SinoInsight 1
Economic data
Aug. 12
The People’s Bank of China released financial data for July 2022 showing:
Money supply
China’s balance of broad money (M2) and narrow money (M1) at the end of July was 257.81 trillion yuan (a six-year high) and 66.18 trillion yuan (new high since April 2021) respectively. The M2 and M1 money supply was up 12 percent and 6.7 percent respectively year-on-year, and up 0.6 percent and 0.9 percent respectively month-on-month.
RMB loans
RMB loans increased by 668 billion yuan in July, down 348.7 billion yuan from a year ago.
Household loans increased by 122.9 billion yuan in July from a month ago and were up 282.9 billion yuan year-on-year. Short-term household loans decreased by 27 billion yuan (less 35.4 billion yuan YoY) while medium- and long-term household loans increased by 150 billion yuan (less 247.5 billion yuan YoY).
Loans to enterprises and institutions increased by 298.2 billion yuan in July from June and decreased 135.1 billion yuan from a year ago. Short-term loans to enterprises and institutions decreased by 356.7 billion yuan (less 99 billion yuan YoY), medium-and long-term loans increased by 344.9 billion yuan (less 148.8 billion yuan YoY), and bill financing increased by 313.6 billion yuan (up 136.5 billion yuan YoY).
Loans to non-banking financial institutions increased in July from the previous month by 246.8 billion yuan and grew 69.4 billion yuan year-on-year.
RMB deposits
RMB deposits grew by 119 billion yuan in July from a month ago and increased 1.22 trillion yuan year-on-year. Meanwhile, household deposits decreased by 338 billion yuan, non-financial corporate deposits fell by 1.04 trillion yuan, fiscal deposits increased by 486.3 billion yuan, and non-banking financial institution deposits grew by 1.01 trillion yuan.
Social financing
The stock of social financing in July grew 10.7 percent year-on-year to 334.9 trillion yuan.
The increase in the scale of social financing in July was 756.1 billion yuan, less 319.1 billion yuan from a year earlier; this is compared with an increase of 5.18 trillion yuan in June. The 756.1 billion yuan increase in the scale of social financing also includes 399.8 billion yuan in government bonds and 100.5 billion yuan in loans written off.
Aug. 15
1. The PBoC lowered the rate on 400 billion yuan of one-year medium-term lending facility (MLF) loans to some financial institutions by 10 basis points to 2.75 percent. The central bank also injected 2 billion yuan through seven-day reverse repos while cutting the borrowing cost by 10 basis points to 2.0 percent from 2.1 percent.
2. The National Bureau of Statistics released the following real estate data:
- From January to July, investment in real estate development in China decreased 6.4 percent year-on-year to 7.9462 trillion yuan. Of the total, investment in residential development decreased 5.8 percent to 6.0238 trillion yuan. In July, investment in real estate development in China fell 31.1 percent from the previous month to 1.1148 trillion yuan, of which investment in residential development declined 31.3 percent to 843.4 billion yuan.
- From January to July, commercial housing sales area decreased 23.1 percent year-on-year to 781.78 million square meters. Of the total, sales area of residential buildings fell 27.1 percent to 66.087 million square meters. Total commercial housing sales fell 28.8 percent to 7.5763 trillion yuan, of which sales of residential buildings declined by 31.4 percent to 6.6328 trillion yuan. In July, commercial housing sales area fell 49.1 percent from the previous month to 92.55 million square meters, of which sales area of residential buildings fell by 47 percent to 80.3 million square meters. Total sales of commercial housing in July was down 45.4 percent to 969.1 billion yuan, of which residential building sales fell 43.7 percent to 864.5 billion yuan.
- From January to July, funding received by real estate developers dropped 25.4 percent from a year ago to 8.877 trillion yuan. Of the total, domestic loans fell 28.4 percent to 1.103 trillion yuan and personal mortgage loans fell 25.2 percent to 1.4169 billion yuan. In July, funding received by real estate developers declined 27.5 percent from the previous month to 1.1923 trillion yuan. Of the total in July, domestic loans were down 30.5 percent to 122.4 billion yuan and personal mortgage loans fell 15.3 percent to 201.1 billion yuan.
Xi and Li make public appearances
Aug. 15
State mouthpiece Xinhua announced that CCP Central Committee ideological journal Qiushi will publish an article by Xi Jinping the following day titled, “The Whole Party Must Completely, Accurately, and Fully Implement the New Development Concept” (全黨必須完整、準確、全面貫徹新發展理念). The Qiushi article is excerpted from Xi’s speech delivered at the Politburo’s 27th collective study session on Jan. 28, 2021.
