CIA changes its view on China

Christopher Joye

Coolabah Capital

It’s worth further reflecting on some of the bigger macro risks that loom ahead. Let’s start with the recent remarks of the CIA Director, William J. Burns, on China and Taiwan, which seem to represent something of a shift in the CIA’s historically sanguine assessments.

Those who claim to have knowledge of the CIA’s thinking on the subject were asserting last year that the intelligence agency imputed a very low probability to prospect of China trying to take Taiwan by force, and this then triggering a kinetic conflict between the two superpowers.

By way of contrast, senior China strategists in the US military’s Indo-Pacific command put a much higher, circa 70 per cent likelihood on major power conflict erupting over Taiwan in the next seven or so years.

In a fireside chat with the Aspen Security Forum, CIA chief Burns seemed to have hawked-up on Taiwan, stating that he “wouldn't underestimate President Xi's determination to assert China's control… over Taiwan”.

“I think he's determined to ensure that his military has the capability to undertake such an action should he move in that direction,” Burns continued. “I think the risks of that become higher, it seems to us, the further into this decade that you get.”

He added that the key lesson President Xi has drawn from the Russia-Ukraine war is that “you don't achieve quick, decisive victories with underwhelming force”. “You’ve got to amass overwhelming force if you're going to contemplate that in the future.”

The core signal here is that the CIA has shifted its position, and is converging towards a much more hawkish perspective on China conflict risks, which was inevitable given President Xi’s choices in recent times.

Our own statistical modelling based on 160 years of conflict, economic, political, social and other data, which we recently updated to 2021, suggests there is a circa 3-in-4 likelihood of a serious military conflict between China and Taiwan over the next decade. The probability is 1-in-2 over the next 5 years. This comports with the US military’s judgement, but is more hawkish than the CIA.

Our modelling further implies that there is a 1-in-2 chance of a kinetic conflict between the US and China in the next 10 years, which declines to just over a 1-in-3 prospect in the next 5 years.

In contrast to the views of the CIA, the US military, and our own quant models, our subjective assessment is that conflict probabilities are tilted towards the short-term, and particularly the period while Biden (or any Democrat successor) remains in power, rather than later in the decade.

The military technology gap between the US and China is rapidly growing again after shrinking for the last 30 years, and the more assertive Republican reaction function raises the likelihood of US resistance. Crucially, President Xi knows this. 

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Christopher Joye
Portfolio Manager & Chief Investment Officer
Coolabah Capital

Chris co-founded Coolabah in 2011, which today runs $7 billion with a team of 33 executives focussed on generating credit alpha from mispricings across fixed-income markets. In 2019, Chris was selected as one of FE fundinfo’s Top 10 “Alpha...

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