In this week’s episode of China Insider, Miles Yu discusses the accelerating trend of financial flight, and whether the Chinese Communist Party can stop China’s wealthy elite from leaving the country. Next, Miles reviews Japan’s Liberal Democratic Party leadership election, the upcoming election for prime minister, China’s response to the current slate of candidates, and Beijing’s desired outcomes. Finally, Miles comments on the recent purge of Liu Jianchao from China’s International Department, and Xi Jinping’s efforts to concentrate the CCP’s foreign affairs and diplomatic dialogue under a more centralized authority.
China Insider is a weekly podcast project from Hudson Institute’s China Center, hosted by China Center Director and Senior Fellow, Dr. Miles Yu, who provides weekly news that mainstream American outlets often miss, as well as in-depth commentary and analysis on the China challenge and the free world’s future.
Episode Transcript
This transcription is automatically generated and edited lightly for accuracy. Please excuse any errors.
Miles Yu:
Welcome to China Insider, a podcast from the Hudson Institute's China Center. I am Miles Yu, senior fellow and director of the China Center. Join me each week for our analysis of the major events concerning China, China threat and their implications to the US and beyond.
Colin Tessier-Kay:
It is Tuesday, October 7th, and we have three topics this week. First, we discuss the immigration of wealth out of China over the past year and look into what's behind this continuing trend. Next, we visit Japan's upcoming election for Prime Minister and evaluate China's reaction to the recent leadership vote for Japan's ruling Liberal Democratic Party. Finally, we track the latest round of CCP purges who were dismissed and the significance of the ongoing campaign to Xi Jinping's leadership role. Great to be with you again this week, Miles.
Miles Yu:
Nice to be with you again, Colin.
Colin Tessier-Kay:
So up first today following China's economic decline. After COVID-19 lockdowns, high youth unemployment, and the real estate sector collapse, China's wealthy elite have continued the trend of leaving China to the extent possible, transitioning their wealth out of Chinese-based banks to destinations abroad. Miles, start us off here with the latest on the exodus of China's wealthy elite from this past year, and what countries are they fleeing to exactly?
Miles Yu:
Well, it's been well known. First of all, foreign direct investment, foreign companies, foreign capital, it has been fleeing China for a number of years. That's because China has all kinds of laws, regulations that make foreign investment in China increasingly impossible. That's why you have virtually no foreign direct investment going into China. As a matter of fact, many of them are trying to get out of China. So that's the fact. Now, another gigantic movement of capital is taking place simultaneously, that is, Chinese domestic capital is fleeing China, in mass; the numbers were staggering. You have somewhere around 15,000 -16,000 Chinese millionaires moving out of China last year alone. So this year the trend continues. So we're talking about hundreds of billions of dollars, maybe more, that are trying to get out of China. This is a reflection of many, many things. Number one, it shows that the fundamental collapse of confidence in the communist regime and their economic, financial, and political policies.
So, obviously, if we don't have confidence in the regime, then you just get out of there. So number two, basically, it's real because if you have money in China, you're a wealthy individual. You're subjected to extortion not only by the central government but more from the local government because the local government traditionally has relied upon the sale and resale of land. And with the collapse, total collapse of China's real estate market, that route of money source is gone. So now the local government, many of them do not really have the money to pay the office workers and the bureaucrats. So they increase all sorts of measures to extract and extort money from people who have money in China, from people having money in China. So that's why they feel their wealth is not protected. China is still a communist country. There is no constitutional guarantee of property protection, so they feel unsafe.
And I think thirdly, also, even if you do not have enough money, but you want to have money, you have to borrow money from the banks. And that's the problem because China has one of the most ridiculous and stringent currency controls. It's very hard for you to do banking in China if the party doesn't like you. So many people who want to have more money and who have entrepreneurial spirits, who have business models, business ambition - they want to establish foreign residency so that they can deal with a banking system in the free trade world. So that's basically pretty much like summing up some of the motives, but mostly money, just because they're pushed out, and I think so as to which countries they're going to, I think they're going to obviously, ideally, wherever there is a strong property protection, property rights protection, they’ll go to.
