New from the China Leadership Monitor

Winter 2020 Issue 66, Dec 1, 2020

The PLA’s Evolving Role in China’s South China Sea Strategy

by Oriana Skylar Mastro

During the past eight months of the global COVID pandemic, the Chinese People’s Liberation Army (PLA) has been active in promoting China’s claims in the South China Sea.  This essay evaluates PLA statements, military exercises and operations, and deployment of relevant platforms and weapons in the South China Sea during this period. I leverage Chinese-language sources in addition to my own operational knowledge from over a decade of military experience to provide greater context for these activities. I argue that the greatest change in the PLA’s role in the South China Sea has not been operational. Instead, the most interesting development has been the fact that the PLA has taken on a more significant signaling role. Specifically, the Chinese military seems to be purposefully using, and perhaps even exaggerating, its capabilities and activities to enhance deterrence against the United States. This may be seen as necessary as the US increases its own efforts to push back on China’s militarization of the South China Sea. In other words, the PLA has taken a more active role in China’s South China Sea strategy, but not necessarily a more aggressive one

Continuous Purges: Xi’s Control of the Public Security Apparatus and the Changing Dynamics of CCP Elite Politics

by Wu Guoguang

This essay identifies three waves of purges in the Ministry of Public Security under the Xi Jinping leadership, and then focuses on the third wave, which, corresponding to similar measures beyond the public security system, featured the cleansing of those who rose to prominence due to their support of Xi’s earlier anti-corruption campaign. Such a development whereby Xi turns his sword against his previous political allies indicates that continuous purges are becoming a new political dynamic in CCP elite politics. The essay finds that Xi’s prolonged tenure in power and the governance challenges he confronts are the two leading factors that have helped to shape China’s current proto-Maoist power struggles and elite politics. According to this line of reasoning, Xi’s ongoing efforts to control the public security apparatus indicates that CCP elite politics is becoming increasingly dominated by internal repression and coercive means.

Will China Eliminate Poverty in 2020?

by Terry Sicular

In 2015 China announced the ambitious target of eliminating poverty by 2020. Since then China has launched an all-out, campaign-style push to meet this goal, using a “Precision Poverty Alleviation” strategy that targets individual households and monitors their progress using a nationwide poverty database. Investments of financial and human resources in this program have been considerable. Although the poverty reduction target is ambitious, it is also pragmatic. It applies only to the rural population and it is based on a low poverty line. Funding for the program, while large in absolute terms, is a small percentage of government revenue. Thus, the target is achievable. Reaching the target, however, will not mean that China has won the war on poverty. Many households will remain vulnerable to poverty, and the government’s current definition of poverty does not adequately reflect what it means to be poor in China going forward.

From ‘China Inc.,’ to “CCP Inc.’: A New Paradigm for Chinese State Capitalism

by Jude Blanchette

CCP General Secretary Xi Jinping has overseen a significant transformation of China’s domestic economic system, undergirded by important new reforms that have drastically expanded the reach of the Chinese state into the economy and Chinese firms.  This has included the integration of CCP organizations into public and private firms, the regulatory shift of SASAC from “managing enterprises” to “managing capital,” and the role of government guidance funds in driving industrial policy. The overall change in China’s economic and regulatory structure – and the political control wielded by the CCP – combined with the Xi era blending of the public and private, and market and planning, is of such a proportion that it marks a new paradigm in China’s development trajectory.

Interview with David Shambaugh on his recent book: Where Great Powers Meet: America and China in Southeast Asia (Oxford University Press, 2021).

=The End of an Error=

NPR: Biden Wins Presidency, According To AP, Edging Trump In Turbulent Race

CBS: 2020 Election Live Updates: Biden projected to win election as president

CNN: Joe Biden to become the 46th president of the United States, CNN projects

NBC: Joe Biden becomes president-elect: Election live updates

Perspective

One of the economists I follow had a curious post about the October (US) labor data. I won’t name him, because it struck me as something written by someone who was far too deep into the numbers to remember to put it in context.

