SinoInsight 1
The Central Commission for Discipline Inspection published a lead article on its website titled, “Deep Focus | Guard Against the Capture of Leading Cadres by Interest Groups” (深度關注 | 防範領導幹部被利益集團綁架).
Key points in the article include:
- The article pointed out that “interest groups use unscrupulous means to ‘surround and capture’ leading cadres,” and are an “important reason why the increase in corruption still occurs.”
- “Power rent-seeking” and “internal and external collusion to form interest groups” have “resulted in compromises in the implementation of decisions and deployments by Party Central.” And “if this phenomenon is allowed to develop, it will inevitably shake the foundations of Party rule.”
- Those who “insist on taking and receiving bribes will be investigated” as the CCP “resolutely guards against interest groups ‘surrounding and capturing’ leading cadres.”
- In previously handled corruption cases, political and economic issues were found to have been intertwined as “[political] power and capital mutually colluded.”
- The article noted that some leading cadres of state-owned enterprises engaged in “transfer of benefits” for personal career advancement. Also, some SOE owners who sought political power after securing economic power proceeded to ‘surround and capture’ and corrupt leading cadres, engaged in power and money transactions, and formed interest groups. Some leading cadres were “surrounded and captured” by lawbreaking elements and formed interest groups with them, eventually creating a vicious circle. These interest groups violated regulations and interfered with justice, and obstructed law enforcement. The interest groups “paid lip service (陽奉陰違) to Party Central’s decisions and deployments, and undermined the centralized and unified leadership of Party Central and Party unity.”
- The article called on Party members and cadres to be “politically sensible people” (做政治上的明白人), “conscientiously maintain a high degree of consistency with Party Central in ideology and political actions,” and “must not become spokespersons of interest groups within the Party.”
- The article cited the case of Xue Jining, the former Party secretary and director of the Inner Mongolia Banking Regulatory Bureau as a negative example to avoid. Xue is accused of being “surrounded and captured” by “lawbreaking financial groups and Baoshang Bank,” including helping Baoshang Bank (linked with Xiao Jianhua’s Tomorrow Group corruption case) set up branches in Shenzhen, Chengdu, and Beijing in violation of regulations.
- The article noted that the CCDI, the National Supervisory Commission, the Central Organization Department, the Central United Front Word Department, the Central Political and Legal Affairs Commission, the Supreme People’s Court, and the Supreme People’s Procuratorate had jointly issued a document on Sept. 8 on taking further steps in investigating those who take and receive bribes (關於進一步推進受賄行賄一起查的意見). The document called for exploring the implementation of a “blacklist” system for bribery cases, as well as the implementation of dynamic management and joint punishment for guilty parties.
Central Inspection Work Leading Group head Zhao Leji announced the commencement of investigations into 25 financial institutions in a speech delivered at the eighth round of the 19th central inspection work mobilization and deployment meeting.
The financial institutions are:
- People’s Bank of China;
- China Banking and Insurance Regulatory Commission;
- China Securities Regulatory Commission;
- State Administration of Foreign Exchange;
- China Investment Corporation;
- China Development Bank;
- Export-Import Bank of China;
- Agricultural Development Bank of China;
- Industrial and Commercial Bank of China;
- Bank of China;
- China Construction Bank;
- Bank of Communications;
- China CITIC Group;
- China Everbright Group;
- People’s Insurance Company of China;
- China Life Insurance Company;
- China Taiping Insurance Group;
- China Export & Credit Insurance Corporation (Sinosure);
- Shanghai Stock Exchange;
- Shenzhen Stock Exchange;
- China Huarong Asset Management;
- China Great Wall Asset Management;
- China Orient Asset Management;
- China Cinda Asset Management.
In the month of September, the CCP authorities investigated 10 cadres at central-level financial institutions or state-owned enterprises, including:
Sept. 1
1. Zou Yongsheng (59 years old), executive deputy general manager of PetroChina Southwest Pipeline.
2. Cao Yaofeng (68), a former Party group member and deputy general manager of Sinopec.
Sept. 3
Jiang Yutang (59), a Shenzhen Supervisory Bureau second-level inspector stationed at the China Banking and Insurance Regulatory Commission.
