1 Analyzing personnel reshuffles at the Two Sessions
March 10
The third plenary meeting of the first session of the 14th National People’s Congress voted to pass the new State Council reform plan as well as key leadership personnel of the body.
PRC president and Central Military Commission chairman
- Xi Jinping
PRC vice president
- Han Zheng
NPC chairman
- Zhao Leji
NPC vice chairmen
- Li Hongzhong
- Wang Dongming
- Xiao Jie
- Zheng Jianbang
- Ding Zhongli
- Hao Mingjin
- Cai Dafeng
- He Wei
- Wu Weihua
- Tie Ning
- Peng Qinghua
- Zhang Qingwei
- Losang Jamcan
- Shohrat Zakir
NPC secretary-general
- Liu Qi
2. The third plenary meeting of the 14th National Committee of the Chinese People’s Political Consultative Conference elected key leadership personnel of the body.
CPPCC chairman
- Wang Huning
CPPCC vice chairmen
- Shi Taifeng
- Hu Chunhua
- Shen Yueyue
- Wang Yong
- Zhou Qiang
- Pagbalha Geleg Namgyai
- He Houzheng
- Leung Chun-ying
- Bater
- Su Hui
- Shao Hong
- Gao Yunlong
- Chen Wu
- Mu Hong
- Xian Hui
- Wang Dongfeng
- Jiang Xinzhi
- Jiang Zujun
- He Baoxiang
- Wang Guangqian
- Qin Boyong
- Zhu Yongxin
- Yang Zhen
CPPCC secretary-general
- Wang Dongfeng
The plenary meeting also elected 299 people as standing committee members of the 14th CPPCC National Committee.
March 11
The fourth plenary session of the 14th NPC elected another batch of key leadership personnel:
State Council premier
- Li Qiang
Central Military Commission vice chairmen
- Zhang Youxia
- He Weidong
CMC members
- Li Shangfu
- Liu Zhenli
- Miao Hua
- Zhang Shengmin
National Supervisory Commission director
Supreme People’s Court president
Supreme People’s Procuratorate procurator-general
The plenary meeting also elected 159 people as standing committee members of the 14th NPC.
March 12
The 14th NPC held its fifth plenary session and voted in another batch of key leadership personnel:
PRC vice premiers (by rank)
- Ding Xuexiang
- He Lifeng
- Zhang Guoqing
- Liu Guozhong
State councilors
- Li Shangfu
- Wang Xiaohong
- Wu Zhenglong
- Chen Yiqin
- Qin Gang
State Council ministers
- Qin Gang, foreign minister
- Li Shangfu, defense minister
- Zheng Shanjie, National Development and Reform Commission director
- Huai Jinpeng, education minister
- Wang Zhigang, science and technology minister
- Jin Zhuanglong, industry and information technology minister
- Pan Yue, State Ethnic Affairs Commission director
- Wang Xiaohong, public security minister
- Chen Yixin, state security minister
- Tang Dengjie, civil affairs minister
- He Rongwei, justice minister
- Liu Kun, finance minister
- Wang Xiaoping, human resources and social security minister
- Wang Guanghua, natural resources minister
- Huang Ranqiu, ecology and environment minister
- Ni Hong, housing and urban-rural development minister
- Li Xiaoping, transport minister
- Li Guoying, water resources minister
- Tang Renjian, agriculture and rural affairs minister
- Wang Wentao, commerce minister
- Hu Heping, culture and tourism minister
- Ma Xiaowei, minister in charge of the National Health Commission
- Pei Jinjia, veterans affairs minister
- Wang Xiangxi, emergency management minister.
Other senior officials
- Yi Gang, governor of the People’s Bank of China
- Hou Kai, auditor-general of the National Audit Office
- Wu Zhenglong, State Council secretary-general
The meeting also voted in members of the State Ethnic Affairs Commission, the Supervisory and Judicial Affairs Commission, the Education, Science, Culture, and Health Commission, the Foreign Affairs Commission, the Overseas Chinese Commission, the Environment and Resources Protection Commission, the Agriculture and Rural Affairs Commission, and the Social Construction Commission.
Our take
1. As we analyzed in October 2022 after the 20th Party Congress, Zhao Leji and Wang Huning were appointed chairman of the NPC and chairman of the CPPCC respectively. We also analyzed at the time that both officials were likely elevated to their positions as part of “major compromises” between Xi Jinping and the Jiang Zemin faction.
