SinoInsight 1
On July 5, Xi Jinping chaired a meeting on “consolidating the achievements in the reform of Party and state institutions.” Aside from Chinese People’s Political Consultative Conference chairman Wang Yang, the rest of the Politburo Standing Committee were in attendance.
Xi gave a speech where he made the following noteworthy points:
- Xi stressed that deepening reform of Party and state institutions is a “systematic” and “holistic” restructuring of the Party and state organizational structure;
- The restructuring of Party leadership system, government administration system, armed forces system (military and paramilitary forces), and mass organizations system is meant to “enhance the Party and government’s ability to govern”;
- The Party’s “comprehensive leadership” must be strengthened and the “centralized and unified leadership” must be maintained.
OUR TAKE
1. We have written several times that Xi Jinping has been “signaling left to turn right” on policy. Xi’s high-level meeting on “consolidating the achievements in the reform of Party and state institutions” appears to be intended for precisely that purpose.
At the G20 meeting in Osaka, Xi and President Donald Trump agreed to restart trade talks. To reach a trade deal, however, Xi will likely have to commit to making the structural reforms requested by the Trump administration. Those structural reforms count as “right” policies and are traditionally frowned upon in the Chinese regime. For Xi to ram through “right” policies, he has to first “signal left” by strengthening and re-emphasizing his paramount authority in the Party while consolidating his control over the Party and state organs.
2. Based on our long-term research into the CCP, we believe that Xi Jinping will find it very difficult to succeed in his latest reform effort. In May, Xi did not appear to be politically strong enough to challenge the decision of the Party’s “collective leadership” and other political forces to reject the Sino-U.S. trade deal draft. Xi will face the same or even greater political resistance when his trade representatives next return with another draft deal, and he will unlikely be able to overcome that political resistance. Concurrently, Xi’s latest attempt at power consolidation will meet with stiff pushback as factional networks get disrupted by the Party and state institutional reforms. This would in turn lead to more escalation in the CCP factional struggle.
Xi’s power consolidation at the 19th Party Congress, his cancellation of presidential term limits, and the Sino-U.S. trade war would engender increasing and widespread opposition to his rule. Xi’s political risk levels, which are already very high, could soon hit a critical level as he seeks to overhaul the regime with his institutional reforms.
3. We believe that Xi’s latest round of institutional reforms will not succeed and he will not be able to overcome the Party’s will to seal a trade deal with America. When trade talks break down again, the U.S. will likely impose additional tariffs before the year is out.
However, should the Trump administration utilize novel solutions to target specific factional forces in the Chinese regime, the Xi leadership could succeed in institutional reforms and usher in positive change in China. (For details, contact us.)
SinoInsight 2
On July 2 and July 3, the China Banking and Insurance Regulatory Commission announced on its website that seven branches of the Bank of Wenzhou were found to have fraudulently increased their deposits and loans. The bank will be subjected to administrative punishment.
On July 4, Shanghai Pudong Development Bank publicly listed eight of its properties for sale. Of the eight properties, one was the bank’s 28-story headquarters in Shanghai with a transfer value of 2.068 billion yuan. The bank also requested that the office building be leased back to it for two years after the sale. According to publicly available information, Shanghai Pudong Development Bank sold at least 36 properties with a transfer value of nearly 90 million yuan in 2018.
OUR TAKE
1. The Bank of Wenzhou’s troubles and the listing of properties for sale by Shanghai Pudong Development Bank are signs that China’s financial system faces increasing systemic risks.
We noted in our China 2019 outlook that “some financial institutions may go bankrupt” and “Chinese companies may start selling off their property assets to pay off debt.”
2. Shanghai Pudong Development Bank is one of three Chinese banks that could face U.S. financial sanctions over their breaching of U.S. sanctions against North Korea.
We noted in the June 28 edition of this newsletter that “The Chinese regime’s tough talk against U.S. financial sanctions is just talk, and it cannot do much else to retaliate. The U.S., however, would likely be aware of the fallout of sanctioning large Chinese banks and would proceed cautiously. Ultimately, the three Chinese banks could admit to their violations and settle for a lesser punishment.”
3. Shanghai Pudong Development Bank could be opting to sell its headquarters building and other properties now after judging that China’s property prices could soon trend downwards. The bank could thus be seeking to reduce risks by selling its headquarters building and leasing it back. Should property prices hit a low, the bank could even repurchase its headquarter building later at a cheap price.
4. China’s bank fraud problems are an open secret. This problem could even be a reason why the stock value of 19 A-share listed banks (out of 32) fell below their net asset value recently.
In 2017, the Shanghai branch of Shanghai Pudong Development Bank was found to have committed illegal credit cases worth 775 billion yuan and was fined 462 million yuan by the regulatory authorities. The bank’s Chengdu branch was also found to have covered up its non-performing loans, an incident which the headquarters somehow missed.
Financial data fraud is a ticking time bomb in China’s financial system.
5. We believe that the U.S. will go ahead with additional tariffs in the second half of 2019. There is a good chance that the new tariffs could trigger China’s financial risks.
