Is Beijing finally gearing up to address chronic oversupply – and resulting price wars – in its NEV and other cleantech sectors?
Trey McArver joins Trivium China Podcast host Andrew Polk this week to discuss just that question.
Specifically, they examine what may be the early signs of a major policy shift – meant to break through the structural causes that keep industries from consolidating and zombie firms from exiting the market.
The two discuss:
The most recent meeting of the Central Commission for Financial and Economic Affairs – which took direct aim at these issues
Other signs that momentum is building for a more forceful approach
The ongoing challenges that such a policy pivot would face
Parallels between this moment and mid-2016 – the last time a significant new macro policy framework was rolled out
The gents also dive into their takeaways from the June Politburo meeting – as the Party looks to better coordinate its top policymaking bodies – and touch briefly on the latest rumors that Xi Jinping is losing his grip on power.
Spoiler alert: We don’t buy the rumors.
It’s another fun one – so enjoy!
Transcript Follows:
00:00:07
Andrew Polk:
Hi, everybody, and welcome to the latest Trivium China Podcast, a proud member of the Sinica Podcast Network. I’m your host, Trivium Cofounder Andrew Polk, and I’m joined today by my colleague and frequent podcast guest, Trey McArver. Trey, how are you doing, man?
00:00:20
Trey McArver:
Yeah, doing good.
00:00:22
Andrew:
Good to have you on as usual, and particularly today, because we are going to touch on some domestic politics and policy. For those who don’t know, Trey runs Trivium’s political research on China. So, we’re going to get into some of those developments today that have happened over the past few weeks, specifically, or really over the past week — specifically, we’re going to discuss this week’s meeting of the Central Commission on Financial and Economic Affairs that highlighted the need to better “Govern disorderly and cutthroat price competition by enterprises.”
00:00:55
That’s what the Chinese refer to as involution-style competition. It’s basically the price war in the EV market and the overcapacity in the clean-tech sector, such as solar panels and batteries and things like that. And that meeting that discussed that this week comes on the back of a couple of high-profile party-linked publications on the same issue. So, we’re going to kind of get into what looks like the beginnings of a pretty significant potential policy shift to really crack down on that “involution style, competition” that regulators and officials are increasingly concerned about. Then we’re going to touch quickly on Monday’s Politburo meeting. So, that was the June Politburo meeting, held Monday, June 30th, which reviewed regulations governing party commissions and leading small groups.
00:01:46
Pretty sort of seemingly niche or esoteric thing, but quite important. And finally, if we have time, we’re just going to touch on the latest rumors that Xi Jinping is losing power somehow, otherwise in trouble politically. These rumors seem to crop up once a year, typically around this time of year, just before the summer. Spoiler alert there — we don’t really give any credibility to these rumors, but we’ll sort of rundown what they are this time and touch on maybe why they seem to be a little bit more widespread this year. But we’re just going to touch on that briefly at the end. But before we get into all of that, Trey, we got to start with our customary vibe check. It’s been a minute since you’ve been on the pod. How’s your vibe, man?
00:02:27
Trey:
Tired.
00:02:30
Andrew:
Yeah. Three kids, still tired. For the listeners, before we were getting on the pod, Trey just said to me, I feel like the next five years are going to be a grind. And I didn’t know if he was talking about work or kids. And it was kids. Well, cool. Well, I know you’re tired. It’s July 4th today. It’s July 3rd — We’re recording on 11:15 in the morning, East Coast Time, July 3rd. Everybody’s getting ready to go out of town, out of D.C. for the holidays. So, I’m pumped. We’re going to go hit the lake. Have a good long weekend. So, that’s the energy I’m bringing into this. So, hopefully, that can offset your tiredness. But before we get into the meat of the discussion, we have to do the usual housekeeping as well.
00:03:13
First, a quick reminder, we’re not just a podcast here. Trivium China is a strategic advisory firm that helps businesses and investors navigate the China policy landscape. That includes policy towards China and D.C., London, Brussels and other Western capitals. So, if you need any help on that front, please reach out to us at hq@triviumchina.com. We’d love to have a conversation about how we can support your business or your fund. Otherwise, if you’re interested in receiving more Tribune content, check out our website, triviumchina.com. We’ve got a bunch of different subscription products, both free and paid. You can definitely find the China policy intel that you need on our site. And finally, tell your friends and colleagues about Trivium and about the podcast — helps us grow our business, grow our listenership.
00:03:51
All right, man, so that’s done and dusted. Let’s get into it. We’re going to start with the meeting of the Central Commission on Financial and Economic Affairs that took place this week. The meeting, specifically, the overarching agenda for the meeting was to talk about a unified and open national market. This meeting took place on July 1st Tuesday, and it was the first meeting, at least officially announced meeting since February 2024. Like I said, they looked at the idea of a unified and open national market. We’ll get into what exactly that means. But a subcomponent of that was really looking at these price wars that are going on or “involution-style competition,” as I talked about, and they put the emphasis on sort of local governments, the actions that governments are taking to kind of, really, that drives a lot of this involution-style competition.