The appointment of Jiang faction associate Han Zheng as PRC vice president is likely part of Xi’s political bargain with the Jiang faction in exchange for having most of his trusted officials in other key positions.
The new State Council vice premiers appear to have been ranked per their qualifications and their portfolio assignments could be redistributed. For instance, Zhang Guoqing could be put in charge of industry and technology and He Lifeng will likely be tasked with handling finance matters.
Among the new crop of state councilors, it is unclear what Chen Yiqin’s portfolios will be. Chen could take over the work of former state councilor Wang Yong (civil affairs, emergency management, state-owned assets management, market supervision, etc.).
Of the new ministers, only Zheng Shanjie (National Development and Reform Commission) and Li Shangfu (defense) were officially appointed to their post at the Two Sessions while the rest took office earlier. Li’s appointment as defense minister affirms our analysis in November 2022 and debunks the prediction of some China watchers that He Weidong would take up the role (this would break with political operation norms).
Xi Jinping retained central bank governor Yi Gang and finance minister Liu Kun despite both having reached the retirement age of 65. This suggests that Xi is looking to keep things steady and stable on the economic policy front as the CCP regime navigates “great changes unseen in a century” and “unprecedented risks and challenges.” Xi could also have trouble finding “loyal” technocrats or those he trusts sufficiently to replace Yi and Liu.
2. Xi Jinping strengthened his control over the regime through the State Council reforms and reshuffling the bulk of the personnel in the leadership ranks of the NPC and the CPPCC. With a top leadership team stacked with his allies and his third term officially in the bag, Xi is in a much stronger position (though not yet dominating) to focus on economic reform (including those laid out at the Third Plenum of the 18th Party Congress) and rescue, as well as pursue his anti-corruption campaign to purge the regime of his remnant factional enemies.
Xi’s leadership position may be stronger, but there are still questions about whether his governance ability will be boosted simply by having more “loyalists” in key positions. Several of these officials (notably the new premier Li Qiang) lack experience and will be severely tested as the CCP’s internal and external crises worsen. Xi’s allies are also not immune to approaching problem-solving with their own careers and interests in mind, and the proclivity of CCP officials to “prefer left rather than right” could create more trouble for the Xi leadership further down the road.
3. In contrast to the Party Central emerging with greater control over the regime after the Two Sessions, the State Council saw its political position downgraded to being a subsidiary CCP organization (as opposed to the head organ of the state apparatus in the regime’s Party-state parallel government). Notably, news that Li Qiang has been elected as State Council premier did not even make the special topic column on the front page of the Xinhua website. This appeared to have been deliberate because Xinhua had featured in its special topic column news of the election of other top leaders like the NPC and CPPCC chairmen, the PRC vice president, the National Supervisory Commission director, the heads of the Supreme People’s Court and Supreme People’s Procuratorate, and the vice chairmen and members of the CMC.
Having state media not call attention to the election of the premier could be Xi’s way of signaling that only he has paramount authority (定於一尊) in the regime and Li Qiang (and by extension, the State Council) is strictly subordinate to him. The “marginalizing” of the PRC premier could also partly be Xi’s way of making sure that overseas media outlets and commentators know who is boss and make it harder for them to credibly speculate about a so-called “Xi-Li [Qiang] split”; such speculation has already begun. Overseas media and commentators had previously hyped up a “Xi-Li [Keqiang] split,” a development that Xi’s factional rivals could have been behind or leveraged in attempts to drive a wedge in the Xi camp and the Xi-Hu alliance.
2 China’s markets are losing appeal
March 2
Mark Mobius, founder of Mobius Capital Partners and a billionaire investor known for being bullish on China, told Fox News that he could not get his money out of his account with HSBC in Shanghai.
“The government is restricting the flow of money out of the country. So I would be very, very careful investing in China,” he said.
Officials at the State Administration on Foreign Exchange later told CNBC that Mobius’s case was a matter of “basic process and internal control requirements of the bank handling specific business,” and that there was “no change” in the PRC’s policy on cross-border remittance of funds. Hong Kong newspaper Ming Pao reported on March 7 that Mobius’s problems had been resolved, but did not offer details.
Peter Alexander, managing director of the Shanghai-based investment management consulting firm Z-Ben, said that Mobius appeared to be having a problem with his personal bank account and that his business “never had a single issue” with sending money in and out of China.
