At the end of each year, the Communist Party of China (CPC) holds the Central Economic Work Conference to set up the economic work for the next year, but this routine is often official and not newsworthy. Not so this year, many clues have come to light in the official media reports, from which many changes in the economic fate of the CPC can be found. There is a saying in “Huainanzi – Saying Mountain Training”, “A leaf knows the autumn”, which later became an idiom, meaning that the fall of a leaf can tell the arrival of autumn, metaphorically speaking, the development trend and outcome of the whole situation can be seen through individual subtle signs. Now, from the fact that China’s Internet giants are selling cabbages, we can also know the autumn by a leaf, and see the economic difficulties faced by the Chinese Communist Party.
A. The policy of financial investment to boost the economy has failed
The economy of any country is a “troika”, relying on consumption, investment and exports to pull the three “horses”. In the first and second quarters of this year, all economic activities were semi-stopped because of the rampant epidemic. The economic data released by the National Bureau of Statistics (NBS) was that the GDP dropped 6.8% in the first quarter and 3.2% in the second quarter, which was expected and the two data would be under-reported, not over-reported; the economic activity started to recover in the third quarter and the NBS announced that the economy grew 4.9% in the third quarter, which would be over-reported, not under-reported. In the third quarter of this year, the contribution of consumption to economic growth was 1.7 percentage points, and the contribution of exports to economic growth was 0.6 percentage points. If we only look at consumption and exports, the economic growth in the third quarter was only 2.3%, but the authorities used the economic stimulus package to force the economy through government investment, causing investment to contribute 2.6 percentage points to economic growth; that is, more than half of the economic growth in the third quarter was created by government investment.
The authorities used government investment to force the economy by three main means: first, expanding the central fiscal deficit by 1 trillion yuan; second, issuing 1 trillion yuan of special anti-epidemic treasury bonds; and third, increasing the number of special bonds issued by local governments for infrastructure investment by an additional 1.6 trillion yuan to 3.8 trillion yuan. Together, the three items bring the fiscal investment used to forcefully boost the economy to 3.6 trillion to 5.8 trillion yuan in 2020, or about 3-5% of GDP. However, the contribution to economic growth with government investment of about 3-5% of GDP is only 2 percentage points, which is clearly more than worth the loss. The authorities are already reluctant to do this again next year because it would cause greater fiscal difficulties and a potential financial crisis.
The government has spent 3.6 trillion to 5.8 trillion yuan in investment, which has been scattered through various channels in various industries, and in what areas has it been spent in the end? Investment is mainly in three major directions, manufacturing investment, real estate investment, and infrastructure investment. from January to September 2020, manufacturing investment fell by 6.5%, infrastructure investment increased by only 0.2%, while real estate investment increased by 3.8%. This shows, firstly, that due to the decrease in people’s income and the big increase in unemployment, and therefore the weak consumption, even if the government strongly encourages manufacturing investment, this 3.6 trillion to 5.8 trillion yuan of government investment basically failed to be spent on manufacturing investment; secondly, although local governments issued a large number of special bonds in infrastructure, most of this money was used to pay off old debts and did not start many new infrastructure investment projects; once again, the After the huge investment released by the central and local governments to stimulate the economy, the vast majority of it ended up going to real estate companies, improving the very tight capital chains of real estate companies because residential properties were not selling, and allowing them to increase some real estate investment.
Zhongnanhai realizes the failure of the fiscal investment-driven economic policy, so it will tighten fiscal spending in 2021, and will also no longer allow the real estate bubble to continue to inflate. Looking at this year’s economic trends, next year’s economy may be even worse than this year: weak consumption will intensify, which will further lead to a shrinking manufacturing sector; although exports were once hot before the end of this year, in large part because U.S. buyers took emergency measures to restock early for fear of a resurgence of the epidemic in China, next year’s exports will remain difficult; and investment has lost its way, as it will not be able to invest in real estate in the future, and will not need a lot of infrastructure investment, while the manufacturing sector has no intention of increasing capacity in a relatively shrinking situation. The three horses that drive the economy, consumption, investment and exports, the three “horses” are down.
