Analyzing rumors that Xi is appointing a ‘successor’; September data underscores Beijing’s difficulty in economic rescue

  1   Analyzing rumors that Xi is appointing a ‘successor’

Rumors and speculation that Xi Jinping is suffering from poor health and potentially faced a coup have been circulating nonstop this year, particularly around the period of the Third Plenum of the 20th Central Committee.

Recently, fresh rumors and speculations have surfaced advancing the notion that Party elders are pressuring Xi to name a successor. Among the notable rumors include:

1. Some overseas Chinese commentators and Chinese language media believe that certain recent developments — including the Xi leadership’s economic policy shift in late September, former senior Party officials Li Ruihuan and Wen Jiabao being seated on either side of Xi Jinping at the reception dinner for the 75th anniversary of the founding of the PRC on Sept. 30, and recent military personnel changes — are signs that Xi is losing power (the specific Chinese term used is “分權,” or having one’s power divided up) or being sidelined. The commentators and media outlets then speculate that Party elders are pressuring Xi to name a successor.

2. Official mainland media published an article by Chinese People’s Political Consultative Conference vice chairman Hu Chunhua on Oct. 8 titled, “Upholding the Comprehensive Leadership of the CCP over the CPPCC.” However, some Chinese commentators insisted that it was unusual for official PRC media to “prominently feature” Hu, a so-called “deposed crown prince” (廢太子, or a senior CCP official who was tapped to become Party leader but never came to the position) by publishing an article with his name in the byline on the first day after China’s Golden Week.

3. On Oct. 13, Party mouthpiece People’s Daily provided extensive coverage of PRC premier Li Qiang’s visits to Laos and Vietnam on its front and second page. Some commentators said that the coverage of Li contrasted starkly with his near “invisibility” in official media, and speculated that Li could be positioned to replace Xi.

  Our take

1. The latest rumors and speculation about Xi Jinping losing power and Party elders pressuring him to name a successor appear to be built on earlier rumors about Xi’s health and political situation that we have repeatedly debunked in earlier newsletters (for example, see here, here, and here). If our assessment is correct, then the latest political rumors and speculation about Xi are way off the mark because they are based on assumptions that are fundamentally flawed to begin with.

2. It is unlikely that Xi Jinping’s power has been “divided up” as some Chinese commentators and media outlets are claiming. We previously analyzed in the Oct. 10 newsletter that Beijing’s economic policy shift is not a sign that Xi’s grip on power has weakened. To briefly recap, it is well within the CCP’s past practices for Party leaderships to make sudden and drastic shifts in policy to cope with severe crises, and Xi likely made policy adjustments to revive the rapidly deteriorating Chinese economy and preserve his security priorities amid rising geopolitical challenges. Also, the ability of Party elders to influence the Xi leadership has been greatly diminished since the 20th Party Congress, with Xi having consolidated power to an even greater degree and removed many allies and confidants of former Party leaders from the current core leadership circle.

Xi moving the Party towards “one-man rule” and away from the “collective leadership” makes it much harder for Party elders or other influential CCP elites to rein him in or “divide up” his power. Senior positions who could be considered to be “successor” roles have also been pushed out of the core circle of power during Xi’s tenure. For instance, the vice chairmen of the Central Military Commission and the PRC vice president no longer sit on the Politburo Standing Committee since the 18th Party Congress. The CCP General Secretary has also become more than a “first among equals” position, with other members of the Politburo Standing Committee being required to submit reports to Xi from the 19th Party Congress onwards.

Party elders and other influential elites would find it difficult to move against Xi like how Deng Xiaoping ousted the “Gang of Four” given the advances in techno-authoritarianism and surveillance in the modern era. The CCP elites are also typically divided amongst themselves and there is currently no one within the Party with sufficient “quan wei” (authority and prestige) and political power to rally the rest against Xi. But when crises reach an extreme, including complete economic collapse or should the PRC attempt to embark on an “unwinnable” war, it cannot be ruled out that cadres outside the CCP leadership but with a degree of practical power (i.e. from the military, Central Guard Regiment, General Office, etc.) could attempt to pull off a coup. However, the probability of this development is very slim and China’s current crises are not yet severe enough to force cadres to make such a move.

3. In a scenario where Xi Jinping is forced to relinquish some power for various reasons (health problems, etc.), the current CCP power structure would see Xi’s authority being distributed among the members of the Politburo Standing Committee instead of the Party elders. A “dividing up” of Xi’s power this way would effectively restore the “collective leadership” system. However, there are no signs in CCP propaganda or organizational matters that indicate the elevation of Politburo Standing Committee members aside from Xi.

