1 Western ‘disunity’ over Macron’s remarks on Taiwan, ‘strategic autonomy’ throw the CCP a lifeline
Macron’s controversial remarks and pushback
On April 9, Politico published an interview with French president Emmanuel Macron that was conducted when he was en route from Beijing to Guangzhou.
While promoting his theory of “strategic autonomy” for Europe, Macron said, “The paradox would be that, overcome with panic, we believe we are just America’s followers. The question Europeans need to answer … is it in our interest to accelerate [a crisis] on Taiwan? No. The worse thing would be to think that we Europeans must become followers on this topic and take our cue from the U.S. agenda and a Chinese overreaction.”
Macron added, “Europeans cannot resolve the crisis in Ukraine; how can we credibly say on Taiwan, ‘watch out, if you do something wrong we will be there?’ If you really want to increase tensions that’s the way to do it.”
Macron’s remarks drew stiff pushback on both sides of the Atlantic. Some examples include:
- Sen. Marco Rubio (R-Fla.) said in a tweet, “If Macron speaks for all of Europe, and their position now is they’re not going to pick sides between the U.S. and China over Taiwan … maybe we should basically say we’re going to focus on Taiwan and the threats that China poses, and you guys handle Ukraine and Europe.”
- An unnamed European Union diplomat told Politico’s China Watcher newsletter, “Macron does not represent Europe — only France. There is no EU consensus on a strategic autonomy that turns away from the transatlantic partnership.”
- An unnamed senior EU diplomat told the Financial Times, “The Chinese are great observers of every single nuance, of everyone who participates in the common shaping of the EU’s policy. I am never surprised by the capacity of big powers to divide the EU … they like to work on the divisions between member states.”
- German foreign minister Annalena Baerbock said in Tianjin while on a three-day trip to China, “We are currently seeing how important it is to have partners around the world who share our values at our side when we face our own security threats. That is why it is so important for us, because we are vulnerable as Germany and as the European Union, that we cannot be indifferent to the tensions in the Taiwan Strait.”
- Several analysts and commentators pointed out that Macron had failed in his diplomatic push with Vladimir Putin before Russia invaded Ukraine and had made a similar mistake with his recent engagement with the PRC.
- Some observers have noted that the PLA buzzed the median line in the Taiwan Strait with dozens of military aircraft and naval vessels, as well as held live-fire drills around Taiwan, in the days after Macron left mainland China.
Despite the pushback, Emmanuel Macron has stood his ground. A senior French diplomat told reporters that Macron “stands by entirely” to his remarks and claimed that Politico’s headline was “sensationalist” and did not reflect the nuances of Macron’s views. And during an April 12 press conference in Amsterdam, Macron reaffirmed France’s support for Taiwan’s status quo and the “One China” policy. He added, “That’s a position that has always been in line with the role of an ally. But it’s exactly on this point that I must insist on the importance of strategic autonomy. Being allied doesn’t mean being a vassal.”
Meanwhile, European Council president Charles Michel told French television show La Faute à l’Europe, “On the issue of the relationship with the United States, it’s clear that there can be nuances and sensitivities around the table of the European Council. Some European leaders wouldn’t say things the same way that Emmanuel Macron did … I think quite a few really think like Emmanuel Macron.”
Michel added, “There is indeed a great attachment that remains present — and Emmanuel Macron has said nothing else — for this alliance with the United States. But if this alliance with the United States would suppose that we blindly, systematically follow the position of the United States on all issues, no.”
US lawmakers promise to expedite weapons delivery to Taiwan, make hawkish remarks
April 8
Rep. Michael McCaul (R-TX), the chairman of the House Foreign Affairs Committee, promised Taiwan leader Tsai Ing-wen that the U.S. would resolve a defense equipment backlog.
“As the House Foreign Affairs Committee chairman, I sign off on all foreign military sales, including weapons to Taiwan. And I promise you, Madame President, we will deliver those weapons,” McCaul told Tsai. “We are doing everything we can in Congress to speed up these sales and get you the weapons you need to defend yourself. And we will provide training to your military — not for war, but for peace. For as Ronald Reagan said, we achieve peace through strength.”
A day earlier, McCaul told a press conference that “We are doing everything in our power to expedite” the weapons deliveries.
