1 CCP makes assertive play with dangerous military maneuvers
‘Unnecessarily aggressive maneuver’
May 30
The Pentagon said that a PRC J-16 fighter pilot performed an “unnecessarily aggressive maneuver” by flying directly in front of the nose of a U.S. Air Force RC-135 aircraft on May 26, 2023. The PRC plane came within 400 meters of the U.S. reconnaissance craft, which was “conducting safe and routine operations over the South China Sea in international airspace,” according to the Pentagon.
A U.S. senior defense official told the media, “We don’t believe it’s done by pilots operating independently. We believe it’s part of a wider pattern we see in the South China Sea, the East China Sea, the Taiwan Strait and elsewhere.”
June 3
The U.S. Indo-Pacific Command said in a statement that a PLA warship (PRC LY 132) “executed maneuvers in an unsafe manner” within 150 yards of the USS Chung-Hoon destroyer as it traveled through the Taiwan Strait. The U.S. warship and a Canadian frigate (HMCS Montreal) were conducting a “freedom of navigation” transit.
The PLA later issued a statement blaming the U.S. and Canada for “deliberately creating incidents in the Taiwan Strait region, deliberately provoking risks, maliciously undermining regional peace and stability, and sending the wrong signal to ‘Taiwan independence’ forces.”
June 5
1. When asked about the PLA warship incident, White House spokesman John Kirby said, “Sadly, this is just part, again, of a growing aggressiveness by the PRC that we’re dealing with, and we’re prepared to address it.”
Kirby later added, “There was absolutely no need for the PLA to act as aggressively as they did. It won’t be long before somebody gets hurt. That’s the concern with these unsafe and unprofessional intercepts. They can lead to misunderstandings; they can lead to miscalculations.”
2. Derek Grossman, senior defense analyst at the RAND Corporation, said that “China is only increasing the chances for miscalculation – namely ships or aircraft accidentally colliding – that could then spiral into armed conflict.”
3. PRC foreign ministry spokesman Wang Wenbin said during a regular press briefing that “the U.S. side made provocations first and the Chinese side only responded by handling the incident in accordance with relevant laws and regulations.”
Wang added that the actions taken by the Chinese military were “completely justified, lawful, safe, and professional.
4. Chinese military commentator Song Zhongping told Reuters that the PLA’s “point blank interception” was a demonstration of its navy’s capabilities and “courage.” He added, “The more intensified the provocation from the United States, the stronger the countermeasures from China.”
Military no-talk
June 2
U.S. Defense Secretary Lloyd Austin shook hands with PRC defense minister Li Shangfu around a dinner table on the sidelines of the Shangri-La Dialogue in Singapore. The Pentagon said in a statement that the pair only spoke briefly. The PRC had earlier declined a formal meeting with Austin, while media outlets reported that Li will consider talking when the U.S. lifts sanctions against him.
Austin later said that “a cordial handshake over dinner is no substitute for a substantive engagement.”
June 3
In a speech at the Shangri-La summit, Secretary Austin said, “I am deeply concerned that the PRC has been unwilling to engage more seriously on better mechanisms for crisis management between our two militaries. The more that we talk, the more that we can avoid the misunderstandings and miscalculations that could lead to crisis or conflict.”
Meanwhile, PLA Lieutenant General Jing Jianfeng told reporters at the summit that “China-U.S. military relations are faced with difficulties and the responsibility lies entirely on the U.S. side.” He added, “China attaches importance to developing China-U.S. military relations, and our interactions and communication have never been suspended.”
June 4
Li Shangfu said in a speech at the Shangri-la Dialogue that “A cold war mentality is now resurgent, greatly increasing security risks. Mutual respect should prevail over bullying and hegemony.”
Li also said that “China and the U.S. have different systems and are different in many other ways. However, this should not keep the two sides from seeking common ground and common interests to grow bilateral ties and deepen cooperation.”
Li added that “it is undeniable that a severe conflict or confrontation between China and the U.S. will be an unbearable disaster for the world.”
