SinoInsight 1
In recent weeks, the CCP government has been taking steps to increase deficit spending.
On Dec. 29, 2018, the Standing Committee of the National People’s Congress authorized the State Council to extend the debt limit for local governments by 1.39 billion yuan in 2019. The extension was applied before the 2019 Two Sessions, where the yearly debt limit is usually set and approved.
On Jan. 8, 2019, state media reported that the National Development and Reform Commission had approved over 1 trillion yuan worth of infrastructure projects across the country since Dec. 6, 2018. Many of the projects are rail transit works.
On Jan. 11, the China Financial Futures Exchange issued a notice on using China treasury bonds for margin trading. The notice stated that clearing members can use government bonds as margin for all futures products from Jan. 21, 2019.
OUR TAKE
1. Based on our research, we believe that China’s economy has worsened severely in the past year, with government finances and national employment in a very bad state.
The CCP regime, however, cannot pass substantial tax cuts to stimulate the economy without undermining its political power. This is because the regime needs substantial government funds to carry out “stability maintenance” operations to keep its control over the population and support its vast bureaucracy, among other reasons. Thus, the CCP’s only option is to revisit the old playbook and carry out infrastructure projects using deficit spending.
2. We believe that infrastructure building has limited ability to stimulate the economy. In fact, the CCP could end up making matters worse by inflating existing bubbles and causing further economic imbalance.
3. The CCP anchored its legitimacy to economic growth after the end of the Cultural Revolution. This legitimacy model escaped scrutiny for decades when China’s economy was booming.
Now the CCP’s legitimacy model is facing a very stiff test. With a deteriorating economy follows large-scale business failure, rapidly rising unemployment numbers, and increasing social tensions. To “resolve” social tensions, the CCP is forced to spend more money on domestic security forces and retain government workers so as not to exacerbate the unemployment problem. Increased government spending, however, further worsens the economic situation. The result is a vicious cycle.
SinoInsight 2
On Jan. 8, state media reported that the Central Political and Legal Affairs Commission is leading an investigation team to look into a contract disputes case involving mining companies in Shaanxi Province.
The investigation team includes the Central Commission for Discipline Inspection and the National Supervisory Commission, the Supreme People’s Procuratorate, and the Ministry of Public Security. The team is investigating the Supreme People’s Court for “missing documents” pertaining to the Shaanxi mining case, which involves 380 billion yuan and occurred over a decade ago.
OUR TAKE
1. The sudden re-investigation of a decades-old contract dispute case is almost certainly political in nature. The case very likely went unresolved for an extended period because it concerns various CCP interest groups and the factional struggle.
2. On Dec. 26, 2018, former state television presenter Cui Yongyuan claimed in a Weibo post that the Supreme People’s Court had “stolen” documents concerning the Shaanxi mining case. He accused Supreme People’s Court chief justice Zhou Qiang of playing a “leading role in law-breaking.” Cui had earlier exposed Fan Bingbing and other top Chinese celebrities of avoiding taxes by signing illegal “yin-yang” contracts.
Cui Yongyuan made his accusations during the same period when the CCP Politburo was holding its “democratic life meeting” (Dec. 25 to Dec. 26). On Dec. 27, several provincial-level governments announced that they were rescheduling their local “Two Sessions” meetings (see our analysis below).
Given the timeline of events and Zhou Qiang’s factional leanings, we believe that Xi Jinping may be using the Shaanxi mining case to gain leverage over the Jiang faction. (See our Dec. 5 analysis).
3. The investigation of the Shaanxi mining case could implicate the following officials:
- Supreme People’s Court chief justice Zhou Qiang;
- Former Supreme People’s Court deputy chief justice Xi Xiaoming (purged in July 2015);
- Former Shaanxi governor Chen Deming (in office from October 2004 to June 2006);
- Former Shaanxi governor Yuan Chunqing (in office from February 2007 to June 2010);
- Former Shaanxi governor Zhao Zhengyong (in office from June 2010 to December 2012);
- Former Shaanxi deputy governor Hong Feng;
- Former Shaanxi High People’s Court chief justice An Dong.
4. We believe that Jiang faction member Zhou Qiang is the primary target of the Shaanxi mining case investigation. Zhou currently faces very high levels of political risk.
