China’s economic data hints at impending recession; Xi’s “self-revolution” push reveals ‘killing intent’

     SinoInsight  1     

Analysis:
1. Table 1 shows that investments in fixed assets decreased 13.8 percent (8.7 trillion yuan) from 2017 to 2021 while investments in real estate development grew 34.4 percent (3.78 trillion yuan) over the same period. This indicates that China’s property bubble was swiftly expanding and taking up manufacturing capital while the Chinese economy was steadily deteriorating. Beijing’s attempt to address the property bubble and tighten developers’ access to financing led to China Evergrande’s debt crisis blowing up in July 2021 and a puncturing of the real estate bubble.

2. The festering of the real estate sector debt crisis led to reduced local government revenue from fewer land sales, as well as civil servant salary and bonus cuts.

3. Foreign capital is gradually withdrawing from China due to increasing political and financial risks. Japanese conglomerate SoftBank announced that it was pausing investments in China in August 2021 in light of Beijing’s regulatory action. Regulatory crackdowns in China saw SoftBank reporting in November net assets losses of about $54 billion over three months.

In November 2021, a survey by DIHK Chambers of Industry and Commerce found that 54 percent of its 3,200 members are planning to adapt their supply chains in China or have already done so. Medium-sized German companies are also looking for new suppliers outside of China in the region.

India and Southeast Asian countries are benefiting from foreign capital and supply chains leaving China. According to mainland media, the total amount of newly registered foreign capital, capital growth, and mergers and acquisitions in Vietnam in the first 11 months of 2021 reached $26.46 billion, a figure greater than the whole of 2020. Fifty-three percent of the $26.46 billion went into the manufacturing and processing sector. Meanwhile, the Indian government’s first advance forecast estimates 2021 GDP growth at 9.2 percent, while Fitch Ratings projects India’s growth at 10.3 percent in the fiscal year of 2023.

Sales of commercial residential units in 70 medium- and large-sized cities
On Jan. 15, the NBS released data on changes in the sales prices of commercial residential units in 70 medium- and large-sized cities in December.

New commercial residential units sales price change

• First-tier cities: Shanghai up, Beijing flat, Guangzhou and Shenzhen down.
• Second-tier cities: Seven cities up, 23 down.
• Third-tier cities: Seven cities up, two flat, 26 down.

Second-hand commercial residential units sales price change

• First-tier cities: Shanghai and Beijing up, Guangzhong and Shenzhen down.
• Second-tier cities: Two cities up, 29 down.
• Third-tier cities: Two cities up, 33 down.

Table 3 (Source: National Bureau of Statistics)

Table 4 (Source: National Bureau of Statistics)

Analysis: The tables above show that March was an inflection point for real estate sales in China, following which sales fell until November. Sales were particularly bad after the Evergrande crisis blew up in July, with developers scraping the bottom of the sales barrel during the peak sales period in September and October (金九銀十).

Sales picked up in December somewhat after the authorities began easing restrictions on real estate financing in November. The CCP’s easing of monetary policy in late 2021 and early 2022 could see real estate sales improve in the first half of the year, but is likely to have a limited impact.

Consumption
Retail sales grew 12.5 percent from a year ago to 44.082 trillion yuan in 2021. Growth declined sharply over the course of the year, from over 30 percent in the January-February period to single digits in July, below 5 percent in August, and down to 1.7 percent in December.

Analysis: Several factors led to declining retail sales, including Beijing’s “zero-COVID” policy, regulatory crackdowns, growing unemployment, the “laying flatism” phenomenon, rapidly rising inflation, and a shrinking demographic.

Weak retail sales bodes ill for the Chinese economy, and is convincing foreign capital to withdraw. According to mainland media reports, Walmart closed 32 stores in China in 2021, compared to 80 over the previous four years.

Passenger traffic
In December 2021, the China Transportation Services Index (CTSI) was 85.3 points, a year-on-year drop of 30.1 percent and a two-year average decrease of 28 percent, according to the China Academy of Transportation Sciences. November 2021 saw the least passenger traffic for the year at 71.7 points, down 43.5 percent from 2020.

