1 PRC and Russia signal challenge to US-led world order
Xi Jinping made a state visit to Moscow from March 20 to March 22. This was his first overseas trip since taking a third term as PRC president at the Two Sessions.
Both Xi and Russian leader Vladimir Putin published newspaper articles lauding friendly relations between the PRC and Russia on the eve of Xi’s visit. State media from both countries highly publicized the meeting, with the PRC side describing it as a “journey of friendship, cooperation, and peace.”
After holding talks in Moscow on March 21, Xi and Putin signed two joint statements, according to PRC state media reports. The first statement was on “deepening the comprehensive strategic partnership of coordination” between the two countries, and the second was a “pre-2030 development plan on priorities in China-Russia economic cooperation.” The two sides also signed cooperation documents in areas such as agriculture, forestry, basic scientific and technological research, market regulation, and media.
The statement on “deepening the comprehensive strategic partnership” touched on nine aspects:
- The China-Russia relationship is “not similar to the military and political alliances during the Cold War, but transcends this model of state relations and has the nature of non-alignment, non-confrontation, and not targeting a third country.” The two sides regard each other as “priority partners” and a “model of great power relations in this day and age.” The two sides also do not accept the “replacement of accepted principles and norms of international law with a ‘rules-based order’” in a world that is “changing at an accelerated pace … (where) the formation of a multi-polar international pattern is accelerating … (and where) regional powers with global influence and determination to defend their legitimate rights and interests are increasing.” Further, China and Russia called on all countries to have “dialogue rather than confrontation” and “promote world peace and development.”
- China and Russia oppose “the imposition of national values, the drawing of ideological lines, the false narrative of ‘democracy versus authoritarianism,’ and the use of democracy and freedom as a pretext and political tool to exert pressure on other countries.” Russia said that it attaches “great importance” to China’s “global civilization initiative,” supports “Chinese-style modernization,” and reaffirms the “one-China principle.” China supports Russia’s “realization of national goals before 2030.” Both sides asserted that “all countries have the right to independently choose their path of human rights development” and opposed “external forces interfering in internal affairs.” Both sides also agreed to strengthen cooperation in legal matters, exchanges between official agencies and political parties, law enforcement, military exchanges, and in safeguarding the “safety and rights of overseas personnel and institutions” of the two countries.
- China and Russia agreed to raise the level of “practical cooperation” in various fields, including bilateral trade, investments, finance, energy, civil aviation, automobiles, shipbuilding, metallurgy, transportation, aerospace, agricultural exports, and tripartite cooperation between China, Mongolia, and Russia. China said that it supports the Eurasian economic integration process while Russia said it supports the construction of the “Belt and Road” initiative.
- China and Russia will work hard to restore and expand offline people-to-people and cultural exchanges and cooperation, including in education, scientific and technological innovation, culture and the arts, tourism, medicine and health, health and pandemic prevention, sports, maritime matters, emergency management, media, youth exchanges, etc.
- China and Russia will strengthen cooperation in international affairs and oppose “all forms of hegemony” as well as “unilateral sanctions and extreme pressure.” While condemning “all forms of terrorism,” both sides also called for an “objective, impartial, and professional investigation” into the Nord Stream pipeline explosions.
- China and Russia agreed to strengthen cooperation in international organization platforms and “firmly condemn the politicization of multilateral platforms.”
- China and Russia reiterated that “a nuclear war cannot be won and must never be unleashed.” Both sides also expressed concerns about the AUKUS trilateral pact between the United States, the United Kingdom, and Australia, as well as Japan’s discharge of nuclear-contaminated wastewater from the site of the Fukushima meltdown into the Pacific Ocean. Both sides further raised concerns about the U.S.’s accelerated construction of a global anti-missile system and deployment of anti-missiles systems worldwide, accusing Washington of “undermining international and regional security, and global strategic stability.”
- China and Russia agreed to strengthen cooperation on climate and environmental protection, and opposed “setting up trade barriers and politicizing climate issues on the grounds of addressing climate change.”
