1 CCP’s support for the private economy stuck in bureaucratic quagmire
Nov. 27
Eight PRC organs and ministries issued a joint notice on strengthening financial support measures to aid the development and growth of the private economy (關於強化金融支持措施 協助民營經濟發展壯大的通知). The organs and ministries are:
- People’s Bank of China
- National Administration of Financial Regulation
- China Securities Regulatory Commission
- State Administration of Foreign Exchange
- National Development and Reform Commission
- Ministry of Industry and Information Technology
- Ministry of Finance
- All-China Federation of Industry and Commerce.
The notice contained 25 specific measures on supporting the private economy and contained the following noteworthy content:
- The notice clarified the objectives and priorities of how finance should service private enterprises. The PRC authorities aim to increase financial support for private enterprises and gradually raise the proportion of loans to private enterprises by setting annual financial service targets for private enterprises, increasing the weight of services related to private enterprises in performance appraisals, and other measures.
- The notice emphasized the need to proceed from the characteristics of private enterprise financing requirements and make efforts to open up diversified financing channels such as credit, bonds, and equity. Financing institutions in the banking sector should not blindly suspend, suppress, withdraw, or cut off loans from private enterprises, but should focus on promoting development and preventing risks.
- The notice proposed that measures such as monetary policy tools, fiscal incentives, insurance guarantees, and other measures should be comprehensively utilized to enhance the enthusiasm of financial institutions to serve the private economy.
The PBoC and other organs said that the “next step” is guiding financial institutions in promptly implementing the requirements of the notice and in formulating specific implementation rules.
Backdrop
On July 19, the CCP Central Committee and the PRC State Council jointly issued an opinion on promoting the development and growth of the private economy that contained a 31-point action plan for supporting the private economy.
Our take
1. The eight PRC organs and ministries’ joint notice on strengthening financial support measures to aid the development and growth of the private economy comes four months after the Central Committee and State Council issued the opinion on promoting the development and growth of the private economy. Yet the joint notice states that the “next step” for the authorities is “guiding financial institutions in promptly implementing the requirements of the notice” and “formulating specific implementation rules.”
In decoding Party speak, the PRC authorities have revealed that its efforts to support the private economy have been limited thus far to meetings, issuing documents and notices, and exhortations to follow the “spirit of the 20th Party Congress,” i.e. a lot of paper pushing and slogan shouting, but almost no concrete action. Beijing’s sluggish response to rescuing the economy reflects the low efficiency and other systemic deficiencies of the CCP authoritarian dictatorship, and demolishes its propaganda that the regime can “concentrate its energies to accomplish major things” (集中力量辦大事).
2. The joint notice’s call to set annual financial service targets for private enterprises to promote the development and growth of the private economy is an indirect indicator that China is in dire economic straits and Beijing needs to rejuvenate a key driver of growth and employment. The promotion of the private economy also indicates that the CCP is reconsidering its policy of supporting state-owned enterprises over private enterprises, or “the state advances while the private sector retreats” (國進民退).
Beijing has likely assessed that years of backing SOEs over the private economy has done the regime more harm than good. SOEs have not increased profits for the PRC, but private firms are becoming endangered by SOEs taking up their “living space” and the rapidly deteriorating economy at large. While it is riskier for financial institutions to lend to private enterprises over SOEs, they are more crucial to the economy (according to the CCP’s own propaganda, private firms contribute more than 60 percent to China’s GDP, absorb more than 70 percent of migrant workers, provide 80 percent of urban jobs, and 90 percent of jobs in emerging sectors) and the stabilization of society.
3. We are pessimistic about the CCP’s ability to rescue private enterprises and revive the private economy when its various measures make it out of the bureaucratic quagmire and are finally implemented.
First, Beijing still has to overcome the many serious deficiencies of the CCP’s own political system. This includes officials “preferring left rather than right” and prioritizing their individual interests over that of the regime, as well as various actors exploiting loopholes in the policy to redirect loans meant for private enterprises into other areas that do not benefit the regime’s broader economic agenda.
Second, financial institutions could still be very reluctant to lend to private enterprises even after the PRC authorities put in place measures to encourage the activity. For one, most private enterprises with financing difficulties can no longer offer good assets as collateral, especially with the real estate crisis causing a drop in property prices. By contrast, financial institutions would prefer to lend to SOEs in troubling times due to their government backing.
