FRIDAY, JULY 28, 2023
7/28/2023 5:33:00 AMShare This Episode
Taiwan Is Key to Xi’s Chinese Dream
A.M. Edition for July 28. The second in our four-part series on China: “The State of Xi’s Chinese Dream.” Wall Street Journal deputy China bureau chief Josh Chin and reporter Joyu Wang trace the rapid growth of China’s military under Xi Jinping and how officials in Taipei and Washington are preparing for the possibility of a Chinese invasion of Taiwan. Plus, Donald Trump is indicted on more charges in the classified documents probe. And the Bank of Japan jolts markets after hinting it would tolerate higher interest rates. Luke Vargas hosts.
FULL TRANSCRIPT
This transcript was prepared by a transcription service. This version may not be in its final form and may be updated.
Luke Vargas: Trump is indicted on more charges in the classified documents probe, plus the Bank of Japan jolts markets after hinting it would tolerate higher interest rates, and our look at how far China is willing to go to retake Taiwan.
Josh Chin: It's one of the central contradictions of the China dream. Xi wants China to be seen as a responsible and respected global power, but he also wants China to be whole. And if you were to launch military action against Taiwan, he may or may not succeed on the first goal.
Luke Vargas: It's Friday, July 28th. I'm Luke Vargas for the Wall Street Journal, and here is the AM edition of What's News, the top headlines and business stories moving your world today. Donald Trump has been indicted on additional charges related to his handling of classified documents, including that he ordered a worker at his Mar-a-Lago resort to delete camera footage so that it couldn't be turned over to a grand jury. The additional charges from special counsel Jack Smith broadened an indictment that was brought by a Florida grand jury in June and come as Trump braces for separate federal charges over efforts to undo his 2020 election loss. A Trump spokesman described Smith as leading a witch hunt and called the new indictment part of a Department of Justice campaign to harass the former president. A spokesman for Smith declined to comment. The Democratic-led Senate has passed an $866 billion defense bill with broad bipartisan support. That puts the legislation on a collision course with the Republican controlled house, which narrowly voted earlier this month to add provisions to the bill restricting abortion access and transgender healthcare for troops. The Senate's National Defense Authorization Act for 2024 does share some central similarities with the House passed version; however, senators largely sidestepped the social issues that polarized the house a few weeks earlier. A surprise announcement by the Bank of Japan has roiled markets and sent treasury yields surging. The bank this morning said it would keep interest rates unchanged, but in a market shift to the BOJ's longstanding ultra loose monetary policy, new governor Kazuo Ueda said it would take a more flexible approach to yield curve control. And here to explain what that means is Wall Street Journal deputy finance editor, Quentin Webb. Quentin, what does yield curve control entail and what is the BOJ actually changing here?
Josh Chin: Hi there. So yield curve control entails controlling longer dated borrowing costs by keeping the 10-year yield of the equivalent of the treasury in a range. Until recently, the Bank of Japan has kept that in a range of up to 0.5%. And what the Bank of Japan has done now is said, actually while it retains that top level as a guideline, it won't buy bonds until they hit 1%. So effectively, it's gently raised the cap towards 1%, if you like, which represents a tightening of monetary policy in a country that has long been notable for its ultra loose policy.
Luke Vargas: That in some ways sounds like an incremental move, Quentin, and yet it's led to a pretty significant market reaction today. Why is that?
Quentin Webb: Part of the thinking here from investors is that as Japan allows yields to rise a bit further, you might see some of the huge holdings of foreign stocks and bonds that Japanese investors have being liquidated and some of that money repatriates to Japan. Don't forget that Japan holds more than a trillion dollars of US treasuries for instance. Many investors have funded international investments by borrowing in yen in what's called the carry trade. So they borrowed cheaply in yen and used the proceeds to invest overseas. So we may see some of that unwinding as well. The other part of the thinking is that this could be the first of several steps to normalize policy in Japan, not least because actually after many years of subpar inflation or outright deflation, in fact as well, Japan is finally seeing some signs that inflation is running at or above targets. So maybe in the medium term, Tokyo will shift towards more normal monetary policy.
Luke Vargas: That was Wall Street Journal Deputy Finance editor, Quentin Webb. Quentin, thanks.
Quentin Webb: Thanks a lot.
Luke Vargas: In the US, three crucial data points this morning are set to shed light on the state of the economy. That would be consumer spending figures, the Fed's preferred gauge for inflation and the employment cost index. And Journal reporter Amara Omeokwe says that last measure of what employers are spending to pay workers' wages and benefits is particularly important for the Fed.
