Dragoman Digest

China’s military purge exposes the limits of Xi’s anti-corruption drive

Campaigns have shifted from predecessors’ allies to Xi’s own handpicked generals

China’s military leadership faces uncharted territory as President Xi Jinping’s anti-corruption campaign targets the generals he personally selected to reform the People’s Liberation Army (PLA). This is unlike previous efforts, which had a particular focus on the appointees of Jiang Zemin and other predecessors. It is widely speculated that General He Weidong, the PLA’s second-highest officer, was recently ensnared in Xi’s anti-corruption probe. He would be the third Central Military Commission (CMC) member removed since 2022. At least 20 senior officers have been removed in two years.

The persistence of graft despite over a decade of Xi’s rule stems from structural factors inherent to China’s political system and the PLA’s unique history. When Deng Xiaoping slashed military budgets in 1984, he allowed the PLA to go into business to compensate for declining revenue. This spawned “PLA Inc.” – a sprawling empire of 20,000 companies by 1993. Though Jiang Zemin formally prohibited the PLA from engaging in business ventures in 1998, many firms that were created in this era endure. Most of Xi’s recent high-profile anti-corruption efforts focus on procurement and the “iron triangle” of conflicting interests – the cozy relationships between defence firms, military officials, and the government. Major arms manufacturers including Norinco and China Aerospace corporations have been implicated in recent scandals.

The failure to definitively lance the boil of corruption has strategic consequences beyond domestic politics. Defence Minister Dong Jun’s expected absence from Singapore’s Shangri-La Dialogue – coming amid the ongoing purges and speculation about investigations involving Dong himself – weakens Beijing’s efforts to portray itself as a reliable regional partner against US “bullying”. At the same time, China is escalating military pressure against Taiwan. April’s “Strait Thunder 2025” exercises advanced beyond traditional invasion rehearsals to practise naval blockades and bombing critical infrastructure. Xi’s lack of trust in his own senior generals has the real potential to damage China’s operational readiness and planning. As one analyst noted regarding Xi’s dilemma: “If you have someone like [General He] who you’ve lost confidence in... then who can you trust?”

China’s property crisis portends a generational economic fracture

Youth abandonment of home ownership threatens broader economic stability

China’s property market faces a looming generational exodus. Youth unemployment of at least 16.5 percent (estimates have suggested the figure has approached 40 percent in recent years) is combining with unaffordable prices to permanently drive young buyers from the market. While prices nationwide have fallen 30 percent since 2021, major urban centres remain prohibitively expensive. In Beijing prices sit at 32 times average salaries – down from 44 times in 2019 but still beyond the reach of most. The traditional pathway from employment to homeownership to marriage has fundamentally broken. This demographic shift – with the key 25-to-34-year-old buyer cohort shrinking – represents a structural rather than cyclical challenge which will be difficult for policy interventions to reverse.

The government’s response has created new distortions. Beijing has successfully prevented major developers from completely collapsing in order to avoid financial contagion. Yet this keeps failed companies like Evergrande (with 2.39 trillion yuan/US$330 billion in liabilities) artificially alive and selling properties. The result has been inventory ballooning to five times annual sales, combined with price controls which have prevented the market from definitively bottoming out. Developer stocks have collapsed 80 percent below 2019 peaks, while international creditors have recovered just 0.6 percent of their capital in subsequent debt restructurings. Desperate sales tactics reveal how far the market has fallen. Developers have accepted down payments in the form of wheat, and estate agents have even posed as romantic partners.

The generational divide also has distinct geographic patterns. First-tier cities, where young professionals are able to find high quality employment, have shown more resilience. Shanghai recently reported 45 percent year-on-year growth in pre-owned home sales. Yet even these bright spots mask deeper problems and market shifts. Sales have been concentrated in smaller pre-owned units, while new developments for more aspirational buyers have stagnated. The government’s financial engineering – cutting mortgage rates and reducing down payments to 15 percent – can only go so far in enticing young buyers. With up to 70 percent of Chinese household wealth tied to real estate, the youth exodus further diminishes any hope that property will reprise its role as a major growth driver. Even inherited assets cannot substitute for a generation abandoning homeownership, leaving China trapped between inflated prices that constrain consumption and the risk of corrections destroying household wealth.

South Korean battery storage companies eye opportunity to regain lost market share

Unpredictable tariffs may not provide an enduring basis for competition with China

Increasing US tariffs on China and growing security scrutiny may present an opportunity for South Korea to regain market share in battery energy storage systems (BESS) in the US. South Korean firms were early leaders in the BESS market, once dominating the global supply of Nickel Manganese Cobalt (NMC) based BESS. Korean market share eroded as Chinese manufacturers, especially CATL and BYD, gained ground by producing cheaper and increasingly efficient Lithium Iron Phosphate (LFP) batteries. China’s ascent received a further fillip through policy-driven domestic demand. Until recently, most provinces required renewable energy projects to be paired with energy storage systems, creating huge internal demand. China now accounts for nearly 90 percent of global BESS production capacity. Chinese companies supply around 80 percent of demand in the US supply and 75 percent in the EU.

