1 China’s bleak economic situation persists despite seemingly better August data
August trade data
Sept. 7
The PRC General Administration of Customs released the following trade data for August 2023:
- Exports and imports decreased by 8.2 percent from a year ago to $501.38 billion (decrease of 8.9 percent when compared with the official August 2022 figure of $550.45 billion).
- Exports decreased by 8.8 percent from a year ago to $284.87 billion (decrease of 9.5 percent when compared with the official August 2022 figure of $314.92 billion).
- Imports decreased 7.3 percent from a year ago to $216.51 billion (no difference in decrease when compared with the official August 2022 figure).
- The trade surplus decreased 13.2 percent from a year ago to $68.36 billion (decrease of 13.9 percent when compared with the official August 2022 figure of $79.39 billion).
The above data indicated that China’s exports and imports had dropped for the fourth straight month in August, albeit by a narrower decline as compared to July (exports fell by 14.5 percent and imports by 12.4 percent). The official data also mostly beat the forecast of economists surveyed by The Wall Street Journal, which expected China’s exports to fall by 10 percent, imports to drop by 9.7 percent, and the trade surplus to reach $73.8 billion.
Meanwhile, China’s trade situation with its main trading partners in August include:
- China to the European Union: Exports fell by 19.6 percent and imports fell by 5.7 percent.
- China to the United States: Exports fell by 9.5 percent and imports fell by 7.9 percent.
- China to ASEAN countries: Exports fell by 13.3 percent and imports fell by 6.1 percent.
- China to Africa: Exports fell by 5.4 percent and imports rose by 0.7 percent.
- China to Russia: Exports rose by 16.3 percent and imports fell by 2.7 percent.
August financial data
Sept. 11
The People’s Bank of China released the following financial data for August 2023:
- The broad M2 money supply increased by 10.6 percent year-on-year to 286.93 trillion yuan, compared with an increase of 10.7 percent in July 2023 and 12.2 percent in July 2022.
- The M1 money supply increased by 6.1 percent year-on-year to 66.46 trillion yuan, compared with an increase of 6.7 percent in July 2023 and an increase of 4.2 percent in July 2022.
- Renminbi loans increased by 86.8 billion yuan year-on-year to 1.36 trillion yuan in August. Of the total:
- Household loans increased by 392.2 billion yuan, of which 232 billion yuan were short-term loans while medium- and long-term loans were 160.2 billion yuan (39.7 percent year-on-year decrease; compared with 265.8 billion yuan in August 2022), the lowest for the month over the past 11 years.
- Loans to enterprises (institutions) increased by 948.8 billion yuan, of which 40.1 billion yuan were short-term loans while medium- and long-term loans were 644.4 billion yuan (12.4 percent decrease year-on-year; compared with 735.3 billion yuan in August 2022).
- Bill financing increased 84.6 percent to 347.2 billion yuan, setting a new high for August in recent years.
- RMB deposits increased by 1.26 trillion yuan, or down 13.2 billion yuan from a year ago.
- Household deposits accounted for 787.7 billion yuan of the total, a year-on-year decrease of 4.9 percent (compared with 828.6 billion yuan in August 2022).
- Newly added social financing in August rose to 3.12 trillion yuan, compared with 528.2 billion yuan in July and 631.6 billion yuan more than in August 2022. Of the total, RMB loans to the real economy reached 1.34 trillion yuan, or down 10.2 billion yuan from August 2022. The net financing from government bonds was 1.18 trillion yuan, or up by 871.4 billion yuan from August 2022.
August economic data
Aug. 31
The National Bureau of Statistics announced that China’s purchasing managers’ index was 49.7 in August, an increase of 0.4 percentage points from the previous month. The new orders subindex moved into the expansion zone as it reached 50.2, but the new exports orders subindex stayed low at 46.7.
China’s PMI stayed in the contraction zone from April to August 2023, but narrowed month by month from the low point of 48.8 in May.
Sept. 9
The NBS released the following consumer price index and producer price index data for August:
- The national CPI increased 0.1 percent year-on-year and 0.3 percent month-on-month. Of the total:
- Pork prices fell 17.9 percent year-on-year but rose 11.4 percent month-on-month.
