1 Economic proposals at July Politburo meeting unlikely to aid China’s ‘tortuous’ recovery
On July 24, the CCP Politburo held a meeting chaired by Xi Jinping on analyzing and studying China’s current economic situation, as well as making economic work deployments for the second half of 2023.
The meeting said that:
- China’s economy is facing “new difficulties and challenges, which mainly arise from insufficient domestic demand.”
- China is facing “difficulties in the operation of some enterprises.”
- There are “risks and hidden dangers in key areas.”
- The external environment is “grim and complex.”
- China’s economic recovery will proceed in a “wave-like” fashion and “torturous” process.
- “The long-term fundamentals of the Chinese economy have not changed.”
The meeting decided that economic work deployment for the second half of the year includes:
- The overall tone of economic policy would be to “strengthen the intensity of macroeconomic policy regulation and focus on expanding domestic demand,” and “boost confidence and preventing risks.”
- Strengthening counter-cyclical adjustments and policy reserves.
- Implement a proactive fiscal policy and give full play to the role of aggregate and structural monetary policy tools.
- Maintain the basic stability of the renminbi exchange rate at a “reasonable equilibrium level.”
- Activate capital markets and boost investor confidence.
- Expand consumption by increasing residents’ income and drive the production of effective supply of services and commodities through “terminal demand” (終端需求, i.e. residential demand, enterprise demand, etc.). Boost consumption of big-ticket items such as automobiles, electronic products, and household goods.
- Better utilize government investments as a driving force, and accelerate the issuance and use of local government special bonds.
- Formulate policies and measures to promote private investment.
- Stabilize the fundamentals of foreign trade and investment. Increase international flights, as well as ensure the stability and smooth flow of China-Europe freight trains.
- Accelerate the cultivation and growth of strategic emerging industries, and create more pillar industries.
- Optimize the environment for the development of private enterprises. Resolutely rectify (the government’s imposition of) arbitrary fees, fines, and apportionments, as well as resolve the problem of government delinquency in payments to enterprises.
- Adapt to the new situation of major changes in the relationship between supply and demand in China’s real estate sector, as well as adjust and optimize real estate policies in a timely manner.
- Increase the construction and supply of affordable housing, and actively promote the transformation of urban villages and the construction of public infrastructure for both normal and emergency use.
- Local debt risks should be effectively prevented and resolved, and a debt reduction package should be formulated and implemented. Financial supervision should be strengthened, and the reform of high-risk small and medium-sized financial institutions should be promoted to eliminate risks.
Beijing’s recent efforts to boost the economy
July 19: The CCP Central Committee and the PRC State Council issued an opinion on promoting the development and growth of the private economy.
July 21: The Central Committee held a symposium in Zhongnanhai for non-Party groups (including the heads of the central committees of democratic parties, the All-China Federation of Industry and Commerce, and representative of other non-Party groups) to hear their opinions and suggestions on China’s current economic situation and economic work in the second half of the year. Xi Jinping presided over the symposium and delivered a speech.
July 24: The National Development and Reform Commission issued a notice on taking further efforts to promote private investment and mobilizing private investor enthusiasm (關於進一步抓好抓實促進民間投資工作 努力調動民間投資積極性的通知).
Our take
1. Party, state, and mainland media positively spun their reporting on the July 24 Politburo meeting and its decisions, noting that the central government had rolled out major “good news” on real estate, the local debt situation, and the capital markets.
Western analysts, however, were more guarded in their assessment. They noted that there was no major announcement of policy specifics and that the CCP leadership had likely decided against offering aggressive stimulus due to concerns about debt risks. Some analysts also suggested that Beijing could either be lacking in urgency about the economy or could not come up with suitable measures to boost the economy.
We believe that the July 24 Politburo meeting statement affirms our earlier analysis that the CCP has no good options for rescuing the economy. We wrote that “those looking at the CCP authorities to roll out strong economic stimulus could be disappointed” because the regime would run into “various economic and financial troubles” depending on what tools it uses. Also, “Beijing will likely rely on propaganda to cover up China’s economic and social difficulties so that the CCP regime can muddle through its complex financial and economic situation while it ‘delays and waits for change.’”
