1 Potential political plans behind Xi’s promotion of the ‘two combinations’
June 18 to June 24
State mouthpiece Xinhua published six commentaries in a series on “deeply understanding the great significance of the ‘two combinations’” (深刻理解『兩個結合』的重大意義系列). The “two combinations” refer to the combination of the basic principles of Marxism with China’s “specific reality” and “fine traditional Chinese culture.”
The titles of the six commentaries are:
- June 18: “Establishing and Developing Socialism with Chinese Characteristics is the Only Way” (開闢和發展中國特色社會主義的必由之路)
- June 20: “The Logical Necessity of ‘Organic Combination’” (“有機結合”的邏輯必然)
- June 21: “Creating a New Cultural Life Form” (造就新的文化生命體)
- June 22: “Building the Foundation of the Road of Socialism with Chinese Characteristics” (築牢中國特色社會主義道路根基)
- June 23: “Exploring Future-oriented Theoretical and Institutional Innovation” (探索面向未來的理論和製度創新)
- June 25: “Consolidating Cultural Subjectivity” (鞏固文化主體性)
Why it matters
The CCP usually seeks to shape public opinion through propaganda before rolling out various agendas. The promotion of the “two combinations” in Xinhua foreshadows political moves by the Xi leadership.
Our take
1. Since taking power in 2012, Xi Jinping has been continuously seeking ways to use traditional Chinese culture to serve the CCP regime, including “how to use traditional culture to tell the China story” and “make traditional culture serve the present.”
Xi’s notable appropriations of traditional Chinese culture include:
- November 2013: Xi Jinping visited the Kong Family Mansion, the historical residence of the direct descendants of Confucius, in Shandong’s Qufu City. In Qufu, Xi requested that the relevant experts “adhere to the standpoint of historical materialism and insist on having the past serve the present” in researching Confucius and Confucianism so that they can “play a positive role in the new era.”
- October 2014: In presiding over a collective study session of the Politburo, Xi proposed to “emphasize traditional Chinese culture” because “realizing the Chinese dream of the great rejuvenation of the Chinese nation requires Chinese spirit, and Chinese spirit must adhere to the core values of socialism.” Also, traditional Chinese culture must be “made to serve the cultivation and practice of socialist core values, serve the construction of advanced socialist culture, and serve the development of the Party and the country.”
- November 2021: Xi’s “historical resolution” passed at the Sixth Plenum of the 19th Central Committee hails Xi as the “principal founder” of “Xi Jinping Thought on Socialism with Chinese Characteristics for a New Era,” a political theory that represents “Marxism of contemporary China and of the 21st century,” “embodies the best of the Chinese culture and ethos in our times,” and “represents a new leap in adapting Marxism to the Chinese context.” (Explainer: The “historical resolution’s” attempt to integrate “Chinese culture” with “Xi Jinping Thought” indicates that Xi considers traditional Chinese culture to be an important part of his ideology.)
- May 2022: Xi Jinping proposed the “Chinese civilization exploration project” during a collective study session of the Politburo. The project calls for deepening research into the features and forms of Chinese civilization to provide theoretical support for the construction of a new form of human civilization. (Explainer: We noted at the time that the “new form of human civilization” is likely a reference to the “community with a shared future for mankind” and “socialism with Chinese characteristics in the new era.”)
- June 2023: Xi delivered a speech on “cultural self-confidence” at a symposium on cultural inheritance and development in Beijing. In his speech, Xi called for “establishing and developing socialism with Chinese characteristics based on the profound foundation of the over 5,000-year-old Chinese civilization,” and added that “combining the basic principles of Marxism with China’s specific reality and fine traditional Chinese culture” is the “only way.”
2. We previously analyzed that Xi is likely embracing traditional Chinese culture to elevate his political theories and solidify his paramount position (定於一尊) in the regime, distinguish himself from his predecessors and their “incorrect political line” (especially that of Jiang Zemin), and underscore his importance to the regime’s present and future. Xi is also likely attempting to restore some of the CCP’s badly eroded political legitimacy by “refurbishing” its bankrupt ideology with traditional Chinese culture, which is much older than Marxism and has greater prestige.
The Xinhua commentary series on the “two combinations,” however, hints that Xi may have even greater political ambitions in attaching importance to traditional Chinese culture than what we earlier identified. Notably:
- The six commentaries that have been published to date make the case that the “two combinations” of Marxism and traditional Chinese culture is the “only way” for the CCP regime to go, argue that the “two combinations” consolidates so-called “cultural subjectivity,” and concludes that “Xi Jinping Thought” is the “most powerful embodiment of cultural subjectivity.”