March 3
Reuters reported that the Bank of America (BofA) and Citigroup cut some investment banking jobs in Asia as China dealmaking slows. BofA laid off six people, including a managing director in its Greater China equity capital markets team and a managing director in its China investment banking team, while Citi laid off four people in its China investment banking team.
Other banks that trimmed China-focused investment banking jobs include Goldman Sachs, JPMorgan (20 jobs, mid-level bankers doing China deals), and Nomura Holdings (18 Asian banking jobs, the bulk of whom were in China-focused investment banking roles).
March 7
1. The PRC General Administration of Customs released China’s trade data for the first two months of 2023.
China’s dollar-denominated foreign trade fell 8.3 percent from a year ago in the January-February period to $895.72 billion. Exports were down 6.8 percent to $506.3 billion and imports fell 10.2 percent to $389.42 billion year-on-year. China’s trade surplus was $116.89 billion, up 6.8 percent from the previous year.
Calculated in yuan, China’s trade for the first two months of the year decreased 0.8 percent from a year ago to 6.18 trillion yuan. Exports increased 0.9 percent to 3.5 trillion yuan, imports dropped 2.9 percent to 2.68 trillion yuan, and the trade surplus increased 16.2 percent to 810.32 billion yuan.
China’s yuan-denominated trade with its top three trading partners are:
1. ASEAN
- Total trade to ASEAN increased 9.6 percent year-on-year to 951.93 billion yuan, or 15.4 percent of China’s total foreign trade.
- Exports to ASEAN increased 17.9 percent to 570 billion yuan, imports fell 0.9 percent to 381.93 billion yuan, and the trade surplus increased 91.6 percent to 188.07 billion yuan.
2. European Union
- Total trade to the EU fell 2.6 percent year-on-year to 851.09 billion yuan, or 13.8 percent of China’s total foreign trade.
- Exports to the EU dropped 5 percent to 552.83 billion yuan, imports increased 2.1 percent to 298.26 billion yuan, and the trade surplus fell 12.1 percent to 254.57 billion yuan.
3. United States
- Total trade to the U.S. fell 10.6 percent to 702.98 billion yuan, or 11.4 percent of China’s total foreign trade.
- Exports fell 15.2 percent to 494.11 billion yuan, imports increased 2.8 percent to 208.87 billion yuan, and the trade surplus decreased 24.9 percent to 285.24 billion yuan.
2. The Wall Street Journal reported that investors are rethinking their exposure to China and how their returns have been impacted. For instance, directors and staff at the Maryland State Retirement and Pension System have been discussing the fund’s exposure to China and its board accepted a recommendation to cut the pension fund’s overall allocation to emerging markets to 10 percent from 14 percent over the next two years. The move would lower the fund’s China exposure to 5 percent from the current 7 percent.
3. Several videos circulating on Chinese social media show the Foxconn factory in Shenzhen relocating a large amount of equipment. The equipment is rumored to be shipped to India and Vietnam, and many of Foxconn’s suppliers are also said to be relocating.
Another video showed Indians visiting the Shenzhen Foxconn factory.
Our take
1. The above information suggests that China is losing its appeal as an investment destination. Foreign investors are becoming disillusioned by the growing and many political risks in China (Beijing’s crackdown on technology, finance, education, and other sectors, increased regulation, property sector debt crisis, “zero-COVID,” etc.), visible signs of deterioration in the Chinese economy (including the CCP’s tepid 2023 GDP growth target of around 5 percent), and future growth prospects as geopolitical pressures ramp up (PRC spy balloon incident, tech restrictions by the U.S. and its allies, efforts to ban TikTok in the U.S. and elsewhere, Western efforts to forestall a PRC invasion of Taiwan, growing pressure over the PRC’s friendship with Russia and stance on the Ukraine conflict, etc.).
Anticipating strong economic headwinds, increasingly poorer returns, and even potential conflict in Asia, some investors have been reducing their exposure to China and pulling their money out. We previously noted that Warren Buffett’s Berkshire Hathaway had been steadily reducing its holdings in the Chinese new energy vehicle company BYD and Taiwanese chipmaker TSMC. Meanwhile, wealthy Chinese worried about political risks and the “zero-COVID” policy before it was scrapped are leaving the mainland and moving their families and assets to places like Singapore (see here, here, and here), the United Arab Emirates, and Australia.
