Accidental war and Xi's sleepless nights

At a private meeting in Beijing before the covid-19 pandemic, President Xi Jinping confided to a visiting foreign guest that there were two things which kept him awake at night. The first, China falling into the middle-income trap. The second, China going to war with the US “by accident”. The latter concern of Xi could not be more pertinent in the wake of Nancy Pelosi’s visit to Taipei last week, and needs to be kept in mind when assessing China’s response.

The Chinese president is currently under immense pressure to show strength, particularly from the military and foreign affairs establishments that probably are arguing the window of opportunity to act on Taiwan is closing. Nationalists – many of whom are slapping themselves on videos posted on Douyin – are also claiming Pelosi’s visit and China’s response to date represent a major loss of face.

But Xi is not in a hurry. He has enough problems to deal with at home, and knows a middle-income trap is much more likely to happen if an accidental incident takes place first. Entering a conflict with the US that does not guarantee victory – initiated on purpose or by accident – could easily turn into a regime-destabilising event with significant economic costs. At the end of the day, Xi is too loyal to the Communist Party of China and its nation-building project to take such a risk.

Indeed, while Xi clearly does not want to be seen as the Chinese leader that let Taiwan slip away from Beijing’s grasp, ordering the PLA to escort Pelosi’s flight or initiating live fire drills around Taiwan while the speaker was on the island would likely have been seen by Washington as acts directly targeting the US. It would also have increased the risk of unwanted incidents. Xi probably suspects that some American policymakers want him to make a “mistake”.

Global Times is therefore probably correct when it argued in an August 3rd editorial piece that “China’s countermeasures will not be one-off but a combination of long-term, resolute and steadily advancing options.” Indeed, although the ongoing drills ultimately will end – despite having been extended for an undisclosed period – this does not mean that the state of affairs will return to “pre-Pelosi” times when they do.

It is important to recall that already in June the Chinese foreign ministry pointed out it does not regard the Taiwan Strait as international waters. This set the scene for the announcement on August 7th that the PLA from now on will conduct regular military exercises on the east side of the median line.

Nevertheless, Xi will probably stick to economic coercion as his favoured tool towards reunification. The unprecedented military exercises, partly taking place inside Taiwanese territorial waters, were after all designed to resemble what an economic blockade would look like. We should therefore expect more ad-hoc “blockades” in the future – some possibly lasting several weeks. This is partly because it is less risky, but also because it is working. International businesses and investors are increasingly re-assessing their exposure toTaiwan, while the US and Europe are spending billions of dollars to become less reliant on Taiwanese high-tech goods.

It is not only Xi that is being kept up at night over an accidental war with the US, concern is also creeping into the minds of CEOs, investors and political leaders across the world who see heightened risk of an incident happening in the future.