Engagement efforts ongoing
June 3
The U.S. State Department said in a statement that Assistant Secretary of State for East Asian and Pacific Affairs Daniel Kritenbrink and National Security Council Senior Director for China and Taiwan Affairs Sarah Beran will travel to Beijing to “discuss key issues in the bilateral relationship.” Kritenbrink and Beran were in China and New Zealand from June 4 to June 10.
June 4
Reuters reported that senior officials from “about two dozen” of the world’s major intelligence agencies held a secret meeting on the sidelines of the Shangri-la Dialogue over the weekend, citing five people with knowledge of the matter. U.S. Director of National Intelligence Avril Haines attended the meeting, while China and India were among the countries present.
The people said that “such meetings are organized by the Singapore government and have been discreetly held at a separate venue alongside the security summit for several years.”
A person with knowledge of discussions said, “The meeting is an important fixture on the international shadow agenda. Given the range of countries involved, it is not a festival of tradecraft, but rather a way of promoting a deeper understanding of intentions and bottom lines.”
The person added, “There is an unspoken code among intelligence services that they can talk when more formal and open diplomacy is harder – it is a very important factor during times of tension, and the Singapore event helps promote that.”
June 5
The State Department said in a statement that Daniel Kritenbrink, Sarah Beran, and U.S. Ambassador to the PRC Nicholas Burns met with PRC foreign ministry executive vice foreign minister Ma Zhaoxu and director general of the North American and Oceanian affairs department Yang Tao in Beijing. The two sides “had candid and productive discussions” and “exchanged views on the bilateral relationship, cross-Strait issues, channels of communication, and other matters.”
June 6
1. Bloomberg News reported that U.S. Secretary of State Antony Blinken has plans to visit China “in the coming weeks” for talks with top officials, “possibly including President Xi Jinping,” citing people familiar with the matter.
2. Kurt Campbell, the U.S. National Security Council Coordinator for the Indo-Pacific, said at an event at the Hudson Institute that “lines of communications are opening up” between the U.S. and China and “we are able to lay out more constructively our areas of interest and concern.”
He also said, “China is increasingly a great power. Her (military) forces rub up against ours much more than they did in the past. The potential for miscalculation, inadvertence, is real and growing.”
Our take
1. The PLA’s recent “aggressive” military maneuvers near U.S. vessels and aircraft, as well as propaganda and statements concerning those maneuvers, indicate that they were within Beijing’s calculations rather than being isolated events. This suggests that the CCP is taking advantage of the Biden administration’s eagerness to have “engagement” with China and “thaw” the bilateral relationship to demonstrate that the PRC cannot be easily bullied and will stand up to Western efforts to “contain, encircle, and suppress” China.
The military maneuvers also allow the Xi leadership to show (through propaganda and other means) the Chinese people and the problematic nationalistic elements in the regime that it is not weak in dealing with the U.S. and the West, as well as the so-called “Taiwan independence forces.”
2. The CCP’s authoritarian nature demands that it always strive to maintain a “tough” image and preserve “face” where possible. In the quest to save “face,” the CCP has been known to take dangerous and unnecessary military actions. A notable example is the PRC’s rejection of the United Nations’ Korean War ceasefire proposal after it had conquered significant territory south of the 38th Parallel and Beijing’s decision to drag on the fighting for several more years with minimal gains beyond propaganda value, despite the steep combat losses the Chinese People’s Volunteer Army (PVA) was sustaining.
Shen Zhihua, a professor of history at East China Normal University and a Cold War expert, told the Chinese language edition of the BBC that one of the reasons why Mao Zedong insisted on sending troops to Korea despite the opposition of many in the Party elite was his belief that the military action would allow him to win Stalin’s approval; this is consistent with the CCP taking action to appear “tough” and save “face.” Shen also said that the PVA would have accomplished its strategic goals of going into Korea at a “relatively small cost” if it had accepted the UN ceasefire in January 1951 after its three successful “Phase Offensives” saw the PRC and North Korea not only push the UN forces back to the 38th Parallel but also take significant portions of territory south of it. Shen added that the casualty ratio between the PVA and the U.S. military was about 0.6 to 1 at the time.
