SinoInsight 1
The Chinese language edition of The Epoch Times published transcripts (see here and here) of an interview with Wu Guoguang, a professor of political science and history at the University of Victoria in Canada and a former member of the central policy group on political reform under PRC premier Zhao Ziyang.When asked to comment on the over 42,000-character “An Objective Evaluation of Xi Jinping” article by “Fang Zhou and China,” Wu said that the “biggest logical confusion” of the piece was claiming that “all the bad things that the CCP is doing now began from Xi Jinping.” He added that he was not looking to defend Xi, but merely point out the fact that things like internet control, control over civil society, the suppression of private enterprise, etc. did not start with Xi even though the latter “did take those a step further.”“So why does this article attribute all those things to Xi Jinping? In fact, many people have pointed out that the key point of this article is so-called, ‘anti-Xi, not anti-CCP,’” Wu said. Wu believes that “post-Tiananmen era” Party elites like Jiang Zemin and Zeng Qinghong are the ones likely behind “An Objective Evaluation of Xi Jinping,” and not liberal intellectuals or overseas anti-CCP dissidents, because the article “intentionally separates Xi from what the CCP did before Xi” even though there was no deviation in the CCP’s behavior. “This I think is very unobjective,” Wu said.
Wu Guoguang said that someone had sent him the article shortly after it was published on the 6park (留園網) overseas Chinese language internet forum. He noted that the article had barely any traction at the time, but was suddenly being republished and promoted by virtually all Chinese language news websites several weeks later. “I don’t rule out that some Great External Propaganda Plan (GEPP, 大外宣) organizations are behind the strong promotion of the article,” Wu said. “In fact, many GEPP organizations obtained massive benefits during the Jiang-Hu era when funds were allocated to them.”
Wu added that the CCP had “such deep connections” with the West especially during the Jiang era, which led to the establishment of “many various kinds of propaganda organizations” overseas. He believes that the “intensive and vigorous promotion” of “An Objective Evaluation of Xi Jinping” and subsequent similar articles (including “An Objective Evaluation of Bo Xilai”) are “coordinated affairs” and not “completely spontaneous actions.”
Wu observed that George Soros also made remarks that were critical of Xi Jinping but not the CCP around the time that “An Objective Evaluation of Xi Jinping” was circulating. “This is not a conspiracy theory … there are many conspiracies in the political process,” he said. Wu believes that the article and Soros’ remarks have the effect of sowing doubt in Chinese and Western public discourse about whether Xi can successfully take a third term at the 20th Party Congress.
Wu Guoguang offered two reasons for why the U.S. and the West are talking about “anti-Xi, tolerating CCP” (反習容共). First, they believe that such a strategy is feasible because only the Party elite stand a chance of ousting Xi, not the commoners in the streets. Second, they have interests in China, but Xi has seriously damaged their interests, including “economic collusion with China (the CCP) and making a fortune.” The U.S. and the West would “rather go back to the Jiang Zemin era” where “everyone was fine” than help China make progress like how it was “in the 1980s or better” (Hu Yaobang and Zhao Ziyang era), or push for political systems on the mainland like “Hong Kong with freedom and the rule of law, and democratic Taiwan,” according to Wu.
Analysis: Wu Guoguang’s analysis of the “An Objective Evaluation of Xi Jinping” article and his observations about the “anti-Xi, not anti-CCP” phenomenon align closely with our own analysis and observations over the past one years. See our breakdown of the “Fang Zhou and China” article and our previous newsletters on external efforts targeting Xi but not the Party (here, here, here, here, here, and here).
March 16
Jude Blanchette, the Freeman Chair in China Studies at the Center for Strategic and International Studies, wrote in Foreign Affairs magazine that Xi Jinping’s “mounting failures” in foreign policy “highlight an increasingly evident trend: the more powerful Xi becomes and the more direct authority he exerts over Beijing’s foreign policy, the more adverse the outcomes are for China’s long-term strategic interests … What is taking shape is less China’s foreign policy than Xi’s.”