- Russia reaffirmed its commitment to resuming peace talks over Ukraine and welcomed China’s “constructive proposals” on the topic. The two sides said that the settlement of the Ukraine crisis must “respect the legitimate security concerns of all countries and prevent the formation of confrontation between camps” that “pour fuel on fire.” Both sides also accused NATO and the U.S. of “undermining regional peace and stability” in strengthening ties with countries in the Indo-Pacific, as well as expressed concerns about “peace and stability” in Northeast Asia, the Korean Peninsula, and the Middle East. The two sides expressed willingness to strengthen cooperation and support for Central Asian countries in “opposing external forces in their promotion of ‘color revolutions’ and interference in regional affairs.” Both sides further agreed to strengthen communication and coordination on African and Latin America affairs.
The statement on “pre-2030 development priorities” listed eight directions for bilateral economic cooperation, including in the fields of trade and e-commerce; finance; energy; capacity building for commodities, mineral resources, and the deep processing of resources; technology and innovation; industry; and agriculture.
On March 22, a video of Xi Jinping and Putin saying goodbyes via translators circulated online. Xi told Putin, “Right now there are changes — the likes of which we haven’t seen for 100 years – and we are the ones driving these changes together.” Putin said, “I agree.” As Xi left Moscow for Beijing, the Russian military launched a barrage of strikes with Iran-made Shahed drones on Kyiv, killing at least nine people, according to the Ukrainian authorities.
Big picture
Xi’s trip to Moscow comes amid heightened Sino-U.S. tensions over issues such as the PRC spy balloon entering U.S. airspace, U.S. warnings about a potential PLA invasion of Taiwan in 2027, U.S. warning the PRC against providing lethal support to Russia, and increasing U.S. tech restrictions on China.
The Xi-Putin meeting also follows escalations in the Russia-Ukraine conflict and greater Western military support for Ukraine.
Our take
1. Official media reports are short on the specifics, but both the PRC and Russia appeared to have gotten a good deal out of each other during Xi Jinping’s latest trip to Moscow.
From the two joint statements, the PRC appeared to have secured greater access to Russian energy and technologies (metallurgy, aviation, aerospace, etc.), a freer hand to expand its “Belt and Road” in Central Asia, and more opportunities to export to Russia (which would make up for some of the reduced demand for Chinese goods in Europe and the United States). Xi and his “great power diplomacy” agenda also received a propaganda boost at home.
Meanwhile, Russia likely gained assurance that China would buy energy, fertilizers, food, and other goods and resources that are being boycotted in the West. Russia will also likely benefit from China’s manufacturing capacity, mature e-commerce systems, and other digital technologies. There are limits, however, to the degree at which both sides can benefit from technology exchanges as neither has developed the advanced technologies that the West has restricted them from accessing. As trade volume and currency exchanges between the two sides increase, they would gradually reduce some of their dependence on the U.S. dollar (though not enough to be decisive).
Unlike what was expected by some observers, the PRC did not announce any big purchase of natural gas from Russia during Xi’s trip. Unless there was some secret agreement, the PRC did not immediately step up imports of Russian energy due to a lack of demand in China given the rapid deterioration of the Chinese economy. The PRC could also be looking to fulfill part of its energy needs from the Middle East to avoid being overly reliant on Russian energy; after all, Russia and China are natural and long-term geopolitical competitors.
Xi Jinping did not revive his “no limits partnership” assurance in meeting with Vladimir Putin, and the China-Russia joint statements made no mention of military cooperation and support. The joint statements also made clear that the bilateral relationship is “not similar to the military and political alliances during the Cold War.” However, both sides essentially signaled greater solidarity with each other in the face of growing Western pressure, a development which raised some alarm and drew criticism in the West.
2. While Xi and Putin stopped short of declaring a formal alliance, they issued statements that effectively crystalizes the current bifurcation of the globe. The PRC and Russia oppose Western “democracy” and “democracy versus authoritarianism” framing, reject the U.S.-led “rules-based order” in favor of a “multi-polar international pattern,” and protest against “all forms of hegemony,” including “unilateral sanctions and extreme pressure” and Western efforts to “undermine regional peace and stability.” Moreover, Xi believes that he and Putin are in partnership to “drive” the “great changes in the world unseen in a century.” Xi’s trip to Moscow could potentially be viewed later as the pivotal moment when the “new cold war” became official and the bipolar world reemerged after decades of unquestioned American dominance.