So traditionally it's going to Canada, the US, and the UK in the last several years; however, the trend is going in a different direction. Most of them go into countries where they're culturally more comfortable, and they're closer to China, and it's easier to go back and forth. And so you're talking about traditionally, historically, for the last 20-some years is Hong Kong, but Hong Kong has fallen. Hong Kong's become just like another Chinese province with the Chinese Communist Party rule with iron fist as a matter of fact. So it's much harder to move the money to Hong Kong. So they go to next door to Thailand, it's very close and it is relatively free, but it's not as good as Japan. Japan is a highly sophisticated, mature country with the rule of law. So you go to Tokyo today and you see a lot of Chinese, wealthy Chinese, they bought properties in Tokyo and the suburbs because the Japanese economy, I mean, the yen was devalued significantly.
So the Chinese Yuan is sort of in a much better position to buy in Japan where the Japanese yen is devalued. So that's why you see a lot of people in Tokyo, you go to a certain part of Tokyo, it's like you are living in Shanghai. A lot of people speaking Chinese. And so you see that trend. But the biggest winner of all, attracting Chinese money capital, is Singapore. In Singapore, the overwhelming majority of Singaporean people are ethnic Chinese. They speak Chinese. That's a language barrier that's very important. Secondly, Singapore has all kinds of very interesting protection of property rights. So a lot of money is going to Singapore, not only directed from mainland China, but a huge number of them have fled Hong Kong in the former heaven of all kinds of capital, legal or illicit. And now Singapore. So Singapore has a record boom of Chinese millionaires. And so that's created a kind of happy dilemma, number one, Singapore is very happy, laughing on its way to the bank literally. And secondly, it created all kinds of policy tensions, housing, schooling, so you name it. That's why Singapore right now is having some kind of second thought and (wants) to reduce the number of influx of Chinese wealthy people.
And I think this trend is not really temporary, I think is a pretty permanent value because once you move your whole family out of the country, your whole wealth kind of country, it's very hard for them to return. And I think that's basically is the situation right now.
Colin Tessier-Kay:
And the numbers would certainly back that up. I think investment migration firm Henley and Partners has been tracking this trend since I think 2022, which at that point saw roughly 10,700 and change high net worth individuals leave the country that increased by 28% to 13,800 in 2023. And again, last year, like you were mentioning, 15,000-16,000. So while China still has a considerable number of wealthy elites tied to the CCP, this has been an accelerating trend over the past several years. But since the CCP has strict limitations on withdrawals, and caps monetary transfers over a certain amount for a given period, Miles, how successful have the wealthy elites been in getting their money out of China? And is the CCP looking for ways to kind of address the exodus to these countries, specifically Singapore and Japan, like you mentioned?
Miles Yu:
Oh yeah. I mean, China has all kinds of control mechanisms to control the capital outflow. And many of the people who are wealthy in China they have connections, they're party members, they have all kinds of very important personal contacts. On the other hand, the Chinese system facilitates this kind of illicit transaction because it's very corrupt. So that's what I mentioned about the Chinese local officials, people who are in charge of cost, and people in charge of the currency control. They themselves are victim of this downward economic situation because many of them, the salary has been cut and no benefits, definitely. So, they are more susceptible to corruption vibrate. This is one thing. Another thing is there's all kinds of, genius way of transferring money out of China, gambling debt for example, and fake lawsuit losses in foreign country.
