes to portray itself as.

Consequences yet to be determined

Longer-term consequences of the conflict will only emerge later. Beijing will be worried about:

1. Whether the conflict will weaken or strengthen American power in general: It must hope for the former, but cannot rule out the latter.

2. The possibility of revolution in Iran leading to the establishment of a pro-‘Western’ government: This seems unlikely, but again cannot be ruled out.

Two other effects

Two other potential long-term effects are worth noting:

1. The US-Israel-Iran conflict benefits Russia and hurts Ukraine: A rising price of oil helps the Russian economy to finance its war effort. Close though the alignment of Chinese and Russian interests are, who wins in the invasion of Ukraine is not of overwhelming importance to the CCP, although it would prefer that a Ukrainian victory does not lead to its acceptance into a more unified European Union (EU). What matters in the longer term is continued cheap energy from Russia; food, minerals and other resources from a peaceful Ukraine; and involvement in post-hostilities reconstruction on both sides.

2. Taiwan’s energy problem (it imports almost all of its oil and gas) and the effect on semiconductor and component manufacture is a potential longer-term worry: The PRC’s economy is still deeply dependent on these areas. A long blockade of the Straits of Hormuz by Iran could lead to a semiconductor crisis, affecting both the Chinese and the global economy.

Finally, it is worth stating that there is no evidence to suggest that the US began the conflict with Iran in order to hamper the PRC’s development. This may be an effect, but it was not the cause. Beijing hopes to win the long-term struggle with Washington by winning what it sees as the science and technology, economic systems, and ideology and global opinion wars. Current events in the Middle East may represent a setback in that aim, but not a big one for the CCP.

Charles Parton OBE is Chief Adviser to the China Observatory at the Council on Geostrategy.

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The Investigator | No. 04/2026

The 15th Five-Year Plan (FYP) will be approved at the end of the National People’s Congress (NPC), which begins on 5th March. Chinese Communist Party (CCP) reports on last year’s adoption of a draft at the Fourth Central Committee plenum have set out its general measures.

It is a commonplace saying that foreign policy is domestic policy carried out abroad – but for the CCP, the inverse is true. Chinese foreign policy, whose mainspring is an abiding anti-Americanism, is steering domestic policy.

Certainly, this claim is exaggerated: it is easy to point to purely domestic concerns – such as local government debt, the real estate market, unemployment and a mismatch of skills, and a long term water shortage (most the result of an economic model described by Xi Jinping, General Secretary of the CCP, in 2013 as ‘unbalanced, uncoordinated and unsustainable’ – all adjectives which remain relevant). Nevertheless, the FYP and future domestic policies will be heavily influenced by foreign policy considerations.

The ‘struggle’ against America and the ‘West’

As the ‘Recommendations’ for formulating the 15th FYP stressed:

Unilateralism and protectionism are on the rise, and hegemonism and power politics pose greater threats. The international economic and trade order is facing grave challenges, and global economic growth lacks steam. Major-country rivalry is becoming more intricate and intense than ever.

The perception that the United States (US) is out to repress and contain the People’s Republic of China’s (PRC) rise has been a leitmotif of past decades. On coming to power, Xi wasted no time in emphasising the struggle with America and the free and open nation successors to the Western bloc. It was the backdrop to his first Politburo speech, where he set out how to avoid falling into the trap which led to the fall of the Communist Party of the Soviet Union.

Three months later, the CCP promulgated ‘Document No. 9’, an ideological screed excoriating the political, economic and social values of the free and open nations. Since then, there has been plenty of talk of an economic systems war, a governance systems war and, above all, a science and technology war.

Xi has also made clear that the battlefield for that war is the so-called ‘Global South’. It is towards those countries in particular that the CCP has constructed its foreign policy architecture of a ‘community of shared future for mankind’ supported by the four ‘Global Initiative’ pillars (Development, Security, Civilisation and Governance).

Seven areas in the 15th FYP where ‘struggle’ with the US affects policies

The political purity of the CCP

This is always top priority. Internally, its essence is strict obedience to the demands of ‘Xi Jinping Thought’. The reverse of that coin is a full rejection by CCP members of free and open nations’ ‘universal values’ in favour of 12 ‘core socialist values’, whose detailed definitions are the party’s prerogative.

‘Promoting and practicing the core socialist values’ are sufficiently important to earn their own heading in the ‘Recommendations’ for the 15th FYP. Externally, the four Global Initiatives emphasise ‘common values’ (peace, development, fairness, justice, democracy and freedom), first enunciated by Xi in his speech to the United Nations (UN) General Assembly in 2015. ‘He [Xi] has since made profound expositions on the common values of all mankind many times.’ Unsurprisingly, such expositions condemn the values behind ‘Western’ actions.

The importance of security

The concept that ‘development is the foundation of security, and security is the condition for development’ – as described in an article in the People’s Daily, the official newspaper of the CCP, and of course attributed to Xi – was born in April 2014, when he ‘creatively proposed the overall national security outlook at the first meeting of the Central National Security Commission’.

It has since climbed higher in the firmament of CCP policy: it became ‘a major principle of the party’s governance’ at the 19th Party Congress in October 2017. In October 2020, the fifth plenum included it in the guiding ideology for the 14th FYP. Two years later, the 20th Party Congress wrote it into the CCP’s constitution. It has figured in top level meetings and documents ever since.

While ‘build[ing] a solid security baseline in development’ means solving pressing economic and social threats to stability emanating from within the PRC, the 15th FYP Recommendations give very considerable emphasis to threats coming from outside the country. The order of topics in CCP documents matters, and it is important to note that the backdrop to the two priorities given pride of place is the need to avoid dependencies on the US and its allies and partners.

Modernisation and reinforcement of the industrial base

The PRC will continue to strengthen its manufacturing base by upgrading traditional industries, ‘ensur[ing] that China’s industrial chains become more self-supporting and risk-resilient’. Fostering emerging industries and industries of the future means developing ‘pillar industries’ and ‘extensively apply[ing] new technologies’.

A high-quality service sector is envisaged, while new types of infrastructure are to be integrated with modernised traditional infrastructure. The Recommendations call for enhancing ‘the diversity and resilience of international transportation routes. It is not hard to see these measures as aimed at avoiding dependencies on ‘hostile foreign forces’.

Domination of the new sciences and technologies, and emerging industries

The priority awarded second place is ‘Achieving greater self-reliance and strength in science and technology and steering the development of new quality productive forces’. This covers ‘original innovation and breakthroughs in core technologies in key fields’, with an emphasis on long-term support for ‘basic research’.

The call is for ‘strengthening self-sufficiency in scientific and technological infrastructure’, and ensuring that advances and innovations quickly enter practical application by supporting leading companies. The education system and immigration of global talent are also to underpin this aim. Data and Artificial Intelligence (AI) must be fully integrated into economic development. The CCP sees self-reliance and self-sufficiency in the technologies and industries of the future as essential for avoiding dependence on the US.

Modernising the PRC’s national security system and capacity

The national security system merits its own chapter heading in the Recommendations. The emphasis is more on the international aspects of security than CCP control of domestic threats to its continued rule. The first section talks of refining mechanisms for ensuring national security in foreign affairs and stepping up the fight against ‘foreign sanctions, interference and long-arm jurisdiction’.

When it comes to key sectors for building national security capacity, the priority areas include food; energy and resources; key industrial and supply chains and major infrastructure; strategic mineral resources; the security of strategic corridors; and developing a strategic hinterland and ensuring backup plans for key industries. Emerging domains include cyberspace, data, AI, biology, ecology, nuclear energy, outer space, deep sea, the polar regions and low-altitude airspace.

Most of these areas are foreign-facing. For example, food security and avoiding reliance on foreign supplies of seed has long been a top priority for the CCP. Grain can be bought on the international market at prices lower than in the PRC, but doing so would mean a greater reliance on free and open nations – something to be minimised, even if it cannot be entirely avoided.

The contrast with the ‘Proposal’ for the FYP from the 2020 plenum is stark. There, international concerns hardly figured, with the focus being on domestic challenges to security. Five years later, the CCP is clear that major challenges are exogenous, and that domestic policies must be aligned with that reality.

A more open call for military-civilian fusion

A striking feature of the 2025 Recommendations is the emphasis on military-civilian fusion, something which, in recent years, the CCP had gone quiet after it aroused ‘Western’ disquiet. No longer, it would seem. The CCP is increasingly conscious of, and confident in, its ‘struggle’ with other powers:

We should deepen military-civilian reforms and establish a well-regulated, orderly framework where both sides fulfil their respective functions and work in close concert with each other. We should move faster to develop strategic capabilities in emerging fields and work toward effective integration between new quality productive forces and new combat capabilities so that the development of one helps drive that of the other.

This section also talks of promoting interoperability between military and civilian standards, enhancing military-civilian alignment and ensuring that all major infrastructure facilities meet national defence requirements so strategic needs are better fulfilled in advance.

Internationalisation of the renminbi

Internationalisation of the renminbi (RMB) has been talked of for many years. In a speech to high-level officials in January 2024, Xi said that for the PRC to realise the ambition of becoming a financial powerhouse, it must ‘have a strong currency, widely used in international trade, investment, and foreign exchange markets, and holding the status of a global reserve currency’. The Recommendations call is more modest:

…advance the internationalisation of the RMB, pursue greater openness of RMB capital accounts, and build a homegrown, risk-controllable cross-border RMB payment system. We should promote reform in global economic and financial governance…

The CCP has seen the damage which the US can inflict through ‘foreign sanctions, interference and long-arm jurisdiction’, hence its desire to move away from a US dollar-dominated international financial system. However, progress is likely to remain limited. Fully opening the capital account and other measures run contrary to the party’s devotion to control.

The other side of the coin: Creating dependencies

Most of the measures discussed above are motivated by a desire to avoid dependencies on ‘hostile foreign forces’. However, they also make foreign countries dependent upon the PRC. The processing of rare earths is the most egregious example, but increasingly areas such as solar and wind energy, electric vehicles and batteries, and telecommunications equipment and cellular modules are dominated by Chinese companies.

This gives the CCP considerable geopolitical leverage. In many cases, it would bestow the ability to disrupt or destroy critical national infrastructure in the event of hostilities, as well as allow the harvesting of vast amounts of data.

Conclusion

The reports to the National People’s Congress in March and the new FYP will cover all aspects of governing the PRC. Even if the space devoted to foreign affairs is usually short, behind the emphasis on self-reliance and ‘development and security’ lies an eye fixed firmly on an unstable external environment and the blurring of internal and external security.

The CCP sees the global future as one of ‘struggle’; of self-reliance and decoupling; of a fading distinction between military and civilian technologies and industries; of creating dependencies; of an identity between national and economic security. Free and open countries need to see this clearly and react accordingly.

That does not mean ceasing to pursue trade and investment, no longer working with the PRC on climate change and other global problems, or discouraging academic and cultural exchanges. It means engagement with eyes wide open.

In the cases of the United Kingdom (UK) and some European countries, it means considering whether it is wise to allow Chinese companies to be involved in critical national infrastructure, such as wind energy and power grids – particularly when, in Britain’s case, security concerns ruled out Chinese participation in the nuclear industry – or whether it is wise to welcome Chinese investment in the vehicle sector, if the connectivity involved in modern cars and trucks would render a country’s logistics system dependent upon the CCP’s goodwill and even make it inoperable during a time of hostilities.

The 15th FYP is a massively important document. It requires study by foreigners. Behind its many targets and aspirations lies great geopolitical significance. Xi has been clear since he came to power that there is a clash of systems and values, and that the PRC must attain the ‘dominant position’.

The FYP gives pointers as to how that is to be achieved. Ignore them, and free and open countries may find that, under CCP suzerainty, they become less free and less open.

Charles Parton OBE is Chief Adviser to the China Observatory at the Council on Geostrategy.

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The Investigator | No. 03/2026

In Tokyo, Sanae Takaichi, Prime Minister of Japan, has begun her term by explicitly casting the People’s Republic of China’s (PRC) behaviour as a campaign of ‘coercion’, using her first post‑election policy speech to warn that Japan faces its ‘most severe and complex security environment since World War Two’, as well as promising a sweeping overhaul of defence and economic security policy. Her ruling coalition’s landslide victory, securing well over two thirds of the Lower House, gives her unusual latitude to accelerate defence spending, relax export controls on military equipment and harden critical supply chains against external economic pressure.

Beijing has responded in kind at the rhetorical level. At the Munich Security Conference, Wang Yi, Minister of Foreign Affairs of the PRC, portrayed Japan’s Taiwan policy as a dangerous departure from past commitments, castigating Takaichi’s framing of a Taiwan contingency as a ‘survival-threatening situation’ and accusing Tokyo of challenging the PRC’s sovereignty and the post‑war settlement. He further suggested that efforts to ‘turn back the clock of history’ would lead Japan down a path of self‑destruction, underscoring how tightly Beijing now links Tokyo’s stance on Taiwan to its own narrative of national rejuvenation.

Against this backdrop, the big picture of Japanese-Chinese relations looks set to remain frosty at best. Takaichi’s agenda to revise Japan’s core security documents, double defence spending and entrench closer alignment with like‑minded partners, combined with Beijing’s sharper warnings over Taiwan and its revived toolkit of economic coercion, point towards a prolonged period of strategic distrust, in which both sides treat economic ties less as a stabilising ballast and more as instruments of leverage.

Sectors under pressure

The current coercive campaign concentrates on three clusters of sectors.

First, marine and aquatic products have again become a primary target. The PRC imposed a blanket ban on imports of Japanese fishery products in 2023 following the release of treated water from the Fukushima Daiichi nuclear plant – a measure later echoed by Hong Kong and Macau. Although partial relaxation followed, Beijing reimposed a suspension of Japanese seafood imports in November 2025 amid diplomatic tensions sparked when Sanae Takaichi, Prime Minister of Japan, remarked that a Taiwan contingency could trigger Japan’s right of collective self-defence.

Second, Beijing has tightened controls on dual-use exports and critical minerals, especially rare earth elements. On 6th January 2026, the PRC’s Ministry of Commerce announced a ban on exports to Japan of all dual-use items for military end-users or end-uses that could enhance Japan’s military capabilities, explicitly justified in terms of national security and non-proliferation. State-affiliated outlets simultaneously indicated that Beijing was considering stricter licensing for certain medium and heavy rare earths already under control since April 2025, with delays and de facto curbs affecting rare earths, magnets and other critical inputs.

Third, the PRC has deployed pressure in tourism, education and cultural industries. Since Takaichi’s speech in November, Chinese authorities have advised citizens to reconsider travel and study in Japan, reduced flights and quietly constrained Japanese cultural and media products in the Chinese market. These measures fall short of formal sanctions, but nonetheless target Japan’s services sector and people-to-people ties.

Motives and sector choice

Beijing has formally justified these measures with reference to Fukushima-related food safety and national security export-control obligations. In reality, the timing, scope and signalling make it clear that the proximate trigger has been Japan’s perceived ‘interference’ in the ‘Taiwan question’ and its broader security realignment.

The seafood bans are framed domestically as necessary to protect Chinese consumers from ‘nuclear-contaminated’ products, despite the International Atomic Energy Agency’s (IAEA) assessment that Japan’s discharge plan complies with international safety standards. Chinese state and social media have continued to amplify alarmist narratives about Fukushima water, often repeating or adapting disinformation that has already been debunked.

The choice of fisheries, rare earths and tourism reflects a logic of targeted salience and reversible pressure. Beijing can utilise these disruptions to achieve high impact to signal displeasure, but can stop the economic pain easily should its demands be met.

Continuity and change in Chinese coercion

There is clear continuity in the use of informal or semi-formal trade tools by the PRC – including blanket import bans, opaque customs procedures, unofficial travel advisories and ‘safety’-based regulatory measures – to punish political decisions in other states. This pattern has also characterised Beijing’s coercive campaigns against South Korea over its Terminal High Altitude Area Defence (THAAD) capabilities, Australia over foreign policy disputes and Lithuania over Taiwan representation, confirming that economic statecraft has become a normalised instrument of Chinese foreign policy.

What is new is the explicit linkage to Taiwan and to Japan’s evolving defence posture. Chinese official statements and state-linked media have directly cited Takaichi’s comments about a potential military response in a Taiwan contingency as the trigger for dual-use and rare earth measures, arguing that Japan has violated the PRC’s core security interests. Rare earth controls in particular are now framed as part of a broader dual-use export control regime rather than a one-off leverage play.

This ‘second generation’ of coercion is also operating in a context in which Japan is no longer the heavily exposed actor it was in 2010. Japan’s reliance on Chinese rare earth imports has fallen from around 90% in 2010 to roughly 65% by the mid-2020s, as Tokyo has diversified suppliers, invested in recycling, and supported domestic and third-country production.

Japan’s response

Japan’s response to the latest measures builds directly on the institutional architecture described in its Economic Security Promotion Act and related strategies.

Politically and diplomatically, Tokyo has characterised the seafood bans and dual-use controls as forms of economic coercion, raising them at the Group of Seven (G7) and other fora, and signalling readiness to challenge at the World Trade Organisation (WTO). The 2025 Diplomatic Bluebook devotes significant space to economic security, and explicitly links coercive practices to the need for international coordination and resilience.

