Taiwan’s Presidential Elections are just over a week away. To say a lot is riding on the outcome would be putting it very mildly. The leading candidate in the race is William Lai Ching-te, who is also the current Vice President. William Lai represents the  Democratic Progressive Party which is center left when it comes to politics but which supports Taiwanese identity and is generally seen as the party most opposed to “reunification” with mainland China.

And that’s increasingly the only thing that matters in this race. China has been framing this election as a choice between war and peace:

Zhang Zhijun, head of China’s Association for Relations Across the Taiwan Strait, a quasi-official body that handles ties with Taiwan, said Taiwanese faced an important choice in the election.

“The two elections coming up in the Taiwan region are important choices between the prospects for peace and war, prosperity and decline,” said Zhang, who headed the central government’s Taiwan Affairs Office from 2013 to 2018.

Zhang not only said Taiwan needed to choose the “right side of history” which in this case means cozying up to China. Electing William Lai would be seen as a refusal to do that and potentially the moment China decides negotiations are insufficient to get what it wants.

Xi jinping has a lot riding on upcoming elections in Taiwan. Those polls will do more than choose the island’s leaders for the next four years. The results may clarify whether politics can still resolve the “Taiwan question”, or whether only force can compel the island to submit to Chinese Communist Party rule.

In an address on December 31st, Mr Xi called Taiwan’s unification with China “a historical inevitability”. Logically, the party chief would rather fulfil that promise without betting his regime on an all-out invasion of Taiwan, which would risk war with America. A safer option involves some mix of blandishments and strangulation, both economic and military, leading to capitulation by Taiwan’s political and business elites. Peace has long rested on America deterring Chinese aggression, and on China deterring Taiwan from declaring independence. It also rests on party bosses being able to plausibly maintain that such a negotiated settlement is possible, not least to China’s people, schooled to believe that most in Taiwan long to return to the motherland…

Victory for Mr Lai would mark the dpp’s third presidential win in a row. Chinese officials and scholars have issued warnings—notably to counterparts in America, Taiwan’s superpower protector—that they have no trust in Mr Lai, whom they call a dangerous, lifelong campaigner for Taiwanese independence. According to Chinese warnings, there would be “no wait and see” period after a Lai victory. To deter a President-elect Lai from radical moves, the People’s Liberation Army can be expected to stage exercises that threaten Taiwan in new ways, it is said. These would aim to show resolve to the Chinese public and to teach the island’s voters that they have rejected the path of peace. New provocations could include unmanned Chinese aircraft flying over Taiwan, or China’s navy or coastguard finding a pretext to search island-bound ships. China recently reimposed tariffs on some Taiwanese goods, arguing that the current dpp-led government had trampled commitments needed to preserve a cross-strait trade deal, the Economic Co-operation Framework Agreement (ecfa). Victory for Mr Lai could see the ecfa suspended in its entirety.

Heightening all of this is the fact that China’s economy hasn’t been doing very well. A nationalist distraction would probably be welcome about now.

Confidence in the economic recovery among households, businesses, and investors has been deteriorating, as reflected in China’s stock market. The iShares MSCI China exchange-traded fund (ticker: MCHI) is down 2% so far this year, after sliding 11% in 2023. The S&P 500 soared 24% last year, in comparison.

Bargain-hunters who were hoping Beijing had learned from past missteps—such as its harsh Covid-19 restrictions and crackdowns on the internet sector—were disappointed in late December when a regulatory agency proposed restrictions on online gaming. The draft regulation sent Chinese stocks careening and blew apart the notion that the government crackdown on the internet sector was near an end…

“This latest regulatory misstep undermined the signals that other parts of the government had been trying to send, showing that the supposed pivot toward economic growth and away from ideology and social control remains at best incomplete,” writes Gavekal Research’s Andrew Batson in a note to clients. Instead, Batson notes Chinese President Xi Jinping “has given extremely clear and consistent instructions over many years that economic growth needs to be downgraded in importance relative to other political priorities.

China’s new national security rules are forcing foreign companies to take some expensive measures to comply.

One of Wall Street’s biggest banks stopped briefing the head of its subsidiary in mainland China on sensitive company strategy, so the government can’t eavesdrop or demand details later.

At nearby outposts for other US and European banks, executives are spending tens of millions of dollars to locally house financial data and set up on-site internal controls. Some units are even looking at reshaping balance sheets to stand separate from parent companies.

Those are just some of the many behind-the-scenes machinations taking place inside the Chinese arms of global financial firms as they try to navigate heightened tensions between the world’s two largest economies, as well as new rules in the name of national security. JPMorgan Chase & Co., Morgan Stanley and HSBC Holdings Plc are among a long list of banking behemoths that have deep ties and long histories in China.

What Xi Jinping can’t afford in the midst of these other problems is to look weak in the face of Taiwanese defiance. Given what’s at stake, China isn’t leaving the outcome of the election entirely to the people. After all, democracy is not something that communist China values. They’ve been gradually pulling economic levers to hurt the DPP:

In August last year, China suspended imports of Taiwan-grown mangoes, again citing pests. It was a political move, coming days after Taiwan’s Vice President Lai Ching-te—now the presidential front runner—made brief stops in New York and San Francisco.

China claimed the transits violated the U.S.’s “one China” policy, under which Washington and Taipei maintain no formal diplomatic relations. The White House disagreed.

In addition to the stick, China is also offering carrots to pro-China officials.

Prosecutors in Taiwan are cracking down on local officials suspected of accepting bribes in the form of paid visits to China, typically involving all-expenses-paid guided tours, accommodation and meals—offered in exchange for their support for pro-Beijing policies at home.

Taiwanese media reported last month that at least eight local officials in the central city of Taichung had been detained and their phones and other evidence seized. Authorities said accepting China’s “hospitality” violated the Anti-Infiltration Act of 2019, introduced to “prevent external forces from infiltrating Taiwan’s democracy.”

China is also reportedly putting pressure on Taiwanese business people living in the mainland, letting them know that if they want to keep doing business they should encourage people to support the pro-China KMT party.

Officially, William Lai hasn’t called for independence. China has made it clear many times that such a call would be considered an act of war. But he is the most pro-independence candidate in the race so if he wins that could represent a last straw for the mainland. Their efforts to prevent his election may not be enough. He’s has been leading in the polls for months. If there’s a Chinese equivalent of an October surprise, we may see it in the next few days.