Xi shores up his paramount position with Party regulations outline; CCP strongly denies that China is experiencing deflation

  1   Xi shores up his paramount position with Party regulations outline

On April 18, the CCP Central Committee issued an outline for the work plan of formulating Party regulations from 2023 to 2027 (中央黨內法規制定工作規劃綱要 [2023－2027], henceforth referred to as the “Party regulations outline” or “outline”) and published a notice requiring all regions and departments to conscientiously implement the outline “in light of actual conditions.”

The notice said that the formulation and implementation of Party regulations is meant to “ensure” that the CCP maintains a high degree of consistency with “Party Central with Comrade Xi Jinping at the core” in “ideology, politics, and actions.” The notice also required Party Committees and Party groups at all levels to “ensure” that the Party regulations outline is implemented in a way that is “tenable, feasible, and manageable.”

Noteworthy points in the Party regulations outline include:

1. The “two safeguards” (safeguard the core position of Xi Jinping in Party Central and the core position of the Party, and safeguard Party Central’s “quan wei” and centralized and unified leadership) are the “supreme political principles” and “fundamental political rules” in the Party. Also, the “two safeguards” must be institutionalized to ensure the unity of the whole Party and consistency in the Party’s actions.

As part of promoting the “two safeguards,” Party Central will:

• Revise the regulations of the Party Committee/Party Group theoretical learning center group study rules to include “weaponizing the minds” of Party members with “Xi Jinping Thought,” as well as “educate and guide” the younger generation of Party members to “consciously” become firm believers and faithful practitioners of “Xi Jinping Thought.”
• Formulate supporting systems to promote the implementation of the CCP Party Central’s work regulations (中國共產黨中央委員會工作條例) to ensure that only Party Central has the power to make decisions and interpret major policy issues concerning the whole Party and the country.
• Research and formulate regulations on Party Central’s decision-making and coordination organization work (黨中央決策議事協調機構工作條例).
• Improve Party Central’s leadership system for the establishment and operation of organizations at all levels and types.
• Formulate regulations on implementing Party Central’s major decisions and deployments (貫徹落實黨中央重大決策部署條例) and regulations on standardizing the formulation of local Party Committee policy documents (規範地方黨委政策性文件製定工作規定).
• Strictly implement the guidelines governing intra-Party political life under the new situation (關於新形勢下黨內政治生活的若干準則); strictly enforce political discipline and rules; resolutely prevent and correct all erroneous understandings, words, and actions that deviate from the “two safeguards”; and resolutely prevent and correct all forms of “low-level red” and “advanced blackening.”
• Improve the political capacity building system for Party members and cadres; leading cadres should take political ability as the primary ability in performing their duties; be politically sensible and honest; persist in daring to struggle and be good at struggling; and be anxious about what Party Central is anxious about, and concerned about what Party Central is concerned about.

2. The Party’s leadership regulations system should be “improved” to “guarantee” the CCP’s overall control and coordination of all parties.

• Improve the system of the Party’s leadership over the National People’s Congress, the state government, the Chinese People’s Political Consultative Conference, the supervisory organs, the judicial organs, the procuratorial organs, the military, the people’s organizations, enterprises and institutions, as well as self-governance organizations and social organizations at the grassroots.
• Improve the system of the Party leading all undertakings.
• Resolve the systemic and mechanism problems regarding the “Party’s leadership over all work” through the “scientific allocation” of the powers and responsibilities of CCP and state organs, as well as the “timely transformation” of Party Central’s decision-making and deployments into laws and regulations.

3. Improve the Party’s organizational regulations and systems.

4. Improve the Party-building regulations and systems.

5. Improve the Party’s supervisory and protection regulations and systems.

  Backdrop

The publication of the Party regulations outline follows several moves by Xi Jinping to strengthen the CCP’s leadership over the governing apparatus, more thoroughly “rectify” the regime, and boost his “quan wei” (authority and prestige), including:

• New Party and state institutional reforms introduced around the 2023 Two Sessions period.
• Revision of the State Council work rules.
• A “Xi Jinping Thought” study campaign (see here and here).
• An “investigation and research” campaign.
• Various anti-corruption efforts (including targeting SOEs, etc.) and the “education and rectification” of the anti-corruption authorities.