On the economic security front, Japan’s Ministry of Economy, Trade and Industry (METI) and Cabinet Office have accelerated efforts to incorporate undersea cables, satellites and other critical infrastructure into the economic security framework, while tightening monitoring of rare earths, magnesium and other vulnerable inputs. Tokyo has expanded strategic stockpiles, supported alternative supply projects with partners such as Australia, and backed Research and Development (R&D) into substitution and recycling to reduce exposure to new Chinese controls.

Domestically, the Government of Japan has provided financial support and market diversification assistance to fisheries and coastal communities hit by the seafood bans, seeking to ease distributional impacts and blunt Beijing’s ability to generate political backlash in affected constituencies. At the same time, the unfolding crisis has reinforced calls in semi‑official Japan-Taiwan economic security dialogues for closer collaboration, including joint research on the risks of Chinese economic coercion and supply‑chain disruption, and has strengthened arguments for embedding economic security more firmly in broader alliance planning with the United States (US) and free and open European nations.

Lessons for other countries

Several lessons from this episode are directly relevant to the United Kingdom (UK) and other free and open allies and partners of Japan.

First, the PRC’s coercion is increasingly multi-dimensional and explicitly tied to Taiwan-related and security issues. Governments should expect measures to be justified in legal or technical terms, while in practice responding to political triggers. Preparing for coercion therefore requires not only trade law expertise, but also careful mapping of political red lines and likely pressure points.

Second, resilience must be built in peacetime. Japan’s experience shows that diversification of critical inputs, investment in domestic capacity and stockpiling can significantly reduce the shock value of coercive measures, even if they do not eliminate vulnerability. For Britain, this underscores the importance of early action on critical minerals and strategic infrastructure, including telecommunications and undersea cables, rather than waiting for a crisis.

Third, institutionalised economic security pays dividends. Dedicated economic security units, clear legal mandates and established channels for engagement with the private sector have allowed Tokyo to respond in a more coordinated and strategic manner than in 2010. The UK would benefit from similarly integrated structures that connect trade, security, industrial strategy and intelligence in a single economic security framework.

Finally, Japan’s case highlights the value and limits of multilateralism. Efforts to frame Chinese actions as economic coercion in G7 communiqués and economic security statements have helped to socialise the concept, raise reputational costs for Beijing and embed ‘de-risking and diversifying’ as shared goals. However, concrete solidarity in moments of acute pressure has often lagged behind the rhetoric: coordination has focused on generic commitments to resilience and critical minerals cooperation rather than visible, Japan-specific countermeasures.

As well as this, bilateral bargains with Beijing, including recent US-PRC understandings on rare earths, risk diluting the deterrent value of a collective line. Until systemic diversification reduces the PRC’s market power meaningfully, and G7 members are prepared to absorb short‑term economic costs on each other’s behalf, economic coercion will remain an attractive tool for Beijing.

Athena Tong is a Visiting Researcher in the Economic Security Intelligence Lab (ESIL) at the Research Centre for Advanced Science and Technology (RCAST) at the University of Tokyo. She is also a Research Associate and Programme Lead at the China Strategic Risks Institute (CSRI) and a Non-Resident Vasey Fellow at the Pacific Forum.

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The Investigator | No.02/2026

Much has been made about the People’s Republic of China’s (PRC) motivations in launching large-scale People’s Liberation Army (PLA) exercises around Taiwan at the close of 2025, in particular its desire to express displeasure with the Trump administration’s record-breaking US$11 billion (£8.2 billion) arms sale to Taiwan and the remarks of Sanae Takaichi, Prime Minister of Japan, regarding her country’s involvement in a cross-strait conflict. No doubt these recent developments shaped the nature of ‘JUSTICE MISSION 2025’; the name given to the military exercises held between 29th-30th December. However, the PLA should not be understood as merely performative nor reactive.

The PLA’s activities in December 2024 demonstrated its ability to deploy large numbers of vessels around Taiwan without fanfare or loudly exploiting a perceived ‘provocation’ to justify its actions. During these unnamed drills, an extraordinarily large number of Chinese naval vessels (around 90) created two maritime ‘walls’. The first blocked the waters east of Taiwan and the second stretched along the First Island Chain, while PLA aircraft simulated attacking foreign naval ships.

Also important to recall is that, according to the Central Intelligence Agency (CIA), Xi Jinping, General Secretary of the Chinese Communist Party (CCP), has instructed his military to be capable of taking Taiwan by 2027. In this vein, as the United States (US) Department of War recently noted, the PLA has been ‘refin[ing] multiple military options’, and throughout 2024 ‘tested essential components of these options’ through exercises.

Thus, it seems plausible that the PLA was looking for another opportunity to refine the Chinese war machine. 2-3 big exercises around Taiwan per year had been becoming standard practice, yet, until late December, only one such exercise had taken place in 2025 – April’s ‘STRAIT THUNDER’.

Weeks before Washington even announced its bumper arms sale, Tsai Ming-yen, Taiwan’s top intelligence chief, warned that it was ‘not unlikely’ that the PRC’s military could combine routine combat-readiness activities and hold large-scale military exercises before the end of the year. It appears that this is what happened. It also seems likely that Beijing believed American arms sales would give it a plausible pretext to escalate its activities.

While the PLA conducted threatening and destabilising manoeuvres around Taiwan, Beijing and its mouthpieces promoted the line that Washington and Taiwan’s ruling Democratic Progressive Party (DPP) were to blame for rising tensions. ‘More arms sales, more danger’, Chinese state media told the world in an English-language video, linking every large-scale PLA exercise around Taiwan since 2022 to that year’s arms sale – a convenient starting point given that in 2019, the only year when the value of US arm sales (totalling US$10 billion [£7.4 billion]) came close to the recent deal, no PLA military drills were forthcoming.

With the justification for JUSTICE MISSION 2025 established, military manoeuvring could begin. Like the December 2024 drills, the People’s Liberation Army Navy (PLAN) and China Coast Guard (CCG) were deployed in tandem, blurring the lines between military and ‘law-enforcement’ activities. This time, however, there was a surge in PLA aircraft entering Taiwan’s Air Defence Identification Zone, and live fire also returned, with missiles landing in waters to the north and south of Taiwan.

The announced exercise zones around Taiwan were geographically the largest ever, encircling the island and covering critical supply routes. Five of them covered not only parts of Taiwan’s contiguous zone, but also its territorial waters (extending 24 and 12 nautical miles [nm] from the country’s coastal baseline respectively).

Prior to launching JUSTICE MISSION 2025, the PLA plainly stated that its forces would simulate ‘blockading key ports’. The drills alone affected 857 international flights and 84 domestic flights, according to Taiwan’s Civil Aviation Administration. Meanwhile, it has been argued that other assets deployed – those with anti-submarine and anti-surface vessel capabilities – simulated counter-intervention operations to support such a blockade. Indeed, the PLA promised that it would practise ‘all-dimensional deterrence outside the island chain’ – making explicit what it only signalled the previous December with its naval ‘walls’.

While the message to foreign forces was clearer, Beijing’s willingness to antagonise Washington and Tokyo appeared limited. Live firing was confined to one day, not spread across four as it was following the trip by Nancy Pelosi, then House Speaker, to Taipei in August 2022. Additionally, no exercise zone encroached into Japan’s Exclusive Economic Zone (EEZ), nor – unlike the post-Pelosi exercises – were any missiles fired into it. In fact, there was a large gap in PLA exercise zones between Taiwan and Japan’s southwestern Yaeyama Islands.

It is perhaps telling that it was not Washington which Lin Jian, spokesperson for the PRC’s Ministry of Foreign Affairs, directed his ire at when first asked about the link between American arm sales and JUSTICE MISSION 2025, but rather Taiwan’s ‘DPP authorities’ and ‘their massive...arms purchase’. ‘Anyone who tries to arm Taiwan to contain China’, gathered journalists were then informed, ‘will only embolden the separatists’.

If Beijing was sending anyone a message late last year (‘their own’ citizenry aside) it was the Taiwanese people. Bolstering its actions with fiery words and some sensational images, the CCP aimed to convince people in Taiwan of the futility of resisting unification.

While opposition legislatures blocked a special defence budget proposed by Lai Ching-te, President of Taiwan, PRC propagandists wanted to emphasise that more weapons would not make Taiwan safer. As one academic quoted by Chinese state media phrased it: ‘seeking “independence” through force is a dead end’.

Beijing also sought to bring into question the utility of the High Mobility Artillery Rocket System (HIMARS), launchers capable of delivering long-range precision strikes at coastal targets in southern China. The passing of the special budget would fund the additional acquisition of HIMARS, giving Taiwan a total of 111 units. The PLA released footage of a system operator reporting to his commanders: ‘target information of (a) HIMARS rocket launcher has been received’. Meanwhile, Chinese state media promoted the claim that the system would be like a ‘porcupine in [a] glass box’, given the detrimental impact the islands’ terrain would have on the system’s mobility. This is if additional HIMARS even arrive; during JUSTICE MISSION 2025, the CCG released its ‘Throat-choking’ poster, which depicts a Taiwanese Evergreen cargo vessel carrying the rocket launchers being intercepted and boarded (a harbinger for things to come? If so, it would be an extraordinary escalation).

This was not the only propaganda poster deployed to convey the PRC’s ability to keep outsiders out. ‘Any external interference that touches the shield will perish!’ read another poster from the PLA, featuring two Great Wall-embellished shields, while another graphic showed the Chinese military cutting off Taiwan’s international supply lines, asking: ‘How can you plot for “independence”?’

Promoting Taiwan’s armed forces as powerless to stop the PLA is another way Beijing seeks to sap Taiwanese morale. In this vein, the Chinese military shared footage, which it claimed to have captured with a drone during the exercises, of Taipei 101 followed by the line: ‘so close, so beautiful, ready to visit Taipei anytime’.

This was not an isolated incident. According to the Taiwanese military’s Political Warfare Bureau, at least 46 pieces of disinformation were circulated to aid efforts in undermining confidence in Taiwan’s government and armed forces, as well as trust in the US. One piece claimed that CCG vessels had quarantined key Taiwanese ports, while another alleged that the PLA had advanced within nine kilometres of the main island’s southern shores. ‘Troll armies’, according to Taiwan’s National Security Bureau (NSB), amplified such narratives, with some 19,000 ‘controversial messages’ pushed out on social media by 799 accounts over the course of five days.

Yet, scare stories aside, the PLA and the CCG continued to edge closer to Taiwan. Of the 27 rockets fired during JUSTICE MISSION 2025, ten landed in Taiwan’s contiguous zone, making it the closest-ever Chinese live-fire exercise. On 29th December, 11 PLAN ships and eight CCG vessels entered Taiwan’s contiguous zone, with the same numbers repeated the following day. Although Taiwanese authorities claimed that the entry of the latter eight CCG vessels was only brief, being promptly warned away, it still marked an escalation given that only one CCG vessel reportedly crossed this line during STRAIT THUNDER.

This ongoing ‘salami slicing’ not only allows Beijing to assert its expansionist territorial claims, but also heightens the risk for escalation. Taipei has long asserted that any aircraft or vessel crossing into its airspace (which overlaps with its 12nm territorial waters) would be viewed as a ‘first strike’. In the case of the PLAN encroachment into Taiwan’s contiguous zone on 30th December, Chiu Chun-jung, the Taiwanese Navy Chief of Staff, did not deny that fire control radar was locked onto a Chinese Type 052D destroyer.

Despite this growing risk, there are likely to be further large-scale military exercises around Taiwan in 2026. The PLA have been told to train, and, with Lai set to remain in office, psychological pressure on the Taiwanese public will be sustained. From across the Strait, people in Taiwan will continue to be warned of the futility of acquiring ever more advanced American weapons. Meanwhile, the PLAN and CCG look set to edge closer to the main island, normalising behaviour once considered escalatory.

Next time the skies around Taiwan are shut down, observers should not confuse the justifications offered in Beijing’s propaganda with the underlying drivers of these actions. If Chinese policymakers can find – or manufacture – a suitable pretext this year, they will likely use it to legitimise their attempts to rehearse, probe and advance their position. However, such a large-scale exercise may have to wait until after the anticipated state visit of Donald Trump, President of the US, to the PRC in April…

Gray Sergeant is the Research Fellow in the Indo-Pacific at the Council on Geostrategy.

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The Investigator | No. 01/2026

In the space of the same week, but on opposite sides of the globe, world leaders sent forth their militaries. The People’s Liberation Army (PLA) – the armed forces of the People’s Republic of China (PRC) – carried out a live-fire exercise around Taiwan, while the United States (US) carried out Nicolás Maduro, the deposed President of Venezuela, from Caracas. However, connection between the two events has been greatly exaggerated.

Operation ‘JUSTICE MISSION 2025’

It is important to put both the timing and content of the PLA activity into perspective, and to strip away Chinese Communist Party (CCP) propaganda. The two-day exercise of 29th-30th December fits the pattern of the last three years. Its conduct was incremental rather than exceptional.

Chinese propaganda has pushed the suggestion that the exercise was in response to the US$11 billion (£8.2 billion) arms sale by the US to Taiwan. While it was the largest ever arms sale, it is unlikely to have been a surprise when it was announced on 18th December. Donald Trump, President of the US, has made no secret of his demand that Taiwan take greater responsibility for its defence. Lai Ching-te, President of Taiwan, has committed to raising the country’s defence budget to 3% of Gross Domestic Product (GDP) in 2026 and to 5% by 2030. The resultant increase in the supply of weapons is likely to come from the US.

An exercise on this scale would take months of preparation. Since 2022, the PRC has conducted large-scale exercises to practise invasion or blockade twice a year, once in spring (April twice and May) and once in winter (January, October and December). Another large-scale exercise was therefore on the stocks. The April exercise was named ‘STRAIT THUNDER 2025A’, which suggested a later ‘2025B’, even if the PLA substituted a more self-righteous name in ‘JUSTICE MISSION 2025’.

For propaganda purposes, the starting gun may have waited for the announcement of the weapons sale, just as in April it may have been timed deliberately after Lai described the CCP as a ‘hostile force’ and announced a raft of security measures. The CCP never misses an opportunity to reinforce the propaganda loudhailer.

Operation JUSTICE MISSION 2025 represents a continued tightening of the screw of military threat, with reports of crossings inside Taiwan’s 12 nautical mile territorial waters and large numbers of intrusions. In the Global Times, an English-language CCP news outlet – and therefore to be taken as a statement of the official line – a National Defence University professor made clear that blockading Taiwan was the focus of the exercise in three areas: nearshore (Matsu and islands close to the mainland); Taiwan island itself; and the sea (including subsea) and air to the east of Taiwan, including at long ranges.

The message was aimed at the US: the PLA will prevent help being sent to Taiwan. Graphics in Chinese media showed ships to the east of Taiwan being intercepted. In the words of the People’s Daily, the official newspaper of the Central Committee of the CCP, ‘This is a serious warning to Taiwan independence separatist forces and external interference forces.’ Given the ongoing spat with Japan over remarks made by Sanae Takaichi, Prime Minister of Japan, about conflict over Taiwan being a ‘situation threatening Japan’s survival’, Japan was also undoubtedly one of those ‘external interference forces’.

Venezuela’s relevance to Taiwan

Hours before the American operation against Maduro, a high-level Chinese delegation had met the erstwhile dictator in Caracas. In his speech three days earlier at the Symposium on the International Situation and China’s Foreign Relations, Wang Yi, Politburo member and Foreign Minister of the PRC, had said, ‘We closely follow the developments in Latin America and the Caribbean, and will firmly support LAC [Latin America and the Caribbean] countries in defending sovereignty and national dignity…’ Not that closely – not that firmly.

For Beijing, the downsides of the American action surely outweigh any upsides. The CCP has invested considerable resources in Latin America – not least around US$60 billion (£44.5 billion) in Venezuela – and must be fearful for its long-term returns. Cuba, another Chinese ally, is likely to come under severe pressure if the US prevents Venezuelan oil from reaching the island. Hitherto reliant on Venezuela for energy, Cuba could see economic collapse. For the PRC itself, Venezuelan oil imports, at roughly 4% of total imports, are not crucial.

Where the CCP will make hay is in propaganda. The American action will be further evidence for its line that the US is destroying the current world order, while the PRC is upholding it. This plays well with the so-called ‘Global South’. The CCP will brush off accusations of hypocrisy that an invasion of Taiwan is no different from the action in Venezuela. It argues that the US invaded a foreign, sovereign country, whereas Taiwan is neither: it is and always has been a part of China; thus, its ‘reunification’ – whether by peaceful or forceful means – is an ‘internal matter’. Of CCP support for Russia in its full-scale invasion of Ukraine, the less said the better.

However, the American attack on Venezuela will not make an attack on Taiwan any more likely by providing an excuse to the PRC. Rather than use kinetic war, the CCP seeks to convince Taiwan and the world that ‘reunification’ is inevitable and irresistible, through all means short of an invasion or serious blockade. Neither can be ruled out, but they would happen under conditions which are wholly unaffected by events in Latin America. Those conditions are:

• The CCP believes that the PLA possesses overwhelming military power and effectiveness, so that it can win in a very short time and avoid getting bogged down in a war against ‘fellow Chinese’;

• The US has no time to come to Taiwan’s aid, even if it wants to, and Europe and other powers have no option but to accept a fait accompli;

• The PLA has sufficient regional superiority to convince the US not to try to help Taiwan, while its military capability and confidence are sufficient to repel American attempts if it does seek to help Taiwan;

• Self-sufficiency and dominance in the production of semiconductors, so that the PRC can stomach the loss of the Taiwan Semiconductor Manufacturing Company (TSMC), which currently produces the bulk of the world’s semiconductors, and being cut off from American technology; and

• An economy sufficiently self-contained and robust to weather the inevitable plummet in trade and investment and the high likelihood of sanctions without causing a massive rise in unemployment, and thence instability and anger threatening the CCP’s hold on power.