Korean companies are now trying to leverage geopolitical dynamics to regain a foothold in the US market. Chinese battery products temporarily faced tariffs of 156 percent under President Trump’s highest tariff schedule. The 90-day tariff pause initiated on May 12 has lowered this figure to 41 percent. Korean companies, such as LG Energy Solutions, have responded by repurposing EV production lines to build LFP-based BESS capacity.

Tariffs alone are unlikely to provide a basis for enduring competitiveness. Some industry experts have argued that China’s cost advantages are so great that some companies could conceivably absorb tariffs of 150 percent whilst still turning a profit. Korean companies are also still in the process of mastering LFP production. Security concerns may ultimately provide a more enduring barrier to Chinese BESS. In December 2024, CATL batteries were disconnected from a Marine Corps base in North Carolina over fears of cyber vulnerabilities and the potential for remote access. Although the discourse on the security threats posed by BESS is relatively nascent in policymaking circles, further bans are possible. Companies like Duke are already pre-emptively phasing out CATL BESS products in favour of those sourced from the US or allied nations.

The EU struggles to retain Active Pharmaceutical Ingredients (API) production

Major API producers are moving production to China to remain competitive

The EU is facing headwinds in its capacity to produce cost competitive Active Pharmaceutical Ingredients (APIs). APIs are the biologically active components in drugs which catalyse therapeutic effects. Presently, 80 percent of APIs used within the EU are sourced from China, which has become an increasingly dominant producer in the API market. In the mid-1990s, 90 percent of all APIs were made in the US, EU and Japan. Production has gradually been offshored, in part to avoid the significant chemical pollution entailed in the manufacturing process. China’s looser environmental standards, lower production costs, and cheaper raw materials have made it – alongside India – an ideal location for API production.

Danish company Xellia Pharmaceuticals, the EU’s last major manufacturer of APIs for vital antibiotics, provides a stark illustration of the EU’s dwindling capacity to produce APIs. In early May, Xellia opted to close its largest factory in Copenhagen and shift production to China gradually over the next decade. Xellia’s CEO put the choice facing the EU in clear terms. To support local production, the EU must either subsidise API production or allow higher costs of production to be passed onto consumers.

The EU is now grappling with how to bolster domestic production. In March, the EU Commission proposed the Critical Medicine Act, aiming to increase EU production of over 200 medicines from antibiotics to painkillers. The Act would allow EU member states to make joint bulk purchases that favour EU-made products, allowing European manufacturers larger economies of scale.

World’s largest Liquefied Natural Gas (LNG) carrier fleet operator switches procurement from China to South Korea

Mitsui O.S.K’s “wait-and-see” strategy is a tacit recognition of the implausibility of switching to US-made carriers – despite Trump administration ambitions

Japanese shipping giant Mitsui O.S.K. plans to shift new orders of liquified natural gas (LNG) carriers from Chinese to South Korean manufacturers. Mitsui O.S.K. operates the world’s largest LNG carrier fleet, with 97 vessels out of an estimated 641 globally in 2024. Media coverage has focused on recently imposed US port-entry tariffs as the reason for Mitsui’s move.  On 17 April, the United States Trade Representative, a key figure in President Trump’s Cabinet, announced a series of wide-ranging duties on China-related ships entering US ports. However, LNG carriers have secured an exclusion from these duties.

Instead, the US Trade Representative has imposed a schedule of domestic shipbuilding requirements on the US LNG export industry. Beginning in 2030, one percent of all US LNG exports must be exported in a US-built vessel, ramping up to 15 percent in 2047. Industry spokespeople have called the schedule “impossible”, noting that US shipyards cannot turn out vessels fast enough to meet the 2030 deadline. As of 2023, the US occupied approximately 0.2% of global shipbuilding market share. The decline of US shipyards is reflected in their average annual production of large oceangoing vessels, which in 2016 was less than 12% of its 1953 output.

The switch from Chinese-made to South Korean ships will not directly mitigate Mitsui’s exposure to US LNG-industry regulations, which focus on boosting US manufacturing rather than excluding Chinese ships. Instead, Mitsui’s self-described “wait-and-see stance” appears to be betting that the US will eventually settle on a strategy of diluting China’s growing shipbuilding market share in strategic sectors, rather than seeking to wind back the clock on US shipbuilding. For South Korea, the April 17 rulings represent a significant economic and political opportunity. Already the global leader in LNG carrier production, diversification from China may elevate South Korea to partner of choice for the US and its allies.