SinoInsight 1
Troubled SMEs
1. The South China Morning Post (SCMP) reported on Dec. 30 that about 4.37 million of China’s micro and small businesses shut down permanently in the first 11 months of 2021. The same period saw the opening of only 1.32 million micro and small businesses, as compared to 6.13 million in 2020. SCMP estimates that the number of deregistered firms in 2021 will likely exceed the historic high of 4.45 million (twice that of 2019 and 10 times that of 2018) in 2020.
SCMP noted that smaller enterprises, the nation’s “economic backbone,” account for “half of China’s tax revenue, 60 percent of its GDP and 80 percent of urban employment.” Analysts say that China’s GDP growth could drop below 4 percent in the fourth quarter of 2021.
2. According to PRC National Bureau of Statistics data released on Dec. 31, the official Purchasing Managers’ Index of small enterprises was 46.5 percent. With the exception of March, the PMI for small enterprises was below the 50-point mark separating growth from contraction.
3. On Jan. 4, the State-owned Assets Supervision and Administration Commission of the State Council issued a notice requiring central enterprises to implement regulations on guaranteeing payments to small- and medium-sized enterprises (SOEs) (保障中小企業款項支付條例) that were issued in July 2020 and further resolve arrears owed to SOEs.
The notice required that all central enterprises:
- Clearly state payment methods and due date in new contracts. Central enterprises shall not use their advantageous position to force SMEs to accept non-cash payments.
- If a new contract is signed without prior written agreement on non-cash payments, no supplementary agreements on non-cash payments shall be subsequently agreed upon or used on principle. If non-cash payments are necessary, the capital cost shall be borne by central enterprises.
- From 2022, central enterprises shall no longer issue commercial papers or supply chain debt vouchers that have maturities of more than six months on principle (contracts made before the Jan. 4 notice with commercial paper or supply chain debt voucher agreements are the only exception). This guards against efforts to disguise extensions to payment dates.
- Support and cooperate with upstream and downstream SMEs on supply chain financing.
Without a change in the situation, SMEs will face steep struggle in 2022 as economic conditions worsen and they are unable to secure the funds owed to them. The weakening of China’s “economic backbone” will further aggravate economic deterioration and escalate the crisis facing the CCP regime.
Property sector woes
1. On Dec. 21, Nomura Securities analysts said in a note that Chinese real estate developers face $19.8 billion in maturing offshore U.S.-dollar denominated bonds in the first quarter of 2022 (almost double the $10.2 billion in the fourth quarter of 2021) and $18.5 billion in the second quarter.
The analysts also estimate that developers owe about 1.1 trillion yuan in deferred wages to construction workers before the Lunar New Year on Feb. 1. Also, “failing to pay deferred wages could be severely punished by both the central government and related local governments” given Beijing’s emphasis on social stability ahead of the 20th Party Congress near the year’s end. They added, “there is tremendous reputational risk for those developers and constructors that could not pay deferred wages in a timely manner, especially if social protests are triggered.”
2. Employees of China Evergrande’s subsidiaries in Shanxi, Guangxi, Hunan, and other places began pasting strike notes on the front gates of their respective workplaces and striking from Dec. 22, according to media and social media reports. The strikes were inspired by Evergrande owing wages and security security payments to its employees.
3. On Dec. 30, the Danzhou municipal local government in Hainan Province ordered Evergrande to demolish 39 buildings (434,941 square meters in gross floor area) on Ocean Flower Island (海花岛) within 10 days, stating that the illegally obtained permit for the buildings had been revoked.
Ocean Flower Island is an 800 hectares artificial island comprising three flower-shaped islets located off the coast of Danzhou. According to mainland media, Evergrande has invested a total of 160 billion yuan (about $25.1 billion) in Ocean Flower Island since building the project commenced in 2012.
4. On Dec. 24, the National Resources and Planning Bureau of Rizhao City in Shandong Province auctioned off three plots of construction land, including two residential plots. One of the plots was auctioned off to Rizhao Civil Air Defense Assets Operation Group for 1.081 billion yuan, a premium of 106 million yuan. The plot’s land value per unit floorage (楼面地价) was 15,126 yuan per square meter, a new record high in Rizhao.