If Taiwan declared independence, the CCP would be likely to invade whether or not the above conditions apply. However, the Taiwanese would not be that unwise.

Sadly, cross-strait relations will not enter calm waters in 2026 – the Taiwan presidential election in early 2028 is likely to make the latter part of 2027 rough, particularly if it appears likely that the Democratic People’s Party will win for a fourth successive time. The CCP will continue to raise the temperature through the normal playbook of interference, pressure and threat.

It is not beyond imagination that the PRC could, in the next few years, ‘persuade’ – by blockade, and deprivation of water and energy – the islands of Jinmen and Matsu to welcome ‘reunification’. It could even risk taking the Pratas Islands or Taiping Island (Taiwanese outposts in the South China Sea) if the tiger of nationalism which Xi Jinping, General Secretary of the CCP, has stirred up requires some meat to be thrown its way.

Charles Parton OBE is Chief Adviser to the China Observatory at the Council on Geostrategy.

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The Investigator | No. 18/2025

Much attention has been paid to Beijing’s goose-stepping military parade on 3rd September. This, however, was only one in a series of events being held by the People’s Republic of China (PRC) to commemorate the events which saw the end of the Second World War. On 25th October, the Chinese Communist Party (CCP) will celebrate the 80th anniversary of what it calls ‘Taiwan’s recovery from Japanese occupation’. On that day in 1945, Chen Yi, a general and politician of the Chinese nationalist Kuomintang (KMT), arrived in Taiwan, which had been part of Japan’s colonial empire since 1895, to receive the surrender of the Japanese forces there.

For Beijing, this is yet another historic event which legitimises its claim to Taiwan [1], wider acceptance of which will help to justify any unilateral action it takes across the strait, as well as to delegitimise – and undermine – any opposition to it.

The Cairo Declaration of 1943, which pledged to ‘restore [...] to the Republic of China’ Taiwan and Penghu, and the Potsdam Declaration of 1945, which promised to carry out these terms, are also cited by the CCP for the same purpose. Xi Jinping, General Secretary of the CCP, has said that these two later proclamations have ‘legal effect under international law’ and ‘affirmed China’s sovereignty over Taiwan’; ‘The historical and legal fact therein’, Xi maintains, ‘brooks no challenge’.

Except they do, at least as far as His Majesty’s (HM) Government is concerned.

The British position on Taiwan’s status was formally laid out on 4th February 1955 by Antony Eden, then Foreign Secretary. According to Eden, the Cairo Declaration was merely ‘a statement of intention’. Moreover, the takeover of Taiwan by KMT forces (at the direction of Gen. Douglas MacArthur, Supreme Commander of the Allied Powers) ‘was not a cession, nor did it in itself involve any change of sovereignty. The arrangements made with Chiang Kai-shek [KMT general and President of the Republic of China] put him there on a basis of military occupation pending further arrangements, and did not of themselves constitute the territory Chinese.’

Finally, Eden explained that the outcome of the 1951 Treaty of San Francisco, in which Japan simply renounced its right to Taiwan and Penghu without assigning them to any particular state, ‘did not operate as a transfer to Chinese sovereignty, whether to the People’s Republic of China or to the Chinese Nationalist authorities.’

It was for these reasons that Eden concluded: ‘Formosa [Taiwan] and the Pescadores [Penghu] are therefore, in the view of Her Majesty’s Government, territory the de jure sovereignty over which is uncertain or undetermined.’

This did not change when the United Kingdom (UK) upgraded its relations with the PRC to an ambassadorial level in 1972, even though London made some concessions around its position on Taiwan. As negotiations between both countries concluded, Alec Douglas-Home, then Foreign Secretary, informed British diplomats on 9th March that: ‘We have not subscribed to Peking’s [Beijing’s] claim that Taiwan is a province of China. The statement in “acknowledging the position of the Chinese government that Taiwan is a province of the People’s Republic of China” does not imply acceptance of the Chinese claim.’

As far as Her Majesty’s Government was concerned, Home would go on to clarify: ‘…we have long held that sovereignty over Taiwan is undetermined. We have held this view since the Japanese peace treaty provided for the relinquishment of sovereignty by Japan in 1951 and believe that it remains legally correct.’

Given that HM Government stated in December 2024 that ‘the UK’s longstanding position on Taiwan, as set out in the 1972 Communiqué, has not changed’, in addition to still only ‘acknowledging’ Beijing’s claim, this presumably means that HM Government continues to believe that Taiwan’s legal status is yet to be decided, or certainly that it was not decided during the events which ended the Second World War.

If so, why not say as much?

Last month, the United States (US) called out Beijing’s motives. The American Institute in Taiwan told Reuters that ‘China intentionally mischaracterises World War Two-era documents, including the Cairo Declaration, the Potsdam Proclamation and the Treaty of San Francisco, to try to support its coercive campaign to subjugate Taiwan.’ Washington’s de facto embassy also made clear its view that: ‘Beijing’s narratives are simply false and none of these documents determined Taiwan’s ultimate political status’.

Britain is, however, in a trickier position. In 1972, in order to exchange ambassadors with the PRC, the UK tied its own tongue. As Home also explained to British diplomats: ‘we have…privately agreed with the Chinese that we shall no longer express in public the view which we have long held that sovereignty over Taiwan is undetermined’.

This should change.

For one thing, it is unbecoming for British ministers to silence themselves indefinitely, especially when Beijing’s representatives in London repeatedly – and falsely – claim that: ‘the UK government clearly recognised the Chinese government’s position that Taiwan is a province of China.’

Presumably, HM Government would not stand by and allow Russia to misrepresent the UK’s position on Ukraine’s sovereignty. Nor is it likely that London would not respond if Moscow misused historic statements or agreements, which Britain had been party to, to give succour to their expansionist claims.

Another clarification will, most likely, have to come at some point. The UK’s private assurance was the product of, as one official working on the agreement later described it, ‘fudging’. And a fudge can only last so long.

Some officials at the time may have thought that the issue would resolve itself once the PRC and Taiwan quietly unified – not an unreasonable assumption when the dictatorships on both sides of the strait resolutely believed in ‘One China’. But Taiwan is now a democracy, and one where a distinctive Taiwanese identity has flourished. No government in Taipei is going to hand over its country unless, perhaps, under extreme pressure. Will Britain only speak out when Taiwan is quarantined or blockaded, or when the People’s Liberation Army (PLA) – the PRC’s armed forces – are amassing along Fujian’s coast?

And what weight will such a last-minute intervention carry? Could a significant proportion of global opinion be swayed so late in the day as to help constrain the Chinese leadership? It seems unlikely, particularly when Beijing will have done more and more beforehand to gain legitimacy for its expansionist claims.

The UK, alongside the US, is well placed to push back against this Chinese ‘lawfare’. As a respected voice on matters of international law, and a leading member of the wartime Allies, what London says carries weight.

Beijing’s current efforts to use the events of 80 years ago to give validity to its expansionist desires mirror its ongoing efforts to distort United Nations Resolution 2758. Indeed, these efforts prompted HM Government to call out the CCP’s attempt to ‘rewrite history’ and state Britain’s own position clearly for the first time. If there was merit in clarifying the legal and political implications of this 1971 vote, then the same is surely true of the Cairo Declaration and other Second World War events and documents.

A clarification will not please Beijing, whose officials were quick to condemn the American Institute in Taiwan’s remarks. But then again, this is the same regime which, last month, performed ‘constructive kills’ against a Royal Navy frigate transiting the Taiwan Strait, and is also currently fuelling a brutal war of aggression on European soil. Bilateral relations cannot, and should not, be good.

Of course, if Chinese officials did protest about the breaking of a promise, they may want to be reminded of the Sino-British Joint Declaration of 1984, which was supposed to guarantee Hong Kong’s high degree of autonomy until 2047. What was it that the Foreign Ministry of the PRC called this legally binding treaty? A ‘historical document’, which ‘no longer has any practical significance…’

1. The ‘undeniable proof’ cited by China Global Television Network, a Chinese state media outlet, is an internal KMT message sent to Chiang Kai-shek from Chen Yi on 26th October 1945, which states that Taiwan had been returned to the motherland. Wang Weinan, Executive Deputy Director at Shanghai Jiao Tong University’s Centre for Taiwan Studies, claims that similar words used by Chen Yi during the ceremony also meant: ‘The Japanese surrender in Taipei on 25th October 1945 essentially functioned as a ceremony restoring China’s sovereignty over Taiwan and the Penghu Islands.’ He argues that acceptance of the Potsdam Declaration in the surrender broadcast made by Hirohito, then Emperor of Japan, on 14th August 1945, and the Japanese Instrument of Surrender, co-signed by nine countries on 2nd September 1945, ‘elevated the declaration from a one-sided declaration from the Allied forces to a legal contract accepted by both sides who participated in the war’.

   Her Majesty’s Government’s view of Taiwan’s legal status in regards to the Japanese surrender was outlined in a 1955 Foreign Office research department paper. It reads (emphasis added):

   The Japanese Emperor accepted the Potsdam terms and the Japanese surrender was received on September 25, 1945, by General MacArthur “for the United States, the Republic of China, the United Kingdom and the USSR and in the interests of the United Nations at war with Japan”. The Japanese forces in Formosa were then instructed to surrender to Generalissimo Chiang Kai-shek which they did on October 25, 1945. Japanese acceptance of the Potsdam declaration did not affect a change regarding the sovereignty over Formosa and the Pescadores, but merely constituted an advance recognition and acceptance of such steps as the Allies might eventually take for the purpose. Therefore, in law, Formosa’s special status was that of enemy territory under military occupation. Chiang Kai-shek assumed the administration of Formosa responsible to the whole body of the Allies pending the conclusion of a Peace Treaty, or if the status of Formosa was not finally settled by that treaty (which it was not), pending an eventual settlement.

Gray Sergeant is the Research Fellow in the Indo-Pacific at the Council on Geostrategy.

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The Investigator | No. 17/2025

Beijing pursues a unique industrial policy for commercial reasons, but also domestic, economic and geopolitical ones. It supports an unusually wide swathe of industries and firms at a huge and unprecedented cost in order to dominate new technologies, support economic growth and increase the People’s Republic of China’s (PRC) footprint in the so-called ‘Global South’ through exports and technology.

Like other nations, it wants to insulate itself from strategic vulnerability, and become self-reliant in key sectors. Like few others, it seeks to capitalise on its mercantilist interests. Yet, this misses the broader context. The PRC’s industrial policy is a state-backed effort to knock the United States (US) off the perch of global technological leadership, by dominating what Xi Jinping, General Secretary of the Chinese Communist Party (CCP), refers to as the ‘fourth industrial revolution’, involving new technologies in Artificial Intelligence (AI), big data, quantum computing and biotechnology. Unlike other nations, which used industrial policy to catch up to rivals, the PRC wants to leapfrog them.

Beijing’s industrial and commercial successes in, for example, electric vehicles (EVs) and batteries, and climate change mitigation manufacturing, are often put down to industrial policy programmes, but top-down industrial policy only started in the mid-2000s. The seeds of private sector industrial success were sown much earlier, when market reforms, entrepreneurship and the private sector were all encouraged under the ‘Reform and Opening Up’ campaign.

From roughly 2006 to 2015, the CCP picked sectors, and defined strategic emerging industries to be new drivers of economic growth under the slogan ‘indigenous innovation’. From about 2016, Beijing set out to control the evolving technological revolution, incorporating communications, data and AI under the banner of the ‘Innovation-Driven Development Strategy’. It also became more explicit about wanting to take on the leadership of the US, and emphasised a new campaign known as ‘Made in China 2025’, with a ten-year goal of making the PRC a manufacturing superpower.

Since 2020, self-sufficiency has been a national goal. Scientific and technological self-reliance were incorporated into the 14th Five-Year Plan (2021-2025), with the goal of cutting the PRC’s reliance on foreign technology and dependence on imported resources as quickly as possible.

The price tag for the PRC’s industrial policy is eye-popping, even though it is difficult to estimate many of the more opaque forms of industrial assistance and funding, and impossible to quantify the cost of other factors.

A recent report from the International Monetary Fund (IMF) suggested the cost at 4.5% of Gross Domestic Product (GDP) – already a substantial multiple of what the largest Organisation for Economic Cooperation and Development (OECD) economies spend. Yet, the IMF was not able to estimate local government subsidies, government venture capital funds, below-market borrowing, energy costs, implicit financial guarantees and a host of other ways in which the party-state supports industries.

The full range of industrial policy initiatives and funding is most likely at least 5%, more likely 7-8%, and possibly an even higher proportion of the PRC’s US$20 trillion (£15 trillion) GDP.

We know a lot about the PRC’s industrial leadership, for example, in high-speed rail, EVs, nuclear reactors, green energy, sophisticated electronics and, to a degree, aerospace. A lot of attention has been drawn to the successful EV manufacturer BYD, but in EVs, we find some revealing contrasts.

BYD, which has a roughly 30% market share in the PRC, is one of few very successful EV manufacturers to have emerged from a 15-year-old strategy. At its peak, CCP largesse attracted about 500 firms into the sector, but the number is now down to between 150 and 200, and still too high. BYD remains a large recipient of subsidies. It and nine other firms have a 65% market share, with the rest unprofitable and scrapping over minuscule shares of the market.

The EV sector shines a bright light on the handful of successful firms, but a dark shadow over endemic problems such as waste, corruption, loss making, overcapacity and deflation, with far-reaching consequences both at home and for the world economy. Nor has industrial policy succeeded in pulling the PRC out of a productivity funk, and it may actually be contributing to it as a result of the survival of loss-making firms, the abuse of political connections to get access to assistance and, generally, the triumph of rigid centralisation and conformity over competition and market incentives.

Although overcapacity features strongly in real estate, the immediate concern now is in goods and services, including EVs and lithium batteries, photovoltaic cells and wind turbines, building materials, metals processing, digital finance, semiconductors, and standard medical devices and pharmaceuticals.

Earlier this year, Beijing’s leaders, from Xi downwards, urged companies and sectors to desist from destructive competition and price cutting. They have invoked the term ‘involution competition’ to emphasise concerns about excess production, anti-competitive business practices, diminishing returns, losses and aggravated deflationary pressures. Yet, it is doubtful that the CCP’s rhetoric will gain traction when it is the CCP which is channeling resources to and prioritising firms and industries, creating incentives to conform rather than compete, and setting unrealistically high growth targets for the economy, thus encouraging ever more investment and production.

The implications for global trade and the world economy are concerning.

Surging exports have become a poorly appreciated global problem. Even though trade news in 2025 has been dominated by the tariffs introduced by Donald Trump, President of the US, the larger threat to world trade and the world economy derives from the rising likelihood of a backlash against Beijing’s ‘dumping’ of its overcapacity via trade.

The PRC’s global footprint is already huge. It accounts for a third of global manufacturing. From a standing start a decade ago, the PRC’s share of global EV sales has surged to over 50%. It accounts for half of global shipping tonnage built annually, 60% of wind turbines manufactured and 80% of solar panels, and is the biggest exporter of steel in the world. It also has a chokehold, for now at least, on the processing of rare earth metals and magnets. The PRC’s trade surplus is running at about 5% of GDP, with the manufacturing surplus about twice as big. Chinese mercantilism resides strongly in the vigorous pursuit of export growth and stagnant imports.

While the US and European Union (EU) have both developed sophisticated governance infrastructures to police, contain or discourage Chinese exports and direct investment in sensitive areas, as well as control exports of sensitive goods, the eye-catching development has been the recourse to an array of trade defence measures by emerging and middle-income countries in the so-called ‘Global South’, and for which the PRC is their biggest or leading trade partner. These include Mexico, Turkey, Brazil, India, South Africa, Vietnam and Thailand, which harbour varying concerns about unfair competition, but also an angst about premature deindustrialisation if significant flows of low-priced Chinese exports continue to threaten local firms and industries.

In some important ways, the PRC’s economic status and industrial prowess are reminiscent of Japan in the 1980s and 1990s, when, despite having an industrial structure and slew of dynamic firms which were the envy and fear of the world, it nevertheless succumbed to a major macroeconomic shock, from which its leading industrial and financial firms could offer no protection.

Japan’s experience shows how two things can be true at the same time. An economy boasting world-class firms and striking accomplishments in innovation can also be one in which systemic imbalances, bubbles and overcapacity, political contradictions and institutional rigidities run too deep for the most impressive firms to deliver durable and stable growth. Great firms and strong top-down industrial policy do not protect an economy against bad macroeconomic policy outcomes.

Technological islands of excellence are no substitute for good macroeconomic governance and well-institutionalised technology ecosystems that diffuse benefits throughout the economy – neither of which constitute Beijing’s strong points. As global trade tensions and fragmentation continue to evolve in years to come, the international backlash against the PRC may well become a catalyst for increased instability.

