Signs of recession, deflation become more obvious from China’s July data; Biden restricts U.S. tech investments in China

  1   Signs of recession, deflation become more obvious from China’s July data

  China’s July trade and economic data

Aug. 8
According to data released by the PRC General Administration of Customs:

China’s exports and imports in July 2023

• Imports and exports decreased by 13.6 percent to $482.92 billion. (When calculated using the CCP’s figure of $564.66 billion in July 2022, imports and exports saw an actual decline of 14.5 percent.)
• Exports decreased by 14.5 percent to $281.76 billion, the steepest drop since February 2020. (When calculated using the CCP’s figure of $332.96 billion in July 2022, exports saw an actual decline of 15.3 percent.)
• Imports decreased by 12.4 percent to $201.16 billion. (When calculated using the CCP’s figure of $231.7 billion in July 2022, imports saw an actual decline of 13.2 percent.)
• The trade surplus decreased by 19.4 percent to $80.6 billion. (When calculated using the CCP’s figure of $101.26 billion in July 2022, the trade surplus saw an actual decline of 20.4 percent.)

China’s exports and imports for the January-July 2023 period

• Imports and exports from January-July decreased by 6.1 percent to $3.4 trillion. (When calculated using the CCP’s figure of $3.64 trillion in January-July 2022, imports and exports saw an actual decline of 6.6 percent.)
• Exports from January-July decreased by 5 percent to $1.94 trillion. (When calculated using the CCP’s figure of $2.06 trillion in January-July 2022, exports saw an actual decrease of 5.8 percent.)
• Imports from January-July decreased by 7.6 percent to $1.46 trillion. (When calculated using the CCP’s figure of $1.58 trillion in January-July 2022, the actual decrease of imports was the same as what was officially reported.)
• The trade surplus from January-July increased by 3.5 percent to $489.57 billion. (When calculated using the CCP’s figure of $482.3 billion in January-July 2022, the trade surplus saw an actual increase of 1.5 percent.)

China’s exports by country/region in July 2023

• China’s exports to the European Union accounted for 15 percent of total exports, down by 20.6 percent year-on-year; exports to the EU from January-July fell by 9.1 percent year-on-year.
• China’s exports to the United States accounted for 15 percent of total exports, down by 23.1 percent year-on-year; exports to the U.S. from January-July fell by 18.9 percent year-on-year.
• China’s exports to ASEAN accounted for 14.8 percent of total exports, down by 21.4 percent year-on-year; exports to ASEAN from January-July fell by 4.8 percent year-on-year.
• China’s exports to Africa accounted for 5.2 percent of total exports, down by 4.9 percent year-on-year; exports from January-July increased by 11.6 percent year-on-year.
• China’s exports to Russia accounted for 3.6 percent of total exports, up by 51.8 percent year-on-year; exports from January-July up by 72.5 percent year-on-year.

Aug. 9
According to data released by the National Bureau of Statistics, China’s consumer price index and producer price index fell by 0.3 percent and 4.4 percent respectively in July.

• China’s CPI has shrunk from 2.1 percent in January to negative growth in July.
• China’s PPI saw its 10th consecutive month of negative growth in July on a year-on-year basis; on a month-on-month basis, the PPI saw zero growth in February and March and negative growth for the other months.

Aug. 11
The People’s Bank of China released the following financial and loan data:

• The broad M2 money supply increased by 10.7 percent year-on-year in July to 285.4 trillion yuan, compared with an increase of 11.3 percent in June 2023 and the 12 percent increase in June 2022. The July M2 growth was the slowest increase since April 2022.
• Chinese banks extended 345.9 billion yuan of new renminbi loans in July, a year-on-year decrease of 349.8 billion yuan, down 89 percent from June 2023 (3.05 trillion yuan), and the lowest since November 2009 (294.8 billion yuan).
• Total social financing stood at 528.2 billion yuan in July, 270.3 billion yuan less from a year ago, down from 4.22 trillion yuan in June 2023, and a new low since July 2016 (479.1 billion yuan).
• The stock of total social financing at the end of July was 365.77 trillion yuan, a year-on-year increase of 8.9 percent. The rate of growth hit a record low since the data was available for the second consecutive month.