However, Mao Zedong was ambitious and wanted to keep up the CCP’s campaign against “American aggression in the guise of the UN.” The PRC and the DPRK only agreed to an armistice after another two years of increasing setbacks: The DPRK gained Kaesong south of the 38th Parallel by July 1953 while losing a net total of about 1,500 square miles of its territory to South Korea; the casualty ratio between the PVA and the U.S. military increased to 2.6 to 1; and only a small portion of Chinese prisoners of war agreed to return to Communist China (fewer than 6,000 POWs went back to the mainland while over 14,000 went to Taiwan).
Despite the PRC’s Korean War losses, the CCP continued to claim in its propaganda that it had fought a righteous and successful war against the U.S. “aggressors” and that its tenacious fighting had forced the Americans to come to the table for negotiations. Mao and the CCP also received a boost in “quan wei” (authority and prestige) and political legitimacy for taking “tough” action against the West.
Xi Jinping and the CCP, however, would not be able to replicate Mao’s Korean War propaganda success if they decide to take on a serious act of aggression, including invading Taiwan. For one, modern technology guarantees that the Chinese people will learn of massive setbacks in a conflict faster than the CCP can carry out censorship. The PLA is also in the midst of modernization and is still some years away from being able to provoke serious military confrontation and find success against the more technologically advanced U.S. and Western militaries. Thus, Beijing currently has to settle for “aggressive” interception to generate propaganda soundbites and project “toughness.”
3. The U.S. and its allies will likely continue seeking “engagement” with the PRC despite its “aggressive” military maneuvers as they look to convince Beijing to align itself with them on key items like pushing for an outcome in the Russia-Ukraine war that the West prefers, as well as the climate economy and agenda. Meanwhile, the PRC could continue to make “unsafe” maneuvers as it searches for bargaining leverage, but will likely stop short of actual aggression that is not in its interest. Neither the PRC nor the West are in a position to escalate tensions to the point of serious conflict at present given their respective domestic frailties and the lack of preparedness on both sides.
However, the U.S. and its allies could be compelled to sharply pressure the PRC regardless of their respective domestic situations if the latter moves to strongly support the Russian war effort or makes other moves that represent a serious challenge to the rules-based international order and agenda. Western efforts to counter the PRC are also unlikely to shift even if efforts at “engagement” improve as long as the CCP refuses to abandon its “revisionism” and ambitions to displace America as the global hegemon.
2 Beijing talking down local gov’t fiscal and debt issues underscore their severity
Since the start of the year, several local governments have gone public about their financial difficulties and debt risks while signaling the central government for help (see here, here, here, and here). This has forced the PRC finance authorities to indirectly respond to the local government debt problem in state media.
Meanwhile, there are increasing signs that local governments are creating more financial risks in easing their debt and financial difficulties.
Beijing downplays local gov’t debt issues
On June 5, state mouthpiece Xinhua published an article explaining the fiscal shortages of “some” local governments titled, “How to View the Current Situation of Local Fiscal Operations” (如何看待當前地方財政運行態勢).
The article listed the national fiscal revenue data for 2022 and the first four months of 2023 before explaining that the difference in fiscal revenue and expenditure in the localities is due to local fiscal power being not equal to local general public budget revenue. The article further explained that central government transfer payments currently make up about 40 percent of local financial resources. Also, the scale of transfer payments from the central government to local governments reached 9.71 trillion yuan in 2022 and is expected to hit a high of 10.06 trillion yuan this year.
The article then featured interviews with experts and scholars who signaled that local government “financial revenue is expected to recover this year, but challenges and risks still exist.” Local governments at all levels have also reportedly stepped up fund “coordination, revitalization, reduction, and adjustment” efforts, “find new sources of income and reduce expenditure (开源节流), guarantee and reduce some expenditures (有保有压, i.e. maintain “three guarantees” spending and cutting down on unnecessary expenditures), and effectively improve the efficiency of financial fund usage.”
The article cited a “relevant finance ministry official” as saying that the PRC government’s debt ratio is not high. The official noted that the ratio of the balance of the PRC government’s statutory debt to GDP was controlled at around 50 percent in recent years, which is lower than the internationally accepted threshold of 60 percent and lower than that of other major market economies and emerging market countries. The official added that the risks are “generally manageable.”