With the 15th Five-Year Plan (2026-2030) expected to be approved by the CCP Central Committee in coming weeks, it is fair to assume that industrial policy will retain its central role in Chinese policymaking. This is likely to make Beijing’s domestic economic problems worse, and give rise to increasing pushback against the PRC’s export of large volumes of goods and its domestic overcapacity. For the world, this is far more threatening than Trump’s tariffs.

George Magnus is a member of the Advisory Council of the China Observatory at the Council on Geostrategy.

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The Investigator | No. 16/2025

On 3rd September, the Chinese Communist Party (CCP) will celebrate the 80th anniversary of the end of what it calls – with Chinese characteristics and prolixity – the Chinese People’s War against Japanese Aggression, a part of the World Anti-Fascist War (the Second World War). In the past, 15 parades have been held on 1st October – the People’s Republic of China’s (PRC) ‘National Day’ – and only one explicitly military parade on 3rd September, the day after Japan’s surrender in Asia. That parade, in 2015, was the initiative of Xi Jinping, General Secretary of the CCP and also Chairman of the Central Military Commission (CMC), therefore commander of the People’s Liberation Army (PLA) – the armed forces of the PRC.

The CCP rightly points out that the Chinese have never been given sufficient credit for their contribution to the victory in the Second World War. They fought for 14 years, suffered 35 million casualties and tied down well over a million Japanese troops and their materiel; resources which would otherwise have been deployed against the Americans in the Pacific and the British in Burma.

Yet, 80 years after the end of the war, such a parade seems out of place to many outsiders, for whom reconciliation has long replaced hostility. For the CCP, the effort and expense are not without reason, nor without the sacrifice of truth in the service of propaganda. The Chinese Civil War continued for much of the 14 years of resistance. The bulk of the fighting was carried out by the army of the Nationalist Party, also known as the Kuomintang (KMT), while the CCP kept its powder dry for the eventual struggle with the KMT. Even Mao Zedong, founder of the PRC, wryly acknowledged this: when Kakuei Tanaka, then Prime Minister of Japan, apologised in 1972, he quipped that without the invasion, the communists would still be confined to the hills by the KMT.

Why is the CCP holding the parade?

In June, the State Council Information Office held a press conference to introduce the overall arrangements for the commemorations of the 80th anniversary. It listed the following purposes of the parade:

• To highlight the pivotal role of the CCP in the war. ‘To demonstrate China’s responsibility to resolutely safeguard the results of victory in the Second World War…and to actively promote the building of a community with a shared future for mankind…To unwaveringly uphold world peace.’

• To demonstrate the political awareness of the PLA and its obedience to the party (it is important to note that the PLA has always been the party’s army, not a national army).

• To showcase the PLA’s progress in modernisation, battle readiness and becoming a world-class force, capable of integrated joint operations, mastering new technologies and forms of warfare, and winning future wars.

• To inspire the party, PLA and people of all ethnic groups ‘to unite more closely around the Party Central Committee with Comrade Xi Jinping at its core…and to…build a strong nation and achieve national rejuvenation through Chinese-style modernisation’.

It is interesting to contrast this with an explanation published in the People’s Daily, a CCP-administered newspaper, in 2015. Its considerable candour applies equally to 2025:

• ‘To demonstrate China’s military strength. Currently, great power competition has reached a critical juncture, and the room for compromise and manoeuvring between major powers is shrinking. This is reflected in specific international events, such as the rift between the US [United States] and Russia, and between Europe and Russia over Ukraine, and the currency wars in which countries refuse to give in…Only with this hard power can we instil fear in our opponents in international competition, secure cooperation from our partners, and steer the strategic landscape in our favour.’

• ‘To deter Japan and demonstrate to the world China’s unwavering resolve to maintain the postwar world order…In recent years, fuelled by the US’ return to the Asia-Pacific region to contain China, Japan has become increasingly aggressive towards China. Not only has it ‘nationalised’ the Chinese territory of the Diaoyu Islands, it has also attempted to deny history and its aggression against China, and is showing signs of returning to a militaristic path. These actions indicate that Japan is attempting to subvert the post-World War II international order and change its status as a defeated nation.’

• ‘To showcase the military’s appearance, spirit and weapons to the Chinese people, building confidence and increasing their sense of pride…[which] is particularly crucial during China’s period of deepening institutional reform and economic restructuring.’

• ‘To demonstrate to corrupt elements that, in addition to the ‘sword handles’ of the Discipline Inspection Commission and the political and legal system, the ‘sword handle’ of the People’s Liberation Army is also firmly in the hands of the Party and the people.’

Perhaps unsurprisingly, this aggressive – and honest – piece has been scrubbed from the internet, as have official records of the 2015 press conference which introduced the parade to domestic and foreign journalists. A decade on, candour is not invited to the parade.

The purposes of this year’s parade encompass all of the above. In sum, Xi wants to reinforce the party’s legitimacy and claims to have ended the so-called ‘century of humiliation’ of foreign semi-colonial behaviour in the PRC; to remind the people that the PLA is the party’s army, which will maintain the CCP in power; to send a message of deterrence to other countries that the PRC is not to be messed with, whether regionally (the East and South China Seas) or globally; and to convince Taiwan that resistance is futile and ‘reunification’ inevitable.

To strengthen the last two intentions, there is consistent emphasis that ‘all the weapons and equipment on display in this parade are domestically produced, active main battle equipment’; and on displaying ‘all types of capabilities, including command and control, reconnaissance and early warning, air and missile defence, firepower, and integrated support.’

Likely domestic reactions

The parade is not the only activity. At the June press conference, Hu Heping, Deputy Minister of the Propaganda Department, emphasised ‘focusing on mass participation’. Other events will commemorate the start of hostilities with Japan in 1931 (18th September), the liberation of Taiwan (25th October), and the Nanjing massacre (13th December). Commemorative medals, stamps and coins will be issued, and a new batch of war sites certified. All regions and departments are to ‘leverage the role of various grassroots cultural platforms, and widely organise themed, diverse and educationally meaningful mass commemorative activities…such as laying wreaths, visiting memorial facilities, paying respects to martyrs’ tombs and holding public memorial services.’ Education, literature, music and online activities are to be pressed into service, and Hong Kong, Macao and Taiwan ‘compatriots’ will hold a symposium.

Given the system and controls on society, any taking of the temperature of public reaction is impossible to measure, but the likelihood is that the parade will be generally well-received. Most Chinese people will be uplifted by patriotism and nationalist fervour. Inevitably, some will contrast the expense and the pomp with the current economic malaise, unemployment and falling living standards.

Foreign participation and likely reaction

In 2015, approximately 1,000 foreign troops in eleven contingents took part in the parade. This year it seems none are invited, not least perhaps because a Russian contingent would look bad as the full-scale invasion of Ukraine grinds on.

Nor will the list of attending heads of state, ministers and other dignitaries match 2015 in breadth. The Shanghai Cooperation Organisation (SCO), a CCP-led economic and security organisation positioned as a counterweight to the North Atlantic Treaty Organisation (NATO), concluded its meeting in Tianjin on 1st September, and many leaders of member countries will stay on. But so far, it appears that from the European Union (EU), only Robert Fico, Prime Minister of Slovakia, will attend, and no ministers. In 2015, former democratic national leaders such as Sir Tony Blair, former Prime Minister of the United Kingdom, attended; this year they will not. Even EU ambassadors are said to be boycotting the event, while the Japanese government is reported to have asked European and Asian countries to refrain from attending, in blunt contrast to ten years earlier when Shinzo Abe, former Prime Minister of Japan, kept quiet but stayed away because of ‘his schedule in parliament’.

One leader who was absent in 2015 but will be present this time is Kim Jong Un, Supreme Leader of North Korea. Relations, bad a decade ago, have since strengthened.

Foreign analysts will look for indications that Xi’s control over the military is shaky or firm (this author believes the latter), and similarly for his health. The main take away will – or should – be that however much the CCP declares its peaceful intentions and a ‘community of shared future for mankind’, it is a regime ultimately reliant not on the support of the people, but on military might; and that such might could one day be directed against free and open countries. They should also consider that the PLA is not the only threat, but a more visible one than sub-threshold actions such as interference, cyber warfare, creation of dependencies and more.

Perhaps the last word should go to George Orwell, taken from his essay ‘The Lion and the Unicorn: Socialism and the English Genius’, for whom ‘The goose-step, for instance, is one of the most horrible sights in the world…It is simply an affirmation of naked power’ to be associated with totalitarian states. ‘Why is the goose-step not used in England?…because the people in the street would laugh’. They won’t in Tiananmen.

Charles Parton OBE is Chief Adviser to the China Observatory at the Council on Geostrategy.

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The Investigator | No. 15/2025

New regulations on central decision making bodies

Speculation about the June politburo meeting readout is feeding rumours of Xi Jinping, General Secretary of the Chinese Communist Party (CCP)’s ‘weakening’ hold on power. The readout announced that the politburo had reviewed new ‘Regulations on Party Centre Decision Making, Discussion and Coordinating Body Work’ [‘党中央决策议事协调机构工作条例’].

This speculation hangs on two ideas. The wilder of the two is that some elusive group of actors has decided to establish a new body above Xi. This is based on a misreading of the first line of the readout – a boilerplate introduction to the topic at hand, not a declaration of a new power centre being established. The second is that these regulations are designed to rein in Xi’s power by placing it under institutionalised constraint.

Both readings ignore basic facts and two ongoing, well-documented trends: centralised CCP decision making nudging out the state, and ‘rule-based rule of the party’ [‘依规治党’]. Linking the readout to speculation about Xi’s ‘decline’ misses an opportunity to examine the regulations’ significance for the People’s Republic of China’s (PRC) evolving political system. While analysis of Xi’s impact on the system rightly points to power ‘centralisation’ and ‘personalisation’, less is known about how the CCP and its leader use power once it has been centralised. The regulations – not yet released – are likely part of the party centre’s ongoing task of modifying institutions to help it put centralised power into action.

To be clear, the politburo meeting readout contains nothing shocking. The party centre has long been planning to formulate the regulations in question. We know this because they were mentioned in April 2023’s Central Intra-Party Regulations Formulation Work Plan Outline (2023-2027) (hereinafter ‘Party Regulations Formulation Outline’).

What is ‘centralised power’ without rules to use it?

These planned regulations are part of Xi’s longstanding pet project to govern the CCP and the PRC by rules – his macro-plan combines ‘rule-based rule of the party’ and ‘law-based rule of the country.’ On coming to power, Xi spoke of the party’s need for rules to rein in the party’s excesses and avoid the existential threat of a breakdown in the party-people relationship, and he has been making rules ever since.

Xi has made rules about making rules – stipulating how party regulations can be formulated and by whom – and has made rules to put his fellow party members’ authority ‘in a cage’ [‘把权力关在笼子里’]. He has used rules to his advantage, giving himself maximum flexibility for pushing through decisions and to remould the party’s internal workings, creating new incentive structures, and making himself the ‘core’ with whom all must ‘align.’ He has used rules for everything; from dictating how many dishes cadres may serve when entertaining to delineating party powers to manipulate the state.

Xi takes rules, and their use for creating governance mechanisms, seriously. He regards them as integral to ‘modernising’ Chinese governance. In 2019, a Central Committee Plenum document resolved to ‘better translate China’s institutional strengths into national governance efficacy.’ The document called for ‘strengthening the role’ of the bodies involved in the controversial politburo readout, improving mechanisms for ensuring party centre decisions are implemented and ‘strictly enforcing’ the instruction requesting and reporting system – a little-discussed system of longstanding importance to the party’s internal workings which is discussed later in this article.

Xi has used rules not only to maximise his concentration of power, but also to facilitate its use. The Central Military Commission ‘Chairman in Charge’ system [‘中央军委主席负责制’] is a case in point. While analysts stress Xi’s being ‘in charge’ – and his ultimate authority to make decisions – his attempt to create a whole set of rules and mechanisms to facilitate this decision-making role go under the radar. For instance, the ‘three mechanisms’ developed through intra-party rules seek to serve the Chairman’s decision making capabilities.

What are Party Centre DDC bodies?

Party Centre Decision Making, Discussion and Coordination bodies (DDC bodies) form a level of authority which shifts major decision making upwards, away from state institutions. Some were originally ‘Leadership Small Groups’ transformed into commissions under the 2018 institutional reform. Their upgrade sought to ‘strengthen the Party Centre’s centralised, unified leadership over major work.’ Others, such as the Central Science and Technology Commission (CSTC), were established directly as commissions.

Though researchers refer to the new regulations as the ‘regulations on the Work of the Party Central Committees [DDC bodies]’, the document’s official title uses ‘Party Centre’ [‘党中央’], not ‘Central Committee’ [‘中央委员会’]. This reflects the nature of Party Centre DDC bodies: they are beholden to the 24 men of the politburo or the seven men of its Standing Committee (PBSC) and not to the larger Central Committee. Xi himself, as General Secretary, has direct control over the topics of DDC body meetings, either deciding on, or giving the go-ahead to, a meeting.

On the functions of Party Centre DDC bodies, the language from the June politburo readout is almost verbatim that of the aforementioned Party Regulations Formulation Outline. The Outline stated that such regulations are needed to help DDC bodies fulfil their functions of: ‘top-level design, choreographing and coordinating, integrated promotion, and monitoring and urging implementation’ [‘顶层设计, 统筹协调, 整体推进, 督促落实’] of major work. This is precisely the language used in the 2020 Central Committee Work Regulations, which stipulate the Central Committee’s power to create DDC bodies. The politburo readout uses the same ‘4x4’ character expression. This language is also used for the specific DDC bodies. The 2023 institutional reform plan describes the then-new Central Finance Commission’s functions in exactly the same way. The PRC Law on Foreign Relations grants the same functions to the Central Foreign Affairs Commission.

The new regulations will complement or adjust existing rules. Said rules themselves reveal something of these elusive power centres’ workings. Xi’s ten-year rule making spree has reinvigorated the Instruction Requesting and Reporting system [‘请示报告制度’] (IRR). The IRR lets lower ranking bodies request instructions from senior organisations and report back up on implementation. It enables party entities to respond to eventualities on the ground in their locality or policy field, although it can also create logjams.

At least since 2019, DDC bodies – and their leaders individually – have been permitted to play the role of IRR responders. This may be a way of delegating party centre authority while helping facilitate calibration of policies with central requirements. It could also help with the apparent spike in IRR requests resulting from a decade of relentless campaigns, pervasive punishments and strict demands for alignment with party centre policy, which has left officials ‘lying flat’ or looking for other ways to avoid culpability. DDC bodies have been ordered to create detailed and specific rules for implementing IRR in their own fields. This could amount to substantive power delegation to the heads of DDC bodies’ implementing offices.

The respective arrangements of the Central Foreign Affairs Commission (CFAC) and the CSTC serve as useful discussion points. Wang Yi, CFAC Office Head, holds triple roles, also serving as a politburo member and Minister of Foreign Affairs. This links CFAC decisions directly to the principal state implementing agency. With Wang heading both the Ministry of Foreign Affairs (MFA) and the CFAC Office, he can implement CFAC decisions through both the MFA and through coordinated action with other CFAC member ministries. Wang’s position as CFAC Office Head may be an authoritative lever to press other agencies to coordinate with the MFA. While the CFAC-MFA setup may be an outlier (due to the demise of Qin Gang, Wang’s predecessor), the CSTC’s arrangements are similar. Yin Hejun, Minister of Science and Technology (and Central Committee member), reportedly doubles up as CSTC Office Head, allowing CSTC decisions to flow directly to the Ministry of Science and Technology and giving Yin the lever of CSTC Office Head to help coordinate the implementation of CSTC decisions.

Xi ‘in decline’ or delegated powers being refined?

Returning to the politburo meeting readout, considering the powerful role of DDC Office Heads it is unsurprising that regulations should require DDC bodies to ‘coordinate, not stand in for, and perform as required, not overstep’ [‘统筹不代替、到位不越位’]. While speculation sees this as a ‘direct criticism of Xi’, it is more likely that the relevant provision seeks to regulate the power delegated by the Party Centre. Notably, Xi has himself used the expression in relation to the Central Comprehensive Law-based-rule Commission.

Overlooking subnational practice misses a chance to reflect on assumptions. Countering the notion that, from the politburo readout, ‘some language could reasonably be read as Xi being shunted aside’, provincial-level party committees are repeating that very same language in a promise to do better. Shanxi, Chongqing and Xinjiang, for example, declared that they will ‘study the spirit’ of Xi’s ‘important [politburo meeting] speech’ and improve the practices of their subnational DDC bodies. They will produce ‘realistic and effective policy measures’ [‘切合实际、行之有效的政策举措’] – a line also in the politburo meeting readout – and better regulate DDC body establishment and operation under their jurisdiction to ‘ensure implementation of Party Centre decisions.’ Provincial-level party committees have the power to make intra-party regulations. It appears communications about the Party Centre Regulations are prompting them to follow suit and make implementing documents to tighten up on local DDC body practice.

The regulations are likely less a signal of Xi’s waning star and more a run-of-the-mill move to hammer out the details of how the CCP uses the power it has centralised under Xi’s first two and a half terms. It may be that the Party Centre (or members thereof) will attempt to have the regulations’ content incorporated into the Party Charter at the 21st National Party Congress in 2027. This would give the CCP ‘constitutional’ credibility to the use of DDC bodies in governance, consolidating their place in the New Era Party bureaucracy.

