1 Xi looks to boost morale of national security cadres with commendation conference
State mouthpiece Xinhua reported that the National Security System Commendation Conference was held in the Great Hall of the People in Beijing on July 14. Central Political and Legal Affairs Commission secretary Chen Wenqing presided over the meeting and delivered a speech.
Chen repeatedly emphasized that the national security organs must implement Xi Jinping’s various political theories and requirements. He added that the national security organs had achieved new results in promoting “hidden front work” (隱蔽戰線工作; “hidden front” refers to the CCP’s domestic and foreign spies, as well as various intelligence agents and assets) since the 20th Party Congress under the leadership of the new Party Committee.
In concluding, Chen Wenqing requested that the political and legal affairs commissions of Party Committees at all levels and departments should “attach great importance to, as well as care and support,” the “hidden front work” and provide “strong guarantees.”
Background
1. The last National Security System Commendation Conference was held on May 19, 2015. At the Conference, Xi Jinping proposed in a speech to create a national security cadre that is “determined and pure, [allowing the] Party to be reassured, willing to dedicate themselves, and capable of fighting and winning.”
Earlier on Jan. 16, 2015, Ma Jian, the state security vice minister and a Party Committee member of the Ministry of State Security, was investigated.
2. On Nov. 13, 2013, the 18th Central Committee of the CCP called for establishing a National Security Commission to improve the national security system and national security strategy in the communiqué of its Third Plenum.
On April 15, 2014, Xi Jinping presided over the first meeting of the Central National Security Commission. During the meeting, Xi proposed for the first time the necessity of “adhering to the overall national security concept and blazing a trail of national security with Chinese characteristics.”
3. On May 30, 2023, Xi called for the CCP to have “bottom-line thinking and worst-case scenario thinking,” be prepared to withstand “major tests” that can throw up “high winds and rough waves” as well as “perilous situations,” at the first meeting of the 20th Central National Security Commission.
4. On June 5, 2023, state media Study Times published a 5,200-character piece by state security minister and Xi ally Chen Yixin. The article called for “innovations in the mechanism of strict supervision,” and urged national security officials to focus on overcoming the unique difficulties of strengthening supervision over “hidden fronts.” Also, the state security apparatus should 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).
5. On July 1, 2023, the CCP’s revised anti-espionage law came into effect. The legislation expanded the scope of what can be defined as “espionage activities” and the CCP government’s law enforcement authority. Chen Yixin described the law as “a major move to advance the modernization of the hidden front work’s system and capabilities.”
6. On July 15, 2023, the CCP’s national security propaganda studio released a short video to pay tribute to the “unsung heroes in the hidden front.”
Our take
The Xi leadership last held a National Security System Commendation Conference during a period where Xi Jinping was targeting “big tigers” in the political and legal affairs apparatus as he began to consolidate power in earnest. In other words, Xi likely held the commendation conference to “appease” and win over officials in the national security apparatus to gain some political stability as he carried out destabilizing purges and factional struggles.
Xi also appears to be searching for greater political stability with the recent National Security System Commendation Conference, although under different circumstances. While Xi has eliminated or largely suppressed most of his enemies in the CCP elite and centralized power to a high degree, the CCP regime’s internal and external crises have also worsened dramatically since he took office. With “Party Central with Comrade Xi Jinping at the core” being solely responsible for the PRC’s policies, many of which are failing or have been disastrous like “zero-COVID,” Xi is likely feeling the pressure and believes that he needs to again win over the hearts and minds of the national security cadre through commendation so as to shore up his political position.
Commending the national security cadre sends the signal that those who are loyal to Xi Jinping will be rewarded and recognized for their efforts. In particular, the commendation of national security organs for achieving new results in promoting “hidden front work” since the 20th Party Congress affirms the work of Xi ally Chen Yixin, the new PRC minister of state security.
We wrote in the June 12 edition of this newsletter that the Xi leadership was 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.” Chen Yixin has brought up the issue of supervising the “hidden fronts” during a number of meetings this year, and his work and loyalty shown thus far appear to have impressed the Xi leadership enough to merit public praise.