Meanwhile, Xi has been busy with various diplomatic efforts, including receiving several heads of state and senior officials in Beijing. The CCP also released positive-looking economic figures for the first three months of the year, and the data has increased the optimism of international investors for China’s growth prospects in 2023.

Concurrently, the U.S. and its allies have been pressuring the CCP regime over Taiwan and other issues.

  Our take

The Party regulations outline is Xi Jinping’s latest effort to further centralize power in the regime under his person, solidify his paramount position in the regime, strengthen the CCP’s governing ability, and lay the groundwork to move against lingering factional rivals and others who oppose his rule. Xi likely believes that working towards the aforementioned objectives gives himself and the CCP the best chance to survive and overcome the many internal and external crises facing the PRC, as well as pave the way for the regime to seize future opportunities to dominate the region and the globe.

Several points in the outline make clear Xi’s intention to have the “Party lead everything.” Notably, the implementation of the regulations would grant Party Central the power to “make decisions and interpret major policy issues concerning the whole Party and the country,” as well as have increased “leadership” control over the various Party and state governing bodies and organizations. Xi is justifying his and Party Central’s power grab by arguing that it is the “scientific allocation” of “powers and responsibilities” and the “timely transformation” of the Party’s orders into “gang rules” (“laws and regulations”) that must be obeyed.

Xi is also looking to address the longstanding problem of “orders not leaving Zhongnanhai” by “improving” the so-called “Party leadership regulations system” to “guarantee” the CCP’s control over all entities in the regime. With the Party leading “all undertakings,” officials are compelled to comply with orders lest they are found to have “disciplinary” or political problems and find themselves facing the anti-corruption authorities. Of course, officials will still default to “preferring left rather than right” and other inefficient or even detrimental approaches in carrying out orders. But they could have less room for “inaction” (不作爲) or “lying flat” going forward if Party Central decides to get hard on those who refuse to “persist” in “daring to struggle and be good at struggling; and being anxious about what Party Central is anxious about, and concerned about what Party Central is concerned about.” Conversely, Beijing will struggle with morale problems as officials grow resentful of increased supervision, and could find its governing ability lowered instead of raised as officials develop new “countermeasures” to protect their self-interests.

Xi’s promotion of the “two safeguards” to ensure “the unity of the whole Party and consistency in the Party’s actions” is a way to obliquely outlaw all factions in the CCP and establish new “gang laws” in the regime. Leading cadres and officials who are loyal to Xi and “take political ability as the primary ability in performing their duties” stand to be rewarded, while those who deviate from the “two safeguards” (carry out “low-level red” or “advanced blackening,” engage in “erroneous understandings, words, and actions,” etc.) will be purged.

As Party members and cadres increasingly have their minds “weaponized” with “Xi Jinping Thought” and are “firm believers and faithful practitioners” of Xi’s political theories, Xi Jinping will be able to more safely and openly denounce Jiang Zemin’s “incorrect political line” and eliminate the remnant Jiang faction. And like with the State Council work rules, the emphasis on “Xi Jinping Thought” over all of the CCP’s other ideologies in the Party regulations outline also create the conditions for Xi to “abandon the CCP and its ideology when forced by ever-worsening circumstances to choose between preserving the regime and saving himself,” as we earlier analyzed.

  2   CCP strongly denies that China is experiencing deflation

  Dispelling deflation

April 18
In addressing the issue of whether China faces deflation risks due to the weak growth in consumer prices, National Bureau of Statistics spokesperson Fu Linghui said during a press conference that in general, the “Chinese economy does not appear deflated and deflation is unlikely in the near term.”

Fu listed the following reasons why he believed there is no deflation:

• The national consumer price index (CPI) grew by a moderate 1.3 percent year-on-year in the first quarter of 2023.
• The broad M2 money supply rose by 12.7 percent at the end of March, a “relatively rapid rate” of growth.
• China’s economy grew by 4.5 percent in the first quarter, rebounding from the fourth quarter of 2022.