  Country Garden misses bond payments

Aug. 8
Country Garden did not make payments on two dollar bond coupons totaling $22.5 million due on Aug. 6. The $10.5 million bond will mature in February 2026 and the $12 million bond in August 2030. Both payments have 30-day grace periods.

Country Garden is due to make principal and interest payments this year on bonds in various currencies totaling more than $2 billion.

Aug. 10
1. Country Garden announced equity sales amounting to 140.8 billion yuan from January to July 2023, a year-on-year decrease of 35 percent and a drop of 61 percent when compared to 2021. Also, July saw equity sales of 12.1 billion yuan, a month-on-month drop of 60 percent (down 78 percent when compared to 2021) and the fourth consecutive month of declines.

Country Garden also said that it expects to see net losses of between 45 billion yuan to 55 billion yuan for the first six months of 2023 ending June 30 due to declining sales in the real estate industry, decreasing gross profit margins for the real estate business, increasing impairment of property projects, and net foreign exchange losses due to foreign exchange fluctuations.

2. Moody’s downgraded Country Garden’s rating to Caa1 from B1 due to the company’s heightened liquidity and refinancing risks. A rating of Caa1 indicates a very high credit risk.

Moody’s also lowered its forecast for Country Garden’s contracted sales for 2023, saying that “the company is also likely to increase its reliance on secured debt because of the deterioration in its credit quality. As a result, the expected recovery rate for senior unsecured claims at the holding company will be lower.”

Aug. 11
Mainland media Yicai reported that Country Garden is expected to start a debt restructuring process soon.

The news saw Country Garden shares fall by as much as 14.4 percent on Friday morning to hit a record low of HK$0.89; Country Garden shares had lost 38 percent of its value at that time for the week. Also, most of the property developer’s dollar bonds traded at a record low of below 7 cents on the dollar, down from 8 cents on Aug. 8 after it missed bond payments.

  Evergrande in technical bankruptcy?

Aug. 10
China Evergrande issued its annual and semi-annual bond reports for 2021 and 2022, its annual audit reports for 2021 and 2022, and its semi-annual financial report for 2022.

According to Evergrande’s data, the property developer suffered a net loss of 52.720 billion yuan in 2022. Evergrande’s total liabilities were 1.679 trillion yuan as of Dec. 31, 2022 and its monetary funds (including cash, cash equivalents, and restricted funds) totaled 9.173 billion yuan.

Meanwhile, Evergrande has 1.834 trillion yuan in total liabilities and just 1.469 trillion yuan in total assets.

  Foreigners sour on China’s property sector

Aug. 7
Bloomberg Intelligence analyst Patrick Wong wrote, “It seems like more investors are betting on Country Garden’s liquidity concerns leading to its failure.” Wong added that the developer “has a sizable amount of projects, so any default will significantly affect the overall property market sentiment and hit other developers.”

Aug. 8
Bloomberg Intelligence analyst Kristy Hung wrote that any default by Country Garden “would impact China’s housing market more than Evergrande’s collapse as Country Garden has four times as many projects. Any debt crisis at Country Garden will have a far-reaching impact on China’s housing market sentiment and could significantly weaken buyer confidence on solvent private developers.”

Bloomberg noted that Country Garden has more than 3,000 housing projects in smaller cities and employed about 70,000 people at the end of 2022.

Aug. 11
Brock Silvers, chief investment officer at Hong Kong private equity firm Kaiyuan Capital, said that China’s property market “is now substantially uninvestable. The systemic risks are dramatically larger than previously anticipated.”

  LGFVs overdue on commercial paper

Aug. 7
Bloomberg reported that 48 local government financing vehicles are overdue on commercial paper (short-term loans with a maturity of less than a year), up from 29 in June. The LGFVs missed payments totaling 1.86 billion yuan, compared to 780 million yuan in June.

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As of July 2023, there are 140 LGFVs overdue on their debt, with the amount owed totaling 10.51 billion yuan.

  Damage control

Aug. 5
The Financial Times reported that multiple local brokerage analysts and researchers at top Chinese colleges and state-run think-tanks had been instructed by PRC regulators, their employers, and mainland media outlets to “avoid speaking negatively about topics ranging from fears of capital flight to softening prices.”