In his speech, Xi noted that his “new development concept” (新發展理念) is a systematic theoretical system that answers a series of practical and theoretical questions about regime development. The “new development concept” also clarifies the CCP’s “political position, value orientation, development model, development path,” and other major political questions. Xinhua added that the whole Party is required to “completely, accurately, and fully implement” Xi’s “new development concept.”
Aug. 16
1. Xi Jinping inspected the city of Jinzhou in Liaoning Province, according to official media. While in Jinzhou, Xi visited a forest park and the Liaoshen Campaign Memorial, which commemorates key battles that took place in 1948, during the Chinese civil war.
According to Xinhua, Xi said at the memorial that the Liaoshen campaign fully demonstrated the “superior strategic vision and planning” of Mao Zedong and other CCP leaders. He added that the decisive battle between the Kuomintang and the CCP during the so-called “liberation war period” was not just “a battle of arms and firepower, but also a battle for the people’s hearts and minds.
Xi said that “the hearts of the people are politically paramount (民心是最大的政治)” and they “determine the success or failure of a cause.” He stressed that the CCP “decided not to allow the country to change its color and the people will never agree to that.” Xi added that “the red country is hard-won and safeguarding the country is a great responsibility.”
2. While in Shenzhen on an inspection tour, PRC premier Li Keqiang held a video meeting with senior officials of six “economically strong provinces” —Guangdong, Jiangsu, Zhejiang, Shandong, Henan, Sichuan— to analyze China’s economic situation and put forward requirements for the next step in economic work. According to official media, Guangdong Party secretary Li Xi, Guangdong governor Wang Weizhong, Jiangsu governor Xu Kunlin, Zhejiang governor Wang Hao, Shandong governor Zhou Naixiang, Henan governor Wang Kai, and Sichuan governor Huang Qiang each delivered speeches during the meeting.
In his remarks at the meeting, Li Keqiang praised “Xi Jinping Thought” and the leading role of Party Central with “Comrade Xi Jinping at the core” in stabilizing the economy. He then noted the importance of the six “economically strong provinces” to the national economy, and added that large provinces must take the lead in growing the economy. Li requested that the local governments of those provinces “complete the task of making financial contributions [to the central government],” persevere with belt-tightening (過緊日子), and “safeguard the ‘three guarantees’ [wages, operations, basic livelihood] at the grassroots, especially protecting the people’s basic livelihood expenditure and payment of wages at the grassroots level.”
Li listed some statistics about the six provinces in his speech:
- The provinces account for 45 percent of China’s GDP and nearly 60 percent of the national total for trade and foreign investment.
- The four coastal provinces account for more than 60 percent of local government financial contributions to the central government.
- More than 40 percent of market entities in China are located in those six provinces.
- Over 40 percent of the employed population is in those provinces.
Sichuan power crunch
Aug. 14
The Sichuan Provincial Economic and Information Department and State Grid’s Sichuan Electric Power Company released a joint announcement (關於擴大工業企業讓電於民實施範圍的緊急通知) requiring power-consuming industrial enterprises (including key enterprises on a power guarantee “whitelist”) in Sichuan to suspend production for six days.
Semi-official mainland media The Paper later reported that more than 20 listed companies in Sichuan had issued announcements regarding the impact of power cuts as of Aug. 16, including Foxconn’s Chengdu factory. Chengdu Foxconn announced that it was shutting down production from Aug. 15 to Aug. 20 and was maintaining just 20 percent of its electricity load for security purposes. Apple smartwatches and computers are manufactured at the Foxconn campus in Chengdu.
Mainland media report that many parts of China are experiencing a shortage of electricity since the beginning of summer in June as power demand for air conditioning spiked amid soaring temperatures. Places like Zhejiang, Jiangsu, Anhui, and Sichuan logged temperatures between 35 degrees celsius to 39 degrees celsius, with some regions seeing temperatures of 40 degrees celsius and above. Weather conditions in Sichuan were among the most severe.
A “relevant person-in-charge” at the State Grid Sichuan Electric Power Company told mainland media that water supply was down 40 percent in July and down 50 percent in August, resulting in the province’s hydroelectric generation capacity dropping by more than half.
Sichuan relies on hydropower to generate 80 percent of its electricity. Concurrently, Sichuan is seeing some of the highest temperatures, lowest precipitation, and highest power load in the historical record.
OUR TAKE
1. Recent public appearances by Xi Jinping, Li Keqiang, and other senior CCP officials after an absence of about a fortnight suggest that the annual Beidaihe work-vacation has ended.
