1 Analyzing the removal of a Xinhua special on ‘Xi the Reformer’
July 15
State mouthpiece Xinhua published an over 10,000-character special report titled “Xi Jinping the Reformer” (改革家習近平) on the opening day of the Third Plenum of the 20th Central Committee. The report summarized the direction and course of Xi’s “reforms” since he took office and lauded Xi as a “reformer.” The report also discusses the relationship between Xi’s “reforms” and those of Deng Xiaoping, as well as Xi’s attitude towards reform.
Notable points in the report include:
- Xi is designated as “another outstanding reformer” like Deng, and both are said to share the same mission.
- Xi is quoted as saying, “The easy reforms, those that everyone applauds, have already been completed. The tasty meat has been eaten and what remains are the tough bones.”
- Xi has a consistent commitment to reform.
- Like Deng, Xi’s motivation for reform comes from the expectations of the people.
- Xi has a “lineage of reform.”
- Xi has been a pioneer of reform in all positions that he has served.
- A department leader who is in charge of reform and is familiar with the situation told Xinhua, “Major reform decisions are all made by General Secretary Xi Jinping.” The department leader added that Xi carefully revises and reviews all drafts of significant reform plans himself.
- Xi is clear-headed about the direction of reform and warns that reforms that negate socialism will have serious consequences.
- Xi said, “What cannot be reformed must not be reformed” and reforms must “adhere to the comprehensive leadership of the Party.”
- Overseas commentators described the new era of China’s reforms as “Xi-style reforms” and not a mere “economic transformation.” “Xi-style reforms” also imply adapting Marxism to the new era and the realities of the country, and integrating Marxism with China’s fine traditional culture.
- Xi aims to comprehensively deepen reforms towards the general goal of “improving and developing the socialist system with Chinese characteristics and advancing the modernization of the country’s governance system and capacity.”
- Observers believe that Xi, who is the “designer, practitioner, and leader” of new era reforms, is continuing the socialist market economy pioneered by Deng and is “constantly writing new chapters.”
- Xi is dedicated to achieving Deng’s vision of “common prosperity.”
- Through the comprehensive deepening of reforms, Xi has inherited and promoted Deng’s work, ensuring that China not only continues its economic miracles but also showcases its cultural charm and creates a new form of human civilization.
Xinhua subsequently took down the special report on the same day. This sparked speculation both domestically and internationally. Some common speculation and explanations from observers include:
- The report was withdrawn because it engaged in excessive flattery and Xi was concerned that it would have a negative effect.
- Xi could be taking a leaf out of Mao Zedong’s “anti-rightist” playbook by “luring the snakes out of their holes” (引蛇出洞).
- The withdrawal of the report, which appeared to be engaging in “low-level reddening,” was an act of advanced blackening.
- An irreversible action to oust Xi might have occurred on the first day of the Third Plenum.
- Hong Kong media Sing Tao Daily wrote in an article on July 19 that Xinhua has different versions of the report for internal and external audiences, and the report was intended for an external audience. Sing Tao claimed that the Chinese version of the report being circulated in Hong Kong and Macau and English versions of the report in China and abroad have not been taken down. (At the time of writing, SinoInsider could only locate one English version of the report in a Middle Eastern publication, and the English version on Xinhua appears to have been deleted.)
- Hong Kong media Storm Media published an article on July 14 where it cited a Beijing insider saying that the report was urgently removed at the request of Central Propaganda Department head Li Shulei. The insider added that the problem with the report was that it constantly highlighted Deng Xiaoping and promoted the idea that Xi Jinping was following Deng’s path in continuing the deepening of reforms.
Backdrop
PRC state media published a series of articles praising Xi Jinping’s achievements before and after the Third Plenum. On the opening day of the Third Plenum, Xinhua also released a 40-minute documentary titled “Navigating the New Journey” (領航新旅程) that extolled Xi’s achievements in leading and promoting the comprehensive deepening of reforms.
