1 Beijing expands trimming of civil servants to counties amid fiscal troubles
The CCP’s Party and state institutional reforms (see here and here) introduced at the 2023 Two Sessions contained several measures aimed at helping the regime with its fiscal shortfall, including trimming the civil service workforce under staffing administration (編製) reform. The “Decision” issued at the Third Plenum of the 20th Central Committee expanded on the earlier staffing administration reform by calling for “promoting the optimization of institutions in counties with small populations,” or the downsizing of staffing administrations in county-level governments.
Recently, mainland media reported that Shanxi Province took the lead in local staffing administration reform after it was carried out at the central level, with other areas following suit. This staffing administration reform is mainly carried out in counties with relatively small permanent populations. Mainland media cited statistics as showing that more than 400 of the over 2,000 county-level administrations have populations of below 200,000, and there are more than 80 pocket-sized counties (including cities) with populations below 50,000.
Mainland media said that the main reasons for downsizing staffing administrations in counties with small permanent populations include:
1. Civil servants are becoming redundant as an increasing number of county towns see their population shrink. The phenomenon of overstaffing has become severe, necessitating optimization and downsizing.
2. The growing number of civil servants places an unbearable burden on the nation’s finances. Reports comparing data from the national housing provident fund’s annual reports in 2020 and 2023 show:
i) In 2020, there were 726,100 state agencies and institutions. In 2023, there were just 720,500 state agencies and institutions, a reduction of 5,600 over three years.
ii) In 2020, there were 45.1336 million civil servants being supported by the state’s finances. In 2023, the number increased by 3.2254 million to 48.359 million civil servants.
iii) In 2020, there were 215,700 state-owned enterprises. In 2023, SOEs increased by 55,000 to 271,200.
iv) In 2020, there were 29.0738 million SOE personnel. In 2023, the number increased by 1.4759 million to 30.5497 million.
v) Personnel that can be broadly defined as “within the system” (i.e. state agencies and SOEs) increased by 4.7013 million over the past three years.
Staffing administration reforms
Per the Party and state institutional reforms introduced in 2023:
- Central Party and state institutions will downsize their staff by five percent.
- Staffing resource reductions at local Party and state institutions will be left to the discretion of provincial level (including autonomous regions and directly administered municipalities) Party Committees based on actual conditions.
- County and township level governments do not have staff resource reduction requirements.
Our take
1. The CCP’s “optimization of institutions in counties with small populations” reflects the increasing severity of the authorities’ fiscal shortages and China’s population crisis.
i) The Party and state institutional reforms rolled out in March 2023 made modest proposals (see subsection above) on trimming the civil service at the central and provincial level, and made no requirements on staffing reductions in county and township level governments. At the time, Beijing could have considered that local governments should exercise greater discretion in making staffing adjustments based on their respective fiscal situations and that county and township governments tend to be busy and understaffed. The expansion of civil service personnel layoffs at the county level after the Third Plenum, however, suggests that the fiscal situation of local governments has steadily worsened over the past year and Beijing has no choice but to make staffing reduction requirements in counties with smaller populations first to ease their financial burden.
Mainland media had called attention to the financial difficulties of smaller county-level administrations as early as May 2021. Mainland media noted that grassroots government operations in some parts of western China were affected due to delayed payment of wages and bonuses to town or village-level cadres. Also, population outflows in counties are more serious in areas with smaller populations and less developed economies, with an unnamed western county having lost 52 percent of its population. Despite the population decline, local governments in counties with small populations are still required to maintain a full Party-state administrative system, placing immense financial pressure on them. Mainland media further reported that the bulk of the fiscal expenditure of Foping County in Shaanxi Province was spent on civil servant wages.
ii) The CCP authorities’ fiscal problems are evident from the drop in revenue and expansion of the deficit in the first six months of 2024. The declines in several main tax revenue sources also suggest that China’s economy shrunk rather than grew in the first half of the year.