April 9
In an interview with Fox News, Sen. Lindsey Graham (R-S.C.) said that the U.S. should train the Taiwanese “so they can fight like Ukrainians,” send Taiwan F-16s, “move war forces to South Korea and Japan,” and “put nuclear-tipped cruise missiles on all of our submarines all over the world like the Russians did.”
Graham believed that those measures should be undertaken because Beijing is “setting the stage possibly for a blockade of Taiwan.” He said, “The Communist Chinese Party is going to test us dramatically this year and next year before the election. In 1961, the Russians tried to isolate West Berlin. So I’m fearful that the Chinese may be setting conditions to blockade Taiwan in the coming months or weeks, and we need to respond forcefully if they do that.”
Graham also said, “I would let the Chinese know that if you blockade Taiwan, you’re gonna have a hard time getting oil from the Mid-East.”
“Taiwan’s not the problem. Lindsey Graham’s not the problem. It’s Putin and it’s Xi,” Graham said.
Backdrop
Macron’s remarks about Europe’s “strategic autonomy” and Taiwan come amid growing Sino-U.S. tensions, including the U.S. and its allies tightening technology restrictions on China and the PRC spy balloon incident.
Our take
1. Xi Jinping and the CCP will likely interpret Emmanuel Macron’s remarks as being favorable to the regime. Beijing could also see Macron’s remarks as a sign of early success in its diplomatic campaign (promotion of “multilateralism,” “greater democracy in international relations,” “sovereignty and territorial integrity,” and peace in Ukraine, etc.) to set the PRC’s worldview as an alternative to that of the U.S. (“democracy versus authoritarianism,” uncompromising stance on Ukraine, etc.) and drive a wedge between America and its allies.
Whatever Macron’s stance on Taiwan, it is unlikely to alter the Xi leadership’s plans to achieve “peaceful reunification.” Beijing will likely only consider an invasion when the regime has exhausted all “peaceful” options (including influencing the 2024 Taiwanese presidential election) but is unable to make any headway towards achieving “reunification.” The PLA’s maneuvers in the Taiwan Strait after Macron and European Commission president Ursula von der Leyen’s trip to China appear to be a direct response to Tsai Ing-wen meeting with U.S. House Speaker Kevin McCarthy in California, and not a reaction to the perceived display of “division” in the U.S.-EU ranks.
Xi Jinping is more likely to take advantage of the “breathing space” that his leadership has won by stepping up its diplomatic efforts and sowing divisions abroad to take the “self-rectification” campaign into “deep water territory” at home. That is, Xi will purge more officials, intensify political indoctrination, and pursue “investigation and research” efforts to “unify” the Party and prepare the regime to wage the “new cold war” against the West.
2. Macron’s skepticism of the U.S. and concerns about escalation over Taiwan are not completely unwarranted in considering America’s disastrous pullout from Afghanistan, Washington’s stance on how peace in Ukraine should be achieved, controversial information about the Nord Stream explosion and from leaked Pentagon documents, and hawkish statements from U.S. lawmakers with regard to defending Taiwan.
To better unite allies and partner nations in countering the CCP threat without provoking another military crisis, the U.S. should consider challenging the PRC on issues such as human rights, universal values, and morals. Washington would also benefit by focusing international efforts on exposing the CCP’s pernicious Marxist-Leninist ideology, propaganda, disinformation, and various influence operations. The CCP would find it hard to pick a fight with the U.S. when confronted on those issues, and America’s allies and partners will be less concerned about working with Washington in standing up to Beijing.
2 Emerging critiques of Liu Yazhou suggest his purge could be made official
Hong Kong newspaper Ming Pao reported on March 24 that former People’s Liberation Army Air Force general Liu Yazhou could be handed a suspended death sentence with a two-year reprieve for “serious economic corruption,” citing multiple sources from different channels in Beijing.
Over the past week, more signs have emerged that the CCP could be preparing to officially announce their investigation into Liu in the near future and move his case into the prosecution phase. Beijing could also be taking preliminary steps in purging the regime of Liu’s “lingering poison” (肅清劉亞洲餘毒).
Liu condemned
April 10
The Taiyuan No. 7 Cadre Rest Center (太原第七幹休所; cadre rest centers are a sort of retirement home for senior military veterans) issued a notice informing its inhabitants and staff (老首長、阿姨和全體住戶) to “thoroughly investigate and clean out” all “harmful information” (including various forms of literature and media content) with regard to Liu Yazhou from the center.