00:04:48
So, before we get into some of the more specifics of the meeting, Trey, can you just talk a little bit about the commission? And so we’re going to use the acronym the CCFEA — Talk about what it is, what it does, why it’s so important.
00:05:01
Trey:
Yeah. Happy to do that. So, the Central Commission for Financial and Economic Affairs is the Party’s top economic policy-making body. It’s chaired by Xi Jinping. And over the years, it has been the place where a lot of the most important economic policies have originated. So, at its most recently publicized meeting in February of 2024, that was when they announced the big consumer goods and industry equipment trade-in program that continues to be kind of front and center of efforts to boost demand in the economy even now. But some other big initiatives that have come out of this group in the past was common prosperity in August 2021 and the dual circulation system in 2020, which is — Sorry, throwing a lot of kind of Party jargon at you here. I know you understand what it is, but it makes sense, the metaphorical eyes of our listeners glazing over-
00:06:06
Andrew:
Yeah. If I can just jump in there for a second, I mean, we won’t get into the details of them, but these are just really big policy sort of frameworks that Xi Jinping himself and the wider state Party apparatus have pushed forward, that really kind of govern a lot of the sort of more granular decisions, policy decisions, policy documents as relates to financial and economic affairs. And so the point being that when this body talks about policy, it’s at the sort of the highest strategic level and really sets the tone for what is coming next. And so, it’s hugely important to pay attention to the agenda of these meetings. This is them signaling, okay, now we are focused on these issues, not only signaling to us, but signaling to others in the Party who need to kind of execute on these priorities, right?
00:06:59
Trey:
Exactly. I mean, this meeting got scant coverage in Western media. But in China, every single official knows that this meeting happened and is poring over the readout and probably the internal instructions that are coming on the back of this meeting because they know, okay, these are the priorities. And again, this body is chaired by Xi Jinping. And this commission, along with a bunch of other commissions, and I’ll do this to TF our conversation about Party commissions later, were established in 2018 by Xi Jinping. And they’re really emblematic of the way that he has personally kind of taken control of a lot of the key policy portfolios. So, this commission was built on the back of something that was called the leading small group for financial and economic affairs, which has been around since the ’80s.
00:08:00
But Xi Jinping really elevated this group to basically put economic policy directly under his remit as Party General Secretary, as opposed to under the remit of the premier, which is where it had kind of de facto sat in the decades before Xi Jinping took over. Again, this commission is incredibly important, and it’s very emblematic of the kind of Xi era and his approach to governance and his centrality to everything, including economic policy.
00:08:35
Andrew:
Yeah. Great stuff. And so getting into a little bit more specifically what this meeting was about, the overarching, the headline from the meeting was talking about this unified national market, which is Xi Jinping, and top officials talk about a lot. And it’s sort of one of those, like you’re saying, about the dual circulation strategies, like, what exactly does that mean? I mean, at its most basic, China’s economy is, I don’t know if we can say this word, it is balkanized, it’s very fragmented. So, that drives inefficiencies in the market. A lot of that is driven by local protectionism at the city level or the provincial level, which makes cross-province investment inefficient and means that local officials protect their local companies so that other SOEs from other provinces or private firms can’t do business there, can’t get procurement.
00:09:24
And so it just makes the whole thing messier than it needs to be. That’s kind of, at the basic level, what they mean when they’re talking about a unified national market, kind of breaking down those barriers between provinces in particular. And, as we’ll get into, a lot of that really drives in not only in NEVs, so electric vehicles, but across a bunch of different industries really drives overcapacity because everyone’s, all these local officials are competing with each other for economic growth and taxes and employment and all that stuff. And so everybody subsidizes and supports their local industry, especially in NE area, that’s a policy priority. So, you end up with huge overcapacity like we currently see in the auto sector. But we’ve seen that movie over and over and over in China in a bunch of different sectors because of these issues. So, they talked about five different aspects of what exactly needs to be unified.
00:10:16
So, the five unifications, I guess I will just touch on them quickly — so, unifying the foundational market systems, unifying market infrastructure, unifying the standards for government conduct, unifying market regulation and enforcement, and unifying the market for factors of production. So, that’s kind of the framework that they’re thinking about unifying the market. But perhaps more importantly, and this I’ll throw over to you, Trey, is they touch on six specific issues or kind of tasks to address in order to unify the market. Do you want to go down those quickly and kind of give your thoughts on what each of those are?
00:10:51
Trey:
Well, actually, before you even get there, I want to underline some of what you were saying and try to illustrate this a little bit for people. First of all, I would say kudos to the top leadership because this is a major problem. And I think it’s one that’s not well understood outside of China, just how fragmented the Chinese economy is. There are some stats that will just blow your mind. I love aluminum, right? Like, if you look at the major aluminum producers of the world — Canada, Russia, the United States — they have one or two aluminum producers. In China, there are over 100 aluminum producers. That’s down from about 300 like 15 years ago.
