1 Analyzing the nationalistic attacks on private enterprise and academia
China saw a number of nationalistic incidents occur starting from around the middle to late February 2024, as well as around the Two Sessions period. Chinese netizens have recently began referring to three of the incidents as the “Three New Pests” (新三害), a reference to the “Four Pests Campaign” (除四害) during the Great Leap Forward.
Nongfu Spring attacked
Chinese nationalists began launching attacks on Chinese soft drink maker Nongfu Spring and its founder Zhong Shanshan after the death of Wahaha Group founder Zong Qinghou on Feb. 25.
The nationalists sought to contrast Zong, who was a revered nationalist figure, and Zhong and Nongfu:
- Zhong Shanshan was accused of being “ungrateful” to China and compared with the fable of the “farmer and the viper” (i.e. kindness met with betrayal).
- Nongfu was accused of being a “pro-Japanese company.” Nationalists said that the red bottle cap used on Nongfu water bottles resembled the red sun emblem in the Japanese national flag; the mountain peaks on a Nongfu drink label looked like Mount Fuji; the Greek letter on Nongfu’s bottled jasmine tea was in the shape of Yasukuni Shrine in Tokyo where the Japanese war dead are remembered; and the carp-shaped designs on the label of Nongfu’s brown rice tea drink resembles Japan’s traditional carp flag koinobori windsock.
- Nationalists noted that Zhong Shanshan’s son Zhong Shuzi, a possible successor to the company, is an American citizen, and suggested that the Zhong family is overly inclined towards foreign countries and their assets will be in the United States.
- Nationalists speculated that Zhong Shanshan is a descendant of Japanese war criminals.
According to mainland media reports, Nongfu’s products were met with boycotts and returns, and the company’s stock price dropped significantly:
- Sales at Nongfu’s official flagship store have been declining continuously since Feb. 28. Daily sales fell from 100,000 yuan to 250,000 yuan to just 5,000 yuan to 7,500 yuan, or a decrease of over 90 percent. On Feb. 27, the Nongfu flagship store took in sales in excess of 1 million yuan.
- Between March 1 and March 8, Nongfu’s stock price fell by 6.53 percent and the company lost HK$32.6 billion in market value.
- On March 8, two branches of 7-Eleven in Changzhou City, Jiangsu Province said that they had pulled all Nongfu products from their shelves. The 7-Eleven branches claimed that they would not sell products from Chinese companies that demonstrate pro-Japan behavior (this is somewhat ironic considering that 7-Eleven, while founded in America, is currently owned by a Japanese company).
- On March 13, Zhong Shanshan implied in a social media post that his 95-year-old mother (a retired senior Party cadre), who passed away on March 11 despite being seemingly in good health as of March 8, could have been affected by the “online bullying” that he had been receiving.
Concurrently, others announced on various Chinese social media platforms that they would only drink Nongfu products in the future to express their disdain for the irrational nationalism on display. Some also used Nongfu products as props in creating short films to show their support.
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According to publicly available information, Zhong Shanshan has a net worth of 450 billion yuan and was named the richest person in China for three consecutive years on the 2023 Hurun Rich List.
Meanwhile, past mainland media reports indicate that Wahaha Group, while publicly a private enterprise, has the state as its majority owner after it underwent equity restructuring in the late 1990s. The State-owned Assets Supervision and Administration Commission of Shangcheng District in Hangzhou City reportedly owns 46 percent (originally 51 percent) of Wahaha’s shares, the late founder Zong Qinghou held 29.4 percent of the shares, and the rest of the shares were owned by the company’s management team and employees.
Mo Yan targeted
Feb. 27
1. A Chinese netizen (username “說真話的毛星火,” real name Wu Wanzheng) posted to social media a lawsuit that he had filed and claimed that he was suing the Nobel literature laureate Mo Yan for insulting the CCP’s founding revolutionaries, late Chairman Mao Zedong, and the Chinese people.
The netizen claimed that Mo’s two novels had allegedly “defamed martyrs” and other charges, and expressed the hope that the courts would support the banning of Mo’s books, get him to issue an apology to “heroic martyrs and the entire nation,” and pay 1.5 billion yuan in compensation (1 yuan per Chinese citizen).
According to overseas Chinese language news reports, the Chinese courts have yet to accept the netizen’s lawsuit as of March 7. Also, the Zhejiang publishing bureau notified the netizen in February that there was “no problem” with Mo Yan’s books.
2. Former Global Times editor-in-chief Hu Xijin slammed the netizen’s effort to sue Mo Yan and accused him of orchestrating a farce.