The notice, a screenshot of which was circulated on Chinese social media, said that the center’s residents should “fully recognize the extreme importance and necessity of carrying out this activity” and “carry it out in a timely manner as a serious political task.
April 12
Sing Tao Daily, a pro-Beijing Hong Kong media outlet, reported that Liu Yazhou had been investigated on suspicion of “serious violations of discipline and the law.” The Central Military Commission’s discipline inspection department had reportedly concluded its investigations into Liu, found that huge sums were involved in his case, and transferred the case to the military judicial system.
Sing Tao further added that the People’s Liberation Army had issued a notice in February 2023 requesting that all of “Liu Yazhou’s harmful information” (i.e. Liu’s writings and content) be scrubbed from the military by March given that he had “considerable influence” as the son-in-law of former PRC president Li Xiannian and as a prominent writer and strategist.
April 12 to April 15
Several semi-official leftist mainland websites published articles that were critical of Liu Yazhou:
1. On April 12, “Red Culture Net” (紅色文化網) published a commentator named “He Lanfeng” (賀蘭峰) titled “For Whom Will Liu Yazhou be ‘Martyred’?” (劉亞洲要為誰“殉道”?) [Background: “Red Culture Net” is run by the China Red Culture Research Association, which falls under the Chinese Academy of Social Sciences. The China Red Culture Research Association serves to consolidate Party rule and facilitate CCP governance.]
The article made the following observations and criticisms of Liu:
- Liu considers himself to be a “person of advanced thinking” and a celebrity among senior officials. He “often takes pleasure in talking about how his discourses on national matters serve as a guide for high-level officials.”
- Liu is an advocate of the “Western democratic system,” and wants to “fundamentally shake and subvert the CCP’s ruling position” and “lay a theoretical foundation for the implementation of a multi-party system.”
- Liu is an advocate of “nationalizing the military,” and is trying to “fundamentally negate and change the Party’s absolute leadership over the military,” as well as “resist and oppose the CMC chairman responsibility system.”
- Liu attempted to use history to explain the present, including taking advantage of “disagreements and controversy” over the disastrous defeat of the Fourth Red Army (also known as the “West Route Army,” or 西路軍) during the Long March to criticize Party Central for “mistakes in strategic decision-making and command.”
- Liu “vigorously promoted” Western “humanism” (人性論) and sought to “shake and change” the nature and purpose of the PLA with “fallacies” such as “human rights and humanism.”
- Liu is described as a “typical careerist and conspirator,” a hidden “fifth column in the military, the “number one traitor in the Chinese military,” and the head of the “vanguard [of the enemy],” among other criticisms.
2. On April 15, “Red Culture Net” published a piece by commentator “Gao Geli” (高戈里) titled, “The Trajectory of Liu Yazhou’s Thinking on Taiwan Strategy Leads Toward Political Surrender” (劉亞洲對台戰略走向政治投降的思路軌跡).
The article accused Liu of “negating that Taiwan is China’s core interest,” “opposing reunification by force to stop Taiwan independence,” abandoning Marxism-Leninism and socialism with Chinese characteristics and “preferring” Taiwan’s Westernized “democratic system,” and advocating that the CCP “take Taiwan’s ‘road to democratization.’”
The article further noted that Liu’s Taiwan strategic propositions and political pursuits, which are based on “anti-Marxism-Leninism and anti-socialism,” have been “spread widely and leaves a legacy of poison to this day.” This must be “criticized and eliminated” to “bring order out of chaos.”
3. On April 12, the leftist mainland website “Kunlun Strategy” (崑崙策) published a piece by Liu Zhenqi (not related to Liu Yazhou), a senior researcher at the Kunlun Strategy Research Institute and a former professor at the PLA University of Logistics (now PLA Army Service Academy), titled “Reading He Lanfeng’s ‘For Whom Will Liu Yazhou be ‘Martyred’?” (夜讀賀蘭峰文章“劉亞洲要為誰‘殉道’?”).
Liu Zhenqi praised He Lanfeng’s article for eliminating “fallacies” pertaining to Liu Yazhou from a theoretical standpoint, as well as eradicating the “bad influence” that Liu caused politically.