The Politburo meeting statement’s broad scope (seven major areas) and lack of policy details suggest that Beijing is still at a loss as to how to revive the economy without creating additional difficulties or worsening current problems for the regime. As things stand, the regime has its hands full with stabilizing the current exchange rate, the property market, the bond market, consumption, state-owned enterprises, the private economy, and employment. The statement also indicates that real estate and local debt risks will further spread and affect the banking system when the economic work deployment for the second half of the year is implemented.
2. The July Politburo meeting admitted that China’s economy is facing “new difficulties and challenges,” while economic recovery will proceed in a “wave-like” fashion and “torturous” process. This is a much grimmer assessment than the April meeting where it saw an “easing” of the “triple pressures of demand contraction, supply shocks, and weakening expectations.”
Despite the gloomy assessment, the Politburo still decided in its July meeting to stick to conventional stimulus measures like increasing infrastructure investment to drive private investment. The Politburo also did not signal how else it intends to drive up consumption or increase residents’ income.
The CCP authorities are limited in what they can do to turn things around given that the Chinese economy is almost certainly experiencing deflation and is facing a “balance-sheet recession.” Going forward, Beijing could introduce expansionary fiscal and monetary policies; lower interest rates and cut the reserve requirement ratio; and roll out measures to reduce the indebtedness of enterprises, residents, and the government to curb the vicious cycles that stem from a shrinking balance-sheet.
3. The July Politburo meeting statement call to “activate capital markets and boost investor confidence” is new, but the lack of details leaves much to be desired.
China’s poor post-pandemic recovery, the tightening national security regime, and other factors have led to reduced optimism abroad for Chinese equities. For instance, the Financial Times reported that net foreign inflows to emerging markets in Asian countries outside of China were over $41 billion over the past 12 months, or more than the $33 billion that went into mainland Chinese equities via Hong Kong’s Stock Connect, citing data compiled by Goldman Sachs. This is compared with net inflows of $42.8 billion to China over the previous 12 months.
Foreign investors are also cutting their exposure to China. Cathie Wood, the CEO and CIO of Ark Invest, said in a webinar on July 20 that she reduced her China exposure to zero from a peak of nearly 25 percent after Beijing’s crackdown on Jack Ma and Alibaba. “We saw the trouble that Alibaba, Alipay got into — Jack Ma specifically, and we began to wonder ‘Oh no, is this a broad-based crackdown by the government on any company or person with too much power?’ And that’s exactly what it was, as it turns out, in hindsight,” she said.
4. The July Politburo statement’s call to adapt to “major changes” in the demand-supply dynamics in the property market, adjust and optimize real estate policies in a timely manner, and the lack of mention of “houses are for living in, not speculation,” suggest that with the exception of first-tier cities, Beijing may more fully do away with property sector restrictions in various areas to avoid the risk of a “hard-landing.” Beijing signaling a willingness to roll back real estate restrictions hints at desperation and is another indirect sign that China’s economy has severely deteriorated.
Meanwhile, Beijing’s proposal to stimulate the economy through renovating urban villages and constructing public infrastructure is of questionable feasibility. Such infrastructure work requires funds, which local governments struggling with financial and debt difficulties could have trouble providing. Local governments also need to find ways to make those infrastructure projects ultimately generate some sort of profit so that they can recoup at least part of their investments.
In theory, the CCP’s urban village renovation plan could help it “increase the construction and supply of affordable housing,” with the goal of slowing the real estate sector’s trend downwards and upping the scale of social financing to stimulate the economy. However, the plan also has the potential to backfire and bring new instability to the regime. First, buyers in general are adopting a “wait-and-see” approach towards purchasing property with home prices falling and with the poor economic situation. Those circumstances could make the “transformed” apartments in urban villages not seem as attractive to buyers as the CCP could be hoping. Second, the residents currently living in urban villages are mostly those from low- and middle-income groups who work in nearby factories. Those residents could find it harder to make ends meet after the “transformation” is completed and housing prices, rents, and living costs inevitably go up steeply; local labor costs are also likely to rise. Increasing livelihood difficulties for residents in renovated urban villages will in turn lead to greater social instability at the grassroots.
5. The Politburo’s proposed development and implementation of a “debt reduction” plan will likely end up transferring local debt risks to the banking system, as we previously analyzed. While this could technically allow the CCP authorities to delay defaults and the triggering of debt risks, as well as buy time to resolve various financial and debt issues, the move would come at the cost of creating financial contagion and greatly increasing the PRC’s systemic financial risks.