The domestic value-added tax, corporate income tax, and personal income tax are key indicators of the circulation of value-added goods, corporate profits, and individual income. How much of those taxes the CCP authorities can collect reflects the actual health of the economy. However, all three categories of taxes saw declines in the first half of the year, with domestic value-added tax (accounting for 37.6 percent of the national tax revenue) decreasing by 5.6 percent year-on-year, corporate income tax (27 percent of the national tax revenue) decreasing by 5.5 percent year-on-year, and personal income tax (7.8 percent of national tax revenue) decreasing by 5.7 percent year-on-year. The CCP’s official tax revenue figures are perhaps one of its more reliable pieces of data given that the authorities are known to over-collect taxes, and the declines in those tax revenue call into question the official growth rate of over 5 percent.
iii) In addition to “optimizing” staffing administrations, the CCP is also attempting to address economic problems stemming from population decline through the promotion of “new urbanization.”
For instance, item 20 in the Third Plenum’s “Decision” proposes:
- Building a benign interactive mechanism for industrial upgrading, population agglomeration, and urban development.
- Implementing a system where basic public services are provided based on household registration at the place of residence. Promote equal rights for eligible rural migrant populations in terms of social insurance, housing security, and compulsory education for their children so that they enjoy the same rights as the local registered population, thereby accelerating the urbanization of rural migrants.
- Ensuring the legitimate land rights of farmers who settle in cities, including legally protecting their land contracting rights, residential land use rights, and collective income distribution rights, and exploring voluntary compensated exit methods.
The above measures align with our analysis back in May 2020 of the CCP’s crisis response strategy:
- The CCP will carry out so-called “industrial layout optimization” (分工佈局) for technology industries like 5G, artificial intelligence, Internet of Things, Industry of Internet, big data, cloud services, new energy vehicles, biotechnology, etc.
- The CCP will strive to ensure the economic development of coastal areas and improve on existing industrial chains.
- The CCP will prioritize and invest in basic research and the development of core technologies.
- The CCP will likely look to liberalize the household registration system to:
- Attract people with ability and wealth to medium- to large-sized cities.
- Resolves labor shortage problems brought about by very low population growth.
- Drive the development of areas and cities neighboring first-tier cities in China.
- Facilitate labor and capital needs for “industrial layout optimization.”
- Bring purchasing power to medium- to large-sized cities.
- Prop up property prices in medium- to large-sized cities.
- The CCP could consolidate rural agricultural land through “shareholding” policies and promote intensive farming to increase food production.
2. We believe that the CCP’s effort at civil service staffing reform will see limited success at best and may even result in new problems given the drawbacks of the CCP authoritarian system, deeply ingrained bureaucratic habits, and Party culture.
The CCP authorities have proposed and attempted to streamline its bureaucracy in the past, but those efforts often led to even more bloated bureaucratic practices. Per mainland media figures listed above, while there were 5,600 fewer state agencies and institutions in 2023 compared to 2020, the number of civil servants increased by over 3 million and the number of SOE employees went up by nearly 1.5 million. This suggests that while institutional reforms led to a reduction of organizations, the personnel were “redistributed” to other departments or lower-level administrations, resulting in an increase in staff. We previously analyzed the case in Hequ County in Shanxi Province where there was a problem with the “unreasonable” ratio of the local population to “financial support personnel” (財政供養人員, i.e. workers who draw a salary from the government) and a growth in the number of such personnel even after organizations and staff were supposedly trimmed.
To maintain a large number of “financial support personnel” on the payroll, the local authorities would have to step up taxation efforts and extract more money from businesses and the public. The Third Plenum “Decision” contains several items that could potentially be abused by local authorities:
- Deepen tax collection and administration reform.
- Promote price reforms in water, energy, and transportation. Optimize the tiered pricing system for water, electricity, and gas for residents, and improve the pricing mechanism for refined oil products.
- Increase local financial autonomy, expand local tax sources, and appropriately expand local tax administration authority.
- Study the merger of the urban maintenance and construction tax, education surcharge, and local education surcharge into a local surcharge tax. Authorize local governments to set specific applicable tax rates within certain limits.
- Standardize non-tax revenue management. Appropriately delegate some non-tax revenue management authority to local governments for differentiated management based on local conditions.
Should local governments creatively interpret the above items, this would lead to price increases for energy, transportation, and utilities, as well as expanded discretion for local governments to levy fines and increase taxation. The result is increased business costs, reduced consumer spending capacity, and more difficulty for China’s economic recovery.