So those kinds of things, you can do it. And also October 1st is the Chinese National Day. China has a weeklong celebration, not usually is the economic policy started in the summer 20-some years ago. One of the objectives is to stimulate spending. People spend a whole week traveling and buying stuff. And so stimulate domestic and international tourism to make people go. So in China, the most hated country in China, according to Chinese propaganda, is obviously in the United States. Secondly, the second most hated country in China is Japan. That's why they have this September 3rd parade of victory over Japan in World War II this summer, 80 years ago. But the Chinese people, particularly those with money, they can vote with their feet. During this week, which actually ends today, October 7th, some 5 million Chinese tourists are going to Japan. They're in Japan. So this is a huge number of Chinese tourists. So Chinese propaganda really does not work that effectively because people do not believe in the regime in a fundamental way. Now, what do the people do in Japan? They buy stuff. They're scouting the possible escape route. So this is basically a very big phenomenon. So people lost the Chinese confidence in the Chinese Communist Party's economic policy, but also politically, there are some unspoken ways to get out, and they also they show their disenchantment with the regime in a very indirect way.
Colin Tessier-Kay:
I think that's a great segue, actually, into our next topic for this morning. Last Saturday, Japan's ruling Liberal Democratic Party held elections for their new leader and saw hardline conservative Sanae Takaichi emerged as the new party leader after two rounds of voting by lawmakers and rank members pending a successful election for Prime Minister. At the end of this month, she stands to become Japan's first female prime minister and will succeed current PM Ishiba. Miles, before we bring China into the conversation here, can you tell us a bit more about Ms. Takaichi and her platform and how likely is the LDP to hold the seat of Prime Minister with her and the race, given the other candidates that are running?
Miles Yu:
Ms. Sanae Takaichi is a very unique and rising star in Japanese politics. Most people say, “Oh, she would be the first female Japanese prime minister”. That's true. But also, what distinguished her from the rest of the crowd is that she has a very distinguished political stance. She's strictly following the line of former Prime Minister, Shigeru Ishiba, which is very strong on defense and very strong on China and very strong on US-Japan bilateral defense and security relationship. And domestically, she's also very tough. She is absolutely a staunch steward against illegal immigration in Japan. And she is also tough on crime. So in all aspects, she'll be regarded as a conservative and a nationalist, and she represents something you would say, ‘Make Japan Great Again’, that kind of a political line. So we'll see. And this is also in sharp contrast to Prime Minister Shigeru Ishiba’s cabinet, the one whose term is just about to end.
Ishiba cabinet is very ambiguous in many ways, and it was known as pro-China, even though I don't even know what that means because in Japan there's really no pro-China, pro-China experts or policy makers, but relatively soft shall we say. I think challenges of course facing Takaichi are also very, it is quite daunting, I would say. And the trade relationship with the United States is the one, and how to specifically implement the Ishiba-Kishida defense and security policy. And that's another issue that's basically what we're talking about, the Japanese have already abandoned its purely defensive posture toward China and post-World War II security arrangement. Now it's focused on developing counterstrike, even preemptive capabilities, in the Japanese defense system. That's going to be talking about money, that's going to talk about tax, and that's going to talk about coordination and with alliances. But I think Xi’s going to pursue continuing to pursue the Abe-Ishida line that is to strengthen US-Japan relationship and also, in the meantime, to strengthen Japan NATO relationship.
And also, Japan is going to lead the Asian pack of nations that were bullied by China. And that's very, very important. Finally, I think this package has one thing that's very, very pronounced that is she's very close to Taiwan, and she visited Taiwan many times, and she's very likely to continue the Abe line that whatever happens to Taiwan will happen to Japan, and whatever Taiwan is facing, so is Japan. So that kind of policy I think, is going to be very interesting and it's going to potentially change the entire dynamic of security and defense in the Asia Pacific.
Colin Tessier-Kay:
It's certainly reassuring here as far as the Indo-Pacific strategy is concerned. And of course, as with all regionally relevant elections, China has been carefully following these developments and has shown expected unease following the LDP's elections this past weekend. And to build off what you were saying, Miles, despite historical tensions, current Prime Minister Ishiba did make more concerted efforts to renormalize, I guess you could say, the China-Japan relationship with cautious strides, including meetings with then Premier Li Young and President Xi Jinping last year at the Apex Summit. So Miles, let's dive in here. What has been China's reaction to Ms. Takaichi’s selection? And you hinted a little bit about what we can expect in terms of the next iteration of China-Japan relations, should she win the general election, but what might that look like going forward from there?