00:11:27
Same thing, think about cars. America — you basically have four car makers. You have the big three, and you have Tesla. Think about Germany, you basically got three, right? You’ve got Volkswagen, Mercedes-Benz, and BMW, whatever. We can give other examples. Japan, Korea, France, wherever you want to go. You’ve got a couple car makers. In China, I think the number is still over 80 — 80 different car makers. My favorite example of this, as Andrew knows well, I used to be a smoker, and I just loved it. You want to buy cigarettes in China., you walk in — think, you know, back in the day when I was a smoker in America, basically you have two choices, it’s like Camel or Marlboro, and then basically they’re offshoots, right? But it’s RJR or it’s Philip Morris, or like maybe they’re some American spirits or something else — In China, you walk into the tobacco shop and there’s like 80 different cigarette brands because every province has its own cigarette maker.
00:12:29
And then sometimes even cities have their own cigarette makers. And, as you said, this is a real problem because what that means when you have such fragmented markets is that you don’t get the economies of scale that accrue to large players. And in China as well, like, not only you’re not getting those economies of scale, but it is kind of pointing to a broader problem, which is just a very distorted market system, where basically these local companies are being protected by local governments. And that ultimately leads to real macroeconomic inefficiency.
00:13:19
Andrew:
Yeah, that’s all great points. I also like the anecdote of being in a Shanghai couple years ago with one of our colleagues, and kept asking him, you know, “What brand of EV is that? What brand of EV is that?” And eventually, he was just like, “I don’t know, I’ve never seen that before.” So, can you imagine looking at a car that was produced in your country and having no idea what it was? I do just want to make one point that’s a little bit of a dogleg that I feel like I’m going to bring back as a soundbite at some point to people, which is the flip side of this is if you only have three car makers in China, and 80 of them go out of business, those are going to be three freaking huge companies.
00:14:02
They will dwarf by an order of magnitude Western carmakers or whatever. And I think that maybe that’s just a piece of when Western policymakers complain about Chinese overcapacity is something that they’re not kind of thinking about, is there may be less overcapacity if the industry consolidates, but it’s going to consolidate into ridiculously huge companies that will have massive global weight and be very difficult to compete against. So, careful what you wish for on that front. Just throwing that out there is a point. But let’s circle back now to these sort of six. I think these are actually quite pretty specific things that policy-makers talked about needing to focus on, the six specific issues. You want to run through those real quick? The six specific issues that need to be addressed in terms of trying to unify the national market.
00:14:56
Trey:
Yeah, sure. So, all right, strap in, everybody, because this is going to be an exciting recitation of Chinese policy talking points. Number one, governing this orderly and cutthroat price competition by enterprises in accordance with laws and regulations, guiding enterprises to improve product quality, and promoting the orderly exit of outdated production capacity. So I would really underline that last bit.
00:15:22
Andrew:
That’s the big one. Yeah.
00:15:23
Trey:
Yeah. Number two, regulating government procurement and tendering processes and strengthening fairness reviews of bid outcomes. Number three, regulating local government investment promotion activities and improving transparency in the disclosure of such information. Number four, promoting the integration of domestic and foreign trade, smoothing the pathway for export products to be sold in the domestic market, and cultivating a group of high-quality enterprises engaged in both domestic and international trade.
00:15:55
Is everybody still with me? You guys excited for number five and six? What’s it going to be? What’s it going to be? Number five, continuing special campaigns to regulate law enforcement involving businesses, improving fiscal, statistical, and credit systems that support market unification. I’m going to underline that one as well, the improving fiscal systems. And number six, guiding officials to adopt and practice a correct view of political achievement and refining performance assessment systems for high-quality development and official evaluations.
00:16:30
Andrew:
So, that’s an interesting list. Like I said, I don’t want to get into every single one of those. I mean, we can if you want to come back to them, actually, Trey, but I just wanted to get those out there to show, like for a high-level strategy, this is pretty specific in terms of the six things, like we really want to make sure that the local government procurement processes are working well, we want to align statistical systems. We want to better integrate trade into this process so that actually that products that we’re going for exports can be sold in the domestic market. Right? And that’s part of offsetting trade pressures globally. So, really some interesting and pretty specific stuff. But the one we really want to dive into is number one, which is just kind of seems to be the first among equals when it comes to the agenda, which is basically addressing this issue of price wars, cutthroat price competition, overcapacity, and especially focusing on the orderly exit of outdated production capacity.
00:17:31
This is like sneaking right up to the edge of saying we have overcapacity, which is now become a bad word in the Chinese policy landscape because the U.S. and Europe keeps banging China over the head with the overcapacity piece. But it seems to me that they are elevating this as a policy priority with this meeting and some other things that have happened. Do you agree with that point of view, Trey?