2 CCP continues walking a diplomatic tightrope as pressure on PRC grows
Recent key PRC diplomatic activities
The PRC embarked on a range of diplomatic endeavors after the Third Plenum of the 20th Central Committee. Notable developments by country or region include:
Ukraine
July 24
Ukraine’s foreign minister Dmytro Kuleba met with PRC foreign minister Wang Yi in Guangzhou.
Kuleba said in his opening remarks, “I am convinced that a just peace in Ukraine is in China’s strategic interests, and China’s role as a global force for peace is important.”
Talking about Kuleba’s meeting with Wang in an evening video statement, Ukrainian president Volodymyr Zelensky said, “there is a clear signal that China supports Ukraine’s territorial integrity and sovereignty” and “it was also confirmed … that China will not supply weapons to Russia.”
According to PRC state media reports, Wang Yi said the PRC believes that “the resolution of all conflicts ultimately requires returning to the negotiation table” and “all disputes must be resolved through political means.” He added that both Ukraine and Russia have shown willingness for negotiations. Wang also noted that the “risk of escalation and spillover remain” with the Ukraine crisis entering its third year.
PRC state media also reported Kuleba as saying that Ukraine is “willing and prepared to conduct dialogue and negotiations” with Russia. However, Western media reported Kuleba as telling Wang that Ukraine is willing to negotiate with Russia only when Russia is ready to negotiate in good faith.
July 30
Ukraine said it invited Wang Yi to visit and hold bilateral talks. According to Ukraine, the PRC has expressed interest in visiting.
Middle East
July 23
Fourteen Palestinian factions, including main rivals Fatah and Hamas, signed a declaration on “ending division and strengthening Palestinian national unity” in Beijing.
The Beijing Declaration backs the formation of a unified government for the Gaza Strip and the Israeli-occupied West Bank that all parties can agree on. However, the statement lacks details about how such a government would be formed and when.
India
July 25
On the sidelines of ASEAN meetings in Laos, Indian foreign minister Subrahmanyam Jaishankar and Wang Yi agreed to work as soon as possible to resolve border issues.
An Indian statement said the two foreign ministers “agreed on the need to work with purpose and urgency to achieve complete disengagement at the earliest.”
A PRC foreign ministry statement had Wang saying that both sides should “step up dialogue and communication, increase understanding and mutual trust, properly handle differences, and develop mutually beneficial cooperation” amid the “current complex international landscape and daunting global challenges.” Also, both sides agreed to “make concerted efforts to maintain peace and tranquility in the border areas, and work for new progress in consultations on border affairs.”
The Philippines
July 21
The Philippines and the PRC reached an “understanding on the provisional arrangement” for resupply missions to the BRP Sierra Madre on the Second Thomas Shoal, according to Manila’s foreign ministry.
The Department of Foreign Affairs said, “Both sides continue to recognize the need to de-escalate the situation in the South China Sea and manage differences through dialogue and consultation and agree that the agreement will not prejudice each other’s positions in the South China Sea.” The PRC foreign ministry confirmed the “temporary arrangement” between the two countries.
July 22
The PRC foreign ministry stated Beijing’s “principled position” on the situation at the Second Thomas Shoal, namely:
- The PRC continues to demand that the Philippines tow away the BRP Sierra Madre and restore the state at the Second Thomas Shoal of “hosting no personnel or facilities.”
- The PRC is willing to allow the Philippines to send living necessities to the personnel living on the BRP Sierra Madre if the latter informs China in advance and after on-site verification is conducted. The PRC will monitor the entire resupply process.
- The PRC “absolutely will not accept” and will “resolutely stop” efforts by the Philippines to send large amounts of construction materials to the BRP Sierra Madre and attempts to build fixed facilities or permanent outposts.
July 27
The Philippines completed an unimpeded resupply mission to the BRP Sierra Madre, according to the Department of Foreign Affairs. The DFA added that Chinese vessels kept a reasonable distance with no risk of collision, and that the Philippines gave no prior notification to China and China made no attempt to inspect the vessels.
