Yes it looks like a trap for Xi, and in many ways he's already fallen for it. These are just rumors -- rumors that put war back in the minds of anyone with money. Of course everyone with a brain and a wallet wants to preserve the status quo. The US, in provoking such a strong CCP response at just rumors, has sent a clear message to people outside China -- "first Trump, now Biden. You can't control the US president. Maybe your investments in China are riskier than you think" -- and a clear message to certain people inside China -- "you may be rich and think you're as powerful as Liu He, but you are not in control of the party. Stand back and watch as the US threatens your and your country's economic security. How powerful are you really?" All this accomplished with nothing more than rumors. Not to mention the lower-order effect of signalling solidarity with the EU, who has also been committing high-level visits there recently. China's wolf warrior diplomacy and support for Russia has sent unfavorability ratings soaring in the EU, so the rumors are also in play for the EU population. As you mentioned Bill, this does reinforce the "Taiwan may be the next Ukraine" narrative. Is it a coincidence that this rumor broke in the Financial Times? 

What else can the US get if it follows through on these rumors? The carrot power of the United States is its economy and market power (as opposed to its giant military stick): "If you want access to our markets, then you have to play by our rules." The US held this line for Russia. Now it's trying to hold this line for China. The credibility of American power rests on the credibility of this statement. The CCP explicitly challenges this framework. They argue that the West is too weak to uphold it. Salami-slicing the Taiwan issue, or rather the US putting pressure on China via Taiwan, is a message back to China saying "we're not as weak as you think." Pelosi visiting Taiwan would force the CCP to choose: do you want Taiwan or do you want US market access? The more the CCP goes for Taiwan, the less secure their access to US markets. Just threatening Pelosi over Taiwan has forced multinationals to reconsider investment plans, or at the very least consider contingency plans to exit China. If the CCP actually acts on those threats, then foreign direct investment in China and Chinese access to US markets winnows even further, potentially dramatically. Pelosi visiting Taiwan would be an incremental increase in pressure and is America trying to have its cake and eat it too by forcing a slow decoupling. 

What does the CCP get out of this? A strong response might give the Chinese public confidence in their military strength and reinforce a belligerent nationalism with Xi Jinping as its standard-bearer. The CCP might respond more forcefully than previous Taiwan straits crises to tangibly demonstrate China's growth in power and to shore up Xi's legitimacy. It would stave off doubts around the efficacy of Xi Jinping's aggressive foreign policy. Their words today are playing to this end. It may help set the ground for a war to take Taiwan by force.

What are the risks to the CCP? The risks vary with the intensity of the response. The spectrum starts from nothing -- just suppress news of the visit -- and goes all the way to international condemnation and isolation, threatening economic collapse, mass unrest, and resentment of CCP rule. The common person cares first and foremost about economic security and prosperity. Zero-covid has reduced consumption so much that the economy is leaning on exports and infrastructure spending to stave off financial collapse. To keep things humming, China's governments and businesses take on more debt, expand state-run enterprises, and funnel money into projects with little hope of getting a positive ROI in the long-run. Foreign investment is key to stabilization. Jeopardizing the country's trade relationship with both the US and the EU at this time is like playing with fire. No doubt this is why the US is putting pressure on China at this moment.

What are the risks to the US? Maybe a recession if the decoupling goes faster than expected. Unfortunately the real risks are almost all for Taiwan to bear. It's possible that Pelosi may be killed, but cynically speaking that would also play directly into the US strategy of isolating China economically and diplomatically (and for very low cost to boot). No doubt Pelosi knows this.

Overall it looks like a trap to me. It's hard for me to see how the benefit is worth the cost for China, which makes me wonder if it's actually for Xi's faction's benefit and not for the CCP's or China's. I don't think I'm saying anything here that isn't being said by US and CCP officials themselves. The deliberate ambiguity on part of the Biden administration is probably driving Chinese planners up the wall and is brilliant. It's significantly easier to solve a known, concrete problem. Forcing intense deliberation on an ill-defined issue with dramatic tradeoffs that concern the hardest topics for China is a great way to sow dissent among CCP ranks and force competing views out into the open -- views that concern issues so deep that minds will not be easily changed. What follows fundamental disagreements in dictatorships? Usually a purge or a revolt. In either case, instability and weakness.