1 Zhang Youxia’s Vietnam trip and a recent Politburo meeting are not signs that Xi is ‘losing power’
Zhang Youxia visits Vietnam
Zhang Youxia, vice chairman of the Central Military Commission, led a delegation to visit Vietnam upon invitation from Oct. 24 to Oct. 26. In Vietnam, Zhang was separately received by Vietnam Communist Party general secretary To Lam, Vietnamese president Luong Cuong, and Vietnamese prime minister Pham Minh Chinh.
The Vietnamese media prominently covered Zhang’s visit. Meanwhile, mainland media only reported Zhang’s Vietnam trip on Oct. 26.
Politburo meeting
On Oct. 28, Xi Jinping presided over a meeting of the CCP Politburo to review a comprehensive report on the third round of inspections of the 20th Central Committee (關於二十屆中央第三輪巡視情況的綜合報告).
The meeting emphasized that Party Committees at all levels must continuously elevate their political standing, proactively alleviate the Party’s burdens, and fulfill their responsibilities to the country. The meeting also stressed the need to strengthen leadership team development, strictly implement democratic centralism, and promote the flexibility of leadership appointments and removals. Finally, the meeting called for maintaining a high-pressure stance against corruption.
More Xi ‘power loss’ speculation
Some overseas Chinese commentators and media outlets view Zhang Youxia’s trip to Vietnam and Xi Jinping’s remarks at the Oct. 28 Politburo meeting as fresh signs that Xi is “losing power” (“分權,” or having one’s power divided up). They made the following observations:
- Zhang Youxia is “overshadowing” Xi with frequent and prominent public appearances.
- On Oct. 17, mainland media Caixin placed Xi and Zhang’s name side-by-side in the headline of an article about Xi inspecting People’s Liberation Army Rocket Force’s strategic missile units in Anhui Province.
- Zhang presided over a large-scale joint training session of the entire PLA from Oct. 20 to Oct. 22. Meanwhile, Xi traveled to Russia to attend the BRICS summit from Oct. 22 to Oct. 24. Upon Xi’s return to Beijing, Zhang had already embarked on his Vietnam visit.
- Zhang received high-profile reception and media coverage during his Vietnam trip.
- The CCP’s handling of news related to Zhang’s visit to Vietnam was “highly unusual” given that it was only reported on Oct. 26, or at the end of the trip. Some commentators suspected that Cai Qi, who oversees propaganda, blocked reporting of Zhang’s trip and only allowed the reporting to go through after it received external attention and speculation. Those commentators contrasted the CCP’s reporting of Zhang’s Vietnam visit with reporting of premier Li Qiang’s visit to Vietnam, and suggested that the development hinted at internal power struggles within the PRC leadership.
- The Politburo meeting’s mention of “promoting the flexibility of leadership appointments and removals” could be viewed as a veiled move by opposition forces against Xi and potentially hint at his loss of influence.
Our take
1. The recent speculation about Xi Jinping “losing power” appears to be built on earlier rumors and observations that do not correspond with how the CCP operates and with present power dynamics in the Party elite. We previously debunked many of these rumors and speculation, including allegations that Xi was in poor health, Xi’s so-called “disappearance” after the Beidaihe work retreat, Beijing’s economic policy shift and the appearance of veteran Party cadres alongside Xi at the PRC national day reception indicating Xi’s “power loss,” and claims that Xi’s control over the military was weakening and he was being forced to designate a successor (see here and here).
2. We assess that Zhang Youxia’s visit to Vietnam and the Oct. 28 Politburo meeting’s call to “promote the flexibility of leadership appointments and removals” are not at all unusual and do not signal that Xi Jinping has “lost power.”
i) Zhang’s Vietnam trip is in line with customary foreign visits made by previous CMC vice chairmen. For instance, former CMC vice chair Fan Changlong visited Vietnam on June 18, 2017 and met with Vietnam’s Communist Party general secretary, the Vietnamese president, and the Vietnamese defense minister in Hanoi.