Other investors, however, may still be bullish on China and believe that the CCP’s 2023 GDP target reflects the regime’s confidence in a rebound as opposed to a lack of faith that it can turn things around. As we wrote in our 2023 China Outlook, “Financial institutions and investors could bet on the Chinese economy recovering under the expectation that things will return to normal with the easing of ‘zero-COVID.’ However, signs of a quick recovery are likely to be illusory as the Chinese economy continues to deteriorate and people lose confidence in China’s economic prospects.”
2. China’s trade data for January and February reflect orders for exports from three to four months ago, or in late 2022. If exports do not pick up by the time the April data comes in, then China’s economic growth for the first half of the year will be bleak.
3. China’s increasing trade with ASEAN countries appears to partly reflect the supply chain exodus from the mainland. As manufacturers like Foxconn and its suppliers move to Southeast Asian countries like Vietnam and Thailand, China will see its re-exports to the region and trade in raw materials, parts, and semi-finished products go up.
The supply chain relocation to countries in ASEAN, India, and elsewhere will worsen China’s economic deterioration. Decreasing exports will lead to rising unemployment, reduced consumption, shrinking markets, and decreased attractiveness of China to foreign capital.
Why it matters
As China becomes increasingly unattractive as an investment destination, the CCP’s “economic shield” will become increasingly ineffective and the PRC will become more vulnerable to Western pressure. Growing geopolitical pressures on China will hasten capital outflows and stem the influx of foreign capital, creating another vicious cycle.
3 Local gov’t vehicle subsidies hint at more regime problems
March 1
The Hubei provincial government, in conjunction with a number of car companies, rolled out one-month joint rebates on car purchases on 56 vehicle models from seven major brands, according to promotional material. Notably, Dongfeng Motor Corp. joint ventures and the Hubei government jointly offered rebates of up to 90,000 yuan (about $13,000) per vehicle, or the equivalent of around a 40 percent discount.
The substantial purchase rebates appeared to have led to long queues outside many automobile shops in Hubei, according to mainland media. In an interview with mainland media, Lin Shi, the secretary-general and automotive analyst of the China-European Association’s autonomous network vehicle department, said that the joint rebates were offered “half” by the government and companies so as to “allow companies to offload their inventory) because sales in January and February 2023 were “really too terrible.”
Other local governments later copied what the Hubei government did with joint rebates, resulting in a “joint rebate war.” According to incomplete data compiled by semi-official mainland media The Paper in a March 10 report, no less than 40 car companies, including Mercedes-Benz, BMW, Great Wall Motor, Geely, and BYD, have launched joint rebates with local governments. Concurrently, some car companies began offering ultra-low-cost prices to their employees to purchase vehicles.
According to data by the China Passenger Car Association, automakers in China sold 2.68 million units in January and February 2023, down from 3.3 million units (less 19.8 percent) sold in the same period a year ago.
Hubei auto industry
The automotive sector is a pillar industry in Hubei. The province has 25 vehicle manufacturing plants, 1,400 component companies, and 1,578 auto companies above designated scale. The Hubei auto industry accounts for 12.9 percent of enterprises above designated size in the province and 7.45 percent nationwide.
Chip shortages and the COVID-19 pandemic saw Hubei’s auto industry output fall 4.6 percent in 2022. However, the Hubei auto industry still ranked first in manufacturing revenue in the province with 692.29 billion yuan that year.
Background
The CCP authorities had previously stopped offering rebates for the purchase of new energy vehicles in 2023 and many local car companies had announced price increases. However, Tesla began slashing prices at the start of the year (five adjustments as of the first week of March) and BYD also followed suit.
Meanwhile, China’s consumer price index (CPI) grew by just 1.0 percent from a year ago according to data released on March 9, the lowest growth rate over the past 12 months. In February, the producer price index (PPI) fell by 1.4 percent year-on-year for five consecutive months of declines, beating market expectations.
Our take
1. The “joint rebate war” reflects what Xi Jinping referred to at the Central Economic Work Conference in December 2022 as the prominent problem of “insufficient total demand” in the Chinese economy. The development also foreshadows troubles for China’s automotive industry and the economy in general.