Analysis: Passenger traffic volume is a key indicator of economic activity in China. Noticeable declines last year suggest that the “zero-COVID” policy is having an even greater impact on passenger traffic in 2021 as compared to 2020. Reduced passenger traffic also affects consumption.

CPI and PPI
China’s consumer price index grew by 0.9 percent (chiefly due to pork prices falling 30.3 percent) in 2021, while the producer price index rose 10.3 percent.

Analysis: The nearly 10 percent difference between CPI and PPI in 2021 shows that inflation is rising slower than manufacturing costs, which shows shrinking consumption power.

Imports and exports
According to NBS data, China’s total imports and exports increased 21.4 percent from a year ago to 391.009 trillion yuan in 2021, with exports up 21.2 percent (217.348 trillion yuan) and imports up 21.5 percent (173.661 trillion yuan). The trade surplus of 43.687 trillion yuan was the highest since 2015.

Analysis: A chief reason for China’s strong export figures was growing demand for manufactured goods in Western countries and the coronavirus pandemic reducing global production capacity, particularly in countries like India and Vietnam. The external environment saw orders (possibly temporarily) returning to China.

However, the CCP did not benefit as much as it should have. Data from the PRC General Administration of Customs (GAC) and the Hong Kong Census and Statistics Department (CSD) of goods imported from Hong Kong to the mainland suggests that China’s trade surplus in 2021 is possibly half or less of what it should have been. GAC figures show that the total value of goods imported from Hong Kong to mainland China was $9.7 billion (about 61.5 billion yuan) from January to December 2021. Meanwhile, CSD data shows that exports from Hong Kong to the mainland amounted to $340.4 billion from January to November 2021. The difference of $330.7 billion reduces China’s trade surplus by 48.9 percent; the percentage is almost certain to exceed 50 percent with the inclusion of December data.

Exchange rate fluctuations and differences (the renminbi appreciated by 2.62 percent in 2021), soaring energy and commodity prices, rising freight rates, and port gridlocks also impacted China’s exports in 2021. Small and medium-sized Chinese enterprises (most with profit margins of below 5 percent) have become increasingly cautious of accepting orders as they fear ever-increasing losses. Nevertheless, many of these companies end up accepting loss-making orders to avoid losing customers and maintain future business opportunities.

China’s imports and exports will likely run into difficulties this year if developed countries signal an “end” to the pandemic while implementing monetary policies to curb inflation. The situation could get even worse should India and Southeast Asian countries recover their production capacity.

Population
China’s population increased by 0.03 percent (480,000 people) to 1.4126 billion people in 2021, according to the official census. There were only 10.62 million births in China, an 11.5 percent drop from 2020 and a record low of 7.52 births per thousand. The national death rate was 7.18 per thousand.

Population by age in 2021

• 0-15: 263.02 million (18.6 percent); 5.28 million fewer than 2020
• 16-59: 882.22 million (62.5 percent); 2.47 million more than 2020
• 60 and above: 267.36 million (18.9 percent); 3.29 million more than 2020
• 65 and above: 200.56 million (14.2 percent); 9.92 million more than 2020

Table 5 (Source: National Bureau of Statistics)

Analysis: Per the NBS’s figures, China’s population barely grew at all last year and is aging further (over 14 percent of the country is 65 and older). Meanwhile, the NBS data cannot be cross-referenced with the Ministry of Public Security’s (MPS) newborn registration data, which have yet to be released at the time of writing. It is possible that the MPS is wary of releasing the figures given the many anomalies in the PRC’s Seventh National Population Census; the MPS could either still be in the process of “cleaning up” (falsification) the data, or could stop releasing such data altogether to avoid embarrassing the regime.

OUR TAKE
1. The NBS data shows that China’s economy is decelerating at a rapid pace. The persisting or worsening of current economic trends, coupled with likely multiple rate hikes by the U.S. Federal Reserve this year, are raising the prospects of recession in China in 2022. Clearer signs of recession in the second half of 2022 will pose serious challenges to Xi Jinping and regime security.

