SinoInsight 1
The People’s Bank of China released its monetary policy implementation report for the third quarter of the year (2021年第三季度货币政策执行报告).
Key takeaways in the report include:
- In assessing the economic situation, the report bluntly notes that “it has become more difficult to maintain stable economic operations,” and omits the expression “further strengthening of the development momentum” that was used in the previous quarter’s report.
- The report notes that the external environment has “become more complex and severe,” with the global economic recovery weakening in momentum. Disruptions in overseas production and consumption, as well as longer-term inflation, are expected due to the possibility of the pandemic’s “pulsating disturbances” in the future, the intertwining effects of accelerated “green” transformation and “increased supply chain friction” in various countries, as well as supply chain bottlenecks and energy shortages. Meanwhile, attention must be paid to potential financial market turbulence and the spillover effects on emerging economics (i.e. capital flows shift outward) as major developed economies start to adjust their monetary policies.
- The report notes that China’s internal economic recovery still faces constraints from “phase-specific, structural, and cyclical factors.”
- The report mentions the need to “prevent secondary financial risks from arising in the process of dealing with risks in other areas,” and adds that government regulators will move more slowly and steadily in the process of resolving real estate market risks. The report believes that returns in the real estate market will tend to decline in the medium to long-term, and that the contribution of real estate investments to the economy will most likely fall slowly.
- The report believes that the world will be impacted by the spillover effect of the Federal Reserve’s tightening monetary policy. Also, it expects two-way fluctuation of the RMB exchange rate to become the norm, and the flexibility of the RMB exchange rate will be further increased.
- In the section “major policy ideas for the next phase,” the report omits the phrases, “persevere in not ‘opening the floodgates’ [releasing stimulus]” and “control the monetary gate” that were in the previous quarter’s report, and instead calls for “enhancing the stability of total credit growth.”
- The report proposes that future policies should “maintain a reasonable and sufficient liquidity,” “give full play to the leading role of structural monetary policy tools,” “support the real economy,” “persevere in not using real estate as a short-term means of stimulating the economy,” and “stabilize land prices, housing prices, and expectations.”
Mainland media outlets widely reported that beginning March 1, 2022, vendors will be prohibited from using personal payment codes on WeChat and Alipay to receive money for business purposes. This is in accordance with an Oct. 14 notice by the PBoC on strengthening payment acceptance terminals and related business (關於加強支付受理終端及相關業務管理的通知), which lays out specific requirements for the management of the payment business and merchants, as well as the monitoring of business transactions.
Dec. 2
Yang Weimin, a deputy director in the Central Chinese People’s Political Consultative Conference’s economic committee, said during an economic forum that housing prices in some cities have exceeded the limits of affordability for middle income groups. He added that housing prices are impacting manufacturing and innovation, and is especially unfavorable for long-term population growth.
Dec. 3
1. In a video meeting with International Monetary Fund chief Kristalina Georgieva, PRC premier Li Keqiang said that China will “cut reserve requirement ratios (RRR) in a timely way to step up support for the real economy, especially small and micro firms, to ensure stable and healthy economic operations.” He added that China will continue to implement steady economic policies, maintain reasonable and ample liquidity, and maintain prudent monetary policy.
2. The Guangdong provincial government summoned China Evergrande boss Hui Ka Yan for a meeting after the company announced in a filing to the Hong Kong stock exchange that it could not guarantee that it would have sufficient funds to make debt repayments. Evergrande also said in the filing that it had received a demand from creditors to pay $260 million, and was late in paying $82.5 million in coupons due on Nov. 6.
The Guangdong government said in a statement that it would send a working group to Evergrande to oversee risk management, strengthen internal controls, and maintain the company’s normal operations.
In the evening, the central bank and PRC regulators issued statements to reassure the market that risks to the property sector could be contained. The China Securities Regulatory Commission said that any fallout for the capital market was “controllable” and that it would continue support for real estate developers’ funding needs. The China Banking and Insurance Regulatory Commission said that the Evergrande case would not affect normal operations in the property industry and that it would step up support for guaranteed rental housing.