- The commentaries note call for adhering to the political thought of Xi’s predecessors, but also require cadres to “fully implement Xi Jinping Thought on Socialism with Chinese Characteristics for a New Era, [adhere to the] CCP as a ‘Marxist in action,’ firmly believe in Marxism, and treat Marxism with a scientific attitude.” Also, “we must always firmly grasp the world view and methodology of Xi Jinping Thought on Socialism with Chinese Characteristics for a New Era to explore future-oriented theoretical and institutional innovation.”
Taken as a whole, the points above from the Xinhua commentaries pave the way for the Xi leadership to treat the political theories of Xi Jinping’s predecessors with a “scientific attitude” and make “scientific” improvements to them—that is, eventually replacing them entirely with “Xi Jinping Thought”—under the guise of carrying out the “two combinations.”
Therefore, we believe that Xi leadership’s promotion of the “two combinations” and “future-oriented theoretical and institutional innovation” could pave the way for the following three scenarios:
- The Xi leadership could gradually phase out the political theories of former Party leaders, await an opportune moment to criticize Jiang Zemin’s “incorrect political line,” leave “Xi Jinping Thought” as the CCP’s sole guiding theory, and further entrench Xi’s paramount position in the regime. This currently appears to be the most likely of the three scenarios.
- Xi Jinping could have greater ambitions to establish himself as the de facto “emperor of the red dynasty.” In conforming to the phenomenon of Chinese uniformity (大一統), the Xi leadership could eventually package “Xi Jinping Thought” as a representative of Marxism and “Chinese socialism” into a “new” Chinese culture for the “new era.” With this “new” Chinese culture serving as ideological underpinning and appealing to civilization legitimacy, Xi could establish a new autocracy with echoes of the Chinese imperial system. The Tang Dynasty-inspired performances and banquet at the China-Central Asia Summit from May 18 to May 19 in Xi’an potentially hint at Xi’s imperial ambitions.
- In the scenario where the CCP’s various domestic and external crises come to a head and the Party suffers a drastic drop in political legitimacy, Xi could pull off a desperado move by dissolving the Party, abandoning Marxism-Leninism (so that Xi can make reforms that would otherwise be unthinkable under the communist regime), and keeping himself in charge by claiming civilizational legitimacy and the need to oversee China’s stable “transition” to a genuine “new era.” Given the huge risks involved and the immense political courage it would require of Xi, we presently assess this scenario to be the least likely of the three.
3. We believe that Xi’s “two combinations” and attempt to appropriate traditional Chinese culture to serve his political goals and ambitions will not endear him to either the CCP elite or the Chinese people. If anything, Xi’s effort to retool Marxism-Leninism and “borrow” civilizational legitimacy from traditional Chinese culture will only increase the CCP elite and the Chinese people’s antipathy towards him, as well as make more apparent the loss of faith, on the part of Xi and the Party, in Marxist ideologies (including Xi’s own version of it) and Marxism’s “historical inevitability” (i.e. the triumph of communism at the “end of history”). Ironically, in attempting to rescue the Party and the CCP’s ideology, Xi is himself creating the conditions that would accelerate the demise of both.
What’s next
Developments like financial risks and social instability in the West, the poor optics of Secretary of State Antony Blinken’s visit to China, and the stalemate in the Russia-Ukraine war appear to give the impression that Xi Jinping’s talk of “the East is Rising, the West is in Decline” (東升西降) may not be mere propaganda. Xi could play on that impression and take advantage of “great changes unseen in a century” (百年未有之巨變) to advance his political agenda.
2 2022 audit exposes CCP regime crisis
On June 26, Hou Kai, auditor-general of the PRC National Audit Office, delivered the State Council’s report on auditing the implementation of the central government budget and other financial revenues and expenditures in 2022 (國務院關於2022年度中央預算執行和其他財政收支的審計工作報告).
The report stated that it referred to provincial-level administrative regions collectively as provinces; sub-provincial, prefecture-level, and municipal-level administrative regions collectively as cities; district administrative regions collectively as counties, and provinces, cities, and counties collectively as districts; and central budgetary units collectively as departments.
The report said that the audit had identified and referred more than 300 major violations of discipline and the law involving over 1,800 people since May 2022.
The audit found the following main problems:
1. Collection of tax revenue by the tax and customs authorities
Problems include:
- The tax authorities had left 25.338 billion yuan of taxes uncollected by the end of 2022.