Controversy later broke out after a screenshot of Rizhao Civil Air Defense Assets Operation Group’s bidding process for the plot of land was leaked on the internet. The screenshot showed that the company raised the bidding price four times in a row (24 million yuan, 70 million yuan, 4 million yuan, 8 million yuan) without rival bids within a three-minute span, resulting in a price increase of over 100 million yuan.
Industry and commercial data show that Rizhao Civil Air Defense Assets Operation Group is fully controlled by the SOE Rizhao Urban Investment Group.
5. China’s real estate market has been in decline from the second half of 2021, with the top 100 property enterprises showing rare negative growth and more than 80 percent of real estate companies failing to hit their annual sales targets, according to mainland media reports on Jan. 4.
The reports cite data from CRIC as showing that cumulative sales of China’s top 100 real estate enterprises at the end of 2021 decreased by 3.5 percent as compared to the same period in 2020, with large real estate companies seeing rare negative growth. Large real estate firms achieved an average sales target of less than 90 percent—much lower than the average sales target of over 105 percent in recent years. Further, more than 80 percent of large real estate companies that disclosed their annual performance targets had not hit their respective targets by the end of December 2021.
The reports also cite data from China Index Academy as showing that six representative real estate enterprises—Evergrande (61.5 percent); Beijing Capital Land (68.3 percent); Jinke (74.9 percent); Modern Land (76.7 percent); Fantasia Holdings (77.7 percent); and Vanke (78.5 percent)—hit less than 80 percent of their annual sales target in 2021.
6. The transaction area of new commercial residential properties in key Chinese cities dropped 42 percent year-on-year during the 2022 New Year’s Day holiday period (Jan. 1 – Jan. 3), according to Jan. 6 mainland media reports citing data from China Index Academy. In first-tier cities, the transaction area declined 24 percent year-on-year, while second-tier, third-tier, and four-tier cities saw drops of nearly 60 percent from the previous year.
Mainland media also reported that the volume of property transactions in 10 key cities fell below 2,000 units during the New Year’s Day holiday period of 2022, a five-year low.
7. According to a Jan. 7 Reuters report, the Shenzhen authorities pressured Kaisa Group into devising a plan by the end of the month to repay investors in its wealth management products, citing sources familiar with the matter. The sources say that the Shenzhen government could seize some of Kaisa’s assets and gradually take over the company if it fails to make repayments.
8. Bloomberg News reported on Jan. 7 that PRC regulators told banks to increase lending to property developers after at least two quarters of consecutive declines, citing people familiar with the matter. The people also said that “borrowing by major property firms used to fund mergers and acquisitions will no longer be counted toward the ‘three red lines’ metrics that limit debt,” according to the article.
9. On Jan. 8, mainland media reported a speeding up of second-hand mortgage lending in Beijing and other popular cities, with loans being released now for mortgages in September 2021, or a month quicker than last year. The lending cycle had also been shortened to three months as compared to four to six months previously.
Meanwhile, home mortgage loan interest rates in Guangzhou were lowered from 5.85 percent to about 5.65 percent for the first unit, and about 6.05 percent to 5.85 percent for the second unit.
Analysis: It is an open secret that local governments have been colluding with property companies to raise land prices. As the real estate sector runs into increasing trouble, however, local governments like those in Rizhao City are forced to pull off crude operations to sustain high land prices.
The plight of the real estate industry can be seen through the first three rounds of centralized land auctions in 22 cities in 2021. The first round of auctions was relatively well attended, with property firms and their shell companies lining up to bid for land. The second round saw a sharp fall in participation, with a rising incidence of suspended or terminated transactions and decreasing premium rates. The third round of centralized auctions saw markedly fewer suspended or terminated transactions as SOEs stepped into the breach; in Changchun, Changsha, Shenyang, Tianjin, and Beijing, SOEs bought 100 percent, 82 percent, 75 percent, 72 percent, and 75 percent of the land on sale in the third round respectively.