- Tourism prices rose 14.8 percent year-on-year and 1.4 percent month-on-month.
- The national PPI fell by 3 percent year-on-year and increased 0.2 percent month-on-month. Meanwhile, the purchasing price of industrial producers dropped by 4.6 percent year-on-year and increased by 0.2 percent month-on-month.
Big picture
Beijing rolled out several policies in August in a bid to rescue the economy (see here, here, and here).
Our take
1. At a glance, the CCP’s official data suggests that China’s economy rebounded somewhat in August. For instance, the expansion of new RMB loans and newly added social financing beat expectations; the CPI and PPI improved from the previous month; and the PMI went up from the previous month even though it remained in the contraction zone.
However, the same data and the CCP’s own numbers from last year indicate that China is still seeing deflation, consumer and business confidence remains low, and the economy will likely deteriorate further in the third and fourth quarters:
- The declining growth rate of the M1 and M2 money supply in August is an indirect indicator that China has entered into a “balance-sheet recession.”
- Net financing from government bonds accounts for 37.8 percent of newly added social financing. Such financing, however, is unsustainable due to its low investment efficiency and impact in weakening the role of private enterprises in the Chinese economy. Increased government spending will also worsen the local government debt crisis.
- The record bill financing in August is not a positive development because it shows that banks have stepped up lending to each other (i.e. 金融空轉 , or “financial idling”) to boost their respective performance.
- Medium- and long-term loans (residential mortgage loans, enterprise investment in fixed assets and production equipment, etc.), which reflect the actual demand of residents and businesses, fell by 39.7 percent and 12.4 percent respectively from a year ago in August. In breaking down the figures:
- Residential medium- and long-term loans grew by about 160 billion yuan in August, a year-on-year drop of nearly 40 percent to the lowest level in the same period in nearly 11 years. The decline in such loans is reflected in sluggish real estate sales. Meanwhile, the transaction volume of commercial housing in 30 medium- and large-sized cities in August was just 9.6 million square meters, compared with the average of 15.7 million square meters during the same period in the past four years.
- Medium- and long-term loans to enterprises shrunk from a year ago in August, reflecting the pessimism of businesses towards China’s economic prospects.
- The improved CPI figure is attributed to the increase in pork and tourism prices while other goods and services remain weak, indicating that deflation persists in China and the situation has not actually improved.
- While PPI went up month-on-month in August, it was lower than during the same period last year when “zero-COVID” was in effect. This suggests that companies are seeing reduced orders, demand is very weak, and the Chinese economy is still seeing deflation.
2. China’s trade data for August indicates continued weakness in the Chinese economy and foreshadows further deterioration.
First, while the slump in imports and exports was lower in August as compared to July, China still saw the fourth consecutive month of declines. Moreover, a comparison between the recently released official figures and those published by the CCP last year for August 2022 suggests that the actual trade slump is likely greater than what Beijing is claiming.
Second, China’s exports to its main trading partners, including the EU (14.5 percent of total exports), the U.S. (15.8 percent of total), ASEAN (15 percent of total), and Africa (5 percent of total) in August mostly shrank across the board. Only exports to Russia, which account for only a small percentage of total exports (3.3 percent), saw growth. This is in line with the trend in July and reflects a declining global demand for Chinese goods. Global demand will likely drop off further as various countries cope with recessionary pressures, and this will in turn impact China’s exports and economic situation.
Third, declining imports in August means fewer exports in the coming months. Fewer exports mean even greater economic weakness for China given that exports are a critical driver of growth. China’s trade situation is not likely to improve with the depreciation of the renminbi and the increasing cost of imports; higher import costs in turn mean reduced profits and even losses for enterprises.
Finally, China’s trade trends and figures paint a bleak picture. Official data lists imports as having decreased by 7.6 percent, or $1.67 trillion, during the January to August period. However, a comparison with the CCP’s own data from 2022 shows a decrease of 8 percent, or $1.82 trillion. Meanwhile, the PMI subindexes for new export orders and imports only entered the expansion range in February and March of 2023, but stayed in the contraction range for the other months.