Sept. 9
He Xingxiang, a Party committee member and vice president of China Development bank.
Sept. 10
Xie Hongru (60), the former Party secretary of China CITIC Bank’s Guangzhou branch.
Sept. 15
Yu Huayuan (50), the former vice president of the Bank of Communications’ Liaoning branch.
Sept. 17
Xiao Mingfu (53), a Standing Committee member of the Anshan Iron and Steel Group Party committee.
Sept. 24
Lin Jinben (61), the former Party secretary of Fujian Energy Group.
Sept. 27
Lu Jinwen (59), the former vice president of the Industrial and Commercial Bank of China’s Guangdong branch.
Sept. 28
Cai Jiangting (57), a first-level inspector stationed in the legal department of the China Banking and Insurance Regulatory Commission.
OUR TAKE
The CCDI article should also be read in the context of Beijing’s moves since 2017 to clean up the financial sector and the political and legal affairs apparatus, including the arrest of Xiao Jianhua in 2017, the purge of CEFC China Energy chairman Ye Jianming in 2018, the suspension of Ant Group’s IPO in late 2020 and the sidelining of Jack Ma, the execution of China Huarong Asset Management’s Lai Xiaomin this January, and the recent exposing of purged Jiangsu political and legal affairs officials like Luo Wenjin and Wang Like for running a “judicial mafia.” All the aforementioned personnel are linked with the Jiang faction.
The inspection of the 25 state financial institutions is bound to lead to a wave of arrests and personnel reshuffles. Depending on the severity of Beijing’s actions, the inspection could potentially lead to some market fluctuations as investors account for escalating political risks in China.
By taking steps to “scrape poison from the bone” (刮骨療毒) and dealing with “anti-Party Central” elements in the Party elite, Xi is looking to simultaneously push his reforms into “deep-water territory” (深水區) and eliminate those who oppose his bid for a norm-breaking third office term at the 20th Party Congress in 2022.
2. Xi Jinping’s recent moves affirm the analysis we made following the conclusion of the 19th Party Congress in October 2017. We wrote at the time that Xi would step up anti-corruption efforts, “particularly in the financial sector and the domestic security apparatus,” as he goes after factional rivals, works to overcome the problem of his orders not leaving Zhongnanhai (政令不出中南海), and advances his reforms.
The Sept. 25 CCDI article also indirectly affirms our November 2020 analysis of why Beijing is cracking down on technology companies. We wrote, “the CCP fears a scenario where Chinese big tech companies accumulate enough money and resources to become serious political challengers. Thus, Beijing is preemptively stepping in to regulate tech companies and their online platforms to mitigate the Party’s financial and political risks, under the guise of safeguarding the Chinese people’s interests.” Also, “China’s big tech companies, backed by members of the ‘red aristocracy,’ have amassed so much capital and assets (data) that they are legitimate threats to Party Central.” The CCDI article indicates that Xi’s effort to rein in the financial sector is motivated by concerns similar to that which we previously laid out.
We believe that Xi is taking bolder action now to ram through financial reform and move against powerful interest groups due to changes in the PRC’s external environment. In particular, a clear weakening of America and the West’s stance on China and Wall Street warming up to the Xi leadership have opened a window of opportunity for Xi to focus his efforts on resolving domestic problems and allow geopolitical issues to take a backseat. Washington’s disastrous withdrawal from Afghanistan and the return of Huawei’s Meng Wanzhou to China have also affirmed the “correctness” of the Xi leadership’s strategy and boosted Xi Jinping’s personal “quan wei.” Xi now appears to be tapping into his growing political clout and lowered international pressure to take action against his factional rivals, with an eye to decisively settling the factional struggle in his favor before the 20th Party Congress.
3. Observers must not underestimate the political risks facing Xi Jinping. Frequent mentions in official mainland media about “another Party Central,” recent calls to guard against a “Lin Biao armed coup,” references to the “Gang of Four,” and the upholding as negative examples the CCP elites who engaged in factionalism like Wang Ming and Zhang Guotao, indicate that Xi is met with similar, if not even greater, challenges to his leadership today.
