SinoInsight 1
The CCP is gradually raising alarm bells about the state of China’s economy after weeks of “all’s well” signaling around the Sixth Plenum period and propaganda about Xi Jinping’s “achievements” in his “historical resolution. Mainland media reports and economic data also indicate that the economy has deteriorated even more since the outbreak of the Evergrande crisis earlier in the year.
Central economic work conference and experts’ analysis of the economy
Dec. 2
Li Daokui, a professor at Tsinghua University’s School of Social Sciences, expressed his concerns about China’s economic prospects amid global recession during a virtual economic forum. He said, “I’m afraid that the Chinese economic operation and development over the next several years may be relatively difficult,” and added that the next five years is “probably one of the most difficult periods in the past 40-plus years of reform and opening up.” Li said that international markets will see major recessions in three areas, namely, debt (shrinking debt scale leading to insufficient liquidity), supply chains, and carbon (economic impact as a result of Western and developed economies pursuing a carbon reduction agenda).
Dec. 6
1. The CCP Politburo held a meeting to analyze and study economic work in 2022. The meeting proposed to “promote the construction of subsidized housing, support the commercial housing market to better meet the reasonable housing needs of homebuyers, and promote the real estate industry’s healthy development and virtuous cycle. The meeting did not bring up the “houses are meant for living, not speculation” policy that had been repeatedly stressed in recent years.
2. In its annual blue book (經濟藍皮書: 2022年中國經濟形勢分析與預測), the Chinese Academy of Social Sciences (CASS) recommended an economic growth target of above 5 percent for 2022.
The CASS blue book also called on the central government (while it is implementing the “three red lines” and “two concentrations” policies) to proactively engineer a “soft landing” for the real estate sector, to avoid failed land auctions and surging housing prices due to a lack of land supply in big cities, and guard against triggering collateral risks stemming from quickly falling property prices in smaller cities.
Dec. 10
1. PRC state media report that Xi Jinping and other top leaders held the Central Economic Work Conference in Beijing from Dec. 8 to Dec. 10. The word “stability” was mentioned 25 times in Xinhua’s roughly 5,000-character report about the meeting.
The meeting touted economic “achievements” under Xi, noting that China “remains the global leader in economic development and epidemic prevention and control; national strategic science and technology strength has seen accelerated growth; the resilience of supply chains has been enhanced; reform and opening up has been promoted to a deeper level; livelihood protection has been strong and effective; and the construction of ecological civilization continues to advance.” The meeting also acknowledged that “economic development is facing three pressures of demand contraction, supply shock, and weakening expectations.” Further, “the external environment is becoming more complex, severe, and uncertain under the impact of the pandemic of the century and the acceleration of changes unseen in a hundred years.”
The meeting stressed that the CCP government should in 2022 “do the ‘six stables’ (六稳) and ‘six guarantees’ (六保) work well; continue to improve the people’s livelihood; focus on stabilizing macroeconomics; keep the economy running within a reasonable range; and maintain overall social stability.” Next year’s economic work should be “stable, steady, and progressive,” and all departments should assume responsibility for “macroeconomic stability” and actively launch “policies conducive to economic stability.”
The meeting brought up the following key points for economic work in 2022:
- Implement new policies to reduce taxes and fees, strengthen support for small and medium-sized enterprises, individual entrepreneurs, manufacturing, risk resolution, etc., and moderately advance infrastructure investment.
- Party and government organs should persevere in belt-tightening (過緊日子) operations.
- Curb new local government implicit debt.
- Stable monetary policy should be flexible and moderate to maintain a reasonable abundance of liquidity.
- Strengthen anti-monopoly and anti-fair competition measures.
- Manage malicious defaults and debt evasion.
- Enhance the core competitiveness of the manufacturing sector and launch a number of industrial base re-engineering projects.
- Adhere to the position that “houses are meant for living, not speculation.”
- Implement a three-year action plan to reform the science and technology system, and formulate and implement a ten-year plan for basic research.
- Fully implement the registration system for stock issuance and complete the three-year action plan for reforming state-owned enterprises.
- Steadily promote the reform of the power grid, railroads, and other natural monopolies.
- Social policies must cover the bottom line of people’s livelihood.
- The “common prosperity” policy should be achieved through strategic goals and practical approaches. The “people of China will work together to make the ‘cake’ bigger and better, and the ‘cake’ will be divided through reasonable institutional arrangements.”
- The positive role of capital should be brought into play, while its negative role should be controlled; “traffic lights” must be set up to regulate capital.
- The supply of primary products must be guaranteed. A comprehensive conservation strategy must be implemented in the areas of production, consumption, resources, and agriculture.
- Major risks must be prevented and resolved.