There are some rumors circulating in Chinese-speaking circles of Xi supposedly being weakened politically after Beidaihe, including him being criticized by Party elders and supposedly being forced to step aside at the 20th Party Congress. However, the propaganda apparatus’s continued promotion of Xi and Li Keqiang’s speech to senior officials of the six “economically strong provinces” indicate no change in Xi’s political position after Beidaihe. Li led off his remarks by touting Xi’s political theory and crediting Party Central with Xi at the core for Beijing’s economic work, a gesture that reaffirms our analysis that Li’s economic moves are made at the behest of Xi and refutes speculation from earlier this year about Li’s profile growing at Xi’s expense (see here and here). Meanwhile, Xinhua and Qiushi’s promotion of Xi’s “new development concept” and call for the whole Party to “completely, accurately, and fully implement” the concept shows that Xi Jinping wants CCP members to start accepting the “reality” of him still being in charge after the 20th Party Congress. The pro-Xi propaganda in state and Party media is also another sign that Xi’s control of key regime institutions has not slackened after Beidaihe.
Xi’s visit to the Liaoshen Campaign Memorial following the conclusion of Beidaihe sends a political signal that he is looking to turn things around for the regime, which is currently struggling to cope with multiple crises. The Liaoshen campaign was one of three major engagements in the civil war between the CCP and KMT and a key turning point for the Party. The military strength of the communists and nationalist forces reversed for the first time after the campaign, leaving the latter with a decisive edge to press on and seize power over mainland China in 1949.
There are several possible reasons why Xi’s political position appears to be intact after the informal political conclave at Beidaihe. The least likely reason is that Xi and his factional rivals arrived at a temporary truce of sorts to allow the Xi leadership to focus on dealing with various regime-endangering crises. Another less likely reason is that Xi has now accumulated so much power and “quan wei” (authority and prestige) that nobody dares to challenge or rebuke him, regardless of the setting. More likely is Xi altering the significance of Beidaihe in recent years such that informal discussions of elite politics there have a reduced or no impact on his running of the regime.
There is also a possible scenario where informal discussions at Beidaihe are still meaningful, but Xi made arrangements to prevent those discussions from taking place. For instance, Xi could have restricted Party elders from traveling to Beidaihe, or allowed them to go to the beach resort but be kept under “bubble management” (thereby limiting their interaction opportunities), under the guise of protecting their health amid the COVID-19 pandemic. The official appointment of Xi ally Wang Xiaohong as public security minister near the end of June and the possible tightening of surveillance over senior officials “for their protection” as crises escalate for the CCP would have made it even harder for Xi’s opponents to mobilize politically against him even if they were permitted to visit Beidaihe. If Xi was able to avoid unpleasant political discussions at Beidaihe, then it would follow that there is no visible change in his political strength and position after Beidaihe.
2. Xi’s political position may not have changed after Beidaihe, but it does not mean that he is out of the woods just yet. The latest official economic figures bode ill for the CCP regime, and serious economic problems have the potential to trigger social instability and political trouble for the Xi leadership.
The PBoC’s financial data for July seems to indicate that China is caught in a liquidity trap. The M2 growth rate hit a record high, which points to ample liquidity, but social financing and RMB loans have fallen off sharply from a year ago, an indicator of weakening consumer demand for property and other goods. This means that the CCP authorities’ usual tactic of monetary easing to spur growth is unlikely to revive the economy this time. Economists have suggested that the authorities may have to step in to bail out failing property developers, loosen “zero-COVID” restrictions, and try other non-monetary means to restore consumer confidence, improve demand, and turn around the economy.
The increase in the scale of social financing in July to 756.1 billion yuan is a six-year low. After subtracting government bonds and the write-off of bad loans, the increase in the scale of social financing was only 255.8 billion yuan in July. This reflects an unwillingness of private capital to invest in the current economic environment.
From the PBoC’s figures, the 12-month rolling net increase of residential medium- and long-term loans decreased by 2.43 trillion yuan from a year ago in July. Meanwhile, the 12-month rolling net increase of housing deposits grew by 4.02 trillion yuan over the same period, of which 83 percent were term deposits. This shows that the Chinese people are taking out fewer loans to buy property and increasing their precautionary savings. Also, part of the reason why household deposits fell by 338 billion yuan in July could be due to home buyers making early payments on property loans as they look to reduce mortgage interests or secure their real estate as quickly as possible in light of crisis in the property sector, according to mainland and overseas Chinese-language media reports. This phenomenon is in line with the sharp declines in real estate investment, sales, and personal mortgage loans in July.
PBoC data also shows that the 12-month rolling net increase of corporate medium- and long-term loans fell by 1.86 trillion yuan year-on-year, while the 12-month rolling net increase corporate bill financing grew by 3.25 trillion yuan over the same period. In July, only bill financing increased (up 136.5 billion YoY) among the various indicators for loans to enterprises and institutions. This reflects a lack of demand for corporate financing; it is possible that the banks inflated their July RMB loan scale by massaging bill financing (a form of short-term corporate borrowing) data.