We have long warned about the CCP’s global ambitions, which do not change despite the Party’s temporary retreats. For instance, we wrote in 2018 about the CCP-hijacked world order and observed in 2019 that the CCP’s “subversive behavior since the ‘normalization’ of Sino-U.S. relations four decades ago is clear evidence that it will, if left unchecked, establish the twenty-first century’s ‘evil empire.’”
Xi could have been inspired to be more open about the CCP’s domination agenda after accounting for the recent banking crisis in the U.S. and Europe, as well as the increasingly chaotic political and domestic situation in America. Such developments appear to validate the CCP’s assessment that “the East is rising and the West is in decline,” emboldening Beijing to reembrace “wolf warrior” diplomacy and seize its chance to establish PRC hegemony amid the growing geopolitical turmoil.
We see four reasons why the PRC appears to be willing to court greater Western pressure now as opposed to the initial months after the 20th Party Congress.
First, Xi Jinping likely feels confident enough to pursue a more ambitious foreign agenda and resist the West after having more fully centralized power at the 20th Party Congress and 2023 Two Sessions. In particular, Xi securing a third term and pushing through Party and state institutional reforms technically strengthens Party Central’s (with Comrade Xi at the core) control over the state government and allows for more nimble application of policies like “great power diplomacy” (including the “wolf warrior” approach).
Second, the Xi leadership likely concluded after examining growing U.S. efforts to counter China that its own attempt to cool Sino-U.S. tensions would lead nowhere and confrontation is inevitable. Therefore, it is better to revive the “wolf warrior” and explicitly call out U.S. “containment” instead of sticking to a one-sided effort to rehabilitate the bilateral relationship.
Third, Beijing likely assessed that it cannot allow the West to defeat Russia and install a Western-friendly government in Moscow that would extend the Western threat right up to China’s doorstep. Hence, the PRC has no choice but to stand in solidarity with Russia even if it severely tarnishes China’s international image.
Fourth, the Xi leadership likely believes that the PRC has a real chance to triumph over the West through “great power diplomacy” and other measures even though the CCP can barely keep things together as domestic crises pile up. Beijing could have determined that the U.S. and parts of Europe are currently experiencing serious political, economic, and social turmoil, or other “great changes unseen in a century” that the PRC can exploit to come out ahead in “great power” competition. Beijing could also have assessed that not all countries are wholly supportive of Washington’s stance on Ukraine and are open to a PRC-mediated peace (which will boost the CCP’s global standing while diminishing America’s), are suspicious of U.S. intentions (especially over the Nord Stream sabotage), are wary of the Western financial system (given the banking crisis), and could be weary of various Western agendas such as climate change and the promotion of the LGBTQ+ rights movement. The CCP is betting that countries that are looking for an alternative to the U.S.-led world order could eventually be interested in its “Chinese-style modernization,” as well as turn to the yuan and away from the dollar. Thus, Xi Jinping has no qualms with visiting Moscow during this sensitive time to promote the CCP’s “peace plan,” standing shoulder-to-shoulder with Putin, and inviting greater international criticism.
3. The PRC and Russia may have drawn battlelines, but have also signaled that they presently have no appetite for greater conflict with the West in the short term. Instead, both sides are content to play the “peacemaker” and defender of the “multi-polar world order” while blaming the U.S. and its allies for stirring up geopolitical turmoil. This is evident from the PRC and Russia repeating the stance that “a nuclear war cannot be won and must never be unleashed” (both an attempt at conflict deterrence and a veiled threat), condemnation of AUKUS, and accusation that NATO and the U.S. are “undermining regional peace and stability.”
However, the Western and Eurasian powers appear to be preparing for escalations and larger conflicts in the second half of the decade, and particularly between 2027 and 2030. In the interim, the U.S. and its allies will likely step up decoupling from China and offshore supply chains to Southeast and South Asia, tighten technology restrictions on China, strengthen military alliances in the Indo-Pacific, and deepen its support for Taiwan. The U.S. could also look to boost its local manufacturing capabilities, especially in weapons production. Meanwhile, Russia and the PRC will likely deepen bilateral exchanges and trade, while the CCP ramps up efforts to make the regime more self-sufficient.
Get smart
Sino-U.S. tensions are set to spiral downward further after Xi’s trip to Moscow, and likely at a rapid clip. Businesses, investors, and governments must prepare for growing geopolitical risks, as well as increased social instability and heightened political risks in China.