OUR TAKE
Beijing appears to be particularly concerned that the Fed accelerating the tapering of its large-scale bond buying and likely interest rate hike will trigger capital flight and adversely impact the Chinese economy. To cope with the Fed’s measures, the CCP signals that it would allow the yuan to fluctuate and devalue per requirements. The PBoC’s report and Li’s comment about cutting the RRR in a “timely way” suggest that the central bank is preparing to release stimulus and boost the growth rate of social financing as needed to rescue the economy.
Beijing, however, is wary that stimulus funds would flow to the property sector (see the last bullet point in the entry above on the report) and undo its efforts to carefully deflate the real estate bubble while growing the real economy. Beijing is looking to keep housing and rental prices within the means of most people to support its family planning policy and ensure that the Chinese economy does not lose too much momentum due to shrinking demographics. Concurrently, Beijing has to thread the needle and ensure that real estate companies get enough funds to tide them over their debt crisis and avert a “hard landing” for the industry.
2. There are several possible reasons why the CCP is banning the use of personal payment codes on WeChat and Alipay for business transactions.
First, Beijing is looking for ways to boost tax revenue. For instance, Chinese influencers selling services or products have been avoiding business taxes even when they are essentially operating a business when they accept payment using personal payment codes on WeChat and Alipay. The ban on personal payment codes for business transactions forces influencers or other individuals engaging in similar activity to apply for a business account and get taxed accordingly. Meanwhile, the CCP is using big data analysis in monitoring personal payments on WeChat and Alipay, and has already required individuals with relatively high cumulative amounts in their account to pay a personal tax rate of as high as 45 percent.
Beijing’s use of technology to secure more tax revenue, however, has the potential of being abused by the officialdom (“prefer left rather than right,” “one-size-fits-all” approach, etc.) to the detriment of regime stability. For example, local governments in less economically developed regions could conceivably expand the scope of big data analysis and target those who are struggling to survive (small businesses, poorer individuals, etc.) as they look to eke out more tax revenue; higher tax burdens will in turn make it harder for the poorer classes to survive and increase public discontent towards the CCP.
Second, Beijing is looking to rein in capital flight, online gambling, and phone fraud. This is consistent with the recent arrest of Alvin Chau and the broader crackdown on cross-border gambling and money laundering. The ban on WeChat and Alipay personal payments for businesses will make capital flight more difficult when the CCP releases stimulus and the Fed tightens its monetary policy.
Third, the CCP will be able to better promote the use of its digital yuan and monitor the flow of large amounts of money.
Finally, the CCP is weakening the ability of large technology companies to allocate resources in society while increasing the central government’s control over society and finance.
SinoInsight 2
Among those who wrote articles include Zhao Leji (CCDI Party secretary), Ding Xuexiang (CCP General Office director and Party Secretariat secretary), Huang Kunming (propaganda head), Wang Chen (NPC vice chairman and president of the China Law Society), Chen Xi (CCP Organization Department head), Yang Jiechi (Central Foreign Affairs Commission director), Li Hongzhong (Tianjin Party secretary), Liu He (PRC vice premier), Yang Xiaodu (National Supervisory Commission director), Guo Shengkun (CPLAC secretary) and Zhang Youxia (CMC vice chairman).
Notable articles include:
Li Hongzhong
Published on Nov. 26, Li Hongzhong’s piece was titled, “Resolutely Safeguard the Core of the Party and the ‘quan wei’ of Party Central” (堅決維護黨的核心和黨中央權威).
The article cited Mao Zedong and Deng Xiaoping on the importance of Party Central’s “quan wei,” and observed that “this is a scientific conclusion drawn from the Party’s historical experience. The quotes are:
- Mao: “There can be only one leadership core. How many cores are there in a peach when you slice it open? There is only one core”; “It is very important to have a unified leadership, to establish a leadership core, and to oppose ‘a state with three rulers.’”