On July 16, Xinhua published a piece titled, “Carrying the New Era of Reform and Opening Up Till the End — Understanding Xi Jinping’s Path of Reform Through 72 Central Deepening Reform Commission Meetings” (將新時代改革開放進行到底－從72次中央深改委（領導小組）會議中讀懂習近平的改革之道). The piece did not mention Deng at all.
Our take
1. At a glance, the scrubbed Xinhua special report on “Xi the Reformer” appears to be in line with the theme of propaganda promoting Xi Jinping’s achievements around the Third Plenum period. However, a closer look at the report and juxtaposing it with earlier propaganda reveals that the report is not in sync with what Xi wants.
For one, the special report’s political positioning of Xi Jinping and Deng Xiaoping does not conform to that laid out in Xi’s “historical resolution.” In analyzing the “historical resolution,” which was issued in November 2021 at the Sixth Plenum of the 19th Central Committee, we observed that it downplayed the political legacy of Xi’s predecessors, including minimizing the importance of Deng’s “reform and opening up” contribution to the Party’s history and the policy in general (see also here). By downplaying the political legacy of Deng, Xi was attempting to enhance his own political achievements and show that only he has the courage to take “reform and opening up” into so-called “deep water territory” unlike his immediate predecessors who merely continued on Deng’s path. Xi’s effort to distance himself from Deng and his “reform and opening up” was so noticeable that Xi’s factional rivals appeared to criticize him for it though articles containing “advanced blackening” published in Hong Kong media that are known for carrying the messaging of various CCP factions (see here and here).
Despite the political positioning of Xi and Deng being clarified in Xi’s “historical resolution,” the Xinhua special report somehow ended up straying from the official narrative. Instead of setting Xi apart from Deng, the report likened Xi to a reformer “after” Deng, wrote that Xi had “inherited and promoted” Deng’s work, claimed that Xi is committed to achieving Deng’s vision of “common prosperity” (we previously explained the difference between Deng and Xi’s idea of “common prosperity” here), and claimed that Xi is “constantly writing new chapters” in the socialist market economy pioneered by Deng. This makes the report’s positioning of Xi closer to the “advanced blackening” articles in Hong Kong media than that of Xi’s “historical resolution.”
The Xinhua special report also contains another glaring instance of “advanced blackening.” The report emphasizes Xi’s authoritarianism and adherence to ideology using propaganda rhetoric that was at times overblown, notably by observing that “major reform decisions are all made by General Secretary Xi Jinping,” describing Xi’s reforms as “Xi-style reforms” inspired by “Sinicized Marxism,” and quoting Xi as saying that “what cannot be reformed must not be reformed” and reforms must “adhere to the comprehensive leadership of the Party.” This contrasts starkly with Deng’s “pro-Western” and “liberal” effort to embark on “reform and opening up” and establish the “collective leadership” system. The overall effect of the report ends up casting the reforms pursued under Xi as political regression rather than liberalization.
2. We believe that the Xi leadership very likely withdrew the Xinhua special report because it was found to have violated political taboos under Xi’s rule, including engaging in “low-level red” and “advanced blackening.”
We also find the claim by Hong Kong media that propaganda chief and Xi ally Li Shulei had the report “urgently removed” to be plausible. Li would have been busy coordinating the many propaganda activities around the Third Plenum period and would not have the time to scrutinize all reports before they are published. But once the Xinhua special report came to Li’s attention, he would have been able to detect the various problems with it and order that it be taken down given that he is a key figure in shaping Xi’s theoretical framework and establishing his “quan wei.”
We have several theories on how the special report could have been written and published despite the Xi leadership’s tightening control over propaganda and discourse in the regime:
i) Those responsible for drafting and editing of the report could have been guilty of what the CCP describes as “low political awareness” and mistakenly believed that the Party’s theoretical frameworks are consistent and coherent. Therefore, they linked Deng Xiaoping’s “reform and opening up” with Xi Jinping’s “further deepening of reforms” in an effort to show theoretical consistency and praise Xi.