March 18
Liu Yawei, the editor of the U.S.-China Perception Monitor and director of the China program at the Carter Center, gave an interview with the Hong Kong-based China Review News Agency regarding the Biden-Xi phone call.
Liu believes that President Joe Biden was eager to talk to Xi Jinping, and the latter was also eager to make China’s position on the Russia-Ukraine war clear to Western leaders.
Liu added that both leaders should realize that while the sky may not fall if they do not cooperate, both will be exhausted in trying to hold up the sky on their own. He believes this is because the United States no longer has the capability, resources, and popular support to maintain world peace and stability single-handedly, while China’s return to the era of self-reliance will arouse dissatisfaction from people who reaped the dividends of “reform and opening up” in recent decades.
Background and analysis: China Review News Agency is a Hong Kong pro-establishment camp media outlet that reportedly has links to United Front organizations connected with the People’s Liberation Army General Political Department.
Liu Yawei is the younger brother of Liu Yazhou, the former People’s Liberation Army Air Force general who was arrested in late 2021 for what appears to be political and factional struggle reasons. Liu Yawei’s remarks to the China Review News Agency hinting at the deterioration of Sino-U.S. relationship reads like indirect criticism of Xi Jinping’s “great power diplomacy.” Meanwhile, his “arouse dissatisfaction from people who reaped the dividends of ‘reform and opening up’” comment almost certainly refers to Party elites and interest groups from the Deng Xiaoping and Jiang Zemin eras who are displeased with Xi Jinping and his policies.
March 24
Yibao, a Chinese language dissident-run news and commentary website, published a 5,500 character piece titled, “Chinese Netizen: Xi Jinping Must Step Down” (中國網民: 禍國殃民的習近平必須下台). The article quickly became a topic of discussion in Chinese language circles.
The article opened by accusing Xi of “breaking existing political rules and conventions” and “preparing to learn from Russian president Vladimir Putin and rule for 20 years.” It added that “the majority of people are opposed” to Xi extending his tenure and believe that he must step down “otherwise China will cease to be a country.”
The article excoriates Xi from start to finish, claiming that he has lost the “will of Heaven and the people,” and is “lacking in virtue, talent, and competence.” The article proceeds to list his failures, including the PRC’s mishandling of the Russia-Ukraine war, the recent COVID-19 outbreaks, and the “Xuzhou chained woman” incident. The article states that Xi’s performance over the past decade shows that he “cannot shoulder the heavy responsibility of defending China’s sovereignty and dignity, and has no ability to realize the peaceful reunification of the motherland” (i.e. Xi lacks the ability to take Taiwan). Further, Xi’s presence is the “biggest stumbling block to the rejuvenation of the Chinese nation and the biggest obstacle to China’s rise.”
The article does not criticize the CCP.
Analysis: “Chinese Netizen: Xi Jinping Must Step Down” reads like a “commoner” version of “An Objective Evaluation of Xi Jinping” that does not push factional and elite interests. In contrast, the author behind the latter piece, “Fang Zhou and China,” noted on its social media page that it is a “cabin of the rich and powerful” (權貴的船艙). The lengthy “Objective Evaluation” of Xi carries a clear Jiang faction bias and represents elite views.
Like “An Objective Evaluation of Xi Jinping,” the latest critique of Xi on Yibao does not fault the CCP or earlier Party elites for China’s current state, but holds Xi Jinping solely accountable. “Chinese Netizen: Xi Jinping Must Step Down” only differs from “An Objective Evaluation of Xi Jinping” in being more concise, polished, and up-to-date with the inclusion of Xi’s latest failures, while in essence remaining entirely consistent with the latter in being “anti-Xi, not anti-CCP.”
March 27
1. Frederick Kempe, president and CEO of the DC-based think-tank the Atlantic Council, published an op-ed titled, “By doubling down on Putin, Xi is gambling his own power.”
