SinoInsight 1
The PRC authorities lifted the mass quarantine on Hubei Province with the exception of Wuhan City, the original epicenter of the COVID-19 coronavirus, on March 25.
Officially, people who are free of the contagion and have been issued a “green code” by the provincial authorities certifying so are allowed to leave Hubei. Unofficially, however, the surrounding provinces continue to bar people from Hubei from entering their area, resulting in the outbreak of fierce clashes in some instances.
- On March 27, public security officers from Jiujiang City in Jiangxi Province crossed the Yangtze River and set up a checkpoint in Hubei’s Huangmei County to stop people from Hubei from entering Jiujiang. This drew the attention of Hubei public security, and scuffles broke out that morning between the public security officers of Jiujiang City and Hubei Province. Later, thousands of people from Hubei joined in the brawl, resulting in smashing and overturning of several Jiujiang riot police vehicles. The skirmish also led to the hospitalization of several Jiujiang public security officers and auxiliary public security officers.
- Also on March 27, a video making the rounds on Chinese social media showed Hubei residents on the road leading to Susong Country, Anhui Province holding aloft banners protesting the Susong local government for setting up obstacles to prevent people from Hubei Province from traveling to Susong.
- On March 28, a video circulating on Chinese social media showed that vehicles from Hubei Province were banned from traveling on Henan’s Xinyang Expressway (highway). Video footage showed hundreds of cars stopped in front of the highway’s entrance.
Meanwhile, the PRC central government continues with its drive to get people back to work.
On March 29, Xi Jinping visited the coastal province of Zhejiang. Xi inspected the port at Ningbo and an industrial zone for high-end auto parts where he learned about local efforts to “restart production,” according to a report by state mouthpiece Xinhua. Another Xinhua report said that Xi’s visit to Zhejiang sent a “clear message” that China was resuming regular social activity and production. A Xinhua commentary piece titled “Get Warmed Up! Get Busy!” noted that the resumption of agricultural product wholesale markets across China had reached 99.4 percent, while the resumption rates of large supermarket chains and convenience stores was 99.5 percent and 95.4 percent respectively.
OUR TAKE
1. The phenomenon of Hubei residents being blocked from traveling to other parts of China suggests that many local governments do not believe the central government’s epidemic data. In fact, even the central government might not fully believe its own coronavirus rhetoric; there is no indication that the Beijing municipal government has removed its Feb. 29 order barring people from Hubei or those who had recently visited the province from traveling to Beijing.
We wrote on Feb. 27 that “the regime may see a rise of ‘regionalism’ as cadres shift from passivity to being ‘proactive’ in looking out for local interests first.” The barring of Hubei residents shows that regionalism is definitely on the up in the PRC.
2. Xi Jinping’s Zhejiang trip is clearly aimed at galvanizing local governments into getting people back to work and resuming production. On the flipside, the fact that Xi needs to attempt this “PR stunt” indicates that local governments are not doing what the central government wants, most likely out of fear that the regular resumption of work and production could trigger subsequent epidemic outbreaks, turn their area into a second Wuhan, and torpedo the political careers of leading local government officials.
We previously noted that local officials have found “creative” ways to satisfy the central government’s “work resumption” criteria, including ordering factories to turn on their machinery and lights to meet electricity consumption benchmarks. Such measures may protect the interests of local officials, but business owners are left to pick up the tab. A post on Chinese social media from a family business in Zhejiang says that the Zhejiang local government “does not care whether factories live or die” by forcing them to keep their machines operating at maximum capacity even though there is insufficient demand to justify the move. The post claims that the family business loses 60,000 yuan per day from running their machines and notes that they will go out of business by the second half of the year at the current rate. Further, the post says that the family business would rather pay wages to workers who are not working [likely due to epidemic restrictions], than continue with the current arrangement, but “why doesn’t the government let us stop our machines!”
The CCP’s “survival-dominance” dynamic runs through all levels of the Party. At the local level, the survival of individual officials can take precedence over regime survival, particularly when the central government appears to lack the means and cannot be trusted to look out for the interests of the localities.
3. In analyzing Xi Jinping’s Feb. 23 national teleconference meeting with 170,000 Party cadres and military personnel, we noted Xi was “likely looking to mitigate the regime’s age-old ‘game of telephone’ problem in epidemic prevention and control work.” However, we remained pessimistic that Xi had found a solution to the problem of having his orders properly implemented once they are issued from Zhongnanhai (政令不出中南海).
