Xi’s Military Purges and China’s Geopolitical Stability: Assessing the Impact on Defense Investments and Global Risk Premiums

The geopolitical landscape in 2025 is marked by a paradox: China’s military modernization and internal purges under President Xi Jinping have simultaneously reinforced and destabilized its strategic position. While the official 2025 defense budget of $246 billion—a 7.2% increase from 2024—signals a commitment to technological advancement and readiness for contingencies like a Taiwan reunification, the leadership instability caused by Xi’s purges raises critical questions about the effectiveness of these investments. This analysis explores how the interplay of purges, budget reallocations, and geopolitical tensions is reshaping global risk premiums and investor behavior.

Leadership Instability and Defense Strategy

Xi’s military purges, which removed 126 senior officers between 2023 and 2025, have been framed as a campaign to eradicate corruption and enforce ideological conformity. However, these actions have also exposed systemic vulnerabilities within the People’s Liberation Army (PLA). According to a report by Foreign Policy, the removal of figures like Admiral Miao Hua and Defense Minister Li Shangfu has created a “crisis of confidence” in the military’s leadership structure, potentially undermining operational coherence [1]. This instability has coincided with a strategic shift in defense spending: the 2025 budget emphasizes reconnaissance systems, joint strike capabilities, and cyber warfare, reflecting a pivot toward high-tech, asymmetric advantages over traditional force expansion [2].

The purges appear to have accelerated resource reallocation toward projects aligned with Xi’s 2049 national rejuvenation agenda. For instance, China’s development of roll-on/roll-off (RO-RO) ships and civilian-military mobilization systems—key enablers for a potential Taiwan operation—has received significant funding [3]. Yet, the abrupt demotion of Qin Gang, Xi’s handpicked foreign minister, and the purges of trusted allies suggest a “Stalinist logic” of eliminating even loyal cadres to consolidate power [4]. This unpredictability complicates long-term strategic planning, as seen in the May 2025 India-Pakistan conflict, where Chinese-supplied technology performed well but highlighted gaps in PLA readiness [5].

Geopolitical Risks and Global Risk Premiums

The ripple effects of China’s internal instability are evident in global financial markets. As stated by the International Institute for Strategic Studies (IISS), the U.S. defense budget surged to $1 trillion in 2025, driven by fears of Chinese hypersonic missile advancements and Taiwan-related tensions [6]. This escalation has elevated geopolitical risk premiums, with investors increasingly favoring safe-haven assets like gold, which gained 27% in 2024 alone [7]. The U.S. judicial rulings questioning Trump-era tariffs have further muddied the trade landscape, emboldening Beijing to delay concessions while deepening economic fragmentation [8].

China’s alignment with Russia and Pakistan, as demonstrated at the 2025 SCO summit, has also contributed to a multipolar order that challenges Western dominance. However, this “axis of autocrats” is fragile: India’s participation in the grouping remains transactional, and China’s domestic economic struggles—low growth, youth unemployment, and a shrinking labor force—threaten to undermine its global ambitions [9]. The resulting uncertainty has pushed investors to hedge against volatility in China-exposed sectors, with private capital markets favoring resilient industries like defense tech and energy [10].

Investor Implications and Strategic Recommendations

For investors, the key takeaway is the need to balance exposure to China’s long-term growth potential with the short-term risks of leadership instability. The defense sector, while benefiting from budget increases, faces headwinds from PLA inefficiencies and geopolitical miscalculations. Similarly, global risk premiums are likely to remain elevated as the U.S.-China rivalry intensifies, with tariffs and technological decoupling acting as persistent stressors.

A data visualization query could help illustrate these dynamics:

Conclusion

Xi’s military purges and defense investments reflect a dual-edged strategy: consolidating domestic control while projecting power abroad. However, the instability they generate—both within the PLA and in global markets—underscores the fragility of China’s geopolitical ambitions. For investors, the path forward requires vigilance, diversification, and a nuanced understanding of how leadership dynamics in Beijing will shape the next phase of the U.S.-China rivalry.

Source:
[1] Foreign Policy, "Xi Jinping's Terrible, Horrible, No Good Year" [https://foreignpolicy.com/2025/01/02/xi-jinping-china-trump-tariffs-economic-crisis/]
[2] ORF, "Chinese Defence Budget 2025: Lower Allocation, Bigger Impact" [https://www.orfonline.org/expert-speak/chinese-defence-budget-2025-lower-allocation-bigger-impact]
[3] FPRI, "Forceful Taiwan Reunification: China's Targeted Military and Civilian-Military Measures" [https://www.fpri.org/article/2025/03/forceful-taiwan-reunification-chinas-targeted-military-and-civilian-military-measures/]
[4] Asian Lite, "Leadership Instability and Strategic Challenges under Xi" [https://asianlite.com/2025/columns/leadership-instability-and-strategic-challenges-under-xi/]
[5] Belfer Center, "China's Role in the May 2025 India-Pakistan Conflict" [https://www.belfercenter.org/research-analysis/chinas-role-may-2025-india-pakistan-conflict-strategic-and-global-implications]
[6] IISS, "Global Defence Spending Soars to New High" [https://www.iiss.org/online-analysis/military-balance/2025/02/global-defence-spending-soars-to-new-high/]
[7] Scribd, "In Gold We Trust Report 2025" [https://www.scribd.com/document/864490427/In-Gold-We-Trust-Report-2025-English]
[8] Congress.gov, "Congressional Record Vol. 170, No. 108" [https://www.congress.gov/congressional-record/volume-170/issue-108/house-section/article/H4354-1]
[9] Deloitte, "China's Economic and Industry Outlook for 2025" [https://www.deloitte.com/cn/en/services/consulting/perspectives/deloitte-research-issue-95.html]
[10] Private Capital Solutions, "The Macroeconomic Backdrop to the Private Capital Market" [https://www.privatecapitalsolutions.com/insights/the-macroeconomic-backdrop-to-the-private-capital-market-june-2025]