SinoInsight 1
The PRC National Bureau of Statistics (NBS) recently released China’s economic data for the third quarter of 2020. Most of the data reflect economic recovery in China, a point that CCP propaganda outlets highlight. U.S. and international media are also pushing the narrative that China is bringing the coronavirus “under control” and seeing a “surging economy.”
Oct. 19
NBS data shows a 0.8 percent increase in China’s investment in fixed assets (excluding rural households) to 43.653 trillion yuan ($6.53 trillion) from January to September 2020 compared to a year ago. National investment in fixed assets decreased 0.3 percent year-on-year from January to August.
Total retail sales of consumer goods increased 3.3 percent nominally (actual official increase of 2.4 percent after deducting price factors) to 3.5295 trillion yuan in September from a year earlier. From January to September, total retail sales of consumer goods increased 7.2 percent nominally to 27.3324 trillion yuan.
Oct. 20
NBS data shows that China’s third quarter GDP increased 4.9 percent to 2.66172 trillion yuan from a year ago. China’s GDP for the first three quarters increased 0.7 percent to 72.2786 trillion yuan year-on-year.
OUR TAKE
1. Narratives about China’s “surging” economic recovery should be taken with a grain of salt after accounting for the economic toll of the coronavirus lockdown, natural disasters, falling global demand, supply chains exiting China, and other indirect economic indicators.
Fraud and deception are baked into the CCP’s mode of operations. Extra vigilance is prudent when deciphering official PRC economics data and propaganda that advertises “all’s well” (“形勢一片大好”). After the Sino-U.S. trade war broke out, we caught the CCP manipulating data by changing computational formulas (“calculated according to a comparable caliber,” goes one official explanation of how data is derived). We have ample reason to suspect more data manipulation is at play this time. Nick Marro, a China analyst with The Economist Intelligence Unit, pointed out that China’s investments should reflect a contraction of about 30 percent year-on-year, but instead show an 8.7 percent increase after “some tricky revisions to data from Sept 2019, which lowered the base of comparison by 2.8 trillion yuan, by apportioning some of the previous Sept numbers to Oct.” Marro continued, “NBS said that reflected adjustments to their complex methodology, but no other month was affected, leading me to believe that it was meant specifically to cushion the Q3 headline figure.”
The CCP is known for releasing national GDP figures incongruent with provincial GDP sums. For instance, adding up official provincial GDP figures for 2019 yields 550 billion yuan less than the national GDP. In 2018, Renmin University economics professor Xiang Songzuo said that a “very important institute” in the PRC estimated China’s actual GDP growth for the year to be 1.67 percent, or even negative. However, the official GDP figure was stated as 6.5 percent.
2. A comparison and calculation of NBS data for fixed asset investments and retail sales between 2017 to September 2020 reveal crude manipulation on the CCP’s part. Our calculations, derived from comparing the CCP’s own figures from year to year, also show that China’s economy is stagnant at best.
Color coding
Green: Official growth is consistent with our calculated growth.
Orange: Official growth is higher than our calculated growth.
Blue: Official growth is lower than our calculated growth.
From our chart, the CCP used data calculation methods that at least make mathematical sense until 2018. From 2019 onwards, however, the CCP’s math is fraudulent in the fashion of “socialism with Chinese characteristics.”
According to a simple year-to-year comparison of officially published data, China’s investment in fixed assets should indicate a 5.3 percent contraction from January to September 2020. However, the CCP somehow showed 0.8 percent growth. Meanwhile, investments in the primary sector only increased by 0.8 percent, yet NBS data reflects 14.5 percent growth.
Additional signs that the CCP’s data is dubious is the percentage of investments in the tertiary sector versus the percentage of official growth. Despite investments of nearly 70 percent (68.7 percent), the tertiary sector contracted 3.7 percent based on our calculations. Even the official figure of 2.3 percent growth is unimpressive.
The figures for private investment suggest that Chinese investors are pessimistic about the country’s economic prospects. In previous years, private investments into fixed assets accounted for around 60 percent of all investments. As of September 2020, the share of private investments fell to 55.9 percent.
The CCP’s January-September retail sales data and September data are a mess. The figures appear to be derived from one computation method, but the bulk of the official growth data is inflated. Oddly, the official figure for auto sales is lower than our calculation.