What is currently happening on the ground in China appears to be developing just as we predicted back in February: “Local officials may understand perfectly what Xi is driving at, but they will find ‘innovative’ ways to fulfill them and safeguard their political capital. For instance, local governments can both ensure that strict quarantine measures are in place and show on paper that regular work production has been resumed (factories can turn on their machines and ‘show’ that work is being carried out as measured by electricity consumption). When the regime runs into trouble later due to fraudulent practices at the local level, Xi Jinping will still be blamed because he is the Party’s ‘core’ leader and the buck stops with him.”
4. The recent actions of local governments indicate that they are very aware that the “CCP virus” has not yet been contained in China, no matter what the central government says. Therefore, businesses, investors, and governments must pay attention to political gestures in the PRC and not allow themselves to be misled by the CCP’s official coronavirus data or its “work resumption” figures. Understanding political risks in the PRC is key to mitigating risks and discovering opportunities in China.
SinoInsight 2
According to data released by the PRC National Bureau of Statistics (NBS) on March 27, China’s enterprises above designated size made total profits of 410.07 billion yuan during the January to February period this year, a year-on-year decrease of 38.3 percent.
OUR TAKE
1. According to NBS data, China’s enterprises above designated size earned total profits of 708.01 billion yuan during the January to February period of 2019. In comparing the 2019 and 2020 data, enterprises above designated size in China should have seen a 42 percent decrease in total profits, not the 38.3 percent as claimed by the NBS.
Since 2018, the NBS has been explaining the discrepancy in its own economic data by claiming that it applies a “comparable caliber” in its calculations. Then, the NBS claimed that it needed to use a “comparable caliber” in its calculations due to the difference in sample sizes for enterprises above designated size, or industrial enterprises with annual main business revenue of 20 million yuan or more. However, because the sample size of enterprises above designated size would almost certainly change every year, it does not make sense for the NBS to only use a “comparable caliber” from 2018. The use of a “comparable caliber” also implies that the NBS had been “miscalculating” its macroeconomic data for some time.
The real problem with the NBS data is not its use of a “comparable caliber,” but rather, the CCP’s penchant for manipulating official data to suit its purposes. With most of China under lockdown for nearly two months and local governments being slow to get people back to work to resume production (see SinoInsight 1), it is highly dubious that China’s enterprises above designated size only saw a 38.3 percent decline in total profits as the NBS claims.
2. According to the recent NBS data, total profits for state-owned enterprises, foreign investment enterprises, and private enterprises that are above designated size fell by 34.1 percent, 55.1 percent, and 36.1 percent respectively.
In comparing past NBS data, total annual profits for enterprises above designated size fell 11.8 percent between 2017 (75.187 trillion yuan) to 2018 (66.351 trillion yuan), and 6.6 percent between 2018 to 2019 (61.996 trillion yuan).
The CCP’s own official figures indicate that the coronavirus epidemic is on track to have a far greater negative impact on the Chinese economy than the Sino-U.S. trade war.
3. From the enterprises above designated size revenue and operating income per capita data provided by the NBS, we estimate that the number of employees hired by enterprises above designated size could have decreased by as many as 6.64 million during the January-February period of 2020 as compared to the same period in 2019. Of the 6.64 million, 760,000 came from state-owned enterprises, 1.54 million from foreign investment enterprises, and 2.66 million from private enterprises. The “reduced” number of employees at enterprises above designated size revenue could be partially due to the exclusion of companies (and their employees) that were once above designed size but failed to make the cut this year. Still, the figure offers insight into the possible unemployment situation at large companies in China.
If the estimate is a close reflection of reality, then the coronavirus outbreak led to fewer people working at enterprises above designated size in two months than the whole of 2019 (6.58 million fewer) when the Sino-U.S. trade war was already underway. In using the same estimation method, there could be nearly 25 percent fewer people working for enterprises above designated size as of the first two months of 2020 (68.33 million) as compared to 2017 (90.38 million), the year before the trade war broke out.
4. According to a March 29 Xinhua report, the average work resumption rate in China (not counting Hubei Province) is:
- 95 percent for enterprises above designated size;
- 70 percent for small and medium-sized enterprises;
- 99 percent for large-scale wholesalers;
- 80 percent for the catering industry;
- 60 percent for the lodging industry;
- and 40 percent for the housekeeping industry.
Without going into the authenticity of Xinhua’s data, things look bleak for businesses in China given that enterprises above designated size are seeing decreased profits of 38.3 percent (or 42 percent without a “comparable caliber”) and 6.64 million fewer people working for them in the first two months of the year even with such a “high” work resumption rate. Small and medium-sized enterprises in China and other types of businesses would almost certainly have been hit harder by the coronavirus outbreak than enterprises above designated size.
5. A prolonged shutdown of the Chinese economy brings the risk of large-scale business failure and sharply rising unemployment, which in turn jeopardizes regime security. Thus, Xi Jinping has been pushing local governments to get people back to work even though the CCP regime has not curbed the epidemic.