6. Economic rescue policies that the CCP could come up with under the present circumstances are likely to have a limited effect so long as China’s exports continue to shrink (this affects investment and consumption) and geopolitical pressures on the PRC remain high (this affects foreign investments). Beijing will also be unable to drive up demand regardless of what policies it rolls out if China saw a significant number of COVID-related deaths during the three pandemic years.
Businesses, investors, and governments should recognize China’s new economic reality and make adjustments accordingly.
2 Analyzing Qin Gang’s removal from office
On July 25, the Standing Committee of the 14th National People’s Congress decided to remove Qin Gang from the position of PRC foreign minister, but not from his position as state councilor. Qin’s removal gives him the distinction of being the foreign minister who served the shortest term in the PRC’s history, with less than seven months on the job. After Qin’s removal, reports of his official activities were scrubbed from the foreign ministry’s website.
Wang Yi, the CCP Foreign Affairs Commission Office director, replaced Qin as foreign minister and now holds both posts concurrently.
Timeline of Qin’s absence
June 25: Qin Gang met with his counterparts from Russia, Vietnam, and Sri Lanka in Beijing. This was Qin’s last official public appearance as foreign minister.
July 10: A day before the PRC authorities announced that Qin would not be attending the ASEAN meetings due to “health reasons,” Tang Tianru, the outspoken wife of former foreign ministry spokesman and prominent “wolf warrior” Zhao Lijian, posted on Chinese social media the words, “today is a good day” and a picture of Zhao when he was foreign ministry spokesman, seemingly out of the blue.
July 11: PRC foreign ministry spokesman Wang Wenbin said at a regular press conference that Qin Gang would not be attending the ASEAN ministerial meeting in Jakarta due to health reasons. Wang’s remarks did not appear in the official transcript of the regular press conference.
Mid-July: Rumors that Qin Gang’s “disappearance” had to do with him having an affair and a child out of wedlock with Phoenix TV reporter Fu Xiaotian began circulating online. When PRC foreign ministry spokeswoman Mao Ning was asked about the rumors during a regular press conference, she said that she had “no information to provide” and “does not understand the situation.” Mao’s response did not appear in the official transcript of the press conference.
July 15: Bi Ruxie, a “second generation red” writer based in the United States, claimed to have received information from Beijing insiders that the Qin Gang case was an internal strife within the PRC foreign ministry. Bi said that Wang Guangya, a former vice foreign minister and the son-in-law of founding revolutionary Marshal Chen Yi (himself a former foreign minister), was jealous of Qin’s “rocket promotion” up the ranks. Wang then seized upon Qin’s affair with Fu Xiaotian, insisting that Fu was a double agent and that Qin must give a clear account of himself (i.e. Wang Guangya is indirectly accusing Qin Gang of endangering national security, a serious charge under the Xi leadership). Bi also said that Fu Xiaotian going into hiding puts Qin in further jeopardy (see next segment).
July 19: When asked about Qin Gang’s whereabouts at the 2023 Aspen Security Forum, PRC ambassador to the United States Xie Feng said, “Let’s wait and see.” When pressed on the issue, Xie replied that the PRC foreign ministry had already briefed the media on the issue.
Timeline of Qin’s ‘affair’
According to information in circulation about Qin Gang and Fu Xiaotian:
July 28, 2021: Qin arrived in the United States to serve as PRC ambassador.
Jan. 20, 2022: Fu allegedly became pregnant with Qin’s child.
March 21. 2022: Fu interviewed Qin in Washington.
Nov. 24, 2022: Fu allegedly gave birth to Qin’s illegitimate son.
Dec. 30, 2022: Qin is appointed PRC foreign affairs minister.
March 12, 2023: Fu allegedly posted a photo of Qin’s illegitimate son while they were in the U.S. on social media with the caption, “victorious opening [of the Two Sessions]” (Qin was appointed as a state councilor at the 2023 Two Sessions).
March 18, 2023: Fu allegedly posted a message on social media saying that her son wished his father “happy birthday” (Qin Gang’s birthday is March 19, Beijing time). Fu and her son were reportedly still in the United States at the time.
April 11, 2023: Fu allegedly posted on social media that she and her son were leaving Los Angeles by plane for “the front” (前方); the post also contained a photo of Fu interviewing Qin in Washington. After publishing that post, Fu Xiaotian allegedly disappeared.