However, we believe this possibility to be low since the authors and editors of such special reports are typically selected for their “high political awareness” and ought to be familiar with Xi’s political positioning since the publication of his “historical resolution.”
ii) The authors of the special report could have an editor who rose up the propaganda ranks during the Jiang Zemin faction’s era of dominance and harbored great dissatisfaction towards Xi Jinping. The editor, acting independently, could have decided to carry out “advanced blackening” against Xi through edits in the final draft of the piece.
iii) Influential “anti-Xi” forces in the regime could have orchestrated the writing and publication of the special report through their remaining links in the CCP propaganda apparatus.
Those “anti-Xi” forces would not care that the report was eventually taken down as long as it was made public. They would have calculated that the report would undermine Xi’s political position if left published, and fuel speculation about the political instability of the Xi leadership if deleted. Also, the publication and deletion of the report would also lend some credibility to rumors circulating during the Third Plenum period that Xi had suffered a stroke.
2 China’s credit woes likely to persist after bank deposit rate cuts
Six major state banks cut rates
July 25
China’s six major state-owned banks — Industrial and Commercial Bank of China, Agricultural Bank of China, Bank of China, China Construction Bank, Bank of Communications, and Postal Savings Bank of China — cut deposit rates by 5 to 20 basis points.
The rate cuts for various deposit items by the six banks were generally consistent:
- The annual interest rate for demand deposits was reduced by 5 basis points.
- The rates for three-month, six-month, and one-year deposits were all reduced by 10 basis points.
- The rates for two-year, three-year, and five-year term deposits were all reduced by 20 basis points.
***
The People’s Bank of China cut rates on July 22, including lowering the seven-day reverse repo rate to 1.7 percent from 1.8 percent, as well as lowering the one-year loan prime rate (LPR) to 3.35 percent from 3.45 percent and the five-year LPR to 3.85 percent from 3.95 percent.
Banks vary rebates to attract mortgage loans
July 26
State-run mainland media National Business Daily reported that Chinese banks are varying their commissions or rebates to intermediaries or developers based on the loan amount after considering performance assessments, significant pressure on loan issuance, and a shrinking demand for mortgages.
National Business Daily learned from industry insiders that bank mortgage loan rebates are phased, with a maximum rebate rate of 0.6 percent of the loan amount. The worse the markets perform the higher rebate, and there is no rebate when the markets are doing well. Insiders add, however, that it is illegal for banks to offer cash rebates to clients.
Zhang Bo, director of 58 Anjuke Research Institute, told National Business Daily that rebates can easily trigger vicious competition, potentially leading to market risks. Additionally, high rebate rates can affect banks’ profit margins, leading to a continuous reduction in net interest margins which is not conducive to long-term bank operations.
National Business Daily said that there are two main reasons for banks offering mortgage loan rebates, including the continuous reduction in the scale of housing loans and declining net interest margins in the banking industry increasing the pressure on lending.
Performance of 72 listed property firms in H1 2024
According to mainland media reports, 72 of 104 A-share listed Chinese real estate companies released their performance forecasts for the first half of 2024. Notable details include:
- Forty-seven of the 72 companies (more than 60 percent) reported a net loss attributable to their respective parent company, with estimated losses of between 27.478 billion yuan to 34.885 billion yuan. Of the 47 companies, nine had losses exceeding 1 billion yuan, including state-owned enterprises Beijing Capital Development Co. Ltd., Financial Street Holding, Overseas Chinese Town Enterprises, and CCCG Real Estate.
- Twenty-five of the 72 companies expect to achieve positive profitability, with a total net profit attributable to their respective parent company of between 9.49 billion yuan to 10.03 billion yuan. Of those 25 companies, the central-owned enterprise Poly Real Estate had 7.508 billion yuan of net profits attributable to its parent company, but saw its net profits decline by 38.57 percent from a year ago. The situation with Poly suggests that the other 24 companies are likely teetering on the edge of profitability, with some making just a few million yuan.