The PRC coast guard said it supervised the entire process. A day later, the DFA said that the PRC had “mischaracterized” what happened during the resupply mission.
Blinken-Wang Yi meeting
July 27
U.S. Secretary of State Antony Blinken and Wang Yi met on the sidelines of the ASEAN regional summit in Laos. According to various news reports, the meeting went on for one hour and twenty minutes and the two discussed U.S.-China relations, the situation in the Taiwan Strait, the situation with the Philippines and the South China Sea, and the PRC’s support of Russia’s war effort in Ukraine.
A senior U.S. State Department official told reporters that Blinken spoke extensively with Wang about Taiwan and Beijing’s recent “provocative” actions towards the island. The official added, “In every discussion, Taiwan is the issue that they care most about. They see it as … an internal China issue.”
According to a PRC foreign ministry readout of the meeting, Wang told Blinken that the U.S. “has not stopped, but rather doubled down on its containment and suppression of China” despite engagement efforts over the past three months.
Recent ‘counter China’ developments
July 24
Speaking at a seminar at the American Enterprise Institute, U.S. Assistant Secretary of State for East Asian and Pacific Affairs Daniel Kritenbrink said that Secretary Blinken’s 10-day tour of six countries in Asia (Laos, Vietnam, Japan, the Philippines, Singapore, Mongolia) starting on July 25 is intended to signal that President Joe Biden and his endorsed successor Vice President Kamala Harris are “all in” on Asia.
Mira Rapp-Hooper, senior director for East Asia at the White House National Security Council, said that the Biden administration hopes that the region’s minilateral groups — such as the Quad, the U.S.-Japan-South Korea group, and the U.S.-Japan-Philippines Groups — will interact with each other to defend the rules-based international order. She said, “It is essentially the creation of a new regional architecture that helps to reinforce the Indo-Pacific against all manner of challenges, whether they’re coming from the PRC, the DPRK, climate change, or any number of other threats and challenges.”
Rapp-Hooper added, “What we are looking to do across the board … is to bolster our Philippine ally’s capabilities and abilities to continue to operate lawfully in its waters and just stand up to the types of challenges that it has faced in recent months.” Ely Ratner, the Assistant Secretary of Defense for Indo-Pacific Security Affairs, said the U.S. was “on track to engage in some unprecedented support for the modernization of the … armed forces of the Philippines.”
July 25
Speaking on the CSIS’s “Pekinology” podcast, U.S. Ambassador to China Nicholas Burns said, “the actual policy of China against the United States, it’s very aggressive, it’s confrontational in many ways, it’s very competitive, and that’s why we are where we are in this relationship.”
July 28
The U.S. upgraded the U.S. Forces Japan to a joint force headquarters with expanded missions and operational responsibilities to meet challenges posed by the evolving security environment.
In a statement on “2+2” talks in Tokyo between U.S. Secretary of State Antony Blinken and Secretary of Defence Lloyd Austin and their respective Japanese counterparts, Yoko Kamikawa and Minoru Kihara, the ministers concurred that the PRC’s “foreign policy seeks to reshape the international order for its own benefit at the expense of others.”
July 30
U.S. Deputy Secretary of State Kurt Campbell told a hearing of the Senate Foreign Relations Committee that competition with China was the “defining geopolitical challenge confronting modern American diplomacy” and the U.S. Navy and Air Force have to “step up” their game in the Indo-Pacific.
Campbell said, “We need to do more, and we have to contest Chinese actions, not only in terms of their forward basing strategy, but their desire to go after Africa’s rare earths that will be critical for our industrial and technological capabilities.
Campbell also said the difference in shipbuilding between the PRC and the U.S. was “deeply concerning” and the U.S. has to “do better” in this area or “we will not be the great naval power that we need to be for the 21st century.”
July 29 – July 31
Taiwan hosted the Inter-Parliamentary Alliance on China (IPAC) conference in Taipei. The conference was attended by 48 lawmakers from 24 countries and Taiwan president William Lai was invited to deliver an opening address.