In a social media post, Hu wrote, “The plaintiff is completely misrepresenting (Mo Yan) … opening up another boundary and imagination space for malicious framing on the internet.” He added, “these voices have already had a negative impact on social reality.”
March 4
1. Li Yang, the PRC consul general in Rio de Janeiro, accused Mo Yan in a Weibo post of making “reactionary remarks” in the visitor book of the Liaoshen Battle Memorial Hall in September 2005.
Li claimed that what Mo allegedly wrote (“with gunfire raging day and night, all for regime change; corpses scattered everywhere, the sons and daughters of the peasants”) belittled the PRC’s founding revolutionaries and the “red land,” as well as revealed Mo’s “reactionary” stance.
2. Hu Xijin published a lengthy social media post on the “suing Mo Yan” controversy.
Hu wrote that some “extremely radical and active ‘political censors’ on the internet’ have, under the “guise of ‘patriotism’ and ‘positive energy, simplified the general logic of political correctness into specific, absolute labels or taboos.” He added that those individuals had “charged ahead recklessly, constantly targeting individuals and events for political attacks, turning normal commercial activities and creative expressions, or some technical errors, into ‘malicious confrontations,’” which created an “aggressively hostile atmosphere online” and “undermines the relaxed atmosphere and openness” of the PRC.
Tsinghua University falls under suspicion
“Little pinks,” or nationalistic Chinese netizens, targeted Tsinghua University for being one of only two Chinese universities not being hit by U.S. sanctions.
The “little pinks” claimed that the U.S. did not sanction Tsinghua and Peking University because they provide the U.S. with outstanding Chinese talents. They cited data showing that 69.5 percent of Tsinghua graduates choose the U.S. as their preferred destination for further studies and that 86 percent of them do not return to China after completing their studies.
On Jan. 17, Tsinghua posted an article (“Five Questions: Where Have Tsinghua’s Graduates Gone to?”) on its WeChat account to refute the “little pinks.” The article said that just 8 percent of its 2023 cohort of graduates pursued further studies abroad and that the majority of its alumni who studied abroad had returned to work in China.
Tsinghua has refuted on several occasions the rumor that “80 percent of Tsinghua graduates go abroad.”
Backdrop
April 2023: The secretariat of the Cyberspace Administration of China issued a notice regarding a “special action” to “clear and optimize the business network environment to protect the legal rights and interests of enterprises.” The CAC required local cyberspace administrations to thoroughly clean up “false and infringing” information that is unfavorable to enterprises and entrepreneurs, crack down on “malicious speculation behavior,” as well as investigate and deal with websites, platforms, and accounts that “infringe” on enterprises and entrepreneurs.
On Aug. 1, the CAC reported that key websites and platforms had cleared out more than 86,000 pieces of false and misleading information relating to enterprise, and punished 8,425 accounts for spreading such information.
July 2023: Party Central and the State Council jointly issued an opinion on promoting the development and growth of the private economy.
March 5, 2024: The economic goals and policies laid out in premier Li Qiang’s government work report were viewed as inadequate and lackluster.
March 15, 2024: The CAC announced 10 tasks for its 2024 “Qinglang” (清朗) with a focus on “rectifying prominent problems and chaos online” and “deciphering new problems and risks in the online ecosystem.” These include:
- Emphasize the rectification of the dissemination of false information involving enterprises, the deliberate spreading of rumors to discredit businesses and entrepreneurs, and the extortion of enterprises under the guise of “public opinion supervision.”
- Concentrate on rectifying issues concerning “self-media” actors creating hot topics, exploiting trends, and manufacturing “information traps” to indiscriminately attract followers for profit.
Our take
1. Some of the nationalist attacks, especially those against Nongfu Spring, Zhong Shanshan, and Tsinghua University, appear to have developed spontaneously and organically as online “little pinks” search for new targets.
However, the continuation of nationalist attacks suggests that other factors could be at play. In the Nongfu case, it cannot be ruled out that some of the company’s competitors could have mobilized so-called “internet water armies” (i.e. netizens paid to post online comments) to smear Zhong Shanshan and affect his business. Zhong being on the Hurun rich list for three straight years would also make him a standout target for abuse as the PRC re-emphasizes nationalism, socialism, and left-leaning policies under Xi Jinping.
In all three cases, it cannot be ruled out that the CCP propaganda apparatus and some members of the diplomatic corps decided to amplify nationalism as a means to distract the Chinese public from the many crises affecting the regime, notably the rapidly deteriorating economy, worsening real estate troubles, and political scandals involving top officials like Qin Gang and Li Shangfu. For one, it is difficult for the three cases to become hot-button issues without the tacit approval (i.e. non-censorship of content pertaining to those topics) or instigation of the CCP authorities; the propaganda authorities in particular would “prefer left rather than right” and be tolerant of attacks against “reactionaries” and private enterprise regardless of Beijing’s attempts to support the private economy.