Kempe noted that while “geopolitical oddsmakers still expect a carefully choreographed outcome at the Congress that would anoint Xi for a third term and perhaps even as ‘leader for life,’” a “Putin failure of whatever stripe could ‘create the chemistry necessary for a rethink of Chinese leadership inside the party,’ Kevin Rudd, the former Australian prime minister, tells me. Though Xi’s control remains ‘comprehensive,’ Rudd says, it’s not ‘complete.’”
Kempe added later on in the piece that “the problem for Xi, in this most important of years for his historic legacy, is that his problems are self-inflicted, cumulative, and growing. None on its own would be enough to turn Party comrades against him, especially after a series of purges that have removed potential opponents. Taken together, however, they have dramatically changed the mood.”
Background: The Atlantic Council previously published “The Longer Telegram” in January 2021, a China strategy that we analyzed as being “anti-Xi, not anti-CCP.”
In the foreword, Frederick Kempe described “The Longer Telegram” as “one of the most insightful and rigorous examinations to date of Chinese geopolitical strategy and how an informed American strategy would address the challenges of China’s own strategic ambitions.” He added that the “perspectives set forth in this paper deserve the full attention of elected leaders in the United States and the leaders of its democratic partners and allies.”
2. A nine-point “written brief” (上書) allegedly penned by former PRC premier Zhu Rongji to Xi Jinping made the rounds on social media. The “written brief” criticizes Xi over “zero-COVID,” the economy, the “Xuzhou chained woman” incident, “wolf warrior” diplomacy, support for Russia, cult of personality and removing term limits, and for “ruling the country without virtue.” The “written brief” also proposes putting Hu Jintao, Zeng Qinghong, and Wang Yang in charge of 20th Party Congress work.
The “Zhu Rongji written brief” was quickly debunked by many Chinese commentators due to its irregularities. For one, Zhu did not need to submit a formal “written brief” to get word to Xi Jinping as he is a Party elder and has his own direct channels. Zhu is also known for doing things in a low-key manner and going public with criticism is uncharacteristic behavior. Moreover, some proposals in the “written brief” were too outlandish and ridiculous for them to have come from Zhu, particularly the points about “ruling the country without virtue” and having Hu, Zeng, and Wang oversee 20th Party Congress work.
March 28
During a session of Taiwan’s Legislative Yuan, DPP legislator Lin Shu-fen asked ROC National Security Bureau director-general Chen Ming-tong to shine light on the forces behind “An Objective Evaluation of Xi Jinping” and the article’s agenda, according to Taiwanese media reports. Chen said that he would be willing to brief Lin about the report in private.
Lin followed up by asking Chen whether the mainland regime is stable. Chen answered by pointing out the difference between how democracies and dictatorships resolve pressures and challengers from the people. He then quoted Huang Yanpei’s “rise suddenly in the beginning, fall suddenly at the end” (其興也勃焉, 其亡也忽焉) remark to Mao Zedong, before clarifying that dictators are well aware that while things may look good for the regime at present, the regime can collapse overnight.
Political mobilization and purges
March 28
State mouthpiece Xinhua published a piece touting Xi Jinping’s epidemic prevention and control political “achievements” since 2020 titled, “Always Put People and Life First —— A Commentary on General Secretary Xi Jinping’s Command in the Battle of Planning Epidemic Prevention and Control, and Economic and Social Development” (“始終堅持人民至上、生命至上”——習近平總書記指揮打好統籌疫情防控和經濟社會發展之戰述評).
The article stated that Xi Jinping “personally directed and deployed” the “scientific strategy to cope with the extraordinary difficulties” brought about by the “epidemic of the century.” Xi also “established the general strategy to prevent imported cases and internal rebounds, and the general policy of dynamic zero-Covid,” as well as “united and led hundreds of millions of people in fighting the battle of planning epidemic prevention and control, and economic and social development.”
The article added that while Xi constantly adjusted “specific prevention and control strategies” to account for the frequently mutating virus and evolving situation, his theme of “adhering to the people-centered approach and putting the people at the highest position in his heart” did not change.
