The world is trapped in Red China’s Matrix; Zheng Xiaosong’s death and the CCP factional struggle

China Week in Review
Week of Oct. 15, 2018

China and the world

• The United States steps up economic and military pressures on the People’s Republic of China, a strong counter to the regime’s recent provocations (see the near-collision between a U.S. and PLA ship in the South China Sea).
• Various developments concerning North Korea last week suggest that the denuclearization process is progressing in a positive direction. There is a good chance that the U.S. and North Korea would make a declaration to end the Korean War before the year is out.

Oct. 16:

• U.S. Secretary of Defence James Mattis told reporters that the U.S. is “highly concerned” about China’s continued militarization of the South China Sea and cases of PRC predatory economic behavior. Mattis also noted that America is looking for fairness and reciprocity in the relationship with China, and that the U.S. is “not out to contain China.

Oct. 17:

• The White House announces that it will start a year-long process to leave the Universal Postal Union. The move is aimed at countries, and particularly China, that take advantage of the foreign postal services to send cheap shipments to the United States. Currently, the system allows for small packages arriving in America from China to receive a 40 to 70 percent discount on shipping, which costs the U.S. $300 million annually.
• U.S. President Donald Trump nominates ex-Air Force general David Stilwell to be an Assistant Secretary of State for East Asian and Pacific Affairs.
• According to Korean newspaper Dong-a Ilbo, executives from food and energy multinationals held meetings with North Korea on Oct. 16. The Dong-a Ilbo added that the DPRK is anticipating an easing of sanctions and influx of investments in the future.

Oct. 18:

• U.S. Defense Secretary Mattis meets with his Chinese counterpart Wei Fenghe in Singapore. Neither side issued an official statement on the meeting.
• Speaking to reporters about PRC claims of U.S. aggression, Mattis said in reference to a recent near-collision incident: “When the Chinese ships are putting bumpers over the side … You don’t do that when you’re out in the middle of the ocean, unless you’re intending to run into something.”

Oct. 19:

• U.S. security agencies (ODNI, DOJ, FBI and DHS) issue a joint statement on combating foreign influence in
• U.S. elections. China is one of three countries named as running “ongoing campaigns” to “undermine confidence in democratic institutions and influence public sentiment and government policies.”
• U.S. Secretary of State Mike Pompeo wants Panama against doing business with the PRC. “The importance isn’t that China is out competing in the world. We welcome that. It’s when state-owned enterprises show up in a way that is clearly not transparent, clearly not market-driven and designed not to benefit the people of Panama, but rather to benefit the Chinese government,” he said. “Those are the kind of things we think are both inappropriate and not good for the people of Panama or any other country where China is engaged in this kind of predatory economic activity.”
• Vigilant Ace, an annual aviation exercise between the U.S. and South Korea in December, will be suspended to “give the diplomatic process every opportunity to continue,” according to chief Pentagon spokeswoman Dana White

Oct. 20:

• The U.S. Navy is considering sailing warships through the Strait of Taiwan, according to the Wall Street Journal and Reuters.

Sino-U.S. trade war

• The U.S. will not completely close doors on trade negotiations with China, provided the PRC shows that it is willing to take concrete action to reform its abuse trading practices.
• CCP trade war propaganda has shifted from “fighting till the end” in March to going “an eye for an eye” in June to “having disdain for going ‘an eye for an eye’” in October. This suggests that the CCP presently has no effective solutions to defuse the trade conflict, which is badly affecting China’s economy.

Oct. 15:

• Two vessels were loaded with U.S. soybeans departed for China. (see our April analysis, “Why China Won’t Touch Soybeans in the Trade War”)

Oct. 17:

• U.S. National Economic Council Director Larry Kudlow told Fox News that President Trump would “probably” meet with Xi Jinping at the G20 summit in Argentina in November. Kudlow noted that while it is “always better to talk than to not talk,” he had become “very cynical because we have given our ask and China does not respond. I worry that they are moving in the wrong direction.”
• Fan Gang, a former member of the monetary policy committee of the People’s Bank of China, cautioned the PRC against launching retaliatory attacks against U.S. business in China during a speech at Tsinghua University. “The business community is now the only voice [in the US] that may speak for China. If we target them, then we may really lose the trade war,” he said.
• The People’s Daily publishes a commentary titled “The Rainbow After the Storm” about the trade war. According to the article, China’s attitude towards the U.S. is to “show disdain for ‘eye for an eye’ style direct retaliation” and focus on overcoming difficulties by releasing China’s “potential.”

