Gone Too Far
The problem in defense is how far you can go without destroying from within what you are trying to defend from without – Dwight D. Eisenhower
China is a feudal society much like it was at the end of the Qing dynasty (1911). Instead of aristocrats and land owners, Red princelings are the nobility today, remnants of the upper echelon of Mao’s victorious forces in 1948. The fortunate ones ceased being comrades long ago, having morphed into trust fund babies following Deng’s opening of China to market forces.
Common folk with talent and energy thrived for a time during the Jiang Zemin and Hu Jintao years. Jiang’s reign lasted for 13 years during which his faction accumulated enormous amounts of power and wealth. When he was forced to step down in 2002, he retained significant influence in the PLA, controlling the top of each branch with his own people.
Hu Jintao is a technocrat and not a Red princeling and he ruled with significantly less power than his predecessor because his people didn’t control the Central Military Commission, which is the committee of generals that manage the PLA. Without control of the People’s Liberation Army, a General Secretary’s impact is severely limited.
When Hu’s 10 years were up in 2012, the various factions within the CCP met to choose a new General Secretary, with a secondary goal of limiting the power of the Jiang Zemin faction. The compromise was a Red princeling of only modest talents named Xi Jinping. He was meant to be a placeholder loosely allied with Hu Jintao to continue weakening the Jiang faction’s stranglehold on the PLA and financial system.
Meet the new boss, same as the old boss – Pete Townsend (The Who)
Before his ascendancy, Xi was best known for keeping a low profile and surviving the periodic turmoil when playing in a political quagmire. He was relatively unknown and initially taken for granted. Once in office, he set out to purge the Jiang faction out of the PLA with the help of the other CCP factions.
Along the way, he quietly built his own faction, amassing wealth and influence by placing his own people in important roles. The result was that Xi became the new monster of the CCP, elevating himself to the level of Mao, which is precisely what the factions within the CCP did not want.
Once he secured sufficient power, Xi began acting like a despot. He had Hu Jintao forcefully removed from a Politburo meeting and is widely believed to have ordered the death of Li Keqiang, who passed under mysterious circumstances. Xi also attempted to staff the PLA with his own generals, which started the Stalin-like purge of PLA leadership in 2019.
Xi reportedly experienced an illness, possibly a stroke, during the summer of 2025 and this opened the door for party elders such as Hu Jintao and Wen Jiabao to step in. While recovering, they apparently joined forces with General Zhang Youxia to reduce Xi’s power to that of a placeholder instead of forcing him out. Their goal was to maintain the illusion of CCP unity to a nation that is being ravaged by an economic depression and demographic collapse. Their timidity may have destroyed the Middle Kingdom.
Chaos
Civilization begins with order, grows with liberty and dies with chaos – Will Durant
China’s Central Military Commission is supposed to have 5 members under the party’s General Secretary but thanks to political infighting and possibly assassination, there is only one member remaining. Vice Chairmen Zhang Youxia and Liu Zhengli were either arrested or assassinated on January 20th; their fates are still unclear.
Li Shangfu and Miao Hua, both close to Xi, were arrested over the past year. This leaves Zhang Shengmin as the sole remaining member of the CMC. In effect, the heads of China’s military have been removed. Over the past few years, roughly 30 full generals have been purged for various reasons. Joe Stalin would be impressed.
This would be chaotic in the US or Europe but it may prove devastating in China because the PLA isn’t homogenous. Instead, each regional army group seems to have its own political affiliations and loyalties. Zhang Youxia was extremely well-respected in the army, so much so, none of the regional armies have openly supported Xi’s decision to remove the general.
Xi is believed to control the nation’s intelligence and police apparatus but not the armed forces. If he is unable to consolidate power over the next few weeks, things could get ugly in China. Chaos has the potential to produce regionalism in reaction to the power vacuum in Beijing. In its ancient history, China has rarely been united as one nation. In more recent history, the Qing dynasty lost Manchuria to the Russians in 1860, who lost it to the Japanese in 1931, and was only returned to China in 1949.
Impact
Success breeds complacency. Complacency breeds failure. Only the paranoid survive – Andy Grove
The US has been exceedingly complacent for 30 years and now a significant amount of the global supply chain circulates through China. Until January 20th, Chinese party elders and the capable general, Zhang Youxia, kept things largely under control. Now, we have extreme uncertainty thanks to the actions of a highly incapable Mao acolyte.
It's possible that things settle down in the next couple of months but it’s also possible that the whole country goes up in flames. The economy has been destroyed for most citizens who lived through the devastating policies of Xi.
Will the CCP fall? Will civil war develop? Will Xi succeed in consolidating power and making himself emperor? Will Xi attempt external military action to divert domestic attention from his failed policies?
The only good news is that China has historically been run by a cadre of local administrators, whether they are governed by emperor, president, or general secretary. This tradition promises a modicum of stability at the local level.
But if China descends into chaos, it will have a profound negative impact on the global economy. The global banking system would book enormous losses and given the delicate nature of global finance, capital losses could create a domino effect in counter-parties. I see little concern for this possibility in the media.
Additionally, there is a secondary impact. Globalism can’t survive without China. Europe and Canada would lose the critical counter-weight to US hegemony. Central bankers would lose the deflationary impetus of Chinese exports, ending their cover for money supply crimes. Worse, if China becomes a massive version of North Korea, the world would be desperate to be protected by the US military.
Conclusion
Ambition is the last refuge of the failure – Oscar Wilde
Whether he succeeds at consolidating power or not, I already consider Xi Jinping to be a monumental failure, perhaps worse than Mao. He’s the very definition of ambition without talent and the Chinese people are suffering under his leadership. Xi inherited an economy on weak footing, yet respected around the globe and managed to make a difficult situation 100X worse while alienating much of the world.
This is the man who allowed Covid to spread to the world, locked down his own country with disastrous consequences, and proclaimed a goal to take Taiwan by force in 2027. Zhang Youxia was a stable force on the CMC to counter Xi’s ambitions and now he’s gone, either assassinated or jailed.
The spectrum of possibilities spans no impact to supply chain disruptions to global war and it’s impossible to apply probabilities because China is opaque. This isn’t a risk that can be ameliorated by diplomacy or a deal.
Adding this risk to a weakening US economy, problems in private credit in the US, a deteriorating Western Europe, and continued warfare in Ukraine and possibly Iran, we’re in quite a fix as investors. Quant models can’t possibly anticipate this level of risk; there are no historical equivalents to draw from.
If we get chaos, money will flow to the US dollar and precious metals. Interest rates will fall around the world as supply chains seize.
Xi Jinping has gone one step too far by eliminating Zhang Youxia and Liu Zhengli. The Chinese people already hate him and now, the Chinese elite can’t trust him.
If you’re interested in learning more, visit us at https://geovestadvisors.com/ and contact Paul Hurley.
Philip M. Byrne, CFA