- With regard to peak carbon and carbon neutrality, the gradual withdrawal from traditional energy sources should be based on the safe and reliable substitution of new energy sources. Realize the transformation from “dual energy consumption control” of energy consumption to “dual control” of total carbon emissions and intensity, and prevent “one-size-fits-all” measures at realizing the targets at different levels of government.
The meeting required all Party Committees, governments, and leading cadres at all levels to consciously maintain a high degree of consistency with Party Central in implementing the Party line and policies. Objective reality and the needs of the masses must be respected in leading economic work, and officials must “resolutely prevent simplistic and chaotic actions, as well as oppose non-responsibility and inaction (不作為).”Finally, the meeting called on “all Party comrades to closely unite around Party Central with Comrade Xi Jinping at the core,” and “take practical action to put into place the decisions and deployments of Party Central to welcome the commencement of the 20th Party Congress with victory.”
2. In commenting on the real estate policy discussed at the Central Economic Work Conference, Lou Jianbo, the director of the Center for Real Estate Law at Peking University, noted that the central government’s real estate policy has been “clear and continuous” since the emergence of the “city-based policies” in 2014 and the “houses are meant for living, not speculation” policy in 2016. He added that while the central government’s real estate policy has at times been stricter or looser, the “basic principles have not changed” as it guards against a “hard landing” for the property sector.
Lou also said that guarding the bottom line of real estate development means not incurring financial risks and not affecting the development of the real economy.
3. According to a report by Shanghai E-House Real Estate Research Institute, the total inventory of newly built commercial residential properties in 100 model cities in China stood at 521.1 million square meters at the end of November, up 2.1 percent month-on-month and year-on-year, as well as a new high since August 2016. The inventory has shown positive growth for four consecutive months and 36 consecutive months of year-on-year growth.
Third and fourth-tier cities saw the largest year-on-year increase in inventory. According to the report, first-tier, second-tier, and third- and fourth-tier cities grew by 30.52 million square meters, 265.71 million square meters, and 224.87 million square meters respectively, or a year-on-year increase of -2.9 percent, -0.9 percent, and 6.7 percent. Third- and fourth-tier cities also saw positive year-on-year growth for 37 consecutive months.
Real estate debt and financing
Dec. 2
Rumors that China Aoyuan Group failed to make payment on overdue wealth management products began circulating on the internet. Mainland media outlets report that a portion of around 6 billion yuan of China Aoyuan’s wealth management products is currently overdue. Previously, the company said that it offered repayment by cash installment or in physical assets, and investors can choose to be paid through either option or a combination of both.
Dec. 5
Chinese property developer Sunshine 100 China Holdings said in a filing that it will not be able to make payment on $170 million of principal and over $8.9 million of interest on its 10.5 percent senior notes due 2021. In August, the company said it was unable to repay the principal, premium, and accrued interest of its 2021 bonds. Sunshine 100’s default will also trigger provisions under some other debt instruments.
Dec. 9
Fitch Ratings downgraded China Evergrande and Kaisa Group Holdings to “restricted default” after both companies missed payment deadlines. Evergrande failed to make two coupon payments on Dec. 6 after a grace period, a move which could trigger cross-defaults on the company’s $19.2 billion dollar debt. Meanwhile, Kaisa failed to repay a $400 million dollar bond that matured on Dec. 7.
Dec. 10
According to data compiled by mainland media and Wind, Chinese real estate companies had issued 28.5 billion yuan worth of debt financing instruments in November, an increase of 128 percent from a month ago. The bulk of the companies who issued the instruments are state-owned. And aside from developers with a healthier capital situation like Country Garden and Longfor Properties, most private real estate companies did not see an uptick in the issuing of debt financing instruments.
Civil servant pay cuts
Since early December, mainland media outlets and netizens have reported or described civil servants in many areas seeing substantial cuts to their pay.
- Chinese web portal NetEast reported on Dec. 2 that certain local governments in Guangdong Province stopped issuing subsidies to civil servants and will only guarantee payment of basic wages. Payment to some civil servants was also suspended for two months while payments to teachers were suspended for a month.
- Some netizens report that civil servants in Shanghai, Jiangsu, Zhejiang, Guangdong, Fujian, and other areas received notices that their pay would be cut by as much as 20 to 30 percent. For instance, the annual salary of a police chief in Shanghai would go down from 350,000 yuan per year to less than 200,000 yuan, while the annual salary of a section-level civil servant would be reduced from 240,000 yuan to 150,000 yuan.
- A female civil servant in Hangzhou City disclosed that the local financial department had announced pay cuts to certain staff without providing specific reasons, a move which brought tremendous pressure to families of average means. Another netizen claimed that civil servants in Hangzhou were seeing pay cuts of up to 25 percent, and could see pay reductions by as much as 50,000 yuan in 2022.