June 25, 2023: Qin Gang made his last public appearances as foreign minister.
Why it matters
How the Xi leadership handles the Qin Gang case will provide insights into the current dynamics of factional struggle within the CCP, as well as offer hints as to what extent Xi has consolidated power.
Our take
1. The Qin Gang case is still unfolding even with his removal as foreign minister. More information and developments are bound to surface in the future that would shed more light on his sudden exit.
Still, the official and unofficial information available and developments that have occurred as of the time of writing are worth unpacking to make sense of which theories about Qin’s removal are more or less plausible.
2. We earlier assessed that illness appeared to be the most probable explanation for Qin Gang’s lengthy public no-show. This explanation has become much less likely with his removal from office and the unofficial information presently available, but still cannot be ruled out.
3. For the Xi leadership, the appointment of Wang Yi as foreign minister makes the most sense politically and operationally given what appears to be a genuine last-minute move to remove Qin Gang.
Operationally, Wang should be able to transition with few hiccups into Qin’s position as he was the former foreign minister and is currently the CCP’s top diplomat. Wang appeared to have already taken over Qin’s duties during his month-long “absence,” including handling top-level meetings with senior U.S. officials and Henry Kissinger. Having an experienced senior diplomat like Wang running the show during this critical period of heightening geopolitical pressures would allow Beijing to retain stability and continuity in dealing with foreign matters.
Politically, Xi Jinping seems to be satisfied enough with Wang Yi’s work and loyalties to have him take over Qin Gang. Based on our research into the Xi leadership’s personal arrangements, Xi generally prefers to have in key positions his allies, “technocrats” with weak or less obvious factional allegiances, or officials who rose slowly up the ranks during the Jiang-Hu era when the Jiang Zemin faction was the peak of its power. However, Xi likely retained the services of Yang Jiechi and Wang Yi despite their Jiang faction “background” (both won steady promotion during the Jiang-Hu era) because the foreign service is a professional field and experienced diplomats of a certain seniority are hard to come by. Wang has also appeared to be loyal to Xi thus far, and Xi has no reason to sideline him over factional concerns.
4. The rumors of Qin Gang having an affair and an illegitimate child sound plausible enough, though there remains no hard evidence for the scandal. Moreover, claims that his alleged mistress Fu Xiaotian is a double agent are not backed up with convincing sources.
The CCP authorities do not typically discipline officials simply for having mistresses or illegitimate children, given the prevalence of the phenomenon. However, the authorities have been known to list such behavior as part of the litany of wrongdoings that officials who have been investigated for corruption are found guilty of. For instance, former China Huarong Asset Management chairman Lai Xiaomin was officially found to have been “corrupt, depraved, lived extravagantly, and engaged in power and sex transactions with a number of women.”
Officials have been known to be investigated for having mistresses, but such cases are relatively few and kept low-key. In March 2019, the Legal Daily (the official newspaper of the CCP Political and Legal Affairs Commission) reported in a piece that focused on Lai Xiaomin that 63 officials had been investigated for so-called “inappropriate sexual behavior” (“兩性作風問題”) since the 19th Party Congress, but did not provide an exhaustive name list of those officials.
However, there is precedent of an official’s inappropriate relations being exposed to threaten or facilitate investigations into said official as part of factional struggle in the Xi era. A prominent example of this is the Peng Shuai-Zhang Gaoli affair that broke in November 2021 (see here, here, and here). We noted at the time that Xi Jinping could have targeted Zhang to place him on notice because the latter was rumored to have led other Party elites in blocking Xi’s effort to denounce Jiang Zemin’s “incorrect political line” in his “historical resolution” unveiled at the Sixth Plenum of the 19th Central Committee. Yet Zhang was not ultimately punished for his affair with Peng Shuai, and even attended the 20th Party Congress as a specially invited representative of the standing committee of the presidium of the 20th Party Congress.
As seen in the Zhang Gaoli case, sex scandals in and of themselves do not portend the downfall of officials with strong political connections or backing. Likewise, Qin Gang should technically not be purged for having a mistress and an illegitimate child. However, it cannot be ruled out that Qin and Xi’s political enemies had cast Qin’s case as one with “serious” national security implications by insisting that Fu Xiaotian is indeed a “double agent.” In this scenario, Xi Jinping would be forced to investigate Qin or at least put him under some form of control until anti-corruption or national security probes are completed. And if Qin has to be placed under control due to national security reasons, then it follows that he would be unable to perform his regular duties as foreign minister and would have to be replaced.
