China’s new export orders subindex contracted for 16 months straight; Ying Yong to serve as procurator-general?

     SinoInsight  1     

Aug. 29
Pro-CCP Hong Kong newspaper Sing Tao reported that Hubei Party secretary Ying Yong (age 64) moved to the Supreme People’s Procuratorate (SPP) around Aug. 20, citing at least two “reliable sources” familiar with the matter. Ying is reportedly serving as a deputy secretary of the SPP’s Party group, and ranks ahead of deputy secretary and executive deputy procurator-general (ministerial rank) Tong Jianming. Sing Tao said that Ying could be formally appointed SPP deputy procurator-general at the meeting of the National People’s Congress Standing Committee from Aug. 29 to Sept. 2.

Sing Tao’s sources say that while Ying Yong is nearly 65, he is still being arranged to serve in a “frontline” position (as opposed to a “second line” sinecure), which indicates that he is of “great use” to the Xi leadership. The sources expect Ying to succeed Zhang Jun (66) as SPP procurator-general at the 2023 Two Sessions and become a national leader. The sources also believe that Zhang has a chance of “rising to the next level” and do not rule out his transfer to the Supreme People’s Court to serve as president, among other appointments.

Aug. 30
In a meeting presided over by Xi Jinping, the CCP Politburo decided that the Seventh Plenum of the 19th Central Committee and the 20th Party Congress will be held on Oct. 9 and Oct. 16 respectively.

State mouthpiece Xinhua rehashed propaganda narratives promoting Xi Jinping and the CCP regime in its report on the Politburo meeting. The meeting emphasized that the 20th Party Congress will “hold high the great banner of socialism with Chinese characteristics,” adhere to Marxism-Leninism and the political theories of Party leaders (Mao Thought, Deng Theory, “Three Represents,” “Scientific Outlook on Development,” “Xi Thought”), “seriously summarize the work of the past five years,” and “comprehensively summarize” the “major achievements and valuable experience” of Party Central “with Comrade Xi Jinping at the core.”

The Politburo meeting also said that the 20th Party Congress will “deeply analyze the international and domestic situation,” as well as the “new requirements” of the CCP’s “new era and new journey” to formulate a “program of action and general policies” to continue advancing a series of “political agendas” by the Xi Party Central. A new Central Committee and Central Commission for Discipline Inspection will also be elected at the 20th Party Congress.

OUR TAKE
1. The Politburo’s setting of a date for the Seventh Plenum and the 20th Party Congress suggests that the CCP elite has reached a “consensus” on the topic of Xi Jinping taking a third term and key personnel appointments. In assessing post-Beidaihe developments (see here and here), we noted that Xi looks likely to extend his tenure and secure the bulk of his political agenda items at the 20th Party Congress if Xi’s “political operations are allowed to progress unimpeded and crises do not boil over for the regime.”

Intra-Party “consensus” on the 20th Party Congress could have been the result of Xi having the upper hand in factional struggle and his political rivals not being in a good position to challenge Xi just yet. “Consensus” could also have been reached because Party elites recognize that the crises facing the regime are existential and continuity in governance is necessary to keep things stable for the moment and avert collapse.

Xi can afford to move more boldly to rescue the economy and address geopolitical tensions after a 20th Party Congress that goes his way. For instance, Xi could make changes to the “zero-COVID” policy that fundamentally alters its nature and helps to unblock the economy. This could include easing draconian epidemic prevention and control measures after claiming that the virus is becoming milder and less dangerous, imposing shorter and less restrictive lockdowns only if the situation warrants it, and reducing restrictions and quarantine period for international travelers to China. That being said, Beijing could still resort to harsh epidemic control measures for the purposes of “stability maintenance.”

