Geopolitical Monitoring Report | October 14, 2022

China

China’s Xi Set to Secure a Third Term as the Country’s Leader at a Critical Juncture for Beijing

Background:

The 20th National Congress of the Chinese Communist Party is scheduled to begin on Sunday, October 16, and is widely anticipated to be a coronation ceremony for incumbent President Xi Jinping’s unprecedented third term as the country’s leader. If the meeting goes as expected, Xi will leave it as the most powerful Chinese leader since Mao Zedeong. Xi is also not expected to name a successor, breaking a long-held tradition and signaling to the party that he intends to remain in power beyond his third term. Xi faces significant challenges ahead despite the fact that he has locked down an iron grip on power.

The persistent “zero-COVID” policies enacted by his government continue despite their negative impact on China’s economy.  His announcement of a “no-limits partnership” with Russian President Vladimir Putin shortly before the Russian invasion of Ukraine has resulted in China becoming significantly isolated from the West and has resulted in Moscow becoming bogged down in that conflict, thereby having less resources to deploy around the globe.

Finally, in response to the continued deterioration of relations between Washington and Beijing and the threat of a possible Chinese invasion of Taiwan, the Biden Administration has recently enacted strict export controls that effectively prevent US citizens and companies that do business in the US from working in the Chinese semiconductor industry. The US previously used chip export controls of this nature to effectively end Chinese telecom firm Huawei’s smartphone business.

In 2020, shortly after the export controls on the company were enacted by the Trump Administration, Huawei went from the world’s largest smartphone provider to the number six spot; the company is now opening other lines of business to make up for its continually declining smartphone sales, as its products are now no-longer competitive.

Impact:

Xi securing a third term will only further the growing rift between China and the West, as he will naturally view the renewed mandate as a sign that he should continue his current policies. While “zero-COVID” may be modified following the party congress, supply chain disruptions and strict lockdowns are likely to continue across China due to COVID-19 cases. This is due to the fact that China’s Coronavac and Sinovac vaccines have been demonstrated to have lower and declining efficacy when compared to other vaccines and there is very little natural immunity among the country’s general population.

China’s relations with the West will also continue to deteriorate as Xi continues to present himself as the leader of an emerging anti-Western bloc. The recent actions by Washington to restrict China’s access to advanced semiconductors – which were enacted by the Biden Administration building off of actions taken by the Trump Administration – highlights the growing bipartisan consensus among US policymakers that China is a threat.

This means the US is likely to continue pursuing these types of measures against China as long as Xi remains in power and on his current course; the new export restrictions are so severe, there is little chance for the US to reverse course without first demanding significant concessions from Beijing. The US export restrictions are almost certain to negatively impact China’s emerging chip industry and may have long-term supply chain implications on a global scale due to its far-reaching tertiary impact.

First and foremost, China will not only find itself with a lack of manufacturing equipment for advanced chips, but it will also find a much smaller talent pool as US citizens will have to apply for waivers (that will not be granted) in order to support Chinese semiconductor manufacturing. The restrictions will also apply to any foreign-made chips that use US designs or software in their construction, which will prevent China from accessing help from a third-party. This may result in increased cyber and industrial espionage operations being conducted by Beijing as increased government involvement in the Chinese industry will likely be essential for its survival and almost all technology transfers will now be illegal.

The fight over semiconductors is unlikely to be the last major spat between Beijing and Washington, especially after Xi cements his grip on power and may decide to act in a more aggressive manner to secure China’s global and regional interests. Xi has already called for the “reunification” of Taiwan with the mainland and his military will reportedly be ready to conduct such an invasion by 2025.

However, while most experts believe an invasion is still far off and isn’t likely to occur anytime soon,  Xi may accelerate these calls for “reunification” with Taiwan at this year’s party conference as a way to distract from the increasing number of challenges faced by China. Xi might also become convinced that reuniting the island with the mainland by military means might be his only option following the recent export restrictions announced by the US, as control of Taiwan’s advanced semiconductor manufacturing plants might have become more of a necessity for Beijing.

Mitigation:

Companies and organizations that rely on manufacturing or supply chains in China – especially those in the technology sector – should ensure that their third-party intelligence capabilities can adequately identify any sanctioned persons or entities that may negatively impact their businesses.

Companies should prepare to continuously monitor this sphere in the future with regards to China, as Washington has clearly indicated – absent significant changes in China’s behavior – that future sanctions against Beijing are likely forthcoming, especially if China were to do something like escalate it support of Russia in the Ukraine war or continues its aggressive behavior towards Taiwan, the Philippines, and other nations around the South China Sea. Renewed cyber and industrial espionage are also likely to occur as China is slowly cut off from advanced technology, such as computer chips.

Companies and organizations should take care to ensure that their cyber intelligence capabilities are robust enough to ensure they do not become the victims of such action by China or any other hostile threat actor. Ensuring that your organization can find and mitigate corporate data leakage, address gaps in your network security and identify potential insider threats to your organization is essential in order to prevent becoming a victim.

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