1 Personnel reshuffles at CASS hint at seriousness of regime crises
Aug. 22
The Chinese Academy of Social Sciences Party Committee made several personnel decisions in a meeting:
- Wang Limin, the Party secretary and deputy director of the Institute of Economics at CASS, was transferred to the Institute of Finance to serve as Party secretary.
- Huang Qunhui, the deputy Party secretary and director of the Institute of Economics, was removed from his position.
- Gong Yun, the Party secretary and deputy director of the Institute of Finance, was transferred to the Institute of Economics to serve as Party secretary.
- Li Xuesong, the director of the Institute of Quantitative and Technical Economics, was transferred to the Institute of Economics to serve as director and deputy Party secretary.
- Song Hong, the deputy director of the Research Bureau at CASS, was transferred to the Institute of Economics to serve as deputy director.
Sept. 15
Hong Kong newspaper Sing Tao Daily reported that Zhu Hengpeng, the deputy director of the Institute of Economics at CASS and director of the Public Policy Research Center at CASS, was subjected to serious disciplinary action for allegedly “making reckless remarks about the central government.”
Sing Tao added that the recent leadership team reshuffle at the Institute of Economics was connected with Zhu being disciplined, and described the reshuffle as a “political earthquake.”
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The official website of the Personnel and Education Bureau at the CASS, which oversees personnel changes, no longer contains any information on Zhu Hengpeng.
Some publicly available news reports about Zhu in recent years include:
- On July 6, 2018, mainland media Jiemian News published an interview with Zhu titled, “Why are Cancer Drugs So Expensive, and Why Can’t Their Prices Be Too Low?”
- The November 2022 issue of the “Economic Dynamics” publication carried an article by Zhu titled, “Social Security Expenditure Should Limit the High and Support the Low, and Focus on Low-income Groups.” In the piece, Zhu wrote that China’s “heavy tax burden and unreasonable social security structure have suppressed the improvement of residents’ consumption levels.”
- On May 8, 2024, Zhu spoke about pension issues at the “China Elderly Care Industry Forum.”
Backdrop
On Sept. 13, state mouthpiece Xinhua announced the Standing Committee of the National People’s Congress’ decision to gradually raise the retirement age in China. Over a 15 year period starting Jan. 1, 2025, the retirement age for men would be raised from 60 to 63, while the retirement age for women in white collar work would be raised from 55 to 58 and from 50 to 55 for women in blue collar work.
Over the past year, many Chinese economists were “canceled” for expressing views that were not aligned with the official stance. Former Global Times editor-in-chief Hu Xijin also appeared to have been subjected to a three month ban for inappropriate comments.
Our take
The personnel shake-ups at the CASS, the premier PRC think-tank for social sciences and bastion of ideology, suggest that there was indeed a “political earthquake” of sorts in the community of pro-CCP economic scholars.
i) Zhu Hengpeng, the deputy director of the CASS Institute of Economics and director of the CASS Public Policy Research Center, as well as some of his colleagues and peers, could have expressed opinions that differ from the central government in either private or public with regard to the rising of the retirement age in China or other issues.
Zhu had previously called attention to the “unreasonable social security structure,” which indirectly criticizes the CCP authorities for lopsided pension payments in China. For instance, pension payments for employees in wealth-creating enterprises are less than a third of those for civil servants. Some observers have estimated that while civil servants make up just 6.21 percent of the pension-paying population, retirees from this group consume more than half of the nation’s pension funding.
Meanwhile, Zhu could have also expressed differing views on the fairness of raising the retirement age or its negative consequences given that the topic falls within his research area. One of the “push” factors behind Beijing’s decision to raise the retirement age is the sustainability of China’s pension funds, which are threatened by an aging population and declining birth rates. In theory, delaying retirement would help to alleviate pension burdens. However, there are also downsides to the move, some of which quickly surfaced after the NPC announced that the retirement age was being pushed back and the social security payment period would be extended. Many netizens took to Chinese social media like Douyin to share videos of themselves terminating social security payments immediately to “cut losses.” Should this become a trend, China’s pension fund shortfall could be exacerbated.
ii) Zhu Hengpeng and other pro-CCP economists could have also been “canceled” or purged for not adhering to the PRC’s long-held principle of focusing on good news and not reporting the bad (報喜不報憂).
