SinoInsight 1
Liu He, a Politburo member and director of the Central Leading Group for Financial and Economic Affairs, made several noteworthy statements in his prepared speech at the 2018 Davos economic forum:
- China’s economy is “steadily turning for the better with enduring, robust fundamentals.”
- China’s financial system is “basically sound with a high savings rate.”
- The Chinese authorities have “already set out to properly handle a series of risks.”
- China’s economy has been “transitioning from a phase of rapid growth to one of high-quality development.”
OUR TAKE
- Liu He’s statements come after reports of GDP fabrication in Inner Mongolia and Tianjin (30-40 percent overstated), the issuance of large fines to several financial institutions, several cases of bank fraud, and growing social unrest over a massive Ponzi scheme. Also, Bloomberg recently noted that China’s quarterly GDP growth is nearly always 0.1 percent higher than what economists project.
- Liu echoes the official rhetoric of China’s economy “transitioning” from a “rapid growth” model to “high-quality development.” We believe that this rhetoric is somewhat disingenuous and serves to obscure China’s economic slowdown in recent years.
- Liu’s Davos speech affirms our pessimistic outlook on China in 2018. Last week, China banking regulator Guo Shuqing said that China faces the threat of Gray Rhinos and Black Swans—an identical assessment to our earlier China 2018 forecast.
SinoInsight 2
At Davos, Liu He also said that China is studying new ways to open up the economy that would “exceed the international community’s expectations.” Some of the market-opening measures include:
- Opening up China’s financial sector to foreign investment;
- Further opening up the manufacturing and service sector to foreign firms;
- Stepping up enforcement of intellectual property protection;
- Expanding imports.
OUR TAKE
1. If the Xi administration successfully implements the reforms that Liu laid out at Davos, then Xi has clearly gained the upper hand in a Communist Party factional struggle that has been particularly intense during his first term in office.
In November 2013, Xi already talked about “deepening reforms” at the important third plenum meeting. But his reform efforts were frequently stymied by the Jiang Zemin faction and other CCP interest groups. Now after five years of Party rectification via the anti-corruption campaign and further power consolidation at the 19th Party Congress, Xi appears ready for another stab at reform.
2. From another perspective, the Xi administration is keen to push reform at this stage to mitigate China’s mounting financial risks and steer the CCP away from a legitimacy crisis.
SinoInsight 3
On Jan. 22, mainland Chinese news media Beijing News carried a story about Tomorrow Group controller Xiao Jianhua’s rise to prominence. Xiao’s first investments in Inner Mongolia state-owned enterprises gave him a foothold in the markets, and he later built a sprawling business empire on the back of three listed companies—Baotou Huazi Industry, Baotou Tomorrow Technology, and Xishui Strong Year.
OUR TAKE
- Xiao Jianhua made international headlines in January 2017 when he was kidnapped from his luxury apartment in the Hong Kong Four Seasons Hotel. Several reports say that Chinese agents brought Xiao to Beijing for questioning.
- Xiao is a money launderer for the Jiang Zemin faction, and his Tomorrow Group was involved in adding fuel to the 2015 China stock market crisis. Xiao’s detention is Xi Jinping’s way of firing a warning shot at the Party princelings and elites who control China’s financial sector.
- In an interview with People’s Daily on Jan. 17, Guo Shuqing talked about cracking down on financial groups who create “massive illegal structures.” The recent exposé of Xiao Jianhua foreshadows an official announcement and resolution of his case.
- Xi could make an example of Xiao Jianhua to caution financial elites against interfering in the economy and to wrap up their game. Should the financial elites back off, China’s economic risks will be lowered.