2 NBS attempts to dispel doubts about China’s June and Q2 data
Official Q2 and June data
July 17
The PRC National Bureau of Statistics released China’s economic data for June and the second quarter of 2023. Notable figures include:
- China’s GDP grew by 5.5 percent (30.8038 trillion yuan) year-on-year in the first half of the year. China’s GDP in the second quarter grew by 6.3 percent (59.3034 trillion yuan) year-on-year, or a quarter-on-quarter increase of 0.8 percent.
- Joblessness among those aged 16 to 24 was 21.3 percent in June, up from 20.8 percent in May. With the June figure, the youth unemployment rate has hit a record high for three consecutive months.
- Total retail sales of social consumer goods increased by 8.2 percent to 22.7588 trillion yuan in the first half of 2023. In June, the total retail sales of social consumer goods increased by 3.1 percent to 3.9951 trillion yuan, the lowest growth rate in the first half of the year (even lower than the 3.5 percent increase during the January-February period after the end of “zero-COVID”).
- National real estate development investment decreased by 7.9 percent (calculated on a comparable caliber) year-on-year in the first half of 2023. Of the total, residential investment decreased by 7.3 percent to 4.4439 trillion yuan.
- The sales area of commercial housing decreased year-on-year by 5.3 percent to 595.15 million square meters, of which the sales area of residential buildings fell by 2.8 percent to 515.92 million square meters. Meanwhile, commercial housing sales increased by 1.1 percent year-on-year to 6.3092 trillion yuan, of which residential building sales increased by 3.7 percent to 5.6639 trillion yuan.
- National fixed asset investment (excluding rural households) increased by 3.8 percent (calculated on a comparable caliber) year-on-year to 24.3113 trillion yuan, the lowest growth rate since January 2021; in comparing month-on-month, fixed asset investment (excluding rural households) increased by 0.39 percent in June. Meanwhile, private fixed asset investment decreased 0.2 percent year-on-year to 12.857 trillion yuan.
Wall Street banks lower China’s growth forecast
Several Wall Street banks lowered their forecast for China’s GDP in 2023 after the release of the Q2 and June data:
- J.P. Morgan: 5 percent from 5.5 percent.
- Morgan Stanley: 5 percent from 5.7 percent.
- Citigroup: 5 percent from 5.5 percent.
‘Temperature ‘difference’
On July 17, Fu Linghui, director of the NBS’s national economic comprehensive statistics department, said during a media interview program launched by state mouthpiece Xinhua that it is necessary to “correctly understand the ‘temperature difference’ between the macro and micro-economic data,” or why Chinese residents are perceiving a gap between the CCP’s official data and their much worse economic situation on the ground. In typical CCP jargon meant to obscure and confuse more than elucidate, Fu said that the main reason for the “temperature difference” was the “comprehensiveness of the macro data” and the “limitations of the feelings of the micro subjects,” with macro data reflecting the overall situation of the economy as a whole.
Fu added that people tend to feel the impact of consumer prices and often question why they feel that consumer prices are high when the official figure “seems to be relatively moderate.” He explained that a major reason for this is because the NBS data is based on a representative basket of goods and services that includes most categories of household consumption goods, but the bulk of consumption for specific persons could reflect only a portion of what the NBS has in the basket.
Our take
1. China’s economic figures for June 2023 and the second quarter of the year, as well as various other metrics, will likely further convince investors that the PRC is not just struggling to recover post-pandemic and “zero-COVID,” but is also experiencing deflation and some form of recession. Investors could become even more pessimistic about China going forward as the regime’s economic and financial troubles increasingly bubble to the surface in the second half of the year.
The official data further affirms our longstanding assessment of China’s economic situation and prospects. Several of the predictions in our China 2023 Outlook have either been verified or are on track for verification, including:
- Financial institutions and investors could bet on the Chinese economy recovering under the expectation that things will return to normal with the easing of “zero-COVID.” However, signs of a quick recovery will likely prove illusory as the Chinese economy continues to deteriorate and people lose confidence in China’s economic prospects.