Liu Zhenqi added that Liu Yazhou had “created and provoked a maelstrom (腥風惡浪)” within the Party, the military, and society by “slandering Party Central’s leadership over the collective, denigrating Chairman Mao, and reversing the verdict of Zhang Guotao.” This “power, scope, duration, and impact” of Liu Yazhou’s “maelstrom” was “huge,” “long,” and “rare,” and “continues to this day.”
On April 13, “Kunlun Strategy” published an article by the commentator “Guan Yu” (關愚) titled, “Critique of Liu Yazhou” (劉亞洲批判). The article accused Liu of engaging in “historical nihilism” with his “fictional-style writings,” crafted a theory of “compromise and surrender” (i.e. promoting Taiwan “reactionary” forces and American imperialism, sneering at the PLC’s “determination” to take Taiwan, etc.) with his “ever-changing writing style,” and engaged in “low-level red” and “advanced blackening” in his works.
Our take
1. The criticism of Liu Yazhou on leftist websites appears to be both an attempt to shape public discourse about Liu’s downfall before it becomes official and a trial balloon of sorts by Beijing to gauge the reaction from the public and the Party towards the takedown of Liu.
In particular, the Xi leadership will likely be closely watching how the Party princelings, whom Liu appeared to be on good terms with and had influenced to a degree, respond to the latter being the target of a public and semi-official “struggle session.” A muted reaction by the princelings or attempts by them to kick Liu while he is down could see Beijing go ahead with sentencing him to death with a two-year reprieve as rumored. On the other hand, strong pushback against the Xi leadership over Liu’s plight could see Beijing hand out a lighter sentence, or take measures to suppress dissent first before officially sentencing him.
2. The targeting of Liu Yazhou at this time could serve as a prelude to Xi Jinping making bigger moves to eliminate the remnant Jiang faction. In an interview with Radio Free Asia in February 2022, then Hudson Institute Center on Chinese Strategy director Michael Pillsbury said that Liu could have been detained over his association with Jiang Zemin and Zeng Qinghong through his father-in-law Li Xiannian. Pillsbury added that the Jiang-Zeng association “may have been nothing in the past,” but is now a “big deal” given the “current political ecology of Beijing.”
The late Li Xiannian was a conservative Party elder who opposed Deng Xiaoping’s “reform and opening up,” backed the Tiananmen Square Massacre, and was one of Jiang Zemin’s more influential political backers. Hence, the takedown of Li’s son-in-law (or ex-son-in-law, if Hong Kong media reports are accurate) Liu Yazhou would send a clear signal to the remnant Jiang faction that they are being put on notice.
3. Some of the criticism of Liu Yazhou on leftist websites and the portrayal of him as an “enlightened, liberal, and pro-Western PLA general” do not stack with views that he espoused or was reported to have held. For instance, Australian-based Chinese dissident and jurist Yuan Hongbing cited Party insiders as saying that part of the reason why Liu was purged was due to his slamming Xi Jinping for lacking the ability to lead the CCP to victory in a “decisive battle” over Taiwan where the regime’s fortunes are at stake and having requested “a change of commander-in-chief.” Put another way, far from supporting Taiwan’s liberal-democratic system, Liu is hawkish on Taiwan and does not oppose “reunification” through arms.
Liu has also made remarks or taken action on several occasions during his career that marks him as a firm enemy of the United States, defender of the CCP regime, and proponent of a PLA invasion of Taiwan:
- April 2004: Liu’s 2001 review of the Battle of Kinmen (金門戰役檢討) went viral on the mainland. In the review, Liu explicitly stated that he had researched the battle because then-CMC chairman Jiang Zemin once said, “There will be a war in the Taiwan Strait.” Liu also proposed that the PRC “must be prepared for a war with the U.S. military.”
- June 2013: Liu, then political commissar of the PLA National Defense University, was the chief planner behind “Silent Contest,” a propaganda film published by the university that year about how the U.S. is carrying out a global conspiracy to topple the CCP.
- October 2013: Military mouthpiece PLA Daily published an article by Liu titled, “Firmly Occupy the Ideological Position” (牢牢佔領意識形態陣地). In the article, Liu advocated that the Party should pay close attention to ideological work to ensure that the PLA always obeys the CCP’s command. Liu also noted that “the internet has become the main battlefield in the ideological field” and “hostile forces in the West are trying to use this ‘biggest variable’ to ‘bring down China.’”