Dr Holly Snape is Lecturer in Politics at the University of Glasgow.

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The Investigator | No. 14/2025

The Trump administration is trying to curb unfair and abusive Chinese trade practices; practices exacerbated since Beijing’s accession into the World Trade Organisation in 2001. A response to the tariffs imposed by Donald Trump, President of the United States (US) has been the restriction of rare earth mineral exports to the US.

Dependence on the People’s Republic of China (PRC) for critical and rare earth metals and minerals is a major energy and national security risk for the US, the United Kingdom (UK) and other nations. Beijing not only controls a massive component of the upstream value chain and production of raw critical minerals, but also – more importantly – it controls nearly all of the downstream refining and processing for most critical metals and minerals. Britain, America and most advanced nations do not refine and process the vast majority of rare earth metals and minerals.

The UK and US are almost entirely dependent on the PRC for gallium. Gallium was placed under export restrictions by the PRC in August 2023. It is used in semiconductors, photovoltaics for solar panels, and batteries, among other uses.

Some politicians and business leaders in the free and open nations are working on initiatives to reduce their dependency on the PRC for these materials. The Minerals Security Partnership is an example of this, but significantly greater efforts are needed to tackle this unbalanced global metals and minerals problem.

An immediate and proactive approach, which includes not just sourcing the raw metals and minerals, but refining and processing them, is essential to start rebalancing the market and take away the PRC’s control of metals, minerals and the finished products (such as batteries). The impact of this is far-reaching, and extends to auto manufacturing and military hardware. Refining these metals is energy intensive. Energy – power generation specifically – is needed to refine and process these metals and minerals. The PRC has abundant, reliable and cheap coal-fired power generation, which underpins its ability to process and refine metals and minerals.

In the recent US-PRC talks hosted in London, Beijing used its rare earth exports as leverage, claiming ‘difficulties’ in processing. America has realised that the PRC aims to dominate science and technology in its race to become the global hegemon, utilising unfair business practices as necessary. This is why the US is trying to curb the PRC’s access to sensitive technologies, including computer chips.

The desire of nations and politicians to have low-priced batteries and refined rare earth metals from the PRC is a short-term destructive trap which must be ended. Unless Britain, America and other liberal democracies begin producing and refining these metals and minerals in significant quantities, Beijing will maintain control of both production (refining and end products) and pricing. This was observed in 2010 and 2011, when prices of the heavy rare earth dysprosium increased 26-fold. This was triggered by a territorial dispute between the PRC and Japan, where Beijing used its export controls as geopolitical leverage.

London recently hosted trade talks between Beijing and Washington. His Majesty’s (HM) Government presented it as a ‘diplomatic win’ for the UK, believing that Trump’s advisers chose London because it is ‘geopolitically in the right place right now to act as bridge and facilitator’. The notion of Britain acting as a bridge between the two rival powers is a theory which Whitehall may wish to propagate.

The talks in London restored rare earth and magnet supplies for civilian US industries with a fast-track system, valid for six months. It included neodymium, praseodymium and dysprosium; all vital to electric vehicles, wind turbines and electronics. Military-grade materials, such as titanium sponge, nuclear-grade isotropic graphite, germanium and gallium, remain off the table. The PRC is using this as leverage to pressure America on chips, artificial intelligence (AI) and export restrictions.

As the PRC continues to wield its rare earth leverage to gain advantage in critical areas, the UK and US must get serious about the real long-term threat of the PRC, especially as it pertains to energy. After all, energy underpins AI. The PRC’s coal-fired power generation is what powers its AI, manufacturing centres, and refining and processing of rare earth metals and minerals.

HM Government’s recent nationalisation of British Steel from Chinese ownership is one example of a very positive move by democratic governments in reclaiming the most critical sectors of their industrial manufacturing base. The same measures need to be applied to energy, specifically traditional fuels such as oil and gas.

Britain’s special relationship with America, as the largest oil and gas producer in the world, needs to be utilised. The UK can increase domestic energy security and economic security by increasing purchases of US natural gas and oil. Natural gas is an extremely reliable and energy dense fuel which provides stable and distributable power. With access to more LNG (Liquified Natural Gas) from America, Britain could build out its power generation, lower electricity and energy prices for UK consumers, increase energy security and begin to rebuild its manufacturing base.

The US exports over four million barrels of crude oil per day. Britain could be taking more of this oil. As well as this, America exports about 14 billion cubic feet of natural gas per day in the form of LNG, with ambitions to export far more. The UK could dramatically increase imports of US LNG, strengthening the trading relationship with America as well as the implicit security relationship which comes from increased energy shipments. Increased access to US LNG alone could allow Britain to reduce domestic energy costs and stem the decline of the industrial base, directly supporting defence. This is the type of win-win which both the UK and US need to look for in long-term competition with Beijing.

Trisha Curtis is a macroeconomist with expertise in US shale markets, geopolitics, and China. She is the CEO of PetroNerds, host of the ‘PetroNerds’ podcast, and an economist for the American Energy Institute.

Grace Theodoulou is the Policy Fellow at the China Observatory at the Council on Geostrategy.

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The Investigator | No. 13/2025

On 9th May in Geneva, the United States (US) and the People’s Republic of China (PRC) agreed to reduce their respective tariffs by 115% for 90 days. Within a month, this truce in the ‘trade war’ broke down. The recent bilateral trade talks hosted in London on 9th-10th June appear to have restored the Geneva status quo. Although details of the agreement have not been revealed, the Chinese Communist Party (CCP) has seemingly relaxed restrictions of rare earth exports in return for American agreement to remove export bans on certain technologies, ethane (important for plastics) and civil aviation components.

A truce is not a peace treaty. The Geneva agreement may have been shored up until 9th August, but American tariffs of 30% and Chinese tariffs of 10% remain. Donald Trump, President of the US, likes tariffs, and perhaps ones higher than 30%. Moreover, none of the underlying systemic trade issues worrying to both the US and Europe have been addressed.

Broader than a trade war

More pertinently, despite the media’s soubriquet of ‘trade war’, this is a broader, deeper conflict. The ‘win-win’ language of the CCP’s propaganda department is for foreign consumption. Internally, the party talks of a long ‘struggle against hostile forces’; of the science and technology war being more serious than the trade war; of the need to repudiate liberal democratic values, political and economic systems, media and civil society freedoms. As the CCP emphasised in the leaked ‘Document No. 9’ of April 2013, this is an ideological struggle. These elements add up to a geopolitical war; a new Cold War in which the CCP claims that the US is ‘containing and suppressing’ its rise, while in the US there is bipartisan agreement that the PRC is a threat to its global power, interests and values. Both sides are correct. Many third countries fail to recognise this reality.

Neither side emerged from the London talks as a winner. Both have stepped back from the brink – for the time being. The CCP’s legitimacy is largely based upon satisfying the people’s economic aspirations. The economic model is over-reliant on exports. The trade war adds to existing economic problems, especially unemployment. Rising unhappiness among the people could lead to unrest directed at the party, perhaps in a more virulent form than what happened when Covid-19 restrictions became unworkable. Better to retreat and concentrate on the longer-term science and technology war. The power of the PRC’s weaponisation of rare earth exports has become all too plain for the US and its companies, who have suffered the economic consequences.

Countries will be forced to choose sides

This glint of the sword before it was re-sheathed (in the famous expression ‘hide and bide’ [韬光养晦], the first two characters reflect this meaning) was also evident to European and other American allies. The rare earth exports squeeze made the pips squeak in European car and wind power companies. Beijing, whose ‘difficulties’ processing rare earth exports authorisations seemed to disappear after the London truce, doubtless wished to remind the free and open countries that they too would be better advised not to pursue policies inimical to CCP aims.

Liberal democracies will be made to choose sides. Scott Bessent, US Secretary of the Treasury, has warned that: ‘moving towards China would be cutting your own throat.’ The same point was made by Brendan Carr, Chair of the Federal Communications Commission, a few days later. In the recent trade agreement between the United Kingdom (UK) and the US, the UK agreed to ‘work to promptly meet US requirements on the security of the supply chains of steel and aluminium products intended for export to the US.’ If that is the case with metals, it is even more likely in more sensitive high technology areas. Indeed, in a little-noticed memo issued by the White House on 21st February, titled ‘America first investment policy’, two sub-paragraphs demonstrate this pressure to choose. In relation to advanced technology, critical infrastructure and other sensitive areas:

1. Restrictions on foreign investors’ access to US assets will ease in proportion to their verifiable distance and independence from the predatory investment and technology-acquisition practices of the PRC and other foreign adversaries or threat actors.

2. This [‘fast-track’] process will allow for increased foreign investment subject to appropriate security provisions, including requirements that the specified foreign investors avoid partnering with United States foreign adversaries.

Unsurprisingly, the Chinese have threatened those who side with America. In April, the Ministry of Commerce was explicit:

It needs to be especially pointed out that China firmly opposes any party reaching deals at the expense of China’s interests. If such a situation occurs, China will absolutely not accept it and will resolutely take countermeasures in equal measure. China has the determination and ability to protect its own interests.

Europeans have fallen out of love with Trump’s America, and some argue that cosying up to the PRC is a viable option. Yet, if the choice is to become a satrapy of one or the other, Europe will go with America. Shared history, culture and values apart, this would be an economic necessity. For both the UK and the European Union (EU), exports of goods and services to the US are around five times those to the PRC. In terms of investment, the figures are far starker. The stock of British investment in the US is around fifty times greater than British investment in the PRC; in the stock of foreign investment in the UK, American investment is over 170 times more than Chinese investment, which represents a mere 0.2%.

Combatting the rare earths weapon

These fundamental dependencies make it more than likely that liberal democracies will come up against the ‘resolute countermeasures’ promised by the CCP, the most effective of which is restricting rare earth exports. That the US and its allies have allowed this to happen is the result of the failure of successful governments to discern the nature of the CCP’s global ambitions and to act on clear warnings. In 2010, the CCP restricted Japan’s access to rare earths over a fishing dispute. 15 years later, the global democracies have done nothing to break the PRC’s near monopoly over the processing of rare earths (‘rare earths’ is a misnomer: they are not rare, but processing has been outsourced to the PRC). Given the vital role of rare earths in modern industries and weaponry, rectifying this economic security and national security weakness is a top priority.

The US and its allies and partners will have to unite in this effort. They should shift towards an industrial policy, something at odds with prevailing beliefs in free and open markets. But this is inevitable, given the ideological and practical clash of Chinese and liberal democratic economic systems. Not least, it means devoting some of the increase in military spending to processing rare earths, since they are a vital component of so many modern weapons.

The CCP is not a ‘black box’ (although leadership politics and how decisions are reached is rarely clear). Party media informs party members about intentions and policies. But whether through woeful or wilful ignorance, many foreign governments and businesses are not willing to confront the reality of what the CCP says in Chinese to party members about its ambitions and its attitudes to democratic ‘hostile foreign forces’. Even if this were not as evident as it is, it would surely be a dereliction of responsible government to leave a country vulnerable to pressure by a power which declares its ideological, political, economic, judicial, media, values and more systems to be in a long-term struggle with those of liberal democracies.

Some may declare that America is moving away from the values of liberal democracies. But Europeans and others will have to choose. That choice is between a certainty of clear incompatibility with CCP ambitions and values on the one hand, and, on the other, the possibility of a ‘community of shared future’ (to cannibalise a phrase) with a post-Trump America. Dillying and dallying is a third and worst choice – particularly when it comes to the processing of rare earths.

Charles Parton OBE is Chief Adviser to the China Observatory at the Council on Geostrategy.

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The Investigator | No. 12/2025

Yesterday, the People’s Liberation Army (PLA) – the armed forces of the People’s Republic of China (PRC) – announced the deployment of its ground, naval, air and rocket forces around Taiwan. Shi Yi, Senior Colonel in the PLA, said the drills would include sea-air combat-readiness patrols, strikes on sea and ground targets, and blockades on key areas and sea routes.

At the same time, the China Coast Guard (CCG) announced ‘law-enforcement patrols’, which would involve intercepting and inspecting ‘unwarranted vessels’. ‘These operations are concrete actions to exercise legitimate jurisdiction and control over Taiwan Island in accordance with the one-China principle’, a spokesperson said.

Prior to the drills, the Ministry of National Defence (MND) of Taiwan reported that the Shandong aircraft carrier entered their ‘response zone’ (a self-declared zone beyond territorial waters). The carrier subsequently engaged in operations approximately 220 nautical miles southeast of Taiwan involving – it is speculated – fighter aircraft and helicopters. According to the Financial Times, two people ‘briefed on the situation’ said that the Shandong was approaching waters 24 nautical miles off Taiwan’s coast; ‘the closest it has ever been to the Taiwanese mainland.’

Throughout 1st April until 6am (UTC+8) on 2nd April, Taiwan’s MND claims that 15 PLA Navy ships and four ‘official ships’ operated around Taiwan in addition to 76 sorties of PLA aircraft, 37 of which crossed the Taiwan Strait’s median line.

According to the head of the MND’s Office of Deputy Chief of General Staff for Intelligence, who spoke at a press conference yesterday, no PLA aircraft or vessels entered Taiwan’s contiguous zone, which extends 24 nautical miles from the coast. However, ‘two senior Taiwan officials’ told Reuters that more than ten PRC military ships had approached close to the contiguous zone.

On 2nd April, the PLA announced that military exercises would continue with ‘Strait Thunder-2025A’ in the middle and southern areas of the Taiwan Strait. In their statement, interceptions and seizures were once again threatened, among other activities. As of publication, there is no indication that any PRC vessels have intercepted, boarded or detained ships in the area. Previous announcements of this kind appear not to have been acted upon.

It has since been reported that long-range live-fire drills were held in the East China Sea; although no locations were given, it was said that exercises aimed to simulate precision strikes on key ports and energy facilities.

There has not been any indication as to how long any of these exercises will last.

Motivations

These moves follow a visit to the region from Pete Hegseth, Secretary of Defence of the United States (US), who pledged to bolster America’s military posture in Japan to deter Chinese aggression, including across the Taiwan Strait. Some Taiwanese analysts have linked the PLA’s actions to this development.

Beijing has, however, claimed that these exercises are in response to the ‘Taiwan independence’-seeking actions of Lai Ching-te, President of Taiwan. In particular, they cite Lai’s speech of 13th March as an escalatory move, worthy of ‘resolute countermeasures and strict punishment’.

Last month, Lai introduced 17 major strategies to respond to the national security challenges Taiwan faced. In doing so, the PRC was labelled a ‘foreign hostile force’. One wonders which word Beijing took most exception to – ‘hostile’ or ‘foreign’?

Of course, the People’s Republic may be using Lai’s three-week old words as a pretext for exercises which it always wanted to – and intended to – carry out for the purpose of practising military manoeuvres and applying further pressure on Taiwan’s people and their government.

Propaganda

Given the political objectives of PRC military manoeuvres around Taiwan, propaganda has often accompanied these shows of force. Last October, the CCG depicted their patrols around the main island with red lines in the shape of a heart, alongside the words: ‘The patrol is in the shape of loving you’ [巡航都是愛你的形狀].

This time, the Western Theatre Command of the PLA has depicted Lai as a green ‘parasite’, ‘poisoning’ and ‘hollowing out’ Taiwan, and ‘courting ultimate destruction’. In one of these images, a four-armed Lai can be seen grabbing opposition party assets and bribes as well as imprisoning Ko Wen-je, the former Chair of the Taiwan People’s Party, who has been indicted on corruption charges.

This imagery echoes Beijing’s recent efforts to portray Taiwan as living under ‘green authoritarianism’ (the colour of Lai’s Democratic Progressive Party). Only a few days ago, Xinhua, the PRC’s state media agency, described a ‘climate of fear’ across the island and accused Lai of stepping up ‘harassment’ against individuals and organisations engaging in cross-strait exchange.

With this message, Beijing no doubt wishes to amplify divisions within Taiwan (opposition politicians also accuse the government of ‘Green Terror’) as well as delegitimise the country’s democratic credentials worldwide. In turn, this could help justify their ‘response’.

‘Response’ would be the word. Another piece of propaganda pushed out yesterday attempted, as Beijing always does, to place the onus for these drills on ‘Taiwan Separatists’. Beijing wants the world to believe that they are ‘courting disaster upon themselves’.

Reaction

Taiwan’s military has responded with the deployment of its own ships and aircraft. Readiness levels have also been elevated to ensure, in the words of an MND spokesperson, that Beijing does not ‘turn drills into combat’ and ‘launch a sudden attack on us’. The Presidential Office has also condemned the moves as ‘blatant military provocations’ which ‘undermine security in the entire region’.

The US concurred: its statement expressed opposition to ‘China’s aggressive activities and rhetoric toward Taiwan’. Its State Department spokesperson went on to say that ‘China has shown that it is not a responsible actor’. Meanwhile, the European External Action Service has charged the Chinese exercises with ‘increasing cross-strait tensions’ and called for ‘restraint’. At the time of publication, the Foreign, Commonwealth and Development Office (FCDO) has not commented.

Gray Sergeant is the Research Fellow in the Indo-Pacific at the Council on Geostrategy.