3. Dismal economic and financial data aside, what Beijing would find even more concerning is that its various policy guidances and measures (see here, here, here, and here) to revive the property sector, support the stock markets (cut stamp duties, restricting IPOs, restricting major shareholders from reducing their holdings, etc.) and rescue the economy have hardly had any effect in turning things around.
At the time of this newsletter’s publication, the Shanghai Composite Index is struggling to stay above 3,100 points, while the onshore RMB exchange rate hit a new low of 7.3498 to the dollar on Sept. 8 (lower than the record 7.3280 set on Nov. 1, 2022, and the weakest since 2007).
Meanwhile, the small uptick in home sales in China’s biggest cities after the CCP authorities loosened mortgage requirements appeared to lose momentum less than a fortnight after the policy adjustment. According to Centaline Group, second-hand home sales in Beijing fell 35 percent to 1,700 from 2,600 during the weekend of Sept. 9 and Sept. 10, while the sales of new homes showed a similar trend. Meanwhile, real estate information platform China Index Holdings found that new home sales were up 3.8 percent from a week ago in Shenzhen, but fell in Shanghai and Guangzhou. China Index Holdings also found that property transactions across China dropped more than 20 percent by area.
The worsening property and economic situation in China, as well as Xi Jinping and the CCP’s growing authoritarianism, has led to increased pessimism and reduced confidence in the Chinese economy. International financial institutions have been continuously revising down their forecast for China’s 2023 GDP growth thus far this year, with some anticipating just 4.5 percent (see here and here) after the recent official data dump. Capital Economics China economics head Julian Evans-Pritchard said, “The primary culprit is the property sector. This source of growth has now evaporated and won’t be coming back. We have long been more bearish than most…but even we have been surprised by the speed at which growth has declined. The deceleration probably still has further to run.” Minxin Pei, a Claremont McKenna College professor, told The Wall Street Journal, “Xi’s centralization of power has caused a crisis of confidence in China’s economy not seen since 1978.”
We wrote previously that Beijing has “few good options for rescuing the economy.” Current developments have played out per our assessment, with the situation likely to worsen further before the end of 2023. Confidence in the Chinese economy could plummet even more should observers believe that Xi Jinping and his “ideology” (as opposed to Beijing’s genuine lack of policy tools to fix existing economic and debt problems without worsening them) is preventing the PRC from rolling out major stimulus or drastic policy changes. The entrenchment of chronic China pessimism is likely to accelerate outflows, result in real estate prices falling uncontrollably, worsen the CCP regime’s economic and financial situation, and produce serious political problems for Xi.
Businesses, investors, and governments should prepare contingencies for potential political “Black Swan” events, which could emerge in the latter half of 2023 and 2024.
2 PRC’s domestic weaknesses leave Xi vulnerable to external pushback
PRC admits economic woes to the US
Sept. 7
U.S. Commerce Secretary Gina Raimondo disclosed some of her interactions with CCP officials during her recent trip to China in an interview with Washington Post columnist David Ignatius:
- Raimondo recalled Shanghai Party secretary Chen Jining’s observation that China’s “economic rebound is a bit lackluster” so “stable bilateral ties in terms of trade and business is in the interest of two countries.”
- Raimondo said, “The word ‘Taiwan’ did not come up once. They gave us very, very little rhetoric or lecturing.”
- Raimondo said that officials from PRC premier Li Qiang on down admitted China’s present economic problems. “They acknowledged the real estate crisis. There was no pretending that wasn’t happening. They repeatedly said the U.S. is ahead of China in artificial intelligence” and conceded they “need to pick up [their] game in artificial intelligence.”
Sept. 10
President Joe Biden spoke about his brief meeting with Li Qiang at the G20 meeting in India and China’s economic situation during a press conference in Vietnam.
Notable points include:
- Biden said his trip to Vietnam was “less about containing China,” but having “a stable base in the Indo-Pacific.”
- Biden said that Xi Jinping has “some difficulties right now,” including “some real difficulty in terms of their economy of late, particularly in real estate.”