Seven prominent economists told the Times that they were told by their employers that “some topics were off-limits for public discussion.” Two think-tank scholars and two brokerage economists, all of whom are government advisers, said there was pressure to put a positive spin on economic news to increase public confidence. “The regulator doesn’t want to hear negative comments about the economy in public. They wanted us to interpret bad news from a positive light,” said an adviser to the central bank.

An economist also told a closed-door conference in Beijing when asked about deflationary risks, “As the entire market is aware, there is no such thing as deflation in China. We could, however, talk about low inflation [risks].”

Aug. 10
1. The Wall Street Journal reported that PRC regulators had instructed a group of domestic legal firms to “soften the wording of China-specific risk disclosures in overseas stock-listing documents,” citing people familiar with the matter.

The regulators gave alternative descriptions of certain risks and said that some descriptions should not be mentioned at all. For instance, the lawyers were instructed not to refer to “adverse changes” in China’s economy but describe it as “evolving”; laws and regulations in China change “from time to time” instead of “without notice”; and “China’s legal system is different from other jurisdictions” when talking about how some administrative and court proceedings can drag out.

2. Bloomberg reported that the corporate bonds division of the China Securities Regulatory Commission plans to hold a virtual meeting with some property developers and financial institutions on the morning of Aug. 11. People familiar with the matter said that Country Garden was not among those invited.

The China Securities Regulatory Commission plans to convene with some property developers and financial institutions virtually on Friday morning, said the people, who asked not to be identified because the matter is private. The gathering through video conferencing is being organized by the CSRC’s corporate bonds division, one of the people said.

Country Garden Holdings Co. was not among those invited, one of the people said. The developer — once the nation’s largest by sales — has become the latest focus of China’s property woes after bondholders said they had yet to receive overdue interest payments, raising concerns that it may be the next giant to default.

  ‘Ticking time bomb’

Aug. 11
President Joe Biden said at a political fundraiser in Utah, “China is a ticking time bomb … China is in trouble. China was growing at 8 percent a year to maintain growth. Now close to 2 percent a year.”

Biden added, “They have got some problems. That’s not good because when bad folks have problems, they do bad things.”

  Our take

1. The various economic and financial data released by the PRC for July and the first half of 2023 reflect a sharp economic contraction, deflation, and shrinking trade. The data affirms our assessment of the Chinese economy’s severe deterioration and several of the economic forecasts made in our 2023 China Outlook.

2. The PRC’s official data shows China’s imports and exports falling for three consecutive months and at expanding declines. Recessionary pressures abroad and geopolitical factors also saw China’s exports to main regions like Europe, the U.S., and ASEAN (34.8 percent of total exports) fall by more than 20 percent in July, while trade with Russia remains the PRC’s sole bright spot.

The actual situation with China’s trade is likely to be far worse than stated in the official data. A direct comparison between the July figures and those released by the CCP over the same period last year reflect steeper drops. Moreover, the CCP has long been known to manipulate its official data, often to make them look much better.

China’s dismal trade data foreshadow worse things to come for the economy. Shrinking imports suggest that China’s manufacturing industry is receiving fewer orders and requires fewer raw material or components, which in turn would lead to fewer exports over the next one to three months. Also, reduced export orders will lead to price competition, which coupled with currency depreciation and global inflation, will likely result in a smaller trade surplus due to lower export prices and higher import costs. Exports are arguably the central pillar of China’s “troika” of growth drivers (exports, investment, consumption). As the trade situation worsens for the PRC, the Chinese economy will lose momentum at a faster pace and deteriorate more sharply.

3. China’s declining exports and shrinking trade surplus appears to have resulted in a reduced appetite for investment and consumption. This is partly reflected in the falling CPI and PPI figures in July, which also indicate that China is in deflation territory. Reduced investment and consumption are further reflected in China’s financial and social financing data, which saw sharp drops in the M2 money supply, total social financing and its stock, and new RMB loans.

