1 Yunnan local govts publicly acknowledge their debt crisis
April 25
The local governments of some counties and cities in Yunnan Province are publicly saying that they are under immense pressure to resolve their debt issues and barely have enough financial resources to pay wages, according to mainland media reports.
Mainland media highlighted the debt problems in Yunnan’s Tengchong City and Yongping County:
- Tengchong’s Party secretary said during a financial, taxation, and state-owned assets supervision and administration work conference on April 24 that the city’s financial security capacity is low and the local government can barely guarantee the payment of wages. The Party secretary added the city’s financial self-sufficiency rate is low; the debt scale is large and the debt ratio is increasing year by year, and the difficulty of carrying out risk prevention and control is increasing; and the level of operation and efficiency of state-owned enterprises is not high.
- A research group formed by the Standing Committee of the People’s Congress of Yongping County recently found in a special survey of the county government’s debt management that it is under great pressure to service its debts, and there is a “prominent contradiction” between the county government’s existing financial resources and debt repayment ability.
Local government debt ratio
In referring to local government debt, mainland academics and industry commentators frequently use terms like “debt-to-GDP ratio” (負債率), “debt ratio” (債務率), and “debt service ratio” (償債率):
- “Debt-to-GDP ratio” refers to the ratio of government debt to GDP and is a measurement of the PRC economy’s capacity to bear debt, of which 60 percent is the threshold limit of which additional increases in debt can have an adverse impact.
- “Debt ratio” refers to the ratio of government debt to its comprehensive financial resources for the year. The debt ratio reflects the ability of local governments to repay their debts and has a threshold limit of 100 percent.
- “Debt service ratio” refers to the ratio of debt principal and interest repayment to the local government’s comprehensive financial resources for the year, and has a threshold limit of 20 percent.
In the case of Yongping County, data from mainland financial information provider Wind showed that the county’s debt-to-GDP ratio was 45.59 percent, debt ratio was 991.01 percent, and financial self-sufficiency ratio was 15.66 percent in 2022.
Per Yunnan Province’s local fiscal budget execution in 2022, the balance of local government debt in Yongping County was 3.44 billion yuan, of which the balance of general debt was 620 million yuan and the balance of special debt was 2.82 billion yuan.
According to publicly available information on the Yongping local government’s website, its general public budget revenue in 2022 was 299 million yuan, general public budget expenditure was 1.911 billion yuan, and fiscal deficit was 1.612 billion yuan. A comprehensive economic assessment in Yunnan Province ranked Yongping County 58th out of 65 counties.
Backdrop
On April 12, the Guizhou authorities disclosed in a special survey of the province’s local government debt situation that it was deeply in debt, was unable to carry out self-rescue, and needed assistance from the central government to get out of its debt crisis.
Our take
1. Like the Guizhou case, the public disclosure of debt problems by some local governments in Yunnan Province is likely an appeal to the central government for help. That local governments are resorting to such appeals suggests that at least some areas are facing very serious local debt issues and the local government debt crisis on the whole is worsening.
Local officials in Yunnan are likely hoping that Beijing will be concerned enough about the regime’s overall security to bail them out of a local debt crisis. If the central government steps in, local officials will gain some reprieve and get to preserve their respective careers. If the central government does not help out and things take a turn for the worse, local officials will claim that they had already sent a warning and look to absolve themselves of responsibility for the situation. Meanwhile, the central authorities will find it virtually impossible to hold accountable the officials who were responsible for the debt crisis because the crisis was the accumulation of the actions of successive officials, some of whom may have already been promoted for their past “achievements” and are in the current senior leadership (i.e. denying the past “achievements” of senior officials in the Xi leadership would undermine Xi Jinping’s credibility and “quan wei”).
Because this is a long-term debt crisis accumulated by successive officials, some of whom may have already been promoted, the authorities have no way of holding them accountable, and it is impossible to deny past “achievements”.
The constant surfacing of local government debt risks further indicates that local government funding is in short supply. This in turn means that local governments are struggling to sustain grassroots government operations and will experience difficulties in properly implementing central government policies. Local officials will inevitably increase pressure on local enterprises and the local population through taxation and fines to generate revenue, and this pressure could lead to breakdowns in social stability. Rising social instability will worsen local government problems because “stability maintenance” costs money, and their inability to “maintain stability” will raise the CCP’s political risk levels.