Pension fund and retirement age issues aside, economists and scholars — including those with the PRC establishment — have almost certainly realized that the Chinese economy is in much worse shape than the official figures suggest, and economic and financial crises are likely far more serious than Beijing has acknowledged. Economists and scholars could also have noticed that the Xi leadership’s economic policies are not aligned with basic economic principles, yet Beijing insists on claiming that things are “stable and improving” even when the economy has fallen into a liquidity trap and is facing deflationary pressures.
The scholars and economists at the CASS in particular have to toe the Party line. For instance, the Institute of Economics at CASS states in its website introduction that it adheres to three principles, namely, “Run CASS well in accordance with the requirements of General Secretary Xi Jinping and the Central Committee; serving General Secretary Xi Jinping and the Central Committee is the duty of the CASS; and Xi Jinping Thought on Socialism with Chinese Characteristics for a New Era is the banner and soul of philosophy and social sciences with Chinese characteristics in the new era.”
iii) The continued suppression and purging of scholars, experts, and pundits are likely to dissuade them from reporting bad news and focus on only broadcasting “good news.” Over time, the CCP leadership would become increasingly disconnected from reality and make policies that send the regime down a misguided path of no return.
2 CCP strengthens propaganda as Western pessimism about China grows
Xi leadership again calls for indoctrination
Sept. 14
The Standing Committee of the National People’s Congress held a ceremony at the Great Hall of the People in Beijing to celebrate the 70th anniversary of the NPC’s founding. Xi Jinping attended the ceremony and delivered a speech.
In his speech, Xi emphasized the need to further strengthen the “confidence in our path, confidence in our theory, confidence in our system, and confidence in our culture.” He also called for the development of “whole-process people’s democracy” and for the NPC system to be “maintained, improved, and operated well” to provide “institutional guarantees” for the realization of the Party’s cause.
NPC Standing Committee chairman Zhao Leji, who presided over the ceremony, said Xi Jinping’s important thoughts on upholding and improving the NPC system are a “programmatic document shining with the brilliance of Marxist truth” that must be thoroughly studied, understood, and resolutely implemented.
Sept. 16
Qiushi, the CCP Central Committee ideological journal, published in its 18th issue of the year a speech by Xi Jinping delivered on July 18, 2024 at the second all-hands session of the Third Plenum of the 20th Central Committee.
In his speech, Xi said that the decision of the Third Plenum reflects the “wisdom of the entire Party and society” and is a “programmatic document” for further comprehensively deepening reforms. He stressed that studying and implementing the “spirit of the plenary session” is a “major political task” for the entire Party and country, both at present and in the future.
Xi also presented his views on how to implement the spirit of the Third Plenum. This includes thoroughly studying and understanding the “spirit” to ensure the effective implementation of the decisions made at the plenary session, as well as diligently carrying out the work for the second half of the year.
Propaganda and the economy
The CCP authorities have been highlighting its development achievements across various fields and industries in the lead up to the 75th anniversary of the PRC’s founding on October 1. With regard to the economy, the National Bureau of Statistics claimed on Sept. 14 that China’s economy in August saw “continued recovery in production and demand, basic stability in employment and prices, ongoing high-quality development, and maintaining overall stability with steady progress” under the “strong leadership of Party Central with Comrade Xi Jinping at the core.” Also, a People’s Bank of China official said on Sept. 13 that “the total volume of finance grew at a reasonable rate” in August and the “credit structure continued to improve.”
However, economic data released by the central bank and the NBS before the Mid-Autumn Festival holiday in mid-September showed that the Chinese economy still faces deflationary pressures. Meanwhile, the Shanghai Composite Index nearly fell below the 2,700 mark in the week of September 9, closing at 2,704.09 points on Friday. When trading resumed on September 18, the Shanghai index dropped below the 2,700 mark during intra-day trading. Further, Chinese economists who are concerned about a potential economic depression have been advising the CCP authorities to fight deflation by increasing fiscal stimulus and issuing more government bonds.