The article also claimed that Xi “personally planned and deployed” China’s “solid actions to consistently promote a high level of opening up to the outside world and strengthen international cooperation, showing the world the responsibility of the world’s second-largest economy.” Xi also put forth two proposals to build a “community of human health and fitness” (人類衛生健康共同體 ) and a “community with a shared future for global development” (全球發展命運共同體).
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March 23
Zhou Quanfu (age 59), a first-level inspector of the Guizhou Provincial Department of Justice, was investigated. Zhou previously served as deputy director of the Guizhou Provincial Department of Justice from November 2016 to December 2020.
March 24
Huang Yi (64), a former vice chairman of the Yunnan Provincial Political Consultative Conference, was investigated. Huang was the former head of the Yunnan Provincial United Front Work Department from November 2006 to January 2017.
March 25
1. Sheng Guangzhu (63, ministerial-rank), a former Party secretary and general manager of China Railway and a former deputy chairman of the National People’s Congress Financial and Economic Affairs Committee, was investigated.
Sheng was transferred to the General Administration of Customs to serve as its director in April 2000, a position he held for nearly 11 years. In February 2011, he replaced Liu Zhijun, who was purged for corruption, as minister of railways.
2. Yang Yi (49), former chief prosecutor of the Kaizhou District Procuratorate in Chongqing City, was investigated.
3. Qi Huaimin (63, retired in December 2017), former president of the Suzhou Intermediate People’s Court in Anhui Province, was investigated.
March 29
1. Hao Chunrong (59, female), vice governor of Liaoning Province, was investigated. Hao had served as vice governor for four years, and was the second vice governor from Liaoning to be investigated in March.
2. Xie Xiaodan, (59), a former Standing Committee member of the Guangzhou Municipal Party Committee and former Guangzhou Municipal Political and Legal Affairs Commission secretary, was investigated.
Xie served as secretary-general of the Guangzhou Municipal government and General Office director before his transfer to the provincial political and legal affairs apparatus. Xie was appointed director of the Guangzhou Municipal Public Security Bureau (January 2016 to September 2016) and deputy secretary of the municipal Political and Legal Affairs Commission (January 2016 to October 2016), before being promoted to Guangzhou PLAC secretary (October 2016 to November 2017).
3. Lin Zhenwen, director of the Ministry of Justice Information Center, was investigated.
March 30
Guo Baoqin (58), the former head of the Tianjin Municipal Party Committee inspection team, was investigated. Guo formerly served as deputy Party secretary of Tianjin’s Wuqing District and secretary of the Wuqing Political and Legal Affairs Commission.
March 31
1. Fu Zhenghua, the former justice minister and public security vice minister, was officially expelled from the Party and office (shuangkai, 雙開), according to a Xinhua readout.
The readout accused Fu of the following:
- Never being truly loyal to the Party and the people, not having the “four consciousnesses,” and deviating from the “two safeguards”;
- Having extremely inflated political ambitions and despicable political conduct, and was willing to use unscrupulous means to achieve personal political goals;
- Joined Sun Lijun’s political gang, formed factions, and formed parties for personal gain;
- Created falsifications and deceived Party Central on major issues, endangering the centralization and unity of the Party;
- Had improper discussions of Party Central’s major policies and long-term friendship with “political liars,” causing bad influences;
- Long-term violation of using and carrying firearms, causing serious safety hazards;
- Law enforcer who violated the law (執法犯法) and arbitrary abuser of power (擅權專斷), causing serious adverse political consequences;
- Long engaged in superstitious activities and resisted organizational investigation;
- Sought benefits for others in the selection and appointment of cadres, seriously damaging the political ecology of political and legal affairs teams;
- Was greedy and corrupt, engaged in power and money deals, and illegally received huge amounts of money and property.
Analysis: The “shuangkai” of Fu Zhenghua comes near the scheduled conclusion of the political and legal affairs apparatus “education and rectification” campaign in March, and is likely intended to serve the purpose of “killing chickens to scare the monkey.”As we observed in October 2021, Fu was indeed associated with the “Sun Lujin political gang” in the official denouncement. While the Xinhua readout does not say so explicitly, Fu and Sun are essentially being accused of being part of an “anti-Party group,” a very serious accusation in the CCP.