It is possible that criticisms of Liu Yazhou for being a pro-Western, Taiwan-supporting liberal were merely part of Beijing’s broader propaganda strategy to paint Liu as a diehard “counter-revolutionary” and justify handing him a stiff sentence for “economic and political crimes.” However, “anti-Xi” elements in China and abroad could later seize upon this propaganda faux pas to condemn Xi Jinping. Already, former Party School professor and prominent Xi critic Cai Xia tweeted on April 12 that Liu Yazhou is a “second Ren Zhiqiang” and Liu’s plight “foreshadows a greater catastrophe.”
Should Liu Yazhou’s purge become official, Xi’s enemies and Western countries could cite the “political persecution” of “liberal” Liu as another sign of the “CCP under Xi Jinping’s” growing authoritarianism and proclivity for aggression, particularly against Taiwan. The strengthening impression that the Xi leadership is more “repressive at home and aggressive abroad” could increase the willingness of the U.S. and its allies to hit the PRC and its officials with more sanctions.
3 Data and reports hint at clouded recovery and bigger crisis for the Chinese economy
Optimistic economic forecasts
April 11
The International Monetary Fund forecasted China’s economic growth at 5.2 percent in 2023 in its World Economic Outlook report. The IMF wrote, “The reopening and growth of (China’s) economy will likely generate positive spillovers, with even greater spillovers for countries with stronger trade links and reliance on Chinese tourism.”
April 14
1. A media forecast of 70 economists polled by Reuters saw China’s GDP growing by 4 percent in the first quarter of 2023, the fastest growth since the first quarter of 2022. The economists also predicted that China would see 5.4 percent growth for the whole year, exceeding Beijing’s target of 5 percent.
2. People’s Bank of China governor Yi Gang said during a meeting of G20 finance ministers and central bankers that the Chinese economy is “stabilizing and recovering, inflation remains low, and the real estate market has undergone positive changes,” according to a report on the PBoC’s official website. Yi also predicted that China’s GDP growth for the year would be “about 5 percent.”
Official financial and economic data
April 11
1. Per data released by the National Bureau of Statistics:
- China’s consumer price index (CPI) rose by 0.7 percent from a year ago in March (lower than market expectations), compared with a year-on-year increase of 1 percent in February.
- China’s producer price index (PPI) fell 2.5 percent in March from the previous year, compared with a year-on-year decrease of 1.4 percent in February.
2. According to data released by the PBoC, total social financing (a broad measure of credit and liquidity in the economy) in China rose by 707.9 billion yuan from a year ago to 5.38 trillion yuan in March while new renminbi loans rose by 749.7 billion yuan to 3.89 trillion yuan, both exceeding market expectations.
Also, outstanding total social financing grew by 10 percent in March from a year ago to 359.02 trillion yuan, while the M2 broad money supply grew by 12.7 percent in March from a year earlier.
Trade data
April 13
The General Administration of Customs released the following dollar-denominated trade data for March 2023:
- China’s exports in March increased 14.8 percent year-on-year and 47.5 percent month-on-month to $315.59 billion, ending months of consecutive declines since October 2022.
- China’s imports in March decreased 1.4 percent year-on-year and increased 15.3 percent month-on-month to $227.40 billion. This was better than the 5 percent decline as predicted by economists and an improvement over the 10.2 percent decline in the first two months of the year.
- China’s exports from January to March increased 0.5 percent year-on-year to $821.83 billion, while imports over the same period decreased 7.1 percent to $617.12 billion.
China’s top three trading countries and regions in March are:
1. ASEAN
- China’s exports to the ASEAN region in March increased 35.4 percent year-on-year t0 $56.4 billion, while exports from January to March increased 16.9 percent to $139.0417 billion.
- China’s export value to the ASEAN region in March was 17.9 percent of the total, up 2.8 percent from a year ago. The export value from January to March was 16.9 percent of the total, up 2.5 percent from the previous year.
2. European Union
- China’s exports to the EU in March grew 3.4 percent year-on-year to $45.8943 billion, while exports from January to March decreased 7.2 percent to $126.0059 billion.
- China’s export value to the EU in March was 14.5 percent of the total, down 1.5 percent from the same period in 2022. The export value from January to March was 15.3 percent of the total, down 1.2 percent from a year ago.