2. Local government debt risks have been rising steadily in recent years following the drop in land sales connected with Beijing’s real estate sector restrictions and the implementation of the “zero-COVID” policy. While Beijing lifted “zero-COVID” near the end of 2022, the Chinese economy has not rebounded well and local governments are still struggling to generate revenue. Local government debt problems are likely to be particularly bad in economically backward provinces and regions, and those places could see large scale defaults should current trends persist.
Yongping County, for example, has a debt ratio of 991.01 percent and is seriously insolvent. The county is estimated to pay about 172 million per year in interest (assuming an average annual interest rate of 5 percent, though the rate could be much higher the county’s difficulties in making repayments) on its 3.34 billion yuan in local government debt, or close to 60 percent of the county’s general public budget revenue. In other words, the Yongping local government and other local governments facing a similar situation will have a very tough time just making interest repayments, let alone servicing their debt. Their debt situation will only worsen each year as they borrow even more to pay off old debts.
Perhaps more troubling for the CCP authorities, Yongping does not even have the worst economy of all the counties in Yunnan Province, and Yunnan’s debt ratio is not the worst among China’s 31 provinces and provincial level administrations. According to mainland listed company Yuekai Securities’ 2022 local government debt report (2022年31省份地方債務全景) published on Feb. 15, 2023, 23 out of 27 provinces (the report did not have sufficient data for Jiangxi, Hebei, Heilongjiang, and Gansu) it surveyed have debt ratios of over 100 percent. Yunnan ranked third with a debt ratio of 171.9 percent, Jilin second with 173.9 percent, and Tianjin topped the list with a debt ratio of 295.7 percent. Guangdong, the best performing province in China by GDP, had a debt ratio of 116.8 percent.
According to data from the PRC finance ministry, local governments added 4.73 trillion yuan, 4.47 trillion yuan, and 4.87 trillion yuan of new debt in 2020, 2021, and 2022 respectively. The balance of local government debt in China at the end of 2022 was 35.1 trillion yuan, and the total balance of all government debt exceeded 60 trillion yuan. Since 2017, the balance of local government debt has been growing at an average annual rate of 16.3 percent, or much higher than the 7.8 percent nominal economic growth per year, resulting in rising debt ratios and growing debt risks.
3. Local governments will likely only have themselves to rely on in resolving their debt issues. However, local officials are likely limited in their ability to turn around the debt problems. This means that local officials will stick to the usual modes of operation for problem resolution in addressing the local debt problems, that is, deploying propaganda and resorting to cover-ups and short-sighted fixes that let the risks fester and kick them down the road to their successors to handle.
The central government had previously made clear that it does not have much ability to help out local governments. In a teleconference with 100,000 officials in May 2022, then-premier Li Keqiang obliquely told them not to expect financial support from the central government. “If there is a catastrophic natural disaster, there is the premier’s reserve fund. But the rest of the money is dependent on you” the local governments, Li said. And in a proposal on “further preventing and resolving” local government hidden debt risks (關於進一步防範化解地方政府隱性債務風險的提案) issued on Jan. 5, 2023, the PRC finance ministry called for “adhering to the principle of no assistance from the central government” and “if it’s your kid, you take care of it” (誰家的孩子誰抱, i.e. local governments are responsible for handling their own problems, and should resolve their own debt and financial issues).
The central government, however, could help local governments by allowing “local government debt replacement” (地方政府債務置換), or more new borrowing to pay off old debts. The central government could also encourage local governments to sell their stock assets (minerals, buildings, etc.) and their equity holdings of listed and non-listed companies. Indeed, the sharp rise in state-owned company stocks since the start of the year could be tangentially linked to a possible effort by the CCP authorities to aid local governments in getting a good price to sell their equities and secure valuable funding to resolve their debt woes. But local governments selling their equities and stock assets to make repayments is at best a stop-gap measure and does not address the fundamental problem of reduced revenue post “zero-COVID” and when the regime is weaning off its reliance on the real estate sector for economic growth.
What’s next
More local governments could publicize their debt problems to pressure the central government into issuing bailouts. Local governments can be expected to default on their debt if the central government sticks to its guns on not providing assistance and should current economic trends continue.
2 State Council’s raft of ‘employment stabilization’ measures hint at dire unemployment situation
April 22
The PRC National Health Commission and other departments jointly issued a notice (關於實施大學生鄉村醫生專項計劃的通知) on implementing a “special program” to allow medical school graduates to serve as doctors in rural areas without needing to go through the licensing process first.
The notice said that 4,300 medical school graduates have gone to serve in village clinics since 2020. The notice added that the purpose of the “special program” is to “enrich” and “optimize” the stable of rural doctors, as well as “promote” the employment of college graduates.