Miles Yu:
I think China, I mean, this is actually quite ironic – China, I think, has the correct perspective on the Japanese leadership change. That is, China doesn't believe there are hawks, there are doves in the Japanese high-level political leadership level. They believe every one of them is hawk against China and Ms. Takaichi is openly, explicitly tough on China, but then everybody else, they're just in a nicer way to express the harsh line against China, Koizumi, for example. Another example is Ishiba himself, the current prime minister. He was known as somebody who is very dovish on China, but then, when you enter the office of Prime Minister, you have to deal with the real threat of China, and therefore, he turned to the center and right. So this is going to be the perspective from China. So they keep a watchful eye on Takaichi, however, and to see how she's going to handle. And China also has some leverage, too. And I think Takaichi is going to face a tough interlock, shall we say, across the Sea of Japan.
Colin Tessier-Kay:
Going beyond Ms. Takaichi, there are four other candidates in the running currently, some of whom are from the LDP as well. So to round out this topic for today, Miles, how does China view the other candidates that have declared for the ballot, and does Beijing have a preferred outcome in the upcoming general election?
Miles Yu:
Oh, I mean they would like to have Hayashi, Motegi, and the foreign minister to be in place because, at least in appearance, they sound very soft on China. Koizumi, of course, is a number two contender, and he was defeated by Takaichi. Kozumi is a strong former prime minister, and he's very articulate, but he's young and inexperienced, so that's one reason why he didn't win. Japanese politics is full of factional insight. It all depends on how well networked you are, to a larger degree, of course. So we'll see what will happen. Japanese politics is also very important because Japan is China's largest regional rival and Japan has enormous power to take initiative, even more so than the United States. You look at all the US policies in the Pacific, it is all initiated by Japan, the so-called free and open Pacific. That is the idea coming out of Prime Minister Abe. Quad, the regional security dialogue, shall we say, dialogue is not the alliance of Japan, the US, Australia, and India. That was the grandchild of Prime Minister Abe. So many of the things regarding regional security or initiatives by the Japanese. So I think they're going to play a much more positive and active role in this regard.
Colin Tessier-Kay:
Yeah, we'll stick with the election process as it unfolds here over the next few weeks. But turning to our final topic for today, Xi Jinping's purge campaign continues as the CCP recently replaced the head of its international department, Liu Jianchao. Following a two-month absence from the public eye, Liu Jianchao was tapped to be the likely next foreign minister, as far as some rumors have uncovered, but was detained back in July following an overseas trip and hasn't been seen or heard from since. So, Miles, walk us through what happened here. Who is Liu Jianchao, and what's significant about his dismissal from the party?
Miles Yu:
Liu Jianchao was a seasoned diplomat. First, he served in the Chinese Foreign Affairs Department ministry, the MFA for many years. At some point, he was a spokesperson, so a lot of foreign journalists knew him as such. He was also China's top diplomat, dispatched to some of the most sensitive and important countries, both prominently. In his own case, he was dispatched as ambassador to the Philippines and Indonesia, particularly when Indonesia emerged as the key Asian country in China’s diplomatic priorities. So he was there to take on pretty tough assignments. Before his downfall, he was the Minister of the International Liaison Department. This is a party organization, not sort of a semi-intelligence organization, semi liaison, mostly intelligence officially on paper, dealing with party to party, right? For example, the Chinese Communist Party and the North Korean Communist Party, and the Cuban Communist Party. But it is sort of a part of the united front, broadly defined effort.
