1 New state security minister urges clean up of spy system
On June 5, the state-run Study Times published a 5,200-character-long article by PRC minister of state security and Xi Jinping ally Chen Yixin titled, “Comprehensively Improving the Capability of Leading Cadres and Accelerating the Forging of a State Security Iron Army in the New Era” (全面提升領導幹部能力水平 加快鍛造新時代國安鐵軍).
The article was based on Chen’s response and statement to the first meeting of the 20th Central National Security Commission chaired by Xi on May 30. The meeting noted that the “complexity and arduousness” of national security issues currently facing the regime have significantly increased, as well as urged officials to adhere to “bottom-line thinking and worst-case scenario thinking,” be prepared to withstand “major tests” that may throw up “high winds and rough waves” and “perilous situations.”
Noteworthy points in Chen’s article include:
- Chen called on state security cadres to use “Xi Jinping Thought” to “concentrate their hearts and cast their souls” (凝心鑄魂; i.e. be thoroughly indoctrinated in “Xi Thought”), have clear political standards that support Xi’s political philosophy, must have a tenacious spirit of struggle, etc.
- Chen said that state security leading cadres should take the lead in defending the “Two Safeguards” and must make it a political requirement and work requirement to learn and implement “Xi Thought.” Leading cadres in state security must also be good at making judgments and decisions from “overall, long-term, and general trends,” and powerfully serve the overall work of Party Central.
- Chen called for “innovating a strict supervision mechanism.” State security officials should also focus on overcoming the unique difficulties of strengthening supervision over “hidden fronts” (i.e. the CCP’s domestic and foreign spies, as well as various intelligence agents and assets) and accelerate the construction of a supervision layout that promotes the “three non-corrupts” (i.e. don’t dare, can’t be, and don’t want to be corrupt; 不敢腐、不能腐、不想腐).
- Chen said that regular inspection and supervision should be carried out according to local conditions. Daily supervision of leadership teams should also be strengthened.
Background
Jan. 28: The Party Committee of the Ministry of State Security held a video conference on building a “clean and honest” state security apparatus. During the conference, Chen Yixin said that the difficulties of supervising “hidden fronts” in the state security system have not been completely eliminated and the problem of passive corruption still occurs from time to time. He also called for attaching great importance to and resolutely rectifying the “five wrongs” (“disloyalty, injustice, dishonesty, inaction, and impropriety”; 不忠、不公、不廉、不為、不正).
Jan. 2023: Liu Yanping, the former head of the discipline inspection and supervision team of the Ministry of State Security, was sentenced to death with a two-year reprieve. Liu’s sentence will be commuted to life in prison without parole after the reprieve.
March 2023: The Ministry of State Security noted in an announcement about the inspection and rectification situation that the state security apparatus must “comprehensively and thoroughly eliminate the poisonous influence of Ma Jian, Sun Lijun, and others.”
Our take
1. Chen Yixin’s article urging state security cadres to essentially be loyal to Xi Jinping and strengthening supervision over “hidden fronts” indirectly affirms our analysis that the Xi leadership is still struggling to bring the CCP’s intelligence apparatus fully under its control (the intel apparatus had long been under the sway of the Zeng Qinghong clan). Xi had likely appointed his political ally Chen to head the Ministry of State Security during this third term to oversee a more thorough “rectification” of the intelligence apparatus and the effort to bring the apparatus completely to heel.
2. A review of Chen Yixin’s career shows that he and Xi were former colleagues and Chen had helped Xi in his efforts to clean up the political and legal affairs apparatus and state security system:
- Chen Yixin served directly under Xi Jinping when the latter was Zhejiang Party secretary. Chen was promoted to deputy secretary-general of the Zhejiang Provincial Party Committee in July 2003 and later served as director of the Zhejiang provincial policy research office in June 2006.
- Chen was appointed as a full-time deputy director of the Office of the Central Leading Group for Comprehensively Deepening Reforms in December 2015 during Xi’s first term. Xi used the Central Comprehensively Deepening Reforms Commission to push through measures that weakened the “collective leadership” system.
- Chen was promoted to secretary-general and member of the Central Political and Legal Affairs Commission on March 20, 2018, becoming an important asset for Xi in the political and legal affairs apparatus during the latter’s second term.
- After the outbreak of COVID-19 in Wuhan, Chen was appointed deputy leader of the central government’s steering group for Hubei and other severely affected areas on Feb. 8, 2020. In July 2020, Chen was directly put in charge of “rectifying” the political and legal apparatus with his appointment as deputy head and office director of the leading group overseeing the education and rectification of the political and legal affairs apparatus.