Second, the central economic work conference “far-sighted”
December 18, the CPC’s Central Economic Work Conference closed, which is a routine meeting of the authorities to set the next year’s economic work guidelines. Before the meeting, the Beijing-based Dovetail News acknowledged in its Dec. 7 article, “CCP’s Central Economic Work Conference to be Held, Four Key Points to Watch,” that the epidemic had dampened consumption tendencies and expectations, and that consumption recovery was lagging significantly. The article therefore predicted that the meeting might focus on how to boost consumption. But this prediction seems to be wrong, in fact Zhongnanhai seems to be quite “far-sighted”, it is currently more concerned about science and technology and industrial upgrading.
While previous years’ central economic work meetings have generally focused on fiscal and monetary policies as their top priorities, this meeting listed the key tasks for 2021, with the first emphasis on science and technology and industrial autonomy. To this end, the Communist Party leaders proposed at the meeting to strengthen the country’s strategic scientific and technological forces, give full play to the role of the state as the organizer of major scientific and technological innovations, keep an eye on strategic demand orientation, and take high-end chips, high-end CNC machine tools, jet engines, key raw materials, new energy and other fields as key innovation directions.
Is China’s economy really resting on its laurels, and is it time to pursue “lofty” economic development goals? In fact, the reason why the top echelon of the Communist Party of China is considering this is related to the future pattern of China-US relations. According to a December 19 article in Dovetail News, “Central Economic Work Conference, Take Two “Pills of Confidence,” the Central Economic Work Conference focused on breakthroughs in strategic industries in order to address China’s major development and security problems, which are rooted in “U.S. containment”.
Third, out of dependence on U.S. technology?
An article in Dovetail News on December 19 mentioned that although there are views within the CCP that the U.S. containment and technology embargo on China will be eased if Biden is inaugurated as president, Zhongnanhai’s strategic research is not so optimistic. The consideration is that the U.S. containment on China is strategic and holistic and will not change with the change of president. In order to avoid passivity, the Central Economic Work Conference proposed that “we should give full play to the advantages of the new national system” and use important research institutes and universities as the “national team” to implement the allocation of scientific research forces and resource sharing. This idea is basically the same as the “attack” mode of military research and military industry in the Mao era in the last century.
Of course, after decades of deliberately stealing scientific and technological knowledge and military industrial secrets from the United States, the CCP has accumulated a considerable scientific research base, and its strength is completely different from that of the Mao era. However, the inefficiency and wastefulness of the state system has been repeatedly demonstrated by the former Soviet Union and the reality of the CCP since its establishment; if the state system could really bring about rapid progress in technological development, the CCP would not be so worried about the U.S. technological blockade. In fact, under the Trump presidency, the U.S. has “closed the door” on the CCP’s theft of scientific and technological knowledge and military secrets a little, and the CCP immediately faced “major development and security problems The Chinese Communist Party’s “national team” faces “major development and security problems”.
The Communist Party’s “national teams” are all units that endlessly demand money and foreign exchange from the “state” with open hands. As soon as they are given national tasks, their “hand-extending” “mouth-opening” faces are immediately exposed. The Chinese Communist Party does not have a silver mountain for them to squander, so the authorities also look at the private enterprises that have a lot of money, hoping that they can cooperate with the government and generously give money for the development of key industries that the government wants to invest.
In fact, the Chinese Communist Party is not optimistic about the prospect of independent technology development, and the relevant deployment of the Central Economic Work Conference is rather like “lying down and trying to find courage”.
No tomorrow for the “world factory” with “broken chains”?
The lack of electricity and power outages have recently become a hot topic in the Chinese city, but the majority of people still do not know the real reason for the power outages.