- China’s real estate crisis will worsen further and the CCP will find it difficult to turn things around even as it introduces various stimulus and rescue policies. As the crisis deepens, some large Chinese real estate companies could fall into technical bankruptcy and be taken over or restructured by the CCP authorities.
- China’s exports will continue to slow.
- Despite orders from Beijing to boost domestic demand, local authorities will struggle to implement the central government’s policies. Chinese consumption and demand will continue to shrink.
The CCP authorities will introduce more measures to open up China’s markets and the economy. However, it may not be able to reverse the trend of capital outflows and supply chain migration out of China.
As we wrote earlier, “businesses, investors, and governments must be psychologically prepared to see more signs of severe deterioration in the Chinese economy and remain skeptical of official economic and financial data.”
2. Several indicators suggest that China’s actual economic situation is far worse than what the official data shows.
First and most obviously, the CCP’s attempt to “get ahead” of public opinion and explain the “temperature difference” between what the Chinese people are perceiving on the ground (micro economy/subjects) and what the official figures claim (macro economy/data) is a dead giveaway that there is a significant gap between the PRC’s data and reality. However, the CCP’s effort to whitewash China’s economic reality could produce a Streisand effect and further convince the Chinese people and foreign investors that China’s economy is seeing severe deterioration. When such a perception becomes prevalent, CCP propaganda about the economy (including real estate and other financial topics) will increasingly backfire and instead exacerbate the trends that are currently contributing to economic decline.
Second, several metrics suggest that the youth unemployment rate in China is likely far higher than the already record 21.3 percent in June:
- The CCP counts those working just one hour a week as being “employed,” and does not include those who are unable to work and have no willingness to work (including school students) in producing its jobless figures. Information circulating on Chinese social media indicates that official data on the “employment completion rate” of college graduates is heavily manipulated. In one example, chat records of lecturers and students of a Chinese university shared on Chinese social media showed that graduates of the college were considered to be “self-employed” (and therefore having “completed” their “employment”) as long as they registered an account on the mainland second-hand goods trading platform Goofish and completed one sales transaction.
- Chinese institutes of higher education have long been known to withhold issuing graduation certificates to graduates unless they provide proof of employment, resulting in the latter producing all kinds of fraudulent employment proofs to obtain their diploma. Even under such circumstances, Chinese colleges and universities are still showing low employment rates for their alumni. In April this year, some PowerPoint slides from an internal meeting of Shanghai Ocean University were circulated online. The slides showed that the average employment rate of college graduates in Shanghai at the time was just 32.8 percent, of which 24.1 percent were those with a bachelor’s degree. The average employment rate of those with bachelor’s and graduate degrees from Shanghai Ocean University was 13.64 percent and 17.27 percent, respectively.
- The number of college graduates in China is expected to increase by 820,000 to reach 11.58 million in 2023, according to data from the PRC education ministry. While the education ministry has talked up its “100-day sprint” campaign (from May to August 2023) to boost the employment rate of college graduates, China’s economic data and growing youth unemployment figure suggests that the campaign is having a limited impact and has been mostly serving propaganda purposes.
Third, the disclosure of mortality data in Zhejiang Province hints at a far higher COVID-19 death count than officially reported, and in turn sheds light on why China is having problems with “insufficient demand” and economic recovery. On July 13, the Zhejiang Civil Affairs Department released figures showing that the number of cremations in the province for the first quarter of the year increased by 73 percent from a year ago to 171,000. The number was significantly higher than the 91,000 cremations and 99,000 cremations during the same period in 2021 and 2022 respectively. The Zhejiang authorities later scrubbed the data from the internet after it attracted too much attention.
The Zhejiang authorities’ censorship and the fact that local governments and the central government have been excluding cremation data from their official records since the fourth quarter of 2022 indirectly affirms our earlier observation about China’s population could have shrunk significantly after “zero-COVID” was lifted and over the three pandemic years as the CCP was likely grossly underreporting COVID and COVID-related deaths. We also analyzed at the time that a death toll that is substantially larger than reported would see China’s post-“zero-COVID” recovery “stymied,” and “China’s economic ‘rebound’ will be lackluster at best, and is more likely to noticeably fall into recession.”