Chinese who are lower down in the social hierarchy or more easily manipulated groups like the “little pinks” are susceptible to being swayed and controlled by “patriotic” energies and CCP propaganda. However, the public support for Nongfu reflects a significant portion of the population and represents an indirect rejection of Party-backed “patriotism” and indoctrination.
2. The CCP authorities are wielding a double-edged sword in their embrace of nationalist demagoguery.
By allowing nationalism to run rampant and unchecked, Beijing runs the risk of inadvertently creating a degree of social turmoil akin to the leftist political campaigns in Mao Zedong’s earlier years as leader of the PRC. The tolerance or promotion of nationalistic fervor against the private economy and academia, however, is unlikely to become a second Cultural Revolution because the Xi leadership appears to be hyper-aware of not resurrecting the Mao era. Furthermore, Xi Jinping lacks the “quan wei” necessary to launch and follow through with a campaign on the scale and intensity of the historical Cultural Revolution.
Increased nationalism would likely further alienate foreign investors and governments. This would affect investments flowing into China as foreigners increasingly account for growing political risks in China. Funds could also flow more quickly out from China as foreigners and wealthy Chinese flee the mainland as they increasingly fear and look to escape political persecution.
Hu Xijin calling out the “little pinks” suggests that some in the CCP regime are attempting to rein in nationalistic elements and efforts that appear to go overboard and that will affect the markets. Hu also has a personal interest in the matter because he has investments in Chinese stocks.
Meanwhile, the CAC’s new “Qinglang” actions to clean up the Chinese internet and make the online environment more conducive for businesses suggests that Beijing is attempting to control the negative effects of unleashing nationalism and present itself as a “savior” to private entrepreneurs.
2 PRC rolls out equipment upgrade action plan as property crisis deepens
Equipment upgrade and goods trade-in
March 13
The PRC State Council issued an action plan for promoting equipment upgrades on a large scale and the replacement of consumer goods (推動大規模設備更新和消費品以舊換新行動方案).
The action plan outlines 20 tasks across five major areas of action (implementing equipment upgrades, exchanging old consumer goods for new ones, recycling and reusing old equipment and goods, enhancing standards, and strengthening policy guarantees), and lists the key targeted actions until 2027:
- Investment in equipment in industries such as manufacturing, agriculture, construction, transportation, education, culture and tourism, and healthcare will be increased by more than 25 percent as compared to 2023.
- The equipment in key industries should reach basic energy-saving levels, and the production of “A-level environmental performance” equipment should be significantly increased.
- The popularity of digital R&D design tools in large-scale industrial enterprises and the rate of digitization of key processes should exceed 90 percent and 75 percent respectively.
- The volume of scrapped cars is expected to roughly double in 2024 as compared to 2023, while the volume of second-hand car transactions is expected to grow by 45 percent from a year ago.
- Also, the volume of recycled waste household appliances is estimated to increase by 30 percent in 2024 and the proportion of recycled materials in the resource supply is expected to increase further.
March 14
In responding to journalist questions about the equipment upgrade and replacement action plan, a relevant person in charge from the National Development and Reform Commission said that China’s investment in key areas such as manufacturing and agriculture was estimated at 4.9 trillion yuan in 2023. Based on this estimate, over 5 trillion yuan is forecasted to be created annually as industries and companies upgrade their equipment.
The official added that the upgrading of cars and household appliances in China could generate market opportunities on a trillion-yuan scale.
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Xi Jinping had earlier brought up the issue of upgrading equipment and trading in consumer goods on a large scale during the fourth meeting of the Central Financial and Economic Affairs Commission on Feb. 23.
Xi stressed that accelerating the replacement of products is an important measure in promoting high-quality development. He added that the measure will effectively promote both investment and consumption, with benefits for the present and in the future.
Property sector crisis
PRC authorities messaging
March 9
Ni Hong, the minister of housing and urban-rural development, spoke about the importance of addressing risk in the real estate sector during a press conference, according to state media.
Ni stressed the necessity of adhering to legal and market principles, and added that property firms facing severe debt and operational insolvency should undergo bankruptcy or restructuring where appropriate. He also highlighted the need to rigorously investigate and punish actions that harm the public’s interests and ensure that perpetrators face the consequences of their actions.
March 11
Mainland media The Economic Observer reported that the State-owned Assets Supervision and Administration Commission had, at the end of 2023, internally outlined three “should not” principles for managing risks in state-owned enterprises.
