SinoInsight 1
In the days after the PRC passed a national security law over Hong Kong, overseas Chinese media outlets picked up on an article titled “Proactively Respond to Changes in the External Environment” (積極主動應對外部環境變化) by Zhou Li, a senior researcher at Renmin University’s Chongyang Institute for Financial Studies and former vice minister of the CCP International Liaison Department.
In his article, which appeared in the official “Chinese Social Sciences Today” (中國社會科學報) publication on June 22, Zhou noted that the PRC needs to make preparations in six areas:
1. The PRC must prepare for a deterioration of Sino-U.S. relations and for “escalation of the struggle across the board.”
2. The PRC must prepare to cope with shrinking external demand and the disruption of industrial and supply chains.
3. The PRC must prepare for coronavirus epidemic conditions to become the new normal, i.e. humans will have to coexist with the coronavirus for a prolonged period.
4. The PRC must prepare to escape U.S. dollar hegemony and gradually decouple the renminbi from the dollar.
5. The PRC must prepare for a global food crisis.
6. The PRC must prepare for a resurgence of international terrorism and “counterterrorism.”
OUR TAKE
1. Zhou Li’s “six preparations” reveal the CCP’s fears about China’s rapidly worsening economy, food shortages, the coronavirus pandemic, and the Sino-U.S. “new cold war.” The “six preparations” also indirectly confirm what we have covered for some time: The Chinese economy is doing very poorly; the CCP faces a food crisis; the CCP is covering up the COVID-19 coronavirus and its handling of the epidemic is less stellar than what its propaganda outlets and international media give it credit for; and up until very recently, the CCP has been misreading the United States on the trade war and the “new cold war.” Taken to its logical conclusion, the “six preparations” would see the CCP move to partially “close up” China to the outside world.
2. Zhou’s article on the “six preparations” was published days after Central Foreign Affairs Commission chief Yang Jiechi met with U.S. Secretary of State Mike Pompeo in Hawaii and a little over a week before the CCP passed national security legislation on Hong Kong. This suggests the CCP knew the U.S. would retaliate over the Hong Kong issue and the coronavirus pandemic, but decided to greenlight the Hong Kong national security law regardless, believing to not do so would pose greater risk for regime survival.
Zhou’s point about escaping dollar hegemony and decoupling currencies foreshadowed the passing of bills in Congress that sanction PRC officials and banks that do business with them over Hong Kong. We believe the CCP fears the U.S. will soon treat the PRC like Iran or Venezuela on the economic sanctions front, and is thus preparing for that eventuality.
Zhou’s point about “coexisting” with the coronavirus suggests the PRC is unable to cope with the epidemic despite its propaganda. Prolonged epidemic conditions on the mainland will have a disastrous effect on the Chinese economy.
Zhou’s point about a “global food crisis” is likely self-reflective with regard to the PRC. The U.S. is the largest exporter of food by far, and the CCP is almost certainly very concerned that Sino-U.S. decoupling and escalations in the “new cold war” could affect China’s food supply. The CCP is likely also concerned that the coronavirus pandemic will affect world food supply and China’s ability to import food.
Finally, Zhou’s point about a resurgence of international terrorism and “counterterrorism” is really an oblique acknowledgment of a growing international anti-CCP bloc and how the CCP plans to deal with it. The CCP claims that its persecution of Uyghur Muslims in Xinjiang is really “counterterrorism” and has branded pro-democracy protests in Hong Kong as “terrorism.” Thus, Zhou Li is really saying that the CCP plans to counter the anti-CCP bloc (such as imposing a national security law over Hong Kong and stepping up “stability maintenance” measures there) when he talks about the “resurgence” of “counterterrorism.”
3. While mooted by a former official and not an active member of the senior leadership, the “six preparations” appear to be aimed at achieving the same goals as the CCP’s “six stabilities” and “six guarantees” (i.e. safeguarding regime survival). The various “six” policies also appear to be built on Xi Jinping’s call in January 2019 for the Party to “persevere with the bottom line in mind to guard against major risk.” If the CCP cannot “guard against major risks,” then China will see political Black Swans and the CCP could face a “Berlin Wall” as soon as this year.
SinoInsight 2
On July 2, the PRC’s State Administration of Foreign Exchange (SAFE) issued a notice on foreign exchange violations that cited 10 cases of illicit cross-border US dollar transfers through underground banks. The cases, which occurred between January 2017 to November 2019, involved two companies, eight individuals, transactions of hundreds of thousands to millions totaling $36.865 million, and a fine of 24.546 million yuan.
On July 3, Party mouthpiece People’s Daily reported that the public security authorities had seized large sums of money from underground banks since the beginning of the year. The authorities also arrested over 500 counterparties and imposed fines totaling more than 87 million yuan.
OUR TAKE
1. The news above indicates the wealthy inside China are pessimistic about the PRC’s political and economic prospects, and are using various channels to transfer their funds abroad.
Presuming there is a correlation between the value of illicit transactions and fines, and the value of fines for illicit transactions in 2020 is 3.55 times that of January 2017 to November 2019, then it is possible to extrapolate that capital outflows via underground banks amounted to at least $130 million in the first half of 2020. The actual figure is bound to be greater given the CCP’s propensity to underreport bad news.
2. Official PRC data indicates that capital outflows from China is very serious. People’s Bank of China figures show that China’s total foreign debt reached $2.0946 trillion in the first quarter of 2020, while China’s foreign exchange reserves stood at $3.0606 trillion at the end of March 2020. This means that China’s foreign reserves are less than $1 trillion after accounting for foreign debt.
China’s foreign reserves are under heavier pressure if we consider that China’s total external debt does not include Chinese-funded enterprises’ “internal insurance and external loans” (內保外貸). While never officially disclosed, the total amount of “internal insurance and external loans” is unlikely to be small.
3. China’s foreign trade exports will be seriously impacted by escalation in the Sino-U.S. “new cold war” and in the event of a second wave of contagious diseases breaking out in the mainland. Worsening Sino-U.S. relations and epidemics will likely result in an accelerated withdrawal of foreign capital from China. The PRC will also see foreign exchange reserve shortages, and there will be greater pressure on the PRC to depreciate the renminbi—a move the U.S. would not want to see happen, which could further exacerbate the downward spiral of U.S.-China relations.