He said the October labor data was extremely good. Here’s what the numbers also said.

US Employment by age group:

_ _ _ _ _ _ _ _ _ _ _ _ _Oct vs Sep ’20 _ _ _Apr-Sep ’20 vs Apr Sep ’19

16-19 years old _ _ _+213,000 (+4.5%) _ _ _ _ _ _ -1,659,700 (-12.1%)

Over 20 years _ _ _+2,425,000 (+1.7%) _ _ _ _ _ _ -12,425,200 (-8.1%)

20-24 years old _ _ _+664,000 (+5.3%) _ _ _ _ _ _ -2,319,700 (-16.1%)

25-54 years old _ _ +1,339,000 (1.4%) _ _ _ _ _ _ _-7,422,200 (-7.4%)

Over 55 years _ _ _ _+422,000 (+1.2%)_ _ _ _ _ _ _-2,683,200 (-7.2%)

He saw the first column, and I saw the second.

Keep it in perspective: it’s getting better, but there is still a very long way to go.

19th / 5th

“Helmsman” Xi Jinping primed to rule at least until the early 2030s

Dr. Willy Wo-Lap Lam, a Senior Fellow at The Jamestown Foundation, is one of the most readable and authoritative observers of Chinese elite politics. His take on the recently concluded CCP central committee meeting is here: https://jamestown.org/program/helmsman-xi-jinping-primed-to-rule-at-least-until-the-early-2030s/

“The Fifth Plenary Session of the Chinese Communist Party’s (CCP) Central Committee, which took place from October 26 – 29, has elevated the status of President and CCP General Secretary Xi Jinping to that of Helmsman, a title once reserved only for the late Chairman Mao Zedong. Strong signals were also sent that the Central Committee—comprised of 198 full and 166 alternate members—supported the 67-year-old supreme leader’s desire to continue exercising power for an additional ten years or more.

During the session, the Central Committee passed the main points of the 14th Five-Year Plan (FYP) (2021-2025) for National Economic and Social Development and the 2035 Long-Range Objectives (中共中央关于制定国民经济和社会发展第⼗四个五年规划和⼆〇三五年远景⽬标的建议, ZhongGong Zhongyang Guanyu Zhiding Guomin Jingji He Shehui Fazhan Di Shisi Ge Wunian Guihua He ErLingSanWu Nian Yuanjing Mubiao De Jianyi). These can be understood as a general and detailed outline of the 14th FYP. The actual plan, including specific, quantifiable targets for economic development, will likely be published sometime in March.”

The US, Q-3 2020 First Look

The US economy fell a further 2.9% in July-September 2020, as compared to the same months of 2019. The decline follows a 9.0% drop in Q-2, which was more that twice as deep as any previous quarter since modern record-keeping began in 1947. As a direct result, the quarter-to-quarter annualized rate of change flipped from -31.4% in Q-2 to +33.1% in Q-3.

Private consumption fell in line with the economy (-2.9%), after contracting 10.2% in April-June. Durable goods bounced back by +12.7%, but services continued falling for the third quarter in a row, dropping 7.2%.

Capital investment fell 3.8%, the fourth drop in succession, and following on from 16.9% decline in Q-2. Goods and services exports fell 14.6% and imports by 4.2%.

Prices across the economy rose 1.2% in the third quarter, double the Q-2 pace. The same figures were recorded for both the GDP and PCE deflators, and for both quarters. The M-2 money supply, which rose 20.6% in Q-2, was up 23.6% in July-September. As a result, Prof. Milton Friedman’s assertion that inflation is everywhere and always a monetary phenomena can now be safely put to rest.

Natural … Organic … Simply … Pure

You are what you eat, aren’t you?

The US doesn’t legally define some of the most popular terms used to entice people to buy products. One November 2019 attempt sought to define “natural” – in cosmetics, only – as products that are at least 70% natural substances, excluding water, and as confirmed by carbon-14 testing.