2 January-February data show worrying outlook for China’s economy
March 17
The PRC finance ministry released financial data for the first two months of 2023:
- The national general public budget revenue decreased 1.2 percent year-on-year to 4.5642 trillion yuan.
- The national general public budget expenditure increased 7 percent year-on-year to 4.0898 trillion yuan.
- The national government fund budget revenue decreased 24 percent year-on-year to 696.5 billion yuan.
- The national government fund budget expenditure decreased 11 percent year-on-year to 1.2493 trillion yuan.
Figures for the main tax revenue items include:
- Domestic value-added tax increased 6.3 percent year-on-year to 1.5787 trillion yuan.
- Domestic consumption tax decreased 18.4 percent year-on-year to 356.8 billion yuan.
- Corporate income tax increased 11.4 percent to 1.0167 trillion yuan.
- Personal income tax decreased 4 percent to 388.1 billion yuan.
- Value-added tax and consumption tax on imported goods decreased 21.6 percent year-on-year to 293.3 billion yuan.
- Tariffs decreased 27 percent year-on-year to 40.1 billion yuan.
March 20
In an article titled, “We Tried So Hard, Why is it Still 0%?” (都這麼拼了, 為什麼還是0%), state media Zhejiang Daily noted that the added value of industries above designated size in Zhejiang Province for January and February 2023 was 310.6 billion yuan, or zero year-on-year growth.
The article added that the national added value of industries above designated size increased by 2.4 percent year-on-year, while Sichuan, Henan, and Liaoning saw growth of 7.1 percent, 4.9 percent, and 3.0 percent respectively. In comparing those figures with that of Zhejiang, a coastal industrial province, zero growth “inevitably makes people sweat,” the article said.
The article attempted to explain why Zhejiang saw no added value from industries above designated size in the first two months of the year. For one, “contraction in global demand” saw Zhejiang’s exports fall 6.4 percent from a year ago in January and February. Concurrently, commodity consumption was “still recovering” during the aforementioned period. The combination of sluggish external demand and weak domestic consumption posed “considerable challenges” to Zhejiang, whose industries mostly produced final goods.
The article also noted that the 0 percent year-on-year growth of added value of industries above designated size in Zhejiang represented a 4.7 percent rebound when compared with December 2022.
March 21
Mainland media Caijing published a piece about company deregistrations in China’s 40 key cities between 2014 to 2022 (中國重點40城, 九年間消失了多少企業?).
The article said that the 40 cities it selected are important to the Chinese economy in terms of criteria like wealth, population, and city size. The 40 cities in question have a permanent population of 427 million, or about 30 percent of China’s total population.
Caijing divided these cities into four groups according to the wealth level of its residents, or the “per capita disposable income of urban residents.”
- Group 1: Shanghai, Beijing, Suzhou, Hangzhou, Guangzhou, Ningbo, Nanjing, Zhaoqing, Wuxi, and Wenzhou.
- Group 2: Shenzhen, Jiaxing, Huzhou, Taizhou, Xiamen, Jinhua, Changzhou, Dongguan, Changsha, and Foshan.
- Group 3: Qingdao, Zhongshan, Zhenjiang, Nantong, Jinan, Wuhan, Hefei, Fuzhou, Chengdu, and Tianjin.
- Group 4: Nanchang, Dalian, Shenyang, Xi’an, Zhengzhou, Chongqing, Shijiazhuang, Nanning, Taiyuan, and Kunming.
Caijing also defined company size according to their registered capital.
- Micro enterprise: Less than 1 million yuan.
- Small enterprise: 1 million yuan to 10 million yuan.
- Medium enterprise: 10 million yuan to 50 million yuan.
- Large enterprise: More than 50 million yuan.
Caijing then issued the following findings about company deregistrations:
- In 2022, there were 28.216 million companies in the 40 cities and 1.94 million company deregistrations, for a deregistration ratio of 6.9 percent. Of the total:
- 10.327 million were micro enterprises, with a deregistration ratio of 10.8 percent.
- 13.627 million were small enterprises, with a deregistration ratio of 5.1 percent.
- 3.313 million were medium enterprises, with a deregistration ratio of 3.3 percent.
- 949,000 were large enterprises, with a deregistration ratio of 2.4 percent.