China’s “balance-sheet recession” is set to worsen as the Chinese people and companies spend and invest less. This would deepen the debt crisis facing the real estate sector and LGFVs as they see reduced ability to “borrow new to repay old” (借新還舊), and even affect the better performing aspects of the Chinese economy like new energy vehicle sales. Signs that residents are spending less can be seen from the drop in household loans in July by 200.7 billion yuan, of which short-term loans fell by 133.5 billion yuan while medium and long-term loans declined by 67.2 billion yuan. Falling medium to long-term loans suggest reduced household investment in real estate, while declining short-term loans hint at fewer cars (and to a smaller degree, property) being purchased.

4. The situation with Country Garden, one of the leading property developers, bodes ill for most of the other developers in China. Country Garden will struggle to haul its way out of its debt crisis as the Chinese economy continues to decline sharply and residents become even less willing to buy property.

The CCP authorities will also find themselves limited in their ability to get the banks to help Country Garden (and other developers) given the developer’s poor results despite having already received support. In November 2022, Country Garden received more than 150 billion yuan in comprehensive credit from three state-owned commercial banks (Industrial and Commercial Bank of China, Bank of China, and Postal Savings Bank of China), but could not avoid announcing that it expects to announce losses of between 45 billion yuan to 55 billion yuan for the first half of 2023. Other developers that do not have the CCP regime’s support could be forced to default on their debt, and as we wrote in our 2023 China Outlook, “could fall into technical bankruptcy and be taken over or restructured by the CCP authorities.”

5. China’s July data is causing foreigners to lose even more confidence in the PRC’s post-pandemic “recovery” and become increasingly pessimistic about China’s growth prospects more broadly. Continued U.S. investment restrictions (see item two in this newsletter), sanctions, and negativity towards China will also convince foreigners about the intractable nature of the PRC’s geopolitical risks and lead them to fundamentally reassess their China strategies.

We believe that President Joe Biden is being conservative in stating that the Chinese economy is growing at “close to 2 percent a year.” In December 2018, Renmin University economics professor Xiang Songzuo estimated that China’s GDP growth for that year should be around 1.67 percent or even negative. Assuming that Xiang was accurate in his assessment, then China’s actual GDP growth is almost certainly below 2 percent and negative from 2019 to the present given the ramping up of the Sino-U.S. trade war after 2018 and the three years (2020 to 2022) of “zero-COVID.” Regardless, foreigners will likely be even more spooked about the Chinese economy after Biden’s “misstatement,” and could take his “forthcoming” assessment of China’s present economic growth as a sign that they should curb investments in the PRC and step up efforts to “de-risk” and diversify from China.

  2   Biden restricts U.S. tech investments in China

On Aug. 8, President Joe Biden signed an executive order that will restrict Americans from investing in “sensitive technologies critical to national security” such as “semiconductors and microelectronics, quantum information technologies, and artificial intelligence” in “countries of concern.”

The annex of the executive order identified the PRC (including Hong Kong and Macau) as a country of concern. Americans doing business in China are also required to inform the U.S. government about direct investments in AI and other types of semiconductors.

The U.S. Treasury Department described the executive order as “narrowly targeted at investments in highly sensitive technologies and products for the purposes of protecting U.S. national security.”

Notable points about the executive order from publicly available information include:

• The rules in the executive order will go into effect a year later, and the Biden administration will seek public comment on the implementation of the order in the interim.
• An administration official said that the rules are not retroactive and will apply only to future investments.
• Bloomberg reported that the investment restrictions are likely to apply only to Chinese companies that get at least half of their revenue from the three sectors of sensitive technologies, citing people familiar with the matter. This means that U.S. private equity and venture capital firms will be allowed to “put their money in larger Chinese conglomerates that may have artificial intelligence divisions but get most of their revenue from other sources.” The Bloomberg report added that “the provision on revenue would mean that Chinese companies most affected by the limits will be early-stage Chinese startups.”
• The Wall Street Journal reported that some industry representatives described the executive order as being “relatively narrow compared with approaches that lawmakers have considered.”

