SinoInsight 1
The CCP recently “softens” its confrontational rhetoric surrounding the U.S. and certain hot button issues, but pushes back strongly against the Trump administration’s effort to differentiate between the Chinese people and the CCP. Concurrently, the Trump administration continues to ramp up pressure against the CCP regime.
PRC
Aug. 27
When asked to comment on Secretary of State Mike Pompeo’s remarks on the CCP during the Republican National Congress, PRC foreign ministry spokesman Zhao Lijian asserted, “The CCP and the Chinese people have a relationship like fish and water (魚水情深), as well as flesh and blood ties (血肉相連). The Chinese people is the CCP’s impregnable fortress (銅牆鐵壁); let nobody think about breaking them.”
Sept. 2
PRC foreign minister Wang Yi delivered a speech titled, “Working Together to Make the South China Sea a Sea of Peace, Friendship and Cooperation” during an online symposium on the South China Sea. Wang noted that with the world seeing “changes unseen in a century,” including from the coronavirus, “it is particularly important that we address the South China Sea issue with a cool head, and stay firmly on the right course, to preserve the hard-won peace and stability in our region.” He also said that “China and ASEAN countries are a natural community with a shared future” and have a “common stake in a peaceful and stable South China Sea.”
Wang’s recent speech built on a new “pacifist” theme that emerged near the end of July when he declared that the South China Sea is the “common home” of China and ASEAN.
Sept. 3
The CCP held a symposium to commemorate the 75th anniversary of China’s victory over Japan during the Second World War, or in Party parlance, the “Chinese People’s War of Resistance Against Japanese Aggression and the World Anti-Fascist War.”
In a major speech, CCP General Secretary Xi Jinping said that the realization of the “great rejuvenation of the Chinese nation” depends on “adhering to the path of socialism with Chinese characteristics,” the “spirit of struggle,” and “unswervingly follow the path of peaceful development.
Xi added that the Chinese people should “never allow attempts by anyone or any forces”:
- To distort the CCP’s history and vilify its nature and mission;
- To distort and change the road of socialism with Chinese characteristics, as well as deny and vilify the Chinese people’s great achievements in building socialism;
- To separate the CCP from the Chinese people and set them against each other;
- To use bullying tactics to impose their will on China, change China’s developmental direction, or obstruct the Chinese people’s efforts to create a better life for themselves;
- To undermine the Chinese people’s right to a peaceful life and development, undermine their exchanges and cooperation with other people, or undermine their majestic undertaking of promoting peace and development for mankind.
On the same day, PRC Ambassador to the United States Cui Tiankai released a video commemorating the same event (“victory of the World Anti-Fascist War”). Cui said “China and the United States fought shoulder to shoulder for peace and justice on the Asian stage” and added that both countries “need to recapture the spirit of cooperation from WWII and join hands to confront our common enemies in the new era: COVID-19, economic recession, climate change and other global challenges.”
America
Aug. 31
During the virtual U.S.-India Strategic Partnership Forum, Deputy Secretary of State Stephen Biegun revealed an upcoming meeting of the Quad nations—United States, India, Australia, Japan—in New Delhi this fall.
When asked if the Quad is about “counterbalancing the rise of China,” Biegun said he would be “very careful to not define it solely as an initiative to contain or to defend against China” or “be too ambitious,” especially with “loose talk about an Indo-Pacific NATO and so on.” However, he added, “so as long as we keep the purpose right and as long as we keep the ambitions checked to start with a very strong set of members, I think it’s worth exploring an (inaudible) like that, although it only will happen if the other countries are as committed as the United States.”
Sept. 2
In a statement titled “Advancing Reciprocity in U.S.- China Diplomatic Relations,” Secretary Pompeo announced that the Department of State now requires PRC diplomats in the U.S. to receive approval before visiting university campuses and meeting with local government officials. Also, the State Department has to sign off on “cultural events with an audience larger than 50 people hosted by the PRC embassy and consular posts outside of mission properties.”
On the same day, U.S. Attorney General William Barr said in an interview with CNN that the PRC is a greater threat than Russia when it comes to interference in the upcoming U.S. presidential election. “I’ve seen intelligence. That’s what I’ve concluded,” he said.
Sept. 4
U.S. national security adviser Robert O’Brien said the PRC has “taken the most active role” in influencing America’s election. He added that the PRC “had the most massive program to influence the United States politically,” followed by Iran and Russia.
The “massive activities of the Chinese and cyber realm, it’s really an extraordinary thing that we’re facing,” O’Brien said when asked about details of PRC election interference. He also described the scope of PRC activity as “relentless,” adding that “we’ve never seen anything like it. It was nothing like this in the Cold War with the Soviets.”