3. United States
- China’s exports to the U.S. in March decreased 7.7 percent to $43.6781 billion, while exports from January to March fell 17 percent to $115.2373 billion.
- China’s export value to the U.S. in March was 13.8 percent of the total, down 3.3 percent from the same period last year. The export value from January to March was 14 percent of the total, down 2.9 percent from the previous year.
China’s top three countries and regions by export growth are:
1. Russia
- China’s exports to Russia increased 136.4 percent year-on-year in March to $9.0442 billion, while exports from January to March increased 46.4 percent year-on-year to $24.0739 billion.
2. Singapore
- China’s exports to Singapore grew 67.6 percent year-on-year in March to $8.2342 billion, while exports from January to March increased 75.9 percent year-on-year to $23.1465 billion.
3. Africa
- China’s exports to Africa increased 46.5 percent year-on-year in March to $16.848 billion, while exports from January to March increased 18.8 percent year-on-year to $41.7645 billion.
China’s key commodity exports are:
- Commodities with the largest increase in exports in March: Automobiles (up 94.5 percent), ships (up 66.4 percent), and steel products (up 59.6 percent).
- Commodities with the largest decline in exports in March: Unwrought aluminum and aluminum products (down 16.3 percent), grain (down 9.5 percent), and cellphones (down 8.3 percent).
- Commodities with the largest increase in exports from January to March: Automobiles (up 123.8 percent), bags (up 90.1 percent), and ships (up 82.3 percent).
- Commodities with the largest decline in exports from January to March: Cellphones (down 31.9 percent), unwrought aluminum and aluminum products (down 26.6 percent), and automatic data processing equipment and parts (down 26 percent).
China’s top three commodity exports by value are:
1. Electromechanical products
- China’s export of electromechanical products in March increased 12.3 percent year-on-year to $181.9042 billion, while exports from January to March decreased 0.8 percent year-on-year to $475.9307 billion.
2. High-tech products
- China’s export of high-tech products in March decreased 10.4 percent year-on-year to $74.473 billion, while exports from January to March decreased 15.9 percent year-on-year to $201.5684 billion.
3. Automatic data processing equipment and parts
- China’s export of automatic data processing equipment and parts in March decreased 26 percent to $16.4953 billion, while exports from January to March decreased 30 percent year-on-year to $43.1855 billion.
Guizhou debt
April 12
The Guizhou authorities published a special survey of the province’s local government debt situation in an article titled, “Advancing Debt Reduction Work is Extremely Difficult, and There’s No Way to Reduce Debt by One’s Own Ability” (化債工作推進異常艱難, 靠自身能力已無化債方法).
The survey found that local governments in Guizhou Province were deeply in debt, were unable to carry out self-rescue, and were hoping that the higher authorities could provide help with their debt crisis.
In 2022, Guizhou’s total debt was 1.24701 trillion yuan, GDP was 2.01646 trillion yuan, and debt ratio was second-last in the country at 61.89 percent.
Backdrop
The heads of state or senior officials of several countries have traveled to China after the 2023 Two Sessions to improve ties with the PRC. Some countries like Brazil and Malaysia have promoted the idea of reducing dollar dependency and conducting trade with China in their own currencies.
What’s next
China’s official economic data in March appears to reflect recovery, a phenomenon that PRC propaganda outlets are vigorously promoting. The prospect of a recovering Chinese economy has led to greater optimism in the West. Yet a closer look at the data reveals conflicting signals and hints that a larger crisis is impending.
1. China’s total social financing and credit borrowing saw rapid growth in the first three months of the year, but the CPI and PPI indicate deflation. This suggests that the CCP has not been able to stimulate consumption despite boosting liquidity.
The CCP and Chinese analysts have expressed concerns about consumption and recovery. For instance, the PBoC’s monetary policy committee noted in analyzing China’s economic and financial situation at home and abroad during a regular meeting in the first quarter of the year that while the “domestic economy is showing a recovery trend,” the “basis for recovery is not yet solid.” The meeting also proposed the need to “further ease the monetary policy transmission mechanism” and “guide big banks in servicing enterprises.” In reading between the lines, the PBoC is saying that a large portion of new RMB loans are not going to residents, enterprises, and the real economy, but are instead “idling” (空轉) in the financial system.