In his speech, Lai said that the PRC falsely linked UN General Assembly Resolution 2758 (recognizing the PRC as China’s government and replacing the Republic of China in the United Nations) with its “one China principle” to restrict Taiwan’s international participation and “legitimize” the use of force against Taiwan. IPAC members later agreed to pass resolutions in their home parliaments to reject Beijing’s distortion of international law regarding Taiwan’s status (“2758 Initiative” or “IPAC Model Resolution on 2758”) .
Before the conference, lawmakers from at least six countries said that PRC diplomats attempted to pressure them into not attending. IPAC executive director Luke de Pulford told The Guardian that Beijing only targeted countries “where they thought they could bully them.”
Our take
1. The CCP’s diplomatic push and influence operations post-Third Plenum are consistent with its foreign policy agenda and “survival-dominance” dynamic. On the one hand, the PRC demonstrates dominance by maintaining a “hardline” stance on topics of key interest like Taiwan and the “sovereignty” of its claimed territory in the South China Sea, as well as bullying countries into not partaking in “anti-CCP” initiatives like the IPAC conference in Taipei. On the other hand, the PRC shows its survival instinct and pragmatic edge by “relenting” somewhat on the Philippine warship resupply issue, agreeing to “urgently” address the border issue with India, and acting the peace envoy with Ukraine and Palestinian factions.
The CCP’s attempt to broker peace should not be confused with a genuine change of heart by the regime. For one, the so-called Beijing Declaration is short on concrete steps on how the unified government for the Gaza Strip and the Israeli-occupied West Bank would be formed (the CCP does, however, have an interest in brokering peace in the Middle East to resolve shipping problems stemming from that crisis that are affecting China’s trade and growth). And despite Wang Yi’s reported assurances that the PRC supports Ukraine’s territorial integrity and sovereignty in his meeting with Dmytro Kuleba, there is no indication that Beijing will alter its stance on its “no limits” partnership with Russia or the Russia-Ukraine war (we previously explained the strategic importance of PRC-Russia ties here). The performative rather than substantive nature of the PRC’s recent diplomatic activities suggests that it is merely advancing the creation of the “equal and orderly multipolar world” to buy the regime some breathing space amid economic decline in China and the increasingly hostile international environment. The promotion of “multilateralism” also helps the CCP lay the groundwork to fulfill its hegemonic ambitions in the future. As the U.S. and Japan correctly pointed out, the PRC’s “foreign policy seeks to reshape the international order for its own benefit at the expense of others.”
Meanwhile, practical geopolitical calculations appear to be a factor behind Beijing’s effort to lower tensions with India and the Philippines. The Xi Jinping leadership could have assessed that Sino-U.S. tensions would likely increase regardless of the outcome of the U.S. presidential election in November as both parties in Washington prioritize safeguarding national security and interests. The Xi leadership could have also weighed that America would boost efforts by China’s neighbors to counter the CCP, something that U.S. officials at the recent AEI forum have hinted at with regard to the Philippines and its operations in the South China Sea. Therefore, the Xi leadership could have decided to take the initiative to lower tensions with India and the Philippines first to reduce the PRC’s geopolitical risks and the probability of “accidents” occurring that could force the regime into an unwanted conflict, as well as more credibly play the victim of U.S.”containment and suppression” in its propaganda.
Geopolitical factors aside, Beijing’s non-harassment of the Philippines’ resupply missions to the BRP Sierra Madre could have partly been the outcome of a quid pro quo. On July 22, Philippine president Ferdinand Marcos Jr. ordered an immediate ban on widespread and mostly Chinese-run online gambling operations, a move that later drew rare praise from the CCP authorities. The Xi leadership has targeted overseas online gambling operations because they serve as a channel for funds to flow out from China.
2. The U.S. and its allies are unlikely to take the foot off the gas in countering the CCP after the latter’s recent diplomatic moves. If the remarks by Biden administration officials are anything to go by, the U.S. and its allies are preparing to get tougher on the PRC as they seek to pressure Beijing to drop its support of Russia and back away from acts of aggression against Taiwan and in the South China Sea.
While some of the reasons for the U.S. getting tough on China will likely change under a second Trump administration, the general trend of the international environment becoming increasingly hostile to the PRC will persist. In particular, the international community could continually improve Taiwan’s standing on the world stage, a move that the CCP will view as a threat to its legitimacy and increase its dilemmas.
