SinoInsight 1
On March 13, the CCP Central Committee General Office issued the “Party Committee (Party Group) Regulations on the Implementation of Strictly Governing the Party” (henceforth referred to as the “Regulations”) and made it a requirement for all regions and departments to “conscientious abide” the Regulations.
The Regulations appear to build on the messaging in Xi Jinping’s teleconference to 170,000 Party members on Feb. 17 and his recent trip to Wuhan on March 10:
- PRC officials should not be passive in governance and should “do something” (有所作為), particularly on the issue of returning people to work and reviving the economy.
- Local governments must obey instructions from Party central and not do things their own way (各自為政).
We have two key observations about the Regulations:
- The Regulations are directed at Party committees and Party secretaries at all levels of the CCP.
- The Regulations require Party committees at all levels of the CCP to safeguard Xi’s “quan wei” (權威) and the leadership of the Central Committee.
OUR TAKE
1. The Regulations confirm that a central-local governance problem in the PRC that we have long identified has exacerbated during the coronavirus crisis. The Xi leadership’s orders continue to fail to leave Zhongnanhai (政令不出中南海), i.e. are being ignored by local governments. Local governments looking to preserve local self-interests during the epidemic have begun to cheat on pushing people to resume regular work and production, possibly believing that the central government will still swop in to “bailout” struggling areas to prevent financial collapse when local economies tank.
2. In assessing the epidemic situation in China and the COVID-19 pandemic, we believe that the CCP’s central-local governance problem will only get worse going forward:
- Many companies and factories in China have not been operating at full capacity since late January. The CCP will have a very tough time hiding this economic reality even if it heavily manipulates its first quarter economic figures. Local governments will realize (if they have not already) that the central government cannot provide them with adequate financial, material, and “stability maintenance” support. As the central government loses leverage, local governments will have incentive to ignore orders from Party central and operate with greater autonomy.
- The CCP is covering up the true epidemic situation in China and almost certainly has not contained the coronavirus. The central government’s move to rush people back to work will only worsen the epidemic situation. The CCP’s epidemic prevention and control work is further complicated by the global pandemic.
- The epidemic will cause food shortages, rising unemployment, and greater social grievances. Local governments will be pressed to find innovative ways to “maintain stability” and will avoid implementing central government orders that weaken their ability to control local society.
- A prolonged epidemic or subsequent outbreaks will exacerbate the factional struggle in the CCP elite. When the outcome of the factional struggle is unclear, local governments have more reason to sit on their hands instead of immediately complying with central government orders and risk being penalized for being “politically incorrect” later.
We believe that the CCP’s central-local governance problem during a time of prolonged epidemic would result in the emergence of a period of turmoil in the PRC. This turmoil, however, does not mean a return to a “warring states” or “warlord” period because Xi’s sweeping military reforms have greatly curbed the People’s Liberation Army’s ability to rally supporters while no province or area is strong enough to go full rogue.
3. Subsequent epidemic outbreaks will force local governments to take matters into their own hands. For instance, local governments could:
- Monopolize food and medical supplies in their area and control their distribution. Gaining a monopoly could entail stealing from neighboring areas and preventing the export of critical food or materials.
- Some local governments could form “alliances” with each other to survive and make up for their respective deficiencies.
- The decree of “stability maintenance” could differ dramatically from area to area depending on the state of the local economy. For instance, the wealthier coastal provinces could adopt a more “relaxed” approach to social control to facilitate economic development, while the poorer inland provinces could ramp up “stability maintenance” measures to keep the local population suppressed and ensure that local government control remains intact.
4. The coronavirus crisis is functioning as a catalyst to hasten the arrival of tremendous change in China. Businesses, investors, and governments must make preparations to deal adequately with heightened political risks in China, dramatic changes in Chinese society, and even a post-CCP China.
SinoInsight 2
On March 12, the PRC State Council issued a decision on the authorization and entrusting of land use rights (henceforth referred to as the “Decision”). Key points in the Decision include:
- Local governments (provincial, autonomous regions, municipalities) are now authorized to approve the use of agricultural land (except permanent prime farmland designated by the State Council) for construction uses.
- The proposal of pilot programs where local governments approve and entrust the conversion of permanent prime farmland for construction uses. The proposed one-year pilot programs will be rolled out in Beijing, Tianjin, Shanghai, Jiangsu, Zhejiang, Anhui, Guangdong, and Chongqing.
