1 Declining industrial profits another sign of China’s economic malaise
China’s industrial data
July 27
The PRC National Bureau of Statistics published China’s industrial figures for the first half of the year. From January to June 2023, profits of industrial enterprises above designated size decreased by 16.8 percent year-on-year to 3.38846 trillion yuan. The January-June figure meant that China’s industrial profits have fallen by double-digits for the sixth consecutive month this year, including a 22.9 percent decline in the January-February period and an 18.8 percent drop in January-May.
A breakdown of industrial profits from January to June shows:
- Profits of state-owned holding companies decreased by 21 percent year-on-year to 1.2002 trillion yuan.
- Profits of joint-stock enterprises decreased by 18.1 percent year-on-year to 2.4872 trillion yuan.
- Profits of foreign, Hong Kong and Macau, and Taiwan-funded enterprises decreased by 12.8 percent year-on-year to 796.68 billion yuan.
- Profits of private enterprises decreased by 13.5 percent year-on-year to 868.92 billion yuan.
- Profits of industrial enterprises nationwide in the month of June decreased by 8.3 percent year-on-year to 719.76 billion yuan.
Of China’s 41 major industrial sectors, 12 saw profit increases and 29 saw profit drops. Among the sectors that saw decreases in profit are:
- Oil and gas extraction profits down by 12.2 percent.
- Coal mining and washing profits down by 23.3 percent.
- Textile industry profits down by 23.8 percent.
- Computer, communications, and other electronic equipment manufacturing profits down by 25.2 percent.
- Non-metallic mineral products industry profits down by 26.6 percent.
- Agro-food processing industry profits down by 33.2 percent.
- Non-ferrous metal smelting and rolling processing industry profits down by 44 percent.
- Chemical raw materials and chemical products manufacturing industry profits down by 52.2 percent.
- Petroleum, coal and other fuel processing industry profits down by 92.3 percent.
- Ferrous metal smelting and rolling processing industry profits down by 97.6 percent.
Foreign capital leaving China
July 26
Jeffrey Jaensubhakij, the CIO of Singapore sovereign wealth fund GIC, said that it has “incrementally” shifted capital to countries and sectors benefiting from changes in the global supply chain. Most of the capital has been moved “basically out of China into countries such as Mexico, India, Indonesia, and Vietnam,” he said.
July 27
Reuters reported that its analysis shows a “massive jump in the assets of emerging market mutual funds and exchange traded funds that exclude China” as European and U.S. investors become more wary of their China exposure.
Reuters cited Refinitiv data as showing that China-focused mutual funds saw net outflows of $674 million in the second quarter of 2023, while nearly $1 billion went into emerging market ex-China mutual funds.
Also, the iShares MSCI Emerging Markets ex-China ETF, the world’s largest emerging market ex-China ETF, attracted a record $1 billion net inflow in the first half of the year.
Backdrop
The CCP has been expressing support for the private economy through economic proposals and holding symposiums with various groups on the topic.
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On July 26, the U.S. Federal Reserve raised interest rates by 25 basis points to a new target range of 5.25 to 5.5 percent, bringing them to a 22-year high. This was the 11th consecutive rate hike since March 2022.
On the same day, Bloomberg News reported that gasoline futures surged to a nine-month high in New York, affecting the spot market while prices in Asia have been rising. Also, while crude oil futures are little changed year-to-date in global energy markets, U.S. gasoline contracts have gone up by more than 20 percent.
Our take
1. The PRC’s official industrial data for the first half of 2023 indirectly indicate that China’s economy likely worsened much worse than what the recent June and Q2 data showed. Particularly worrisome for the CCP is the six consecutive months of consecutive profit declines for companies of annual average income of at least 20 million yuan (“above designated size”) and state-owned enterprises, which have the benefits of administrative monopoly, suffering a 21 percent year-on-year drop in profits in the first half of the year. In comparison, industries performed better in 2022 despite many cities being subject to “zero-COVID” lockdowns.
Declining industrial profits in China suggest that business confidence has been hit hard and companies are suspending investments. The data could further disillusion investors who are already disappointed with China’s post-pandemic “recovery,” which could in turn stem capital inflows and accelerate outflows from the mainland in the second half of the year.
2. Pressure on the renminbi is set to climb under current global economic trends. Rising gasoline prices in the U.S. and elsewhere are an inflationary omen, and the U.S. Federal Reserve and other central banks could perceive a need to keep raising rates over the next several months. Raising interest rates in the U.S. will further widen the interest rate spread between the 10-year PRC government bonds and U.S. Treasury bonds, which would prompt investors to convert RMB assets into dollar assets and increase pressure on the yuan to depreciate.
3. Deteriorating economic conditions at home and recessionary pressures abroad will weaken the effectiveness of the CCP’s economic rescue proposals. We believe that China’s economic performance in the second half of 2023 will be even worse, and this will begin to be borne out in the Q3 data. China’s rapidly worsening economic situation will heighten social and political instability, and could lead to political Black Swans emerging before the end of the year.