And then he disappeared in late July and of course, now he's detained, and his position was replaced by somebody else. And this is very interesting because Liu Jianchao has been widely viewed as the foreign minister in waiting, that basically obviously would not happen. Foreign Minister Qin Gang was purged suddenly and disappeared, becoming a non-person. And that position was vacant. That position was sort of taken off on the side by the party bureau member Wang Yi, who was a former foreign minister, but now he's the kind of a foreign affairs czar within the Chinese party bureau. So, as I say on this program, Wang Yi is not a very nice figure in our conversations because basically, he's a very disgusting individual in my view.
So now that the position of Chinese foreign minister is gone. So it's vacant, Liu Jianchao. What was his reason for being purged? Very people know exactly. Corrosion, of course, is always the underlying charge, but nobody really believes that's the primary reason for any of the purged individuals, high-level senior communist party leaders. I think you can look at the trend. Xi Jinping regards himself as a genius of all things. Particularly, he wants to be viewed as a world leader. He wants to be viewed as the expert on international affairs, and that’s basically the problem, because if you are in charge of any aspect of foreign affairs, like Liu Jianchao himself or the defense minister, because Chinese defense minister is basically a ceremonial position to deal with international counterparts. So the real power of the Chinese military is not in the defense minister's hands, it's in the Chinese Central Military Commission. That's the CMC Xi Jinping himself is the chairman of that organization. So that's why you see the Chinese defense ministers, the Chinese foreign ministers, or disproportionately purged because those guys who are dealing with international affairs, that's basically my take on this whole issue of purging.
Colin Tessier-Kay:
Yeah, it's pretty clear that if you deal with any kind of foreign affairs within the CCP, you're almost damned if you do, damned if you don't, in the way that Xi Jinping could potentially frame any context of corruption. True or false. And to give a little bit more context, Liu frequently met foreign dignitaries in his role within the international department, and I think most recently in the UK, where he himself studied international relations at Oxford and is fluent in English as well. And some are calling this, like you mentioned, the most high-level diplomat to disappear since Foreign Minister Qin Gang back in 2023. So, to round us out here today, Miles, what does Liu’s dismissal say about the ongoing CCP purge campaign? Because it seems like Xi Jinping is really just trying to consolidate all authority within the foreign affairs wing of the CCP under himself, similar to the CMC, and to the extent that we know outside of Wang Yi, is there a current, he apparent to the role of foreign minister now that Liu is off the table?
Miles Yu:
I don't see anybody in that horizon, first of all, who wants to be in that position and is almost certain to be purged. And to add what you said about Liu Jianchao’s profile international arena, he went to the UK, and also he came to the United States. I remember he came to Washington, DC. All this engagement geniuses really love him. So they gave him another forum to talk in, in think tanks and in some other institutions, as if he's something. But the more he talked, the more in danger he is because Xi Jinping said, I'm supposed to give the directions to the world. I'm supposed to tell the international community what the US-China relationship is all about. So that's a problem. And you mentioned about the fact that he spoke fluent English, and that's a problem because look, the genius in Beijing, Xi Jinping, can't speak a word of any foreign language.
So that's a problem. So then your question about what does it mean, what is reflected is the fact that Xi Jinping lives in absolute paranoia like all dictators, and he's suspicious of anybody who's somebody who's capable, who's capable of taking any individual initiative, even the initiative to interpret Xi Jinping's thoughts, and not basically is taboo. So basically, what we want you to have here is sort of a policy rigidity, and where everybody is afraid of being purged, everybody's trying to figure out what does a great leader Xi Jinping really means. So you're basically talking about what this reflects, the reflection of the fact that China is a communist dictatorship with a theoretical ruler at the top. And that basically is what China is all about.
Colin Tessier-Kay:
Well, that's a great place to leave it off for our time this week. Thank you to our listeners for joining us again. And thank you, Miles, as always, for lending us your expert insight and analysis on these critical issues. Looking forward to next week's discussion.
Miles Yu:
Alright, see you next week, Colin.