The official “double expulsion” of Fu also indicates that the Xi camp is basically done with investigating and extracting what they want from him, including incriminating evidence and material about his political backers and underlings, as well as factional networks. Officials who will find themselves at greater risk of being purged include former “610 Office” cadres, Fu’s superiors in the political and legal affairs apparatus, and Jiang faction members. Their political risks will only increase as “anti-Xi” developments intensify at home and abroad.
2. Zheng Weiming (57), deputy head and Party committee member of the Zhanjiang customs administration, was investigated.
OUR TAKE
1. Xi Jinping is increasingly being singled out and blamed for China’s ills and the PRC’s missteps in both Chinese and English-speaking spheres, and seemingly, both at home and abroad. The constant spotlighting of Xi’s failures in the press and by pundits exposes his vulnerabilities and erodes his “quan wei” (authority and prestige).
Open and widespread discussion of literature criticizing Xi, his grip on power, and the CCP regime’s political stability (particularly in Taiwan’s legislature) are precisely what Xi’s factional rivals and opponents want as they seek to ramp up pressure against him ahead of the 20th Party Congress. Xi’s enemies will be hoping to at least extract valuable political concessions from him (Xi designating a successor [i.e. no unlimited term], keeping the “collective leadership” in play, having their cronies in senior positions, etc.) and at best secure his ouster. Xi currently faces serious challenges in taking a norm-breaking third term at upcoming Party Congress, and will likely encounter steeper pushback going forward.
Growing efforts to distinguish between Xi and the CCP (“anti-Xi, not anti-CCP”), as well as blame various problems (the PRC’s malign domestic and foreign policies) stemming primarily from the latter solely on the former, will also sharply spike up Xi Jinping’s personal political risks. Xi could eventually be pushed into making drastic moves to squash internal challengers and intimidate external critics before the 20th Party Congress, leaving the door open for political Black Swans to emerge in China.
2. Presently, the Xi leadership is sticking to the usual political mobilization and purges in navigating the PRC’s mounting problems. Business as usual, however, seems likely to backfire on Xi Jinping.
Take for example Xinhua’s latest propaganda piece promoting Xi’s direct involvement (“personally directed and deployed”) in epidemic prevention and control work. Such propaganda is over-the-top and overly self-serving even in the best of times. But when things are going poorly COVID-wise, such propaganda makes Xi come across as callous and detached from reality. Many Chinese have recently been forced to endure draconian lockdowns and fresh hardships amid the latest wave of outbreaks across the mainland. Factories were temporarily shut in places like Shenzhen and Shenyang, affecting people’s lives and the local economy. The sudden shutdowns and “zero-COVID” quarantine measures also led to various humanitarian crises; on March 29, the Changchun local government publicly apologized to its 8.5 million residents over food shortages. Videos of people taking to the streets in various areas to protest the COVID restrictions were circulated on social media.
The recent outbreak in Shanghai and the humanitarian issues that have emerged from the implementation of “zero-COVID” policies also comes as a smack in the face for the Xi leadership. Shanghai, a prosperous first-tier city of 26 million, had previously adopted relatively relaxed epidemic controls as compared to other parts of China and only saw localized lockdowns. The spike in cases in March saw the local authorities go the full “zero-COVID” regime with a city-wide lockdown. Residents were ordered to stay in their homes, and office workers were made to isolate themselves in their workplace if they were considered to be close contacts. Horror stories and videos emerged of healthy and infected people being quarantined together in makeshift facilities, old folks living by themselves starving to death in their homes, and people suffering mental breakdowns or committing suicide as a result of the strict lockdown. People with other illnesses found themselves blocked from accessing treatment, including the tragic case of a Shanghai East Hospital nurse who suffered an asthma attack and died because her hospital was closed for COVID disinfection and her family was forced to send her to another one. The inhumane “zero-COVID” situation in Shanghai also led to some small-scale protests. Meanwhile, international economists started revising downward their China growth forecasts for 2022 after factoring in the Shanghai lockdown and its impact on the economy; Shanghai accounts for about 4 percent of China’s total economic output, is a regional headquarters for many multinational companies, and has China’s largest port.