Zhu He, deputy director of the China Finance 40 Forum research department, analyzed in an April 13 article that continued declines in the CPI, PPI, and other price indicators are indicative of insufficient demand in China. Zhu also noted that 60 to 70 percent of new social financing in the first quarter of 2023 was driven by government departments, while private sector demand as reflected in passenger car sales and private investments showed little improvement or worsened. Further, the current round of government financing “leveraging” through investment in new infrastructure is not supported by either fiscal revenue or land sales, but is likely mostly funded by taking on debt.
Meanwhile, various sales figures hint at deflation trends and other vicious economic cycles that we have been warning about. The latest car sales figures from the China Passenger Car Association show retail sales of passenger cars in March increasing 0.3 percent year-on-year and 14.3 percent month-on-month to 1.587 million units, or the weakest month-on-month growth this century. Cumulative passenger car retail sales in the first quarter of 2023 decreased 13.4 percent year-on-year to 4.261 million units. Meanwhile, sales of electronic products have been sluggish and prices are dropping; prices of communication tools (most represented by cellphones) fell 0.1 percent month-on-month and 2.2 percent year-on-year in March.
2. China’s March export data reflects shrinking global demand and the impact of trade restrictions on China imposed by the U.S. and its allies. Notably, China’s exports to ASEAN continued to increase while exports to the U.S. and EU continue to decline, while exports of key commodities shrank sharply in the first three months of the year.
Other export trends are also worrying for the PRC. While China saw increases in automobile exports, the domestic car price war is having a negative impact on the entire industry. Meanwhile, the increase in steel exports and exports to ASEAN in general could in part be due to the relocation of supply chains out of the mainland to Southeast Asian countries, as well as the increased construction of infrastructure in the ASEAN region. The growth of such exports may be good for China’s export figures in the short term, but are problematic in the long term as they reflect a hollowing out of China’s manufacturing sector, increased domestic competition on the mainland, and fewer export orders for China in the future.
China’s exports to Russia may be significantly increased, but they account for just 2.9 percent of the total export value and cannot make up for reduced demand from the U.S. and the EU.
3. The Guizhou local government’s survey of its debt situation appears to be partly an appeal to the central authorities for help with its debt crisis. This is another sign after Guizhou local government financing platform Zunyi Road and Bridge Construction Group issued a debt restructuring plan in December 2022 that the Guizhou authorities are seeing serious debt issues and could be just the tip of the iceberg of the CCP regime’s larger debt crisis.
The local government debt problem is one of the many shortcomings of the CCP authoritarian system and Party culture. Officials have a tendency to prioritize their personal interests above that of the regime, which leads them to take on large amounts of debt to secure political “achievements for promotion and engage in corruption. As the Chinese economy rapidly deteriorates, the consequences of short-term and misguided local government actions are surfacing and endangering the regime.
The central government has no good solution to the local government debt crisis. On the one hand, Beijing has to allow local governments to borrow heavily and invest in infrastructure building so as to drive economic growth and preserve regime survival. On the other hand, increased borrowing worsens the debt crisis as local governments are already struggling to make repayments due to reduced revenue (linked to the rapidly deteriorating economy) and insufficient land sales (linked to the property sector crisis). As the present situation persists, the risk of local government debt defaults will climb steadily.
The central government has taken steps to indirectly help local governments address their fiscal shortfalls, including announcing efforts to “optimize” staff resources as part of Party and state institutional reforms announced at the Two Sessions. After the conclusion of the Two Sessions, some local governments issued a notice regarding staffing resource reductions (i.e. retrenchments) of non-staff personnel such as chengguan (urban enforcers), auxiliary police, finance workers, and human resources staff.
The retrenching of “stability maintenance” personnel would help local governments save some funds given their large numbers. According to mainland media reports, there are about 2.2 million police officers on government payroll (i.e. civil servants or 行政編制) in China, more than 500,000 enterprise and contract police (i.e. staff in public institutions, or 事業編製), about 100,000 security police, about 2.5 million auxiliary police, about 600,000 armed police, about 200,000 chengguan, and about 800,000 chengguan coordinators. The CCP authorities’ financial woes could see local governments cut as many as half of their “stability maintenance” personnel.
However, retrenching “stability maintenance” personnel when social contradictions are worsening in China increases political risks for the CCP regime when the authorities do not have sufficient domestic security forces to suppress protests. Worse, laid off “stability maintenance” personnel could join protesters and compound social instability problems for the regime.
