1 Beijing responds to economic pains with propaganda and censorship
Beijing focuses on economic work and propaganda
July 26
The CCP Central Committee held a symposium at Zhongnanhai with non-Party members to discuss the current economic situation in China and gather opinions and suggestions regarding economic work for the second half of 2024.
Per state media reports, Xi Jinping presided over the symposium and PRC premier Li Qiang laid out the situation with economic work in the first half of the year and outlined considerations for the second half. Non-Party attendees expressed “full agreement” with the Central Committee’s analysis of the current economic situation and its planning considerations for the second half of 2024, as well as offered opinions and suggestions on economic issues.
In a speech at the symposium, Xi said that his leadership successfully handled risks and challenges in the first half of the year despite complex domestic and international situations, and that the economy continued to improve. He added that the current difficulties and problems facing China’s economic development are “completely manageable.” Xi also called for “firm confidence in development, strategic resolve, and proactive responses to problems and challenges,” and advocated the promotion of a positive narrative about China’s economic prospects (“sing about the bright future of China’s economy” 唱響中國經濟光明論).
Xi said that he hoped for three things from non-Party members:
1) Deeply study and implement the spirit of the Third Plenum of the 20th Central Committee, and turn the Central Committee’s decisions into the common will and conscious actions of all sectors of society.
2) Continuously strengthen the common ideology and political foundation of the united front, align thoughts and understanding with the Central Committee’s analysis and judgments of the economic situation, and correctly address issues in reform and development.
3) Continue to contribute to achieving economic and social development goals, and conduct in-depth research to provide references for the Central Committee’s scientific decision-making.
July 30
Xi Jinping presided over a meeting of the Politburo, according to state media. The meeting analyzed and studied the current economic situation, arranged economic work for the second half of 2024, and reviewed regulations on “rectifying formalism and reducing burdens at the grassroots level” (整治形式主義為基層減負若干規定).
The meeting praised the Xi leadership’s achievements this year, noting that “the economy has been generally stable, making progress while maintaining stability and continuing the trend of improvement,” and “the overall social situation remains stable.”
In addressing the issues facing China, the meeting said that the adverse effects of changes in the external environment have increased, domestic effective demand is insufficient, the economy shows signs of divergence, there are still many risks in key areas, and there are growing pains in the transition between old and new growth drivers. The meeting called for “enhancing risk awareness and bottom-line thinking” and “proactive responses,” as well as “maintaining strategic resolve, firm development confidence, and promoting a positive narrative about China’s economic prospects.”
The meeting reiterated the main economic policies decided at the Third Plenum and also called for:
- Preventing and correcting the use of administrative and penal means to intervene in economic disputes in some regions.
- Focusing on boosting consumption to expand domestic demand.
- Strengthening industry self-discipline to prevent vicious “involution-style” competition.
- Tackling the chronic issues of formalism and bureaucratism with significant efforts.
- Effectively freeing the grassroots from the constraints of formalism and bureaucratism.
State Council calls for implementation of Third Plenum Decision
July 31 to Aug. 3
The PRC State Council issued several documents calling for the implementation of the policies and measures introduced at the Third Plenum:
- “Five-year Action Plan for the Deep Implementation of People-centered New Urbanization Strategy” (深入實施以人為本的新型城鎮化戰略五年行動計劃)
- “Guiding Opinion on Improving the Long-term Mechanism for Basic Medical Insurance Participation” (關於健全基本醫療保險參保長效機制的指導意見)
- “Work Plan for Accelerating the Establishment of a Dual Control System for Carbon Emissions” (加速建構碳排放雙控制度體系工作方案)
- “Opinion on Promoting High-quality Development of Service Consumption” (關於促進服務消費高品質發展的意見)
Information censorship and restriction
July 28
Bloomberg News reported that the PRC will stop publishing daily data on northbound flows into individual stocks starting from Aug. 18, 2024, and instead make the data available only quarterly. The only daily data released by the exchanges from that date will be the total turnover and the number of trades made in stocks and exchange-traded funds through the Hong Kong links, as well as the turnover of the 10 most active securities. Meanwhile, data on the holdings of global investors in individual stocks will be published on the fifth trading day of each quarter.
Bloomberg added that overseas money managers offloaded about 30 billion yuan of mainland shares between July 1 and July 26, marking the biggest monthly outflow in the past 10 months.
