SinoInsight 1
In the first week of December, a video of a Nov. 28 speech in Shanghai by Di Dongsheng, vice dean of Renmin University’s School of International Relations, went viral. The video was later censored in mainland China, but continues circulation abroad.
In his speech, Di acknowledged that the CCP had been influencing the United States for several decades. He also confessed, in classic “you know what I mean” (你懂的) fashion, that Beijing’s elite capture efforts have netted former US vice president Joe Biden through his son Hunter; before the 2020 U.S. presidential election, legacy media dismissed Hunter Biden’s laptop and China scandals as “conspiracy.”
Highlights of Di’s speech include:
- “… we know that the Trump administration is in a trade war with us, so why can’t we fix the Trump administration? How come China and the U.S. used to settle all kinds of issues between 1992 and 2016? … I’m going to throw out something maybe a little bit explosive here. We have people at the top. We have ‘old friends’ in America’s core inner circle of power and influence.”
- “There’s nothing that dollars can’t handle, right? If I can’t do it with one stack of dollars, I’ll do it with two.”
- Di brought up a story of an “arrogant” bookstore owner in the U.S. who would not cooperate with him over the launch of Xi Jinping’s book in 2015. “So I asked around and found out that he was once a Democrat and a journalist in Asia. He was very unhappy with our [Chinese Communist] Party, so he purposely chose not to cooperate … So I turned this issue over to [his] leaders, let the leadership solve it … After lunch I rushed to the bookstore, only to find that the leadership was there earlier than I … [The leadership] introduced an old lady to me … She speaks very fluent Mandarin in the Beijing dialect … She said, ‘Let me tell you, not only do I speak Chinese, but I also have Chinese citizenship’ … So I immediately understood that she was an ‘old friend of the Chinese people’ … She is from a famous, leading global financial institution on Wall Street. She is the president of the Asia region of a top-level financial institution. Of course, it would be politically incorrect for me to go on. Do you understand what I mean? If you do, put your hands together!”
- “To put it bluntly, for the past 30 years to 40 years, we have been leveraging the core circle of power and influence in the United States.”
- “Since the 1970s, Wall Street has had a very strong influence on U.S. domestic and foreign affairs. So we had a channel to rely on. But the problem is that after 2008, Wall Street’s status declined, and more importantly, after 2016, Wall Street can’t fix Trump … So during the U.S.-China trade war, they [Wall Street] tried to help … but couldn’t do much.”
- “But now Biden is elected. You can see that the traditional elite, the political elite, the establishment, they’re very close to Wall Street.”
- “Trump has been saying that Biden’s son has investment funds around the world … Who helped [Hunter Biden] establish his funds? Got it? There are a lot of ‘deals’ here.”
Meanwhile, the Trump administration continues to tackle the “China challenge” with tough words and actions.
On Dec. 2, the U.S. State Department announced visa restrictions limiting the maximum duration of travel visas for CCP members and their families to one month. Those who are issued visas are not guaranteed entry into America, but will only be considered for entry by U.S. customs officers. On the same day, William Evanina, head of the counterintelligence branch of the office of the U.S. Director of National Intelligence, said that the PRC is on the move, already targeting Biden’s administration picks and “people close” to Team Biden.
On Dec. 3, The Wall Street Journal published a piece by Director of National Intelligence John Ratcliffe titled, “China Is National Security Threat No. 1.” Highlights of the article include:
- “The intelligence is clear: Beijing intends to dominate the U.S. and the rest of the planet economically, militarily and technologically. Many of China’s major public initiatives and prominent companies offer only a layer of camouflage to the activities of the Chinese Communist Party.”
- “U.S. intelligence shows that China has even conducted human testing on members of the People’s Liberation Army in hope of developing soldiers with biologically enhanced capabilities. There are no ethical boundaries to Beijing’s pursuit of power.”
- “China already suppresses U.S. web content that threatens the Communist Party’s ideological control, and it is developing offensive cyber capabilities against the U.S. homeland. This year China engaged in a massive influence campaign that included targeting several dozen members of Congress and congressional aides.”
- “I briefed the House and Senate Intelligence committees that China is targeting members of Congress with six times the frequency of Russia and 12 times the frequency of Iran.”
- “To address these threats and more, I have shifted resources inside the $85 billion annual intelligence budget to increase the focus on China. This shift must continue to ensure U.S. intelligence has the resources it needs to give policy makers unvarnished insights into China’s intentions and activities.”
- “The world is being presented a choice between two wholly incompatible ideologies. China’s leaders seek to subordinate the rights of the individual to the will of the Communist Party. They exert government control over companies and subvert the privacy and freedom of their citizens with an authoritarian surveillance state.”
- “Beijing is preparing for an open-ended period of confrontation with the U.S. Washington should also be prepared. Leaders must work across partisan divides to understand the threat, speak about it openly, and take action to address it.”