The People’s Daily’s extensive coverage of Li Qiang’s recent foreign visits is entirely within reasonable bounds. For instance, the report about Li on the front page was not a headline article and was placed below a report on Xi’s congratulatory message to the new Ethiopian president. The report about Li’s trip to Vietnam and Laos ran long on the second page because Li participated in a number of activities. The People’s Daily reporting on Li’s overseas trip also did not contain propaganda signaling that his political status had been “upgraded,” but was par for the course of previous reporting.

Meanwhile, Politburo Standing Committee members who recently made public speeches continued to lavish praise on Xi Jinping:

• Zhao Leji, the National People’s Congress Standing Committee chairman, attended a symposium on Sept. 14 on studying and implementing Xi’s important thoughts on upholding and improving the NPC system. At the symposium, Zhao stressed that Xi’s important speech at the 70th anniversary celebration of the NPC was a “programmatic document that shines with the truth of Marxism.”
• Premier Li Qiang emphasized the importance of deeply studying and implementing Xi’s important instructions on improving the macroeconomic governance system while chairing the 10th special study session of the State Council on Oct. 8.
• Wang Huning, the chairman of the CPPCC, attended a meeting of the CPPCC’s specialized committees on Oct. 11. During the meeting, Wang said that it is necessary to deeply study and implement Xi’s important speech at the celebration of the CPPCC’s 75th anniversary, to fully understand the decisive significance of the “Two Establishes” and to firmly uphold the “Two Safeguards,” and to thoroughly implement Xi’s important directives.

4. Xi Jinping has not given any indication that he will choose a successor. If anything, Xi’s policy agenda suggests that he would seek a fourth term on the pretext of overseeing the progress of his reforms. At the Third Plenum of the 20th Central Committee, Xi proposed completing the reform tasks outlined in the Third Plenum “Decision” by 2029 and fully establishing a “high-level socialist market economic system” by 2035.

Xi could potentially groom a successor in his fourth term. However, that person is unlikely to be Li Qiang, who would be past the retirement age of 67 by the 21st Party Congress 2027. Li would also struggle to replace Xi now in the event that the latter is incapacitated; Li is essentially Xi’s “chief secretary” despite being the PRC premier because he has no central government experience prior to the 20th Party Congress and is not a “second-generation red.” Having essentially no “quan wei,” Li would not have the political strength to govern were he suddenly tasked to replace his political patron.

  2   September data underscores Beijing’s difficulty in economic rescue

  September credit and social financing

Oct. 14
The People’s Bank of China released credit and social financing data for September and the first three quarters of 2024:

• The M2 broad money supply increased by 6.8 percent year-on-year in September to reach 309.48 trillion yuan.
• The M1 narrow money supply decreased by 7.4 percent year-on-year in September to reach 62.82 trillion yuan. This marked the sixth consecutive month of declines and an expanding rate of decrease.
• New renminbi loans increased by 16.02 trillion yuan in the first three quarters of the year, compared to an increase of 19.75 trillion yuan in the same period of 2023.
  • Household loans increased by 1.94 trillion yuan, compared to an increase of 3.85 trillion yuan in the same period of 2023.
    • Short-term loans increased by 402.4 billion yuan, compared to an increase of 1.75 trillion yuan in the same period of 2023.
    • Medium and long-term loans increased by 1.54 trillion yuan, compared to an increase of 2.1 trillion yuan in the same period of 2023.
  • Loans to enterprises and institutions increased by 13.46 trillion yuan, compared to an increase of 15.68 trillion yuan in the same period of 2023.
    • Short-term loans increased by 2.83 trillion yuan, compared to an increase of 3.99 trillion yuan in the same period of 2023.
    • Medium and long-term loans increased by 9.66 trillion yuan, compared to an increase of 11.88 trillion yuan in the same period of 2023.
• Renminbi deposits increased by 16.62 trillion yuan in the first three quarters of 2024, compared to an increase of 14.42 trillion yuan in the same period of 2023.
  • Household deposits increased by 11.85 trillion yuan, compared to an increase of 14.42 trillion yuan in the same period of 2023.
  • Non-financial enterprise deposits decreased by 2.11 trillion yuan, compared to an increase of 4.52 trillion yuan in the same period of 2023.
• The cumulative increase in social financing for the first three quarters of 2024 was 25.66 trillion yuan, or 3.68 trillion yuan less than in the same period of 2023.
• The increase in social financing in September was 3.76 trillion yuan, of which government bond net financing accounted for 1.54 trillion yuan (41 percent of the increase).

  September trade data

Oct. 14
The PRC General Administration of Customs released trade data (in USD) for September and the first nine months of 2024.