Xi could also modify the CCP’s “wolf warrior” approach to make the PRC more “lovable” to the international community. This would address the concerns of foreign countries and make China appealing again to external investors; increased inflows would in turn help the Xi leadership to turn around the economy. Beijing has recently been signaling its desire for greater foreign investment as it moves to “deepen reform and opening up.” On Aug. 30, assistant commerce minister Guo Tingting announced at a State Council Information Office press conference that the PRC government will “introduce a new batch of policies and measures” to “stabilize foreign investment and increase investment promotion efforts.”

Meanwhile, news reports say that Xi is preparing to resume personal diplomacy around the 20th Party Congress period, including traveling to Uzbekistan in mid-September to attend the annual summit of the Shanghai Cooperation Organization and traveling to Southeast Asia in November to attend the G20 summit in Indonesia and visit other Southeast Asian countries. Xi would undoubtedly be looking to court investments and dispel the worries of countries who fear a belligerent China on his trips abroad. With his political status secured at the 20th Party Congress, Xi would have few concerns about undermining his own political legacy by making major policy adjustments that contradict earlier approaches.

The need to revive China’s rapidly deteriorating economy and the CCP’s instinct to survive first means that Xi would be more inclined to take action that “endears” the PRC to the world after the 20th Party Congress so as to prop up the regime’s financial and economic security. However, Xi would also be able to act with greater conviction in addressing “provocations” by the United States and its allies over Taiwan and other issues as compared to before the 20th Party Congress when his political status was somewhat in limbo. Given the current crises facing China, Xi would more likely prioritize goodwill over hostilities in diplomatic relations with most countries to preserve regime survival. And unless severely provoked, Xi will also likely refrain from attempting to take Taiwan after the 20th Party Congress and before the 2024 Taiwanese presidential election (heightened military maneuvers around Taiwan could continue as the ROC’s international profile grows).

2. Sing Tao’s information about Ying Yong being transferred to serve as deputy secretary of the SPP’s Party group and take up the procurator-general post later fits with Xi’s personnel reshuffle preferences. Ying is a Xi ally, and Xi Jinping would want an ally heading an important post in the political and legal affairs apparatus. We previously analyzed that Ying could replace Jiang faction member Zhou Qiang as Supreme People’s Court (SPC) president.

Ying Yong’s name, however, is currently not in the list of representatives to the 20th Party Congress. Technically, this rules Ying out for the SPP procurator-general position because he will not be part of the 20th Central Committee and national leaders are usually Central Committee members. That being said, Xi set the precedent of having a non-Central Committee member serve as a national leader at the 2018 Two Sessions with the appointment of Wang Qishan as PRC vice president. Xi could apply the “Wang Qishan precedent” for Ying Yong’s case when the new procurator-general is appointed at the 2023 Two Sessions. Further, PRC regulations governing the procuratorate (中華人民共和國檢察官法) do not require senior procurators to also be Central Committee members.

If Ying Yong does become procurator-general next year, then the current procurator-general Zhang Jun could be transferred to the SPC. If Zhou joins the Politburo at the 20th Party Congress, then he could be promoted to Central Political and Legal Affairs (CPLAC) secretary or vice chairman of the National People’s Congress.

3. If the information about Ying Yong serving as procurator-general is off, then several other candidates could be eligible for the position. In this scenario, who gets appointed to the post will be dependent on who becomes the new CPLAC secretary and SPC president.

CPLAC secretary
The incoming CPLAC secretary at a Party Congress is usually the incumbent public security minister going into the Party Congress. However, current public security minister Wang Xiaohong was just installed in his position and Xi likely means for him to stay there so that the Xi leadership can more tightly grasp the Party’s “knife handle” and carry out further “rectification” of the longtime Jiang faction “fief.” This means that Wang will retain his post of public security minister at the 20th Party Congress.

We see three possible scenarios for how Xi could select the next CPLAC secretary.