- The overall net profit attributable to the parent company for the 72 companies is expected to be between negative 17.45 billion yuan and negative 25.39 billion yuan.
Our take
1. The six major state-owned Chinese banks took advantage of the central bank’s rate cuts to lower their own rates and ease the pressure on their profit margins. The net interest margins of commercial banks narrowed to a record low of 1.54 percent at the end of March 2024.
The six major state banks adjusted their three-month, six-month, and one-year deposits by 10 basis points, or the same margin that the central bank lowered the 1-year and 5-year LPR. Meanwhile, the six major banks reduced the two-year, three-year, and five-year term deposit rate by 20 basis points, or twice the PBoC’s rate cut. Smaller banks could likely make smaller deposit rate cuts amid intense competition to attract clients. The rate cuts could help commercial banks, many of which are technically operating at a loss, to improve their net interest margins going forward.
2. The PBoC’s rate cuts and the major state bank reduction of deposit rates could make fixed-term deposits less attractive and force out funds to stimulate economic growth. For instance, the daily interest on a fixed-term deposit of 10,000 yuan is now less than 0.5 yuan with the interest rate on five-year term deposits cut to just 1.8 percent.
Central bank data shows that borrowing demand from businesses and consumers is weak and large amounts of cash are kept in bank accounts. The proportion of fixed-term deposits among residents and businesses has been steadily rising from 71.9 percent and 66.9 percent respectively at the end of 2023 to 72.6 percent and 72.1 percent respectively at the end of June 2024.
The PBoC has been trying to boost borrowing demand. In April 2024, the central bank required lending institutions not to offer preferential interest rates in a bid to effectively lower banks’ deposit costs. Beijing also prohibited banks from attracting deposits with high manual interest payments (手工補息) and required the industry to conduct self-inspections and complete rectifications by the end of April. Beijing’s move led to a large amount of physical deposits being shifted into wealth management products; in April, the net increase in the scale of wealth management products exceeded 2.2 trillion yuan and set a recent single-month high.
The central government appears to consider the banking industry’s self-inspection of manual interest payments to be “incomplete and inadequate,” according to a government document that was circulated online. The document noted that the State Council will involve the State Administration of Taxation and the Ministry of Public Security in the rectification of manual interest payments starting Aug. 1, 2024.
We believe that lowering deposit rates is not sufficient to boost growth because China is seeing excess savings due to the sluggish economy, significantly reduced investment returns, and an “asset famine.” It is also unclear how much impact the latest round of deposit rate cuts will have. In a July 25 report, Nomura analysts said that the previous round of deposit rate cuts had an almost negligible effect on financing costs because the new rates did not apply to existing deposits and households transferred funds to accounts with higher interest rates as banks’ asset returns continued to decline.
3. The bursting of the real estate bubble appears to be one of the main reasons for the banking industry’s current predicament. The losses sustained by listed Chinese property developers in the first half of the year are a sign that the real estate debt crisis will expand further. This will in turn lead to more bad debts for banks and the scale of real estate-related loans will continue to shrink.
The CCP authorities have no quick and easy solutions to the real estate industry’s troubles because China’s population crisis and property crisis are linked. The demographic that benefited from the “reform and opening up” period are mainly those born in the 1960s and 1970s. While this group holds most of China’s wealth, they are now in their fifties and sixties and are more inclined to put their money towards promoting their health and wellness rather than splurge on property and other risky investments. In contrast, the younger generation wants to invest and consume, but lacks the wealth to do so while being burdened by heavy debts. This means that there are fewer people as potential homebuyers at present when Beijing needs to revive property sales. While the situation might improve several years down the road as the younger generation inherits the wealth of the older generation, it could be “too little, too late” for a regime that is badly in need of an immediate solution.