Biden’s executive order drew criticism from some Republicans and the PRC:

• The PRC foreign ministry said that the regime was “strongly dissatisfied” with the executive order and “resolutely opposes the U.S.’s insistence on introducing investment restrictions on China.”
• A spokesman for the PRC embassy in Washington said that the PRC was “very disappointed” in U.S. investment restrictions, and that the PRC “opposes the U.S.’ overuse of national security to politicize and weaponize trade, scientific and technological issues and deliberately making obstacles to normal economic and trade exchanges and technological cooperation.”
• The PRC commerce ministry said it was “gravely concerned” about the executive order and reserved the right to take measures.
• Senator Marco Rubio (R-FL) said that the Biden administration’s investment restriction plan is “riddled with loopholes, explicitly ignores the dual-use nature of important technologies, and fails to include industries China’s government deems critical.”
• Rep. Michael McCaul (R-TX) said, “The administration scaling back — at a time where aggressive action is needed more than ever — continues the trend of appeasing industry at the cost of national security.”

  Our take

1. The Biden administration’s investment restrictions are broadly in line with its “small yard, high fence” approach to limiting the PRC’s access to critical technologies and safeguarding national security.

However, the publicly available information about President Biden’s executive order suggests that the investment restrictions may not ultimately be as effective as billed or intended. In particular, the PRC will definitely find ways to get around the revenue restriction as reported by Bloomberg to secure much-needed American investments in the three sectors of sensitive technologies. The PRC will also likely use proxies to invest or buy foreign firms that have access to critical U.S. technologies, as well as resort to corporate espionage, to get around the Biden administration’s restrictions. Unless these loopholes are closed, the Biden administration’s investment restrictions are essentially “small yard, low fence” and are very vulnerable to exploitation by the CCP.

2. The relatively modest investment restrictions rolled out by the Biden administration appears to be one of the results of its vigorous pursuit of “deténte” with the CCP regime after the sharp escalation of bilateral tensions in the wake of the PRC spy balloon incident.

Because Beijing is also in on “thawing” tensions stemming from the “new cold war,” its bark will likely be worse than its bite with regard to how it chooses to “retaliate” over the U.S. investment restrictions. Put another way, the PRC could announce some measures as a response to Biden’s executive order, but those measures are likely to be mostly symbolic and not intended to be genuinely provocative.

We previously wrote that the current Sino-U.S. “deténte” is “at best illusory and very fragile as neither the Biden administration nor the Xi leadership has shifted in actuality from their respective positions towards each other despite the Biden administration’s ‘intense diplomacy.’” We also assessed that Sino-U.S. tensions “could suddenly take a turn for the worse as both sides probe each others’ weaknesses and look to take advantage of various developments (changes in the Russia-Ukraine war; political, economic, and social problems in the U.S. and China; etc.) to secure their respective interests.”

3. While the Biden administration’s investment restrictions appear to lack strong teeth, they are likely to reinforce the growing perception held by investors in the U.S. and elsewhere that there are significant political and geopolitical risks involved in investing in China. As foreign investors come to believe that the risks of putting money in China are not worth the returns, they will likely fundamentally adjust their respective China strategies.

Shrinking foreign direct investments in China and accelerated outflows, as well as the Chinese economy’s rapid deterioration (see item one in this newsletter), will greatly weaken the PRC’s “economic shield” and leave the CCP regime vulnerable to various geopolitical threats. The drying up of funds flowing to China will negatively impact the already rapidly deteriorating economy, leading to increased social instability and spiking political risk levels for Xi Jinping and the CCP.

  3   Xi carries out retroactive investigations into the healthcare sector

July 21
The PRC National Health Commission’s department of medical emergency response announced in a video conference that the NHC was working with nine other ministries (Ministry of Education, Ministry of Public Security, National Audit Office, State-owned Assets Supervision and Administration Commission, State Administration for Market Regulation, National Healthcare Security Administration, National Administration of Traditional Chinese Medicine, National Bureau of Disease Control and Prevention, National Medical Products Administration) to carry out a one-year campaign to rectify the pharmaceutical sector.

The NHC said that the rectification campaign will focus on “key links” in the pharmaceutical sector such as supply, sales, usage, and reimbursement, as well as the leading cadres (關鍵少數, “key few”) in the sector. The NHC also called for creating a “high-pressure environment” to ensure that the pharmaceutical sector “dares not be corrupt, cannot be corrupted, and does not want to be corrupt” (不敢腐、不能腐、不想腐).