Zhang’s visit to Vietnam also reflects the relatively smooth diplomatic relationship between the PRC and Vietnam, as well as the CCP leadership’s affirmation of the current political leadership of the Vietnamese communist regime. Ahead of high-level personnel changes in Vietnam on Oct. 21, Luong Cuong, then permanent member of the Vietnam Communist Party Central Committee and a Politburo member, met with Xi Jinping in China on Oct. 11. After receiving this “acknowledgment” of sorts by Beijing, Luong would later be promoted to president. In view of the recent leadership reshuffle, Zhang’s Vietnam visit was likely a gesture to reciprocate Luong’s China trip and indicate the CCP’s affirmation of the Vietnam Communist Party’s. Meanwhile, Zhang receiving a high-profile reception and media coverage in Vietnam reflects the good diplomatic relations between the two countries.
ii) Official PRC media’s coverage of Zhang Youxia’s visit to Vietnam is par for the course for someone in his position. When former CMC vice chair Fan Changlong made his Vietnam trip in 2017, official media only reported on his trip a day after the visit ended.
The difference between official PRC media’s coverage of Zhang Youxia and Li Qiang’s respective visits to Vietnam cannot be viewed as a sign of factional fighting within the CCP because the reporting in both cases followed standard protocol. The CCP propaganda system observes strict standards for reporting on different senior officials based on their ranking. Li naturally receives higher profile coverage because he is the second-ranking member of the Politburo Standing Committee, while Zhang is just the military’s representative in the Politburo.
iii) The Oct. 28 Politburo meeting’s call to “promote the flexibility of leadership appointments and removals” was aimed specifically at officials in various Party Committees that were probed under the 20th Central Committee’s third round of inspections. It is extremely unlikely that CCP officials would interpret this as an implicit signal that “anti-Xi” forces are moving against Xi Jinping. On the same note, no official would interpret Xi’s constant call for “self-revolution” as being directed at himself.
iv) In CCP factional struggles, it is typical for the faction seeking to topple the other to establish a narrative advantage and sway public opinion before actually taking action. For instance, Mao Zedong used criticism of the theater play “Hai Rui Dismissed from Office” to launch a propaganda campaign and carry out political mobilization to regain influence after he “retreated to the second line” (退居二線) of CCP elite politics following the failure of his “Great Leap Forward.” Similarly, Deng Xiaoping promoted the editorial “Practice is the Sole Criterion for Testing Truth” in 1978 to gain public support and gradually weaken Hua Guofeng’s “quan wei” (authority and prestige) and pave the way for the latter’s sidelining. Likewise, the Central Commission for Discipline Inspection under Xi ally Wang Qishan criticized the “Prince Qing” and “iron-cap princes” — allusions to Jiang Zemin faction number two Zeng Qinghong — in what appeared to be political mobilization against Zeng and the Jiang faction during Xi Jinping’s first term.
In contrast, current CCP propaganda and mainland media outlets show no sign of political mobilization against Xi. On the contrary, senior officials from various central ministries continue to praise the achievements under “Xi Jinping’s leadership,” how to implement Xi’s key instructions, as well as Xi’s political theories in their public statements as reported by official media. Barring a noticeable change in the current propaganda and rhetoric, there are no signs that Xi is in imminent danger of “losing power.”
2 China’s latest economic data and PBoC operations hint at rising financial risks
Fiscal revenue continues to fall in Q3
The PRC Ministry of Finance released China’s fiscal revenue and expenditure data for the first three quarters of 2024.
General public budget revenue
The national general public budget revenue decreased by 2.2 percent year-on-year to reach 16.3 trillion yuan during the January-September 2024 period.
- National tax revenue decreased by 5.3 percent year-on-year to 13.2 trillion yuan.
- Non-tax revenue increased by 13.5 percent year-on-year to 3.1 trillion yuan.
- Main tax revenue items:
- Domestic value-added tax: 5 trillion yuan, down 5.6 percent year-on-year.
- Domestic consumption tax: 1.3 trillion yuan, up 1.6 percent year-on-year.
- Corporate income tax: 3.2 trillion yuan, down 4.3 percent year-on-year.
- Individual income tax: 1.1 trillion yuan, down 4.9 percent year-on-year.
- Securities transaction stamp tax: 71.2 billion yuan, down 54.2 percent year-on-year.
General public budget expenditure
The cumulative national general public budget expenditure increased by 2 percent year-on-year to reach 20.2 trillion yuan during the January-September 2024 period.
- Debt interest expenditure increased by 8 percent year-on-year to reach 926.5 billion yuan.
Government fund budget revenue and expenditure
- Revenue from the transfer of state-owned land use rights decreased by 24.6 percent year-on-year to 3.1 trillion yuan during the January-September 2024 period.
- Related expenditures for state-owned land use rights transfers decreased by 7.9 percent year-on-year to reach 3.3 trillion yuan.