July 29
Yang Jianwen, deputy director of the Central Cyberspace Affairs Commission and Cyberspace Administration of China (CAC), said at a press conference that the CAC had over the past year cleared and intercepted more than 57.45 million pieces of illegal and irregular information, handled over 7.81 million accounts and groups, and shut down or removed over 4,800 websites and platforms.
Zheng Li, the Sichuan provincial propaganda department head, said at the same press conference that Sichuan Province has since the start of 2024 handled over 3,400 reports of infringements involving enterprises, processed more than 2,100 pieces of information, closed 36 social media accounts, and solved 19 “internet water army” cases.
China shows more signs of economic recession
July 24
China Index Academy’s judicial auction database published the following data for the first half of 2024:
- Residential properties listed for judicial auction increased by 3.2 percent year-on-year to 184,000.
- The number of properties auctioned off increased by 8.3 percent year-on-year to 53,000.
- The auction clearance rate increased by 1.3 percent year-on-year to 28.6 percent.
- The average auction transaction price decreased by 6.7 percent year-on-year to 9,084 yuan per square meter.
- The discount rate on auction transactions decreased by 5.9 percent year-on-year to 76.9 percent.
July 31
The National Bureau of Statistics announced China’s manufacturing purchasing managers’ index (PMI) data for July. The PMI stood at 49.4 in July, down from 49.5 in June. This meant that China’s PMI has been in the contraction zone for all months in the year so far with the exception of March and April.
Four of the five sub-indices that make up the manufacturing PMI were in the contraction zone:
- Production: 50.1
- New orders: 49.3
- Raw materials inventory: 47.8
- Employment: 48.3
- Supplier delivery times: 49.3
Other PMI indices also showed contraction:
- New export orders: 47.8
- Imports: 47.0
- Purchasing volume: 48.8
- Main raw material purchase prices: 49.9
- Factory gate prices: 46.3
- Finished product inventory: 47.8
- Orders on hand: 45.3
Aug. 1
1. China Index Academy’s one hundred cities price index report for July noted that the average price of second-hand residential properties in the cities that it tracked had declined by 6.58 percent year-on-year and dropped 0.74 percent month-on-month (reflecting 27th month of consecutive month-on-month declines) to 14,653 yuan per square meter. Also, the theme of homeowners “reducing prices to increase sales” (以價換量) persists, particularly with increasing second-hand housing transactions in key cities.
The report also noted that the average price of new homes in the one hundred cities was 16,443 yuan per square meter, an increase of 1.64 percent year-on-year and 0.13 percent month-on-month. The structural month-on-month increase in the price of new homes was driven by introducing high-quality improvement projects in some cities.
2. Mainland media reported that several cities, including Zhengzhou, Shenyang, and Ningde, no longer implement new home sales price guidance and have effectively removed price caps. Also, cities such as Yangjiang, Zhuhai, and Wuhu are optimizing their price cap policies, such as shortening the interval for adjusting record prices and eliminating floor price differences.
Previously, several cities had issued housing “price limit orders” (限跌令) starting from 2021 stipulating that the sales price of new homes cannot be lower than 85 percent of the recorded price. At the same time, many projects faced complaints from homeowners due to price reductions and there were heated discussions online about the disruption of market order.
Aug. 2
Bloomberg reported that the PRC authorities had essentially rejected a proposal by the International Monetary Fund to use central government funds to complete unfinished housing.
In an annual review of China’s economy, the IMF urged the PRC to deploy “one-off” fiscal resources to finish and deliver pre-sold properties or compensate homebuyers. The IMF put the cost of doing so at about 5.5 percent of the GDP over four years. Bloomberg calculated that this would amount to nearly $1 trillion based on China’s GDP in 2023.
However, Zhang Zhengxin, the IMF’s executive director for China, said, “We believe that we should continue to apply market-based and rule-of-law principles in completing and delivering these units. It would be inappropriate for the central government to directly provide fiscal support, as it could lead to expectation of future government bail-out and therefore moral hazards.”
2. Reuters reported that the “protracted downturn in the property market” and “high levels of job insecurity” are impacting China’s fragile recovery and the effects of its slowdown can be felt globally.
Reuters also noted that the PRC authorities’ “stimulus measures have so far failed to boost consumption” and the “overleveraged property market has made consumers less likely to spend.”
Quincy Krosby, chief global strategist for LPL Financial, told Reuters, “There is a deep concern that Beijing is not introducing the kind of stimulus that helps broaden the economic base.”