- Biden said, “China has a difficult economic problem right now for a whole range of reasons that relate to international growth and lack thereof and the policies that China has followed.” He added, “I don’t think it’s going to cause China to invade Taiwan. And matter of fact, the opposite — it probably doesn’t have the same capacity that it had before.”
- Biden said that Xi “has his hands full now. He has overwhelming unemployment with his youth. One of the major economic tenets of his plan isn’t working at all right now … He’s trying to figure out what to do about the particular crisis they’re having now. But I don’t think it’s a crisis relating to conflict between China and the United States.”
- Biden said that he talked about “stability” with Li Qiang on the sidelines at the G20, that their exchange “wasn’t confrontational at all,” and appeared to imply that Li had approached him for the meeting.
***
The PRC did not release an official readout of Li and Biden’s G20 meeting. When asked during a regular foreign ministry press briefing on Sept. 11, spokeswoman Mao Ning said that Li Qiang had stressed during this conversation with Biden that “China’s development is an opportunity, not a challenge, to the U.S. and the two countries should step up exchanges,” while Biden said that the U.S. “hopes to see China’s economy growing and will not hurt its growth.”
US warnings over Taiwan
Sept. 8
The Financial Times reported that the U.S. House Select Committee on the Chinese Communist Party planned to hold a Taiwan war game with business and financial business executives in New York on Sept. 11 to “raise awareness about the risks attached to Americans investing in China.” Select Committee head Mike Gallagher and the Select Committee’s top Democrat Raja Krishnamoorthi would be leading the delegation.
The participants of the war game would include “representatives from investment banks, in addition to current and former executives from pharmaceutical companies and retired four-star US military officers.” The delegation from the Select Committee would also meet other New York financial executives.
Sept. 11
At a Council on Foreign Relations event in New York, Mike Gallagher responded to President Biden’s Sept. 10 comment about the PRC being less likely to invade Taiwan given its economic troubles by saying, “I just think it’s equally as plausible that, as China confronts serious economic and demographic issues, Xi Jinping could get more risk accepting, and could get less predictable and do something very stupid.”
Gallagher also said, “I think our best chance at deterrence is robust and smart investment in hard power.”
More CCP political rumors
Sept. 7
U.S. Ambassador to Japan Rahm Emanuel wrote in a post on X: “First, Foreign Minister Qin Gang goes missing, then the Rocket Force commanders go missing, and now Defense Minister Li Shangfu hasn’t been seen in public for two weeks. Who’s going to win this unemployment race? China’s youth or Xi’s cabinet?”
An unnamed U.S. official told Nikkei Asia in a Sept. 12 report that Li was “absent” due to corruption. “The issue the Chinese military has had for many years is too large for Xi to resolve, and it may affect what Xi wants to achieve,” the official said.
However, Li Shangfu’s last public appearance was on Aug. 29 when he delivered a keynote speech at the 3rd China-Africa Peace and Security Forum in Beijing.
May – September 2023
Various rumors circulating in overseas Chinese language media and social media claim that first vice premier Ding Xuexiang is in political trouble, including being placed under some form of control.
However, Ding accompanied Xi on an inspection tour in Heilongjiang on Sept. 9 and spoke at the inspection meeting in Harbin.
Big picture
The developments above come amid signs of a Sino-U.S. “détente,” as well as recent incidents and information suggesting that Xi Jinping is facing political trouble at home (see here, here, here, and here).
Our take
1. The statements on China by President Biden and Secretary Raimondo indicate that the PRC’s economic situation is so severe that it has no choice but to confront its weakness, work on improving the bilateral relationship, and temper its efforts to confront the United States and the West.
The Biden administration’s China remarks also appear to indirectly affirm part of our analysis of why Xi did not attend the G20 in India. In debunking the theory that Beijing is giving up on accommodating Washington, we wrote in the Sept. 7 newsletter that “the PRC is currently not adequately prepared for all-out confrontation with the West (even if the Party believes that “the East is Rising and the West is in Decline”) and the Xi leadership has not shown that it has given up on diplomacy or improving relations with Washington and the other G20 nations.”