- Chen Yixin succeeded Chen Wenqing (promoted to Party secretary of the CPLAC) as minister of state security on Oct. 30, 2022.
3. The Xi leadership is likely looking to tighten its supervision over the “hidden fronts” in the intelligence apparatus to ensure that trouble does not emanate from those areas during a particularly tense time in Sino-U.S. relations and when there is increasing international scrutiny of the CCP’s spying activities.
The CCP expanded its overseas surveillance and influence operations after Deng Xiaoping embarked on “reform and opening up” and the PRC under Jiang Zemin gained entry into the World Trade Organization in the early 2000s. The CCP elements responsible for elite capture in the U.S. (as Renmin University scholar Di Dongsheng publicly bragged about in December 2020) and elsewhere during the “engagement” era are almost certainly associated with or sympathetic to the Jiang faction by virtue of that faction’s utter dominance in the regime until several years after Xi took office.
The CCP intelligence apparatus is also known for collaborating with Chinese businessmen to further their surveillance and influence operations. We previously wrote that the “fugitive businessman Guo Wengui [for more, see here and here] has ties with Ma Jian, the purged former vice minister of the Ministry of State Security, and is known to leverage on his connections with the intelligence apparatus to get ahead in business.” Ma is a known Jiang faction crony and Guo has thus far refrained from criticizing the Zeng Qinghong clan in his many “exposés” of the Party elite.
The Xi leadership could be concerned that pro-Jiang faction intelligence elements in the state security’s “hidden fronts” could choose to “prefer left rather than right” and take advantage of Beijing’s “wolf warrior” mandate to cause unnecessary trouble (including releasing “explosive information” about Xi and his allies, etc.) during this particularly sensitive period in Sino-U.S. relations and when the CCP is busy advancing its “great power diplomacy” to improve the regime’s geopolitical situation.
The Xi leadership, however, will be hard-pressed to properly clean up the CCP’s intelligence apparatus given the secretive nature of its work and the “single-line” setup of its cell networks (for security reasons). If Beijing moves too aggressively with its “rectification” work, it risks alarming “anti-Xi” elements within the intelligence apparatus into taking “perish together” (同歸於盡) actions, or provoking troublesome defections of intelligence personnel to the West. Put another way, in trying to fix existing problems within the intelligence apparatus, the Xi leadership could end up exacerbating them and triggering worse problems.
2 CCDI calls for fight against ‘political cliques and gangs’
Party mouthpiece People’s Daily published a nearly 5,800-character article titled “Comprehensively Implement Xi Jinping Thought on Socialism with Chinese Characteristics for a New Era, Faithfully Perform Duties and Responsibilities in Promoting Solutions to the Unique Problems of the Big Party” (全面貫徹習近平新時代中國特色社會主義思想 在推動解決大黨獨有難題上忠實履職盡責) by the Central Commission for Discipline Inspection and the National Supervisory Commission on studying the first and second volumes of Xi Jinping’s “selected works.”
The article made the following notable points:
- The discipline inspection organs must study Xi’s “selected works,” study and implement “Xi Jinping Thought,” and must “learn deeply and understand thoroughly” Xi’s important discourses on solving the unique problems of the “big Party” (i.e. the CCP).
- Xi promoted “comprehensive and strict governance” over the Party with “the historical initiative of a Marxist statesman, thinker, and strategist; extraordinary theoretical courage; outstanding political wisdom; and strong mission.” Xi also stopped some “long-term, unhealthy trends that have not been curbed” and “cured some persistent diseases that have not been treated for many years.”
- “Solving the unique problems of the big Party” lies in the whole Party supporting Xi’s “Two Establishes,” “Two Safeguards,” and other political theories; using “Xi Thought” to “concentrate the hearts and cast the soul,” “unify thinking, will, and action,” and always maintaining a high degree of consistency with “Party Central with Comrade Xi Jinping at the core” in “ideology, politics, and actions” (思想上、政治上、行動上); and promoting “self-revolution” and “strictly governing the Party.”
- In discussing “political supervision,” the article called for “strictly (following) political discipline and rules,” as well as “clearly struggling against political conspiracies and actions to form cliques and gangs, resolutely preventing leading cadres from becoming spokespersons and agents of interest groups and power groups, and eliminate hidden political dangers that endanger the unity of the Party.”