First, Xi breaks personnel reshuffle norms and makes Wang Xiaohong both public security minister and CPLAC secretary. The drawback of such an arrangement is that Wang would have tremendous power over public security and eventually become a “security czar” like Zhou Yongkang. There is also a danger of Wang forming “political gangs” or “judicial mafia” over time which could create trouble for Xi in the long term. Xi could go for this option if he believes that he presently has immense “quan wei” to keep Wang in check and cannot find anyone else to appoint as CPLAC secretary.

Second, Xi appoints other Politburo members with no public security background to serve as CPLAC secretary (like Chen Quanguo), with the intention of further weakening the CPLAC. Wang Xiaohong still heads the public security ministry but cannot become a “security czar.”

Third, Xi does not pick Wang Xiaohong as CPLAC secretary, but chooses either the head of the SPC or the SPP for the role (the CPLAC secretary is a sub-national rank position, and the SPC and SPP heads are sub-national rank officials). This makes Zhou Qiang a clear choice for CPLAC secretary because he is more qualified. Xi could opt for this arrangement if his political strength is insufficient and/or he made personnel compromises (Zhou is a Jiang faction member) in exchange for taking a third term. However, Xi could leave Zhou a mere figurehead by surrounding him with Xi loyalists. Wang Xiaohong is already deputy secretary of the CPLAC, and other Xi allies could be installed as SPC and SPP heads.

SPC president
In the first two CPLAC secretary scenarios mentioned above, Xi could keep Zhou Qiang as SPC president or have him swap places with Zhang Jun and head the SPP. If Zhou joins the Politburo, he could be moved away from his base of operations (調虎離山) and promoted in name but demoted in status (明昇暗降) by being appointed vice chairman of the National People’s Congress.

In the third scenario where Zhou becomes CPLAC secretary, current SPP head Zhang Jun or SPC executive vice president He Rong could take over as SPC president.

SPP procurator-general
There are several possible candidates to replace Zhang Jun if he is transferred, including minister of state security Chen Wenqing, SPC executive vice president He Rong, and SPP executive deputy procurator-general Tong Jianming.

     SinoInsight  2     

• Raising the quota on policy bank financing tools by 300 billion yuan. This is on top of the 300 billion yuan announced in June that is already handed out to projects.
• Issuing 200 billion yuan of special bonds for energy supply.
• Distributing an additional 10 billion yuan in subsidies for agricultural supplies on top of the 30 billion yuan already delivered this year.
• The balance of the special-purpose bond quota worth over 500 billion yuan should be “well-utilized” and issued by the end of October to boost “effective investment, spur consumption, and address the problem of insufficient loan demand.”
• Measures to support the development and investment of private businesses and the platform economy.
• Local governments will be allowed to adopt city-specific policies (一城一策) such as flexible credit loans to meet the people’s “basic housing needs.”

• Promptly introduce a new batch of policies and measures to stabilize foreign investment. This includes stepping up the publication of a new edition of a catalog of industries where foreign investment is encouraged (鼓勵外商投資產業目錄).
• Actively carry out investment promotion to attract more foreign-funded enterprises to invest in China’s industrial chain. The commerce ministry plans to organize activities to guide foreign investors to visit and invest in China’s central, western, and northeastern regions. Concurrently, the ministry will promote the establishment of comprehensive pilot areas for expanding the opening up of the service sector and promote the “institutional opening” of China’s service industry.
• Actively respond to the demands of foreign-funded enterprises. The ministry will launch a new batch of key foreign investment projects, as well as strengthen full-process services and all-round guarantees.
• Urge all parties to fully implement various legal systems for the promotion, protection, and management of foreign investment, especially affording foreign-funded enterprises the same treatment as Chinese enterprises. Local governments are advised to take instructions from the 2022 edition of the guidelines for foreign investment in China (中國外商投資指引) and enforce the complaint mechanism for foreign-funded enterprises.