The “you die, I live” nature of factional struggle in the Party elite and the “prefer left over right” tendencies of PRC officials mean that Xi will unlikely get an ideal resolution to his political problems. Businesses, investors, and governments can expect slower economic growth in China as Xi prioritizes reform and factional struggle progress, as well as financial and social turbulence of some sort on the mainland as Xi’s rivals leverage their advantage in the financial sector and the political and legal affairs apparatus in pushing back against the Xi leadership. They can also expect sharply rising political risks in China as the CCP factional struggle intensifies and those affiliated with the losing faction are punished.
SinoInsight 2
Meanwhile, Chinese residents and workers are seeing increasing hardship with power outages and stopped elevators in residential areas. Residents and businesses have been panic buying and hoarding candles; some candle makers report orders increasing 10 times within a week and the emptying of inventories, according to mainland media reports.
The more serious power problems occurred in China’s northeastern provinces. Mainland media reported a sudden power outage in the afternoon of Sept. 23 in the Shenbei New District and Hunnan District of Liaoning’s Shenyang City that was only resolved between 6:00 p.m to 11:00 p.m. in the evening. The power outage led to traffic jams in Shenyang and at least seven traffic accidents. A sudden cut in the electricity supply to a metalwork factory in Liaoning led to a shutdown of the exhaust system and 23 workers being sent to a hospital due to carbon monoxide poisoning.
Power problems in the northeastern provinces appear to be the result of coal supply issues rather than efforts by local governments to adhere to Beijing’s “dual energy consumption control” targets. Per the National Development and Reform Commission’s Aug. 12 “dual energy consumption control” report, Jilin Province had a “green” rating in the three-tier warning system (good control of energy consumption intensity and volume), while Liaoning Province and Heilongjiang Province both received the “orange” rating for energy consumption intensity and the “green” rating for total energy consumption.
China’s official manufacturing purchasing managers’ index (PMI), affected by the power crisis, fell from 50.1 in August to 49.6 in September, according to data from the National Bureau of Statistics.
===
Sept. 26
Party mouthpiece People’s Daily published a commentary on China’s power crunch titled, “As Multiple Places Cut Off Power, The People’s Lives Cannot Be Restricted” (多地拉閘限電，不能讓老百姓生活受限). The article noted that while northeastern regions implemented the “orderly use of electricity” for non-residents, power gaps still exist. Also, measures to restrict power supply to residents were taken because “the entire power grid is in danger of collapse.” The article further pointed out that with winter approaching, “something will happen” if power cannot be guaranteed to residents.
On the same day, the People’s Daily’s operated “Xia Ke Dao” WeChat account published a commentary piece criticizing local governments for dealing with emergencies only at the last minute. The piece noted that some areas took a “one-size fits all” approach to “optimizing energy consumption,” including suspending power production and supply in a manner that affected local residents. “Frankly, this is like doing homework frantically before the start of school,” the “Xia Ke Dao” piece wrote. The piece added that the so-called “movement style” approach to carbon reduction by some local governments exposes their misunderstanding of Xi Jinping’s “new development concept” and shows that they have not been actively planning to transition to a green and low-carbon model.
Sept. 27
The Beijing State Grid Corporation of China announced that some parts of Beijing City will experience power outages from Sept. 27 to Oct. 8 due to “planned maintenance.” The announcement stirred concern among Beijingers and prompted some media outlets and businesses to seek more information from the Beijing State Grid.
Subsequently, the Beijing State Grid “clarified” that it was really carrying out “planned maintenance” and was not restricting power supply.
Sept. 28
Many state media outlets published article criticizing a popular conspiracy theory being spread among domestic “self-media” about how the current nationwide power rationing is the PRC “playing a great game of chess” (國家在下一盤大棋).
“Self-media” commentators theorize that the power rationing is “an international battle for commodity pricing power” and a “financial war between countries.” They explain that the PRC government is “acting in advance” to restrict production capacity by limiting electricity supply so as to protect the export industry as overseas orders pile up. The “self-media” commentators note that excessive overseas orders and a rapidly recovering Chinese economy led many enterprises to expand their production lines, but also drove up the price of raw materials sourced from abroad and led to excess capacity. Those who advocate the conspiracy theory argue that Beijing “would rather not make money in the short term than be overwhelmed by orders now that will suddenly withdraw after a couple of years [leaving China high and dry].”