2. The CCP has voiced its concern about the upcoming Fed interest rate hikes while signaling the risks it poses to the Chinese economy.

On Jan. 16, Chen Yixin, the Central Political and Legal Affairs Commission (CPLAC) secretary general, listed “seven-fold” challenges to political and legal affairs work this year in his summary speech for a CPLAC work meeting in Beijing. The challenges include:

• Efforts by external forces’ to “contain and suppress” the PRC represent a “major threat”;
• The impact of the “once in a century” coronavirus pandemic represents a “major test”;
• The global inflationary environment applies “major external pressure”;
• Political security risks are a “major concern”;
• Economic and financial risks are “major risks with spillovers”;
• Social security and public safety risks are “major challenges”;
• “New security risks” are “important risk increments.”

On Jan. 17, Xi Jinping said in a speech via video link to the World Economic Forum’s annual meeting, “The global low inflation environment has notably changed, and the risks of inflation driven by multiple factors are surfacing. If major economies slam on the brakes or take a U-turn in their monetary policies, there would be serious negative spillovers. They would present challenges to global economic and financial stability, and developing countries would bear the brunt of it.”

The “spillovers” mentioned by Xi and Chen are likely a reference to large-scale capital outflows from China that would result from a narrowing U.S.-China yield spread after the Fed raises rates. As of January 18, the yield spread was only 0.876 percent (U.S. 10-year government bonds: 1.88 percent; China 10-year government bonds: 2.756 percent), a much narrower figure than the 2020 high of 3.28 percent. Central and Wall Street bankers are expecting the Fed to lift interest rates by as many as three to seven times in 2022, moves that increase economic and financial risks for the CCP regime.

The People’s Bank of China (PBoC) appears to be wary about raising rates to maintain the U.S.-China yield spread given China’s deteriorating economic situation. Instead, the central bank cut the reserve requirement ratio and lowered borrowing costs of seven-day reverse repurchase agreements (repos). On Jan. 16, the PBoC lowered the interest rate on 700 billion yuan worth of one-year medium-term lending facility (MLF) loans to some financial institutions by 10 basis points to 2.85 percent, and also lowered repos by 10 basis points to 2.10 percent by offering another 100 billion yuan worth of repos into the banking system. On Jan. 20, the PBoC cut its one-year loan prime rate by 10 basis points to 3.7 and the five-year loan prime rate from 4.65 percent to 4.6 percent.

Large-scale capital outflows will also lead to currency depreciation. When funds outstanding for foreign exchange are reduced, the PBoC will have to withdraw base currency to stem renminbi devaluation (China’s money multiplier is at a high of 7.41; China’s financial markets will currently lose 47 yuan of liquidity per $1 of outflow). However, this will cause liquidity problems, worsening the debt issues of Chinese companies (especially real estate developers), increasing the probability of defaults, and exacerbating the “death spiral” of China’s economic deterioration. If the PBoC does not withdraw base currency, then the pressure to devalue the renminbi will increase and lead to accelerated capital outflows.

In pre-empting the coming economic and financial storm, the CCP could endeavor to open China’s financial markets to an even greater degree and court foreign capital with various perks before and after the Fed lifts rates. In doing so, Beijing will be hoping that Wall Street and other foreign investors decide to defy economic “gravity” by keeping or even increasing their investments in China.

3. China’s rapidly slowing population growth and expanding aging demographic will weaken its economic growth momentum and potential.

The current economic environment and global pandemic conditions are hampering consumption and real estate sales from rebounding to previous levels. Meanwhile, labor shortages are affecting manufacturing and technological innovation; reduced technological productivity and innovation in turn makes it more difficult for the PRC to make up for a shrinking and aging workforce. To make matters worse, the CCP government’s pension burden will rise sharply as Chinese society ages while revenue streams are reduced.

Without a way to reverse the drain on its finances, the CCP’s boast about surpassing the United States in the 2020s will prove to be empty talk.

4. Xi Jinping’s “quan wei” (authority and prestige) will be greatly weakened if the Chinese economy maintains its current downward trajectory and enters a recession. Xi’s factional rivals and other opponents will seize the opportunity to oppose his bid for a norm-breaking third term at the 20th Party Congress.