- Twenty-five customs work units under collected customs duties, import-related taxes, and late payment fees totaling 6.699 billion yuan.
- The tax bureaus of some districts and counties in 28 provinces and cities collected 4.314 billion yuan of excessive taxes and fees.
- The tax bureaus of some districts and counties in 15 provinces and cities delayed 12.878 billion yuan in tax payments to treasuries.
2. Problems found in an audit of the fiscal revenue and expenditure management of 18 provinces and 36 cities and counties in 54 regions, including “common problems extended to other regions,” are:
Financial-related
- Seventy regions inflated fiscal revenue by 86.13 billion yuan through “self-selling and buying” (自賣自買) state-owned assets and fictitious land transactions; 67.5 percent of the problem occurred at the county level.
- Forty-one regions collected state-owned capital gains from loss-making enterprises, levied excessive taxes and fees, or directly imposed fines and assessments, etc., which meant that the local governments collected 7.75 billion yuan worth of illegal revenue.
- Fifty-five regions violated regulations or covertly refunded 22.508 billion yuan in taxes or land transfer fees.
Implicit debt
- Forty-nine regions illegally added 41.516 billion yuan of implicit debt through commitments to underwrite buybacks and advances from state-owned enterprises for construction.
Special bond management
- Twenty regions misrepresented project revenue, underestimated costs, etc. in “packaging” certain projects as being viable (i.e. the project’s financing and income balance out) and issued 19.821 billion yuan worth of special government bonds to finance those projects.
- Five regions illegally invested 5.003 billion yuan in prohibited areas like landscaping projects and commercial projects.
- Forty-seven regions misappropriated 15.798 billion yuan in violation of regulations.
- Five regions misrepresented the expenditure progress of 33 special government bond projects, leaving a balance of 6.027 billion yuan unspent at the end of 2022.
Clearing issues in financial provisional payments
- Financial provisional payments are generally temporary loans made by financial departments to budgetary units for use in emergencies and other special cases. According to regulations, such payments must be cleared and settled in a timely manner and shall not be left uncleared for a long time. However:
- The balance of financial provisional payments in 54 regions reached 148.139 billion yuan by the end of 2022, an increase of 8.363 billion yuan from the previous year.
- Thirteen regions misappropriated 8.647 billion yuan in special transfer payments or special government bond funds, of which some were used for unbudgeted or over-budgeted government expenditures.
- Six regions lent 28.181 billion yuan to enterprises in violation of regulations.
- Twelve regions had to secure 28.072 billion yuan worth of unbudgeted funds from higher-level treasuries, bank advances, or external loans to maintain basic operations.
3. An audit of the 228.559 billion yuan in fiscal budget allocations to 41 departments and 188 affiliated units in 2022 found various problems associated with 10.985 billion yuan of the total (4.8 percent of total budgetary allocations).
4. An audit of public-private partnerships (PPP) covered 408 projects with a planned total investment of 1.53 trillion yuan in 18 provinces and 187 regions. As of the end of June 2022:
- One hundred and fifty-one projects (37 percent of the audited projects) had either progressed slowly, were halted, or were unfinished, resulting in a loss of 1.722 billion yuan in state-owned assets.
- Ten conference venues or landscaping projects were illegally constructed in 10 regions, involving a planned investment of 7.566 billion yuan.
Many problems were also uncovered in the audits of other areas such as basic research and tasks related to tackling key core technologies, key livelihood funds, and state-owned asset management.
Backdrop
On May 23, Xi Jinping presided over the first meeting of the 20th Central Audit Committee.
The meeting called on auditing departments to:
- Intensify audit efforts on “prominent and major issues.”
- “Keep an eye on valuable financial resources.”
- “Pay close attention to key areas such as local government debt, finances, real estate, food, energy, etc., and firmly guard the bottom line of preventing systemic risks.”
- “Give full play to the important rule of auditing in the fight against corruption and chaos, resolutely investigate and deal with corruption where political and economic issues are intertwined, resolutely investigate and deal with corruption in areas where power is concentrated, where capital is intensive, and where resources are abundant, and resolutely investigate and deal with corruption (蠅貪蟻腐) around the masses.”
- The rectification of problems after the audit (“second half of the article,” 下半篇文章) is just as important as doing the audit (“first half of the article,” 上半篇文章); both go hand-in-hand and must be promoted together.
Our take
1. The audit report and the problems acknowledged by the CCP authorities hint at the extent of the financial and debt problems plaguing the central and local governments in the PRC.