It’s even more confusing in food products, where the Food and Drug Administration (FDA) regulates packaged food, while the Department of Agriculture is in change of meat and poultry. The FDA has not defined “natural,” and will not object to the term, if there is no added color, artificial flavors, or synthetic substances. That seems to imply the FDA can’t define it, but it knows it when it sees it. Politics, anyone?

What about genetically modified organisms (GMO)? In the strictest sense, that would eliminate from the grocery list things like Burbank potatoes, which Luther Burbank engineered to help alleviate starvation during Ireland’s Great Famine, more than a century ago. More, GMO products are often designed to reduce dependence on water, pesticides or other inputs, and had a huge impact on the Green Revolution half a century ago. So, kudos for preventing famines.

What’s organic? Here, the law does have an opinion: certain synthetic and non-synthetic substances are permitted, but chemical fertilizers and pesticides are not. Pyrethrins, which target insects’ nervous systems, are fine, as are rotenones (which may cause Parkinson’s disease), but not GMO products or antibiotics. Disrupting natural migration paths or using traps is OK, if done without prohibited substances. Organic food products also attract an average 47% price mark-up, and in the case of animal husbandry, require enormously more land.

Now, how about a snack? Would you like some “Simply Cheetos Puffs?” I’m sure they’re good for you …

Imports: A Key Sign of Economic Well-Being

A competitive economy can hold its own in world, exporting what it does better – or more of – to other markets. A healthy economy, on the other hand, has the ability (financial capacity, domestic demand) to import what it needs or wants from outside. Hence, tracking imports may tell us something useful about economic health in times of crisis.

The Organization for Economic Cooperation and Development (OECD) tracks monthly trade for 46 economies, including nine that are not members of the OECD. The nine are Argentina, Brazil, China, Costa Rica, India, Indonesia, Russia, Saudi Arabia, and South Africa.

Among the 46, all are experiencing double-digit declines in imports in year-to-date 2020, with the notable exceptions of Turkey (-1.2%), China (-2.6%), Denmark (-5.5%), Ireland (-5%), Russia (-7.9%), Korea (-9.1%), Switzerland (-9.4%), Australia (-9.6%), Slovenia (-9.9%), and Norway (-9.9%).

The remaining 36 range from -10% (Hungary) to -31.2% (India), and have a weighted average of -13.3%.

oecd.org

The IMF Reconsiders

World Economic Outlook October 2020 imf.org

The IMF’s World Economic Outlook now envisages a 0.8% less awful 2020, but at the expense of some slowing next year. The global economy is now expected to contract 4.4% in real terms this year, and then grow by 5.2% in 2021.

The big adjustments, to both years and in both directions are for the United States (-4.3%, then +3.1% in 2021), France (-9.8% and +6%), and Italy (-10.6%, +5.2%). Among the largest emerging economies, China gains 0.9%, to +1.9% this year – it’s worst performance in many decades – while India is expected to be 5.8 percentage points worse off, at -10.3%. Both rise above 8% next year.

Excerpts–

“The downturn triggered by the COVID-19 pandemic has been very different from past recessions. In previous downturns, service-oriented sectors have tended to suffer smaller growth declines than manufacturing. In the current crisis, the public health response needed to slow transmission, together with behavioral changes, has meant that service sectors reliant on face-to-face interactions—particularly wholesale and retail trade, hospitality, and arts and entertainment—have seen larger contractions than manufacturing (Figure 1.6). The scale of disruption indicates that, without a vaccine and effective therapies to combat the virus, such sectors face a particularly difficult path back to any semblance of normalcy. ”

“The currencies of commodity exporters among advanced economies strengthened as commodity prices firmed. Most emerging market currencies recovered between April and June, after the severe pressures during the market turmoil in March. Since then the Chinese renminbi has strengthened and the currencies of other Asian emerging market economies have generally remained stable in real effective terms. In contrast, the Russian ruble depreciated on geopolitical factors and the currencies of countries severely affected by the pandemic or with a vulnerable external or fiscal position (such as Argentina, Brazil, and Turkey) have also weakened.”