Fu then said that “seasonal factors” and reasons were responsible for the declining CPI growth in the first quarter of 2023, including:

• Market demand dropped after the Lunar New Year, the supply of fresh vegetables increased a lot, the supply of pigs was sufficient, and some food prices dropped, including pork.
• The slowing international economy drove down energy prices, including crude oil.
• Car companies made great efforts to slash prices to drive sales, resulting in falling car prices and especially the prices of gasoline cars.

Fu added that the CPI increase in the second quarter of 2023 could remain low due to the relatively high CPI growth in the second quarter of 2022, but this does not indicate deflation.

April 20
The People’s Bank of China held a press conference to introduce China’s first quarter financial statistics press conference. A reporter from Reuters asked a question about recent deflationary trends in the Chinese economy.

In response, PBoC monetary policy department director Zou Lan said that “there is no basis for long-term deflation or inflation.” He gave the following reasons to back the claim:

• Some prices have been falling recently due to “economic fundamentals” and “high base figures.” Supply capacity is strong, while demand recovery has been slow. In addition, the surge in international energy prices and the anti-seasonal rise in domestic fresh vegetable prices in March 2022 led to a high base price and affected the CPI this year.
• Deflation is “generally characterized” by continuous negative growth in price levels and a continuous decline in money supply, and is often accompanied by economic recession. This contrasts with the situation in China where “consumer prices are still rising moderately, M2 broad money supply and total social financing are growing relatively fast, and economic operations continue to improve.”

  Positive economic data

April 18
The NBS released China’s economic data for the first quarter of 2023:

• China’s GDP increased 4.5 percent year-on-year and 2.2 percent quarter-on-quarter to 28.4997 trillion yuan.
• The added value of industrial enterprises above designated size increased by 3.0 percent year-on-year in the first quarter and 3.9 percent year-on-year in March
• Service industry added value grew 5.4 percent year-on-year.
• Total retail sales of consumer goods increased 5.8 percent year-on-year to 11.4922 trillion yuan and decreased 2.7 percent from the fourth quarter of 2022.
• National fixed asset investment (excluding rural households) increased 5.1 percent year-on-year to 10.7282 trillion yuan; the rate of growth was the same as compared to the same period in 2022.
• Sales of commercial housing increased 4.1 percent year-on-year to 3.0545 trillion yuan.
• Total trade increased 4.8 percent year-on-year to 9.8877 trillion yuan; exports grew 8.4 percent year-on-year to 5.6484 trillion yuan and imports rose 0.2 percent to 4.2393 trillion yuan.

April 20
1. Fang Xinghai, vice chairman of the China Securities Regulatory Commission, said at the opening ceremony of the China-Singapore (Chongqing) Connectivity Initiative Financial Summit that the net inflow of foreign capital into the A-shares market reached 150 billion yuan in the first quarter of 2023. The first quarter net inflow was half that of the full year of 2021 and more than half the sum of the whole of 2022.

2. The PRC Ministry of Commerce disclosed in a regular press conference that foreign direct investment (FDI) in China increased 4.9 percent year-on-year in the first quarter of 2023 to 408.45 billion yuan.

Of the total, FDI from France and Germany increased by 635.5 percent and 60.8 percent respectively. FDI from the United Kingdom, Canada, Japan, Switzerland, and South Korea grew by 680.3 percent, 179.7 percent, 47.7 percent, 47.4 percent, and 36.5 percent respectively, while FDI from Belt and Road countries rose by 27.8 percent.

  Negative economic data

April 18
1. Per NBS data for the Chinese economy in the first quarter of 2023:

• Fixed asset investment (excluding rural households) decreased by 0.25 percent month-on-month in March.
• Investment in real estate development decreased by 5.8 percent year-on-year, while the area of commercial housing sold decreased by 1.8 percent to 299.46 million square meters.
• Added value of enterprises above designated size funded by foreign investors and investors from Hong Kong, Macau, and Taiwan decreased by 2.7 percent year-on-year.
• In March, the national consumer price index rose by 0.7 percent year-on-year and decreased by 0.3 percent month-on-month.
• The monthly surveyed unemployment rate for those aged 16‑24 years increased to 19.6 percent in March.