2. The PRC’s lack of details on Li Qiang and Biden’s brief meeting at the G20 suggests that Beijing wants to keep under wraps what was discussed from the public and the Party at large. Biden’s subsequent remarks about China at the press conference in Vietnam indicate that Li had likely further acknowledged or affirmed the PRC’s economic crisis and the need for goodwill between both sides while Xi is preoccupied with domestic affairs.
The Xi leadership had likely shown signs of weakness in dealing with the Biden administration, and could have even offered up some concessions to the U.S. off the PRC’s back for the interim. Either gesture would be greatly embarrassing to Beijing and undermine Xi’s “quan wei” (authority and prestige) if more details are revealed, and would explain why the CCP authorities have been coy on disclosing what was actually said at Li Qiang’s meeting with Biden. Indeed, Beijing would be hard pressed to come up with propaganda about the meeting even if it wanted to if Li used “very, very little rhetoric or lecturing” in speaking to Biden.
3. Based on our assessment, both Ambassador Rahm Emanuel’s suggestion that Li Shangfu was being investigated and the rumors swirling about Ding Xuexiang are lacking in believability, with the latter more so than the former.
The Ding rumors are easier to refute because there is currently nothing from publicly available information which suggests that Xi is going after his long-time political confidant. It is possible that Xi’s factional rivals and other “anti-Xi” elements are behind the promotion of the rumors as they hope to invoke paranoia in Xi and have him target more members of his own camp.
As for Li Shangfu, it is normal for the PRC defense ministers to have few public engagements and stay out of the limelight. This is partly because the defense minister chiefly serves as the official representative of the PRC government in its exchanges with foreign governments, and is not the head of the military as is the case with most countries. The Party commands the “gun” in Communist China (黨指揮槍), and the People’s Liberation Army follows the deployments of Party Central rather than the defense ministry or minister.
A comparison of public appearances made by Li Shangfu and his predecessor Wei Fenghe further underscores the lack of irregularity about the former’s “absence”:
- Wei made 20 and 21 public appearances in 2021 and 2022 respectively. Li has already made 27 public appearances in 2023.
- Wei made just one public appearance in September 2021 and September 2022, or 45 days and 26 days respectively after his last public appearance for each year. Assuming that Li still has not made a public appearance at the time this newsletter goes to publication (Sept. 14, 2023), he would have only gone 16 days without showing up for a public event.
Of course, it cannot be ruled out that the U.S. has credible information about an investigation into Li and decided to leak the news through Ambassador Emanuel. If so, then the Biden administration could be taking advantage of what appears to be growing political instability in the CCP and the regime’s worsening internal and external crises to pile pressure on Xi Jinping. This would be an attempt by Washington at instigating a change of leadership in China —as opposed to regime change—and as such would be in line with the “anti-Xi, not anti-CCP” strategy outlined in the “Longer Telegram” report published in January 2021. However, the jury is still out as to whether the Biden administration is being deliberately provocative by floating the idea of Li Shangfu being investigated or whether Ambassador Emanuel was acting as a loose cannon.
The Biden administration could eventually seek to step up pressure on Xi should they sense an opening with the crises plaguing China to bring about behavioral or leadership change from the CCP regime. To that end, Washington could play the Taiwan card (backing “Taiwan independence,” supporting Taiwan’s participation and membership in international organizations, etc.), the human rights card (Xinjiang, Tibet, etc.), the economics card (sanctions, etc.), the national security card (more restrictions on advanced technology, moving supply chains out of China, Chinese hackers targeting U.S. infrastructure, accusing the PRC of spreading disinformation online and/or interfering in U.S. and other democratic elections in Western countries, PRC espionage, etc.), or a combination of measures that would undercut Xi’s “quan wei” and see him further blamed for the CCP’s ills.
The Xi leadership will likely deal with greater U.S. pressure by ramping up information controls and resorting to propaganda. Xi Jinping could also find greater incentive to finally denounce the “incorrect political line” of Jiang Zemin and purge his lingering factional rivals as he looks to absolve himself of blame for the CCP’s crimes and failures.