State media argue that there really is a serious power supply shortage in northeastern China and electricity restrictions have been implemented to prevent a collapse of the power grid. Hence, the “playing a great game of chess” conspiracy theory and talk of a CCP “exporting inflation” strategy is akin to a “roundabout smear” of the central government.
Sept. 29
State mouthpiece Xinhua provided two reasons for the recent power restrictions in a survey report on the power crunch. The first reason explains that “strong economic recovery” in coastal provinces and cities after improvement in the coronavirus epidemic led to rapid increase in electricity demand. The second reason is that insufficient power generation is due to sharply rising coal prices, a shortage of coal supply, and thermal power plants operating at a loss.
===
Sept. 27
The People’s Bank of China published a news item on its website regarding a regular third quarter meeting of its Monetary Policy Committee in Beijing on Sept. 24. The meeting called for “strengthening the analysis of marginal changes in the domestic and international economic situation, strengthening the coordination of international macroeconomic policies, preventing external shocks, concentrating on handling our own affairs, improving the design of cross-cyclical policies, coordinating and doing a good job of macro policy convergence for this year and the next, and supporting high-quality economic development.”
The meeting also noted that “prudent monetary policy should be flexible, precise, and reasonably moderate” so as to “maintain a reasonable abundance of liquidity, enhance the stability of total credit growth, ensure that the growth rate of money supply and social financing scale basically match the nominal economic growth rate, and keep the macro leverage ratio basically stable.”
Analysis: The PBoC’s mention of “external shocks” is likely a reference to the current global economic slowdown, “imported” inflation from the United States, and shifts in the Federal Reserve’s monetary policy.
Meanwhile, the PBoC’s “prudent monetary policy” likely means a relative loosening of the tight monetary policy it has been maintaining over the past period to cope with recent economic deterioration and the massive power outages across the country.
Sept. 28
In a 5,800-character article in the September issue of the official “Financial Research” publication, PBoC governor Yi Gang wrote that China’s real interest rate is at a “more reasonable level,” being slightly lower than the economic growth rate. Also, China has the conditions to continue implementing a normal monetary policy, and will maintain such a policy for as long as possible without needing to conduct asset purchases.
Yi Gang wrote, “Asset purchase tools are not conventional monetary policy tools, but rather a choice forced upon central banks in the event of market problems. Prolonged implementation of asset purchase operations by central banks can create many problems, including jeopardizing market functions, monetizing fiscal deficits, damaging the reputation of central banks, blurring the boundary between central bank resolution of market failures and monetary policy stance, and raising moral hazards.”
Yi added that the PBoC will continue to deepen interest rate marketization reform and strive to improve the market-based interest rate formation and transmission mechanisms.
Analysis: Worsening economic conditions in China is placing great pressure on the PBoC to loosen its monetary policy. However, the PBoC is also aware that quantitative easing is a double-edged sword; the effect of stimulus may not be obvious due to transmission mechanisms, but the stimulus will bring many other negative effects.
Yi Gang believes that interest rates should be used to regulate and maintain the present economic “stability,” and hence is looking to delay quantitative easing for as long as possible.
OUR TAKE
1. State and Party media denying “conspiracy theories” by “self-media” commentators and admitting that raising coal prices are to blame for reduced power supply is a subtle effort by Beijing to cover up its geopolitical missteps that contributed to China’s recent power crisis, such as suspending coal imports from Australia.
Official mainland media is also looking to deflect blame for the power crisis from the central government to local governments by criticizing their last-minute “one-size fits all” approach to “optimizing energy consumption”; implicit in the criticism of local governments is that their attempts to build political capital through crisis handling has instead hampered Beijing’s policies.
State and Party media’s “one-size fits all” criticism affirms our analysis in the last edition of this newsletter of how local officials would react to the power problem.
2. The PRC’s current power predicament is obviously the fault of Party Central and an inevitable byproduct of the CCP authoritarian system. However, local governments also bear a share of the responsibility and for worsening the situation; as we pointed out on a number of occasions, CCP officials have a tendency to prioritize their personal interests before regime interests, and do what is best for career advancement (including doing what they guess will please Xi Jinping) without caring about the negative impact of their actions on the Chinese people or to regime security.