The West grows pessimistic about China’s prospects
Sept. 9
MarketWatch reported that Barclays analysts downgraded Adidas, Burberry, and Gucci owner Kering after a two-and-a-half-week China trip.
The analysts said, “The sentiment on the ground was much more cautious than six months ago, as there is now a clear view that the Chinese weakness is structural.”
The analysts also concluded that the high-growth phase of China’s economy is over, the finance and property sector are currently under pressure and are no longer seen as cash cows, the private sector appears to be shrinking while state-owned companies are expanding, and the tech sector boom is not likely to create as many millionaires as other sectors.
Sept. 11
1. The European Union Chamber of Commerce in China said in its latest Position Paper that many of its over 1,700 member companies are acknowledging that the problems they face in China could have become permanent features rather than “growing pains” of an emerging market.
EU foreign investment flows to China fell by 29 percent from a year ago in 2023 to 6.4 billion euros (about $7.06 billion) according to European Commission data. The chamber said that profit margins in China for about two-thirds of its members had shrunk to equal to or below the global average.
“With many other markets offering greater predictability and legal certainty along with the same return on investment, continuing to invest at previous levels in the China market is simply becoming harder to justify,” said the chamber’s report. The report added that European companies have to deal with Chinese competitors receiving unfair subsidies, a highly politicized business environment, Xi Jinping’s heightened focus on national security, and perennial market access and regulatory barriers.
The report also noted, “At the start of the new millennium, reform plans announced by the Chinese government were seen by foreign companies as credible. Now, after more than a decade of largely unfulfilled pledges, doubts over China’s commitment to reform are increasing.”
Jens Eskelund, the chamber’s president, said in an event introducing the report that “a tipping point has been reached, with investors now scrutinizing their China operations more closely as the challenges of doing business are beginning to outweigh the returns.” He added, “It has become so much harder to make money in the Chinese market.”
2. The Wall Street Journal published a piece about how Western firms are pulling back from China. Examples in the article include:
- The Shanghai municipal government said in August that one of its most urgent economic challenges was Apple’s move to diversify its production to countries like Vietnam and India.
- Walmart sold an eight-year-old stake in one of China’s main e-commerce platforms for $3.6 billion in August.
- IBM closed research institutes in China, impacting more than 1,000 jobs.
- Carmakers are scaling back in China because Chinese firms make up nearly three-fifths of the passenger car market.
- Honda Moto suspended production at three plants in China and cut personnel through voluntary retirements.
- Foreign investment into China fell 8 percent from a year ago in yuan terms in 2023.
The Journal added that “most companies aren’t abandoning China,” with the majority trying to maintain existing operations.
Sept. 12
The American Chamber of Commerce in Shanghai published a survey showing just 47 percent of U.S. companies being optimistic about their five-year China business outlook. This represented a drop of five percentage points from a year earlier and the weakest level of optimism since the AmCham Shanghai Annual China Business Report was launched in 1999.
The survey noted that 66 percent of the 306 U.S. firms polled were profitable in China in 2023, another record low. AmCham Shanghai Chairman Allan Gabor said the trend in declining profitability was due to “domestic demand … deflation, and of course we can’t ignore the membership’s perceptions and concerns about geopolitics.” Gabor added, “This touches investments and touches operating plans in China in terms of how we develop business plans in China for the future.”
The survey showed 66 percent of respondents citing the U.S.-China relationship as their biggest challenge, while 70 percent said the bilateral relationship was the greatest challenge to China’s economic growth. The survey added that 40 percent of U.S. firms polled, the same proportion as the previous year, are currently redirecting or looking to redirect investment meant for China mainly to Southeast Asia and also to India.
According to the U.S. State Department, U.S. foreign direct investment into China dropped 14 percent to $163 billion in 2023 from a year ago.
Sept. 13
A Wall Street Journal column wrote that Beijing “may still not act boldly enough” despite calls by economists for more fiscal stimulus.
The column noted that China has been in deflation for five straight quarters per the GDP deflator, or the difference between China’s nominal and real GDP growth. The column added the housing market crisis and households tightening their purse strings have pushed down prices, and cited Morgan Stanley analysts as saying that deflation is now China’s “public enemy number one.”