Also, the PRC authorities still require financial institutions to guard against risks even as the government pledges to exempt those institutions from some loan risks. This means that the relevant persons in charge of risk management and control at financial institutions would be less willing to approve loans to private enterprises as they look to safeguard their personal interests.
Third, officials and executives in the financial sector would be less willing to make risky moves for fear of running afoul of the Xi leadership’s anti-corruption campaign. This means that financial institutions would not be sincere in supporting private enterprises unless the PRC authorities clarify the conditions under which loans to private companies are exempted from liability. Yet Beijing cannot be too specific about liability exemption clauses lest it enable rogue actors to exploit loopholes to channel funds meant for private enterprises elsewhere (for e.g., rogue actors could exploit Beijing’s policies to illegally obtain low-interest loans for individuals who are looking to make early payments on their mortgage).
All in all, the Xi leadership and the CCP stand a greater risk of exacerbating China’s economic crisis and transforming smaller risks into larger political risks instead of adequately redressing the situation with their measures to support the private economy.
2 Early analysis of the impact of spreading respiratory illnesses in China
In October 2023, information began circulating on Chinese social media of respiratory illnesses spreading on the mainland. Children in particular were hit with an “undiagnosed pneumonia.”
Early signs and reports
Nov. 13
The PRC National Health Commission reported an increased incidence of respiratory diseases in China, and attributed this to the lifting of COVID-19 restrictions and the circulation of known pathogens such as influenza, mycoplasma pneumoniae, respiratory syncytial virus (RSV), and SARS-CoV-2.
Nov. 21
Media and ProMED reported clusters of undiagnosed pneumonia in children in northern China.
Nov. 22
1. Hu Xijin, the former Global Times editor-in-chief, posted on Weibo that his granddaughter had come down with an unprecedented high fever of 40.6 degrees Celsius. Hu added, “The pediatric departments of major hospitals are all overcrowded. It’s a five-hour wait at most of the queues at Beijing Sanjia Hospital, and the queues for infusions are even longer. Taking a child to the hospital to get a queue number at night only to see the doctor in the early morning; only after experiencing that does one know how unbearable the feeling is.”
2. Mainland media reported that the Peking University First Hospital activated a “fangcang” (方艙) hospital, the camp-like facilities that appeared during the “zero-COVID’ era, for use as a temporary infusion room to alleviate the rush of people to the hospital.
Nov. 23
In a video on Douyin (mainland version of TikTok), a man showed a test result which appeared to indicate that he had tested positive for five types of respiratory illnesses out of the eight that the hospital could test for.
The man’s test result listed him as “positive” for influenza virus type A, mycoplasma pneumoniae, RSV, adenovirus, and coxsackievirus group B.
Nov. 24
1. The Taiwan Centers for Disease Control advised travelers to mainland China to pay attention to their hygiene in light of respiratory illness in children in northern China.
Taiwan CDC Director General Lo Yi-chun said at a press conference that there was an increase in the reported cases of respiratory illnesses for five consecutive weeks in China. Lo added that such cases accounted for 6.2 percent of all reported cases at local hospitals, or a 2.5-fold increase over the same period during the past three years.
2. Mainland media reported that the Sanhe City Emergency Rescue Center had mobilized “Big Whites,” or epidemic control personnel dressed head-to-toe in white hazmat suits, to carry out disinfection work in local school premises.
Nov. 27
Benjamin Cowling, an epidemiologist at the University of Hong Kong, told Nature magazine that the wave of illness in China is a “typical ‘winter surge’ in acute respiratory infections” and that it is happening “slightly earlier this year, perhaps because of increased population susceptibility to respiratory infections resulting from three years of COVID measures.”
Nature noted that the wave of illness in China differs from that in other countries, where some nations dealt with flu and RSV infections during their post-COVID winter surges, but Mycoplasma pneumoniae is common in China. Cowling said that this is surprising because “bacterial infections are often opportunistic and take hold after viral infections.”
Cowling also noted that resistance to antibiotics known as macrolides (resistance rates of between 70 percent to 90 percent in Beijing) could be contributing to the high levels of hospitalization from Mycoplasma pneumoniae.