2 Analyzing rumors of a probe into the PLARF leadership
Recent PLARF-related information and rumors
May 24
Ming Pao, a pro-CCP Hong Kong newspaper, reported that Liu Guangbin, the deputy commander of the People’s Liberation Army Rocket Force (PLARF), and his immediate predecessor Zhang Zhenzhong, were both taken away for investigation in April 2023, citing sources in Beijing.
Ming Pao observed that it was rare for “big tigers” to fall in the PLARF and the PLA Second Artillery Corps (as the strategic and tactical missile force was known prior to 2016), and the investigation of deputy theater-level, specialized technical generals (專業技術軍官) instead of those overseeing political work (political commissars) is “even more surprising.”
Month of July
Various rumors and theories circulated in Chinese language circles about how PRC foreign minister Qin Gang’s “disappearance” is linked to corruption and national security issues uncovered in the PLARF’s senior leadership.
July 25
PLA lieutenant general Wu Guohua, a former deputy commander of the PLARF, passed away in Beijing on July 4, 2023 at age 66, according to mainland media.
Observers speculated that Wu could have committed suicide, noting that mainland media only reported his death 21 days after the fact. Another widely circulated rumor was that Wu had died after suffering a sudden cerebral hemorrhage. Some commentators even asserted or implied that Wu’s death is linked to corruption in the PLARF.
July 26
The official WeChat account of the Equipment Development Department of the Central Military Commission (EDD) issued an announcement on “soliciting clues on violations of regulations and discipline by experts in the bidding and evaluation equipment procurement for the entire military” (關於徵集全軍裝備採購招標評審專家違規違紀線索的公告).
The announcement said that the EDD was looking for information on equipment procurement and bidding irregularities from October 2017 to the present. The EDD urged the public to report on “situations” such as officials “lacking in integrity, forming cliques and factions, actively leaking secrets, lacking in supervisions, and other problematic behavior.”
July 28
The South China Morning Post reported that PLARF commander Li Yuchao, as well as Liu Guangbin and Zhang Zhenzhong, were being investigated by the CMC’s anti-corruption body, the Central Commission for Discipline Inspection, and the CCDI’s audit office, citing two sources familiar with the matter.
One of SCMP’s sources said that the investigation into the three generals started some time after March when Wei Fenghe retired as defense minister. Wei was commander of the PLARF/Second Artillery Corps (the name change occurred in January 2016) from October 2012 to September 2017.
“Almost all the senior generals [in the rocket force] had good reputations before their promotion. They became immoral after moving to Beijing headquarters, allowing them to have more chances to engage with defense-related enterprises,” one of the sources told SCMP.
Our take
1. As we previously wrote, rumors of corruption in the PLA and high level probes cannot be completely discounted. The recent information and news concerning corruption in the PLARF’s senior leadership raise the probability that a purge had indeed taken place. The situation could become much clearer around PLA Day (August 1), or a period when key personnel changes are sometimes made.
News that top commanders in the PLARF are being investigated, if confirmed, would be in line with our earlier observation (see here and here for examples) that Xi Jinping is still focused on the anti-corruption campaign and “self-revolution” even after consolidating power to a greater degree at the 20th Party Congress. At the time, a number of observers predicted that the anti-corruption effort could fade into the background because Xi was supposedly “unchallenged” following the 20th Party Congress personnel reshuffles. Yet Beijing has been unceasingly probing CCP officials across the board; on July 22, the CCDI announced that 316,000 officials at all levels nationwide had been investigated between January to June 2023.
Specific to the PLA, the targeting of senior PLARF commanders also appears to be part of Beijing’s earlier efforts to more strictly audit and regulate the military, as well as more recent concerns about personnel loyalties in the wake of Russia’s military struggles in Ukraine.
The Xi leadership has undoubtedly been intensely studying the Russia-Ukraine conflict and would have identified personnel problems in its senior military leadership as a factor inhibiting Moscow’s war effort. The Wagner Group “rebellion” near the end of June 2023 would have doubly convinced Beijing that it must get its house in order during peacetime and when geopolitical tensions are growing so as to avert Russia’s problems with its military leadership should conflict break out. If so, then a purge of the PLARF’s top commanders could be intended to address actual problems (corruption, national security, insufficient political loyalty, etc.) with the personnel in question and place other commanders on notice. Cleaning up the PLARF is also symbolic seeing how Xi Jinping had described it as “an important cornerstone for maintaining national security” during its inauguration.
Meanwhile, the Equipment Development Department of the Central Military Commission had earlier emphasized the need to “strictly regulate the bidding and procurement management” process during a seminar in 2019, and later set up supervision groups to oversee the task. It cannot be ruled out that the senior PLARF commanders were caught in the system set up by the Xi leadership to eliminate internal corruption as they jumped at opportunities to “engage with defense-related enterprises,” as per the SCMP report.