Backdrop
The CCDI article follows several campaigns (anti-corruption, “investigation and research,” thematic education of “Xi Jinping Thought,” etc.) that Xi Jinping launched since the start of the year to purge the regime of lingering opposing forces and further consolidate power.
Our take
Several observations about Xi Jinping’s current political agenda, the anti-corruption campaign, and factional struggle in the CCP elite can be inferred from the CCDI article in People’s Daily:
1. Xi may have centralized power to an even greater degree at the 20th Party Congress and solidified his paramount position within the CCP with various political campaigns, but he still needs to keep up those campaigns to maintain his grip over the Party and society as popular support for Xi and the CCP wanes in the aftermath of “zero-COVID” and with the implementation of other ill-conceived policies that end in chaos and popular resentment.
2. The anti-corruption authorities have again become an important tool for Xi to advance his agenda of regime “rectification” and strengthen his rule after Jiang faction associate Zhao Leji was replaced by Xi ally Li Xi as head of the CCDI at the 20th Party Congress.
3. The CCP began spotlighting “political conspiracies” and political “cliques and gangs” during Xi’s first term in office as the latter sought to eliminate the Jiang Zemin faction’s threats against him and weaken the “collective leadership” system. In particular, the Xi leadership’s guidelines governing “inner Party political life under the new circumstances” (關於新形勢下黨內政治生活的若干準則; issued after Xi Jinping gained “core” leader status at the Sixth Plenum of the 18th Central Committee) criticized “a very small number of people among the senior cadres” with “inflated political ambitions, lust for power, publicly complied but privately defied, ganged up for personal interests, formed cliques and gangs, and sought positions of power, etc.”
The recent CCDI article’s mention of “cliques and gangs” and “political conspiracies” is likely meant to put on notice the remnant Jiang faction and other lingering political opposition towards Xi. As the Xi leadership steps up its political indoctrination campaign to “unify thinking, will, and action,” Party members could eventually be encouraged to participate in outing and condemning Xi’s remaining political rivals so as to better “eliminate hidden political dangers that endanger the unity of the Party.”
3 Xi says ‘large domestic circulation’ needed to deal with ‘extreme circumstances’
Xi Jinping visited Inner Mongolia from June 5 to June 8 to carry out an inspection tour, according to state media reports.
While in Bayannur City, Xi presided over and delivered a speech at a symposium on strengthening the comprehensive prevention and control of desertification and promoting the construction of the “Three Norths” (i.e. northeast, northwest, and northern China) and other key ecological projects.
During his inspection of Hohhot’s Central Industrial Park, Xi said that China “needs to rely on a high level of scientific and technological self-reliance and self-improvement” and construct “a new development pattern to overcome scientific and technological difficulties.” He added that the purpose of “constructing a large domestic circulation” is to “ensure that the national economy can continue to operate normally [even] under extreme circumstances” and this is “not contradictory” to China’s participation in the “international economic circulation.” Xi added that the PRC is “unswervingly implementing high-level opening up to the outside world, building the nation with doors wide open, and working together [with partners] to achieve win-win-results.”
On June 9, state mouthpiece Xinhua reported that Xi Jinping explained that “dual circulation” is “not about closing up the country, but about surviving and living better on our own when others don’t open the door for us.”
Xi added that “some countries want to pursue hegemony and monopoly, and want us to follow them as vassals.” However, “our Chinese nation must be rejuvenated! We must continue to overcome difficulties and rise to the next level!”
Big picture
The U.S. and its allies have been pushing the idea of “de-risking, not decoupling” from China as they pressure the PRC to cooperate with them on various agendas, including Ukraine, Taiwan, and climate change. Meanwhile, Beijing has accused the West of “containing, encircling, and suppressing” China.
Our take
1. Xi Jinping’s “dual circulation” policy is aligned with the CCP’s perpetual drive to survive crises and dominate at home and abroad (the “survival-dominance dynamic”). Xi’s latest mention of “dual circulation” suggests that Beijing is really feeling the heat from external pressures on the regime (U.S. tech restrictions, supply chains moving out from China, countries taking various China “de-risking” and “diversifying” measures, the West essentially rejecting China’s “peace plan” for Ukraine and forcing Beijing to curb its support of Moscow’s war effort, etc.) and the rapid deterioration of the Chinese economy despite the lifting of “zero-COVID” before the start of the year.
2. Xi’s call to “construct a large domestic circulation” to “ensure that the national economy can continue to operate normally [even] under extreme circumstances” and his remark about “living better on our own” suggest that the CCP is prepared to turn China into a “semi-closed” country in the event of a major crisis that threatens regime survival.