The three principles are:
- Central and state-owned enterprises should not become significant points of risk outbreak.
- Central and state-owned enterprises should not trigger systemic financial risks.
- The risks of central and state-owned enterprises should not be exacerbated when disposing of them.
Vanke
March 11
1. Reuters reported that the PRC State Council is coordinating a support effort for China Vanke, citing sources familiar with the matter. A source said, “Banks to ensure (China Vanke’s) financing, insurers to extend maturities for private debt, (every party) to guarantee the repayments of public bonds.”
2. Bloomberg News reported that the Industrial & Commercial Bank of China and China Construction Bank had not yet signed off on a new HK$4.5 billion offshore loan for Vanke, citing people familiar with the matter. The Bank of China had internally approved its own HK$1.5 billion portion of the loan.
One of the people said that the ICBC and China Construction Bank have asked Vanke to provide sufficient collateral to back the new loan, but Vanke was not willing to do so. The person added that the two state banks would need clearing from the PRC regulators to proceed with the loan without collateral or other forms of credit enhancement.
3. Moody’s withdrew Vanke’s “Baa3” issuer rating and placed all ratings on “review for downgrade” over concerns about the Chinese property developer’s ability to recover its sales and improve its access to funding.
4. The Economic Observer reported that Vanke’s chairman Yu Liang and other senior executives from Shenzhen Metro had traveled to Beijing to negotiate with several insurance companies, including New China Asset, China Taiping Insurance, and Dajia Insurance Group, citing a top insurance industry insider.
The industry insider said that Vanke had expressed to the insurers the hope that they would not exercise their early redemption rights (i.e. unilaterally declare loans due before maturity) and continue to fulfill contracts until the loans mature. The insider added that Vanke would likely default formally if an insurer chooses to exercise early redemption due to the developer’s inability to make repayment, but “nobody wants to fire the first shot.”
March 12
1. Bloomberg reported that Vanke is in talks with banks on a debt swap to put off a bond default, citing people familiar with the matter. The people said that Vanke’s major creditor banks are thinking about a plan to swap bond holdings worth tens of billions of yuan in principal into secured debt. The talks are being coordinated by PRC financial regulators and the Shenzhen local government, and the plan is subject to change.
Bloomberg added that several insurers are looking to protect payments on private debt issued to Vanke and at least three insurance firms based in Beijing have sent executives to the developer’s Shenzhen headquarters to discuss a plan.
Bloomberg further noted that Vanke has tried asking state-backed lenders for an offshore loan but two of those banks have yet to approve the HK$4.5 billion syndicated loan as of the week of March 4.
2. According to mainland media reports, 12 Chinese banks led by the Industrial and Commercial Bank of China are looking to raise about 80 billion yuan to support Vanke in avoiding a bond default. The banks are also reportedly adopting a cautious stance towards Vanke.
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Vanke’s cumulative sales from January to February 2024 decreased by 42 percent to 33.45 billion yuan, according to China Index Academy.
According to mainland media reports, Vanke’s total liabilities amounted to 1.24 trillion yuan and its total assets were 1.65 trillion yuan as of the end of the third quarter of 2023. Vanke’s debt at the time stood at 1.2 trillion yuan, with a debt ratio of 75.28 percent. Fifty percent of Vanke’s assets totaling 814.7 billion yuan are in inventory; the value of Vanke’s inventory (unsold properties) is expected to decrease significantly based on current market valuations.
Vanke’s major shareholder (33.4 percent) is Shenzhen Metro, a company held by the Shenzhen State-owned Assets Supervision and Administration Commission. Shenzhen Metro’s 2023 financial report showed a net profit of only 870 million yuan in 2022, a 70 percent decrease from 2021. Shenzhen Metro also only had 22.96 billion yuan of cash on hand as of the end of 2022.
Country Garden
March 13
Several of Country Garden’s onshore bondholders said that they did not receive payment for approximately 96 million yuan in interest due on March 12.
Our take
1. The information above offer more signs that China’s real estate crisis is deepening.
The State Council’s action plan promoting equipment upgrades and the replacement of goods appears to be part of Beijing’s effort to find growth points to compensate for the property industry’s contribution to the economy. The CCP authorities are likely recognizing the immense difficulty of turning around real estate woes in light of recent industry data and the debt problems of leading developers bubbling to the surface.