Aug. 5
Mainland media reported that the throughput of foreign trade cargo at Chinese ports dropped by 9.6 percent month-on-month in July and fell by 1.5 percent year-on-year. Mainland media added that this indicates a downward risk for exports.
Aug. 8
The PRC General Administration of Customs released China’s trade data for July (in U.S. dollars):
- Exports increased by 7.0 percent in July from a year ago, slower than the 8.6 percent rise in June and lower than forecasts of a 9.7 percent increase. China’s exports also fell by 9.7 percent compared to the same period in 2022.
- Imports grew by 7.2 percent in July from a year earlier, reversing a 2.3 percent drop in June and beating analysts’ expectations of a 3.5 percent increase.
Our take
1. China’s latest official data and other developments indicate that the economy is worsening despite the CCP authorities’ claims of continued improvement.
i) Various publicly available real estate data shows that the property sector, which has arguably the most profound impact on China’s economy and financial system presently, has not improved and is instead deteriorating.
While China Index Academy’s report shows that the prices of new homes have increased, this is only a structural rise and does not represent an overall recovery in real estate prices on the whole. Concurrently, the prices of second-hand homes continue to fall significantly and the number of property transactions through judicial auctions is increasing (with transaction prices falling and discount rates widening), which reflects an expanding trend of loan defaults and the continuous depression of home prices.
The lifting of price caps on new homes in several cities, including provincial capitals, suggests that housing prices will keep falling in the coming days. Dropping home prices will in turn worsen the property sector crisis and perpetuate vicious cycles of financial risks.
Meanwhile, the IMF’s proposal that the PRC central government spend massive funds to complete unfinished housing highlights the severity of the real estate sector crisis. The PRC authorities’ response to the plan also suggests that they likely do not have the funds to foot the bill for unfinished housing or come up with adequate solutions to save the real estate sector.
ii) Exports, the sole engine supporting China’s economy, appear to be in trouble. China’s July manufacturing PMI in the contraction zone and the significant decline in the throughput of foreign trade cargo at Chinese ports in the same month hint at shrinking exports. Additionally, the recent market selloff caused by Japan’s interest rate hike could lead to a weakening of global demand and further exacerbate China’s export woes.
iii) Xi Jinping’s speeches at the symposium with non-Party members and the Politburo meeting on July 30 obliquely reflect China’s pessimistic economic situation.
Xi’s remarks suggest that the CCP authorities are attempting to signal that they have the economic situation under control (“completely manageable”) and believe that the way out of the crisis is for constituents to “unite” under Party Central’s “analysis and judgments.” However, Beijing’s insistence on promoting a positive narrative about China’s economic prospects also indicates that the authorities’ “analysis and judgments” lack persuasiveness and the authorities are struggling to due with “involution” and other problems. Further, the Xi leadership appears to be very concerned about the non-alignment of public perceptions of the economy (including that of experts and scholars) with the Party’s narrative and that the pessimism about China’s economic prospects will be hard to shake off despite the propaganda.
Beijing’s focus on economic propaganda is itself a sign that China’s economy is in serious trouble. The more the CCP attempts to promote or cover up something, the more likely that problems in that area are particularly severe. The CCP is also prone to admitting “minor” problems and mistakes in areas where there is serious concern in the hopes of obscuring major issues.
2. The policies and measures rolled out at the Third Plenum of the 20th Central Committee are not likely to be implemented over the short term despite the State Council’s quick issuing of documents regarding their implementation. This means that the Xi leadership will not be able to rapidly and effectively address any of the pressing issues that the Third Plenum Decision is intended to resolve, at least for some time.
CCP leaders have long struggled with formalism and bureaucratism (something acknowledged in the July 30 Politburo meeting) and the Xi leadership is no exception. For instance, the Xi leadership’s proposal of a “unified national market” to break “local protectionism and market segmentation” was first approved as a concept by the Central Comprehensive Deepening Reform Commission in December 2021 and the State Council issued an opinion in April 2022 calling for the acceleration of its construction. However, the Xi leadership was still calling for the establishment of a “unified national market” in the Third Plenum Decision. This suggests that the “unified national market” is currently largely a paper construct that exists in official documents and “research,” but remains far from being implemented despite Beijing’s exhortations. A similar fate likely awaits many of the items in the Decision.