00:17:57
Trey:
Absolutely. I mean, I think you’re right to read these in rank order. Like these priorities, the order is not random, and every word in these readouts is reviewed and argued over, and massaged. So, I think we’re right to give a lot of weight to the words themselves and to the order in which they come. Now, what I actually find interesting about this one is I would say that this first one, I’m going to read it again for everybody because it’s such beautiful prose — “Governing disorderly and cutthroat price competition by enterprises in accordance with laws and regulations, guiding enterprises to improve product quality and promoting the orderly exit of outdated production capacity.”
00:18:38
So, I would actually say that this is three things, right? So, the thing, if you’re like trying to conceptualize it, the thing is let’s get rid of price wars, and then there are three ways we’re going to do that. So, it’s like better regulation of competition, guiding enterprises to improve product quality, and then promoting the orderly exit of outdated production capacity. And so what I don’t like about this is the first two. Like, yes, let these loss making firms get out of the market. That is a huge problem and one that’s been there forever, right? Li Keqiang was talking about zombie companies a decade ago. Liu He put reducing capacity as the number one of his supply-side structural reforms, right?
00:19:28
Andrew:
2016, yeah.
00:19:30
Trey:
Yeah. This is nothing new, and it’s really important, I think when Chinese policymakers talk about orderly exits or improving… they’re talking about bankruptcy procedures, right? And improving the bankruptcy procedure, that is a kind of market-oriented solution. What it’s saying, it’s like these firms are failing in the market, and therefore they need to fail in reality. And what I don’t like about the first two is that they are much more like hands-on statist-
00:19:59
Andrew:
We need to do these things to help keep companies from going out of business, right?
Trey:
Yeah.
00:19:53
Andrew:
Product quality is not like getting them out of the market. It’s like, “Oh, we’ll just help you make something better so that you don’t go under.” And that’s definitely the opposite of market.
00:20:14
Trey:
Exactly. I mean, it looks to me that like this is what will be so interesting to see is how this filters into policy. But like governing cutthroat price competition in accordance with laws and regulations, to me, really makes me worried that you’re going to see very interventionist measures like price floors or other stuff that just end up being completely market-distorting. We’ve seen this. You’ve had price wars, actually, even in EVs before. And you’ve had price wars and property. And so what happens? It’s like, “Hey, buy this property. And we’re also going to give you a new car.”
00:20:53
Andrew:
A golf club membership, right?
00:20:56
Trey:
Yeah. Everybody just starts adding in all of these non-price incentives. And I think markets are beautiful things and prices are beautiful things, and they’re really good at kind of allocating resources. And so I do worry that we may see a lot of hands-on efforts to kind of just get rid of this problem, as opposed to just focusing more on the underlying issues, which I think, if we jumped down to number five, those fiscal reforms that we’ve talked about for a long time, that’s a real key to the problem, right? A lot of reason this happens is because local government revenues are tied to corporate taxes, which are based on revenues a lot.
00:21:39
Andrew:
Yeah. Just quickly. So, one point there then is this is not going to happen quickly. There’s a reason that China has chronic overcapacity, and it’s because of the way the entire system and economy works. So, this is not an easy undertaking, nor will it happen quickly or overnight. But this is a high-level policy signal that regulators or senior officials are getting much more serious about this. And I’ll get into some of the other evidence for that in a minute. And then secondly, I just want to mark here that Trey just said prices are beautiful things. I feel like that was sort of very Trumpian in a way. I can hear Trump saying something like that. So, just mark Trey down for loving prices. Anyway, I am now going to go into a couple of the other.
00:22:23
So, this meeting happened on Tuesday, and then there was a couple of other things that have happened in the past week or so, where high-level party publications also have highlighted this issue. So, in the People’s Daily, the Party’s main sort of daily publication, there was a commentary with a very sharp and direct criticism of local government intervention in the past few days. It said that “misaligned local priorities have exacerbated the overcapacity situation. Many local governments have blindly pursued capacity expansion and duplicative projects, engaging in subsidy arms races and offering excessive preferential policies that have severely distorted resource allocation.” Then they go on to say, “Improper intervention by local governments in distressed firms has stalled the exit of inefficient and obsolete capacity, further exacerbating vicious market competition.” Again, to that inability of companies to exit the market, or at least hindrance from having companies exit the market.
00:23:25
And we won’t get into the specifics of this, but this commentary was written with a byline that basically very much indicated this is a commentary from senior Party officials. So, focusing in on this issue of local government protectionism and it driving the overcapacity and limiting the ability of poor firms or distressed firms to exit the market. And then, echoing that, there was a piece in Qiushi, which is the party’s top like theoretical magazine. So, if People’s Daily is the FT, Qiushi is the economist kind of thing, but very much also saying, reiterating that local government interference is fueling overcapacity and obstructing industry rebalancing. So, it says, “Local government overreach, driven by flawed performance metrics that prioritizes short-term growth, has fueled local protectionism, market fragmentation, and triggered a race to the bottom in policy incentives.”