2. Some of the PLARF rumors and speculation seem to be more sensational and much less reliable than the top personnel purges.
While it cannot be completely ruled out that former PLARF deputy commander Wu Guohua committed suicide, the official obituary suggests that natural causes were the more likely factor. Wu was described as having “departed from this life” (逝世) instead of having “passed away” (離世); we previously explained that the use of “departed from this life” in mainland media is usually used to describe an official dying a natural death, while “passed away” typically refers to officials who die unnaturally.
The argument that Wu was likely involved in the corruption scandal and killed himself over it because the obituary was published 21 days late is not very convincing given that it is not unusual for the mainland media to issue obituaries only some time after the official has passed on. For instance, Party mouthpiece People’s Daily only reported that former public security vice minister Zhao Yongji had died of an illness in Beijing on May 27, 2023 on July 10, or 44 days after the fact.
Another set of rumors that are very dubious are those asserting that foreign minister Qin Gang is involved in the PLARF’s corruption or activity that compromised national security because he either participated in it, or received knowledge of it via the intelligence apparatus but failed to report the matter in a timely fashion to the Xi leadership.
With regard to the first scenario, the foreign affairs apparatus and the PLA are separate organs that do not have many outlets for inter-agency interaction. Qin the professional diplomat is thus very unlikely to have ample opportunities to cross paths with senior PLARF commanders and get familiar enough with them to plot nefarious deeds to sell out Xi and the regime.
With regard to the second scenario, Qin could indeed be notified by intelligence personnel of national security breaches committed by the PLARF or PLARF-related personnel while he was based overseas. However, it is also highly improbable that Qin would delay relaying this information to Beijing within reasonable limits (such as taking sufficient time to corroborate the intelligence) given that the intelligence personnel would almost certainly pass up the information to the top PRC leadership via their own chain of command and Qin would know that he could hardly block the information from reaching Beijing even if he wanted to.
3. There is a possibility that Li Yuchao, Liu Guangbin, and Zhang Zhenzhong were involved in very serious corruption or were implicated in a serious breach of national security. If so, then Xi Jinping would not be able to spare them from investigation even though they can be considered to be his allies or loyalists because in doing so Xi would undermine his own “quan wei” (authority and prestige).
The SCMP report on the investigation into PLARF corruption noted that the investigation into Li, Liu, and Zhang commenced after Wei Fenghe stepped down in March. With the information presented in this manner, observers could read into the SCMP report that Wei, a former PLARF commander, could have been “protecting” the other PLARF commanders from investigation while he was in office. This leaves the door open for observers to suspect whether Wei could get into trouble later.
However, unless Wei Fenghe was directly involved in what the PLARF senior commanders are being implicated in and if that concerns serious national security matters, we believe that there is a low probability of the Xi leadership moving against Wei. Several factors suggest that Wei was trusted by Hu Jintao and is not a Jiang faction associate, including Wei’s unremarkable rate of progression up the ranks during the Jiang-Hu era (Jiang faction CMC vice chairs Guo Boxiong and Xu Caihou would prioritize the promotion of their allies or those who could afford paying huge bribes) and Xi being comfortable enough to keep Wei in charge of PLARF when it was renamed in 2016 and later appoint him as defense minister (Xi would have “retired” Wei along with other Jiang faction generals if the latter had questionable factional allegiances). And if Wei is loyal to the Hu-Xi camp, then he is not likely to be probed in relation to the ongoing PLARF case, barring the aforementioned caveats.
4. There is a possibility that the PLARF case and the Qin Gang case are efforts by Xi Jinping’s remaining factional rivals and the “anti-Xi coalition,” including elements opposed to Xi in the military or the CCP intelligence apparatus’s “hidden front” (see here and here), to exploit the Xi leadership’s prioritization of national security matters to “manipulate” the PRC leader into taking out his own allies and ultimately undermining his own interests.
As we analyzed in the June 12, 2023 edition of this newsletter, “If Beijing moves too aggressively with its ‘rectification’ work, it risks alarming ‘anti-Xi’ elements within the intelligence apparatus into taking ‘perish together’ (同歸於盡) actions, or provoking troublesome defections of intelligence personnel to the West. Put another way, in trying to fix existing problems within the intelligence apparatus, the Xi leadership could end up exacerbating them and triggering worse problems.”
Should the Xi camp fail to properly address what could be the “weaponization” of the national security regime against Xi Jinping and his allies, the “anti-Xi coalition” could attempt to escalate their strategy and greatly heighten political instability in the CCP. Concurrently, Xi could step up his “self-revolution” efforts to “rectify” the PRC of the remnant Jiang faction and other disloyal elements. The escalation of “perish together” factional struggle in the Party would elevate Black Swan risks for both Xi and the CCP regime.