September

• Total imports and exports increased by 1.5 percent year-on-year to reach $525.71 billion (the growth rate was up 1.0 percent when compared with official PRC data from 2023).
• Exports increased by 2.5 percent year-on-year to reach $303.71 billion (the growth rate was up 1.5 percent when compared with official PRC data from 2023).
• Imports increased by 0.3 percent year-on-year to reach $220.00 billion (the growth rate was up 2.0 percent when compared with official PRC data from 2023).
• The trade surplus was $81.71 billion yuan (up 5.1 percent when compared to official PRC data from 2023).

January-September

• Total imports and exports increased by 3.4 percent year-on-year to reach $4.55 trillion (the growth rate was up 2.1 percent when compared with official PRC data from 2023).
• Exports increased by 4.3 percent year-on-year to reach $2.62 trillion (the growth rate was up 3.9 percent when compared with official PRC data from 2023).
• Imports increased by 2.2 percent year-on-year to reach $1.93 trillion (the growth rate was up 2.0 percent when compared with official PRC data from 2023).
• The trade surplus was up 10.8 percent year-on-year to reach $434.99 billion (up 9.4 percent when compared to official PRC data from 2023).

China’s exports to major trading partners

• European Union: Up 1.3 percent in September and up 0.6 percent in the January-September period.
• United States: Up 2.2 percent in September and up 2.4 percent in the January-September period.
• ASEAN: Up 5.5 percent in September and up 9.4 percent in the January-September period.
• Russia: Up 16.6 percent in September and up 1.2 percent in the January-September period.
• Latin America: Up 3.4 percent in September and up 11.5 percent in the January-September period.

  September CPI and PPI

Oct. 13
The National Bureau of Statistics released the consumer price index and producer price index for September:

• The CPI rose by 0.4 percent from a year ago in September, the lowest increase in three months, and grew by 0.3 percent year-on-year during the January-September period.
• The PPI fell by 2.8 percent from a year ago in September, marking the lowest increase in six months and the 24th consecutive month of declines. Meanwhile, the PPI for industrial producers fell by 2.2 percent year-on-year, marking the 23rd consecutive month of declines.

  Beijing’s economic support policies aimed at derisking, not stimulus?

Oct. 15
1. Mainland media Caixin reported China could raise an additional 6 trillion yuan from special treasury bonds over three years to stimulate the economy, citing sources with knowledge of the matter.

Caixin added that part of the funds raised from the bond sales would be used to help local governments resolve their off-the-books debts.

2. The Wall Street Journal reported that Beijing’s economic support policies introduced in late September were an effort by Xi Jinping to “bail out indebted Chinese municipalities on the brink of collapse and revive the stock market without veering too far from his focus on letting the state drive China’s transformation into an industrial and technological powerhouse,” citing officials and government advisers close to decision-making.

The official and advisers say that Xi’s “near-term goal isn’t to massively stimulate demand but to fend off a brewing financial crisis — or ‘derisking,’ in official lingo — thereby helping to stabilize the overall economy” and achieve the about 5 percent growth target for 2024.

The Journal added that Beijing’s mixed message on what exactly it was rolling out in terms of stimulus has sent investors, who were hoping for a massive stimulus package similar to what was rolled out in 2008 during the global financial crisis, on a “roller-coaster ride.” The Journal said that Beijing’s “package of incremental policies” means “little change to Xi’s overarching agenda of directing state resources toward fortifying China’s industries against perceived foreign threats,” while calls by economists and investors inside and outside China for “rebalancing the economy to household consumption from manufacturing haven’t gained much traction.”

  Backdrop

On Sept. 24, the PBoC and the National Development and Reform Commission rolled out a slew of economic support measures. This led to an initial market rally followed by downward fluctuations after the Golden Week holiday:

• The Shanghai Composite Index fell 4.00 percent from 3,674.40 points at the opening on Oct. 8 to 3,202.95 points at the close on Oct. 16.
• The Shenzhen Component Index fell 5.36 percent from 11,864.11 points at the opening on Oct. 8 to 9,965.02 points at the close on Oct. 16.
• The combined trading volume on the Shanghai and Shenzhen indexes shrank from 3.45 trillion yuan on Oct. 8 to 1.37 trillion yuan on Oct. 16, a contraction of over 60 percent.
• Net outflow of main funds from the Shanghai and Shenzhen markets in the first seven trading days after the Golden Week holiday was 686.999 billion yuan. Meanwhile, retail investors have been rushing to snap up shares for fear of missing out on a bull market.

On Oct. 15, the offshore renminbi exchange rate briefly dipped below 7.143 to the dollar before closing at 7.13.