July 28
The anti-corruption authorities held a video conference in Beijing on cooperating with the mobilization and deployment of the pharmaceutical sector rectification campaign. Yu Hongqiu, deputy Party secretary of the Central Commission for Discipline Inspection and the deputy director of the National Supervisory Commission, attended the conference and delivered a speech.

The conference called for “keeping a close eye on leading cadres and personnel in key positions [in the pharmaceutical sector], insisting on investigating bribery, and concentrating on investigating and dealing with a number of corruption cases in the medical field.”

Aug. 6
According to a report by China Securities Journal, at least 155 officials at hospitals across China were being probed for violating discipline and laws as of July 26, or more than double the total tally in 2022.

Aug. 7
The phrase, “CCDI exposes kickback of 16 million yuan for a medical linear accelerator” trended as a search topic on Weibo.

The phrase appeared to refer to a report in May 2023 on the official website of the anti-corruption authorities regarding a case of medical equipment corruption in Yunnan Province. Yang Wenjun, the director of the People’s Hospital of Pu’er City, was found to have accepted kickbacks of about 16 million yuan when the hospital purchased a medical linear accelerator with an import price of 15 million yuan at 35.2 million yuan. The CCDI report said that hundreds of civil servants in the Pu’er City healthcare system were made to pay up more than 50 million yuan in illegal proceeds.

Aug. 9
China Newsweek reported that at least 159 hospital directors and Party secretaries had been investigated since the start of 2023.

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In the past month or so, the health commissions in several provinces issued notices on rectification and reporting [of corruption cases] in the pharmaceutical sector. Many provincial-level anti-corruption authorities also held video conferences on mobilization and deployment matters for the pharmaceutical sector rectification campaign.

  20-year rectification of the healthcare system

According to information circulating online, insiders in the PRC healthcare system are alleging that the CCP authorities are currently carrying out a “20-year retroactive investigation” of the system. The probe will allegedly go through hospital computer records when they were first kept in 2003, and will thoroughly rectify the healthcare system from top to bottom.

Several signs indicate that a sweeping investigation effort is underway in the healthcare system:

• Mainland media reported that the CCP authorities have been pursuing a top-down, systematic anti-corruption effort since the beginning of 2022. The period from early 2022 to the end of July 2023 is reportedly known as the “self-correction” phase where corrupt officials and personnel are required to return their ill-gotten remunerations (including so-called “lecture fees”) and leniency will be shown to those who voluntarily turn themselves in and confess their crimes. The next phase of “concentrated rectification” will commence in August 2023 and end in June 2024.
• Mainland media reported that more than a dozen medical academic conferences have been postponed since August 2023, including one jointly held by eight prestigious medical associations (including the Chinese Medical Association, the Shaanxi Medical Association, and the Guangxi Medical Association). Additionally, some medical study and training courses were also recently postponed.
• Healthcare sector insiders told mainland media that local anti-corruption authorities had dispatched investigation teams over the past two months to large pharmaceutical state-owned enterprises and central enterprises.

China’s healthcare stocks have declined after the CCP authorities cracked down on the pharmaceutical sector and healthcare system. The CSI 300 Healthcare Index fell by as much as 3.4 percent on Aug. 7, with the biggest losers being Huadong Medicine Co. and Shenzhen Mindray Bio-Medical Electronics Co. Mainland media Yicai reported that the healthcare sector’s market capital evaporated by 215.137 billion yuan on Aug. 7 and by more than 450 billion yuan over the previous six trading days, citing data from Wind Healthcare.

  Stricter bribery penalties

On July 25, a draft of the Criminal Law Amendment (XII) was submitted to the fourth session of the Standing Committee of the 14th National People’s Congress for deliberation. The draft strengthened the punishment of bribery crimes, including adding provisions to penalize corruption-related bribery committed by private enterprise insiders and proposing heavier penalties for bribery in the areas of food, medicine, education, and healthcare.

  Big picture

The rectification of the pharmaceutical sector and healthcare system comes amid the continued deterioration of the Chinese economy, local government financial shortages, the Chinese people receiving fewer healthcare benefits after a health insurance reform, and growing social discontent as the people deal with increasing hardships.