• Revenue decreased 30.89 percent year-on-year to 162.363 billion yuan.
• Gross profit decreased 62.8 percent year-on-year to 17.21 billion yuan.
• Gross profit margin was 10.6 percent, compared with 19.7 percent in the same period last year and 17.74 percent for the whole of 2021.
• Parent company net profits decreased 95.9 percent year-on-year to 612 million yuan.
• Interest-bearing liabilities decreased 7.6 percent from the end of 2021 (318 billion yuan) to 293.7 billion yuan. Short-term liabilities account for 24.8 percent (72.9 billion yuan) of the total, or about the same amount at the end of 2021.
• Country Garden ranks first in sales among the top 200 Chinese developers with a sales amount of 720.86 billion yuan.

• Operating revenue decreased 31.82 percent year-on-year to 14.364 billion yuan.
• Net profits attributable to shareholders of listed companies was negative 538 million yuan, a loss of nearly 9.5 billion yuan as compared to the same period last year.
• Sales decreased 45.93 percent year-on-year to 7.323 billion yuan.
• CFLD’s balance of monetary funds was 13.656 billion yuan as of June 30, 2022, including 766 million yuan in available funds and 12.890 billion yuan in funds with various restrictions (all of which cannot be used to repay liabilities to financial institutions).
• CFLD has short-term loans of 12.355 billion yuan, commercial papers and accounts payable of 53.286 billion yuan, and non-current liabilities due within a year of 62.995 billion yuan.
• As of July 31, 2022, CFLD has failed to repay 46.358 billion yuan (excluding interest) of its debt on time.

OUR TAKE
1. China’s economic deterioration is evident from the latest manufacturing data, economic policies issued by the central government, and the sharp decrease in sales of large real estate companies. As we noted in SinoInsight 1, Beijing’s need to turn around the economic situation could see Xi Jinping make changes to the “zero-COVID” policy and “wolf warrior” approach after the 20th Party Congress.

China’s PMI data over the past year (see Table 1 and Table 2) reflects a manufacturing sector that is continually shrinking. In particular, “new export orders” and “imports” (one of the “troika” of the PRC’s growth drivers) have contracted for 16 months and 15 months consecutively. Although some indicators have improved slightly from the previous month in August (PMI is a monthly indicator of economic activity), China’s manufacturing activity is steadily shrinking and causing the regime to lose economic momentum.

Contracting factory activity in China reflects reduced domestic and foreign demand, as well as the impact of the “zero-COVID” policy on economic activity in general. Sluggish factory activity also hints at increased company closures and rising unemployment in China.

2. The impact of “zero-COVID” can further be seen from the losses of the three major Chinese airlines and China Railway. With local governments adopting “one-size-fits-all” draconian lockdowns to curb the spread of the virus in the first half of the year, people movement and passenger traffic naturally grinded to a halt. The various transportation companies were likely also affected by other external factors like high fuel prices and the devaluation of the renminbi, which would have resulted in higher operating costs and lower revenue.

3. China’s intractable real estate sector problems look set to cause more headaches for Xi and the CCP going forward. Country Garden’s dismal performance in the first half of the year bodes ill for other developers, especially in considering that the company became the largest developer in China after the Evergrande debt crisis broke out.

Country Garden is currently nearly 300 billion yuan in debt, with short-term liabilities exceeding 70 billion yuan. This means that even if the company’s net profits in the first half of the year (612 million yuan) increase by nearly 120 times in the second half of the year, it could cover its short-term liabilities but will still have some ways to go to cover its total debt. The heavily indebted (219.2 billion yuan) China Fortune Land Development’s sharp drop in sales and profits is another microcosm of Chinese developers’ debt and liquidity problems.

As the global economy continues to deteriorate and the U.S. Federal Reserve steps up anti-inflationary measures (shrink the balance sheet and raise rates), large property companies in China could see more defaults and even declare bankruptcy in the second half of 2022. Trouble in the property sector will in turn exacerbate other vicious cycles (see here and here for example) dragging down the Chinese economy. Xi Jinping may be locked-in to take a third term at the 20th Party Congress at present, but his political risks continue to spike as China’s economic problems compound and create more social unrest.