- Deng: “Party Central must have ‘quan wei.’ If reform is to succeed, it must be carried out in an orderly manner and with leadership”; “Any collective leadership must have a core. There must be a core, and a leadership without a core cannot be relied upon … we must consciously defend the one core.”
- There is only one “Party core” in today’s China, and that core is General Secretary Xi Jinping. Also, to safeguard the Party core is to safeguard Party Central with General Secretary Xi Jinping at the core, as well as the core position of the whole Party.
- The subject of safeguarding Party Central’s “quan wei” and centralized, unified leadership is Party Central and not other organizations. The so-called “Two Safeguards” cannot be applied at every level and cannot be extended at will. The various levels of government cannot mention their own “quan wei,” and instead must look to the “quan wei” of Party Central.
- The “quan wei” of local governments and departmental Party committees at all levels is derived from and subservient to the “quan wei” of Party Central.
- Local officials “should not regard themselves as feudal era ‘men-on-the-spot’ [“一路諸侯” or “封疆大吏”], should not show disregard for Party Central, should not be unconventional, should not be a self-contained system, and should not do things another way.”
- Officials should “resolutely implement Party Central’s decisions and deployments, ensure the smooth flow of government orders, and execute orders without fail.”
Zhang Youxia
CMC vice chairman Zhang Youxia’s post-Sixth Plenum article was published on Nov. 30 with the title, “Resolutely Walk the Path of Strengthening the military with Chinese Characteristics” (坚持走中国特色强军之路).
The article claims that Xi’s call for the military to walk the path of “strengthening the military with Chinese characteristics” in his “historical resolution” fully demonstrates the “strategic determination” and “far-reaching considerations” of Party Central and Xi Jinping in building a “world-class military in all aspects.”
The article praises Xi’s various “achievements” in “strictly governing the military” (從嚴治軍):
- Xi is said to have promoted the “strong military” cause to achieve historical achievements and historic change.
- Xi “turned the tide” and “delivered the country from distress” by addressing serious political risks facing the PLA in the period before the 18th Party Congress.
- The Xi leadership investigated and dealt with Guo Boxiong, Xu Caihou, Fang Fenghui, Zhang Yang, and other serious disciplinary cases, and thoroughly purged their “poisonous influence.”
- Xi adhered closely to the comprehensive and strict governance of the Party and the military “without relaxing,” paid close heed to the spirit of Party Central’s Eight-point Regulations and the implementation of the CMC’s ten regulations, changed the “Four Winds” (formalism, bureaucracy, hedonism, waste), comprehensively ceased military paid services, and achieved overwhelming victory and comprehensive consolidation in the fight against corruption.
Analysis: Zhang Youxia’s piece obliquely faults Xi’s more immediate predecessors with corrupting the military while crediting Xi with “saving” the military through strict governance. Given Xi’s “heroics,” the military should therefore be loyal to the Party (i.e. Xi Jinping).
Chen Xi
Organization Department head Chen Xi’s article was published on Dec. 1 with the title, “The Necessity of Grasping the Fundamental Plan of Succession” (必須抓好後繼有人這個根本大計).
The article notes that Xi’s “historical resolution” had “clearly defined the key points and focus points for cultivating a large number of successors who can take up important responsibilities of the times. Also, Party Central with Xi at the core had proposed the Party’s “organizational line for the new era,” including:
- “Votes, scores, GDP, age, and internal elections” should not be counted in the selection of personnel. The “unorthodox winds in the selection and appointment of personnel” should also be “resolutely corrected.”
- Promoted cadres must be “loyal, honest, and responsible.” In selecting cadres, the first item that should be considered is the cadre’s loyalty towards the Party.
- The “political stance, political direction, political principles, and political path” of cadres should always maintain a high degree of consistency with Comrade Xi Jinping, who is the core of Party Central.