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The Investigator | No. 11/2025

This ‘Investigator’ looks at political aspects of the ‘Two Sessions’, the annual plenary meetings of the National People’s Congress (NPC) and the Chinese People’s Political Consultative Conference (CPPCC), held between 4th-11th March this year. This piece follows on from George Magnus’ ‘Investigator’, which looked at the economic focus of the ‘Two Sessions’.

Some commentators have described the ‘Two Sessions’ as the equivalent of a typical parliament found in a democracy, and one of the most important political meetings of the year. The first statement is misleading, the second untrue.

The role of the ‘Two Sessions’ is fivefold:

1. To boost national morale by laying out the achievements of the previous 12 months;

2. To reinforce instructions on important issues and policies for the coming year;

3. To allow the Chinese Communist Party (CCP) to consult widely and take the temperature of the party and people;

4. To confirm and pass important legislation; and

5. To promote the image of the People’s Republic of China (PRC) and its policies to the world.

It is not a parliament. True parliaments debate, argue, alter and decide. In the PRC, policy making and politicking happen elsewhere; in CCP meetings. Xi Jinping, General Secretary of the CCP, has increased Leninist control, rendering the divide between party and government almost meaningless. Important decisions are taken in Politburo Standing Committee and Politburo meetings, and ratified at party meetings such as congresses, plenums and the annual Central Economic Work Conference. Li Qiang, Premier of the PRC, made it clear in the Government Work Report (GWR) where policy is decided:

‘In particular, we took firm actions to implement a package of new policies that was decided on by the Political Bureau of the Central Committee at a meeting on September 26.’

That the ‘Two Sessions’ is less important to the party under Xi is evident from its reduced length. Until 2019, it lasted 13-14 days. Since 2020, it has been seven to eight days. In years following a party congress, two days are added for voting on (pre-decided) government arrangements.

The past and the present: similarities and differences

There are three main work reports: the GWR, the National Development and Reform Commission (NDRC) report, and the Ministry of Finance’s (MoF) budget report. Three other reports are also delivered at the NPC: those of the Supreme People’s Procurate, the Supreme People’s Court and the NPC Standing Committee. These reports follow a set form. Many elements are ‘cut and paste’ from the past. But, across the decade of 2015-2025, the similarities, differences and order of topics are interesting for an indication of priorities (although length constraints prevent a complete comparison).

Some interesting similarities

• On support for the private sector, in his GWR, Premier Li said that:

The non-public sector is an important component of the PRC’s economy. We will remain firmly committed to encouraging, supporting and guiding the development of this sector, work to enable entrepreneurs to give full expression to their talent, put into effect all policies and measures encouraging the development of the private sector…

He spoke of cutting through the administrative interference and other hindrances to their development suffered by private companies. But the extract comes from the GWR of Li Keqiang, former Premier of the PRC, in 2015. Similar promises from this year, from Li Qiang, the current premier, largely repeat what the party has failed to implement over the last ten years.

Furthermore, this repetition underlines a consistent truth: the CCP cannot allow the private sector a significant degree of independence, no matter what Xi has been saying recently – ‘I have always supported the private economy’ was the title of an article expressing his words in the People’s Daily, the official CCP newspaper, published the day before the ‘Two Sessions’. But a Leninist system must control the economic levers, because following in the tracks of wealth come demands for representation (‘no taxation without representation’). Hence, five years after Li Keqiang’s GWR, Jack Ma of Alibaba and other private company heads were taught a painful lesson. And the private sector, where 70% of innovation occurs, must act in line with Xi’s instructions on innovation and the domination of new technologies. Its freedom is further constrained: in 2017, 73% of private companies had party cells or branches. A subsequent big campaign will have raised that number. Support for the private sector comes with ‘special Chinese characteristics’.

• Science and technology (S&T) remains a big theme this year in the section titled ‘Major Tasks for Economic and Social Development’, just as it was in 2015, where it featured at fifth place in the NDRC report. It rose to first place in 2024, and was third this year: priority was given to rectifying economic imbalances, consumption, investment and demand, followed in second place by the promotion of ‘new quality productive forces’ – in other words, science and technology put into practical production.

  This emphasis on S&T is one of the two pillars of policy supporting the CCP’s intention of becoming the leading global power. Essential to that aim is dominating the new technologies and the new industries depending on them. But also essential – not least from a national security perspective – is continuing to be the leading manufacturer across the widest possible front of industries. As a leading Chinese economist recently said, even Adam Smith with his free market ideas insisted that Britain should retain the ability to manufacture its own warships. The CCP has taken to heart, and widened the application, of Smith’s wisdom.

• Military-civil fusion has long been at the heart of CCP policy. In the 2015 NDRC report, the links were stated plainly: ‘We will advance the development of national defence-related science, technology, and industries by integrating the military and civilian sectors.’

  However, unease in free and open countries led to attempts to prevent the transfer of technologies to the PRC which could have military or repressive uses. This in turn has led the CCP to use more opaque language. The equivalent reports from 2024 speak of a need to ‘refine the system and layout of defence-related science, technology, and industries’ and ‘enhance military-civilian coordination on major infrastructure construction, and consolidate and enhance the integration of national strategies and strategic capabilities’. Those of 2025 use the same wording, also speaking of a need to ‘strengthen mutual support between civilian sectors and the military’.

Some interesting differences

• Reform was the big theme of the 2015 ‘Two Sessions’, unsurprisingly since the 3rd plenum in 2013 had launched a massive set of reforms of the economic and social model. 87 mentions of reform compare to 44 and 43 in 2024 and 2025 respectively. Neither of the recent ‘Two Sessions’ make any serious attempt to address the most important reforms identified earlier and still not implemented despite deadlines. These include reforms to state-owned enterprises, rural land ownership, the imbalance between local and central government for service provision responsibilities and for sharing revenue, and more.

  The one area of reform which is highlighted in the last two years is the construction of a unified national market – an attempt to get around the problems of local protectionism and practices detrimental to economic growth. This reform was foreshadowed in 2015, where plans such as ‘Jing-Jin-Ji’ (Beijing, Tianjin and Hebei) aimed to break down regional barriers. This has been a consistent theme for Xi. In 2015, focus was on ‘Jing-Jin-Ji’ and the economic development belt along the Yangtze River. Now included are the Yangtze River Delta, the Guangdong-Hong Kong-Macao Greater Bay Area and the Chengdu-Chongqing economic zone.

• Agriculture and food security have been a concern for the party for decades. In 2015, food security figured only briefly:

  ‘We will establish a sound system by which provincial governors are accountable for their provinces’ food security. We will make local governments strengthen their grain reserves systems.’

  But, in recent years, agriculture and food security have achieved greater prominence. The addition of a section in the NDRC plan on national security sees food security as the first – and therefore most important (the party’s survival in power excepted) – element listed (‘We will consolidate the foundation for food security on all fronts’).

• Social governance and the ‘Fengqiao model’ (a Maoist term revived by Xi in 2013 and shorthand for ensuring that localities stamp on potential sparks which might cause prairie fires of protest and unrest) are noticeably absent in the GWR of 2015. But, particularly since protests about banks restricting access to accounts, Covid-19 lockdowns in 2022, and a stuttering economy, stability has been moved to centre stage. ‘Safeguarding national security and social stability’ now appears with its own heading, and the 2025 GWR promised to:

  apply and further develop the Fengqiao model for promoting community-level governance in the new era and facilitate well-regulated development of integrated governance centres in local communities.

  Yet, while the party may feel more threatened, the increasing powers of technological totalitarianism make it unlikely that it cannot control possible outbreaks of unrest, at least in the foreseeable future.

• Foreign affairs do not feature greatly in the reports and meetings of the ‘Two Sessions’. However, Wang Yi, Foreign Minister of the PRC, held press conferences in 2015 and 2025. Li Keqiang, the former premier, also held a press conference in 2015, during which he answered questions on foreign affairs (a further sign of the downgrading of the importance of the ‘Two Sessions’ is that the current premier, Li Qiang, does not hold press conferences). Comparing press conferences in 2015 and 2025, the contents are similar and largely pro forma. Here is the language on the invasion of Ukraine:

  On the issue of Ukraine, China has adopted an objective and just position. We respect Ukraine’s independence, sovereignty and territorial integrity. We hope that there will be a negotiated settlement of this issue through dialogue…there are complex causes behind this issue…

  2015 or 2025? Li Keqiang in 2015. In 2015, when discussing relations with Russia, Wang Yi talked of ‘strong strategic trust between the two sides’, ‘a strong foundation for strengthening strategic cooperation between the two sides’, and a cooperation which has ‘enormous internal impetus and room for expansion’. He promised that the two countries would ‘continue to carry out strategic coordination and cooperation to maintain international peace and security’. Free and open countries cannot complain that they were not warned on how the CCP would react to a second invasion of Ukraine in 2022.

Primus inter impares

The age of CCP collective leadership, of the General Secretary as first among equals, is dead. In 2015, it was still necessary to say that the party would ‘take as our guide Deng Xiaoping Theory, the important thought of Three Represents, and the Scientific Outlook on Development; and fully implement the guiding principles from General Secretary Xi Jinping’s major speeches.’ Now, adherence to the ‘Two Establishes’ (establish Xi as the core of the Party and establish Xi Jinping Thought as the guide) featured throughout the ‘Two Sessions’ and particularly in party media afterwards, as it drew out the lessons to be studied. Numbers tell the same story. In the GWR of 2015, there were five mentions of Xi; in 2025 this rose to 38. On the last day of the ‘Two Sessions’, delegates vote to approve the reports. The number of those daring to vote against passing the reports has fallen sharply. In 2015, the figures for the government, NDRC and MoF reports were, respectively: 24, 151 and 391. In 2025, they were: 1, 18 and 27. Showing opposition to Xi is not career enhancing.

Looking to the future

The most important task for 2025 is the drawing up of the next Five Year Plan, which will be unveiled at next year’s ‘Two Sessions’. The role of the NPC and CPPCC, of the government ministries and departments, is to provide ideas and materials. But the decisions will be made in party commissions and leading small groups, following guidance from the Politburo and Politburo Standing Committee, which will also give its final approval to the plan. This is consultation with a small ‘c’ and Leninism with a big ‘L’.

Charles Parton OBE is Chief Advisor to the China Observatory at the Council on Geostrategy.

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The Investigator | No. 10/2025

This is the first of two ‘Investigators’ this week which will analyse the outcomes of this year’s ‘Two Sessions’ political gathering in Beijing, which refers to the annual plenary meetings of the National People’s Congress (NPC) and the Chinese People’s Political Consultative Conference (CPPCC), held between 4-11th March this year. This ‘Investigator’ by George Magnus focuses on the economic implications of the ‘Two Sessions’, while the next one by Charles Parton will focus on the political outcomes.

The economic headlines from this year’s NPC were that the government has set a 5% Gross Domestic Product (GDP) growth target for 2025, along with a series of other economic and sector targets, and moved consumption growth into pole position among diverse policy tasks. These initiatives had been clearly flagged in the political economy discussions at the Third Plenum of the 20th Central Committee in July 2024, the year ahead outlook at the Central Economic Work Conference in December, and several other high-profile meetings over the last year, including last month’s symposium with the leading private entrepreneurs of the People’s Republic of China (PRC).

Yet, there is more to the Chinese Communist Party’s (CCP) targets and goals than meets the eye, and it is important to consider the context against which the government’s economic narratives, assessments and prospects are set, particularly under prevailing domestic and geopolitical circumstances – and especially trade. Even though the economy is still riding the wave of stimulus measures passed late last year, and will be affected by some new ones planned for 2025, the economy is most likely to remain in a persistent cycle of slow growth and the need for debt-financed stimuli.

The government is certainly not planning to shift its mercantilist economic model away from the emphasis on industrial policies and exports, despite new measures to appear more consumer-focused. The problem is that by not recognising the close binary and antagonistic link between successful manufacturing output and the many issues related to sluggish domestic demand, the government is misdiagnosing the PRC’s economic condition. In doing so, it risks exacerbating the sluggish domestic demand.

Misdiagnosis: The centrality of trade

The emphasis at the NPC was, as usual, overwhelmingly on domestic economic, industrial and financial policy issues. Li Qiang, Premier of the PRC, acknowledged in the Government Work Report that the foundation for Beijing’s sustained economic recovery and growth is not strong enough, demand is weak, there are pressures on employment and some local governments have fiscal ‘difficulties’.

He also acknowledged a variety of international problems – including protectionism, threats to supply chains and geopolitical tensions – which could all impact Beijing’s trade, science and technology. To this end, the Work Report provides for greater efforts to relieve pressures on export firms, boost foreign investment, exploit further trade from the Belt and Road Initiative (BRI) and support the PRC’s participation in international trade arrangements. Yet, nowhere is there any recognition of the intimate connection, and indeed causation, between the PRC’s domestic economic difficulties and the nature of its international footprint.

Put another way, the economic problems which the PRC faces at home are not chance or random phenomena that can be easily cured by incremental tweaks. Rather, they are features of the other side of a highly successful manufacturing and export model. Beijing cannot improve the outlook for the domestic economy materially or ramp up the role of household consumption without making politically awkward decisions to change that model.

The PRC’s astounding foreign trade performance in 2024 was not even a footnote at the NPC. Its trade surplus was almost $1 trillion (£770 billion), or close to 5% of GDP. Export values rose by approximately 6%, and imports by just 1%, but in volume terms (allowing for price falls), Chinese exports rose by approximately 13%, or four times as fast as world trade, while imports rose just 2%. Adjusting for flows related to tourism, services and investment income, Beijing estimates that its current account surplus was approximately $400 billion (£309 billion), or just over 2% of GDP, but a forensic examination of the data suggests that it was perhaps twice as big. Trade, then, may have contributed almost half of the PRC’s reported economic growth in 2024.

Trade is the key factor in the PRC’s economic prospects for two reasons. First, pushback against Chinese overinvestment, overcapacity and overproduction can be seen in the rising incidence of so-called ‘trade defence instruments’ aimed at Chinese products (including tariffs, anti-dumping measures and other restraints) among the world’s 50 largest economies and across all continents, spanning an array of middle-income and developing economies including India, Indonesia, Malaysia, Mexico, Thailand, Turkey and Vietnam.

Second, since protectionism is nowadays a feature of the economic outlook – the PRC’s role is as both a major instigator and a victim – it follows that the government is on the horns of a dilemma. Its policies favour production, supply and exports, but demand at home is sluggish, and demand abroad may be constrained by trade resistance. The NPC offered nothing to suggest that the authorities are prepared for the consequences, or to change the model.

The domestic agenda

In 2025, the government will prepare the 15th ‘Five-Year Plan’ (2026-2030), in which there will be a strong emphasis, one imagines, on science, technology and self-reliance, including priority attention to Artificial Intelligence (AI) and other strategic emerging industries, innovation, data capacity and the recalibration of supply chains.

Much of this is already referred to in a list of ten tasks to be accomplished in 2025, announced at the NPC. The most important task is ‘vigorously boosting consumption and investment returns, and stimulation of domestic demand across the board’. The other tasks comprise:

• Developing new quality productive forces in industry (i.e., cutting-edge science and technology sectors). The government is also proposing up to ¥1 trillion (£107 billion) in new funding mechanisms to nurture industries such as AI, digital technologies, 5G technology, bio-manufacturing and quantum computing, and for Small and Medium Enterprises (SMEs) in the technology space and start-ups;

• Support for science and technology through education system enhancement;

• Unspecified ‘landmark reforms’: the focus is on ‘economic structural reform’, but what it probably means is doubling down on industrial policy and exports;

• Development of international trade and investment;

• Resolution of real estate and local government finance risks. Though far down the list, the government remains worried about asset price declines and financial stability risks;

• Rural revitalisation, including a focus on grain production, land usage and management, poverty alleviation and rural growth;

• New urbanisation, which increasingly looks like a question of reclassification of small towns and communities rather than high migrant flows from rural to urban areas;

• Lowering carbon intensity, which also includes lowering pollution, and the broader green transition agenda; and

• Increasing the quality of people’s livelihoods and social governance – this is probably a catch-all for social stability.

Boosting consumption

On the first and most urgent task, the government says it wants to boost consumer spending and personal income growth, and the supply of quality products and services. However, the main measures outlined are fairly limited, such as more subsidies for consumer goods trade-in programmes – which is essentially about bringing forward future consumption – even though these subsidies are half as big as those for trade-ins for businesses. The government also mentioned increased supply of health, old age and childcare services, small increases in old age and healthcare benefits, and a reform of leave arrangements so as to allow people to enjoy more tourism, culture and sporting events.

Following on, just over a week ago, the government announced a ‘Special Action Plan’ to support consumption, comprising 30 points under eight broad headings. While one of the more content-heavy plans for consumption announced in recent years, the plan was perhaps more about political messaging than economic content. There was, after all, some repetition of NPC measures, but nothing about new spending on, or funding for, programmes. The government aims to lift people’s incomes by underpinning employment, education and stock prices, and encourage people to save less by making minor changes to education and pension benefits as well as medical and maternity insurance. Much of the rest revolves around the expanded trade-in scheme already announced, and measures to ramp up the supply of consumer goods and services in recreational and cultural pursuits as well as for the elderly and tourists.

Such measures are welcome at the margins, but they will do little to strengthen and sustain higher household income and employment growth – the sine qua non for higher spending.