Minister of housing and urban-rural development Ni Hong’s March 9 comments about addressing risks in the real estate sector and the need for troubled property developers to undergo bankruptcy or restructuring “where appropriate” is another acknowledgment by the CCP authorities of the severeness of the real estate crisis. Ni’s messaging is also in line with the central government’s delegation of real estate regulation and policies to local governments. As the real estate crisis worsens, Beijing appears to be looking to pass the onus of cleaning up the outcome of its failed policies (“houses are for living in, not speculation,” “three red lines,” etc.) to the localities.
Meanwhile, the CCP authorities are actively coordinating support for China Vanke because they are likely looking to preserve the creditworthiness of state-owned enterprises. Beijing is likely concerned that a Vanke default could impact the image of SOEs and other state-backed real estate firms, resulting in unwanted repercussions and a further worsening of the property crisis.
However, it is doubtful whether Vanke can obtain sufficient financing from state lenders to avoid a default. Vanke currently lacks sufficient assets to post collateral. Also, without that endorsement or support of the Shenzhen State-owned Assets Supervision and Administration Commission, which likely faces financial constraints, state-owned banks could be hesitant to increase their financial risks by lending to the troubled Vanke. Chinese banks in general are already grappling with various financial risks, with loan rates hitting historic lows and the net interest margins for commercial banks dropping to their lowest levels (below the 1.7 percent threshold) in 20 years in the fourth quarter of 2023.
Finally, Country Garden defaulting on its onshore bonds would exacerbate vicious cycles in the real estate industry and other connected sectors. Home prices in China face downward pressures as more major developers default on their debts and face bankruptcy. Debt risks are also set to increase with the devaluation of real estate-related collateral.
2. At a glance, the State Council’s equipment upgrade action plan could partially offset the economic contraction caused by the real estate sector troubles, as well as stimulate domestic demand and enhance manufacturing standards. However, the CCP authorities face challenges in implementing the action plan, and whether equipment upgrades can effectively boost demand and the economy remains in doubt.
For one, the action plan is not a direct stimulus package unlike the 4 trillion yuan investment plan in 2008. Rather, the equipment upgrading and goods replacement is supposed to be “market-driven” according to the action plan, with the government providing fiscal, financial, and tax policies to support it. Also, the over 5 trillion-yuan market that the action plan is forecasted to create annually is highly dependent on whether companies and residents are willing to make upgrades and purchases, and whether financial institutions are willing to extend loans to companies and residents to help them make upgrades and purchases.
Several factors point to a reduced demand for upgrades and trade-in of goods:
i) China’s economy still faces deflationary pressures despite the improved CPI and trade figures for the first two months of the year. China’s PMI and PPI for the same period remain in contraction.
ii) The central bank’s money supply data suggests that companies and residents are still hesitant about investing and consuming. China’s M2 increased 8.7 percent from a year ago in February 2024 to reach a historic high of 299.6 trillion yuan, while the M1 money supply increased just 1.2 percent year-on-year to 66.6 trillion yuan. We previously explained that the disparity between the M2 and M1 money supply indicates that large amounts of funds are idling in the banks.
iii) Chinese enterprises and residents will be disincentivized to upgrade equipment and trade in old consumer goods for new products (which still requires partial payment) with the debt ratios of China’s household, real economy, government, and financial sectors being much higher now as compared to 2008.
For instance, data from the National Institution for Finance and Development’s China Balance Sheet Research Center shows the debt ratio of the real economy sector was 144.9 percent in December 2007 and 287.8 percent in December 2023, while the debt ratio of the household sector was 18.8 percent in December 2007 and 63.5 percent in December 2023.
More alarming than China’s high macro-leverage ratio is the impact of demographic decline in China, which makes it even more difficult for businesses and households to take on more leverage.
iv) The lack of foreign funds flowing into China and funds flowing out will affect the ability of companies and residents to upgrade equipment and trade in old products. Data from the PRC’s State Administration of Foreign Exchange showed that China took in only $33 billion in foreign direct investment in 2023, down 82 percent from 2022. Meanwhile, $68.7 billion flowed out of China from both enterprises and residents in 2023, compared with a net inflow of $76.3 billion in 2022. The current global environment is also conducive to outflows from China, given the current interest yield spread between the U.S. and Chinese 10-year treasuries (-196.4 basis points), as well as the Federal Reserves not cutting rates as quickly as expected due to higher-than-expected inflation in America.
Finally, Beijing is seriously constrained by the systemic deficiencies of the CCP authoritarian dictatorship, including formalism and bureaucratism, as well as various ills such as officials “preferring left rather than right,” corruption, inaction, and so-called “chaotic actions.” Given these deficiencies, the equipment upgrade action plan will likely provide officials with yet another avenue to engage in corruption and lead to another large-scale squandering of resources with little or no utility in improving the regime’s situation, much like the semiconductor “great leap forward.”