Oct. 19:

• Chinese vice premier Liu He told Xinhua that while the Sino-U.S. trade conflict was having an impact on markets, “to be frank, the psychological impact is greater than the actual impact.”

Politics

• After the arrest of Meng Hongwei, the Central Political and Legal Affairs Commission holds a meeting to discuss system rectification.
• “Xi Jinping Thought” propaganda kicks up as officials associated with the Jiang faction are punished.
• The events over the past two weeks suggest that Xi Jinping has met with a serious political challenge and is being forced to strengthen his personal authority.

Oct. 16:

• State media announced that Fang Fenghui, former chief of the PLA Central Military Commission’s joint staff department, and Zhang Yang, former head of the CMC Political Work Department, were expelled from the Chinese Communist Party.
• PLAC secretary Guo Shengkun holds a national meeting to address the “sweeping black” anti-Mafia campaign. During the meeting, Guo says that the political and legal apparatus must be cleaned up and PLACs at all levels must dare to “turn the knife blade inward.”

Oct. 18:

• On the first anniversary of the 19th Party Congress, state media run a commentary, “Renewal is Rising From the East,” to promote “Xi Jinping Thought.”

Oct. 19:

• Lu Wei, former director of the PRC’s Cyberspace Administration and Jiang faction member, pleaded guilty to corruption charges in court. (For analysis of why Lu was purged, see here).

Oct. 20:

• Zheng Xiaosong, head of the central government’s liaison office in Macau fell to his death at a residential building in Macau, according to the Hong Kong and Macau Affairs Office of the State Council. The Office said that Zheng was suffering from depression. The Macau liaison office website showed that Zheng had met with representatives of a think-tank in the city at the office a day before his fall. (See SinoInsight 1 for analysis.)

Economy

• The Sino-U.S. trade war’s negative impact on China’s economy has become more evident in the past week.
• China’s stock market hit a new low after the 2016 crash. Many listed companies are at risk of seeing their pledged shares liquidated, and local branches of the State-owned Assets Supervision and Administration Commission are trying to save listed companies.
• China’s foreign exchange reserves, outstanding funds, social financing scale, and the renminbi exchange rate all fell during the week. Looking ahead, the RMB is set to depreciate further, export surplus will decrease, and capital outflows could become severe. All this results in shrinking forex reserves for China.
• A Chinese vice premier and top financial regulators have issued statements to stabilize the markets.

Oct. 16:

• The amount of U.S. Treasury bonds held by China have been decreasing for three consecutive months (about $5.9 billion to $1.1651 trillion worth of bonds), creating a record low since June 2017, according to Treasury data.
• The PRC State Council issues a notice on the plan to create a Free Trade Pilot Zone in Hainan Province.
• China’s Consumer Price Index rose by 2.5 percent from a year ago in September. Food costs are up 3.6 percent year-on-year, with fresh vegetables increasing by 14.6 percent and fresh fruits by 10.2 percent.

Oct. 17:

• According to PBoC data, the scale of social financing in September was 2.21 trillion yuan, including 733.9 billion yuan worth of special bonds issued by local governments. Excluding local debt, the total amount of social financing in September is 1.47 trillion yuan, a figure lower than market expectations.

Oct. 18:

• China’s economy grew 6.5 percent in the third quarter from a year earlier, according to data from the National Bureau of Statistics. The GDP figure is below an expected 6.6 percent rate and slower than 6.7 percent in the second quarter of 2018.
• According to central bank data, the balance of PBoC forex holdings at the end of September was 21.408415 trillion yuan, or less 119.395 billion yuan from August.
• Per China’s Ministry of Finance, the national general public budget income in September was 1.2963 trillion yuan, a YoY increase of 2 percent and the slowest growth rate this year. Meanwhile, the tax revenue in the general public budget was 1.0269 trillion yuan, an increase of 6 percent from the previous year.
• The Shanghai Composite Index closed at 2848.42 points, or down 2.94 percent, while the Shenzhen Component Index fell 2.41 percent to close at 7178.49. Over 3,000 shares in both exchanges lost value, while 148 stocks stopped trading.
• Before the opening of the stock market, central bank governor Yi Gang, banking and insurance regulator Guo Shuqing, and insurance regulator Liu Shiyu made public comments to calm the markets. Vice Premier Liu He also made statements to boost confidence in the economy. Stocks rebounded a little after the remarks by the leading officials (Shanghai index rose 2.58 percent and the Shenzhen index gained 2.79 percent). However, the markets were still down on the whole for the week.