The ongoing funk in the real estate market looks set to continue for structural reasons related to weak household formation and excess supply, especially away from the largest cities. More local government borrowing to finance purchases of uncompleted and unoccupied homes might help to raise sales for a while – already evident in the largest Chinese cities – but construction activity is likely to remain in the doldrums.

Encouraging private firms

The NPC also sought to convey a positive message to private firms, including references to the new draft private economy promotion law. The government’s mission to regulate and punish wayward private firms ended some time ago, and it knows it needs the active participation of entrepreneurs in helping to meet the country’s economic challenges, for example in AI and local technology clusters and hubs. The CCP says it wants fairer law enforcement, lower barriers to entry in key sectors and greater credit allocation, but low business confidence is basically down to existing regulatory hurdles, political interference and weak demand and profitability resulting from a flawed economic model.

Macroeconomic targets

The CCP’s principal macroeconomic targets for 2025 include:

• A 5% growth in GDP – the same as 2024 – though the latter outcome was almost certainly overstated;

• New urban employment of 12.5 million, but this excludes the rural economy and urban employees who are laid off, leave work for any reason, or are otherwise inactive. With labour force contraction of about 7 million per year, arising from ageing alone, net employment is no higher than maybe 4-5 million; and

• A 2% Consumer Price Index (CPI) inflation: this is a reduction and represents a small nod to the deflationary pressures in the economy, which are likely to persist. The GDP deflator, which is the broadest measure of inflation, has been negative for the last six quarters, a sign of the dangerously low ‘nominal world’ for wages, profits and asset prices.

Fiscal, rather than monetary, measures are going to dominate policy. The latter will doubtless entail minor reductions in interest rates and banks’ reserve requirements, a continuing focus by the People’s Bank of China (PBoC) – the PRC’s central bank – on liquidity provision, and schemes to encourage lending by banks for government priority areas, such as green technologies and SMEs.

The headline rise in the fiscal deficit to a record 4% of GDP should be taken with a pinch of salt, as it represents central government only, and excludes government-managed funds, which are largely used for infrastructure, the social security budget and other off-balance sheet funds, local government accounts, state enterprises, and contingent liabilities of the state such as pensions. The real, public sector fiscal deficit, according to the International Monetary Fund (IMF), is much closer to 15-18% of GDP. Nevertheless, it is clear that a looser fiscal policy is going to happen this year, and that Beijing is picking up a part of the responsibility from local governments.

The government is proposing almost ¥12 trillion (£1.3 trillion) of new borrowing this year, equivalent to approximately 8.5% of GDP, which comprises:

• Borrowing to fund the fiscal deficit of ¥5.6 trillion (£597 billion);

• Ultra-long-term government bonds, with a value of ¥1.3 billion (£139 million), of which approximately a quarter will fund consumer trade-ins and the rest will fund national security and other strategic projects;

• Special government bonds of ¥500 billion (£53 billion) to support the recapitalisation of the largest banks; and

• Local government special purpose bonds of ¥4.4 trillion (£469 billion) to fund infrastructure, purchases of idle land and unsold housing, and to alleviate cash flow problems.

Conclusion

Notwithstanding the array of domestically focused numbers and programmes outlined at the NPC, and the persistence of an unrealistically high GDP target, the critical factor this year will be trade. The immediate focus will be on whether Donald Trump, President of the United States (US), and Xi Jinping, General Secretary of the CCP meet, and if there might yet be a trade deal between the two countries in which both sides commit to additional purchases from one another. While this could lower the geopolitical temperature for a while, it would be a largely cosmetic – and probably ineffective – deal, leaving the structural deterioration in relations to fester. Meanwhile, the behaviour of many other nations will be worth monitoring for signs of stress in commercial relations with the PRC.

This ‘Investigator’ is a taster of more to come on this critical subject. A short report by the same author on this topic will be available on the Council on Geostrategy’s China Observatory webpage in the coming weeks — keep an eye out for it!

George Magnus is a member of the Advisory Council of the China Observatory at the Council on Geostrategy.

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The Investigator | No. 09/2025

This month marks the tenth anniversary of the National Development and Reform Commission’s (NDRC) publication of the Belt and Road Initiative (BRI), ‘Vision and actions on jointly building silk road economic belt and 21st century maritime silk road’. This plan came out 17 months after the concept, then officially translated as ‘One Belt One Road’, was launched by Xi Jinping, General Secretary of the Chinese Communist Party (CCP). Too little attention was paid to the plan at the time, but, like many party documents, it shed light on future intentions and still repays study a decade later. In particular, it illuminates the intention and nature of Xi’s three global initiatives, particularly the Global Civilisation Initiative (GCI).

The foreign policy which the CCP now propagates emphasises a framework of a leading idea, the ‘community with a shared future for mankind’, underpinned by three initiatives: the Global Development Initiative (GDI), announced in 2021, the Global Security Initiative (GSI) in 2022, and the GCI in 2023. The BRI, in which CCP propaganda invested so heavily that it must remain, now plays a role similar to that of the sweeper in football. Its policies are embedded in two of these initiatives.

The first thing to note about this BRI plan from 2015 is that it came out not under the auspices of the Ministry of Foreign Affairs (MFA), which focuses on implementation of policy rather than the making of it, but of the NDRC. This underlines that the BRI was more about the domestic needs of the People’s Republic of China (PRC) than about foreign policy. For all countries, foreign policy is domestically driven, but the degree of solipsism is most developed in the CCP. The need for resources, markets and the export of overcapacity industries were, and are, important drivers of the BRI. Despite the NDRC plan’s title for section VI, ‘China’s Regions in Pursuing Opening-Up’, there is little in the plan about the PRC itself opening up to the benefit of outsiders. Rather, the focus is on how links with countries abroad will help the north, southwestern, coastal, and inland regions of the PRC develop and reform. Those hopeful that reports of ‘opening up’ mentioned in this month’s National People’s Congress reports presage true ‘win-win’ might want to take note.

One difference between the plan and the reality today is the change of tone. The optimism of 2015 has been replaced by a dour outlook. The PRC faces ‘winds and storms’; politically, stability and security are now centre stage. Internally, the economy hit turbulence shortly after the plan came out: the stock market crashed later in 2015; the Covid-19 pandemic has had lingering effects; and the real estate and debt chickens have come home to roost. Externally, the United States’ (US) pivot to Asia, beginning in 2012, gathered pace during the first term of Donald Trump, President of the US, while the CCP’s alignment with Russia and support for its full scale invasion of Ukraine have soured relations with Europe. The BRI plan from 2015 has little which presages the GSI, because it predated these changes.

However, the intentions of the GDI do feature. Its aims are broad. According to a front-page article in the party’s newspaper, the People’s Daily, from 2024, they ‘lead the world towards a new development path’, not least in global poverty reduction, agricultural cooperation, the sharing of innovation and industrial upgrading, and new energy and ecological protection projects.

So too the ambitions set out in 2015 aimed to lead the world towards a new development path. The BRI is often thought of in terms of infrastructure construction. But the plan enumerated five main elements, of which infrastructure was but one, if the most important:

• Policy coordination: meaning intergovernmental and regional cooperation.

• Facilities connectivity: i.e., infrastructure – not just transport and ports, but also energy and telecommunications.

• Unimpeded trade: mutual recognition of regulations and mutual legal assistance; moves towards coordinated inspection, quarantine, certification, accreditation, standards, and statistical information; alignment of customs clearance facilities; cooperation in energy, research and development for new industries; and investment (although the flow seemed to be into the PRC: ‘We welcome companies from all countries to invest in China’).

• Financial integration: bilateral currency swaps and settlement with other countries; the development of the Asian Infrastructure Investment Bank and the BRICS New Development Bank; cooperation over financial regulation.

• People-to-people bond: essentially, the GCI.

The ‘people-to-people bond’ section envisaged cooperation in most areas: cultural, media, youth, student, sporting exchanges; easing visa regimes to increase tourism; medical cooperation (‘we should strengthen cooperation with neighbouring countries on epidemic information sharing’, a declaration doused in irony by the Covid-19 pandemic); science and technology cooperation, including joint laboratories and interactive technology transfer; cooperation between political parties, think tanks and non-governmental organisations (NGOs); and more.

This section is essentially what later became the GCI, even if that title took eight years to emerge formally. As an important front-page article in the People’s Daily said on the first anniversary of the GCI, in language echoing the 2015 plan, ‘Strengthening international cultural exchanges and cooperation is an important way to implement the Global Civilisation Initiative’. It went on to list most of the fields covered in 2015: education, health, the arts, tourism, and dialogue, and exchanges between youth, think tanks, political parties and the media.

The BRI plan published by the NDRC and the GCI are consistent in their aim: as the former puts it, to ‘provide the public support for implementing the Initiative (BRI)... to win public support for deepening bilateral and multilateral cooperation’ (‘public’ in this instance meaning foreign citizens). In other words, the GCI, which embodies the ‘people-to-people bond’ messaging from 2015, underpins the GDI, the GSI and the BRI.

On the face of it, who could object to the GCI? As Xi said at the ‘BRICS Plus’ leaders’ dialogue in Kazan in October 2024, ‘The Global Civilisation Initiative I proposed is exactly for the purpose of building a garden of world civilisations in which we can share and admire the beauty of each civilisation.’ Or, as the NDRC’s BRI plan claims, ‘it advocates tolerance among civilisations, respects the paths and modes of development chosen by different countries’ and ‘works to build a community of shared interests, destiny and responsibility featuring mutual political trust, economic integration and cultural inclusiveness.’

But there is a catch. In the BRI plan, there are only the mildest hints of the attitudes which the CCP holds tight, such as those set out in the infamous ‘Communiqué on the Current State of the Ideological Sphere’, more commonly known as ‘document no 9’, which excoriates the so-called values of the free and open nations. The BRI plan talks of being ‘an endeavour to seek new models of international cooperation and global governance’. ‘It advocates tolerance among civilisations, respects the paths and modes of development chosen by different countries…’ This is the premise for the CCP position on values and human rights, which must not be universal, but contingent upon national conditions and culture.

Given the circumstances of the BRI’s launch and the need to gather international support, the BRI plan from 2015 was unlikely to be confrontational. Subsequent tensions between the CCP and the free and open nations have removed such reticence. The GCI, linked by the CCP to a tolerant Chinese culture, modernisation and development path, is contrasted with the antagonistic model of the free and open nations:

‘Xi Jinping’s cultural thoughts are rooted in the fertile soil of Chinese civilisation and contain the civilisation gene of openness, tolerance, and eclecticism. In stark contrast to the ‘clash of civilisations’ advocated by Western scholars, we advocate “each civilisation appreciates its own beauty, appreciates the beauty of others, shares beauty with one another, and achieves harmony in the world.” [各美其美, 美人之美, 美美与共, 天下大同] China does not impose its own values and models on others, does not engage in ideological confrontation…’

‘The international community believes that the successful practice of Chinese-style modernisation has shattered the myth that “modernisation equals Westernisation”, forcefully demonstrating that there is more than one path to modernisation and that human civilisation is diverse and colourful. Countries can embark on their own distinctive paths to modernisation based on their own cultural heritage and actual national conditions.’

The GCI aims to change the world’s values from ‘universal values’ to values which better align with those of the CCP. Discussion of the GCI now reflects more openly the challenge to American supremacy, whose prime battlefield is the ‘Global South’, not least Africa. Mention of that continent is sparse in the NDRC’s BRI plan: for example, the list of multilateral cooperation mechanisms does not include the Forum on China-Africa Cooperation, which has been held every three years since 2000 and is now a major event.

As the contest with the US has widened, so too has the scope and ambition of the GCI and the other initiatives. Policies and propaganda have been sharpened as the CCP attempts to bind to its side countries not aligned with the US and its allies. Of the four initiatives, the GCI is perhaps the most insidious. The others are clear in their intentions and methods, not least because they require the PRC to spend money abroad, but the GCI is less tangible. It sits in the natural operating ground of the United Front Work Department, which the CCP describes as its ‘third magic weapon’. Beneath its polished slogans, the GCI works to alter the value system which has reigned since the 1948 Universal Declaration of Human Rights (greatly informed by the Chinese participants in the drafting committee) to one more attuned to the CCP’s interests.

The BRI plan from 2015 also exemplifies a lesson for the so-called ‘China watchers’. Attention paid to what the CCP puts out as vague ‘plans’, ‘opinions’, ‘guidance’, and ‘white papers’ is never wasted. These documents matter because the party must advertise.

Charles Parton OBE is Chief Advisor to the China Observatory at the Council on Geostrategy.

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The Investigator | No. 08/2025

‘Minilateralism’ has joined Beijing’s ever-shifting geopolitics lexicon at a telling moment. Facing dizzying global uncertainty and power dynamics, the use of this term ‘xiaoduobianzhuyi’ [小多边主义] in the People’s Republic of China (PRC) captures an emerging fact: the need perceived in Beijing and elsewhere for small, flexible groupings of states, pursuing shared interests rather than broad ideological alignments.

Morphing from scholarly speculation to the geopolitical chessboard, the term echoes other buzzwords that take on lives of their own. Like ‘soft power’ in the 1990s or ‘strategic ambiguity’ in the 2000s, minilateralism has, at least in Beijing’s eyes, evolved from a descriptive term to an active policy principle. It reflects widespread adaptation to a fragmenting multilateral order and a conscious strategy by pragmatic powers – implicitly led by the United States (US) – to maintain influence while minimising headwinds.

Beijing’s official media dismisses the concept of minilateralism held by the free and open nations as ‘pseudo-multilateralism’ while simultaneously developing its own variants. This mirrors earlier polemics: terms like ‘peaceful rise’ or ‘responsible stakeholder’ became contested ground between competing visions of international order.

A key case in point was ‘climate change’. Repudiated through the 2000s as a ruse by the free and open nations to contain the PRC, after the first United Nations (UN) Climate Change Conference (COP1), Beijing embraced it as an arena in which a stunning ‘China Solution’ might be displayed.

Start of breakout

Extensively discussed in the 2010s by Rory Medcalf at the Australian National University, minilateralism was a background principle in security initiatives like the Quadrilateral Security Dialogue (Quad) and AUKUS. As the Financial Times noted in April 2024, under Joe Biden, then President of the US, the State Department found ever more applications for the term.

Gulf News, the newspaper in the United Arab Emirates (UAE), published ‘Minilateralism: a concept that is changing the world order’ on 13th April 2024. A Chinese translation appeared in the state-run newspaper Reference News Network on 20th April, and was republished the same day by Sohu, a widely-read online platform known to test official limits. The intriguing term later spread, praised with faint damns, in PRC commentary.

Nikolai Mladenov, the author of the piece in Gulf News, is a Bulgarian diplomat with Middle East expertise. Both Chinese versions were allowed to close with Mladenov’s view that ‘minilateralism’s benefits outweigh its defects’.

Mladenov noted that minilateralism refers to small groups of states working together to solve a problem or pursue a common goal and is increasingly popular as a way to address challenges that cannot be solved by individual countries. Minilateralism has several advantages, not least flexibility, speed and focus on shared interests, but also comes with risks, not least the potential to worsen power imbalances and fragment the global order. Minilateralism offers a promising approach to international cooperation, with potential to address some of the most pressing challenges of our time.

Recent cases in point illustrate Beijing’s selective perception of minilateralism:

• The China-Central Asia ‘5+1’ (C+C5) mechanism, formalised in 2020 and elevated to summit level in 2022, was a pragmatic adoption of the rubric. Linking Beijing with Kazakhstan, Kyrgyzstan, Tajikistan, Turkmenistan, and Uzbekistan, it allows direct PRC engagement with Central Asia without Russian mediation. Through focused initiatives in trade, infrastructure, security and cultural exchange, C+C5 illustrates how Beijing can employ minilateral understandings, meanwhile officially promoting ‘genuine multilateralism’ – suggesting the PRC’s criticism of the concept of minilateralism upheld by the free and open nations may be more about content than form.

• During the visit of Wang Yi, Foreign Minister of the PRC, to the US in October 2022, Camille P. Dawson, a US State Department official, described ‘minilateralism’ as a way for countries to work together on specific issues via groups such as AUKUS and the Quad. Beijing officially rejects these as containment (‘exclusive small circles’).

• Conversely, when Ferdinand Marcos, President of the Philippines, visited Vietnam to foster coast guard cooperation. Denouncing this as destructive ‘clique formation,’ Beijing contrasted it unfavourably with ‘genuine multilateralism’ via the Association of Southeast Asian Nations (ASEAN) – demonstrating that the term’s acceptability depends on whether arrangements serve or challenge PRC interests.

End of Breakout

Minilateralism has not remained derogatory in PRC ‘diplospeak’. Uneasy fascination with it, praising it with faint damns, extends beyond strategic responses in security per se. PRC policy work reveals deep engagement with the idea. A growing body of scholarship examines it not just as a containment strategy by the free and open nations, but as an inflection in how states pursue interests in an ever-fragmenting international order.

This engagement comes to the fore in recent analysis of semiconductor supply chain rivalry. PRC theorists develop detailed frameworks probing how minilateral arrangements may reshape global technology ecosystems. They parse distinctions between different types of minilateral mechanisms, grouping them by fine degrees of exclusivity, topic linkage, and organisational flexibility.

