1 Xi’s ‘quan wei’ suffers as China exits ‘zero-COVID’
Western media and commentators have stepped up criticism of Xi Jinping over the disastrous manner in which the CCP has been easing away from “zero-COVID” and the resulting health crisis in China.
For example, the Financial Times cited Chinese University of Hong Kong adjunct professor Willy Lam as saying that “Xi Jinping is badly wounded in the sense that his prestige and authority have suffered tremendously” from the way the regime has handled the move away from “zero-COVID.” Lam added that the harm of the pandemic situation in China is felt by “not only by ordinary people, not only the disadvantaged classes, but even senior cadres, their parents and retired senior cadres,” and this is “particularly detrimental” to Xi over the long-term.
Party officials and insiders have also been leaking information damaging to Xi to Western media. A Jan. 4 piece by The Wall Street Journal claimed that “a rare wave of protests in China’s largest cities in late November, coupled with urgent pleas from many corners of the government” saw Xi “all but abandon zero-COVID” in early December, citing PRC “officials and advisers.”
The Journal also cited notes of a National Health Commission meeting on Dec. 21 saying that nearly 250 million people were infected with the coronavirus between Dec. 1 and Dec. 20. The notes, which were “confirmed as authentic by officials familiar with the matter,” also said that half of Beijing’s 22 million residents were infected over the same period.
Meanwhile, European diplomats told the “Watching China in Europe” newsletter by the German Marshall Fund think tank that “the state of China’s economy … rather than the brief outburst of popular dissent in late November, are behind Xi’s COVID-19 U-turn.”
Our take
1. We analyzed as early as October 2022 that Xi Jinping would move away from “zero-COVID” (see here and here) after securing his political objectives at the 20th Party Congress. The sharp deterioration of the Chinese economy in recent years certainly appears to be a key factor behind the shift in pandemic policy, but Xi would not have been able to abandon “zero-COVID” before the 20th Party Congress without undermining his own “quan wei” (authority and prestige) and sabotaging his power consolidation drive.
We also noted in the Dec. 8, 2022 edition of this newsletter that Xi’s effort to roll back “zero-COVID” would be “stymied by systemic problems and the officialdom’s adherence to Party culture-derived habits.” The sharp uptick in cases and deaths since December 2022 appears to be the result of local officials taking the “optimization” of “zero-COVID” to one extreme after realizing that Beijing is not going to penalize them for relaxing epidemic prevention and control measures.
While local officials and the CCP system in general share the blame for the PRC’s current fiasco in exiting “zero-COVID,” Xi is naturally being singled out for criticism because it fits the mainstream narrative that he is an all-powerful dictator who is literally in charge of everything. “Anti-Xi, not anti-CCP” forces in China and abroad are also in favor of promoting the narrative of Xi Jinping being responsible for all of the regime’s ills.
2. We have reason to be skeptical of The Wall Street Journal’s reporting that protests from Chinese citizens and pleas from government officials convinced Xi to “all but abandon zero-COVID.” For one, “zero-COVID” remains very much on the books and has in no way been officially scrapped. Depending on how the pandemic and social stability situation unfolds on the mainland, Beijing could still signal or order a temporary shift back to stricter controls in troubled areas even as it keeps some restrictions lifted.
The Journal also does not have a good track record of accurately reporting political matters using information for PRC officials and advisers. Officials and advisers told the Journal that Li Keqiang’s profile was rising, and the May 2022 article fueled intense speculation of so-called “Li up, Xi down” in the lead-up to the 20th Party Congress. However, Li and all senior members of the Hu camp were eventually left out of the new Politburo and its Standing Committee.
We noted at the time that the people speaking to the Journal appeared to be opposed to Xi and have in effect labeled him a unique villain in the regime. It cannot be ruled out that “anti-Xi” forces in the mainland are looking to solidify the popular narrative that protests and intra-Party pushback against Xi are having an effect on Beijing’s policy decisions by leaking damaging information and disinformation about Xi and his leadership to Western media. When this view that Xi can be pressured at home into changing policy and is wildly inept becomes prevalent and accepted, Xi’s “quan wei” will be undermined further and his political enemies will gain important leverage to deploy against him at crucial moments.
What’s next
As internal pressure mounts against Xi Jinping, he will be incentivized to step up purges to remove his remaining factional rivals and disloyal elements. Xi’s opponents will in turn ramp up their pressure campaign against him, completing the vicious cycle.