We wrote in a previous newsletter that falling land prices could “trigger a vicious cycle in many localities. Local governments will see their debt ratio go up as land prices go down since land forms the bulk of the collateral used in securing funding from local government financing vehicles. With higher debt ratios, local governments will be restricted from issuing bonds to refinance old debt, which leads to a debt crisis, reduced revenue, and increased operational difficulties. This will have a knock-on effect on local businesses and financial institutions, raising bankruptcy risks and ultimately affecting the revenue streams of local governments.” Local governments have thus far been able to stave off crisis by relying on SOEs to prop up land prices, but how much longer they can sustain such operations remains to be seen as economic conditions in China worsen.
Local government fiscal problems
1. Lin Caiyi, deputy dean of the China Chief Economist Forum Research Institute, published an article on Dec. 21 titled “The Debt Map of China’s Local Governments” (中國各地政府的債務地圖).
The article notes that both the central government and local governments are struggling to make ends meet fiscally. Local government fiscal expenditure on social security and health continues to rise due to an aging population and the coronavirus pandemic. Concurrently, shrinking tax and land revenue has led to a continually expanding gap between local fiscal revenue and expenditure. Therefore, some local governments have entered “survival mode” by maintaining expenditure through borrowing, or as Lin puts it, “eating next year’s food in advance” (寅吃卯粮).
Lin cites data showing that only Shanghai, Guangdong, Beijing, Zhejiang, and Jiangsu have local debt ratios below the 100 percent risk alert line; by contrast, Qinghai, Heilongjiang, Ningxia, and Inner Mongolia have local debt ratios of over 300 percent, with Qinghai’s debt ratio exceeding 500 percent. After taking into account implicit debt such as local urban investment bonds, only Shanghai and Guangdong have debt ratios below 100 percent.
2. On Dec. 23, the Human Resources and Social Security Bureau of Hegang City, Heilongjiang Province issued a notice staying that it took the decision to cancel public recruitment for basic level government staff owing to the implementation of a financial reorganization plan by the city’s government and “major changes” in the city’s financial situation.
3. On Dec. 31, mainland media The Economic Observer referenced the State Council General Office’s 2016 local government debt risk emergency response plan (地方政府性債務風險應急處置預案) to infer that Hegang City’s financial reorganization entails that its general debt expenditure or interest on special debt expenditure had exceeded 10 percent of its public budget or fund budget.
A local budget official told The Economic Observer, “Hegang’s debt ratio is much lower than other areas in Southwest China, but [Hegang’s] revenue is suffering due to increasing downward pressure on the [Chinese] economy. Moreover, some prefecture-level cities in Heilongjiang were [originally] established [to extract] resources, but as resources dried up, whether or not [the cities] should be dismantled or reorganized should be studied.” The local budget officials added that the counties under Hegang City’s jurisdiction are all provincial-administered counties, which means that they cannot support the city financially. Also, the city’s municipal district is struggling financially.
The Economic Observer also reported that Bazhou City in Hebei Province saw declines in local fiscal revenue. According to mainland media, Bazhou was recently “supervised and rectified” by the central government for large-scale imposition of arbitrary fees and fines, as well as the organization of campaign-style law enforcement, as its local government sought to make up for declining land sales and tax revenues. In October 2021, the Bazhou local government ordered officials to secure 300 million yuan in new revenue, resulting in over 2,500 local businesses being hit with penalties totaling 67 million yuan (compared with 6 million yuan in penalties collected from January to September). In November, 13 towns and villages in Bazhou were targeted with fines and confiscations, with officials collecting penalties that month worth 80 times the average monthly penalties during the January to September 2021 period.
The Economic Observer report added that Bazhou and Hegang are not exceptions, citing a local financial official from an eastern area as saying that the local financial deficit in 2021 is close to 1.8 billion yuan, or a third of the eastern area’s total financial revenue, with the chief reason being a sharp decline in revenue from land sales. The officials added that the land sale forecast for 2022 is pessimistic and that the area’s spending budget may be reduced by a third.
4. The Financial Times published a report on Jan. 6 about the fallout of the Evergrande crisis. The report notes that Evergrande’s debt crisis is impacting the real estate sector, which in turn hurts the pockets of local governments who are reliant on land sales for revenue.