The implementation of the Decision is likely also to be sabotaged to a degree by local officials, who tend to prioritize their interests and exploit loopholes when implementing central policies. For example, when the central government proposes a semiconductor “great leap forward” or sets targets for the “green” sector (i.e. electric vehicles, solar panels, and lithium batteries), local governments will scramble to develop the related industries and seek central government incentives and funding support. This leads to the unregulated and skewed growth of domestic enterprises, which in turn results in vicious competition and internal friction with only the most competitive large enterprises able to thrive and produce excess capacity. Local governments also engage in protectionism to shore up local enterprises against losses or closure, which in turn allows the local authorities to avoid unemployment issues, social instability, a loss of tax revenue, and the tarnishing of their political “achievements.” The fiscal and taxation system reforms proposed at the Third Plenum are partly intended to correct this systemic flaw. However, local governments likely lack the capacity to make adjustments.
Finally, the Third Plenum being delayed by nearly a year means that the policies and measures in the Decision will have little impact on China’s economy this year even if some of them have begun to be implemented.
3. The CCP authorities are attempting to cover up China’s economic deterioration through censoring and restricting information, as well as the promotion of propaganda. These moves, however, are likely to backfire and could potentially see economic problems bleed into the political sphere.
Beijing has been trying to boost optimism about China’s economic prospects since doing away with “zero-COVID” in early 2023. Notably, state media urged the Chinese people to “vigorously boost [their] confidence” in “promoting the overall improvement of the economy,” and noted that “confidence is power, and confidence is more important than gold.” Concurrently, the Ministry of State Security and the Cyberspace Administration of China have intimidated people and cracked down on analyses and interpretations that are “pessimistic about China’s economy” since the end of 2023, while the NBS has not reported or “massaged” economic data to cover up China’s economic deterioration. Yet the public and investors’ confidence and optimism have not improved despite the intense information control and more than a year of propaganda about China’s “excellent situation.”
Meanwhile, the CCP’s misleading propaganda and skewed data would inevitably affect policy-making by various departments, local governments, and state-linked financial institutions. The misallocation of resources and pursuit of incorrect strategies based on CCP propaganda and data would lead to counterproductive results and even tragedy. We noted in an earlier newsletter how China International Capital Corporation’s prediction of economic trends for 2023 turned out to be mostly incorrect and one of their female employees appeared to have committed suicide after making a bad bet based on the company’s assessment. Also, mainland publicly offered funds collectively lost about 434.8 billion in 2023, while seven retirement mutual funds announced the termination of fund contracts and the liquidation of fund assets (developments indicating investment losses) since the start of 2024.
2 Shandong provincial gov’t conducts mass public staffing changes
On July 30, the Shandong provincial department of human resources and social security, office of the provincial institution staffing administration Party Committee, and eight other provincial departments jointly issued an Opinion on handling issues related to the transformation of public institutions in the province into enterprises (關於省立事業單位轉制為企業有關問題的處理意見).
The Opinion outlined arrangements for the transition of provincial and non-provincial based public institutions in Shandong into enterprises, including personnel matters, society security and medical insurance, original retirement age, enterprise registration, and the disposal of land and assets.
Mainland media reported the Shandong provincial government’s initiative aims to convert approximately 100,000 public institution employees into enterprise contract workers.
Public institution staffing administration reform
1. Public institutions in China are social service organizations established by government agencies or other organizations using state-owned assets for the purpose of providing social welfare. These institutions engage in activities covering areas such as education, science and technology, culture, and health.
Public institutions can be broadly categorized into those performing administrative functions, those engaging in production and business activities, and those providing public services. They can be fully government-funded, partially government-funded, or self-funded.
2. The Shandong provincial government’s Opinion primarily targets public institutions engaged in production and business activities, as well as those that are self-funded. Those institutions mainly include design institutes, media outlets, printing factories, and cultural and tourism organizations, and do not encompass all public institutions.
The Shandong provincial authorities had issued documents pertaining to the transformation of 79 public institutions in the province into enterprises as early as 2014. In 2019, multiple departments in Shandong issued documents to guide the transformation of some public institutions in the province into state-owned, non-state-owned, or joint-stock enterprises. Most of the business-oriented public institutions in Shandong were transformed into enterprises as part of the 2019 initiative, and while the initiative impacted 100,000 people, its impact was mostly absorbed over time.
Shandong has the third-largest economy in China, is the second-most populous province, and is the largest province in northern China. Shandong has hundreds of provincial public institutions and nearly 40,000 public institutions at various local levels.
3. The central government had selected nine provinces — Shanxi, Inner Mongolia, Heilongjiang, Jiangxi, Shandong, Hebei, Hunan, Jiangsu, and Henan — as pilot areas for public institution reform in recent years.