The report partially confirms that the problem of local governments needing bailouts from the central government is not limited to those who have publicly made appeals since December 2022, but is in fact a widespread emerging issue. In particular, the report noted that “common problems extended to other regions,” that is, the issues found in audited regions can likewise be found in unaudited regions.
The report also indirectly affirms that local government financial and debt problems are steadily getting worse. For instance, the report noted that the “amount of problems found in the 2021 audit has been recalculated to 850.111 billion yuan by April 2023”; there is reason to believe that the “amount of problems” that need to be rectified now is far greater than in 2021 with the rapid deterioration of the Chinese economy in 2022 and in the first half of 2023.
The local government financial and debt crisis is likely more significant than the audit report discloses, given the CCP officialdom’s habit of admitting to small mistakes to cover up larger problems. For instance, the issue of regions inflating fiscal revenue may not seem like a very serious matter given that the bulk of the violation occurred at the county level (67.5 percent). However, the distortion in the data is likely due to officials at the county level having less political backing as compared to provincial and municipal level officials; audit officials are less afraid to offend less powerful local governments at the county level and below, but will be more careful in holding higher-level officials accountable for similar financial infractions.
Higher-level local governments are not more law-abiding as compared to those at the lower levels. For instance:
- In 2017, the Inner Mongolia local government publicly admitted that its general public budget revenue and industrial added value in 2016 were exaggerated by 53 billion yuan (26.3 percent of the total) and 290 billion yuan (40 percent of the total) respectively. The Tianjin Binhai New Area local government also revised downward its 2016 GDP by nearly a third from over 1 trillion yuan to 665.4 billion yuan.
- Mainland media previously exposed local governments for imposing arbitrary fines to make up for financial shortfalls. In 2021, 80 out of 111 prefecture-level cities reported an increase in fine revenue in 2021, or about 72 percent of the total. Of those areas, Bazhou County in Hebei Province fined over 2,500 local businesses 67 million yuan in the month of October alone in 2021 (compared with 6 million yuan in the first nine months of the year). In November 2021, Bazhou officials collected 80 times the average monthly fines between January to September of that year.
The problems uncovered in the audit were likely chiefly caused by three years of “zero-COVID” on the Chinese economy. As financial shortages grew more acute and with the exacerbation of debt woes, local governments turned to illicit methods to boost their revenue and sustain government operations.
The CCP’s own figures paint a bleak picture. The national general public budget revenue in 2022 increased 0.5 percent to 20.37 trillion yuan, while the general public budget expenditure rose 6.1 percent to reach a new high of 26 trillion yuan. With spending being higher than income, the PRC’s fiscal deficit widened from 438 million yuan to 569 million yuan.
Due to the three factors of the pandemic, increased government regulation, and financial tightening over the past three years, national land sales revenue fell by 23.3 percent in 2022 to set a record for the steepest plunge since statistical records were compiled in 1987. Meanwhile, the growth rate of land sales revenue, which local governments are heavily reliant on, has contracted significantly in recent years due to the Sino-U.S. trade war and the pandemic—40.7 percent growth in 2017, 25 percent growth in 2018, 11.4 percent growth in 2019, 15.9 percent growth in 2020, and just 3.5 percent growth in 2021.
In sum, we can reasonably assume that the problems unveiled in the CCP’s audit report are just the tip of the iceberg of the financial and debt problems currently plaguing the central and local governments. PRC departments at all levels and local governments will likely rely on increasingly irregular or illegal means to preserve their interests and secure political “achievements” as the Chinese economy weakens further and local finances plummet precipitously.
2. The audit report also further underscores the problems caused by the Party culture-derived bad habits of CCP officials that we have identified over time, including “the top has policies, but the bottom has countermeasures,” “robbing Peter to pay Paul,” falsifying political achievements, and addressing local financial difficulties through measures that leave the financial risks to the central government.
For instance, the report pointed out that in their quest to boost fiscal revenue, local governments have collected excessive taxes, squeezed loss-making enterprises, directly and randomly imposed fines, engaged in “self-selling and buying,” added new implicit debt in violation of regulations, and issued special government bonds for essentially false projects. Many of these methods were previously exposed in reporting about the Kunming local government fund financial and debt problem in May 2023. Given that Kunming is the best-resourced and financed region in Yunnan Province, it is conceivable that the government financial and debt crisis facing the Xi Jinping leadership is extremely serious, and Beijing has no good way of resolving it.