OUR TAKE
1. The coronavirus epidemic brought the Chinese economy to a halt at one stage and work resumption rates seem to still be low in many areas. This impacts the PRC government’s fiscal revenue. Presently, the central government is taking the old stimulus route to get out of financial trouble by rolling out plans for infrastructure construction. And to facilitate infrastructure construction, the central government needs to help local governments more easily approve the use of existing farmland for construction purposes.
In other words, the State Council’s March 12 Decision is an indication of financial trouble in the PRC. To help local governments sell more land, address their financial woes, and even possibly stave off bankruptcy, the central government has decided to experiment with allowing them to control the authorization and entrusting of land use rights.
The central government’s Decision could bring some financial relief to local governments in the short term. The conversion of agricultural land, however, will lead to the more serious problem of food shortages.
2. Official PRC data and expert opinion paint a bleak picture of China’s economic prospects in 2020.
In a mainland media program aired on March 12, Peking University’s National School of Development dean Yao Yang identified two main problems facing Chinese companies brought about by the epidemic, namely, the “too slow” resumption of work and the unresolved difficulties that private enterprises face in securing financing. Yao noted that the work resumption rate is “not optimistic”; as of early March, the national work resumption rate was only 60 percent, with manufacturing seeing a slightly higher work resumption rate than the national average (64 percent) and the catering industry seeing very low rates of work resumption (less than 33 percent).
Official PRC data showed that China’s economy was hit hard in February. China’s PMI for February dropped 14.3 percent from a month ago to 35.7. Faring worse than manufacturing was the service sector, with the business activity index dropping 23 percent from the previous month to 30.0. And in February, China’s total exports fell 17 percent from a month ago while imports fell by 11 percent.
We can expect global consumption and China’s exports to decline due to the global pandemic and the U.S. stock bear markets. China’s export figures could see negative growth for the year if the pandemic lasts until June, and China’s GDP growth rate could drop by at least one percentage point.
3. A perusal of official media reports shows that a food crisis is developing in China. Take the case of grain in Hubei:
- On Feb. 1, the Hubei Daily reported that Hubei Province has “ample grain reserves,” enough to feed the people in the province for more than a year.
- On Feb. 5, the China Youth Daily reported that the central government’s grain reserves in Hubei hold 10 million tons of grain, which is enough to feed the 60 million people in the province for over half a year.
- On Feb. 14, CCTV reported that “urgently sent” 3,000 tons of “high-quality Heilongjiang rice” from Jiamusi City to “assist Hubei.”
The Hubei Daily and China Youth Daily information on grain reserves in Hubei Province is likely meant to reassure residents that there is sufficient food in the province. The difference in numbers is understandable because the various official media rely on different channels for their information; it is also plausible that the Hubei local government and the central government’s grain reserves in Hubei do indeed hold enough grain in total to feed the people for over a year. However, the CCTV report on Feb. 14 brings into question both Hubei Daily and China Youth Daily’s information. If Hubei Province does indeed have “ample reserves,” then why does Heilongjiang have to “urgently” send over “high-quality” grain over? The CCTV article indicates that Hubei has far less grain in reserve than the other official media claim.
Information on Chinese social media corroborates our assessment of a food crisis in China:
- Villages in Shandong were recently ordered to get rid of their cash crop and plant grain instead. Villagers turned to planting cash crops in recent years to make use of abandoned agricultural land.
- According to a widely circulated screenshot, an unidentified local government had recently begun taking a census to determine the amount of surplus grain being held by farmers.
- A widely circulated picture shows a banner from Penggao Town, Jiangxi Province that reads, “[The situation with] Grain this year is like the present situation with face masks”; there is a serious shortage of masks in China.
- In January, the food security coordination group in Yuhang District, Hangzhou City issued a document calling on urban households to have over 10 days of food in reserve, while rural households should have food stores to last over 20 days and over three months of grain in storage.
From the above information, we believe that the CCP’s relaxation of land use rights will exacerbate China’s food shortage issue and could lead to another humanitarian crisis on top of the coronavirus epidemic.
SinoInsight 3
Recently, the CCP has been strongly pushing the narrative that it has “curbed” the coronavirus and that the “peak” of the epidemic has passed. This narrative, however, is contradicted by PRC official media reports concerning the dispatch of medical personnel to Wuhan Union Hospital and other designated intensive care sites.
On March 10, official PRC media reported that Tianjin had dispatched its fifth batch of medical personnel to assist Hubei after receiving orders from the National Health Commission. The 40-person team (10 doctors, 30 nurses) will “reinforce the Wuhan Union Hospital critical illness area.”