3. Xi Jinping may be “chairman of everything,” but he has little room to maneuver his way out of the many crises facing the regime. Making 180-degree changes on policy is out of the question because doing so undercuts his political legacy and “quan wei.” On the flipside, sticking to current policies makes it difficult for Xi to accrue political “achievements” ahead of the 20th Party Congress.
The Xi leadership could try to finesse existing policies while keeping them on the books, but it would unlikely find success in doing so given the penchant of local officials for “prefer left rather than right” and “one-size-fits-all” approaches to policy implementation. Meanwhile, Xi’s rivals will be emboldened to issue more criticisms and argue that he does not deserve another office term.
SinoInsight 2
The Institute of International Finance issued a report noting “unprecedented” outflows from Chinese stocks and bonds after Russia’s invasion of Ukraine, indicating a “very unusual” shift in global capital flows in emerging markets.
“The timing of outflows … suggests foreign investors may be looking at China in a new light, though it is premature to draw any definitive conclusions in this regard,” the report said.
March 27
Bloomberg reported that environment, social, and governance (ESG) fund managers are considering China risks in light of the Russia-Ukraine war. “Pure ESG funds domiciled just in Europe have about $130 billion invested in China assets,” while “a further $160 billion is held by European-based funds that have screened for ESG-related hazards,” according to the report.
The report cited a JPMorgan Chase & Co. note to clients from earlier in the month that wrote, “Ukraine-Russia conflict may bring back to the fore the issue of how ESG investors manage investments in regions with governments of non-democratic and hybrid regimes.”
Eric Pedersen, head of responsible investments at Nordea Asset Management, told Bloomberg, “What we are now witnessing is a very stark reminder that there are times when the only option you have is to walk away.”
March 28
The 5-year and 30-year U.S. Treasury yields inverted for the first time since 2006, fueling fears of a possible recession.
March 29
1. Economists at the Chinese University of Hong Kong estimated that “zero-COVID” lockdowns in China could cost at least $46 billion a month, or about 3.1 percent of China’s GDP. They estimate that a strict lockdown in Shanghai would reduce GDP by 4 percent, while a lockdown of Beijing, Shanghai, Tianjin, and Shenzhen would see a 12 percent reduction for the duration of the lockdowns. Their estimates were based on using data on the location of nearly 2 million trucks in China and their movements’ correlation with local economic activity.
2. China Beige Book International (CBBI) found that borrowing by Chinese businesses plunged in the first quarter of 2022 while interest rates on loans surged to a record despite the People’s Bank of China’s efforts to encourage lending. Just 16 percent of the 4,354 companies surveyed by CBBI applied for loans in Q1, the lowest since the quarterly poll began in 2012. Meanwhile, the average interest rate for bank loans rose from 6.1 percent in Q4 2021 to 8.5 percent in Q1 2022, while shadow financing loans climbed from 10.7 percent to 15.1 percent over the same period.
3. The Wall Street Journal reported that auditors are resigning from Chinese property companies, probably after “taking a hard look at the developers’ results after a series of revelations about off-balance-sheet debts.”
PricewaterhouseCoopers quit as auditor at Ronshine China Holdings Ltd., Powerlong Real Estate Holdings Ltd., Shimao Group Holdings Ltd., as well as at two linked property-management companies Ronshine Service Holding Co. and Powerlong Commercial Management Holdings Ltd. PwC had earlier quit as auditor of Hopson Development Holdings in January. In October 2021, Hong Kong’s Financial Reporting Council said it had questions about the adequacy of China Evergrande’s “going-concern” reporting and would investigate PwC’s audit of the company’s 2020 financial results.
The Journal also reported that “firms that are members of other international accounting networks such as BDO, Deloitte and EY have also resigned from property-company audits in recent months.”
