SinoInsight 1
On June 9, PRC premier Li Kiqiang said during an executive meeting of the State Council that the State Council plans to aid companies involved in foreign trade and employ “nearly 200 million people” to convert some of their foreign sales to domestic sales.
Also on June 9, the People’s Bank of China announced the rollout of a pilot program in Hebei Province (effective July), Zhejiang Province and Shenzhen City (effective October) to regulate large-sum cash transactions. Business cash transactions of or exceeding 500,000 yuan (about $70,600) would be regulated in all three areas. Personal transactions of 100,000 yuan, 200,000 yuan, and 300,000 yuan will be regulated in Hebei, Shenzhen, and Zhejiang respectively. Bank clients who require cash transactions above the regulated threshold need to comply with registration rules and obtain an approval.
On June 11, the PRC Ministry of Finance issued a statement on the 2020 government departmental budget. The statement noted that general expenditures will be reduced to comply with recent “belt-tightening” policies. For 2020, 740.19873 billion yuan will be allocated to the general public budget, or 50.7 percent less than 2019. Meanwhile, the budget for government expenses (travel abroad, transportation, receptions) in 2020 was reduced by 30.038700 million yuan, a decrease of 55.11 percent from a year ago.
On June 13, mainland media reported that Beijing tax authorities are requiring sellers on Tmall.com, JD.com, and other e-commerce platforms to pay all unreported late fees and taxes owed to the government over the past three years. The Beijing tax authorities alerted 2,000 sellers in the first wave, requiring them to pay back owed taxes and fees based on their online platform transaction records.
OUR TAKE
1. The fact that the CCP government is drastically slashing public expenditure and collecting back taxes from companies suggests that the Chinese economy is doing exceptionally poorly this year. Chinese companies will also find it hard to survive in 2020 as they struggle with the coronavirus impact on sales revenue and government taxes.
Meanwhile, the CCP is likely pre-empting bank runs in the event of a financial crisis through the regulation of cash transactions in large amounts.
2. Due to the economic downturn in recent years, many Chinese companies partake in fake transactions on e-commerce platforms (刷單) to boost their ranking and visibility on those platforms, and commit tax evasion. Those companies now face retribution as they are required by tax authorities to pay back taxes based on their online payment transaction records.
Previously, sellers on Chinese e-commerce platforms managed to avoid paying taxes by making only online transactions as the authorities collected taxes based on physical legal receipts (發票). However, the CCP appears to have closed up this tax loophole in recent years by forcing online payment platforms to hand over their data while using advances in Big Data technology to track merchant transactions.
The CCP’s ability to track merchant transactions spells disaster for sellers on e-commerce platforms. The majority of top-listed sellers usually sell low-cost goods and have slim profit margins (about 10 percent), but were able to stay afloat by avoiding taxes. Now, sellers are liable to pay value-added tax (13 percent), additional tax (12 percent), and corporate tax (25 percent), or at least 350,000 yuan in taxes per 1 million yuan of revenue (not including late fees and other fines). We believe that many companies could declare bankruptcy as a result of having to pay back taxes and fines.
3. The CCP needs to regulate cash transactions in large amounts because it is likely anticipating economic and financial trouble down the road in light of deteriorating Sino-U.S. relations and the impact of the coronavirus pandemic.
Li Keqiang’s observation that 200 million people are involved in enterprises that partake in foreign trade hints at what the CCP is really worried about—more than a quarter of China’s working population (775 million people) faces risk of unemployment if conditions continue to worsen. Mass unemployment would set off a chain reaction that would lead to economic and regime collapse: Companies will default on debts; workers will default on mortgages; banks will be saddled with increasing amounts of bad debt; and bank runs could set off a chain of bank failures (small- and medium-sized banks that have been taken over by the government in the past two years are technically bankrupt).
SinoInsight 2
Recently, some observers have begun linking official rhetoric on the “street stall economy” (地攤經濟) to the CCP factional struggle.
PRC premier Li Keqiang promoted the “street stall economy” and street hawkers in late May and early June as a way for China’s coronavirus-hit economy to get back on track. Li described street stalls as the “lifeblood” of the Chinese economy, and officials said that cities will not be penalized in the “national civilized cities” ranking for allowing street stalls.