00:24:17
Goes on to say “shortcomings in China’s bankruptcy and restructuring regime,” very much right, nailing the nail on the head, “combined with interference from local governments, have prevented the timely exit of obsolete and excess capacity, leading to a rise in zombie firms holding back industrial consolidation.” Couldn’t be any clearer, Trey, right? I mean, are we about to see some big move to consolidate and get some of these firms out of the market, like how do you read all this together?
00:24:45
Trey:
Oof, I don’t know, to be honest. Yes, I do think there’s a clear, like the messages could not be clear. And, as you said, this people’s daily article, this is page one. People’s Daily by a pseudonym that basically says this is an authoritative statement coming on the back, or directly preceding, actually, I guess, this meeting, which also signal this was a major policy priority. So, it does feel a little bit kind of 2015 authoritative person. And for those of you who have no idea what I’m talking about…
00:25:20
Andrew:
Yeah, we should explain that.
00:25:21
Trey:
Yeah. We talked a little bit already. I mentioned supply-side structural reforms, which were a big kind of the overarching policy framework that was laid out by the Party in 2016 that issued in deleveraging and a whole lot of stuff. And that was all signaled ahead of time by articles in the People’s Daily by a “authoritative person” who was talking about the issues in particular with debt. But they very clearly signaled a kind of policy shift that then manifested it. And then what we had in the years to come was a very aggressive and successful effort to deleverage.
00:26:03
Andrew:
And I would just jump in here, like, this one’s interesting because we’ve had clients asking about this. And when that sort of authoritative person wrote the piece about overcapacity in high debt, and they literally said, I say he because now everyone is like, we’re pretty sure it was Liu He who at least sort of push that forward if he didn’t author it himself. But the author of that piece specifically said that high debt is the original sin of sort of China’s economic system, or I forget the phrasing of the last part. But when that came out, everyone was like, “Oh man,” like the day it was published, everyone was talking about it in our circles. It could not be clearer that something had changed, and someone had gotten like up to Xi Jinping and said, “Hey, we got to deal with this now.”
00:26:56
And that was the case. Basically, Liu He had convinced Xi Jinping like basically this debt situation is a national security issue, I think is how he sort of pitched it to him. And then, as you said, they went on this very successful deleveraging campaign. It wasn’t quite that obvious. I mean, it wasn’t like 100% sure everyone knew what was going to happen, but it was like, this is a big deal and signals something. And then, in the months that followed, they rolled out supply-side structural reform, and people were not sure whether it was a real thing or not. But in retrospect, that signal couldn’t be clear. These signals don’t seem quite as clear, but they do seem very significant, I would say. And I would not be shocked if we kind of look back in two years and say, “Okay, 2025, summer 2025 was the moment that they really said, ‘okay, we’re going to clean up the oversupply and the involution and the price wars in the NEV sector and the other clean-tech sectors.’” You agree or disagree?
00:27:53
Trey:
Yeah. Well, exactly. I mean, actually, if you really want to go deep on this, there were three articles by the authoritative person.
00:27:49
Andrew:
Ooh.
00:27:50
Trey:
Yeah. I mean, they happened over the course of a year. And you’re exactly right. That thing, it’s not like the article appeared in the next day deleveraging started. And, I mean, frankly, you’re also right that they were a big deal. I remember having to jump on the phone and talk to clients and writing client notes and all sorts of stuff about it, but also the general feeling and the general sentiment was like, “Okay, this is big, but will they really be able to follow through on this?” And so I think a fair degree of skepticism is in order this time as well. And I think we’ll just have to see how this plays out. I mean, I think it’s been signaled as a priority, but there are lots of priorities.
00:28:45
Andrew:
For sure. Yeah, we don’t want to overeat it. Definitely. I mean, that’s the whole point of watching China for years and years and years is understanding where the signals come from. Right? And this seems like a pretty clear signal, if not quite as strong as the last one. And so, I guess the point kind of from here is what do we look for? I would look for them in this next Politburo meeting if they’re introduced this as a topic in the July Politburo meeting, which will be at the end of this month, which will also specifically focus on the economy. That would be a big signal. We’d also then look for a sort of high-level strategic document, likely to be passed by the general office of the Party as well as the State Council.
00:29:25
So, high-level guidelines on a new framework focusing on the unified national market. And then from there, that would likely sort of task other agencies and ministries with specific aspects of this, and then you’d see policy documents roll out from that. And if we see this big policy push, then we will actually see agencies getting to work on these specific issues. Again, that process will take, even just a policy formulation process, will take anywhere from six months to a year, if not longer. So, it’s a bit of a slow burn, but it’s one of those, again, where you sort of look back a couple of years to three years to, oh, wow, they did a lot. And it started here. And in three years, we could see some significant consolidation in, again, some of the clean-tech sectors, solar panels, NEVs, batteries, etc. One last piece on this before we go to some of the other things we need to discuss quickly before we go is I noticed in the Qiushi piece that they specifically called out misaligned incentives of local officials as being part of the problem, which I think is totally correct.