Factional struggle in the Party elite could become more obvious as crises worsen for Xi and the CCP. “Leaks” of damaging information and disinformation about Xi or his enemies to Western media and credible overseas Chinese language news outlets are a sign of escalation in intra-Party factional struggle.
2 Guizhou municipal investment group extends 15.6 billion loan for 20 years
Zunyi Road and Bridge Construction Group (henceforth referred to as Zunyi Road) announced a debt restructuring plan on Dec. 30, 2022. The largest municipal investment company in Zunyi City, Guizhou Province, Zunyi Road is the first local government financing platform to announce a restructuring of its bank loans.
Details of the debt restructuring include:
- Zunyi Road is rolling over 15.594 billion yuan worth of bank loans for 20 years.
- Annual interest on the loans was adjusted to between 3 percent and 4.5 percent, compared with the original interest rate of 7.5 percent.
- The company will only pay interest on the loans for the first 10 years, and the principal will be repaid in phases over the remaining decade.
Zunyi Road said in its announcement that its debt restructuring plan is based on provisions in two documents by the PRC State Council and Ministry of Finance governing development in Guizhou. The provisions allow financing platform companies to negotiate with financial institutions the rollover of existing implicit debt and restructure debts to maintain liquidity.
An anonymous industry insider told mainland media, “It doesn’t matter how long the institutional funds on the bank side are rolled over. An individual investor will not accept (the Zunyi Road) arrangement.”
More on Zunyi Road
Mainland media reported that Zunyi Road has obtained credit from 18 banks as of June 30, 2022, citing data from enterprise information provider “Enterprise Alert” (企業預警通).
According to publicly available information, Zunyi Road’s revenue in the first half of 2022 was 673 million yuan, down 36 percent from a year ago. Its net profits were negative 286 million yuan, down 17 percent year-on-year. The company’s total interest-bearing debt was 45.858 billion yuan. In addition to its restructured bank loans, Zunyi Road also has trust bonds and other non-standard debt.
Zunyi Road was listed as a judgment debtor (被執行人, or a person or entity who is subjected to court enforced confiscation of assets after losing a suit) at least 158 times as of Dec. 15, 2022, according to mainland news reports.
Macro view
1. The proportion of funds raised by municipal investment companies in Guizhou that was used to repay interest-bearing debt and pay off old debts increased from less than 45 percent in 2020 to nearly 95 percent in 2023. Meanwhile, the proportion of such funds was 100 percent in the provinces of Gansu, Hainan, Heilongjiang, Liaoning, Inner Mongolia, Niangxia, Qinghai, and Tibet, as well as in the first-tier city of Tianjin.
2. As of Dec. 31, 2022, 31 municipal investment companies (including their subsidiaries) in 12 provinces were found to have overdue bank loans, as well as interest in arrears or extensions, according to incomplete data compiled by HuaAn Securities. Of the 31 companies, two had a cumulative balance of over 6 billion yuan in risky loans, while another six companies had a cumulative balance of more than 2 billion yuan.
3. Data from Essence Securities show that 4.6 trillion yuan worth of municipal investment bonds are due to mature in 2023, a 10-year peak. Companies repaid 3.7 trillion yuan worth of bonds in 2022.
4. Mainland media reported that the balance of interest-bearing debt held by municipal investment companies in China reached 56 trillion yuan in 2021 and may hit 65 trillion in 2022.
Why it matters
The debt of municipal investment companies is mainly backed by local governments. Local governments will suffer a crisis of credibility should those companies default on their debt. This will in turn affect the CCP’s “great, glorious, correct” image and legitimacy.
Our take
1. Zunyi Road’s debt restructuring plan would unlikely have been approved were it not a municipal investment company whose standing is tied to that of the local government’s. The announcement of the plan shows that the immense implicit debt problem of local governments is bubbling to the surface, and is a microcosm of China’s local debt crisis.
2. The central government allowed the rollover of Zunyi Road’s debt to “delay and wait for change” by letting inflation slowly lower the scale of repayment over time and help the company survive. In doing so, however, the CCP authorities are merely transferring the debt risks to financial institutions and have not actually resolved the regime’s broader financial troubles.
3. The debt problems of municipal investment companies indirectly reflect the continuous worsening of the Chinese economy and falling real estate prices. The real estate situation in particular will make it impossible for local governments to sustain their finances by selling land.
4. As China’s economy deteriorates further, the debt and financial problems of local governments will become increasingly difficult to cover up. This will greatly increase political risks for Xi Jinping and the CCP regime.
