SinoInsight 1
In an interview with CBS’s “Face the Nation” on Dec. 14, United States Trade Representative Robert Lighthizer said of the Sino-U.S. “phase one” trade deal, “Ultimately, whether this whole agreement works is going to be determined by who’s making the decisions in China, not in the United States. If the hardliners are making the decisions, we’re going to get one outcome. If the reformers are making the decisions, which is what we hope, then we’re going to get another outcome.”
OUR TAKE
1. There has been much analysis and speculation about the feasibility of the “phase one” trade deal since it was announced on Dec. 13. Economists and those in the agricultural industry are skeptical about whether China can purchase $40 billion to $50 billion worth of U.S. agricultural goods (we believe this is possible because the PRC can find ways to resell the surplus farm products it purchases to other countries), and whether U.S. farmers can produce enough to sell to China (President Trump’s remark that farmers should buy “bigger tractors” suggests that production could be a bottleneck).
Instead of economics, we believe that “the CCP factional struggle is Xi’s greatest obstacle to signing and implementing the ‘phase one’ trade deal.” Amb. Lighthizer’s remarks to “Face the Nation” about “whether this whole agreement works is going to be determined by who’s making the decisions in China, not in the United States” affirms our analysis. And his reference to “reformers” and “hardliners” in the CCP elite suggests that the Trump administration acknowledges that there are opposing factions in the CCP elite. Put another way, the Trump administration knows that CCP domestic politics is the decisive factor in whether or not a trade deal can be reached.
2. In view of China’s worsening economy, debt defaults, food crisis, and other pressing problems, we believe that Xi Jinping’s political rivals could, in the name of preserving the Party, be less inclined to attack him over making huge concessions to America in the “phase one” deal. And if Xi faces less internal resistance, then he and Trump could yet actualize the “phase one” trade agreement. But should factional interests trump Party interests, then it is unlikely that the “phase one” deal will be signed. The unprecedented political crisis in the CCP regime raises the odds of political Black Swans emerging to upset the signing of the trade deal.
3. Should both sides reach an interim trade deal in January, the Trump administration should be warned against overselling victory. Signing the deal is part of CCP delaying tactics to gain “breathing space” and survive U.S. pressure, and the CCP will do its best to avoid having to fully implement its “phase one” commitments. Once the CCP has caught its breath so to speak, it would likely advance its external political interference operations and unrestricted warfare tactics to “Pearl Harbor” America.
SinoInsight 2
Between Dec. 9 to Dec. 13, a total of seven full generals, 16 lieutenant generals, and 147 major generals were promoted in the People’s Liberation Army Ground Force, Navy, Air Force, Rocket Force, Strategic Support Force, Academy of Military Science, and the People’s Armed Police.
Six of the seven newly promoted full generals are members of the CCP Central Committee. He Weidong, Commander of the Eastern Theater Command, one of the promoted full generals, is a “shuangfei” (雙非), or neither a full or alternate member of the Central Committee.
OUR TAKE
1. The recent mass promotions suggest that Xi Jinping is accelerating the pace of grooming forces loyal to him in the military. We believe that Xi is strengthening his grip on the Party’s “gun” (槍桿子) to cope with the CCP factional struggle, which would likely intensify ahead of the signing of the Sino-U.S. “phase one” trade deal. As we recently noted, “the CCP factional struggle is Xi’s greatest obstacle to signing and implementing the ‘phase one’ trade deal.”
2. Traditionally, the CCP promotes generals around the PLA’s Armed Forces Day on Aug. 1 or before personnel reshuffles in the Central Military Commission in September or October. It is very rare to see 160-plus generals getting promoted in December; this is a reflection of anxiety and/or desperation on Xi Jinping’s part.
3. The accelerated promotion of “shuangfei” general He Weidong indicates that Xi is looking to elevate and groom senior military officers whom he had previously worked with or is familiar with.
From publicly available information, He Weidong, a native of Fujian Province, spent most of his career in the 31st Group Army (now 73rd Group Army). When Xi Jinping took office in November 2012, He was deputy commander of the 31st Group Army. By July 2013, He was commander of the Jiangsu Provincial Military District, a promotion of several grades. Seven months later (March 2014), He was transferred to the Shanghai Garrison to serve as garrison commander. In February 2015, He Weidong was promoted to head of the Political Department of the Nanjing Military Region.
After the implementation of sweeping military reforms in 2016, He Weidong was promoted to deputy commander of the Eastern Theater Command and commander of the Eastern Theater Command’s ground forces. In December 2019, the 62-years-old He, who was reaching the retirement age for a deputy commander of a theater command (63) , was promoted to commander of the Eastern Theater Command and the rank of full general. He’s recent promotion meant that he had risen from the grade of deputy corp leader to military region leader within a span of only seven years.
SinoInsight 3
On Dec. 17, Lou Jiwei, a member of the Standing Committee of the Chinese People’s Political Consultative Conference and former finance minister, delivered a speech at a discussion forum on the local government bond market.
Lou said that the local governments can consider the large-scale issue of special government bonds to ease government bond market liquidity. He added that the issue of sufficient special government bonds to purchase half of China’s current foreign exchange reserves would release 10 trillion yuan worth of government bonds to the bond market.
OUR TAKE
1. Lou Jiwei’s latest remarks are another sign that the deterioration of the Chinese economy is serious. Already, the Sino-U.S. trade war has accelerated capital outflows and flight from China; placed pressure on China’s foreign exchange reserves; caused a contraction in money supply and a shortage of liquidity; as well as triggered a debt crisis on the mainland.
2. The People’s Bank of China has been trying to resolve the liquidity issue by printing more money, but it lacks assets with high credit ratings to put up as collateral. In 2018, the PBoC relaxed the quality of assets for the medium-term lending facility that can be put up as collateral to include junk bonds.
This November, the CCP revised China’s 2018 GDP figure up by 1.9 trillion yuan (2.1 percent), a move which gives it more room to expand its fiscal deficit.
3. Given the CCP’s previous moves, if it really plans to issue 10 trillion yuan worth of special government bonds, that means that the CCP government is on the verge of bankruptcy and can only continue with its “Ponzi scheme” of debt financing.
In 2019, the national debt limit for local governments was set at 24 trillion yuan. In calculating from publicly available information, we estimate that the scale of implicit government debt is at least between 2 to 5 times higher than the official implicit government debt figure. If we presume that the actual scale of local government debt is 3 times that of the official figure, then local government debt could be as high as 96 trillion yuan, or 106 trillion yuan after adding the 10 trillion yuan worth of special government bonds. That means that local governments will have to pay annual interest on the bonds of 3.71 trillion yuan (presuming an annual interest rate of 3.5 percent).
In May 2018, He Keng, deputy director of the Finance and Economic Committee of the National People’s Congress, revealed at a forum that all local governments are facing serious financial difficulties. He added that no local governments are willing to repay their debts and some local governments cannot even afford to finance the interest on their debts.