We anticipated this as early as January 2019 in analyzing the transfer of Xi ally Liu Shiyu from the China Securities Regulatory Commission to the All-China Federation of Supply and Marketing Cooperatives. We wrote that part of the reason why Xi tasked Liu with a less glamorous job is because Beijing is “considering measures to at least partially close up China.”
We also previously called attention to former PRC vice premier Liu He’s over 6,500-character-long piece on “expanding domestic demand and deepening supply-side reform” published on Nov. 4, 2022 that justified “dual circulation.” In the article, Liu called for “building a unified national market, removing various obstacles that hinder domestic circulation, and paying special attention to achieving medium-level circulation in extreme cases.” Liu also noted that the PRC would adhere to “high-level opening to the outside world” and have “deep participation in the global industrial division of labor and cooperation”; this is echoed in Xi Jinping’s claim that the construction of a “large domestic circulation” is “not contradictory” with the “international economic circulation” or Xi’s call to “unswervingly implement high-level opening up to the outside world.”
Xi bringing up “dual circulation” again at this time suggests that he likely feels strongly that Sino-U.S. relations have reached a critical juncture. Liu Shiyu’s transfer to head the rural supply cooperative came after the Trump administration imposed tariffs on Chinese products and it was unclear how Sino-U.S. trade talks would progress. Now the Xi leadership has to deal with escalated tensions with Washington over the Russo-Ukrainian war, Taiwan, restrictions of advanced technologies, the “de-risking” movement, the Biden administration exposing PRC surveillance and influence efforts in the U.S. and elsewhere, and a host of other geopolitical issues.
Given the “extreme circumstances” facing the PRC, Xi is getting the CCP ready for anything, including returning China to semi-isolationism if necessary. Concurrently, Xi is signaling to foreigners that the regime still very much welcomes their capital and investments.
3. Xi Jinping’s focus on “dual circulation” and talk of “extreme circumstances” affirms our assessment that Beijing will not make major compromises to the West even though the U.S. is currently extending an “olive branch” out to China.
4 Weak economic data in May signals further deterioration and recovery woes
June 7
The PRC General Administration of Customs published data showing that China’s imports and exports in May 2023 reached $501.19 billion, a decrease of 6.2 percent year-on-year and an increase of just $560 million from April. Exports fell 7.5 percent year-on-year and 4 percent month-on-month to $283.5 billion; imports decreased 4.5 percent year-on-year and increased 5.1 percent month-on-month to $217.69 billion; and the trade surplus decreased 16.1 percent year-on-year to $65.81 billion. In comparison, economists polled by The Wall Street Journal expected China’s exports in May to decline by 1.0 percent; imports to fall by 8.1 percent; and trade surplus to reach $96.8 billion.
The top three regions that China exported to in May include:
1. European Union: Exports down 7 percent year-on-year to $44.629 billion; this is compared to $44.742 billion in April (up 3.9 percent year-on-year; ranked second).
2. United States: Exports down 18.2 percent year-on-year to $42.478 billion; this is compared to $43.022 billion in April (down 6.5 percent year-on-year; ranked third).
3. ASEAN: Exports down 15.9 percent year-on-year to $41.49 billion; this is compared to $46.197 billion in April (up 4.5 percent year-on-year; ranked first).
The top three countries and regions that saw the largest increase in Chinese exports in May are:
1. Russia: Up 114.3 percent year-on-year to $9.268 billion; this is compared to an increase of 153.1 percent in April.
2. South Africa: Up 5.7 percent year-on-year to $2.2 billion; this is compared to an increase of 45.8 percent in April.
3. United Kingdom: Up 3.7 percent year-on-year to $6.945 billion; this is compared to an increase of 10.8 percent in April.
June 9
The National Bureau of Statistics announced the following data:
Consumer price index (CPI)
- China’s CPI rose by 0.2 percent year-on-year, faster than a 0.1 percent increase in April but missing a forecast of 0.3 percent rise. The May CPI figure was the second-lowest increase since February 2021.
- China’s CPI decreased 0.2 percent month-on-month, a 0.1 percent faster drop from the previous month and the fourth consecutive month of declines.
Producer price index (PPI)
- China’s PPI fell by 4.6 percent year-on-year, the eighth consecutive month of declines and the fastest drop since February 2016. The decline was 1.0 percent higher than the previous month and bigger than the 4.3 percent expected in a Reuters poll.