Oct. 20:

• The State Council called a meeting of the Financial Stability Development Committee to discuss capital market issues.
• In an open letter to private investors published by Xinhua, Xi Jinping wrote that “any words or acts to negate or weaken private economy are wrong,” and that it is always the CCP Central Committee’s policy to “unwaveringly” support private business development.

Society

• Under pressure from the international community, the CCP issues propaganda about the re-education camps in Xinjiang. The Party’s attempt to whitewash the systematic brainwashing of ethnic Uyghur minorities in Xinjiang is more “mature” and systematic as compared to the whitewashing of the persecution of Falun Gong adherents in past years.
• Friction between government officials and the Chinese people continue to simmer with victims of P2P failures and military veterans carrying out protests and other aggressive actions.

Oct. 15:

• Local government officials in Jiangsu’s Hangji Town forcibly demolished the home of Wei Gang, a former PLA special forces veteran. Wei later drove his car into the government demolition squad, killing one official and injuring nine others. The local police eventually detained Wei Gang.
• Human Rights Watch issues a report on the plight of children and families affected by the crackdown in Xinjiang.

Oct. 16:

• A state media documentary on the re-education camps in Xinjiang seeks to downplay the persecution by depicting the camps as providing “vocational training” for the economically impoverished, strengthening the “citizenry consciousness” of the Uyghurs and improving their Mandarin language ability, and helping them turn away from “religious extremism.”
• Shohrat Zakir, the governor of Xinjiang, gives a detailed interview with Xinhua about the “re-education” of Uyghur Muslims.

Oct. 17:

• The Wei Gang case escalates as the leader of his former special forces team rallies his retired veteran friends and others to surround the Hangji Town police station and demand his release. Over a thousand protesters showed up. An injured Wei Gang was released from police custody and sent to the hospital after the protesters negotiated with local officials. The incident was reportedly brought up to the Jiangsu Provincial Party Committee.
• Hundreds of P2P failure victims traveled to Beijing to make petitions. The local authorities mobilized large numbers of police officers to turn away the petitioners. Dozens were arrested, and foreign media reporters were asked to leave.

SinoInsight 1

Zheng Xiaosong, the head of the central government’s liaison office in Macau who was reported as having died in a fall, is the first Central Committee member to have met with a fatal mishap after the 19th Party Congress.

OUR TAKE
1. Zheng’s fall and death is suspicious because it comes during a politically charged time in the CCP regime. The possibility that Zheng’s death is connected with the CCP factional struggle cannot be ruled out.

2. A review of Zheng Xiaosong’s career suggests that Xi Jinping could have important plans for him.

Zheng was formerly the secretary of the Xinhua News Agency branch in Hong Kong and aide (mishu) of Jiang Enzhu, the first secretary of the CCP liaison office in Hong Kong. Before Jiang took up a sinecure role in the National People’s Congress, Zheng was promoted to deputy director of the Ministry of Finance’s international department in 2000. Zheng was assistant to the Minister of Finance just before Xi took office in 2012.

Zheng Xiaosong won rapid promotion during Xi’s tenure. In July 2013, he was appointed deputy governor of Fujian Province. In March 2016, Zheng was promoted to the Standing Committee of Fujian Provincial Party Committee. The next month, he joined Fujian’s top leadership rank as secretary-general of the Provincial Party Committee. In September 2017, Zheng succeeded Wang Zhimin as director of the Macau liaison office, a ministerial-level position.

The fact that Zheng was promoted to the deputy-ministerial rank and full ministerial-rank in a span of four years and two months indicates that he is very likely being groomed for key positions in the Xi leadership.

3. The Jiang Zemin faction has long controlled key government bureaucracies in Hong Kong and Macau, including the Hong Kong and Macau Affairs Office, and the liaison offices in both territories. During Xi’s first term in office, the Jiang faction constantly stirred trouble in Hong Kong, a top global city that receives lots of international scrutiny, to undermine the Xi leadership.

4. Xi may have consolidated power to a high degree since taking office, but he is not totally in control. To date, Xi has only managed to assign a handful of officials whom he seems to trust to the Hong Kong and Macau bureaucracy while transferring out Jiang faction associates by means of promotion.

The heads of the liaison office in Hong Kong and Macau play a role that is somewhat analogous to “Party secretary” of a region. As “Party secretary,” the liaison office director has to interact with all sorts of local interest groups, including legitimate businesses, underworld elements, and military and intelligence personnel. Liaison office directors also have to cope with complex factional interests in Hong Kong or Macau, as well as handle well their own authority and interests.

In short, there are not many officials that Xi Jinping can trust and pick to head the liaison offices in Hong Kong and Macau. Directors can provoke many interests and are easy targets for political rivals.