00:30:30
But that’s not the officials’ fault, right? The local officials have their KPIs. So, hopefully, senior policymakers are saying, “Well, we need to change the incentives and change the KPIs.” Do you think there’s any chance that that will be a part of this?
00:30:44
Trey:
I mean, I think it’s going to be a part of it. This is actually kind of key to how the whole system works, and something that we’re always trying to figure out, not least because we know, I mean, they’ve been switching official KPIs, revising the official system for evaluation for the past decade, basically. And my understanding is they are revising it by basically just adding things on to it so that it’s actually becoming less and less clear how officials are being evaluated as opposed to more clear. And so I’m a little bit skeptical. I think at the heart of this, this goes back to official KPIs, is definitely always a KPI is that you have to maintain social stability. At the heart of maintaining social stability is maintaining employment. And a big reason that these loss-making firms are not getting shut down is because they employ a lot of people in the local economy.
00:31:41
So, again, I think it’s all about fiscal reforms. And until you have done something to basically align the tax incentives to realign the tax incentives of local governments, and to get more money into the pockets of local governments so that they can support laid-off workers or build out the social safety net, I think this is going to continue to be a problem that they run up against. And given that that was number five on the six-point priority list, I wasn’t impressed with the way they addressed it either. They put it like fiscal accounting and statistics issues, just like, okay, it’s a fiscal issue.
00:32:08
Andrew:
The issue isn’t with the statistics.
00:32:11
Trey:
Yeah, so I see some real problems here. And going back to supply-side structural reforms, okay, we have framed this as, okay, we got this signal. This came out, they really successfully leveraged. But, again, the number one priority, there were five priorities for supply-side structural reform, the number one was cut excess capacity. And here we are five years later saying we need to cut excess capacity. And by the way, China has been trying to cut capacity in different sectors since the 1990s. You’ve had high-level documents, high-level for steel and autos in particular, going back now 30 years, and we still haven’t seen it get done. So, there’s clearly a lot of political economy issues that they’re going to run into trying to do this. I think we should all be a little bit skeptical. And you also said, “Oh, hey, now we’ll look to see the policies come out.”
00:33:18
Well, in 2022, the Central Committee and the State Council put out this big policy on building a unified national market. I would actually say that it’s still too early to tell that that wasn’t a big thing. Like, just because the policy comes out in the next few months also doesn’t mean that this is a done deal.
00:33:36
Andrew:
Yeah, totally. So, we’re just trying to read the tea leaves like we can’t predict the future. We’re saying this might be a big deal, but it might not. My instinct is that it is. But again, we’re not going to be able to prove it either way for several years. Right? To see if it works. I will say the last, and before we move on, the last piece I wanted to say in terms of kind of how this moment parallels the supply side structural reform real policy pivot was that came at the tail end of basically four and a half years of upstream deflation, do surprise deflation. A lot of economic volatility induced by, partly by currency moves, which partly had to do with Trump’s initial election, but also it was like a mismanaged devaluation by the central bank.
00:34:19
But, well, look at where we are now. We’re basically at three years into a deflationary cycle. Again, big overcapacity. Again, global economic volatility that’s threatening to increase domestic economic volatility. So, there’s just a lot of parallels here. We don’t want to override it. But we’ll see where this goes. There’s a lot more to focus on here. And we’ll see kind of what the commentary from the top leadership is. We’ll see what the Politburo meeting in late July says on this issue, if at all. But speaking of Politburo meetings, on Monday, there was the June Politburo meeting, monthly meeting, and they did not announce the date for the next plenum, which we thought they would do. But what they did do was review regulations governing Party commissions and leading small groups.
00:35:04
Specifically, the regulations aimed to make Party commissions and leading small groups more focused and effective by requiring them to concentrate on major and cross-cutting policy issues to stay in their lane. In other words, do their jobs without encroaching on the responsibilities of other Party and state agencies, and to put forward practical, actionable policies to improve the quality and efficiency of decision-making. All right. Trey, there’s been a lot of like in the commentariat and the China-watching space, bit of confusion on what’s going on here. Like, does this mean that… because Xi’s really pushed to these commissions. Right? And does this mean that Xi messed up, the commissions aren’t working well? Or does it mean that they’re just trying to clean up the system if there’s too much overlap? What’s going on here?