Problems with the automotive sector can have a broad impact on the Chinese economy given its scale. The automotive industry has one of the largest output values, the longest supply chains, and the most connected industries among the various manufacturing industries in China. According to data from the National Bureau of Statistics, China’s automotive manufacturing industry generated an operating revenue of 9.3 trillion yuan and a profit of 531.96 billion yuan in 2022, accounting for 7.8 percent (ranked fourth) and 4.8 percent (rank 13th) respectively of all manufacturing industrial enterprises above designated size in China.
Car sales have been sluggish mainly due to three years of “zero-COVID” and its impact on supply chains and consumption. In 2022, only June saw the Vehicle Inventory Alert Index by the China Automobile Dealers Association come in at below 50 percent (49.5 percent); readings above 50 indicate weaker market demand, higher inventory pressure, and greater risks. In January 2023 the China Automobile Dealers Association’s Vehicle Inventory Alert Index rose 3.5 percent from a year ago and 3.6 percent from the previous month to 61.8 percent, an indication of persisting inventory problems.
Another factor that affected inventory was state subsidies for new energy vehicles making those more affordable than traditional fuel vehicles and creating inventory pressure on the latter. According to data released by the China Passenger Car Association on Jan. 10, car companies cumulatively sold 20.543 million units in 2022, a year-on-year increase of just 1.9 percent. Of those units, 14.868 million were traditional fuel cars (down 2.302 million from a year ago) and 5.674 million (up 2.687 million units) were new energy vehicles. Also, new energy vehicles saw a penetration rate of 27.6 percent. Analysts at the China Passenger Car Association are forecasting the sales volume of new energy vehicles to reach 8.5 million units in 2023 and the penetration rate to hit 36 percent.
Despite the scrapping of new energy vehicle state subsidies this year, traditional fuel vehicle inventories are set to come under greater pressure as new energy vehicle manufacturers engage in a price war with Tesla to maintain market share. Tesla made $15,653 in gross profits per vehicle in the third quarter of 2022, and still has room to cut prices more to squeeze out Chinese competitors with thinner margins. For instance, Chinese new energy vehicle company Xpeng Inc reported a gross profit of $4,565 in the third quarter of 2022 and a net loss of $11,735 a vehicle according to data analyzed by Reuters. As Chinese new energy vehicle companies drive down prices to keep up with Tesla, automotive companies could see greater inventory pressure.
High inventories hurt the automotive sector, which benefits from economies of scale, more than price cuts. Thus, Chinese vehicle joint ventures are willing to drop prices and make slimmer margins for the time being if it means increasing orders, keeping plants operational, and sustaining production.
2. Local governments (especially in areas with a sizable automotive sector like Hubei) are willing to work with vehicle joint ventures to clear their inventory by offering joint rebates so as to pump up local GDP, create employment, and improve the political performance of local officials. The systemic deficiencies of the CCP’s authoritarian dictatorship, however, could see local officials push things too far in attempting to “vigorously implement the strategy of expanding domestic demand” and “take more forceful measures to achieve a virtuous cycle of social regeneration” to resolve the prominent problem of “insufficient total demand.” This could result in bigger problems for the CCP regime.
The attractive joint rebates offered by the Hubei government and other local governments could help car companies and local economies over the short term. But the move could be akin to “drinking poison to quench one’s thirst” (飲鴆止渴) further down the road if it leads to deflation and economic stagnation.
The sharp price cuts and generous joint rebates artificially allow people with the means and need to purchase cars to do so at this time without actually creating sustained demand. Car companies also cannot stop offering rebates and revert prices too quickly without again running into inventory pressure. Thus, the automotive industry could be forced to maintain the price war for a long period even if Tesla stops slashing prices. The cost of car companies reducing prices will be passed on to the entire supply chain, and the PPI will inevitably fall. Continuous PPI declines could eventually result in deflation.
China faces a “Lost Decade” like that experienced by Japan if deflation and economic stagnation persist. People and enterprises will shift from maximizing profits during an inflationary period to minimizing debts, including increasing precautionary savings and cutting back on consumption. Deflationary conditions could in turn trigger vicious cycles that lead to economic recession. A recession will result in more debt defaults and collateral devaluation, increasing bad debts held by banks.
Should things go south for the Chinese economy, the Xi leadership could later be blamed for “guiding” the regime towards even bigger problems. A severe economic downturn in China could also accelerate U.S.-China decoupling and increase the risk of conflict for the PRC.