2. The PRC Ministry of Finance released financial data for the first quarter of 2023, including:

• The national general public budget revenue increased 0.5 percent year-on-year to 6.2341 trillion yuan.
• The national general public budget expenditure increased 6.8 percent year-on-year to 6.7915 trillion yuan.
• China’s budget deficit increased 359.6 percent year-on-year to 557.4 billion yuan.
• The national tax revenue decreased 1.4 percent year-on-year to 5.1707 trillion yuan. Non-tax revenue increased 10.9 percent year-on-year to 1.0634 trillion yuan (Note: the increase was mainly due to the “revitalization” of assets at the local level [including sales and leases] driving revenue generated from the reimbursable use of state-owned resources or assets by 32.4 percent).

3. Li Daokui, a member of the National Committee of the Chinese People’s Political Consultative Conference and director of Tsinghua University’s Institute for Chinese Economic Practice and Thinking suggested in an interview with mainland media that the central government should issue 500 billion yuan worth of consumption coupons to Chinese citizens to stimulate the economy and improve domestic consumption levels.

Li added that those who are looking to spend in the short term but dare not incur the expenses will definitely make use of the consumption coupons. He also noted that 500 billion yuan of consumption coupons can stimulate 1 trillion yuan in consumption according to conservative calculations, and the 1 trillion yuan in consumption will see at least 300 billion yuan flow back to the central government’s coffers through taxation.

  Big picture

The international community appears to be focusing more on the possibility of a PRC invasion of Taiwan. The U.S. is also calling for the speeding up of military sales and weapons delivery to Taiwan, and is warning the business community to take seriously the threat of a Taiwan crisis.

Meanwhile, multinational companies are gradually shifting their supply chains out from mainland China and to countries in Southeast and South Asia.

  Our take

1. China’s 4.5 percent GDP increase in the first quarter exceeded analyst expectations of below 4 percent growth and appears to signal that the Chinese economy is on the road to recovery. However, some individual data points do not quite match the overall growth figure and suggest that China’s economic outlook for the rest of the year is not optimistic.

Meanwhile, public murmurings, discussions, and doubts raised about China’s official economic data seem to have concerned the CCP enough for it to publicly refute the signs of trouble and defend the economic recovery. The economy is a confidence game, and Beijing is doubling down on propaganda and “positive”-looking figures to continue attracting foreign investments and strengthen the PRC’s economic ties with the world as geopolitical storm clouds gather.

2. We previously analyzed that “China’s total social financing and credit borrowing saw rapid growth in the first three months of the year, but the CPI and PPI indicate deflation. This suggests that the CCP has not been able to stimulate consumption despite boosting liquidity.” Also, Xi Jinping noted that the prominent problem in the Chinese economy is “insufficient total demand” at the Central Economic Work Conference in December 2022. The CCP’s recently released economic and financial data, as well as international observations, affirm our assessment.

The official first quarter figures and Li Daokui’s consumption coupon suggestion indicate that consumption and resident incomes are both down in China. The decrease in the national tax revenue by 1.4 percent during a period after “zero-COVID” was lifted would be troubling for the CCP regime; in particular, domestic consumption tax fell by 22.2 percent, import consumption tax was down 14.4 percent, and personal income tax decreased by 4.4 percent.

While the PRC’s fiscal revenue increased by 0.5 percent in the first quarter, its fiscal deficit also went up by nearly 3.6 times. Concurrently, land sales revenue plummeted by 21.8 percent, and the drop in real estate investment also reflects a decline in government revenue from land sales.

Perhaps more worrisome for the CCP is supply chains pulling out of China and a shrinking manufacturing sector. The decline in added value of enterprises above designated size funded by foreign investors and investors from Hong Kong, Macau, and Taiwan, poor demand as reflected in the tiny growth in imports, and the high unemployment rate of 16 to 24s indirectly reflect the outward migration of supply chains and a shortage of jobs. An April 17 article on the Chinese-language edition of Nikkei also noted that shrinking demand in the U.S. has contributed to China’s manufacturing sector growing smaller.