3. Weak consumer demand caused by the property sector debt crisis, Beijing’s “zero-COVID” policy, wage cuts, raising unemployment, and the deteriorating economic environment in general will in turn lead to government revenue shortages. Local governments have been forced to slash civil servant wages and recover benefits, further exacerbating the vicious cycle of economic decline in China.
Mainland media reported at the end of July that several district governments in the wealthy first-tier city of Shenzhen in Guangdong Province had adjusted their 2022 fiscal budgets and took back civil servant benefits that were issued at the start of the year. For instance, Luohu District recovered 800 million yuan in civil servant benefits and Longgang District recovered about 760 million yuan. Part of the recovered funds were transferred to cover “unanticipated expenditures” like epidemic prevention and control. Meanwhile, some poorer provinces like Sichuan, Yunnan, and Guizhou also cut administrative expenses and personnel benefits, according to mainland media.
Even as they slash wages, local governments have been encouraging civil servants, as well as their relatives and friends, to buy property. At the Shimen County (in Hunan Province) Real Estate Fair on Aug. 16, the Shimen County Party Committee leader said, “I hope that all comrades and leaders will take the lead in buying houses [at the fair]. Buy one, two, three, and even four sets of property.” On the same day, the official WeChat account of the Si County (Anhui Province) local government published a proposal for “creating prosperity in the real estate industry” (關於共創房地產業繁榮的倡議書). The proposal urged “the majority of civil servants to respond positively, take the lead in resisting illegal transactions of resettlement housing, mobilize relatives and friends to participate in home purchase with practical actions, and work together to promote the smooth operation of the real estate market in Si County.”
Some local governments are offering high-limit credit to civil servants to improve consumer demand. The Bama Yao Autonomous County local government in Guangxi issued a notice on July 29 promoting “consumption-driven steady economic growth” (關於促進消費拉動經濟穩增長有關工作的通知) that requires cadres and workers of township governments, as well as relevant units in the county’s central district and city, to rise their “political standing” and “spend actively.” The notice added that the Guangxi Bama Rural Commercial Bank plans to extend credit to the county’s cadres and workers, with division-rank cadres eligible for a credit line with a limit of 1.2 million yuan, 700,000 yuan for scientific and technological cadres, and 500,000 yuan for regular staff and employees. All available credit lines have a five-year draw period, can be accessed via mobile banking, and will incur no interest if the cadre or worker does not use it.
Local governments are incentivized to pump up consumer demand and rescue local property markets so that they can get funding from land sales and tax revenue to sustain local operations, meet growth targets, and build up their political resumes.
4. The various actions taken by local governments to secure funding show that local finances are in short supply. This is partly reflected in publicly available information. According to mainland media reports, the fiscal balance (calculated as the difference between revenue and expenditure) of local governments from all provinces in the first half of 2022 was a record-high negative 8.2 trillion yuan.
Mainland media also noted that the fiscal gap of most local provincial governments had widened in the first half of the year when compared with the same period in 2021, and all of them had to rely on transfer payments from the central government. For example, the fiscal gaps in the economically strong coastal provinces of Zhejiang and Guangdong went up from 20.5 billion yuan and 161.8 billion yuan respectively in the first half of 2021 to 125.2 billion yuan and 291.2 billion yuan respectively in the first half of 2022, an increase of over 100 billion yuan in both cases. Meanwhile, Shanghai, the only one of China’s 31 provincial-level administrations with a fiscal surplus (94.26 billion yuan) in the first half of 2021, saw a fiscal deficit of 1.8 billion yuan in the first half of this year.
Mainland media further reported that the central government had set aside 9.8 trillion yuan in its 2022 budget for transfer payments to local governments. Given that the fiscal balance of local governments in all provinces is already at negative 8.2 trillion yuan in the first half of the year and with the Chinese economy showing signs of greater deterioration in July, the central government’s budgeted 9.8 trillion yuan in transfer payments will unlikely be enough to support struggling local governments. Indeed, the central government will likely still be short on funds even if the six “economically strong” provinces singled out by Li Keqiang “complete the task of making financial contributions [to the central government].” This means that grassroots government operations in many places across China will be affected, which could lead to rising social tension and further erosion of the CCP’s political legitimacy.
The impact of Beijing’s “zero-COVID” policy and the property sector crisis aside, the ongoing climate and energy problems in several parts of China will further affect production and commerce, to the detriment of the worsening Chinese economy. Continued economic deterioration and the Xi leadership’s inability to stabilize the situation will escalate social and political problems for Xi Jinping ahead of the 20th Party Congress. Xi’s factional rivals could wait for opportune moments of chaos and explosions of public outrage at the Xi leadership to undermine the general secretary and derail his political agenda at the key Party conclave.