5. Bi Ruxie’s insider information that the Qin Gang case was the result of internal strife within the PRC foreign ministry cannot be ruled out. There are bound to be pro-Jiang faction or anti-Xi elements within the senior ranks of the foreign affairs apparatus (including retired but influential cadres) who are jealous of Qin’s “rocket promotion” due to his loyalty to Xi Jinping. If those elements were indeed behind the developments that led to Qin’s removal, then the “anti-Xi coalition” had effectively “killed two birds with one stone” by forcing Beijing to sideline Qin and underming Xi’s “quan wei” (authority and prestige) with their political maneuvering.
Xi’s own propaganda and actions are working against him in the Qin Gang case. State mouthpiece Xinhua had claimed in a piece explaining the 20th Party Congress personnel reshuffle process that Xi had personally “planned and deployed, as well as guided and checked” the personnel preparation work for those serving on the Central Committee and the Central Commission for Discipline Inspection. While the Xinhua article indicated that the political stance of an official was the overriding criteria in personnel selection, the idea that Qin’s allegedly sexual impropriety and potential national security indiscretions escaped the personal vetting of the paramount leader (定於一尊) casts Xi in a humiliating light.
The image that the “anti-Xi coalition” would have created is that the “helmsman” (Xi Jinping) who has repeatedly bragged about “pointing out the development direction for China and the world” is not beyond being “negligent in using people,” that is, Xi is not infallible despite his propaganda and must be “prudent” in heeding the opinion of other interest groups in the Party elite (i.e. the “collectively leadership”) in decision-making. The “anti-Xi coalition” could also raise questions about the “integrity” of Xi’s “self-revolution” campaign now that the PRC leader’s ally is on the chopping block.
6. In typical cases of an official being investigated, the anti-corruption authorities would issue an announcement and the official in question would be removed from his posts. At the time of writing, however, Qin Gang has retained his state councilor position and there is no announcement of a probe. This suggests that Qin was removed for reasons other than investigation (illness, etc.), or the Xi leadership is still undecided as to how best to proceed with handling the Qin case given the immense sensitivity of the issue (both Xi’s personal reputation and the image of the PRC’s foreign affairs apparatus are at stake).
The scrubbing of mentions of Qin Gang from the PRC foreign ministry website is certainly an ominous sign. But it is still unclear if the move was ordered by Beijing or done by overzealous censors who were looking to be “politically correct” after assuming that Qin’s removal meant that he was purged. Based on the information currently available, the former explanation is more likely than the latter.
Qin could still get off relatively lightly even if he is officially probed and removed from all his positions. Liu Shiyu, the former securities regulator and Xi ally, was investigated for corruption in May 2019, removed from his positions, and placed on a two-year probation with the Party. Mainland media China Fund News reported on July 8 that Liu had been attending meetings in Chongqing, Jiangsu, and Hubei since April 2023 in his new role as an adviser to the Counselors’ Office of the People’s Bank of China. A similar outcome could await Qin.
There is also an outside chance, in the scenario where Qin is being investigated for national security or corruption charges, that he is ultimately found to be not guilty and is reinstated as foreign minister.
7. How the Qin Gang case is ultimately handled will reflect how solidly Xi Jinping has consolidated power after the 20th Party Congress. If Qin is purged in a manner similar to Liu Shiyu or worse, then it would suggest that propaganda remains the foundation of Xi’s “quan wei” and he is nowhere near as “unchallenged” or “supreme” as many observers believe. If the Xi leadership is able to suppress Qin’s case to the background and eventually bring him back to office in some capacity, then Xi’s grip on power is relatively secure.
Regardless of how the Qin Gang case is handled, Xi Jinping could gain even more conviction from the incident to move sooner rather than later against the remnant Jiang faction and his other lingering factional foes. Xi could also take measures short of investigations to make it harder for his political enemies to compel him to remove another ally (including by exploiting the Xi leadership’s prioritization of national security matters) and further undermine his “quan wei.” Escalation of factional struggle in the CCP elite will raise political risk levels in China and could lead to political Black Swans.
Meanwhile, the Qin Gang case will likely make foreigners even more wary of political risks in China and could make them more guarded in dealing with the PRC.