The report cites a municipal official from Shijiazhuang City in Hebei as saying, “The real estate downturn has taken a huge toll on the local economy. Beijing says we need to keep the government up and running. But if land sales continue to weaken, we will have real trouble making ends meet.” The report notes that Shijiazhuang’s land sale revenues were down nearly 30 percent in the first 11 months of 2021 as compared to the same period in 2020.
The officials also told The Financial Times that he and his civil servant colleagues, who make about 5,000 yuan a month, saw their 10,000 yuan annual bonus last year canceled for the first time. “It is a big deal for us. Our salaries are not high,” the official said.
China’s economic outlook and external pressures
1. Ruchir Sharma, Morgan Stanley Investment Management’s chief global strategist, wrote in a Jan. 3 article in The Financial Times that 2022 could see “peak” China.
“China’s increasingly sharp turn from trade to ‘self-reliance’ is loosening its ties to other economies. Near perfect five years ago, the correlation between GDP growth in China and other emerging countries barely registers now. China may have peaked as an engine of growth,” he wrote.
2. DoubleLine founder Jeffrey Gundlach told Yahoo Finance, “China is uninvestible, in my opinion, at this point.” In the interview that was published on Jan. 5, Gundlach added, “I’ve never invested in China long or short. Why is that? I don’t trust the data. I don’t trust the relationship between the United States and China anymore. I think that investments in China could be confiscated. I think there’s a risk of that.”
3. On Jan. 5, Xinhua’s Outlook Weekly magazine published an article by Central Financial and Economic Affairs Commission Office executive deputy director Han Wenxiu titled, “Welcoming the 20th Party Congress with Excellent Results of High-quality development” (以高質量發展優異成績 迎接黨的二十大勝利召開).
Han’s article largely repeats the key points brought up in the Central Economic Work Conference on Dec. 10, including the need for stability and stable progress when carrying out economic work in 2022. The article also called on all regions and departments to shoulder responsibility in stabilizing the macroeconomy, which is “not just an economic issue, but also a political one.”
Han also mentions problems pertaining to the implementation of China’s economic policy:
- The article proposes a strengthening of overall planning and coordination, noting that economic and social development is an “interconnected and complex system.” Officials should therefore not just focus on their local priorities without considering how it affects those at the top (“avoid negative effects caused by the superimposition of ‘reasonable’ local policies”) and the bottom (“avoid oversimplifying one point, piling on a problem, [and] making it unbearable for the grassroots”).
- The article proposes a need to “correctly understand and grasp” primary product security. Han notes that China’s dependency on primary product imports is already very high and even going higher for some productions. For instance, China is 77 percent dependent on oil imports, 81 percent on iron ore, 78 percent on copper concentrates, and 84 percent on soybeans; a major gap in primary product supply may lead to a “Gray Rhino” event. Han adds that “half-failures” are intolerable in food security, with the “comprehensive production capacity of agriculture” needing to be elevated to a more prominent position so that the Chinese people’s “rice bowl” is firmly in their hands at all times.
- The article proposes a need to “correctly understand and grasp” the implementation of carbon neutral and “peak carbon” policies. Han notes that the so-called “carbon rush” and “campaign-style carbon reduction” measures that have cropped up in recent “actual work” are not in line with Party Central’s requirements.
To give an example, a provincial government may decide to curb coal production on the pretext of working towards carbon neutrality, while the PRC commerce ministry could block coal imports from certain countries to meet Xi’s “great power diplomacy.” The two moves, when “superimposed” onto each other, will lead to power shortages in the province once coal supplies run low and make things “unbearable” for lower level governments, businesses, and residents. Prolonged power shortages will negatively impact the province’s GDP, which in turn affects the national GDP. The boycott of coal imports could also trigger international pushback against Beijing and further complicate matters for the Xi leadership. Thus, just as Han said, an economic issue becomes a political one.
4. Michael Feroli, chief U.S. economist at JPMorgan Chase & Co., wrote in a note on Jan. 7 that the U.S. Federal Reserve is expected to raise interest rates in March in the wake of unemployment figures and historically high inflation.
“It’s hard to avoid the conclusion that the labor market is very tight. We believe Fed officials are coming to the same conclusion, and that it may be a tough sell to hold off on the first hike until June, our prior call,” he wrote. “We now see liftoff in March, followed by a quarterly pace of hikes thereafter.”