An example is CCP diplomacy. During the Great Famine in China in the 1960s, the CCP exported huge amounts of food to foreign countries to score diplomatic points while rejecting food aid from the Soviet Union due to the ongoing Sino-Soviet split. The CCP’s diplomatic moves ended up worsening the famine situation and contributed to the estimated 45 million deaths during the Great Leap Forward campaign. While Mao Zedong certainly held responsibility for the CCP’s diplomatic policy then, officials reporting inflated food production figures to Party Central to protect their career doubtless contributed to the central government’s erroneous policy direction.
Likewise, Xi Jinping is to blame for the increased aggressiveness in the CCP’s foreign policy. But the Party’s diplomats and propagandists are also responsible for escalating the PRC’s tensions with other countries with their “wolf warrior” approach as they endeavor to fulfil what they believe to be Beijing’s “Great Power Diplomacy” (大國外交). Xi’s speech in June calling on officials to be “trustworthy, lovable and respectable” suggests that the Party’s “wolf warriors” had not been properly implementing what Xi wanted, and had brought more trouble to the regime with their belligerent statements and actions.
The CCP’s overly enthusiastic effort to punish Australia for calling an investigation into the origins of the coronavirus in 2020 certainly worsened the regime’s energy problems and is hampering Beijing’s energy and climate strategy. Beijing’s “green” strategy calls for developing electric vehicles, 5G networks, using electricity instead of coal for heating, the construction of a “super grid,” and other measures that would sharply increase the PRC’s reliance on electricity. Meanwhile, thermal power plants account for 70 percent of China’s electricity generation, with hydro, wind, nuclear, and solar power accounting for the remaining 30 percent.
Sanctions against Australian coal as a result of “wolf warrior” diplomacy, however, throws a wrench in the CCP’s energy strategy. Before the sanctions, thermal coal prices in the first quarter of 2020 did not exceed 600 yuan per ton, while the highest price over the past five to six years was around 700 yuan per ton. After the sanctions, coal prices rose steeply to eventually exceed 1,100 yuan per ton, and even reached 1,600 yuan per ton at one point. Thermal power plants found it hard to keep up with rising prices, and even more so as they were not able to pass on the burden to industrial consumers given the CCP’s administrative measures to limit electricity prices for industries to keep production costs low and boost the export trade. The resulting vicious cycle led to the current power crunch.
China’s nationwide power shortage and global inflationary pressures are impacting the price of raw material and commodities (soaring prices and huge price variance), including those used in construction like cement and steel. This would in turn affect the real estate industry, which is currently undergoing a downturn and suffering the consequences of the Evergrande debt crisis. If the PRC government cannot improve the power situation in the short term, then the power crunch will aggravate the real estate debt crisis as unfinished projects become the norm and social instability increases.
Various signals indicate that power prices in China are likely to go up in the near future. Several provinces and areas are snatching up coal to boost their supplies, while there are reports that the authorities are planning to raise power prices for industrial consumers to alleviate the supply crunch, and possibly raise prices for residential users if industrial increases are not enough to resolve the crisis. High power prices will in turn contribute to growing inflation.
3. China’s power crunch is putting even more pressure on the economy and giving the PBoC fresh headaches over its monetary policy. While China received a surge in overseas orders following the alleviation of the coronavirus pandemic earlier in the year, the PRC did not exactly benefit from the situation, given that the appreciating renminbi and soaring freight rates increased costs for manufacturers. The recent power outages and loss of workers due to power rationing have only compounded the problems facing Chinese companies in the export business.
Under more normal circumstances, the PBoC could consider quantitative easing to dig the PRC out of a hole. However, QE and looser monetary policy is very risky in view of the U.S. Federal Reserve signaling on Sept. 22 that it would likely reduce its monthly bond buying in November and could raise interest rates next year to cope with inflation. Hence, the PBoC dares not carry out QE lest it sharply increase the risk of bursting China’s financial bubble.
The PRC’s current economic problems somewhat offset Xi Jinping’s recent diplomatic victories over the United States and its allies. Moreover, the “anti-Xi coalition” will likely look to take advantage of economic and financial weakness to exacerbate problems for Beijing, undermine Xi’s “great leader” image, and advance their agenda of sidelining him ahead of the 20th Party Congress.