April 26
The State Council General Office issued a notice on “optimizing and adjusting employment stabilization policies and measures to promote development and benefit the people’s livelihood” (關於優化調整穩就業政策措施全力促發展惠民生的通知). The notice required the local governments of all provinces, autonomous regions, and directly administered municipalities, as well as the various ministries, commissions, and institutions under the State Council to take various measures to stabilize and expand employment.
The notice listed the following employment “optimization, adjustment, and stabilization” measures:
- The government will provide various policy subsidies to “industries and companies with strong employability” to expand employment opportunities.
- Financial institutions will be encouraged to grant loans to support the real economy, and to small and micro enterprises with “high employment numbers,” “good job stabilization effect,” and “standardized employment.”
- Guaranteed loans and interest subsidies should be provided to “low investment, low risk” entrepreneurial projects for college graduates, migrant workers, and other groups.
- Various subsidies should be provided to support skills training.
- Unemployment insurance will be refunded to companies whose layoff rate is lower than the stipulated rate.
- Companies that recruit graduates or unemployed youth will be given subsidies.
- Tuition compensation and student loan compensation should be offered to college students and graduates of other institutes of higher learning to encourage them to seek employment in the countryside, grassroots, and remote areas.
- Approve state-owned enterprises to expand recruitment.
- Go over the staffing administration (編製) of Party and government agencies and institutions to “unearth” (挖掘) job vacancies, as well as recruit college graduates.
- Extensively mobilize various enterprises, institutions, social organizations, etc. to recruit no less than 1 million youths for apprenticeship positions, and provide subsidies for training.
- Provide assistance and subsidies to families with difficulties such as having no member of the family employed.
- Provide basic livelihood relief for the unemployed.
Background
1. According to the National Bureau of Statistics, the unemployment rate of youths between 16 to 24 years of age in the first quarter of 2023 was 19.6 percent, an increase of 1.5 percentage points from the previous quarter.
2. According to data from the Ministry of Human Resources and Society Security, there will be 11.58 million college graduates in 2023, which indicates greater employment pressure.
3. On Feb. 20, 2023, the Guangdong Youth League Party Committee issued a three-year action plan to encourage local youths to “return to the countryside” to work on “high-quality development projects” in “hundreds of counties, thousands of towns, and tens of thousands of villages” (廣東青年下鄉返鄉興鄉助力“百縣千鎮萬村高質量發展工程”三年行動). The plan called for organizing 300,000 youths to go to rural areas to provide assistance, receive practice, and have training by the end of 2025 so as to drive local employment and entrepreneurship.
Our take
1. The State Council’s rollout of employment stabilization policies and measures, as well as the easing of rules to allow fresh medical school graduates to become rural doctors without going through the licensing process, are signs that China’s economic deterioration and employment situation is quite dire. In particular, the CCP authorities are worried about finding jobs for youths and college graduates to keep them gainfully employed and prevent them from becoming another source of “social contradiction” for the regime.
From the CCP’s perspective, the greater the number of unemployed people, the more unstable society will become and threaten regime stability.
2. As part of Party and state institutional reforms at the Two Sessions in March, the central government instructed each department in central and state agencies to uniformly reduce their staffing administration (編製) by 5 percent, a move that appeared to be partly intended to address the problem of government fiscal shortages. Yet as part of the State Council’s employment stabilization policies and measures, the central government recently approved the expansion of recruitment by state-owned enterprises, as well as the hiring of college graduates by government agencies and institutions.
The issuing of contradictory policies within the span of a month indicates that the unemployment situation in China is likely very severe, and the CCP authorities have no choice but to tweak its recruitment and layoff measures to keep up with the circumstances.
CCP officials will likely adhere to their “the top has policies, but the bottom has countermeasures” (上有政策, 下有對策) approach to negotiating the contradictory policies. For instance, officials could “tear down the east wall to mend the west wall” (拆東牆補西牆, akin to “robbing Peter to pay Paul”) by laying off government staff with no “guanxi” with the local government/government department leadership and hiring the relatives of officials to replace them instead of graduates of universities or institutes of higher learning, or “selling” administration staff vacancies (i.e. offering government jobs to those who are willing to pay a hefty under-the-table fee). At a glance, officials would seem like they are complying with Party Central and will score political points unless the central government uncovers their schemes. Concurrently, corrupt local officials will exploit loopholes in the employment policies and measures to defraud the state of subsidies and not make the government handouts available to those who actually need them. Ultimately, the behavior of officials will greatly discount the central government’s effort to fix the unemployment problem.