OUR TAKE
1. The CCP’s “softening” tone towards the U.S. and issues that America are concerned with (South China Sea) is a direct response to the Trump administration’s toughening stance on China. The CCP is also alarmed by growing hostility towards its regime in previously “friendly” territories like Europe; a notable episode is the recent Czech Republic visit to Taiwan despite CCP pressure and a Czech mayor’s fiery, profanity-laced response to foreign minister Wang Yi’s threat of reprisals.
A closer examination of the CCP’s remarks reveals that a wolf in sheepskin is still a wolf. Wang Yi describes the PRC and ASEAN countries as a “community with a shared future,” a communistic phrase that indicates the CCP has not abandoned its hegemonic ambitions despite rhetoric of “common home,” “peace,” and “friendship” in the South China Sea. Meanwhile, Cui Tiankai capitalized on the opportunity to spread disinformation regarding the Sino-U.S. alliance in the Second World War—the U.S. cooperated and fought together alongside the Kuomintang and the Republic of China, not the CCP and its People’s Republic (established in 1949), during WWII. (In fact, the CCP collaborated with the Japanese to undermine the KMT war effort, and left the bulk of the fighting to the Nationalists). Today, the U.S. is recapturing the “spirit of cooperation during WWII” on global health and other issues with the ROC but not the PRC—a serious cause for concern for the CCP.
We believe the CCP’s “softening” rhetoric will do more harm than good for itself in the current geopolitical environment. The U.S. is acting on the premise of “distrust and verify” with the CCP, and senior Trump administration officials have said they will judge the PRC by its actions, not words, in the bilateral relationship. Also, many countries now see the CCP for what it is (a Marxist-Leninist regime bent on global domination). When the mask slipped during the coronavirus pandemic (cover-ups, “wolf warrior” diplomacy, “mask diplomacy,” border clashes, etc.), it is likely taking a leaf from the U.S. playbook when dealing with China. Going forward, the CCP will find it increasingly tougher to make friends and maintain relationships in the era of Sino-U.S. new cold war. Meanwhile, the CCP risks losing control over public opinion on Sino-U.S. relations (like it did during the trade war) as it struggles to tailor propaganda narratives to suit the geopolitical mood of the moment.
2. Xi Jinping and Zhao Lijian’s recent remarks about the CCP and the Chinese people indicate it is extremely concerned about the U.S. strategy of drawing a clear line between the two (we explained why differentiating between the CCP and China is important and effective here). Both their remarks also reveal the CCP’s current counter to U.S. ideological warfare—openly conflating the CCP with the Chinese people, equivocating that the Chinese people will be harmed if the CCP is harmed to dissuade the Trump administration from hitting the CCP where it hurts. The “hostage” counter tactic is another subtle application of the “racism” card, and lays the groundwork for the CCP to later use the “nuclear option” of openly accusing the U.S. of being “racist” towards China.
The Trump administration needs to strengthen the cultural component of its strategic approach to the PRC to prevent the CCP from turning the tables on the U.S. in the new cold war.
3. Senior U.S. officials have warned about “relentless” PRC activity to interfere in U.S. elections. We do not rule out the use of “unrestricted warfare” tactics by the CCP (such as the “racism” card and those outlined here) the closer it gets to Nov. 3.
SinoInsight 2
The CCP’s 14th Five-Year-Plan is slated to be formally discussed during the CCP’s Fifth Plenum in October. Recent developments offer insight into how the 14th Five-Year-Plan will shape out.
On Aug. 24, Xi Jinping chaired a symposium attended by nine prominent Chinese scholars on Beijing’s economic strategy for the next five years. The scholars have pet theories that suit so-called “domestic circulation”; since June, the CCP has been promoting the idea of “domestic circulation” as the main driver of its “dual circulation” economic strategy.
On Aug. 30, the China Finance 40 Forum unveiled the “2020 Jing Shan Report” on economic and financial development and policy research during the 14th Five-Year-Plan period. The report’s lead researcher was Xiao Gang, a former China Securities Regulatory Commission chairman.
According to the “2020 Jing Shan Report,” China’s situation will become increasingly complex and severe at home and abroad during the 14th Five-Year-Plan period, and the country’s traditional advantages will disappear. Thus, Chinese economy needs to “release the potential of new advantages of mega-scale markets” to cope with the problems over the next five years. The “new advantages” include:
- The new generation of China’s youths;
- Mega-scale consumer markets;
- Scale of technological innovation, industrialization, and adoption;
- Mega-scale financial markets;
- Regional convergence around mega-scale markets.