Li’s “street stall economy” promotion was met with pushback around the first week of June. Beijing Daily, a local official media, ran a commentary titled, “The Street Stall Economy is Not For Beijing” on June 6 that criticized street stalls and noted that chengguan (thuggish local law enforcement officers) would crackdown on illegal street stalls. State broadcaster China Central Television issued a commentary piece on June 7 about how people should not rush to set up street stalls and another commentary on June 8 about the incompatibility of the “street stall economy” for first-tier cities in mainland China. Local official media in some Chinese cities also ran commentaries on similar themes.
Some observers believe that the difference in official attitude towards the “street stall economy” is the result of factional struggle between Li Keqiang and Xi Jinping.
OUR TAKE
1. We do not believe that the “debate” over the “street stall economy” that has played out in PRC official media is an outcome of factional struggle. Rather, the issue is one of the CCP trying to have its cake and eat it.
2. It is certain that Xi Jinping and Li Keqiang do not see eye-to-eye on all issues. However, it is very unlikely that their political alliance is over given current political realities.
The Jiang Zemin faction’s coup attempt against Hu Jintao and Xi Jinping before Xi took office in 2012 drew Hu, Xi, and Li (a Hu ally) together in an alliance (see our factional struggle guide). While the Jiang faction has weakened considerably as a result of Xi’s policies (anti-corruption campaign, institutional reform, personnel reshuffles, etc.), they retain crucial influence in the CCP regime and are the strongest faction in the “anti-Xi coalition.” As long as the Jiang faction remains a serious political force, Xi Jinping and Li Keqiang have no incentive to break up their alliance. This is especially so because Xi is nowhere near the all-powerful, unchallenged dictator as depicted by mainstream scholars and media outlets, and still needs political allies to aid him in policy implementation.
Party operations and culture also make it extremely unlikely for Li Keqiang to directly challenge Xi Jinping even if he wanted to. Li will need to muster immense support and tap into powerful factional networks to take on Xi, the Party princeling, (descendants of founding revolutionaries who view themselves as rightful heirs of the “red dynasty”), something that he can never accomplish because he hails from a “commoner” background (officials who are unrelated to the founding revolutionaries). Of course, Li could hypothetically switch alliances and join the so-called “anti-Xi coalition,” but he would end up being a puppet at best like Hu Jintao (another “commoner” official) given his lack of revolutionary heritage. Worse, Li would never be fully trusted by those who oppose Xi, because the CCP elite usually regard those who change sides as irredeemable traitors.
3. Prior to Li Keqiang’s “street stall economy” push, the PRC central government had been signaling weakness in the Chinese economy (“six stabilities,” “six guarantees,” 600 million people living on 1,000 yuan a month, etc.) and stressing the need for poverty alleviation. In other words, Li’s promotion of the “street stall economy” is almost certainly a specific central government policy initiative to fight poverty and rescue the economy, and is not, as some observers have claimed, something that the PRC premier cooked up as a challenge to Xi or to boost his own popularity.
The “pushback” against Li’s “street stall economy” initiative is the result of contradictions in the CCP regime. On the one hand, the CCP needs to resolve unemployment problems in China and arrest the economic downslide. On the other hand, first-tier cities like Beijing and Shenzhen cannot afford to have unhygienic and unsightly street stalls thronging roadsides and contributing to urban decay. Hygiene and environmental considerations aside, first-tier cities cannot allow street stalls to undercut brick-and-mortar shops, disrupt the local economy, and affect the confidence of foreign investors. Local officials, and particularly those in first-tier cities, who are looking to deliver results and climb the political ladder thus have greater incentive to curb street stalls rather than heed the central government and Li Keqiang on the “street stall economy” issue. CCTV’s release of critical commentaries on street stalls suggests the Xi leadership already anticipated the political contradiction and gave local officials some wriggle room to disregard the central government’s policy where relevant.
4. Party culture and internal contradictions in the CCP regime mean that the “street stall economy” is little more than a “band aid” for China’s intractable economic problems. This is best illustrated by a mainland media report published just days after Li Keqiang promoted street stalls. According to the report, the Zhengzhou City authorities charged street hawkers on Jiankang Road 20 yuan a month to set up stalls there when the stalls first opened. Within days, the authorities were charging 800 yuan, with some street hawkers being levied as much as 2,000 yuan to 3,000 yuan—a greater than 100-fold increase. A disastrous cycle emerges: Chinese people who are looking to make a living through setting up “cheaper” street stalls make low margins because they are at the mercy of local officials looking to exploit all possible avenues to boost government revenue (and hence burnish their political accomplishments) during tough economic times. Once local officials take too much money from street hawkers, the hawkers will end up being out of business again and the economy on the whole will be negatively affected.