Nov. 28
Beijing Youth Daily reported that Mycoplasma pneumoniae, influenza, COVID-19, and other bacterial viruses are breaking out at the same time across the country, with Mycoplasma pneumoniae detected in the majority of cases.
Beijing Youth Daily added that elementary schools in many places had stopped lessons because many children had been infected.
PRC and WHO statements
Nov. 22
The World Health Organization made an official request to the PRC for detailed information on the increase in respiratory illnesses in mainland China and reported clusters of pneumonia in children.
Nov. 23
The WHO said that the PRC authorities responded to its request for more information by noting that “there has been no detection of any unusual or novel pathogens or unusual clinical presentations, including in Beijing and Liaoning,” but the increase in respiratory illnesses is due to “multiple known pathogens.”
Nov. 26
National Health Commission spokesman Mi Feng said at a press conference that the surge in acute respiratory illnesses in China was linked to the simultaneous circulation of several kinds of pathogens, with influenza being the most prominent. Other pathogens in circulation include rhinovirus, Mycoplasma pneumoniae, RSV, and adenovirus. State mouthpiece Xinhua said that it is believed that the rise in acute respiratory illnesses is related to the superimposition of multiple respiratory pathogens.
Mi Feng also said that “efforts should be made to increase the number of relevant clinics and treatment areas, appropriately extend service hours and strengthen guarantees of drug supplies.” He added that it is necessary to “do a good job in epidemic prevention and control in key crowded places such as schools, childcare institutions, and nursing homes, and to reduce the flow of people and visits.”
Our take
1. From the public information currently available, the situation with the outbreak of respiratory illnesses in mainland China seems to be more serious than what the PRC authorities have communicated publicly and to the WHO thus far at the time this newsletter is published.
The revival of select “zero-COVID” measures in some places, in particular the closing of elementary schools and a Beijing hospital having to activate a “fangcang” hospital to cope with the number of patients, is an indirect indicator that the outbreak is severe in certain parts of China. National Health Commission spokesperson Mi Feng’s call to “increase the number of relevant clinics and treatment areas” and step up epidemic prevention and control in “key crowded places” is another indicator that the surge in respiratory illnesses in China is serious and the PRC authorities are looking to contain the spread.
Based on public information that is currently available, it is impossible to ascertain if the respiratory illnesses circulating in China are seasonal pathogens or are “unusual or novel pathogens.” However, observers can track indicators like reports of atypical respiratory illness symptoms by social media users, medical personnel difficulties in treating the pathogens that are allegedly spreading, and the situation with hospitals and funeral houses to get a sense of whether the pathogens that are spreading in China are regular or novel.
2. We believe that the PRC authorities are less likely to order fresh lockdowns and fully revive other “zero-COVID” measures in tackling the current outbreak lest they torpedo the Chinese economy with their own hands. If anything, Beijing will likely try to cover up the full extent of the outbreak and the type of pathogens in circulation to keep China open to foreign investments and keep up the production of exports to reverse the regime’s rapid economic decline and ease financial shortages.
Beijing could also be wary about worsening social stability by restoring “zero-COVID” measures. Medical staff who could be hired to handle the recent outbreak are unlikely to pursue their duties with any enthusiasm if cash-strapped local governments are still struggling to pay wages to civil servants and with anti-corruption investigators stepping up probes of the healthcare system (see here and here). Meanwhile, most people will not be able to stand a return to lockdowns and the severe restriction of their movements so soon after the end of “zero-COVID,” as well as the prospect of upending their livelihoods again.
Beijing’s tradeoff for not greatly strengthening epidemic prevention measures is risking the current outbreak spreading out of control and creating economic and social problems that the PRC authorities would be looking to avoid in the first place by not returning to “zero-COVID.”
It cannot be ruled out that Xi Jinping decides to partially or fully resurrect “zero-COVID” measures to deal with the current outbreak if he believes that the political costs of not pursuing very strict epidemic prevention and control measures vastly outweigh the economic and social costs of doing so.
Regardless, the Xi leadership would find itself in a “Catch-22” situation on how best to deal with the current respiratory illness outbreak should it continue to worsen during the rest of 2023 and well into the first half of 2024.
3. Businesses, investors, and governments should prepare contingencies for the spread of another epidemic in China, its impact on the Chinese economy and supply chains, and the social instability that could result from the Chinese people’s dissatisfaction with the CCP.