3. China’s employment problem is actually a symptom of economic decline, and economic decline is linked with systemic deficiencies in the CCP authoritarian system and an increasingly hostile geopolitical environment for the PRC that is being driven by the rapid deterioration of Sino-U.S. relations.
Thus far, Xi Jinping’s answer to those problems has revolved around power consolidation and launching various political campaigns to strengthen his paramount position (定於一尊) in the regime. While Xi could strongarm CCP officials into following Party Central’s orders and overcome the “orders not leaving Zhongnanhai” problem to a degree, he will not make much headway in surmounting the CCP system’s systemic deficiencies that are seriously dragging down governing efficiency. Worse for Xi, his growing authoritarianism and unwillingness to accommodate the U.S. and its allies on their key agenda items (particularly Ukraine) mean that the PRC’s relations with America and the international community are set to deteriorate further, with dire consequences for the Chinese economy as businesses, investors, and governments increasingly account for China’s political and geopolitical risks in their decision-making.
3 Why Ray Dalio is mistaken about the PRC being a ‘peacemaker’
On April 26, Bridgewater Associates founder Ray Dalio published his thoughts about Sino-U.S. relations in an article on LinkedIn.
Dalio said that his “perspective” was shaped by “two trips to China lasting 13 days that included many meetings and conversations with people from a variety of backgrounds,” as well as what he learned from “other meetings with non-Chinese policymakers in other countries (including the U.S.) and Chinese citizens and China experts outside of China.”
Some noteworthy points in Dalio’s piece include:
- Dalio believes that the “United States and China are on the brink of war and are beyond the ability to talk.” He explained that both sides are “close to having a sanctions war and/or military war that neither side wants but many believe will probably happen because a) each side is very close to the other’s red lines, b) each side is using brinksmanship to push the other at the risk of crossing each other’s red lines, and c) politics will probably cause more aggressive brinksmanship over the next 18 months.”
- Dalio believes that “the political timetable of the election cycle between now and the 2024 elections in the United States and Taiwan will likely lead to more push-the-limit anti-Chinese brinksmanship from the U.S.”
- Dalio lists several “red lines” that can be “pushed up against with brinksmanship” over the next 18 months, including Taiwan independence, PRC military planes and ships “testing previously established red lines,” the PRC’s dealings with Russia, economic sanctions, controlling and cutting off essential technologies and minerals, and other disagreements.
- Dalio believes that “greater provocations will most likely come from the American side, which I worry will cause a tit-for-tat crossing of the line.” While he thinks that U.S. “provocations” will likely lead to bellicose PRC responses, Dalio does not believe that “Chinese reactions to the provocations will be strong enough to prompt a war in the near future (i.e., the next three years) because the Chinese don’t want to go to war. I expect the Chinese side to be very restrained for the time being.”
- Dalio claims that there is a “strong belief that the world is desperately in need of stronger multilateral 1) leadership, 2) systems, and 3) institutions,” and that the PRC is “very likely to play a leading role in helping to provide these.” He added that “some countries believe that while the Americans are trying to draw them into war (especially the Russia-Ukraine war), the Chinese are trying to facilitate peace.”
- Dalio claims that “it is widely believed that the U.S. is being overly aggressive with China and that is threatening to the world order, though the degrees of this view vary considerably.”
- Dalio acknowledges that the CCP is now “more dictatorial-autocratic” and is “more Marxist-communist,” but is willing to allow “tolerable amounts of capitalism.”
- Dalio thinks that the new CCP leadership “are saying all the right things that investors in China would want to hear about opening up and being a peacemaker in the world, and they are even continuing to do the right things.” He added that his and Bridgewater’s “dealings with the regulators have been excellent.”
Backdrop
Ray Dalio’s LinkedIn piece comes amid escalation in Sino-U.S. tensions since the start of the year over tech restrictions, the PRC spy balloon incident, and Taiwan.
Meanwhile, China, the U.S., and several other countries around the globe are struggling with worsening economic, societal, and other problems.
Our take
1. Ray Dalio is known to be very pro-China and his bias towards the PRC comes through clearly in several places in his article. Most egregiously, Dalio casts the PRC as a “peacemaker” and claims that it is “very likely to play a leading role” in providing the world with “stronger multilateral leadership, systems, and institutions.” This is aligned with the CCP’s propaganda of the PRC being a “champion” of “true multilateralism” and “greater democracy in international relations,” as well as being an upholder of “global stability and prosperity.”