Amara Omeokwe: Economists are expecting a slight slowdown in that index when looking at the second quarter compared with the first quarter. Now, wage growth has been slowing this year, but it is still pretty robust and that is something the Federal Reserve is watching closely because the labor market has been really tight. And so what the Fed is looking for is for that wage growth to kind of slow down as an indication that the labor market itself is slowing down because taken together, a slowdown in the labor market and a slowdown in wage growth would indicate to the Federal Reserve that inflation overall is also easing.
Luke Vargas: Meanwhile, it is a big day for oil companies with ExxonMobil and Chevron set to report second quarter results. And reporter Jenny Strasberg told me that Shell's results yesterday in which the company saw shrinking profits but still announced $3 billion in share buybacks could preview what's to come.
Jenny Strasberg: Exxon has already said that they expect some of the same factors to hit them. Weaker gas prices, lower refining margins, they said would eat about 4 billion off their earnings. Chevron already pre-announced its top line of 6 billion in profit. We're talking about roughly 50% decline from the peaks of record profits last year. So investors are watching to see whether the weaker environment is going to crater any of their pledges around share buybacks in dividends. Investors are still demanding a lot of cash looking for the companies to be very thrifty on their spending, and that is a theme across the industry.
Luke Vargas: In other earnings, Ford has delivered healthy Q2 profits, but is warning of delays to its EV production. The company earlier forecast yearly EV losses of $3 billion, but up that to four and a half billion yesterday amid stiff price competition. And Intel has returned to profitability after two quarters of record losses thanks to a PC rebound that's lifting chip demand. Analysts have been expecting another loss. Coming up, China's Xi Jinping has expanded the power of China's military, but will he risk damaging the country's reputation and potentially sparking a world war in his ambition to retake Taiwan? That's after the break. For the next three weeks, we are taking an in-depth look at China and how Xi Jinping's dream of transforming the country into a global superpower is progressing. This special series has already looked at how slowing economic growth figures into Xi's plans, and this week we're pivoting to geopolitics to look at how a decades long quest to expand the power of China's military is unfolding and how it's leading Xi's attention to focus on Taiwan. And here to do that, I'm joined now by the Journal's deputy China bureau chief, Josh Chin, as well as by reporter Joyu Wong, who's based in Taipei. Josh, we heard last week about how economic growth sits squarely within Xi's Chinese dream, whereas where military prowess fits within his plans as I sense less well understood. How does Xi see the importance of China's military?
Josh Chin: Right. Well, one of the first things Xi Jinping did after taking power in 2012 was order China's military, the People's Liberation Army, the generals to prepare to "fight and win wars". It was one of the earliest orders he gave. There was a common perception in China at the time that the military had grown complacent and corrupt, and Xi basically gradually replaced all of the people he had taken out with loyalists and put them in charge. Then in 2016, he launched the biggest military reorganization that China has seen since the 1950s. He scrambled the command structures, he slashed troops who were part of this sort of bloated bureaucracy, and he put himself in charge of a new joint battle command that was aimed at modernizing operations. For Xi, remaking the military was really important, partly in terms of projecting China's power abroad to help China regain what he sees as its rightful place at the top of the global order, sort of what we think of as the China dream. But it was also important to him in terms of reinforcing his own power at home so he could see that China dream project through.
Luke Vargas: And he's still seeing it through, Josh, our colleague Brian Spiegel reporting a few months ago, that China plans to increase military spending by more than 7% this year, the fastest growth in years. So clearly investments are continuing, which begs the question, where is the Chinese military now in terms of its capabilities?
Josh Chin: Right. So China now has one of the best equipped militaries in the world. It launched its third aircraft carrier last summer. The first one that it designed in China has more naval ships than the United States now, and it's also ahead of the US and the development of hypersonic missiles, which are a new sort of cutting edge missile technology that's really good at evading modern missile defenses. And those are advances that are driven by just huge amounts of spending. Official military expenditures are expected to reach 224 billion this year. That's still behind the US, which spent more than 870 billion in 2022. But military analysts say China likely spends quite a bit more than it actually says it does.
Luke Vargas: Okay. Incredibly well-equipped, but how able to fight and to win wars, those commands basically that Xi gave the military when he took office?