  Our take

1. China’s official economic data for September and the first three quarters of the year show that deflationary pressures are growing and the economy is not in a good shape. Continued economic malaise is likely a key factor behind Beijing’s sudden economic policy adjustment at the end of September.

i) China’s credit and social financing data indicate that Chinese residents are reluctant to consume and businesses with reduced liquidity are unwilling to invest. Also, the situation with idle capital continues to worsen.

In September, China’s M2 increased by 4.43 trillion yuan from a month ago while the M1 decreased by 200 billion yuan, reflecting reduced consumption and investment. The figures further suggest that the liquidity added by the central bank’s monetary easing is idling without being put to productive use.

Reduced loan demand from businesses and residents saw new RMB loans in the first three quarters of the year decrease by 3.73 trillion yuan from a year ago and drop by 720 billion yuan in September alone (down 31 percent year-on-year). In breaking down the figures:

• Household loans in the first three quarters of 2024 decreased by 1.91 trillion year-on-year, reflecting significantly weaker demand.
• Weakness in short-term consumer credit caused a sharp drop in short-term household loans (down 1.35 trillion yuan year-on-year). Meanwhile, the decline in demand for medium- and long-term household loans (down by 560 billion yuan year-on-year) reflects weakness in the real estate market.
• Loans to businesses and institutions decreased by 2.22 trillion yuan year-on-year in the first three quarters of 2024. Over the same period, short-term loans fell by 1.16 trillion yuan year-on-year while medium- and long-term loans decreased by 2.22 trillion yuan year-on-year. The drop in those loans reflects contracting business activities.

Concurrently, RMB deposits in the first three quarters of 2024 fell by 5.86 trillion yuan from a year ago, with deposit growth slowing significantly for businesses (down 2.41 trillion yuan year-on-year) and households (down 2.57 trillion yuan year-on-year). This points to weakening liquidity for both businesses and households, as well as tighter cash flow or reduced profitability for businesses.

Social financing improved in September 2024 as compared to a month ago. This was primarily due to the PBoC’s monetary easing policies and the growth in net government bond financing.

ii) The slowdown in China’s trade growth, along with the weak CPI and PPI figures, reflect intensifying deflationary pressures in China. Deflation appears to be worse now than during the “zero-COVID” pandemic years.

The growth in China’s exports in September 2024 was only marginal despite the low base from weak exports in the second half of 2023. This indicates that exports, which are currently the only growth driver supporting the economy, are losing momentum. Compared with trade data from the same period in 2022, China’s exports in September fell by 5.9 percent, imports dropped by 6.7 percent, and the trade surplus decreased by 3.6 percent.

The slight rise in China’s CPI was influenced by increased water and electricity prices, which pushed up operating costs and further squeezed the household consumption capacity. Meanwhile, the PPI’s 24 consecutive months of decline indicates weak demand and businesses being forced to lower prices to clear inventories.

2. The Wall Street Journal’s information about Xi Jinping’s intention behind his economic support measures largely aligns with our previous assessment. With Xi focusing on “derisking” (i.e. averting a financial crisis) and stabilizing the economy without adjusting his security and geopolitical priorities, the policies that Beijing has been rolling out since late September are unlikely to see anything more than short-term gains as they do not address the fundamental problems of China’s economy.

Take Beijing’s move to substantially increase debt issuance to stimulate the economy. For one, the 6 trillion yuan in special treasury bonds that the central government is planning on raising appears to be primarily used to resolve local government debt issues, which means that it could have a limited impact in reversing China’s economic downturn. The scale (about 2 trillion yuan per year) and speed (delays are expected because the Standing Committee of the National People’s Congress has to approve their issuance) at which the bonds can be issued also do not make this an adequate policy tool to resolve China’s urgent economic problems.

The funds raised by special government bonds will likely also go towards boosting the liquidity of large state-owned commercial banks to mitigate financial risks and provide them with sufficient capital to purchase local government bonds and help the localities with fundraising. Banks could be currently short on funds to help with local bond purchases. The Ministry of Finance revealed in an Oct. 12 press conference that local governments still have 2.3 trillion yuan in special government bonds that have not been utilized, a development that hints at a lack of investment projects and banks lacking capital to buy local government bonds.

3. Recent depreciatory pressure on the offshore RMB likely reflects investor skepticism about whether China’s stimulus policies can truly turn around the Chinese economy. As we earlier analyzed, the yuan could see further devaluation and more capital outflows could be triggered if Beijing allows the central bank to “print money to purchase trillions of yuan in special treasury bonds in the absence of further rate cuts by the U.S. Federal Reserve.”