00:35:47
Trey:
I think it’s probably a little bit of both, to be honest. I mean, to be perfectly honest, I have no frickin’ idea. But nobody else does either. So, my thoughts are as valuable as anybody else’s. But I think, first of all, I will just say that Xi Jinping has a real mania for rules. I mean, since he has come to power, he has basically rewritten the entire internal Party rulebook. And I think that covers some sort of, I can’t remember the number, I want to say it’s like around 300 different internal party regulations, and a lot of the major party regulations are approved at Politburo meetings or deliberated at all at a Politburo meetings, and approved at Politburo meetings. So, this is by no means kind of novel to be debating and passing a measure like this
at a Politburo meeting. And, again, I mean, I think this looks to me to be in 2020 at a Politburo meeting. I’m pretty sure I would have to check on that, but I can’t imagine that it wasn’t. But they released guidelines to govern how the Central Committee works, which also talked a little bit about these central commissions.
00:36:55
But those are the first guidelines you would ever have for how the Central Committee works. And was that proof that the Central Committee wasn’t working or hadn’t worked for the 79 years that it had been functioning? I don’t think so. I think, again, Xi has a little bit of a mania for rules. It was seen as kind of a lacuna in the Party rulebook. And so he went to address it. So, I think this is probably the same sort of thing. You have, we’re on now our third kind of five-year plan for writing party regulations, so I mean, people are tasked every five years with figuring out what regulations need to be drafted and what needs to be put together.
00:37:33
I would assume that this came out of that process. And it’s also not that surprising because these commissions, most of them, were formed in 2018. But then you also had some new ones created in 2023. And so they’re relatively new beasts as well. So, it doesn’t really surprise me that there might not be rules for them already. Now, I do think it’s interesting reading what the Politburo said about this and why they’re doing it. So, they said that “the Central Committee’s decision making and deliberation and coordination bodies must accurately understand their role and responsibilities. They must provide more effective overall leadership and coordination of key initiatives, ensuring that they coordinate without replacing others and that their actions are appropriate without overstepping boundaries.” Right? And so what that implies, certainly, is that maybe there are some issues with commissions overstepping their boundaries or not coordinating with other commissions.
00:38:37
And that’s certainly, to me, that would make sense. Like, I’m very confused about the relationship between these different commissions. So, in particular, we have a commission called the Central Commission for Comprehensively Deepening Reform, which covers everything, and actually, it has six kind of subgroups, one of which is on the economy. We have the commission we’ve been talking about today, the Central Commission for Financial and Economic Affairs, which is obviously focused on the economy. Then we have the Central Financial Commission, which is focused on the financial system. That’s a new one that was formed in 2023. And then we have the Central Science and Technology Commission, which was also established in 2023, which is really about fostering innovation and key technologies in China.
00:39:25
Andrew:
So, nothing to do with the economy.
00:39:27
Trey:
Yeah, exactly. In the past, if you just look at meetings of the Central Commission for Financial and Economic Affairs, they’ve had major policy meetings on science and technology. These predated the establishment of the Science and Technology Commission. But clearly, you know, some overlap there. Also, we were talking about, I mentioned before that in 2022, we had a high-level Central Committee document on building a unified national market, something that the Finance and Economics Commission was talking about today. But that document was passed at a meeting of the Central Commission for Deepening Reform. Right? So, it certainly would make sense to me that maybe it’s not clear how, on economic policy in particular, where there seems to be so much overlap among those four commissions in particular, how they all interact. And so, if this is an effort to kind of clarify that, then it probably is one that is needed.
00:40:27
Andrew:
Yeah, that’s a good point. I think we got to wrap up, and I want to just touch briefly on our last topic. I was thinking, you know, you said these came out of the leading small groups, beefed-up versions of leading small groups, which my conception of the leading small groups is always sort of like they’re the National Security Council of the U.S. They’re there to manage the interagency process, to bring people from across the government and Party to kind of break through barriers, get alignment, and kind of get everybody on the same page, and everybody who goes, executes their part of whatever the issue is. But if you’ve got six different NSC, six different national security councils, then that whole process just becomes totally muddied, and it doesn’t work as intended, which is to actually streamline things and coordinate things because I’m sure there are turf wars and just confusion about who’s responsible for what.
00:41:16
It’s almost like you need an NSC over the NSC, right? Or a commission to oversee the commissions. So, I can see how it would be a bit of a messy process. But that was a great explanation. I know we’ve got to wrap up soon. So, just last topic quickly.
00:41:30
Trey:
Before we wrap up…
00:41:20
Andrew:
Okay, go. Yeah.
00:41:21
Trey:
There’s also another commission is the National Security Commission. And national security in the official framework includes economic security as well as technological security. So, how does that one interact with these as well? I guess my point is that there are a lot of commissions, and it’s even more confusing than the picture that I painted.
00:41:43
Andrew:
Too many cooks in the kitchen.
00:41:44
Trey:
Yeah. These rules clarify their roles. I think it could be useful.
00:41:47
Andrew:
Well, they all are headed by Xi Jinping, so at least, in theory, he could-
00:41:51
Trey:
Actually, they’re not.
00:41:52
Andrew:
Oh, they’re not.