What’s next
Municipal investment companies could default on their debts this year as the Chinese economy struggles to recover. Debt defaults will in turn trigger the financial risks of Chinese financial institutions.
3 CCP retreats in the face of ‘fireworks revolution’
Before New Year’s Day, several local governments reaffirmed a nationwide ban on fireworks in city areas. Fireworks were set off in Beijing, Shanghai, and some areas regardless. Videos circulating on social media showed some people lighting fireworks while driving cars and riding motorcycles as the police gave chase behind.
Clashes erupted in a number of places as local public security forces tried to enforce the ban. Several notable incidents took place in the central province of Henan.
On the evening of Dec. 31, 2022, over one thousand people gathered in Chunqiu Square in Xuchang City to mark the new year. The police moved in after some people set off fireworks, resulting in skirmishes involving residents and over 20 police officers. The mistaken arrest of a female bystander led the crowd to surround the local police station. Eventually, the deputy director of the police station emerged to issue an apology.
More intense police-resident clashes took place at night on Jan. 2 at Luyi County in Henan’s Zhoukou City. Video clips uploaded to social media showed an angry crowd surrounding a police car and demanding the release of those arrested for lighting fireworks. The crowd later overturned the police vehicle. Other clips showed a young man holding aloft the removed license plate of a police car while standing on top of the defaced vehicle.
On Jan. 6, many residents in Zhumadian City, Zhoukou City, and Luyi County gathered to light fireworks, according to videos on social media. The police did not intervene to enforce restrictions.
Separately, a large crowd gathered around the bronze statue of Sun Yat-sen in Nanjing City on New Year’s Eve to let balloons fly. Nearby streets and traffic were essentially blocked by masses who went to pay tribute to the founder of republican China. Eyewitnesses were heard remarking at the size of the crowd in videos circulated online.
The authorities respond
The social unrest resulting from enforcing the fireworks ban led local governments in many areas to subsequently announce a relaxation of the policy. For instance, the Xi’an Municipal Public Security Bureau issued an urgent notice on Jan. 2 urging the police to enforce the law flexibly. The police were also instructed to not “create frontal conflict with the masses and cause negative public discourse involving the police.”
On Jan. 5, state broadcaster CCTV published an article (煙花的“禁”與“放”, 是時候被正視了) on its official WeChat account calling for “taking seriously” the easing of fireworks restrictions. The article noted the following:
- The pandemic has “not been easy for everyone” in the past three years. Those who have been cooped up and are feeling depressed need a “complete release.”
- Public discourse regarding the fireworks ban has grown heated. Thus, relevant local departments must face up to it and “explain to the public the reasons and basis for policy formulation,” as well as “respond to the public’s demands.”
- Local governments should “listen carefully” to the “different voices on the internet” and strive to identify the “greatest common denominator.” Then they should come up with something that “satisfies as many people as possible rather than simply and crudely engaging in ‘one-size-fits-all’” approaches.
Citizens react
Chinese netizens smelled weakness in the CCP from the authorities’ quick relaxation of restrictions on fireworks and the “appeasement” efforts by state media.
One netizen wrote, “The Communist Party is not as tough as it used to be. When young people make trouble, the Party gives in. It seems that the Party is just a paper tiger.”
Another netizen wrote, “This was achieved through struggle.”
Our take
1. Dubbed the “fireworks revolution” by some, the social unrest around the New Year’s period comes a few short weeks after the anti-lockdown and anti-regime “blank paper revolution” in late November 2022. The “fireworks revolution” also follows the CCP’s disastrous effort to hasten its exit from “zero-COVID,” which overwhelmed the regime’s healthcare system and led to a sharp uptick in infections and deaths (including senior and retired cadres).
The outburst of rowdiness and deliberate disobedience by residents is almost certainly a reflection of pent-up frustration after three years of strict lockdowns and a desire to let off steam to celebrate the easing of restrictions. The “fireworks revolution” also reveals the Chinese people’s growing dissatisfaction with the CCP authorities and yearning for greater freedoms.
2. There are several possible reasons why the CCP authorities gave ground on the fireworks ban. The authorities could believe that the ban was a little extreme to begin with and did not mind relaxing it to appease New Year celebrators. The authorities could also believe that offering the small concession would avert greater social instability. Further, the authorities could be looking to “retreat” first but settle scores later with the troublemakers; dozens of participants of the “blank paper revolution” have been subjected to surveillance, intimidation, and interrogations, according to The Washington Post.