From the above chart, total retail sales of consumer goods in September based on our calculations grew at 2.3 percent nominally from a year ago. After deducting price factors (consumer price index of 1.7 percent in September), the actual growth of retail sales for the month was only 0.6 percent. If we consider that the CCP might have published a lower CPI to pad the numbers, then consumption in China may not have recovered at all.
We see two possible reasons for rising auto sales. First, people could be purchasing personal vehicles to avoid public transportation during the pandemic. Second, the sale of “new energy vehicles,” which saw a recent surge, can be explained by auto companies selling to themselves, as part of a scheme to obtain government subsidies without actually manufacturing vehicles for sale to customers.
3. To cope with the economic downturn this year, the CCP is resorting to familiar stimulus measures, like issuing more bonds and investing in infrastructure.
According to mainland media reports, 26 provinces announced 26,000 investment projects with a total value of 49.9 trillion yuan this March. Of the projects announced, 8.4 trillion yuan worth of projects were launched this year.
According to data from China Central Depository & Clearing, the PRC authorities issued up to 10.3 trillion yuan worth of government bonds in the first nine months of the year, up 2.06 trillion yuan as compared to the whole of 2019. Of total government bonds, issuance of local government bonds totaled 5.68 trillion yuan from January to September, up 1.32 trillion yuan from the whole of last year.
China’s outstanding total social financing grew 33.39 trillion yuan in the first three quarters of the year from the same period a year earlier, according to data released by the People’s Bank of China. However, China’s GDP growth over the same period was only 994.6 billion yuan.
China’s outstanding total social financing in September was 280.07 trillion yuan. In calculating a conservative interest rate of 5 percent, China will need to pay as much as 14 trillion yuan in annual interest on total social financing. This means that China saw accumulated losses of 9.5 trillion yuan in the first three quarters of the year, a figure several times higher than gains from GDP growth.
The above shows that the CCP’s attempt to spend its way out of trouble cannot be covered through GDP growth. Beijing may find itself only digging a deeper hole for the regime.
4. Passenger traffic is an important indicator of economic recovery. Low passenger traffic indicates low economic activity. Gathered from the chart below, China’s passenger traffic in August and September recovered to nearly 70 percent. Meanwhile, September saw an 8.69 million reduction in passenger traffic compared to August. Put another way, economic recovery is limited, and prospects for China’s economic outlook are not optimistic.
SinoInsight 2
There has been speculation in recent weeks about a possible PRC invasion of Taiwan. Analysts argue that U.S. efforts to strengthen ties with Taiwan will only “compel” the CCP into attacking Taiwan to preserve its legitimacy and finish the Chinese civil war that never really ended in 1949.
- Speculation about a PRC invasion of Taiwan kicked into overdrive after Xi Jinping and the CCP hinted at the prospect with several moves:
- On Oct. 10, the People’s Liberation Army held a large-scale, “multidimensional” island invasion military exercise, according to videos aired by state broadcaster China Central Television.
- On Oct. 13, Xi visited the base of the People’s Liberation Army marine corps in Guangdong Province and called on them to “focus your minds and energy on preparing to go to war, and stay highly vigilant.” He added that they should “base [their] training on [the need to] go into battle … and raise [their] training standards and combat ability.”
- On Oct. 15, the PRC Ministry of State Security added the phrase, “don’t say you haven’t been forewarned” (勿謂言之不預也) in a commentary on Taiwan in Party mouthpiece People’s Daily. The CCP has used the phrase preceding the Sino-Indian conflict in 1962 and the Sino-Vietnamese conflict in 1979, as well as on a number of other occasions to imply a threat.
- On Oct. 18, the Alibaba-owned South China Morning Post cited military observers and sources as saying that Beijing is “stepping up the militarization of its southeast coast as it prepares for a possible invasion of Taiwan.” Part of the militarization involves DF-17 advanced hypersonic missiles in southern China near Taiwan.
- On Oct. 19, Xi Jinping, the six other members of the Politburo Standing Committee, and vice president Wang Qishan visited the Korean War exhibit at Beijing’s Military Museum of the Chinese People’s Revolution to mark the 70th anniversary of the Korean War. At least one scholar has speculated that Xi’s move could be a signal to the PRC population Beijing’s desire for “over military conflict with the U.S. over … Taiwan.”