This granular attention to ‘mechanisms’ suggests Beijing sees the concept as valuable for understanding – and potentially replicating – new geopolitical ‘games of interest’. Semiconductors illustrate this dual approach. Officially blasting US-led initiatives like the so-called ‘CHIP4 Alliance’ – an initiative between US, Japan, South Korea and Taiwan aimed at securing semiconductor supply chains – as ‘exclusive small circles,’ PRC experts probe them as potential models for future initiatives of their own. Minilateralism thus operates below the threshold of formal alliances while yielding concrete strategic objectives.

US-led minilaterals are lambasted as tools of hegemony, but ironically Beijing’s own ‘middle ground’ [中间地带] strategy turns to eerily similar flexible, interest-based groupings. Originally articulated by Mao Zedong to describe grey zones between US and Soviet influence, it has been repurposed to frame current PRC efforts to build coalitions with nations seeking refuge from major power competition. In initiatives like the Lancang-Mekong Cooperation initiative and certain trilateral dialogues, minilaterals are ‘decontaminated’, to remove any perceived diplomatic props of the free and open nations and become ever more universal geopolitical features.

Minilateralism reveals its utility for British foreign policy day by day, as the second presidency of Donald Trump, President of the US, steps up the erosion of traditional multilateral frameworks. Alarming as this is, it could serve other interests.

The success of AUKUS demonstrates the potential of well-crafted minilateral initiatives. Despite controversy, it has shown how focused cooperation among like-minded states can make ground while avoiding the complexity of broader multilateral negotiations. Of course, AUKUS also highlights potential pitfalls: the arrangement initially strained relations with France and raised concerns among ASEAN nations about regional stability. Careful diplomatic management and clear communication are clearly at a premium.

Beyond AUKUS, several models of minilateral cooperation warrant Westminster’s attention. The Quad’s evolution from a security dialogue to a platform addressing technology, infrastructure, and supply chain resilience is notable, while Japan’s deployment of issue-specific partnerships provides a template for middle powers to retain strategic autonomy while managing relations with both the US and the PRC.

For London, the optimal approach likely involves developing a portfolio of minilateral initiatives serving different objectives. These might include:

• technology partnerships focused on emerging domains like Artificial Intelligence (AI) and quantum computing, where the research capability and regulatory expertise of the United Kingdom (UK) make it an attractive partner

• supply chain security arrangements with trusted partners, leveraging the UK’s position as a major financial centre and trading hub

• climate action coalitions that can move faster than global frameworks, building on the UK’s leadership in environmental policy

• maritime security cooperation in specific regions, drawing on the Royal Navy’s global presence and expertise

A final caveat: buzzwords like ‘minilateralism’ are subject to Humpty Dumpty’s dictum that ‘words mean what I want them to mean’. They are easily loaded with dubious freight and put to dubious use. One assumption that may trigger resistance is the focus on ‘common interests’ rather than ‘common values’, which is supposed to solve all problems. Trade, technology and industry policy need not always work on the basis of shared interests; the interests at play may, to the contrary, be incommensurable, yet, other things being equal, work out smoothly. Voices may at the end of the day still be heard saying ‘it’s the values, stupid’.

David Kelly is a founding partner at China Policy, a policy analysis and strategic advisory firm headquartered in Beijing.

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The Investigator | No. 07/2025

As His Majesty’s (HM) Government prepares its ‘China audit’, policy decisions should not be influenced by misplaced fears that the Chinese Communist Party (CCP) aims to replace HSBC Group in Hong Kong with a Chinese state-owned bank.

This ‘Investigator’ demonstrates that these fears are unfounded, and even if it were the case, for various reasons which the piece explains, the CCP would not be able to replace HSBC Group with a viable state-owned option.

The tax contribution of HSBC Group to HM Treasury is often thought to be higher than it actually is, which intensifies the concerns around the group’s significance in UK-PRC relations.

Looking at the specifics

The amount of tax paid by HSBC Group to HM Government is hard to assess from publicly available sources. The annual report of HSBC UK Bank plc (a wholly owned subsidiary of HSBC Group) shows tax paid of £1.508 billion in 2024. This number is unlikely to represent the HSBC Group’s total contribution to HM Treasury, given the presence in the United Kingdom (UK) of the group’s headquarters and group functions, which will generate payroll and social security charges even if they do not generate taxable profits in the UK.

A report prepared by PricewaterhouseCoopers (PwC) for UK Finance calculates total tax contributions (TTC) by the banking sector in a range of countries, including the UK. TTC includes items like payroll taxes and social security contributions collected by the banks as well as the taxes which the banks pay on their profits. Some extrapolation from the numbers in this report appears to be the best way of estimating, from open sources, the value of HSBC Group’s presence in the UK to HM Treasury.

According to the report, the British banking sector in 2024 paid £12.2 billion in corporation tax, bank surcharge and bank levy. The tax paid by HSBC Group in 2024 represents 12.4% of this number. Using this percentage to derive a figure for HSBC Group’s share of the larger figure for bank sector TTCs from the data in the PwC report produces a figure of £5.5 billion in the UK, or 0.5% of HM Treasury tax receipts. Not, therefore, a meaningful enough sum to influence the conduct of relations with the PRC.

Since the CCP has made no policy pronouncements directly relevant to whether or not it would threaten HSBC Group and other banking interests, any assessment must rely upon a range of indicators. These suggest strongly that the Chinese Government does not harbour any such ambition, not least because several policy imperatives to which they are firmly wedded would make it very difficult for such an ambition to be realised.

Mainland banks would not be up to the task

The main reason for discounting the risk that Beijing might seek to displace HSBC Group from its role and replace it with one of the PRC’s state-owned banks is that none of those banks would be capable of fulfilling such a role. The causes of this are deeply embedded in policy choices made during the years since reform began; and which persist, and are being reinforced, under Xi Jinping, General Secretary of the CCP. These causes can be summed up into two key factors:

• The growth and profitability of the PRC’s state-owned banks has mostly been handed to them by policy makers and regulators – via a process known as financial repression. The banks’ interest rate margin was set by government decree, and at a level which the banks had done nothing to earn, since they have persistently failed to develop any appreciable competence in credit risk analysis. Nor have they been able to address chronic over-staffing and other costly inefficiencies. To be fair to bank management, they would probably not have been allowed to lay off the large numbers of redundant or under-employed staff – but, it does not matter where ultimate responsibility lies for the incompetence of the Chinese state-owned banks, just that it exists and persists.

• Financial repression also resulted, for lengthy periods, in the return on bank deposits being below the rate of inflation – which triggered a desperate search for yield among Chinese savers. This in turn led to the growth of unregulated or poorly regulated savings products promising returns which were either over-optimistic or fraudulent.

The leadership has learned to mistrust Chinese financial institutions

The PRC’s domestic financial institutions, including its state-owned banks, have been heavily complicit in a long series of financial missteps, which have left the Chinese economy and Chinese public finances with a very large, interlocking debt problem. The present leadership is struggling to cope with this legacy. Some examples include:

• State-owned banks funded the uncontrolled overseas spending sprees and uncontrolled domestic expansion of companies such as Dalian Wanda, Anbang, Fosun, HNA Group and Tomorrow group, which resulted in the central government having to take drastic action in 2017 to rein in this activity on the grounds that those organisations had created a significant systemic threat to the PRC’s financial system. The PRC set up a new body, the Financial Stability and Development Commission (FSDC), under the State Council in 2017 to remedy the situation. Some of the measures introduced included arresting or placing under investigation the principal managers, introducing drastic curbs on outbound activity in mergers and acquisitions, and outbound financing by the PRC’s banks in order to reduce the extent of the systemic risk.

• Reputable analysts’ estimates of the total amount of debt linked to the PRC’s real estate industry vary, but none is less than ¥40 trillion (£4.3 trillion) or about 30% of the PRC’s 2024 nominal gross domestic product (GDP), and some are much higher. Although much of the first line debt of real estate developers is owed to local government financing vehicles (LGFVs), the overall indebtedness of the real estate system is still substantially underwritten by bank lending or by banking activity, since banks distribute the wealth management products created by the LGFVs, and the local governments use the proceeds of these borrowings to help repay their own borrowing from the state-owned banks.

• Continuing capital controls also contribute to the difficulty of having a PRC bank assume the kind of role played by HSBC Group. Although Beijing has sanctioned a number of official pipelines enabling some capital account ‘leakage’ – such as the stock and bond connect arrangements with Hong Kong – the abolition of capital controls is unlikely to happen in the foreseeable future.

So the PRC’s state-owned banks will remain firmly embedded in a system which enables them to earn an interest rate margin and a return on capital without having to develop the credit risk analysis and other competitiveness-enhancing skills which underpin success in banks like HSBC, which have grown up in a world of open financial borders and free but regulated competition.

In the land of cover-up, does the leadership know?

Given the deeply ingrained habit of trying to cover up when things go wrong, one cannot automatically assume that the leadership are fully aware of all the problems in the PRC’s banking and financial system nor that these wounds are also attributable to policy options chosen by the leadership itself. However, the events of 2017 and the creation of the FSDC suggests strongly that the leadership has indeed taken the trouble to find out what has been going wrong and to identify rogue players. The fact that many ownership restrictions on foreign financial services companies operating in the PRC were removed in the aftermath of 2017 events also suggests an awareness by the leadership that foreign financial institutions are significantly more compliance-minded than the PRC’s own ones.

Issues specific to HSBC Group

After the imposition of the National Security Law in Hong Kong, the CCP wants to ensure that Hong Kong remains stable. The party keeps exhorting the Hong Kong Government to ensure Hong Kong resumes its role as a leading financial hub in Asia. HSBC Group and its 61% owned subsidiary, Hang Seng Bank, control 40% of all bank deposits in Hong Kong. Any attack on HSBC Group would therefore be highly destabilising to Hong Kong.

The importance of HSBC Group to Hong Kong is not just about its role as the territory’s leading commercial bank. In the absence of any meaningful taxpayer funded pension system in Hong Kong, the shares of large companies like HSBC Group, which pay regular and reasonably generous dividends, have become an important element in the savings and retirement revenues of millions of ordinary Hong Kongers and other Asians, notably the Chinese diaspora.

The decision by the British regulator to prevent all UK regulated banks, including HSBC Group, from paying a dividend in the aftermath of the Covid-19 pandemic, caused financial pain and massive resentment on the part of many ordinary people in Hong Kong and elsewhere in Asia, and was the stimulus for demands among such shareholders for HSBC Group to split itself up and remove its consistently profitable Hong Kong and Asian operations from the purview of the UK regulator. The senior management and board of HSBC Group resisted this effort, although the group has continued to shrink its global presence.

The structural changes recently announced by the new group CEO may result in some geographical separation along the lines being advocated by some shareholders; but the announcements made so far are not clear on this. Although they seemed to envisage some sort of geographical separation, they also refer to global functional overlays.

Conclusion

HSBC Group’s tax contribution to HM Treasury would not be significant to cause damage to the UK economy, even if the CCP harbours the ambition to displace HSBC from its prominent role in Hong Kong, which it does not. As this ‘Investigator’ has shown, the belief that the CCP would displace HSBC Group in Hong Kong and internationally, in favour of a state-owned bank of the PRC, is unsubstantiated and would be unfeasible for the party to enact even if it were the case.

The key point for HM Government to remember is that the only recent source of material damage to HSBC Group’s standing in its traditional markets in Hong Kong and the rest of Asia was caused by decisions taken by the UK banking regulator and not by any action from Beijing.

Richard Margolis is a retired former diplomat and businessman with 40 years of China experience.

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The Investigator | No. 06/2025

If you picked up a copy of the People’s Daily last September, you would have been reminded of the Congolese government’s ‘firm commitment to the One-China principle’. That is their belief that Taiwan is part of the People’s Republic of China (PRC) or as they would say an ‘inseparable part’. More concerning still was the following text from the reprinted joint statement issued by Brazzaville and Beijing:

‘Congo resolutely opposes any form of ‘Taiwan independence’ and external interference in China’s internal affairs. Congo also reaffirmed that it will not engage in any official exchanges with Taiwan and fully supports all efforts by the Chinese government to achieve national reunification.’

Really, ‘all efforts’? This presumably includes the use of military force then; action which Beijing refuses to rule out and which its military resolutely prepares for. Should the PRC ever choose to cross the strait they will no doubt argue that it does include military force. In fact, it will likely argue that dozens of similar statements do too.

Recently, Pakistan once again backed the PRC taking ‘all’ measures to achieve ‘national reunification’ (adding, no doubt to Beijing's delight, that the authority of United Nations (UN) Resolution 2758 remained unchallengeable).

Congo is not alone. In fact, as The Economist has recently reported, 119 countries have endorsed the ‘One China Principle’, 70 of whom have also backed Beijing using ‘all’ measures to achieve ‘reunification’. This includes virtually all Sub-Saharan Africa.

This is remarkable. Who would have thought so many nations, who regularly rail against imperialism, were so keen to restore the frontiers of the Qing Empire? For that, even if they may not realise it, is exactly what they are supporting.

The PRC has never ruled Taiwan. Aside from vague references to ‘since ancient times’, it is administrative developments under the Manchus which today’s Chinese Communist Party (CCP) point to in order to justify their expansionist claims.

Debates about how effective this Qing rule actually was are by the bye, the point is that this should not be the basis for territorial expansion. And one would have thought that all these African nations, who secured their independence within living memory, would agree. After all, as Peng Ming-min, a Taiwanese democracy activist, explained to American audiences while in exile: ‘if historical connection becomes the basis of territorial claims, then England would have a claim upon the people of Massachusetts and Virginia, and Spain could revive claims upon the southwestern regions of the United States (US).’

Yet the number of countries backing Chinese empire-building continues to grow.

Implications

Winning on the narrative fronts gives Beijing’s expansionist goals international legitimacy, which has implications for the development of cross-strait relations and contingencies. As things stand, it is hard to imagine the UN General Assembly condemning a Chinese annexation of Taiwan like they did when Russia invaded Ukraine.

If Xi Jinping, General Secretary of the CCP, believes that he does not need to fear a backlash in global opinion against unilateral action, there is one less factor holding him back. If the international community is divided, efforts led by the US to counter an attempted blockade or invasion could be more easily delegitimised. Compliance with sanction efforts, to punish and degrade Beijing’s ability to prosecute its aggressive actions, would be even patchier than current efforts against Moscow. Critical resources could continue to flow into the PRC.

Admittedly, factors such as the regional military balance of power between the PRC and the US will be more determinative. Nevertheless, this is a front to be fought over and one which the United Kingdom (UK) Government could lead on.

Response

Challenging other countries' wholesale adoption of the ‘One China Principle’ seems an arduous, if not an entirely futile, task. Talk of the San Francisco Peace Treaty and transfers of sovereignty (or rather lack thereof) risks becoming esoteric.

Yet the impact of a war over Taiwan should resonate. The likely costs of a conflict for the global economy are well known, including Bloomberg’s eye-watering estimate, a price tag of US$10 trillion (£7.9 trillion).

Sub-Saharan states should know that they would be hit particularly hard if there is disruption in the Taiwan Strait. According to the Centre for Strategic and International Studies, the four countries most reliant on this waterway are in Africa. 48% of the Democratic Republic of the Congo’s trade goes through the Strait; while for Angola the figure is calculated at 41% and for Gabon and Eritrea it is 44%. The percentage of trade going through the strait for many of their neighbours stands at a smaller, but nevertheless substantial, one tenth.

These countries not only need to be convinced that a cross-strait conflict is not in their interest but be convinced that they have a responsibility to discourage (or at the very least not encourage) such a contingency occurring.

Even if the vast majority of governments in Africa genuinely believe the PRC’s Qing-era claims to be legitimate, they should, nevertheless, be persuaded to make their support for Beijing conditional. For starters, they should be warned against signing up to statements which endorse ‘all’ efforts to secure ‘reunification’. Better still, they should be encouraged to assert that cross-strait differences must be resolved peacefully, preferably publicly, if not then behind closed doors.

Brunei Darussalam’s recent joint statement with the PRC could serve as a model. Despite reiterating that ‘Taiwan is an inalienable part of the PRC’, Brunei only committed to support: ‘the peaceful development of cross-strait relations and the reunification of China.’

Going forward, at the next big bilateral between Britain and a Sub-Saharan African state, His Majesty’s (HM) Government should push for the inclusion of a line covering Taiwan in their joint statement, buried away perhaps in a paragraph underscoring the importance of uninterrupted maritime trade. ‘We reaffirm the importance of peace and stability across the Taiwan Strait’ is the UK and other Group of Seven (G7) nations current go to; other variations, to suit both sides, could surely be found.

But where to start? The three countries with Taiwanese representative offices seem like the best bet: Nigeria, Côte d'Ivoire, and South Africa. Although, given the latter’s pernicious efforts to push Taipei out of their capital, Pretoria, goodwill is not guaranteed. To cast the net further, those countries, all 25 of them, who voted to condemn Russia’s invasion of Ukraine in February 2022 could be pursued.

The prospects for such a pushback may seem dim. Yet the alternative is to stand back and allow territorial conquest to become legitimised. The UK cannot take comfort in internationalising the Taiwan Strait amongst groupings of like-minded nations, as has been achieved with the G7. There is a much bigger fight to be had in the Global South; a fight which, at this moment in time, Beijing is winning hands down.

Gray Sergeant is the Research Fellow in the Indo-Pacific at the Council on Geostrategy.

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