As we explained in the April 10, 2023 newsletter, “Beijing is not offering countries true multilateralism, non-alignment, and optionality (as opposed to the Biden administration’s ‘democracy versus authoritarianism’), but is instead looking to co-opt countries in a global ‘united front’ led by the CCP against the U.S. and its allies.” Those who back the PRC’s “multilateralism” and “greater democracy in international relations” are “unwittingly subscribing to the CCP’s Marxist-Leninist worldview and obliquely condoning its world domination agenda.”
Dalio’s assessment that the PRC wants “peace” and does not want a war in at least the “next three years” is nearly identical to our own analysis of the current situation. However, Dalio does not elaborate on why the PRC is interested in “peace” and in playing the “peacemaker.” We believe that the CCP is depicting itself as a “peacemaker” and wanting “peace” to get back into the international community’s good books, set the PRC up as an alternative to the “warmongering” United States, score geopolitical victories, and ultimately help the regime survive its many existential crises and lay a foundation for it to dominate the globe in the future.
The CCP is presently being very pragmatic with its diplomatic messaging and is “very restrained” in its military ambitions because it simply does not have the military or economic ability to use “hard power” at this time without self-destructing the regime. But the CCP could do a quick 180 on its “peace” stance in a scenario where its economic and military situation improves drastically and the international environment changes to become greatly beneficial to the PRC; because the end always justify the means for Marxist-Leninist regimes, there is nothing that the CCP will not do in dominating the globe. And because the CCP will do anything (or at least try its best to do anything) to advance its interests, Dalio would naturally feel that the CCP leadership is “saying all the right things” and “continuing to do the right things” on opening up China to investors and “being a peacemaker in the world.”
Businesses, investors, and governments are advised to evaluate what the CCP says and does through the ideological lens that tints its worldview so as to correctly assess what its true intentions are and carry out more pragmatic engagements with China. Concurrently, they should strive to come up with more accurate appraisals of the present state of the Chinese economy and the PLA’s military capabilities in determining whether or not Beijing is capable of invading Taiwan and undertaking other serious belligerent activities over the next three years.
2. Dalio’s observation that the U.S. is being “provocative” and “overly aggressive with China” sounds like a CCP talking point, but is very likely how Beijing currently views Washington and its actions. What may seem like innocuous efforts at improving deterrence and shoring up national security to the West would be seen by the PRC as attempts to “contain, encircle, and suppress” its regime. The PRC would also consider America’s attempt to speed up weapons deliveries to Taiwan and boost the ROC’s international profile as promoting “Taiwan independence”; we previously assessed that Beijing could be compelled into invading Taiwan regardless of its readiness level if it deems the U.S. to have crossed certain “red lines.”
In blaming the U.S. for being the “provocative” party at this time and likely in the near future, Dalio neglected to mention that the CCP is itself to blame for what Washington is doing and will do to counter China. The PRC would not be embroiled in a “new cold war” with the U.S. today had it not undertaken various influence and spying operations, industrial espionage, drug trafficking, and other subversive activities against America since relations between the two sides were “normalized” in 1978. The PRC would also not be prematurely forced into “great power competition” with the U.S., including a trade war and a tech war, had it continued to “hide strength, bide time” instead of embarking on several grandiose projects (Belt and Road, “Made in China 2025,” having a “world class” military by 2049, etc.) that Washington would consider to be an open challenge to American hegemony.
However, we share Dalio’s concern that the U.S. and the PRC are on “the brink of war” and that things could become more risky over the next 18 months. To keep up the pressure on the CCP while dialing down the risk of war, the U.S. should, as we wrote earlier, “consider moderating its hawkish approach to tackling the CCP threat and lean more towards challenging the PRC on issues such as human rights, universal values, and morals. Washington would also benefit from focusing international efforts on exposing the CCP’s Marxist-Leninist ideology, propaganda, disinformation, and various influence operations.”
Because the Party cannot properly respond publicly to challenges to the aforementioned issues without inviting further scrutiny of them from the Chinese people and the international community, the CCP “would find it hard to pick a fight with the U.S. when confronted on those issues, and America’s allies and partners will be less concerned about working with Washington in standing up to Beijing.” As the CCP has no good excuse for resorting to belligerence when being confronted by sensitive issues like human rights and ideology that flirt with but do not cross its “red lines,” the international community would “much less likely be dragged into a hot conflict (with the potential of nuclear confrontation) with the PRC.”