- A netizen from Jiangsu Province disclosed that performance bonuses for civil servants in Jiangsu, Zhejiang, and Shanghai were cut, resulting in annual incomes dropping from 300,000 yuan to 200,000 yuan in some cases and 200,000 yuan to 150,000 yuan in others.
We previously wrote about civil servant pay cuts and local government fiscal shortages in July.
Layoffs at major technology companies
Dec. 1
Mainland media report that Chinese online video platform iQiyi laid off between 20 percent to 40 percent of its staff across all departments, including those working on core content and technology. Some iQiyi employees disclosed on a Chinese job search platform that most of the staff that were laid off were at the mid-level or those earning high wages.Dec. 8
1. Several employees of the Chinese video sharing app Kuaishou told mainland media that the company is conducting a new round of layoffs. An employee revealed on a Chinese workspace communications platform that the scope of Kuaishou’s layoffs include entry-level staff and even members of the executive team who are older than 35 and in non-technical positions with annual salaries of over one million yuan.Some Kuaishou employees say that the new round of layoffs hit up to 30 percent of the staff, while others say that the figure is between the 10 percent to 15 percent range. A Kuaishou marketing team vice president told semi-official mainland media outlet The Paper that no layoff notices were received.
2. Employees of big tech companies disclosed on social media layoffs and job transfers in firms like ByteDance’s education, gaming, and lifestyle businesses, as well as children education businesses under Tencent’s Cloud & Smart Industries Business Group.
There are also reports that Baidu, NetEase, and other companies are carrying out “staff optimization” and “business streamlining,” with Alibaba rumored to have laid off 20,000 employees between mid to late November. However, Alibaba staff told media outlets in response to inquiries that they have not received relevant notification.
OUR TAKE
1. The CCP and state-linked experts are expressing pessimism about the future of the Chinese economy to mentally prepare the Chinese people for tough times ahead while subtly lowering standards and expectations of what Beijing can deliver. This way, even modest growth (5 percent and above) during a Party Congress year in 2022 can be spun into an “achievement” for Xi Jinping, and the CCP can continue to make the case that it is “fulfilling” its economic compact with the Chinese people.
The CCP is almost certainly anticipating trouble for the Chinese economy after the U.S. Federal Reserve rolls out measures to check inflation (bond-buying tapering, interest rate increase, etc.). Thus, Beijing has signaled a willingness to consider releasing a degree of stimulus, cut the bank reserve requirement ratio, and even somewhat relax its tight grip on the property sector as it looks to offset the impact of upcoming Fed measures.
The CCP will be hoping that its various countermeasures can help the regime avert a “hard landing” for the property sector, an expansion of financial contagion, the triggering of China’s debt crisis, massive capital flight, and other economic and financial problems. Concurrently, the CCP is looking to attract foreign investments and capital into China while guarding against capital’s capacity to weaken the central government’s control over social resources.
2. Local governments, many of which rely heavily on land sales to maintain their revenue streams, are feeling the strain of China’s deteriorating economy and real estate sector woes. The slashing of civil servant wages and suspension of performance bonuses are tell-tale signs that local governments are experiencing serious financial difficulties. Local governments appear to have no choice but to take measures that would upset social stability in exchange for keeping government operations afloat.
A sustained wage cut policy creates a litany of problems that endanger the regime. For instance, the CCP will erode a reliable base of support (the civil service); government credibility and legitimacy will be weakened; more and more civil servants will turn to corruption and the black market in order to survive; life will get harder for businesses and individuals; social stability will be undermined; local governments will have to spend more on “stability maintenance,” thereby eating into the “savings” made from wage cuts and adding on to existing fiscal problems; etc.
It is unclear whether local governments are acting on their own initiative or taking instructions from the central government in passing wage cuts. However, the central government clearly recognizes that continued and severe economic deterioration is threatening regime survival, and has been taking measures to secure the loyalty of the military, a constituent that the CCP, which believes that “political power grows out of the barrel of a gun,” considers far more important than the civil service in safeguarding the regime.
We believe that the military would more likely cooperate with local governments to obtain and maintain the flow of vital supplies when society stability does break down, while civil servants are more likely to contribute to the chaos with the anger and inaction over government mistreatment. But the central government may find that the additional benefits it has plied the military with this year cannot resolve its problems of command and control (政令不出中南海) during crunch time when the CCP’s “quan wei” and legitimacy hits rock bottom.