Regardless of what the authorities had in mind, the perception that the CCP can be pressured into making concessions will seed the impression in the minds of the Chinese people that they can successfully “struggle” to secure their rights and freedoms.
As we wrote in the Dec. 8, 2022 newsletter: “The Xi leadership is caught between a rock and a hard place in dealing with protests, potential protests, and student demands. Its basic dilemma is as follows: On the one hand, clamping down hard on the people could stop some protests, but could trigger greater nationwide social turbulence. On the other hand, tolerating some protests and giving up some ground could appease some areas, but risks encouraging more demands from the people and starting a prairie fire that ultimately results in regime collapse.”
What’s next
The Lunar New Year period from mid to late January is the next crucial period to watch as people travel around the country, attend gatherings, and set off more fireworks.
Growing social contradictions and the CCP authorities’ weakening grasp of the situation will also embolden anti-Xi forces to instigate or take advantage of social instability and incidents to undermine the Xi leadership.
4 Protest turns bloody at Chongqing pharma factory after mass layoffs
A move by Chinese pharmaceutical company Zybio’s factory in Chongqing to lay off 8,000 temporary workers led to a large protest and bloodshed from Jan. 6 to Jan. 7. The protest ended on Jan. 8 after the factory agreed to compensate the laid-off workers.
The details
Zybio conducts R&D and manufactures vitro diagnostic reagents and equipment, including COVID-19 antigen test kits and test machines. According to information from Chinese language media outlets and social media, the company started large-scale manufacturing of COVID-19 test products after the CCP relaxed “zero-COVID” restrictions in November. The Zybio factory in Chongqing also advertised a 3,000 yuan bonus for temporary workers who would be willing to work during the Lunar New Year period, and eventually recruited 6,000 to 7000 workers.
Then in the evening of Jan. 6, the Zybio factory suddenly fired nearly 8,000 temporary workers and withheld payment of their wages. Some have speculated that the factory saw a steep drop in orders and hence had to cut workers. Regardless, the laid-off workers staged a small protest that night. By Jan. 7, an estimated 4,000 to 5,000 workers were protesting.
Videos circulating online showed workers holding signs saying “return [my] money” (還錢) as they marched in the factory compound. Some angry workers were filmed smashing factory equipment and products. Some factory executives were detained and injured by the protesters, with at least one labor agent being beaten bloody.
Riot police arrived on scene on the evening of Jan. 7 to suppress the protest, but they were forced into retreat by angry workers hurling plastic boxes at them. In the early hours of Jan. 8, Zybio announced that the company would pay the wages of the fired workers plus a compensation fee of 1,000 yuan. The workers agreed to the settlement and ended the protest.
Our take
1. The protest at Zybio’s Chongqing factory is one of many negative byproducts of Xi Jinping’s “zero-COVID” policy.
Zybio appeared to have been impacted by the CCP authorities’ effort to ease pandemic restrictions. Local governments and institutions likely dropped orders as they sought to “optimize” epidemic control and prevention measures. Reduced orders affected revenue and forced the company to save money by firing thousands of temporary workers.
Meanwhile, many people took up Zybio’s recruitment offer because three years of “zero-COVID” have left many struggling to make ends meet. The sudden layoffs and non-payment of wages was likely the straw that broke the camel’s back for many of the workers. Backed into a corner, the workers likely felt that they had no choice but to stage a protest. That the protest turned bloody is another sign of repressed anger left over from the years of lockdowns and hardships.
2. Local officials have been giving ground in the face of surging anger in Chongqing and elsewhere. This “appeasement” by officials is likely an attempt to prevent social tensions from escalating out of control and preserve their respective careers. However, the CCP authorities will almost certainly make reprisals at a later date when tensions have cooled off.
Meanwhile, the Chinese people will learn from the Zhengzhou Foxconn protest, the “blank paper revolution,” the “fireworks revolution,” and other instances where the authorities “backed off” that they can only secure their rights, freedoms, and other interests through determined and furious “struggle.”
What’s next
More protests will erupt in mainland China this year, especially if the CCP authorities are quick to “appease” protesters and make concessions to “maintain stability.” The authorities have an added incentive to smooth over tensions before the Lunar New Year period so as not to ruin the festive period and generate even more animosity towards the regime.
The increased incidence of protest will spike Xi Jinping and the CCP’s political risk levels.