To boost his third term bid and guard against political risk, Xi will be forced to tighten control over public discourse and step up purges. High-ranking cadres could find themselves on the chopping block as Xi looks to make an example of some to intimidate the others into obedience. Intensifying factional struggle will further heighten political risks in China and worsen the regime’s crisis.

     SinoInsight  2     

OUR TAKE
The “perfect storm” of problems facing the CCP regime is strengthening across the board, including a rapidly decelerating Chinese economy, COVID-19 outbreaks in many parts of China, and no end in sight to the real estate sector debt crisis. Many of Xi Jinping’s “achievements” touted at the Sixth Plenum of the 19th Central Committee last November have since been undercut or are heading in the direction of failure. The only thing Xi has going for him is the anti-corruption campaign.

Xi is promoting the anti-corruption campaign now because he has little else to show for at present to boost his “quan wei” ahead of the 20th Party Congress at the year’s end. To that end, Party propagandists are elevating the campaign and “imbuing” it with regime-preserving prestige (“self-revolution” as the “answer” to the “rise-and-fall” cycle, etc.). The Xi leadership will likely keep boasting about the anti-corruption campaign and “self-revolution” in the lead up to the 20th Party Congress, and particularly when things go further south for Xi and the CCP.

Xi also appears to be using the anti-corruption campaign to both deter and resolve challenges against him from within the Party elite. Senior officials, including those who are considered “untouchable,” could be purged this year as Xi looks to “kill the chickens to scare the monkey.” Members of the Jiang faction, especially those in the political and legal affairs apparatus and the financial sector, are at high risk of being taken down. If the Xi leadership decides to pursue the Sun Lijun and Fu Zhenghua cases to its logical end, then senior cadres like Guo Shengkun, Zeng Qinghong, and even Jiang Zemin could find themselves in trouble. Recent Party propaganda continues to obliquely criticize Jiang for the corruption in the regime, adding that such corruption would lead to the “destruction of the Party and the nation” if Xi had not stepped in to right the ship; criticisms of Jiang and corruption during the Jiang faction’s era of dominance (1997 to 2012) will likely become more obvious and severe this year.

Meanwhile, the Jan. 17 Xinhua review article opens up the possibility that the Xi leadership is planning to order executions as a way to further intimidate his factional foes and deter interference with his third term bid. Two likely sacrificial candidates are Sun Lijun and Fu Zhenghua.

Finally, the logic behind Xi making the case that his anti-corruption campaign represents the “will of the people” is similar to his push for “common prosperity.” Xi has made many enemies in the Party elite and in the officialdom over the past decade with his “struggle” against corruption and power consolidation moves. Moving against more senior cadres and possibly influential Party elders will be hugely unpopular among the CCP elite and even destabilizing as the Party’s “great, glorious, correct” image is tarnished by the repudiation of a former leader’s (Jiang Zemin) political legacy (think Khrushchev denouncing Stalin). But with his third term bid at stake and little to show for in terms of “achievements,” Xi has to pull out the brass knuckles and take drastic action, despite the fact that it further alienates him from peers inside the Party.

To win legitimacy for his anti-corruption campaign in the regime at large and insulate himself somewhat from intra-Party criticism, Xi took a page from Mao Zedong’s Cultural Revolution playbook by promoting the campaign as “self-revolution” that reflects the “will of the people.” In aligning himself with the masses, with whom the anti-corruption campaign is genuinely popular, Xi can position himself as the “people’s savior” when he moves against factional enemies while preserving the regime’s image to a degree. There are limits, however, to Xi’s “stand with the masses against the elites” strategy. For instance, if Xi is forced to directly target Jiang or Zeng, he could drastically undermine the CCP’s legitimacy regardless of how carefully he handles the matter, similar to the issues Mao faced when he targeted Lin Biao. Depending on how the situation unfolds, Xi could be forced into choosing between genuinely going along with the “will of the people” to save himself, or siding with the elites to preserve the Party.