Qiu Dasheng, a researcher at the international department of the Taiwan Institute of Economic Research, told Radio Free Asia that in general, both imports and exports would see a strong boost when exports are doing well. However, when imports are “stagnant” in China’s case, it becomes questionable how the exports “supported more than 5 percent consumption and investments.”

According to data by American trade data company Descartes Datamyne, the U.S. handled 1,217,509 containers (measured in 20-foot equivalent units) inbound from Asia this March, a year-on-year decrease of 31.5 percent and a bigger drop from the 29 percent year-on-year decline in February. Of the total, containers inbound from China to the U.S., which form the highest share of the container volume, fell sharply by 40 percent from a year ago and saw its proportion of the total also drop to 53.1 percent, the lowest level since March 2020.

Finally, economic growth in the first quarter of 2023 appeared to have been mainly driven by government investments in infrastructure. According to mainland media reports, the issuance of new local bonds is concentrated in the first half of the year, and the net financing scale of local bonds is expected to be comparable in the first (about 1.75 trillion yuan) and second quarters (about 1.59 trillion yuan). The frontloading of government investments means that the Chinese economy has to see significant improvement in the second quarter or economic growth in the second half of 2023 will be even less optimistic.

  3   Rural property rights reform good on paper, but comes with systemic risks

On April 14, 11 State Council departments jointly issued a work plan for a pilot program to standardize rural property rights transfers and transactions (農村產權流轉交易規範化試點工作方案). A notice announcing the work plan said that it was meant to help the peasantry “better realize their property rights,” and that the pilot would commence in 2023 and be carried out between 2023 and 2024.

Key points in the work plan include:
1. Improve the (rural property rights) transaction system. Coordinate the use of various transaction service venues, institutions, and platforms, as well as promote the improvement of the (rural property rights) information system.

2. Improve transaction rules, including:

• Property rights varieties that are not restricted by law can be transacted.
  • Property rights that can currently be transacted include: Peasant household contracted land management rights, forest rights, “four wastelands” management rights, rural collective operation assets, agricultural production facilities and equipment, the right to use small water conservancy facilities, agricultural-related intellectual property rights, bidding for rural construction projects, industrial project investment and transfer, as well as other transactional varieties that meet the requirements of the law, regulations, and policies.
  • The transfer of rural collective assets of a certain amount or greater should be publicly traded in accordance with regulations.
  • The transfer of rural land by social capital like industrial and commercial enterprises and the larger-scale transfer of rural land shall be traded in accordance with regulations to prevent “black-box operations.”
  • Explore allowing the transaction of rural homesteads and home leasing.
• All legal persons, natural persons, sole proprietorships, partnerships, and other unincorporated organizations that are not restricted by laws, regulations, and policies can participate in property rights transactions.

3. Strengthen supervision and management, as well as risk prevention and control, with regard to property rights transfers and transactions.

4. The pilot program can be implemented in entire provinces (or autonomous regions, and directly administered municipalities), cities (prefectures), and counties (cities and districts).

  Background

Xi Jinping originally proposed the transfer and transaction of rural property rights as part of “urban-rural development integrated system” reform during the Third Plenum of the 18th Central Committee in November 2013.

In December 2014, the central government solicited public opinion on “guiding the healthy development of the rural collective property rights transfer market” (關於引導農村集體產權流轉交易市場健康發展的指導意見).

On Dec. 26, 2016, the central government issued an opinion on “steadily promoting the reform of the rural collective property rights system” (中共中央國務院關於穩步推進農村集體產權制度改革的意見).

In 2017, the central government launched a three-year effort to clear assets and verify the capital of rural collective assets. At the end of 2019, the total area of collective land was 6.55 billion mu (about 1 billion acres) and had 6.5 trillion yuan of assets on book, of which operating assets and non-operating assets accounted for 47.4 percent and 52.6 percent of the total while fixed assets were valued at 3.1 trillion yuan. By the end of 2021, the assets of collective economic organizations such as towns, villages, and groups nationwide amounted to 8.22 trillion yuan (excluding resource assets such as land), of which 3.74 trillion yuan were operating assets.