3. The Central Economic Work Conference’s call for officials to “resolutely prevent simplistic and chaotic actions, as well as oppose non-responsibility and inaction” indicates that Beijing is still struggling to get local governments to properly implement orders its instead of prioritizing local interests first even if doing so is to the detriment of the central government. This is very problematic for the CCP regime’s survival at a time when it is struggling with the “three pressures” on economic development, a “more complex, severe, and uncertain” external environment, and the “acceleration of changes unseen in a hundred years.”
We believe that Beijing’s dilemma of “orders not passing the gates of Zhongnanhai” will only worsen further as the Chinese economy declines amid internal and external pressures, and as local governments have no choice but to sustain wage cuts and suspension of bonuses. Such a development would ramp up political risks for Xi Jinping and the CCP.
4. Domestic and external pressures on the Chinese economy, as well as the Xi leadership’s difficulty in handling the pressures and crises, will compound Xi Jinping’s political problems and could lead to flashpoints in intra-Party factional struggle. Businesses, investors, and governments need to look beyond the CCP’s “all’s well” messaging and propaganda, and make contingencies should China experience Black Swan events.
SinoInsight 2
On Dec. 8, CCP Central Party School publication Study Times published as its lead article a piece by propaganda vice minister Shen Haixiong titled “Strengthen Historical Confidence, Take on the Historical Mission, and Master the Historical Initiative” (堅定歷史自信 擔當歷史使命 掌握歷史主動).The article said that in order to “look ahead to the new journey of the second centennial struggle,” cadres must understand “where the bottom line of ‘historical confidence’ lies.” The article then quoted Karl Marx and Mao Zedong in emphasizing the importance of the “Xi core” to the CCP’s second centennial goals:
- Marx: “Every social era needs its own great figure. If there is no such figure, then one has to be created.”
- Mao: “How many cores are there in a peach when you slice it open? There is only one core.”
The article added, “Throughout the Party’s first centennial history, whether it was the Long March where life hung in the balance or the ten years of civil unrest, every time when the storm was stirring, ‘such a figure’ and ‘leadership core’ would emerge and lead [the Party] to victory.”The article proceeded to tout Xi’s “achievements” since the 18th Party Congress in 2012. Xi is said to possess the “eloquence of a great statesman, thinker, and strategist” who has the “courage and loyalty” to “sacrifice himself for the good of his people” (我將無我, 不負人民). Xi is also said to be be able to “save the day (挽狂瀾於既倒), prevent the building from collapsing (扶大廈之將傾), steer the giant ship of China through dangerous shoals and turbulent waves, pioneer a new era of socialism with Chinese characteristics, and chop the waves on the new journey of achieving the great rejuvenation of the Chinese nation.” This proves that General Secretary Xi “is worthy of being the Party core, the commander-in-chief, and the people’s leader” who is “supported by the Party and loved by the people,” and is worthy of “being the great helmsman who leads the cause of socialism with Chinese characteristics in the new era.”
OUR TAKE
1. Shen Haixiong’s article appears to be part of the series of post-Sixth Plenum articles meant to promote and reinforce Xi Jinping’s “historical resolution.” Shen’s article and those before his seek to provide justification for Xi taking a norm-breaking third term at the 20th Party Congress in 2022, as well as help Xi with his political mobilization against factional rivals.
2. Part of Xi’s political mobilization involves criticizing the legacy of Jiang Zemin and his faction (see here and here). Shen Haixiong does this using the roundabout, backhanded fashion common in Party prose. Shen indicates that the Party was on the verge of collapse when Xi took over before the 18th Party Congress no thanks to governance during the Jiang faction’s era of dominance, and this required Xi to “save the day and prevent the building from collapsing” (挽狂瀾於既倒, 扶大廈之將傾). Xi is then credited with “steering the giant ship of China through dangerous shoals and turbulent waves,” or essentially taking action (anti-corruption campaign, military reforms, institutional reforms, etc.) that ensured the Party’s survival and entry into his “new era.”
Shen’s subtle criticism of Jiang Zemin and his legacy is consistent with the other similar jibes in the series of post-Sixth Plenum articles. The Xi leadership will likely continue with propaganda efforts to blame Jiang and the faction associated with him for allowing corruption to “ruin the Party and the country” (亡黨亡國) while casting Xi as the Party and the military’s “savior” as Xi Jinping consolidates his position ahead of the 20th Party Congress.
Sustained political mobilization is a crucial tactic in CCP factional struggle. Deng Xiaoping and his supporters spent years mobilizing against Hua Guofeng and his “Two Whatevers” through political theory and public discourse before Hua was eventually eased out of the top leadership in 1981. Whether Xi Jinping moves against Jiang Zemin and the Jiang faction before the 20th Party Congress depends on political necessity; Xi may “spare” them for the moment if he does not think that they will oppose and affect his third term bid, or he could step up efforts to eliminate the faction if they act against him or Xi believes that they are going to do so.