- Shanghai ranked first in the country in micro enterprise deregistrations at 216,000 and second in the country with a deregistration ratio of 19.9 percent.
- Taiyuan has the highest micro enterprise deregistration ratio at 33.2 percent.
- Micro enterprise deregistrations at the start of the current downturn in the economic cycle in 2016 was around 10 percent in Group 3 (10.1 percent) and Group 4 (9.8 percent) cities.
- Micro enterprise deregistrations soared after the Sino-U.S. trade war in 2018, with deregistrations in Group 2 (10.7 percent), Group 3 (16.3 percent), and Group 4 (12.2 percent) cities hitting a peak in 2019. In Group 1 cities, micro enterprise deregistrations soared from 9.9 percent in 2019 to 12.9 percent in 2022.
- The deregistration ratio of micro enterprises in Group 3 and Group 4 cities went down in 2020 and 2021, but this is not a signal of economic recovery or increasing business confidence. This is because most of the weaker micro enterprises had already been eliminated earlier on as the economy deteriorated and the remaining micro enterprises were in a stronger position to weather risks.
Our take
1. The CCP’s official financial figures for January and February show limited recovery and suggest that the worst is yet to come this year.
While official figures reflect a fiscal surplus of 474.4 billion yuan, the falling national general public budget revenue (down 1.2 percent) is indicative of reduced tax revenue and sluggish economic conditions. Concurrently, the 7 percent increase in national general public budget expenditure suggests that the CCP authorities are spending more to ensure social stability at home, including on “stability maintenance” forces and capabilities, epidemic prevention and control, social security, and unemployment relief.
The relatively sharp drops in the national government fund budget revenue (down 24 percent) and expenditure (down 11 percent) suggest that local governments are seeing significantly decreased revenue from land sales (land sales are the bulk of the national government fund budget revenue). This means that China’s real estate industry is still in a slump and local governments are not investing as much in infrastructure.
The fall in domestic consumption tax (down 18.4 percent) and personal income tax (down 4 percent) reflects weakening consumption in China and shrinking in the number of people with taxable income (above 5,000 yuan per month). The number of people with taxable incomes in China was just 115 million at the end of 2021, or about eight percent of the entire population. Meanwhile, the drop in value-added tax and consumption tax (21.6 percent) on imported goods and the amount collected in tariffs (27 percent) partly reflect a decreasing demand for imported consumer goods and other products.
2. State media reported that the added value of industries above designated size in Zhejiang Province saw no growth in January and February, but the actual figure is likely in the negative region after accounting for inflation and the usual efforts by CCP officials to “pad” their official data. Zhejiang’s plight is a further sign that China is exporting much less while domestic and international demand fall.
Zhejiang is a wealthy coastal province and plays an important role in the Chinese economy:
- Zhejiang reported a GDP of 5.6 trillion yuan in 2022, ranking fourth among China’s 31 provinces/provincial administrations for 26 consecutive years.
- The added value of industries above designated size in Zhejiang is 2.19 trillion yuan, accounting for 5.45 percent of China’s industrial added value (40.1644 trillion yuan).
- Zhejiang’s exports totaled 3.43 trillion yuan in 2022 and contributed 18.5 percent to China’s economic growth, ranking first in the country.
3. Zhejiang Province struggling so early in the year bodes ill for other less developed and wealthy provinces, as well as the regime on the whole. In fact, Zhejiang’s performance is consistent with the tax situation in China and reduced revenue.
Beijing’s renewed efforts at “great power diplomacy” (“wolf warrior” approach, “12-point” Ukraine peace plan, “Global Development Initiative,” “Chinese-style modernization” as a model for developing countries, etc.) and strengthening partnership with Russia are an open invitation for the U.S. and its allies to raise pressure on China. The hardening battlelines in the “new cold war” could lead to even faster economic decoupling between the PRC and the world, as well as an exodus of foreign businesses and capital from the mainland.
We wrote in our 2023 China Outlook that “Financial institutions and investors could bet on the Chinese economy recovering under the expectation that things will return to normal with the easing of ‘zero-COVID.’ However, signs of a quick recovery will likely be illusory as the Chinese economy continues to deteriorate and people lose confidence in China’s economic prospects.” If China’s current economic trends hold or worsen, then those betting on a Chinese economic revival could be in for a surprise later this year.
