SinoInsight 1
According to state mouthpiece Xinhua, the CCP ideological journal Qiushi will feature an article by Xi Jinping on “persevering and developing socialism with Chinese characteristics” in its seventh issue of the year that will be published on April 1. Xi’s Qiushi article will draw on a speech he gave to new members and alternate members of the 18th Central Committee on Jan. 5, 2013.
Xi’s article will emphasize the following points:
1. Socialism with Chinese characteristics is still socialism regardless of reforms, and China cannot abandon the basic principles of socialism.
2. The disintegration of the Soviet Union is a lesson that the periods before and after “reform and opening up” cannot mutually cancel out each other.
3. Party members should uphold the theories and beliefs of Marxism, communism, and socialism.
4. The “path problem” (“道路問題”; this refers to the paths of capitalism or socialism) concerns the success or failure of the Party.
OUR TAKE
1. We believe that Xi’s latest Qiushi article sends two signals.
First, the CCP senses a coming crisis of ideology in the regime and fears that the crisis will threaten its political legitimacy. We believe that the Party is acutely aware that it is losing the people’s support at home, and has to react to the Trump administration’s tough stance on socialism. Thus, when faced with an ideological crisis, the CCP has to step up the propaganda and brainwashing to maintain its grip on power.
Second, the Xi leadership is laying the groundwork to make major concessions to America to seal the Sino-U.S. trade deal and needs to signal a “left-turn” (emphasizing Marxism, socialism) to go “right” (implement economic reforms). The “left-turn” signals are a necessary line of defense against attacks of “unequal treaties” and “treason” from Xi’s political rivals.
2. Xi’s Qiushi article is drawn from a speech he gave in January 2013, or during a period in his first term where he made several reform-minded moves:
November 2012: Xi Jinping took over from Hu Jintao as CCP General Secretary.
Dec. 4, 2012: Xi gave a speech during a commemoration event to mark the 30th anniversary of the Chinese state constitution. In the speech, Xi criticized “some public officials” for abusing their power and office to “bend the law in their favor” and “severely damage the authority of the constitution.” He added that “no person or organization should be above the law and the constitution” and that officials should uphold the rule of law and govern in accordance with the law. Observers at the time believed that Xi was taking a shot at Jiang Zemin’s stability maintenance policies, and particularly the illegality of the longstanding crackdown on Falun Gong.
Dec. 7 to Dec. 8, 2012: Xi tours Shenzhen in his first trip outside Beijing since taking office. Many observers noted at the time that Xi’s journey south strongly signaled his intention to pursue greater market-oriented reforms.
Jan. 3, 2013: Journalists from Guangzhou’s Southern Weekly newspaper complained that the Guangdong propaganda department heavily censored and altered the paper’s New Year editorial, which was titled “China Dream, Constitutional Dream.” Southern Weekly’s original editorial positively interpreted Xi’s comments on constitutionalism. The scandal gained global attention shortly after it was exposed.
At the time of the censorship, the Guangdong propaganda department was controlled by the Jiang faction.
On Jan. 5, or two days after the incident was exposed, Xi Jinping gave a speech on his China Dream and Constitutional Dream. The Jiang-controlled CCP propaganda apparatus hyped up the China Dream while barely mentioning the Constitutional Dream. Later, the Constitutional Dream was quietly “dropped.”
On Jan. 7, Southern Weekly journalists and their supporters gathered outside Southern Weekly’s office to protest the Guangdong propaganda department’s censorship.
Jan. 7, 2013: The Xi leadership announces that it is planning to abolish the Chinese regime’s labor camp system, and goes ahead with the move in November. Observers believed that the move directly threatened Jiang Zemin’s political legacy.
3. Based on our research, Xi Jinping did not belong to any faction or had substantial political power when he came to office in 2012. Thus, he was hugely unsuccessful in advancing the reform-minded policies introduced in his first year (including the economic reforms proposed at the Third Plenum of the 18th Central Committee in 2013).
We believe that Xi’s subsequent effort to consolidate power to a high degree, a “leftward move,” is part of a strategy to allow him to successfully implement his policies. In other words, Xi needs to be “politically correct” to dispel the Party’s natural resistance towards reform. His Jan. 5, 2013 speech was likely aimed at eliminating internal doubts about his motives for making sweeping reforms.
Beijing very likely needs to make unprecedented concessions to reach a trade agreement with the United States. Hence, Xi needs Qiushi to publish an article which draw on his speech from six years ago to reassure the Party that he remains “politically correct.”
SinoInsight 2
On March 26, China property developer Evergrande held a conference in Hong Kong to announce its 2018 performance. The developer made 72.21 billion yuan ($10.758 billion) last year and owes liabilities worth 1.57 trillion yuan. Also, Evergrande’s total debt was 99.08 billion, or 16 times higher than the industry average.
OUR TAKE
1. According to Evergrande’s 2018 financial report, the company borrowed 482.091 billion yuan and made 45.542 billion yuan worth of cash and various expenditures in 2017. Evergrande did not add new loans in 2018 but added another 232.65 billion yuan in cash and various expenditures, or about half that of 2017. Further, the company did not record any purchases or intangible assets in 2018. Evergrande’s cash flow from operations in 2018 was 54.749 billion yuan; cash flow from operations was still negative in 2016 and 2017.
Evergrande might have reduced its expenditure in 2018, but its total liabilities now exceed 1.5 trillion yuan. And the company could be paying up to 75 billion yuan in interest per year (assuming financing costs of 5 percent), which is higher than its profits.
2. The Feb. 25 edition of Vanke Weekly, a publication of property developer Vanke, carried an internal speech by board chairman Yu Liang which called on the company to “converge, focus, consolidate, and upgrade the fundamentals” to ensure that Vanke “prospers long and well.” This echoes a September 2018 public statement by Evergrande which noted that the company would strive to “keep thriving.”
We believe that Evergrande, a leading property developer, is “too big to fail” in China. Moreover, Evergrande founder and board chairman Xu Jiayin appears to have deep connections with Party interest groups. To avoid a chain reaction of property developer failures, the CCP government will likely find ways to extend funding to Evergrande (at the appropriate time) to help it resolve its debt problems.
Should the CCP somehow allow Evergrande to collapse, however, then a Black Swan event is certainly on the horizon for the regime.
3. In our China 2019 outlook, we wrote that “a few major property companies could file for bankruptcy.” If Evergrande’s 2018 performance is reflective of a broader trend in the industry, then our forecast is on track to being confirmed.