  Our take

1. The Xi leadership’s “rectification” of the healthcare system appears to partly be aimed at resolving the issue of the regime’s financial shortfalls. In theory at least, local governments should be able to recoup some funds from corrupt healthcare officials and hospitals, reduce government healthcare expenditures, and even lower the Chinese people’s healthcare expenses to a degree (which would in turn help to lower social tensions). Of course, the CCP regime stands to benefit the most from recovering the ill-gotten gains of corrupt officials and personnel, and the people will see minimal returns from such actions at best.

Back-of-the-envelope calculations suggest that the CCP authorities could recover a sizable amount of funds from confiscating the takings of corrupt officials and personnel. Information circulating on Chinese media and social media indicates that the CCDI has ordered doctors at major hospitals in Liaoning Province to return their illegal income within a certain time frame. The amount reclaimed after three rounds of returns was reportedly about 10 billion yuan, with regular doctors coughing up sums starting from 200,000 yuan and hospital directors 500,000 yuan and up.

According to NHC data from 2021, there are 11,804 public hospitals in China (excluding 509,128 grassroots healthcare institutions), of which 434 are in Liaoning. Assuming that the CCP’s rectification campaign was limited to public hospitals and the authorities had confiscated 10 billion yuan in illegal income from the corrupt doctors and directors in Liaoning, then each public hospital in the province yielded about 23 million yuan on average after the government shakedown. Assuming a conservative figure of 10 million yuan per public hospital, the CCP authorities could extract upwards of 118 billion yuan from corrupt officials and personnel by targeting all public hospitals in the country.

Beijing’s focus on bribery and the pharmaceutical sector foreshadows the fining of pharmaceutical companies. If so, the CCP authorities could recover amounts totaling hundreds of billions of yuan from the pharmaceutical sector and the healthcare system in the current round of rectification efforts.

2. The Xi leadership is likely also looking to further its political de-risking and factional struggle through the rectification of the pharmaceutical sector and the healthcare system.

Xi Jinping has long worked towards eliminating the Jiang faction’s influence in the regime. We previously wrote that “it was common knowledge during the Jiang-Hu era, when the Jiang Zemin faction was dominant, that the CCP elite was using up a significant portion of the regime’s healthcare resources.” The commercialization of healthcare in China was also a by-product of the Jiang faction’s era of dominance, and problems associated with that development have persisted under the Xi leadership.

Beijing would too have noticed that officials, various elite interest groups, and pharmaceutical companies had colluded during the pandemic years to siphon off medical insurance funds and bring risks to the regime as they profited immensely. With the regime now well into the post-pandemic period and Xi having consolidated power to a greater degree at the 20th Party Congress, the Xi leadership could feel that the time is ripe to bring the anti-corruption campaign to “where power is concentrated, where capital is intensive, and where resources are abundant,” and eliminate the remaining political risks that are threatening Xi and the regime.

3. The Xi leadership’s healthcare system probe potentially opens the door for Xi Jinping to shift the blame of political legacy issues in the healthcare system, issues that cropped up during the implementation of “zero-COVID,” and the politically sensitive topic of forced organ harvesting of prisoners of conscience in China on to the Jiang faction.

The CCP’s forced organ harvesting could be quietly growing into a matter of concern for the Xi leadership in light of growing attention towards the issue. Near the end of March, the U.S. House of Representatives passed the “Stop Forced Organ Harvesting Act” with near unanimity. And in July, Chinese observers spotted signs that the CCP had persisted with organ harvesting during the Xi years, including a recently released testimony from a Falun Gong practitioner who managed to recount the abuse inflicted upon her and the removal of her kidneys to a doctor who videotaped her account in 2019 before she succumbed to her injuries, and several mainland media reports that appeared to acknowledge indirectly that a Sichuan Airlines flight on July 21 had transported “living organs” from Chengdu to Wuxi for transplantation.

If Xi does go after the Jiang faction in “rectifying” the healthcare system, then he could be laying the groundwork for a broader denunciation of Jiang Zemin’s “incorrect political line” further down the road as he carves out a path to “absolve” himself of blame for the forced organ harvesting that was carried out under his rule.