China’s industrial profits fall
On Oct. 27, the PRC National Bureau of Statistics announced profits of industrial enterprises above designated size in China in September and for the first nine months of the year:
- Industrial profits fell 27.1 percent from a year ago in September to 575.43 billion yuan (calculated on a comparable caliber) due to the “high base from the same period last year” according to the NBS. Also, industrial profits decreased 3.5 percent to 5.23 trillion yuan during the January-September 2024 period (calculated on a comparable caliber).
- Profits of state-owned holding enterprises were down 6.5 percent from the previous year during the January-September 2024 period to 1.72 trillion yuan.
- Profits of foreign-invested enterprises (including those from Hong Kong, Macau, and Taiwan) increased by 1.5 percent from a year earlier during the January-September 2024 period to 1.3 trillion yuan.
- Profits of private enterprises were down 0.6 percent year-on-year during the January-September 2024 period to 1.42 trillion yuan.
PBoC adds outright reverse repo to toolkit
On Oct. 28, the People’s Bank of China announced that it would activate the open market outright reverse repo operations facility to “maintain a reasonable abundance of liquidity in the banking system and further enrich the central bank’s policy toolbox.” The central bank would carry out outright reverse repurchase agreements with primary dealers monthly for a timeframe of no more than a year. Assets eligible for repurchase include sovereign bonds, local government notes, financial bonds, and corporate debt, according to the PBoC.
Mainland media reported that the central bank’s move primarily addresses the large-scale maturity of medium-term lending facility loans. MLF maturities will reach 1.45 trillion yuan, 1.45 trillion yuan, and 995 billion yuan over the next three months respectively. Mainland media added that the repo tool provides the PBoC with more “bargaining chips” and flexibility for future transactions in the medium term, such as buying or selling government bonds and non-bank swap facilities. In the long term, the repo tool could gradually replace the MLF, becoming an important channel for the central bank to inject medium- to long-term liquidity.
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Per PBoC regulations implemented on May 20, 2004, outright reverse repo is a transaction where the central bank initially purchases bonds from primary dealers for a set period within a year (with 1 month, 3 months, 6 months, or 1 year terms), and the primary dealers repurchase the bonds from the PBoC at an agreed price.
Beijing planning to issue 10 trillion yuan in debt?
Oct. 29
Reuters reported that Beijing is considering approving the issuance of 10 trillion yuan in bonds over the next several years at the meeting of the Standing Committee of the National People’s Congress from Nov. 4 to Nov. 8, citing sources familiar with the matter. The fiscal package, including 6 trillion yuan which would be partly raised via special sovereign bonds, could be unveiled on the last day of the meeting. The sources say that the 6 trillion yuan worth of debt would be raised over three years (including 2024) and the funds would mainly be used to help local governments address off-the-book debt risks.
The sources said that the timing of the NPC Standing Committee meeting offers Beijing “greater flexibility” to adjust the fiscal package and its size based on the election outcome. For instance, Beijing could announce a stronger fiscal package should former president Donald Trump return to the White House because the latter is expected to intensify economic headwinds for China.
The sources said that the NPC Standing Committee is expected to approve all or part of up to 4 trillion yuan worth of special-purpose bonds for idle land and property purchases over the next five years. Local governments would also be allowed to raise that amount on top of their annual issuance quota (3.9 trillion yuan in 2024 and 3.8 trillion yuan in 2023). Should the NPC Standing Committee approve those issuances in full rather than in stages, the total stimulus size could be increased to over 10 trillion yuan.
The sources add that Beijing is considering approving other stimulus measures worth at least one trillion yuan, such as a consumption boost including trade-in and renewal of consumer goods. Another one trillion yuan could also be raised via special treasury bonds for capital injection into large state banks.
Our take
1. China’s continued fiscal weakness in the first nine months of the year and the plunge in industrial profits partially affirm our assessment that the Chinese economy is going to worsen in the second half of 2024 and the CCP authorities will struggle to convincingly hit its annual growth target. Poor economic conditions are likely also the central reason behind Beijing’s rollout of economic support measures in late September.
i) China’s industrial profits, adjusted with the NBS’s “comparable caliber,” saw growth in the first eight months of the year but reflected a decline of 3.5 percent in the January-September period. This suggests that economic deterioration was very severe and the CCP authorities had struggled to manipulate the data.