3. The 2-year and 10-year Treasury yield curve inverted for the first time since 2019.
March 30
1. Five of the largest banks in China noted in their respective annual reports that they face multiple headwinds this year owing to the pandemic, property sector crisis, and global politics.
The Industrial and Commercial Bank of China said that China faces “shrinking demand, disrupted supply and weakening expectations” in its annual report. The Agricultural Bank of China made a similar assessment in its own report.
China Construction Bank said that China’s banking industry faces “a more complicated and severe business environment,” while the Bank of China said that the “global epidemic will continue to recur, the easing policies of developed economies will be withdrawn, and geopolitical conflicts will intensify.”
China’s Bank of Communications said on March 25 that the bank would find it difficult to deliver satisfactory earnings in 2022.
2. The S&P China consumer-staples index fell 20 percent in the year as of March 30, with the bulk of the decline coming after Russia invaded Ukraine, according to a Wall Street Journal report. The sector underperformed S&P’s broader China index (down 14 percent) and Chinese internet giants like Alibaba and Tencent. Well-known beverage companies like China Resources Beer (down 24 percent), Nongfu Spring (down 17 percent), and Kweichow Moutai (down 16 percent) all saw declines in the same period.
March 31
1. China’s official manufacturing PMI fell to 49.5 in March from 50.2 in February, a five-month low. The non-manufacturing PMI declined to 48.4, the lowest since August 2021.
The PRC State Council also announced that 40 percent of this year’s 3.65 trillion yuan special-purpose bond quota had already been dispersed. The State Council warned government agencies to refrain from “measures detrimental to the stabilization of market expectations” and to “prepare contingency plans to deal with the possibility of encountering greater uncertainties.”
Analysis: While 40 percent of the special bond quota has been dispersed, it is questionable how much of it went to new projects instead of being used to pay off maturing debt. As Tianfeng Securities analyst Sun Binbin noted last November, the aforementioned phenomena will hugely discount the impact of new special bonds in boosting infrastructure investment.
2. From the start of the year to March 31, the CSI 300 Index fell nearly 15 percent, the Shenzhen Component Index dropped 18 percent, and the Shanghai Composite Index fell about 11 percent.
OUR TAKE
The CCP’s fears of “spillover effects” and difficulties in maintaining “stable conditions” are coming to pass as the Chinese economy is becoming more visibly impacted by the Russia-Ukraine war, “zero-COVID” policy, real estate debt crisis, financial contagion, investors’ fear of crackdowns, and rising interest rates in the United States.
China seems headed for a recession as we observed in December and January. Lockdowns of key financial and manufacturing areas like Shanghai and Shenzhen will worsen economic stagnation and hasten the arrival of a slump. Poor economic conditions and population traffic will impact consumption and create a vicious downward cycle. Meanwhile, the resignation of big auditing companies from Chinese property developers suggest that the implicit debt of the latter could be far more alarming than their explicit debt. Auditing companies likely also dare not risk covering up for fraud and other illegal activities by property developers in the current political environment.
External factors are also a problem. The U.S. Federal Reserve’s signal of big interest rate increases and balance sheet reductions later this year to curb inflation foreshadow more significant outflows from China and would lead to RMB depreciation. Worsening economic conditions in America and around the world would affect demand for goods and China’s exports. Further, foreign investors wary of sanctions against the PRC over the Russia-Ukraine war and the impact of COVID lockdowns will be hesitant to pump more money into China regardless of Beijing’s efforts to open up to a greater degree. The need to comply with ESG standards could also see more Western capital and companies withdrawing from China, worsening the so-called “spillover effect.”
The trend of rapid economic deterioration is a huge negative for Xi Jinping as he seeks a third term at the 20th Party Congress. Xi’s rivals will argue that he is indeed the “biggest stumbling block to the rejuvenation of the Chinese nation and the biggest obstacle to China’s rise,” and step up efforts to block him from extending his tenure. In response, Xi will be forced to double down on political mobilization and purges to safeguard his own safety. The escalation of factional struggle in the Party elite could lead to political Black Swans and exacerbate regime instability, which could in turn further concern foreign investors and accelerate capital flight.
