Economic worries are just one dimension of the challenges facing Beijing.
Around late July to mid-August, the leadership of the Chinese Communist Party and other elite cadres head to the Beidaihe beach resort for their annual work retreat.
In years past, crucial political negotiations took place at Beidaihe as the incumbent CCP boss and various factions jostled for power and influence. This year, however, the outing at Beidaihe appeared politically uneventful with Xi Jinping having centralized authority to a high degree at the 20th Party Congress and there being no more Party elders with sufficient clout to lock horns with Xi after the death of Jiang Zemin in late 2022.
But Xi would have hardly been able to enjoy his vacation at Beidaihe this year. Internal and external crises plaguing the People’s Republic of China have sharply worsened since January, arguably putting Xi in his worst political position since taking office in 2012—and leaving him few options to turn the situation around.
Grimmer economic outlook
Chief among Xi’s headaches is the bad shape of China’s economy and finances.
Data released by the various PRC departments in early August show that the economy is facing recessionary and deflationary pressures. Exports decreased by 14.5 percent to $281.76 billion in July, the steepest drop since February 2020. Meanwhile, imports decreased by 12.4 percent to $201.16 billion. Declining trade bodes ill for China’s near-future growth prospects as well as the economy overall, especially with exports being a critical growth driver.
Other indicators show that China is experiencing deflation despite the CCP authorities’ efforts to downplay the phenomenon. China’s consumer price index and producer price index fell by 0.3 percent and 4.4 percent respectively in July according to National Bureau of Statistics data. Worsening investment and consumption in China can also be seen from People’s Bank of China data showing that Chinese banks extended just 345.9 billion yuan of new renminbi loans in July, a year-on-year decrease of 349.8 billion yuan and down 89 percent from June 2023. Total social financing was only 528.2 billion yuan in July, down from 4.22 trillion yuan a month ago and a new low since July 2016.
China’s debt crisis also worsened in August, notably in the shadow banking and real estate sectors. Country Garden, one of China’s leading property developers, skipped payments on two dollar bonds totaling $22.5 million due on Aug. 6, and is due to make payments on interest and principal totaling over $2 billion this year. Country Garden’s ability to service its debt became more doubtful when it announced equity sales of 140.8 billion yuan from January to July 2023 but net losses of between 45 billion yuan to 55 billion yuan for the first six months of 2023; its total liabilities are 1.4 trillion yuan.
Meanwhile, Zhongrong International Trust missing payments on dozens of investment products since late July led to raised concerns about the outsized exposure of China’s $3 trillion shadow banking sector to the real estate sector. Bloomberg reported on Aug. 16 that Zhongrong has at least 30 products overdue and has also halted redemptions on some short-term instruments, citing people familiar with the matter.
China’s deepening economic and debt crises have spooked foreign investors. U.S.-based hedge fund investors like Tiger Global, Coatue, D1 Capital, and Scion Asset Management have already cut their exposure to Chinese companies in the second quarter of 2023, including selling all or nearly all of their stakes in Chinese tech giants like Alibaba and JD.com. China’s July economic and trade figures, as well as trouble with Country Garden and Zhongrong, will likely see more investors exit as they lose confidence in China.
Political pushback
Economic worries are just one dimension of the challenges facing Beijing. Politically, the recent removal of PRC foreign minister Qin Gang and the replacement of two leading generals of the People’s Liberation Army Rocket Force suggests that Xi is very likely facing pushback of some sort from within the Party.
The removal of Qin, former PLARF commander Li Yuchao, and former PLARF political commissar Xu Zhongbo is highly unusual because all of them can be considered to be aligned with the Xi camp and Qin took office only very recently (December 2022). This means that disloyalty and corruption are unlikely to be major factors that led to their sidelining.
In analyzing the various publicly available information and rumors about Qin Gang and the probe into the PLARF leadership, we believe that Xi Jinping could have moved against members of his own camp following complaints that their actions had threatened national security. Because the Xi leadership has long prioritized national security above all, Xi would have no choice but to take the allegations seriously and open probes into his own associates. If Xi’s factional rivals and other “anti-Xi” elements were behind the complaints against Xi’s associates, then they could be emboldened by their “success” to further exploit the national security regime against the Chinese leader.
No good solutions
Xi Jinping is greatly limited in what he can do to pull the PRC out of its quagmire. For one, the systemic deficiencies of the CCP’s authoritarian system will sharply lower the efficiency of Beijing’s measures to rescue the economy and other policies to preserve regime survival. Officials steeped in Party culture will ultimately “prefer left rather than right” and adopt “one-size-fits-all” approaches to implementing central directives as they prioritize self-preservation and being “politically correct” to not run afoul of the Xi leadership, rather than take flexible and potentially effective, yet also potentially risky approaches to handling crises.
We previously analyzed why Xi has few good options to fix the economy. Xi also cannot do much beyond intensifying propaganda to restore confidence in the Chinese economy both at home and abroad. And CCP propaganda will eventually fall on deaf ears as economic realities hit home.
Some observers are concerned that Xi could start a war over Taiwan or some other small-scale conflict to distract the Chinese people as the CCP’s situation grows more desperate. However, we believe that such worries are presently unwarranted because Xi has not demonstrated signs that he is irrational enough to further destabilize his and the CCP’s situation by provoking conflict and piling greater risks upon the regime. And if Xi is indeed meeting with political pushback now, he will not dare to hand over military command and ammunition to his generals to undertake war operations lest he ends up enabling a coup against himself.
Finally, Xi appears to be responding to his political problems by doubling down on the anti-corruption campaign and propaganda urging the adoption of his political theories and rallying around his person. Propaganda, however, will rapidly lose its effectiveness as China’s economic situation worsens. Also, the fear of being purged could compel the “anti-Xi coalition” to attempt riskier and more daring “counteroffensives” against the Xi leadership.
The more Xi resorts to highly repressive CCP methods to “maintain stability” within the Party and in society, the more instability will be generated. The resulting vicious cycle will eventually threaten a concentrated triggering of the PRC’s internal contradictions, to the detriment of Xi and the CCP.