The NBS attributed the 27.1 percent drop in industrial profits (575.43 billion yuan) in September 2024 to the “high base” from the previous year. Per official data, industrial profits in September 2023 (756.17 billion yuan) were 5.20 percent higher than in September 2022 (632.45 billion yuan). However, industrial profits for September 2024 were down 9.02 percent compared to September 2022 when strict “zero-COVID” lockdowns were in place.
In the Sept. 30, 2024 newsletter, we found that China’s industrial profits declined by 0.07 percent from a year ago during the January-August 2024 period in absolute terms, and the decline in August alone reached 22.24 percent. Meanwhile, industrial profits in September 2024 dropped by 23.90 percent in absolute terms, costs rose by 1.90 percent, and operating income increased by just 0.68 percent. This suggests that enterprises are facing operational challenges amid poor economic conditions and are relying on price cuts to sustain their revenue scale.
A calculation of China’s industrial profits for the January-September 2024 period and the month of September in absolute terms produces a decline of 3.40 percent and a drop of 23.90 percent respectively. Given how close those figures are to the official data, it is possible that the NBS is less aggressively manipulating its figures as China’s economic downturn intensifies.
ii) The trend of declining fiscal revenue over the first nine months of the year aligns with the drop in industrial profits.
Meanwhile, the CCP authorities appear to be collecting more taxes even as corporate profits shrink:
- Nationwide tax revenue fell by 5.3 percent year-on-year during the January-September 2024 period, while non-tax revenue increased by 13.5 percent.
- In September 2024, tax revenue fell by 5.0 percent year-on-year, while non-tax revenue rose by 25.2 percent.
- From January to September 2024, domestic value-added tax fell by 5.6 percent year-on-year, while corporate income tax fell by 4.3 percent.
- In September 2024, domestic VAT fell by 12.1 percent, while corporate income tax surged by 25.4 percent. This suggests that the CCP authorities are increasingly collecting “retroactive” taxes amid declining corporate profits.
The rise in non-tax revenue suggests an increase in the collection of fines and penalties, including through “deep-sea fishing” style law enforcement (遠洋捕撈式辦案). An internal reference of the Guangdong provincial local authorities (廣東省內參) that recently began circulating online contained a subsection noting that internet-based companies in Guangdong are struggling to survive due to “cross-regional profit-seeking law enforcement,” or a technical phrase that refers to “deep-sea fishing.” The document added that nearly 10,000 companies (mainly private enterprises) in Guangdong have been subjected to “cross-regional law enforcement” since 2023, with many of the cases displaying clear profit-driven motives.
The intensifying pressure on businesses exerted by local governments and tax governments foreshadows further declines in corporate profits and fiscal revenue in China.
2. The PBoC’s adding of outright reverse repo to its toolkit, along with the NPC Standing Committee potentially approving the issuance of 10 trillion yuan in bonds, underscore severe deterioration of the Chinese economy and rising risks in local government debt and the financial system.
According to Reuters, the bulk of the funds raised by the massive bond sale would go towards addressing local government hidden debt risks. Such risks are likely to be substantial given the massive scale of local government debt. Li Jianjun, the vice president of the Central University of Finance and Economics in Beijing, revealed at a financial forum on Oct. 18 that as of June 2024, local debt in China reached about 100 trillion yuan, with 42.23 trillion yuan in local government bonds and 57.16 trillion yuan in interest-bearing local government financing vehicle debt. Meanwhile, fiscal shortages make it difficult for local governments to service their debt while increasing debt risks. In particular, local government fiscal revenue declined in the first nine months of the year, with land sales revenue dropping by nearly a quarter. As the economic situation worsens and local governments struggle with debt and revenue issues, the central government has to step in to stabilize things and ensure that local governments can still maintain basic operations.
So far, state banks have been helping local governments absorb much of their massive debt through bond purchases. However, those banks could be short on liquidity to make bond purchases as we indicated in the Oct. 17, 2024 newsletter. The central government therefore has to support state banks in local government debt resolution to reduce implicit debt risks and allow them to absorb the issuance of new government bonds. The central bank’s recent activation of open market outright reverse repo operations facility helps state banks secure liquidity to purchase new government bonds through the sale of local government bonds to the central bank.
The PBoC adding outright reverse repo to its monetary toolkit is not without risks. Because its funds are limited, the central bank would have to increase money printing to conduct large-scale outright reverse repo operations. This would in turn lead to renminbi depreciation and accelerate capital outflows, further worsening China’s economic and financial risks.