OUR TAKE
1. Recent speculation about Li Zhanshu’s absence from the CPPCC event on Dec. 31 is par the course for a Party Congress year when there is fierce factional fighting.
As we noted in our China 2022 Outlook, “Factional struggle in the CCP elite will spill out into the open to a greater degree. This includes the various factions releasing scandals and other ‘explosive’ negative information about each other (in overseas media and social media, etc.), as well as covert and overt efforts by the various factions to attack each other’s negative political legacies.”
2. Li Zhanshu is both a close ally and longtime friend of fellow Party princeling Xi Jinping. Their friendship was established in the early 1980s when Xi was Party Secretary of Hebei’s Zhengding County Party Secretary and Li was Party Secretary of the neighboring Wuji County; the two “appreciated each other” and “usually drank together,” a person familiar with the matter told The New York Times in a 2015 report. When Xi took office at the 18th Party Congress, he made Li director of the CCP General Office, a position that is regarded as top aide to the General Secretary and an appointment reflective of the deep trust Xi has in Li (the General Office director also oversees the top leadership’s security). Li’s move up to the National People’s Congress and the third-rank Politburo Standing Committee member at the 19th Party Congress further underscores his alliance and friendship with Xi.
Li has never contradicted Xi while in the top leadership and served exemplarily over the past nine years. Li also owes his high political status directly to Xi and does not appear to have separate political patronage. While the Li clan could have engaged in corruption, the odds of Li Zhanshu being removed because of corruption are virtually nil given his ties to Xi; Xi has only purged one national level leader (Zhou Yongkang) and six sub-national level leaders, but they are all connected to the rival Jiang faction and were targeted for factional struggle reasons with corruption being the official pretext. Finally, Li would unlikely be arrested now even if he was suddenly found to be problematic because he is slated to retire at the 20th Party Congress (Li is 72), and Xi would not risk axing a close ally, ruining his own political legacy (anti-corruption), and undercutting his “quan wei” (prestige and authority).
Given the aforementioned factors and the coronavirus situation in China, we believe it is more likely that Li Zhanshu failed to show up at the CPPCC tea party due to health reasons. This does not necessarily mean that Li is seriously ill or came down with COVID-19; Li could have come into contact with COVID-positive individuals and was quarantined.
3. The rumors currently circulating about Li Zhanshu’s absence overwhelming benefits Zeng Qinghong in particular and Xi’s rivals in general. Regardless of what happens to Li, the Zeng camp gains as long as people believe the rumors for the following reasons:
a) The Zeng camp previously boasted on numerous occasions that Zeng Qinghong is responsible for Xi Jinping’s rise to power and the two men have “guan xi.” If Li Zhanshu turns out to be fine, the Zeng camp can spread rumors about how Zeng Qinghong is responsible for Li escaping investigation given Zeng’s “close” relationship with Xi. The Zeng camp can also claim that Zeng Qinghong is not being targeted by Xi despite growing evidence that this is underway.
b) In the extremely unlikely event that Li Zhanshu is investigated, the Zeng camp can conveniently deny the rumors that Li is really his man while claiming that Zeng Qinghong helped Xi “clean house.”
c) Rumors that Wang Qishan is behind Li Zhanshu’s absence creates the impression that there is a “Xi-Wang” split, and are useful in the spreading of future rumors that either Xi or Wang had been “defeated” when Li finally re-emerges.
d) China watchers who are convinced that there is infighting in the Xi camp will keep harping on the issue. Eventually, all the attention on the issue will make the rounds in CCP official circles, resulting in a weakening of Xi’s “quan wei” and bargaining power in the CCP elite.
4. The rumors about Wang Qishan investigating Li Zhanshu are likely intended to split the Xi camp. They are reminiscent of rumors before the 19th Party Congress in 2017 about then-public security vice minister Fu Zhenghua investigating Wang for corruption. Fu had participated in very few public security activities from 2016 to 2017 and appeared at the 2017 Two Sessions heavily escorted by a security detail, which suggested that he had been placed under a form of internal control; we wrote in 2018 that Fu had likely ran into trouble over his mishandling of the 2016 “Lei Yang Incident” and getting the Beijing public security apparatus to resist Xi.