On March 14, Guangxi News Online (gxnews.com) reported that Guangxi Province had dispatched its fourth batch of medical personnel to assist Wuhan. The 104-person team (24 doctors, 80 nurses) would be sent to Wuhan Union Hospital and other designated intensive care sites. On the same day, three doctors dispatched to Wuhan from Anhui’s Feidong County were sent to Wuhan Union Hospital to replace doctors sent in from west China who were administering critically ill patients. The three doctors first arrived in Wuhan on Feb. 12.
Guangxi News Online also reported that over 20 medical personnel teams have been dispatched to Wuhan Union Hospital to provide critical care for coronavirus patients. The hospital now has 580 COVID-19 patients and expects to admit over 100 new patients in the future. The “intensive care task continues to be very onerous,” reported Guangxi News Online.
According to PRC National Health Commission data, there were 20 newly confirmed COVID-19 cases and 10 deaths on March 14 nationwide. Of all the confirmed cases in Hubei, only four came from Wuhan, while all death cases occurred in Wuhan. Official data claimed that Wuhan had 9,911 confirmed cases as of March 14, 3,058 of which were critical cases.
On March 15, a video circulating on Chinese social media showed footage of what appeared to be the construction of a 4,000-bed temporary hospital (方艙醫院) just outside Wuhan’s Si Huan area. The temporary hospital appeared to be surrounded by an electric fence, and the whole setup was not dissimilar from a concentration camp.
OUR TAKE
1. The information presented above indicates that the epidemic situation in Wuhan is far worse than what the PRC official claims, and could even be very severe.
2. On March 12, Mi Feng, a spokesman with the PRC’s National Health Commission and deputy director of the commission’s propaganda department, said that the “peak of the epidemic has passed for China.” On paper, this appears to be the case. On March 1, there were 6,225 new coronavirus cases in Wuhan, and by March 14, there were 3,058 cases, a drop of over 50 percent or 250 fewer cases per day on average. Should the rate of 250 fewer cases per day hold, then there will be zero confirmed cases of COVID-19 in Wuhan by the end of March.
But if the epidemic is indeed under control as indicated by the official data, then why are medical teams still being dispatched to Wuhan to reinforce places like Wuhan Union Hospital? The official coronavirus data also challenge Guangxi News Online’s reporting about how Wuhan Union Hospital “expects to admit over 100 new patients in the future” and how the “intensive care task continues to be very onerous.”
Then there is also the issue of Hubei Province’s Feb. 18 guidelines regarding the deployment of frontline medical staff during the epidemic. According to guidelines, frontline medical personnel deployed to temporary hospitals should not work there for over a month, while it is recommended that those assigned to designated intensive care sites should be deployed there for even shorter periods of time. Yet the Guangxi News Online’s March 14 article notes that medical personnel from Guangxi and Anhui who have been deployed to temporary hospitals for about a month are being transferred to Wuhan Union Hospital, a designated intensive care site. Given that the epidemic “peak” has passed, why are the frontline medical staff not instead rotated out of Wuhan? And why are areas outside Wuhan still dispatching medical teams to the city even though there are 20 external teams there?
Based on mainland media reporting, we can deduce that many of the external medical personnel in Wuhan have come down with the coronavirus and the epidemic situation remains critical. That is why medical teams still have to be dispatched to Wuhan from elsewhere, and particularly to Wuhan Union Hospital where things are severe. This is an ominous sign for the rest of China. With experienced medical personnel being “used up” in Wuhan as “cannon fodder,” there will be fewer people with experience to handle severe outbreaks in other parts of China should they break out. Millions in China could be without proper medical care in a subsequent outbreak.
3. Zhang Wenhong, the head of Shanghai’s intensive care expert group, once said that the death rate of severe COVID-19 cases is 46 percent, according to mainland news reports. Other reports indicate that the death rate of patients with severe COVID-19 in Jinyintan Hospital’s intensive care unit in Wuhan is 61.5 percent. Based on these figures, we have reason to suspect that the reason for the sharp decline in confirmed cases in China is an uptick in the death rate. Concurrently, the official death rate remains low because coronavirus deaths can be reclassified as death by other causes; new coronavirus cases could also be registered as other ailments or are not recorded.
4. We again warn that the epidemic situation in China has not abated and that the CCP is almost certainly engaging in another big cover-up as it struggles to revive the economy and ensure regime survival. Through its actions, the CCP has effectively sown the seeds of subsequent outbreaks. The next outbreak will likely be more severe than the first one and the impact on China’s economy will be much greater.
Businesses, investors, and governments must treat CCP data with extreme skepticism and make emergency preparations to mitigate the impact of subsequent outbreaks.