- “This is our once-in-a-generation challenge. Americans have always risen to the moment, from defeating the scourge of fascism to bringing down the Iron Curtain. This generation will be judged by its response to China’s effort to reshape the world in its own image and replace America as the dominant superpower.”
On Dec. 4, Secretary of State Mike Pompeo announced visa restrictions on “PRC and CCP officials, or individuals active in United Front Work Department activities, who have engaged in the use or threat of physical violence, theft and release of private information, espionage, sabotage, or malicious interference in domestic political affairs, academic freedom, personal privacy, or business activity.” Pompeo said, “The Chinese Communist Party has long sought to spread Marxist-Leninist ideology and exert its influence all over the world,” and accused the CCP of intimidating targets overseas who work against Party interests.
Also on Dec. 4, Pompeo announced the termination of five PRC “cultural exchanges” that are actually used as “soft power propaganda tools.” These programs include the Policymakers Educational China Trip Program, the U.S.-China Friendship Program, the U.S.-China Leadership Exchange Program, and the U.S.-China Transpacific Exchange Program and the Hong Kong Educational and Cultural Program.
OUR TAKE
1. After Xi Jinping congratulated Joe Biden on Nov. 25, the CCP proceeded to say the quiet part out loud via Di Dongsheng, i.e. The CCP has long infiltrated America’s business and financial elite, and has leverage over the Biden family and possibly the Democratic Party.
Communist China’s brazenness is likely due to its belief that President Donald Trump has no avenue to overturn the election result, coupled with confidence that Joe Biden will revert America back to the “engagement” policy that massively benefited the PRC’s rise in the last four decades.
Mainstream media outlets claim a Biden administration will be “tough on China,” citing Joe Biden’s willingness to “work with allies” on China (but never offering details) and the one time he labeled Xi Jinping a “thug.” However, what the mainstream media has remained mum on is Biden’s refusal, despite overwhelming evidence, to recognize the CCP as America’s greatest national security threat. Also, Biden’s advisers and picks for the Treasury, Office of the United States Trade Representative, and White House National Security Advisor, are all firmly in the pro-CCP “engagement” camp. We believe Team Biden’s China policy will be “soft engagement” or “competition without confrontation,” which plays right into the CCP’s global domination agenda.
The CCP likely believes Trump cannot win re-election, even though he has legitimate legal and constitutional paths to victory, because the U.S. establishment has been “bought off” and will do everything in their power to deny Trump. In Di Dongsheng’s words, “there’s nothing that dollars can’t handle… if I can’t do it with one stack of dollars, I’ll do it with two.” Money, however, will not resolve the CCP’s Trump problem; thousands of Americans have done their civic and moral duty in filing sworn affidavits claiming election fraud and irregularities, and tens of millions of Americans still support Trump despite legacy media’s best efforts to crown Biden and dethrone Trump. As we wrote previously, “the U.S. Supreme Court could be called in to judge some of the cases and state legislatures in contested states could block certification of the election results, denying Biden 270 electoral votes by the mid-December deadline and throwing the election to the House of Representatives.”
2. The CCP deems a Biden presidency a fait accompli and is currently gearing policies towards that outcome, including intimidating Australia and arresting prominent pro-democracy activists in Hong Kong. This sets the stage for Black Swans in China in the event of a Trump reversal.
Businesses, investors, and governments are advised to hold off on finalizing China plans based on a Biden presidency to sidestep risks and capitalize on opportunities.
SinoInsight 2
More signs of China debt and banking sector problems surface.
Nov. 25
Li Yang, chairman of the PRC National Institution for Finance and Development and a member of the Chinese Academy of Social Sciences, said he was concerned about China’s debt and leverage ratios during Caijing Magazine’s annual conference. Li noted that local debt is rising very quickly, and more seriously, local governments are not spending on projects after issuing bonds.
Li also spoke about the “painful discovery” of seemingly economics-illiterate local officials who boast about carrying out “self-circulation” at the provincial and county level without realizing that the CCP’s “dual circulation” is a national-level, macroeconomic policy. “This is a very big problem,” he said.
Dec. 2
1. The People’s Bank of China issued an article by central bank governor Yi Gang on its website. Titled “Building a Modern Central Banking System,” the article is based on an official guide on how to interpret the CCP’s fourteenth Five-Year Plan.
In the article, Yi Gang acknowledges problems with the central banking system, including its “insufficient” overall supervision of systemic financial risks. Yi proposes the implementation of an independent central bank financial budget management system to stabilize the renminbi, prevent the monetization of fiscal deficits, and guard against a scenario where the central bank has to bear corporate credit risk and currency credibility is affected.
Yi Gang also accused local governments and financial institutions of forcing the central government and the central bank to spend huge sums to resolve their financial risks, so as to maintain social stability in China. He proposed the creation of an accountability system to guard against major financial risks and ensure that financial institutions, local governments, and regulatory agencies are held responsible for their own actions.