The column observed that Beijing has chosen to support the manufacturing sector instead of providing stimulus to households to boost consumption. The move, however, has resulted in excess capacity and has concerned many countries, while further investment in manufacturing and exports does not resolve the housing market issue.
Sept. 14
The PRC commerce ministry announced that foreign direct investment into China fell 31.5 percent from a year ago to 580.19 billion yuan in the January to August period.
Sept. 16
Goldman Sachs and Citigroup lowered their full-year projections for China’s economic growth to 4.7 percent. Goldman Sachs previously forecasted China’s full-year GDP growth at 4.9 percent and Citigroup at 4.8 percent.
In a note dated Sept. 15, Goldman Sachs said, “We believe the risk that China will miss the ‘around 5%’ full-year GDP growth target is on the rise, and thus the urgency for more demand-side easing measures is also increasing.”
Our take
Beijing has been holding off on fiscal stimulus and focusing on manufacturing instead of taking more concrete steps to rescue the property sector amid a deflationary spiral. Beijing’s seeming lack of action and policy focus has caused concern among Western companies and observers, who are becoming increasingly pessimistic about China’s prospects.
Meanwhile, the Xi leadership is doubling down on propaganda and indoctrination, particularly promoting the study and implementation of the spirit of the Third Plenum, as well as lauding Xi’s achievements since the 18th Party Congress.
We see several reasons why Beijing is acting in such a manner:
i) The CCP needs to uphold its “great, glorious, and correct” image as the 75th anniversary of the PRC’s founding approaches, and Xi Jinping needs to safeguard his “quan wei” (authority and prestige). Therefore, the Party has to stick to its usual practice of reporting only “good news” (including “spinning tragedy into victory”) and downplaying or obscuring problems even when China’s economic problems are becoming too obvious to ignore.
Beijing will also continue to boost manufacturing and exports to obtain more favorable growth figures and keep up the pretense that the economy is still trucking along.
ii) The Xi leadership could believe that China’s economic deterioration has not bottomed out, and therefore massive stimulus measures should be avoided lest they prove to be counterproductive. Engaging in monetary easing would likely lead to a deprecation of the renminbi and the acceleration of capital outflows. Providing direct stimulus to households under the current deflationary pressures and when there is an “asset famine” could incentivize people to pay off loans early or invest in long-term government bonds instead of spending and investing. Instead of stimulating consumption, more fiscal stimulus could lead to further shrinking of credit in China and a worsening of other economic and financial problems.
Beijing could also be holding off on stimulus until the results of the U.S. presidential election in November are clear. The Xi leadership would want to have some policy tools ready in the event that former president Donald Trump returns to office and imposes steep tariffs on Chinese goods and severe sanctions. The Xi leadership could also be anticipating the imposition of stricter restrictions, tariffs, and sanctions under a Harris administration as Washington and its allies look to apply more pressure on Beijing to stop supporting Russia’s war effort in Ukraine and deter an invasion of Taiwan.
Finally, Beijing could be withholding stimulus now over concerns that the U.S. could experience a major financial crisis and that it would need tools to deal with the aftermath. The global economic depression that could result from financial turmoil in the U.S. would impact foreign demand and worsen China’s economic situation. Simultaneously, Beijing could also be looking to undertake more fiscal stimulus in the event of a U.S. financial crisis to create opportunities for itself to overtake its chief geopolitical rival and fulfill its slogan/vision of “the East is Rising, the West is in Decline” (東昇西降).
iii) The CCP appears to be focusing on manufacturing to boost the PRC’s self-reliance and indigenous innovation capacity as it anticipates an intensification of Western “containment” and even clashes in the future as geopolitical tensions rise. In the CCP’s ideal scenario, it would establish a comprehensive industrial supply chain that would reduce the PRC’s need for foreign products while increasing other countries’ dependence on Chinese exports.
Beijing could even be preparing for scenarios where it can export excess capacity to advance its agenda of global dominance. In the event of a U.S. financial crisis and a global economic downturn, the U.S. dollar could depreciate sharply and many countries could see foreign exchange shortages. The PRC could then seize the opportunity to more vigorously push exports of cheap goods (thereby creating another “China shock” and undermining the manufacturing sectors of other countries) and further promote the internationalization of the RMB.