However, many China watchers at the time presumed that Xi had tasked Fu Zhenghua to investigate Wang Qishan. They speculated that an investigation into Fu would be the result of a “Xi-Wang” split, and because Fu was behind public security opposition to Xi. Xi’s subsequent personnel arrangements appeared to be partly aimed at “debunking” the speculation—Wang became PRC vice president, while Fu became justice minister and was assigned a “supervisor” in the form of then-justice ministry Party secretary Yuan Shuhong. Fu Zhenghua’s subsequent postings and downfall last year affirmed our analysis.
SinoInsight 2
Li Zhanshu, the chairman of the Standing Committee of the National People’s Congress and Politburo Standing Committee member, was absent from the National Chinese People’s Political Consultative Conference’s New Year’s Day tea party in Beijing for reasons unknown. The other six Politburo Standing Committee members and PRC vice president Wang Qishan were in attendance.
Jan. 4
Bi Ruxie, a U.S.-based “second generation red” (紅二代) writer, wrote in his blog that his friends in Beijing informed him that Wang Qishan, “an opponent of Xi Jinping,” had delivered material about the corruption of Li Zhanshu’s daughter and son-in-law to the Politburo Standing Committee. This forced Xi to “shed a tear in executing Li Zhanshu” (揮淚斬栗戰書, i.e. punish Li unwillingly), and hence explained his absence at the CPPCC tea party.
Bi’s Beijing friends added, “This is what is being rumored in the sons-and-daughters circle of Beijing cadres. It’s up to you to believe it or not.”
Jan. 6
1. Ming Pao, a pro-Beijing Hong Kong newspaper, published an op-ed on the topic of why Li Zhanshu was missing from the CPPCC tea party (“栗戰書因何缺席?”).
The op-ed opened by expressing surprise that no one had asked about Li’s absence during the PRC foreign ministry’s regular press conference on Jan. 5. The op-ed continued by noting that former Politburo Standing Committee member Huang Ju failed to attend the CCP’s 2006 Lunar New Year event on Jan. 27, and was later confirmed to be suffering from an illness before his death in June of that year.
The Ming Pao op-ed described Li as a close friend of Xi Jinping’s and a “loyal backbone minister” (肱骨之臣) before mentioning that it learned of a “new version” of the Li-Xi relationship. The op-ed claimed that Li Zhanshu’s uncle Li Jiangjiang was the elementary school classmate of the sister (Zeng Haisheng) of former Politburo Standing Committee member Zeng Qinghong, and Li Zhanshu is “actually someone that Zeng Qinghong had installed at Xi’s side.” The op-ed added that Li Jiangjiang had been recently investigated.
In concluding, the op-ed said that it is unclear why Li Zhanshu was absent from the CPPCC New Year’s Day tea party before speculating about his health. The op-ed noted that Li would make a public appearance at or before the Central Committee’s Lunar New Year Day gathering if he was only suffering from a minor illness, but “it would be a bad thing” if he made no public appearances before the Two Sessions in March.
2. Xi Jinping listened to work reports from the National People Congress Standing Committee, the State Council, the National Chinese People’s Political Consultative Conference, the Supreme People’s Court, the Supreme People’s Procuratorate, and the Central Secretariat during a meeting of the Politburo Standing Committee. As with past reports about such meetings, state media did not include a list of officials present at the meeting.
Li Zhanshu’s last public appearance was at a special lecture by the National People’s Congress Standing Committee on Dec. 24.
OUR TAKE
1. Recent speculation about Li Zhanshu’s absence from the CPPCC event on Dec. 31 is par the course for a Party Congress year when there is fierce factional fighting.
As we noted in our China 2022 Outlook, “Factional struggle in the CCP elite will spill out into the open to a greater degree. This includes the various factions releasing scandals and other ‘explosive’ negative information about each other (in overseas media and social media, etc.), as well as covert and overt efforts by the various factions to attack each other’s negative political legacies.”