Power shortages and blackouts have recently become a hot topic in China’s cities, but the vast majority of people still don’t know the real reason for them.
Since the Chinese Communist Party has fallen in love with the crown of “world factory,” its media has often emphasized that China now has the most complete and systematic industrial chain in the world, and that the earth cannot live without it. However, the Central Economic Work Conference has revealed the embarrassment of the authorities at the moment. According to a December 19 article in the Dovetail News, the Chinese government believes that “the security and stability of the industrial chain supply chain is the basis for building a new development pattern” and that China must have a more solid and reliable industrial supply capacity and control of key core industries.
So how did this industrial chain system, which was “complete” for many years, lose its “security and stability” in one year? The reason for this is something the CCP does not want to admit. Over the past few years, foreign and Chinese companies with a pivotal position in the export chain have left Vietnam, the Philippines and other countries or withdrawn to their home countries to avoid the pressure of higher U.S. tariffs. Not only the downstream assembly enterprises took away the orders, but also took away some upstream parts manufacturing enterprises. If those upstream enterprises do not follow the downstream customers migrate out of the country, only one way to close down. As a result, there are now hundreds of thousands of foreign immigrants in Vietnam who suddenly appear in the “middle stem” (cadres from China), that is, in order to keep their jobs and follow the proprietors to Vietnam employment of the former middle management of enterprises in China.
The departure of these enterprises is one of the important reasons for the sudden loss of “security and stability” of various industrial chains in the “world factory”. China’s original “complete” industrial chain system suddenly lost a number of important links, in fact, it has become a “broken chain” that can not run smoothly, the remaining upstream manufacturers naturally became “fish without water “, “wood without soil”, can only have to lay off staff to close the factory. So many industrial parks in Guangdong appeared in a wide range of empty plant off, and even demolition of the plant to build residential.
The central economic work conference proposed to make up for the shortcomings of various industrial chains, as soon as possible to solve a number of “neck” problems, to enhance the independent control of the industrial chain. The December 19 article in the “Dovetail News” even mentioned that the Chinese government must bear the possible failure of the future, “to endure the input-output inversion that may last for several years, more than a decade”; but also “to resist the impact of international industrial giants and price suppression and temptation of products “. These two sentences mean that in order to save the “broken chain”, the CCP will invest a lot of money in research and development of technology and equipment at any cost, and “import substitution” for key components in the industrial chain that were originally purchased by foreign enterprises, in order to repair various “broken chains”. “And it may take “years or decades” to save the “world factory”, during which time those outgoing manufacturers will have already sent their products to the shelves of the U.S. shopping malls. In the meantime, those outgoing manufacturers have already sent their products to the shelves of American shopping malls, and even if the mended Chinese industrial chain can be shipped, it may be backward in style, inferior in quality and high in price, and lacking in competitiveness. Even so, Zhongnanhai is determined to go along in this direction, otherwise, the “broken chain” of the “world factory” will not have tomorrow.
V. Internet giants “selling cabbages”
While the CCP is scratching its head over the development of high-tech industries and repairing the “broken” “world factory”, it finds that those big Internet companies with huge capital are becoming more and more “unprofessional The Internet has become more and more “unproductive”. Recently some Internet companies have invested a lot of resources to enter the fresh food community group buying industry, trying to use their own massive data, advanced algorithms and strong capital to control the fresh food group buying, that is, the bulk of selling food.
Internet companies are considered high-tech enterprises, now the focus of business to sell food, give up the development of high-tech, although fast money, but may squeeze the original online fresh food business, but also may form a new monopoly of daily food sales industry. WeChat public number “People’s Daily Review” published a commentary article, “Behind the controversy of “community group purchase”, is more expectation of technological innovation of Internet technology giants”, this article quoted Xi Jinping‘s original words, “with a huge amount of data, advanced algorithms of the Internet Internet giants with massive data and advanced algorithms should have more responsibility, more pursuit and more action in scientific and technological innovation. Don’t just think about a few bundles of cabbage, a few pounds of fruit traffic ……” Then the General Administration of Market Supervision announced the investigation of Internet companies Alibaba Investment Company and three other companies, each issued a 500,000 yuan fine.