Some commentators are also concerned that Beijing could take advantage of a contested U.S. election to launch an invasion of Taiwan.
OUR TAKE
1. Given the dire political and geopolitical consequences of invading Taiwan, the CCP will exhaust all non-kinetic means of achieving “reunification” before it seriously contemplates military action. If things do reach a point where the CCP believes military means are the only way to bring about “reunification,” it will make sure the chance of success is very high before proceeding. Failure to conquer Taiwan will bankrupt the CCP’s political legitimacy and doom the regime. Presently, the CCP has neither abandoned its non-kinetic strategies for “reunification” nor is invasion the only option left. Thus, we believe the speculation of an impending PRC invasion of Taiwan is just speculation.
Militarily, the PRC is just not ready at the moment to launch a successful Taiwan invasion. Granted, the PLA has been rapidly building up its amphibious assault force in recent years—two Type 075 amphibious assault ships have been launched since 2019 with a third in construction, and the PLA marine force is now estimated at 25,000 to 35,000 troops, up from 10,000 in 2017. However, it is questionable whether the PLA has sufficient trained personnel and equipment to sustain a first wave assault and push for victory. Equipment wise, the PLA has a shortage of suitable troop landing crafts, and the civilian vessels it could mobilize to bolster its landing fleet come with all sorts of problems (lack of training, not designed for assaulting beaches and landing troops, etc.). Meanwhile, the quality of PLA training has long been dubious; the CCP only recently decided to overhaul its military education to shift away from an earlier emphasis on political indoctrination.
Geographical conditions this time of the year also do not suit invasion. The Taiwan Strait is a rough patch of water with strong winds and high waves. The period from late October into March is marked by poor weather and visibility. Good weather is vital for a successful beach assault; after all, D-Day was postponed for a day due to bad weather, and the English Channel is more passable than the Taiwan Strait. Thus, even if there was a “contested election” scenario in America (November to January), the CCP is unlikely to invade Taiwan due to poor weather.
A PRC missile bombardment of Taiwan is possible, but has zero practical value aside from pure vindictiveness. Part of Taiwan’s appeal for the CCP is its existing infrastructure, and Beijing would not want to expend additional resources to rebuild Taiwan after what would be a costly invasion. As White House National Security Advisor Robert O’Brien observed at the Aspen Institute forum on Oct. 16, the PRC could conceivably “annihilate” Taiwan with its massive missile force, “but I don’t know what they would gain from that.”
O’Brien also did not think that the CCP “at this point want or likely are prepared for an amphibious landing.” Such an invasion “would be a hard operation for the Chinese to do” and Beijing would have to consider how the U.S. would respond, he said. “If we got involved, that can make that a very dangerous effort for the Chinese to engage in,” O’Brien added. Indeed, the CCP, which grows cautious in the face of strength, would likely be dissuaded from launching kinetic operations against Taiwan given the heightened U.S. activity in the Taiwan Strait and the South China Sea in recent years. From January 2019 to October 2020, U.S. warships sailed 19 times through the Taiwan Strait. On Oct. 19, the U.S. Seventh Fleet announced that the U.S., Japan and Australia conducted trilateral naval exercises in the South China Sea, the fifth such joint operation this year.
2. Xi Jinping and the CCP currently do not have sufficient political incentive to even consider an invasion of Taiwan.
As we have detailed in previous newsletters, Xi is facing a “perfect storm” of domestic and external problems. Xi likely finds it challenging enough to bring the Party to consensus and hold the Fifth Plenum at the end of October without incident. Invading Taiwan at this juncture is political suicide for Xi, especially when the odds of success are very low. A failed invasion would destroy Xi’s political mythos.
The CCP’s political legitimacy is not hinged upon invading Taiwan at this point. “Reunification” now does not benefit the regime much, when its most pressing issues are the economy and factional struggle.
3. What the CCP wants is for the U.S. and other countries to dial back their support of Taiwan. To that end, Beijing has a vested interest in promoting narratives that play up the risks of building better diplomatic ties with Taiwan (and dampen Taiwan’s international profile).
The CCP’s bellicose rhetoric on Taiwan and “scare tactics,” however, will likely backfire in the “new cold war” climate. Instead of getting countries to abandon Taiwan out of fear, the CCP will instead inspire the U.S. and other countries to strengthen their support for Taipei.