00:41:52
Trey:
The Central Financial Commission is headed by Li Qiang, the premier.
00:41:57
Andrew:
Oh, interesting. Well, that’s actually a perfect segue into our last topic, which is the annual rumors that Xi Jinping is losing power and that somehow Li Qiang, in this iteration of the rumors, is giving him a run for his money on economic affairs. So, the rumors, this time around again, I will have Trey do a little rundown, but every year, about this time heading into the summer, there are sort of these rumor swirls — Xi Jinping’s somehow losing power. He’s sick. He is incapacitated in some way. These rumors specifically are kind of centered on the recent upheaval in the PLA. So, has Xi Jinping lost control of the army? And then the idea that there are competing narratives around economic policy, with Li Qiang pushing a kind of more to consumer piece and consumption, and Xi Jinping pushing new productive forces in innovation — my view would be that those things are not incompatible with each other.
00:42:54
They can both move forward at the same time, but that people are dissatisfied with Xi’s governing of the economy. And then the final kind of piece of evidence is that Xi Jinping is not going to the BRICs summit in Brazil in a few months, and Li Qiang is going in his stead. So, it must mean that he needs to stay home to watch his back or something. Trey, run down your thoughts on all this and anything I miss there, and just tell listeners how they should be thinking about this stuff when it inevitably pops up every year.
00:43:21
Trey:
Yeah, I mean, the only other thing that I think the major, other piece of information that’s been feeding this is the fact that Xi was absent from public view for around ten days. And then when he popped back up into public view, it was to meet the president of Belarus, Lukashenko, who was visiting. But he met him in his house instead of having a big meeting in the Great Hall of the People. And so that also just gave rise to speculation that he was either somehow in political trouble or that he might be having health problems. I mean, you know what? I’m not even going to go through all of these one by one. The truth is, is that some of them, like the PLA stuff, is the most interesting, right? Like there is clearly, like, it appears that three…
00:44:06
Andrew:
Something rotten in the PLA.
00:44:07
Trey:
Three of the six members of the Central Military Commission have been purged in the past two years. Right? Half, and these are people that Xi had kind of, one of them in particular, a Politburo member, He Weidong, was fast-tracked. It was amazing that he was put on the Politburo. He hadn’t served on the Central Military Commission before. He hadn’t served on the Central Committee. What he had done is spent a lot of time with Xi Jinping in Fujian in the ’90s. And so I think the fact that these are kind of Xi’s people that are being purged is one of the big reasons that people are now claiming that he has lost control of the military or that there is significant pushback against him within the Party more broadly.
00:45:01
And I would just like to acknowledge that there is clearly something going on in the PLA. Now, my reading of that is actually the exact opposite, where Xi Jinping is so firmly in control that he can get rid of his generals without suffering any kind of real political pushback. But I do think it’s at least worth noting. Everything else are kind of bits of information that you could basically pluck at any time, right? I mean, i.e., Xi is absent sometimes, Xi also sometimes doesn’t go on foreign trips, right? I mean, he sent Li Qiang to the G20 in 2023, and broadly has been delegating a little bit more in his third term, both to Li and some other members of the Politburo Standing Committee. So, I think the real reason I don’t put any truck behind this stuff is because nobody credible has said it.
00:45:38
It’s just kind of random people; they pick this up, often kind of overseas Chinese Falun Gong affiliated folks, and then that gets picked up by somebody random and kind of amplified. But as you know, people have been getting in touch with us for a week — “Hey, have you heard this? What’s going on? Blah, blah, blah.” We’ve been talking to every smart person in the world that knows about China; they can’t find any evidence of any of this stuff. They don’t think any of it’s true. So, I think, for me, that’s the big one, is that I don’t know, just because there’s like a random article here, an editorial by somebody who doesn’t know very much about China, claiming that Xi Jinping is about to lose power — In the absence of better evidence, my default is to discount these things.
00:46:22
That said, the system is opaque, and nature abhors a vacuum, right? And so this stuff can persist because we will never get any sort of official rebuttal to any of this or any kind of dispositive evidence.
00:46:36
Andrew:
Totally. I mean, that’s the reaction every time that stuff like this crops up is like, it’s by people, especially for people like us, who watch this stuff closely, it’s like, “Oh, that’s ridiculous. I don’t see any evidence for that.” Then you kind of pause and you’re like, “Actually, I can’t count it out 100% because we don’t know what’s going on, especially in the really elite part of Chinese politics.” But that’s a great rundown. So, I think we’ll remain skeptical. I think listeners should remain skeptical when they hear this stuff. But you can never know. And that’s just a great reminder that the system is very opaque. But you covered a bunch of stuff today, Trey. Thanks so much for the time and for going through all this stuff with me. I really appreciate it.
00:47:17
Trey:
Yeah. Well, you owe me.
00:47:20
Andrew:
Thanks, man. And thanks everybody for listening. We’ll see you next time.
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