Why is the Chinese Communist Party so unhappy with large private enterprises? It is not because the new business practices of these enterprises have offended the authorities’ “cheese”, but because the authorities see the danger of a deteriorating economic situation and want these wealthy enterprises to contribute to saving the economy and invest their capital in high-tech breakthroughs or industrial chain repair, which the government desperately needs, instead of taking refuge in the easy way out and being eager to “selling cabbage”. So, why do these Internet giants coincidentally want to “sell cabbage”, they have a large number of experienced coders, can only do “sell vegetables” business?
In fact, the Internet giants in the past two years to develop new business markets and the use of investment to create returns, has been full of brains. They have invested in enterprise service platforms, logistics companies or consumer-oriented entertainment and media companies, and last year only the so-called Internet giants BATJ (Baidu, Ali, Tencent, Jingdong) and TMD (Today’s headlines, Meituan, Drip), the seven companies have 67 projects, amounting to 21.7 billion. However, with the gradual tightening of the people’s purse, the return on these investments is getting smaller and smaller. It’s not that these big companies are incompetent, but the deteriorating economic environment makes them very helpless, so they look at the food supply industry, which serves to feed more than a billion people. In this most traditional industry, community group buying is related to the operation and wholesale and retail of 4 trillion fresh food, which is the source of the people’s food and the last relatively stable business sector of the Chinese economy after the overall economic recession. High-tech companies use “yard farmers selling cabbages” because there are only “cabbages” left to sell.
Sixth, China’s economic situation has deteriorated, and companies are desperate
In fact, at the end of 2018, Natixis reported that the relative importance of China’s new economy (meaning high-tech-related industries) is declining and that the financial health of emerging sectors has deteriorated rapidly since 2017; the stagnation in relative size and the deterioration in corporate financial health both suggest that the light of China’s new economy seems to be getting dimmer; the decline in income and return on capital is eroding corporate financial health, and the slowdown in consumption and household income has put a question mark on whether China can rely on the new economy to drive economic upgrading.
The bank’s analysis of 3,000 listed companies in traditional and emerging sectors in mainland China and comparison of their financial health since 2014 reveals two facts. First, the relative importance of the new economy is declining; in the new economy sector, the share of domestic listings has shrunk slightly, while the relative share of global peers is higher and still rising. Second, the financial health of the emerging sector has deteriorated rapidly since 2017, with shrinking gross margins and worsening solvency.
The report notes that investment in China’s new economy has plummeted in 2019, as revenue growth in emerging sectors fell from 25% in 2017 to -8% in the first half of 2019, even below traditional sectors. This indicates that in the overall economic slowdown, emerging sectors can neither cut costs nor raise revenues, and their return on investment has fallen to a level below that of traditional sectors, with a bleak outlook for the future.
This research report by the French bank Banque du Commerce Extérieur at the end of 2018 actually gives a general outlook for the future of the Chinese economy. Although the new economy is the driving force behind the economic upgrade that the Communist Party’s top brass expects so much from, these industries themselves are subject to a general environment of economic downturn, declining incomes and high unemployment, and are unlikely to have room for growth. The CCP’s expectation to boost the economy by developing a new type of economy is actually just a wishful dream. Is it possible for the Internet giants to reverse the declining economy of China? The reality that Zhongnanhai has been reluctant to admit is that high-tech companies want to “sell cabbages”, which is a true reflection of the Chinese economy’s struggle to find a way out. However, born as Chinese enterprises, these private companies can not really talk business, they must be “loyal” to the party and state, as to whether the investment will be “wasted”, you have to know that it is not possible to do it. This is the case with private companies, and the party state is no different.
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