- There should be “vigorous training and selection” of young cadres. There is a need to build a team of “excellent young cadres” who faithfully adhere to “Xi Jinping Thought on Socialism with Chinese Characteristics in the New Era,” and ensure that they are in “sufficient quantity, with excellent quality and vitality.”
- Regarding the cultivation and selection of young cadres, there is a need to 1) strengthen political training; 2) optimize their growth path, with an emphasis on ground-up work experience; 3) discover and select outstanding talents from a wider pool; 4) use them in a timely and bold manner; 5) strictly manage and supervise them.
The Xi leadership is also taking pains to groom and promote young cadres up the ranks. This is consistent with our 2017 analysis about the downsized CMC where we explained that Xi will promote a new guard of young officers who will be loyal to him to replace those who climbed the ranks during the Jiang faction’s era of dominance, who are likely tainted by corruption and whose loyalty is suspect.
Guo Shengkun
Central Political and Legal Affairs Commission head Guo Shengkun’s article was published on Dec. 2 with the title, “Building an Even Higher Standard of Safety in China” (建设更高水平的平安中国).
The article claims that Party Central under Xi Jinping’s leadership had made “historic achievements in the fight against blackness and evil,” before rattling off several statistics:
- A total of 3,644 gang-related organizations and 11,675 criminal groups were eliminated nationwide from 2018 to 2020. The number of eliminated gang-related organizations was 1.28 times that of the previous decade.
- From 2018 to 2020, 89,700 gang-related corruption and “protective umbrella” issues were investigated and dealt with. Cases were filed against 115,900 people and handled; 54,700 weak and lax village Party organizations were investigated and rectified; and 42,700 problematic village cadres (“village tyrants,” criminal gang participation, etc.) were investigated and rectified.
Analysis: Guo Shengkun’s promotion of Xi’s “stability maintenance” track record and “achievements” is tantamount to accusing previous Party bosses of failing to do their job. Meanwhile, Xi is credited with cleaning up their mess after strengthening Party Central’s leadership.
OUR TAKE
1. The post-Sixth Plenum articles by senior officials largely adulate Xi Jinping and obliquely criticize the rule of his more immediate predecessors. For instance, the senior officials tout Xi’s “achievements” in their respective fields, such as Xi’s role in saving the Party and the military, comprehensively carrying out anti-corruption and economic reforms, promoting “rule by law,” and strengthening Party Central’s unified leadership over the central government. In praising Xi’s contributions, the senior officials indirectly end up casting shade on the Jiang Zemin and Hu Jintao eras, including the shortcomings of “collective leadership” system, the weak leadership of the central government, the prevalence of corruption, the “disorderly expansion of capital,” and the monopolization of industries that hurt the real economy.
The articles reinforce the messaging of Xi’s “historical resolution” and represent a further effort by Xi to carry out political mobilization as he prepares for intensifying factional struggle against the Jiang faction and other factional rivals in the lead-up to the 20th Party Congress in 2022. Xi is signaling through the articles that officials and Party members must internalize the “spirit of the Sixth Plenum” and adhere to the new political orthodoxy that he has defined. Also, officials and Party members must abandon the shortcomings and political norms of the period during which the Jiang faction was dominant if they are to prosper in the Xi era.
It is possible that some of the senior officials who submitted post-Sixth Plenum articles were part of the team that drafted Xi’s “historical resolution.” The official “historical resolution” explanation article noted that the working group behind the resolution was headed by Xi, with Wang Huning and Zhao Leji serving as deputy chiefs. Relevant Party and state leaders, as well as the heads of relevant central departments and localities, had also participated in the drafting process.
2. We previously pointed out the lack of open pledges of support for Xi Jinping from the military after the Sixth Plenum and laid out three possible scenarios for why this may be. The fact that only Zhang Youxia was “allowed” to make a post-Sixth Plenum open pledge of support on behalf of the military suggests that Xi is facing the second scenario, i.e. Xi is concerned with the loyalty of his military leaders due to lingering elements of opposition in the PLA, and therefore needs to tightly control who is allowed to make public loyalty pledges.