2. The State-owned Assets Supervision and Administration Commission (SASAC) of Shaanxi Province issued a notice on corporate bond financing management “for the prevention and control of debt risks.” The notice stressed that it is necessary to “resolutely prevent defaults on bond payments upon maturity.”
Dec. 3
The PBoC and the China Banking and Insurance Regulatory Commission jointly issued “assessment measures” for “systemically important banks.” The “assessment measures,” effective Jan. 1, 2021, will identify certain banks as “systemically important” and impose additional regulatory requirements upon them to prevent “too big to fail” scenarios.
Dec. 4
The PRC’s National Association of Financial Market Institutional Investors announced that Xinzheng New District Development Investment Co, a government-owned infrastructure construction services from Henan Province, completed paying out its “16 Zhengxin Development PPN001” bond in cash to holders. According to analysts, Xinzheng essentially made a prepayment of the bond principal plus interest.
Per publicly available information, “16 Zhengxin Development PPN001” is a five-year bond issued on March 30, 2016 with a coupon rate of 5.4 percent. The bond’s initial issue size was 1.5 billion yuan, and 500 million yuan worth of bonds remained when Xinzheng New District Development Investment Co made the early payout and took the bond off sale. Chinese credit rating agencies give Xinzheng an AA+ rating.
OUR TAKE
1. This year, the CCP implemented monetary easing policies and issued large quantities of government bonds to stem the impact of the Sino-U.S. trade war and the coronavirus pandemic. According to ChinaBond.cn, the PRC government issued a staggering 12.5 trillion yuan worth of bonds in the first 11 months of 2020, an increase of $4.13 trillion yuan (49.3 percent) over the same period last year. Over half (6.26 trillion yuan) of the government bonds issued were by local governments.
Local governments are issuing large quantities of bonds in accordance with central government policies, but it is doubtful whether the stimulus will actually be effective given Li Yang’s revelation about the lack of local projects to spend on. The lack of projects is yet another sign of serious economic deterioration in China, and the large-scale issuance of government bonds may end up only expanding the PRC’s debt crisis instead of aiding recovery.
2. Yi Gang’s article indicates that the CCP is very concerned with systemic financial risks and is actively making efforts to mitigate them. Party culture and characteristics, however, will doom Beijing’s attempt to avert a crisis.
The CCP presents an image of “unity” and “consensus” in public, but its officials are largely driven by individual interests. Thus, officials will strive to meet central government targets to secure political achievements, but will usually do so as much deception as they can get away with (reporting manipulated data, obscuring problems, etc.) and adhere to political correctness (“preferring left rather than right”). Ultimately, local officials will safeguard their own interests, at the expense of regime security and health. A recent example is the case of Henan’s Yongcheng Coal & Electricity Holding Group Co bond defaults, which caused doubts to be raised about the CCP regime’s creditworthiness (see here and here for the full analysis).
In response to the Yongcheng case, the central government has begun interviewing bond underwriters while local SASACs are publicly talking about debt default prevention. Meanwhile, we have the case of the government-owned Xinzheng New District Development Investment Co making what amounts to a prepayment on its bond, a move intended to restore investor confidence in Henan state-owned enterprises.
However, Henan SOEs appear to have largely “freezed” issuing bonds after the Yongcheng default on Nov. 10. From Nov. 11 to Nov. 30, only one property developer in Henan, a private company, issued bonds for sale (total scale of 900 million yuan).
3. Yi Gang’s article and the “assessment measures” for “systemically important banks” suggest that the CCP regime faces serious fiscal and financial risks. Beijing has essentially acknowledged it cannot keep up its financialization Ponzi scheme to generate growth, as further financialization will only increase systemic financial risks. Also, Beijing recognizes that local governments play the threat of political instability to get the central government to underwrite local debt problems.
By delineating clear boundaries on financial responsibilities, Beijing is warning local governments it either will not or cannot rescue them when crises arrive. Previously, CCP financial officials already signaled that the central bank is reducing its scale of stimulus.
4. Recently, local governments made high-profile pledges, pressured by the central government, to stop their SOEs from defaulting. Those commitments however, do not resolve Communist China’s fundamental economic and financial woes.
Local governments might employ administrative means to transfuse funds from healthy SOEs to its ailing SOEs to maintain the facade. But there is a limit to how long local governments can sustain musical chairs; eventually, the music (money) will stop and chairs will disappear, leaving more and more players standing. Meanwhile, local debt problems will continue to compound.
Barring unexpected shocks, local governments could technically play musical chairs with its SOE debt problem for a lengthy period before they are found out. The game will be up quickly, however, in the event of Black Swans, including a second term for Trump and increased U.S. pressure on China.