OUR TAKE
1. We previously looked at the purchasing power aspect of why the CCP’s “domestic circulation” will not work. Weakening spending power across the board is one reason why the so-called “mega-scale market” advantage mentioned in the “2020 Jing Shan Report” will not materialize in China. Another strike against it is the CCP’s failure to realize the potential of “mega-scale markets” a decade ago, when China’s economy was still booming and the regime could still enjoy demographic dividend.
2. It is easy to look at China’s 1.4 billion population and presume that the PRC has a labor and markets advantage. However, China has a large wealth gap and the Chinese people lack spending power. Also, China’s large population is aging and the absence of a sizable “new generation of youths” will not see “mega-scale” advantages come to fruition during the 14th Five-Year-Plan period (2021-2025).
According to the CCP’s National Bureau of Statistics, there are 176 million people aged 65 and above in 2019, or roughly four times more people in that age bracket than Japan. Having 176 million people aged 65+, or 12.6 percent of the population, brings China closer to the 14 percent threshold for an official “aging population.” In fact, certain provinces (Sichuan, Jiangsu, Chongqing) already meet the over 14 percent requirement in 2018.
Back in May, PRC premier Li Keqiang said that China has 600 million people living on a monthly income of 1,000 yuan. Li appeared to have gotten his data from Beijing Normal University’s Institute of Income Distribution. A breakdown of the data released by the institute at the time reveals that China’s income situation is even worse than what Li let on. Of the 600 million people mentioned by Li, 5.46 million have no income at all, while 216 million earn less than 500 yuan. Meanwhile, there are 202 million people in the 500-800 yuan range, and only 124 million earn between 800-1,000 yuan per month.
China’s population on the whole also does not have much spending power. Per CCP data, the annual per capita disposable income of urban and rural residents in China was 30,733 yuan in 2019, or 2,561 yuan per month. The number of people earning less than 2,000 yuan a month totaled 964 million people, while there were only 775 million people employed in China at the end of 2019. Official data also states that 63.28 million people have a monthly spending power in the 5,000-10,000 yuan range, while only 7.84 million people fall in the 10,000-20,000 yuan range.
Given the above data, it is hard to see the emergence of “mega-scale markets” in China over the next five years. The “2020 Jing Shan Report” also acknowledges that a fundamental reason for China’s low consumption rate is low labor remuneration and the limited income and spending power of regular Chinese workers.
3. It is difficult to see how the PRC can take advantage of the “scale of technological innovation, industrialization, and adoption.” Many of China’s innovation, industrialization, and commercialization problems in growing its semiconductor industry (see here) apply to other technologies as well. Meanwhile, the ease at which the CCP can change its policies means that advantages stemming from mass adoption of technology are limited. For instance, the People’s Bank of China’s policy now requires all third-party payment transactions to go through its online payment platform as of June 2018, as well as its rollout of a digital renminbi. Consequently, third-party payment apps like Alipay or WeChat, which account for 93.11 percent of China’s mobile payment market, will quickly lose their market advantage.
4. Talk of achieving “mega-scale financial markets” is also just talk considering the serious systemic financial risks in China’s financial markets at present, including a property bubble in danger of bursting (see our Aug. 24 analysis).
According to CCP court data, more than 500 property developers filed for bankruptcy to date this year, compared to 450 in the whole of last year. Bankruptcy aside, property developers face a broad reshuffle in standing due to significant changes in their financial status. For instance, R&F Properties, ranked 10th in the list of top real estate companies in 2020, disclosed on Aug. 31 in its financial report for the first half of the year a total debt of 351.759 billion yuan, a balance sheet ratio of 80.3 percent, and a debt to net worth ratio of 177 percent. This means that R&F Properties crosses all three of the PRC authorities’ “three red lines” policy and is not eligible to refinance through issuing new bonds. Subsequently, U.S. ratings companies Fitch (“stable” to “negative”) and S&P downgraded their rating for R&F Properties. R&F Properties is certain to drop out of the top ten given its difficulties in refinancing and the rising risk of the company defaulting on debt.
5. China’s economy is unlikely to recover quickly as the Sino-U.S. relationship swiftly deteriorates. The CCP has a higher chance of systemic risks triggering economic Gray Rhinos than it does enjoying “advantages in mega-scale markets.” Businesses, investors, and governments must be vigilant when reading CCP propaganda, especially when it comes from senior cadres with a stake in preserving the system.