In April 2024, the Henan provincial government announced that with the exception of schools and hospitals, public institutions in Henan would be streamlined by no less than 50 percent, staffing administrations by no less than 30 percent, and financial allocations to staffing administrations by no less than 10 percent. The Henan provincial authorities added that public institutions at the section level and below, as well as public institutions with fewer than 16 staff, would no longer be retained. The streamlined and recovered staff would be reallocated, with 5,638 positions distributed to the counties (including cities and districts) and more than 3,300 positions assigned to science and technology innovation platforms.
Backdrop
1. Local governments have been gradually “optimizing” their staffing administrations (i.e. reducing staff) since the rollout of Party and state institutional reforms at the 2023 Two Sessions.
2. Local governments have also been actively recruiting civil servants.
According to publicly available information, the 2024 national civil service exams will recruit 39,600 people, an increase of 6.7 percent from the previous year and the continuation of consecutive years of civil service hiring expansion. Meanwhile, the 2023 provincial civil service exams led to the recruitment of 10 percent more people from 2022 on the whole, with Gansu, Yunnan, Guangxi, and Inner Mongolia recruiting up to 50 percent more civil servants.
In 2024, various public institutions in Shandong at the provincial and municipal levels recruited 100,000 new staff.
Our take
1. While the Shandong provincial government began transforming public institutions in the province into enterprises as early as 2014, the initiative likely only saw significant progress after sweeping Party and state institutional reforms were introduced at the 2023 Two Sessions. The Shandong provincial authorities’ latest Opinion primarily addresses issues related to the transitioning of public institutions into enterprises.
2. Aside from adhering to Party and state institutional reforms, local governments in the PRC are likely stepping up the streamlining of their staffing administrations to cope with fiscal shortages and increasing deficits. The localities are running into financial difficulties due to China’s weak recovery post “zero-COVID,” the bursting of the real estate bubble, and the continued deterioration of the Chinese economy.
3. At a glance, the effort by local governments to alleviate some of their financial burden by streamlining staffing administrations is contradicted by the expansion of the civil service. We previously noted the CCP authorities’ plan to recruit more civil servants and housing provident fund contributions showing that there were over 48 million people employed in state agencies and public institutions in 2023.
However, the expanded civil service recruitment and the streamlining of staffing administrations are less paradoxical than they seem. The CCP authorities appear to be hiring fresh graduates into the civil service to replace civil servants who have long been “idling” in the public sector. The latter group (many of whom are middle-aged with families and children) are a drain on the regime’s finances (poor professional skills, real work is often outsourced to contract workers, etc.), and they and those in their network are technically less likely to rebel against the CCP if their livelihoods are impacted by their being streamlined out from public institutions and into enterprises to serve as contract workers. By contrast, young people are prone to act impulsively and threaten social stability if they remain unemployed for long periods; their recruitment into the civil service “buys” their loyalty to the CCP regime and helps with “stability maintenance” issues.
The streamlining of public institutions means that the CCP authorities will pay less pensions and social insurance, reducing their financial burden. The CCP authorities will also save money by hiring young people to replace the older civil servants as the pay for fresh recruits is much lower than longtime hires.
Meanwhile, the CCP authorities could have plans to redeploy the streamlined personnel into institutions used for “stability maintenance” work, including the new social work departments, grid administration, public security, and online surveillance. Freed-up staffing administrations could also be used to hire young people to grassroots positions and bolster the governing capacity of the regime at the lower levels.
4. Other provincial governments are likely to follow the Shandong provincial government’s lead in transforming public institutions in the province into enterprises in a bid to streamline their respective staffing administrations and cut costs. The mass trimming of civil servants nationwide could potentially introduce new risks and social instability.
Although the civil servants being “streamlined” are likely to be older and are less likely to protest, this does not mean that they will not attempt to raise their grievances with the CCP regime. Incidents or protests in one area could soon lead to unrest proliferating across the nation as people learn about them from social media, and the Party could suddenly find itself having to confront the previous beneficiaries of its authoritarian system who form the foundation of support for the regime.
Large-scale “streamlining” of public institutions will likely affect demand as civil servants are a main force of consumption in China. Weakening consumption will further impact the economy and affect recovery.
Finally, the mass recruitment of young people into the CCP system could make that demographic more aware of the problems of the regime than they previously were. Over time, young Chinese could become less inclined to believe Party propaganda and could grow less, not more loyal to the regime.