Josh Chin: Well, that's the big question for China, which is experience. China has 2.2 million active troops, but almost none of them have seen live action. The last war that China fought was a border skirmish with Vietnam in 1979. And experience matters, in particular because of the complexity of modern warfare. One example that military experts will point to is aircraft carriers. China now has three of them, but operating just one takes thousands of people. Each one of those people has their own job and they all have to work in concert, and then you add other ships in a carrier group that also have to work together. And then that carrier group, which has to coordinate with the Air Force and the army, the US military has been honing its ability to run these sorts of complex joint operations basically almost constantly since the start of the war on terror. China hasn't, and it's been trying to get experience for soldiers where it can, mainly by having them participate in UN peacekeeping missions in Africa and other places. But if you talk to both Chinese and American defense officials and analysts, they will note that it's a big leap from that to say a major military operations like you would have in say a conflict over Taiwan.
Luke Vargas: All right. So speaking of Taiwan then, Joyu, you were there in the capital Taipei. How is Taiwan viewing this Chinese military buildup?
Joyu Wang: Well, we've seen (inaudible), especially for the past year that the Taiwanese government has been taking quite a few concrete step. I mean, one of the most notable example would be the government actually extended the conscriptions from four month to a year. Another thing we can see is they're spending more on the military weapons, and one of the things that they have been spending more would be on missiles. The governments last year approved the special budgets on buying more initial systems, but also on other weapons such as naval ships and also jet fighter. And according to the military analysts, we are expected to see the government will continue to spend more in the years ahead.
Luke Vargas: And Joyu, you have been speaking to members of the Taiwanese military. You've embedded with them even at times. Is it clear if Taiwan could actually take on China militarily were it to come to that?
Joyu Wang: These are questions that everyone here or in Beijing are trying to figure it out, but what we know according to the military analyst that we've spoke to that ... I mean, Taiwan by itself has its own strength in defending a possible invasion from China. One of the thing is geographical, the island itself is separated from the mainland and the oceans are really rough. I mean, that's only a few months of a year that be suitable for a possible landing. But of course at the same time, by being an island itself, Taiwan is also very vulnerable to a blockage. And this is something that the government is also taking notes of and also trying to play catchups on to make sure that its internet connections be working under a situation, and also it's like energy resurface as well. So these are just like a double-edged sort. It can help protecting Taiwan from an invasion, but also would put Taiwan in a kind of a vulnerability positions.
Josh Chin: And Luke, Joyu makes a good point there and probably because of all those factors, we've seen China recently actually start to practice not just for invading Taiwan, but to potentially blockade it. So we saw this last year when Nancy Pelosi was then the House speaker, visited Taipei and China very angrily responded by conducting live fire drills. But those included surrounding Taiwan with ships in a mock blockade. And since then, military analysts in the US and elsewhere have been studying that as a more likely possibility. One that makes it more difficult for the US to respond, because obviously in the case of an invasion, that's a really striking, really violent choice that would anger a lot of people and make it relatively easy for the US politically to get involved. But a blockade is much more ambiguous, it's much less dramatic, and it's much less clear that the American public or American allies will see that as cause to get involved. So that's now become a huge factor in all the strategic thinking around Taiwan.
Luke Vargas: Josh, what is the sense you're getting about Xi's urgency to act here?
Josh Chin: There've been a lot of dates thrown around, 2027, 2035. But one thing that's really important to think about is that there's an important tension at play inside China. Xi has made taking control of Taiwan a part of the China dream. He said it's a task that "should not be passed down from generation to generation", which some people take to mean that he wants to accomplish this before he dies, and he actually faces some domestic pressure to make good on his word. Many Chinese people, even if they're critical of the Communist Party, still feel strongly that China won't have recovered its former greatness unless it's made whole by capturing Taiwan. But it's questionable how eager Xi is actually to take military action in Taiwan, at least in the near future. I mean, it's a big step, right? This could ignite a much bigger conflict. It could involve the US. You could have potentially World War III. So it's a big gamble for him. What you're seeing now is that US is really eager to take advantage of that tension. They're trying to move as aggressively as they can to try to deter China from seriously considering an attack or a blockade. They're doing that by arming Taiwan, lining up support from allies in the region, and political analysts, foreign leaders, the Biden administration, they've all argued that Xi is very likely to damage China's standing globally if he does that.
Luke Vargas: That was Wall Street Journal deputy China bureau chief Josh Chin and reporter Joyu Wang in Taipei. Josh, Joyu, thank you both for the time.
Josh Chin: It's a real pleasure, Luke, thanks.
Joyu Wang: Yep, thank you.
Luke Vargas: And speaking of China's standing globally, on next Friday's episode, we'll look at how Xi Jinping's increasingly authoritarian regime is affecting foreign businesses and their future plans in the country. But until then, that was What's News for Friday morning. We'll be back tonight with a new show. I'm Luke Vargas for the Wall Street Journal. Have a great weekend and thanks for listening.