2. Li Zhanshu is both a close ally and longtime friend of fellow Party princeling Xi Jinping. Their friendship was established in the early 1980s when Xi was Party Secretary of Hebei’s Zhengding County Party Secretary and Li was Party Secretary of the neighboring Wuji County; the two “appreciated each other” and “usually drank together,” a person familiar with the matter told The New York Times in a 2015 report. When Xi took office at the 18th Party Congress, he made Li director of the CCP General Office, a position that is regarded as top aide to the General Secretary and an appointment reflective of the deep trust Xi has in Li (the General Office director also oversees the top leadership’s security). Li’s move up to the National People’s Congress and the third-rank Politburo Standing Committee member at the 19th Party Congress further underscores his alliance and friendship with Xi.
Li has never contradicted Xi while in the top leadership and served exemplarily over the past nine years. Li also owes his high political status directly to Xi and does not appear to have separate political patronage. While the Li clan could have engaged in corruption, the odds of Li Zhanshu being removed because of corruption are virtually nil given his ties to Xi; Xi has only purged one national level leader (Zhou Yongkang) and six sub-national level leaders, but they are all connected to the rival Jiang faction and were targeted for factional struggle reasons with corruption being the official pretext. Finally, Li would unlikely be arrested now even if he was suddenly found to be problematic because he is slated to retire at the 20th Party Congress (Li is 72), and Xi would not risk axing a close ally, ruining his own political legacy (anti-corruption), and undercutting his “quan wei” (prestige and authority).
Given the aforementioned factors and the coronavirus situation in China, we believe it is more likely that Li Zhanshu failed to show up at the CPPCC tea party due to health reasons. This does not necessarily mean that Li is seriously ill or came down with COVID-19; Li could have come into contact with COVID-positive individuals and was quarantined.
3. The rumors currently circulating about Li Zhanshu’s absence overwhelming benefits Zeng Qinghong in particular and Xi’s rivals in general. Regardless of what happens to Li, the Zeng camp gains as long as people believe the rumors for the following reasons:
a) The Zeng camp previously boasted on numerous occasions that Zeng Qinghong is responsible for Xi Jinping’s rise to power and the two men have “guan xi.” If Li Zhanshu turns out to be fine, the Zeng camp can spread rumors about how Zeng Qinghong is responsible for Li escaping investigation given Zeng’s “close” relationship with Xi. The Zeng camp can also claim that Zeng Qinghong is not being targeted by Xi despite growing evidence that this is underway.
b) In the extremely unlikely event that Li Zhanshu is investigated, the Zeng camp can conveniently deny the rumors that Li is really his man while claiming that Zeng Qinghong helped Xi “clean house.”
c) Rumors that Wang Qishan is behind Li Zhanshu’s absence creates the impression that there is a “Xi-Wang” split, and are useful in the spreading of future rumors that either Xi or Wang had been “defeated” when Li finally re-emerges.
d) China watchers who are convinced that there is infighting in the Xi camp will keep harping on the issue. Eventually, all the attention on the issue will make the rounds in CCP official circles, resulting in a weakening of Xi’s “quan wei” and bargaining power in the CCP elite.
4. The rumors about Wang Qishan investigating Li Zhanshu are likely intended to split the Xi camp. They are reminiscent of rumors before the 19th Party Congress in 2017 about then-public security vice minister Fu Zhenghua investigating Wang for corruption. Fu had participated in very few public security activities from 2016 to 2017 and appeared at the 2017 Two Sessions heavily escorted by a security detail, which suggested that he had been placed under a form of internal control; we wrote in 2018 that Fu had likely ran into trouble over his mishandling of the 2016 “Lei Yang Incident” and getting the Beijing public security apparatus to resist Xi.
However, many China watchers at the time presumed that Xi had tasked Fu Zhenghua to investigate Wang Qishan. They speculated that an investigation into Fu would be the result of a “Xi-Wang” split, and because Fu was behind public security opposition to Xi. Xi’s subsequent personnel arrangements appeared to be partly aimed at “debunking” the speculation—Wang became PRC vice president, while Fu became justice minister and was assigned a “supervisor” in the form of then-justice ministry Party secretary Yuan Shuhong. Fu Zhenghua’s subsequent postings and downfall last year affirmed our analysis.