  Our take

1. Like the opinion on constructing a “unified national market,” the pilot program to standardize rural property rights transfers and transactions appears to be part of Xi Jinping’s plan to actualize the reforms proposed at the Third Plenum of the 18th Central Committee and resolve long-standing problems that have been troubling the regime.

Xi is likely making a more concrete attempt now to make progress on the property transfer rights reform because he appears to finally have sufficient political strength to do so after a decade of steady power consolidation and purges.

2. After the CCP took power in 1949, it introduced policies that saw the state claim ownership of all land in China. As part of “socialist transformation” in the 1950s, rural land would become the property of collectives and remain so today even after the failure of Mao Zedong’s Great Leap Forward.

The collective ownership structure would prove to be a serious impediment to rural land reform. After Mao, Deng Xiaoping would introduce a household contracting system as part of “reform and opening up” that helped the peasantry and boosted agricultural development. But the household contracting system would come with its own problems or be sabotaged by corruption, including:

• Some local governments and village Party Committee officials abused their power to illegally intervene in land contracting and transfers. Some local officials and governments even illegally occupied the land set aside for the peasantry.
• The household contracting system allowed some wealthy peasants to earn more income through land transfers and contracting, while poorer peasants had difficulty accessing enough land to make a living. Rural land in some areas also tended to be concentrated in the hands of the wealthier peasants.
• Restricted land circulation led to peasant demoralization and a lack of land cultivation.
• Rural land tended to be fragmented into smaller parcels under the household contracting system, making it harder to improve agricultural production efficiency through large-scale operations.
• The peasantry, and especially the younger generation, are increasingly abandoning their land and moving to the cities for jobs due to the rising cost of living and low crop prices.
  Peasants tend to not invest resources towards maintaining soil fertility when their contracts are about to expire and before re-contracting, causing the land to turn barren in some cases.

In 2019, Xi Jinping extended land contracts by another 30 years upon their expiry to ensure that rural land contracting is “stable and unchanged on a long-term basis.”

3. The Xi leadership has more reason to push through rural system reform now than compared to the start of Xi Jinping’s tenure. Food self-sufficiency and rural stability are becoming increasingly crucial to regime survival amid a rapidly worsening Chinese economy, rising geopolitical tensions, and the growing threat of regional and global conflicts breaking out. Beijing is also looking for new avenues of economic growth after moving away from the unsustainable model driven by real estate development.

On paper, the Xi leadership is looking to reap the following benefits from the rural property rights reform:

• There are potentially 8.22 trillion yuan of rural collective assets available and 6.55 billion mu worth of collective land transactions to be made. Freeing up those land and assets could unlock China’s economic development potential, drive economic growth, and increase local government revenue.
• Liberalizing the transfer of rural property rights under the CCP’s land ownership system is conducive to the introduction of capital and technology to intensify agricultural production and land management, minimizing land abandonment, and increasing operating income for the peasantry and grain production.
• Easing the peasantry’s ability to transfer land management rights and shares of collective assets helps to promote urbanization and paves the way for the gradual relaxation of household registration restrictions in the future.
• Fully standardizing the transfer of rural collective property rights is akin to semi-privatization of the land and helps to reduce the obstacles to economic development caused by the CCP’s land ownership system.

4. We believe that Xi Jinping will not be able to overcome the CCP’s rural problems with his reforms given the systemic deficiencies of the CCP authoritarian dictatorship. Local governments and interest groups are likely to engage in official-business and official-triad collusions to take advantage of Xi’s reforms to accumulate land and collective assets for themselves while infringing upon the peasantry’s interests. A dispossessed and downtrodden rural population would in turn create new problems for the CCP and further destabilize the regime.

Some of the Xi leadership’s rural reforms are already causing trouble. We noted in the previous newsletter that Chinese netizens are complaining about “agricultural managers” (nongguan) and how their efforts to “manage all rural affairs” have led to increased social conflicts.