“Major central banks are assumed to maintain their current settings throughout the forecast horizon to the end of 2025. The baseline forecast is consistent with financial conditions remaining broadly at current levels. ”

“Global trade is expected to contract by over 10 percent this year—a pace similar to during the global financial crisis in 2009, despite the contraction in activity being much more pronounced this year. ”

In Chapter 2, there’s a deep analysis of the cost and benefits of economic lock-downs:

“The observation that lockdowns can reduce infections but involve short-term economic costs is often used to argue that lockdowns involve a trade-off between saving lives and protecting livelihoods. This narrative should be reconsidered in light of the earlier findings showing that rising infections can also have severe detrimental effects on economic activity. By bringing infections under control, lockdowns may thus pave the way to a faster economic recovery as people feel more comfortable about resuming normal activities. In other words, the short-term economic costs of lockdowns could be compensated through higher future economic activity, possibly even leading to positive net effects on the economy. This remains a crucial area for future research as more data become available. ”

US Federal Deficit: $3.1 trillion

Oct 8, 2020 cbo.gov

Monthly Budget Review for September 202 0

The federal budget deficit was $3.1 trillion in fiscal year 2020, the Congressional Budget Office estimates. CBO’s estimate is based on data from the Daily Treasury Statements issued by the Department of the Treasury; the department will report the actual deficit for fiscal year 2020 later this month. Relative to the size of the economy, the deficit—at an estimated 15.2 percent of gross domestic product (GDP)—was the largest since 1945, and 2020 was the fifth consecutive year in which the deficit increased as a percentage of GDP. The estimated deficit is more than triple the shortfall recorded in fiscal year 2019. Revenues were 1 percent lower and outlays were 47 percent higher in 2020 than they were in 2019, CBO estimates.

Partly due to postponed tax collection, individual income tax receipts were down 15.8% (-$157 bn) from FY2019, and corporate income taxes by 20.9% (-$34 bn); payroll tax collections, on the other hand, rose 5.2% (+$34 bn).

Federal government spending rose 47% in the estimated year to end-September 2020, to $6.55 trillion. $149 billion (6.3%) of the $2,347 billion extra spending was incurred in the first half of the fiscal year (i.e., Oct-Mar); the vast majority came in April-September.

During FY2020, Social Security benefits rose 4.7% (+$24 bn), Medicare and Medicaid payments by 25.8% ($142 bn). Unemployment compensation was 31.6 times larger (+$443 bn), and spending by the Small Business Administration rose from an embarrassing $1 billion to $578 bn.

Interest on the public debt, on the other hand, actually fell 20% (-$46 bn) due to lower interest rates.

US Workers in Q-3, 2020

In the third quarter of 2020, the American labor force was 2.1% smaller than in July-September 2019, and employment was 7.4% lower. The unemployment rate was 8.9%, vs. 3.6% in the same quarter a year earlier. New unemployment claims were more than four times higher, and continuing claims were up nearly 8-fold. The U-6 measurement of unemployment, which includes those who are discouraged from working, more than doubled, to 14.5%

In manufacturing, employment was down 5.4% and the average number of hours worked per week off by 1.4%. That reduced the total number of hours devoted to manufacturing in the economy by 6.8%. Real pay rose 0.1% (inflation was +1.1% in Q-3).

In the third quarter, the population over the age of 20 rose by 1,126,000, while the labor force fell by 1,635,000 and employment dropped by more than 11 million.

Wages and salaries paid to workers across the economy, and as measured in the national accounts through August, were 0.8% lower than in January-August 2019. Employer contributions to employee pensions and insurance fell 1.7%. Government social benefits to individuals rose 44.5%, and unemployment benefits by 2,306.6%. Personal tax payments – which includes money not paid because of deferments – fell 1%, and contributed to the +7.2% rise in disposable income per capita and 146.2% rise in personal savings.

Household spending on goods rose 1.3% in January-August, while services spending dropped 5.7%. Retail sales were down 1.8% through August.