- China’s PPI decreased by 0.9 percent month-on-month, speeding up from the 0.5 percent decline in April. The cost of commodities decreased by 1.2 percent, with a rate of decline expanding by 0.6 percent from a month ago; while the cost of living decreased by 0.2 percent, with the rate of decline narrowing by 0.1 percent.
- The ex-factory prices of 25 out of 30 major industries fell year-on-year in May, of which seven declined from between 8.4 percent to 19.1 percent; 20 industries saw month-on-month ex-factory price drops.
Big picture
1. The Institute for Supply Management (ISM) said on June 5 that its non-manufacturing PMI fell to 50.3 in May from 51.9 in April, the lowest level so far in 2023. The U.S. business activity index also registered 51.5 percent, a drop of 0.5 percent from April and the fourth straight month of declines.
2. The eurozone entered into a technical recession with two consecutive quarters of negative growth. According to figures published by Eurostat on June 8, the seasonally adjusted GDP in the euro area fell by 0.1 percent quarter-on-quarter in the first quarter of 2023, while the EU’s GDP grew by 0.1 percent. And in the fourth quarter of 2022, the euro area’s GDP decreased by 0.1 percent and the EU by 0.2 percent.
3. According to a TrendForce press release on June 7, the global production volume of smartphones declined 19.5 percent year-on-year in the first quarter of 2023 to just 250 million units. This represented the greatest annual decrease and a historic low in quarterly production since 2014.
Our take
1. China’s weak trade data in May, as well as declining CPI and PPI figures, are the latest indicators that the Chinese economy has entered into a recession and is experiencing deflation.
We noted in the March 13, 2023 newsletter that if China’s exports “do not pick up by the time the April data comes in, then China’s economic growth for the first half of the year will be bleak.” The official data affirms our assessment, and signals further deterioration and recovery difficulties for the Chinese economy in the second half of this year.
2. China’s receding exports in April and May seem to be linked to declining global demand, particularly in the developed European and American markets. Shrinking exports to the ASEAN are also likely the cause of reduced global demand and weakening economies in many areas because many of China’s re-exports flow through the region. The only possible “silver lining” for the PRC of fewer exports to ASEAN is that the development could indicate that the supply chain exodus out from the mainland is perhaps slowing down as well amid the economic gloom.
As the eurozone moves deeper into recession and with signs of a recession emerging in the U.S., China’s exports are expected to continue tumbling in the second half of 2023. Meanwhile, China’s steepening factory gate deflation and slowly rising CPI indicate that domestic demand on the mainland is likely much weaker even than the shrinking demand from the rest of the world.
3. There are other troubling signs of what the CCP has itself acknowledged of “insufficient demand” in China. According to information circulating on Chinese social media, China’s once booming catering industry has not been doing well after the Labor Day holiday period. Even the cheap barbecues in Zibo City appear to be dropping in popularity.
Officially, China’s catering industry has been picking up since the end of “zero-COVID.” According to the National Bureau of Statistics, the national catering revenue from January to April 2023 increased year-on-year by 19.8 percent to 1.5888 trillion yuan. In particular, the national catering revenue for April saw a 43.8 percent increase from a year ago, or a much higher growth rate as compared to March. However, the mainland catering website “Red Meal Network” (紅餐網) noted after interviewing caterers in Guangzhou, Chengdu, Wuhan, Shijiazhuang, and other places that “no one has been coming to eat” after the Labor Day holiday period, and that there are “no signs of recovery.”
Another sign of “insufficient demand” is reports in mainland media of ride-hailing and food delivery companies reaching saturation in terms of hiring even while orders are dwindling. This development suggests that unemployment is on the rise due to rapidly worsening economic conditions, forcing middle-class people who are out of a job and college graduates to take up low-skilled jobs like doing food deliveries and ride-hailing. With more people taking up lower wage jobs and struggling to make ends meet after three years of lockdowns, domestic consumption has naturally declined and China’s economic recovery has been stymied.
4. China’s economy is presently facing unprecedented difficulties, including shrinking exports, falling consumption, deflation, population decline, a bursting real estate bubble, local government financial and debt troubles, the inability of the authorities to sufficiently stimulate the economy through government investments, and the accumulation of various financial risks.
As the Chinese economy continues to deteriorate, the PRC could see a concentrated triggering of various financial and debt risks in the second half of the year. Businesses, investors, and governments must pay close attention to China’s economic and political developments and make contingencies for worst-case scenarios.