“At present, local government debt is unevenly distributed, with some local governments seeing relatively high debt risks and large debt repayment pressure. We have urged relevant local governments to earnestly assume their main responsibilities, effectively resolve government debt risks, and hold the bottom line of preventing systemic risks,” the official said.
The official also said that China’s financial situation is “healthy and safe” and enough space has been allowed to “deal with risks and challenges.”
The article cites He Daixin, director of the financial research office at the Chinese Academy of Social Sciences’ Institute of Economic Strategy as saying, “China’s financial stability and health are among the best in the world, with relatively good performance on key financial and sustainability indicators.”
Local gov’ts sell parking concessions
On June 2, mainland media The Economic Observer reported that parking space operation rights have become a hot “product” for local governments in China’s midwest region.
The report noted that close to 40 local governments began auctioning off the rights to operate parking spaces from January to May 2023, as compared to a total of 11 during the same period in 2022. Those local governments auctioning parking space operation rights are mainly county governments located in the central and western regions, including the provinces of Guizhou, Yunnan, Shaanxi, Hunan, Gansu, Sichuan, and Hebei.
A person engaged in government investment and financing told The Economic Observer that the buyers of local government parking space operation rights will pledge their future operation rights or revenue rights to continue seeking financing. The buyers are usually local government financing vehicles (LGFVs) or state-owned enterprises.
The person added, “Previously, the fiscal revenue of many localities was acceptable and they had no problem with maintaining [government] operations. Now many localities are facing “three guarantees” pressure and urgently need to revitalize stock assets and alleviate financial pressure. Parking space assets are easier to obtain and transfer.”
The report cited a June 1 article on the website of Shaanxi Provincial Public Assets Trading Center as saying that the assets being traded thus far in 2023 include parking spaces, sewage treatment, heating, reservoir operating rights and supporting facilities assets, public service venue operating rights and asset transfers. A total of 17 districts (counties) were involved in asset trading, had completed 10.7 billion worth of transactions, and have 1.2 billion yuan worth of assets still listed for trading.
The report also noted that a mainland media report in May 2023 had spotlighted an incident involving a company securing a huge loan from a bank after pledging its parking space operation rights. “Huipo Parking,” a company controlled by the Nanning State-owned Assets Supervision and Administration Commission, had obtained the right to operate all parking spaces in Guangxi’s Nanning City for 30 years. The company then pledged the company’s rights to operate the parking spaces for 25.5 years (July 2022 to January 2048) to a bank for 7.209 billion yuan; the generous loan amount was partly due to the “Huipo Parking” charging high parking fees and its cooperation with the local court to recover outstanding fees from vehicle owners. “Huipo Parking’s” bank loan later became a trending search topic and the subject of public scrutiny.
Under public pressure, the Nanning municipal government issued a notice on May 22 to rectify and audit “Huipo Parking.” The state-owned Nanning Public Transportation Group then took over the management and operation of “Huipo Parking’s” parking spaces. Hou Gang, the deputy Party secretary and mayor of Nanning, issued a public apology on May 23 and explained that “Huipo Parking’s” 7.209 billion yuan loan was just a “valuation” and the bank did not actually make the loan.
Our take
1. The Xinhua report on how to view the “current situation of local fiscal operations” appears to be typical CCP “spinning tragedy into victory” (喪事當喜事報) propaganda. If so, then the report obliquely reveals that local government financial and debt crises in China are as serious as the localities’ recent public call for help indicates, if not even more severe.
Analyzing the Xinhua report in the broader context offers a window into China’s financial woes. For instance, the report notes that there is a “difference” in local government fiscal revenue and expenditure, which is an indirect admission of financial problems in the localities.
The acknowledgment that 40 percent of local financial resources stem from central government transfer payments hints at another can of worms. We noted in the May 30, 2023 newsletter that a document about the Kunming LGFV debt crisis circulating in May revealed that the Shanghai authorities were not able to transfer hundreds of billions of yuan to support Yunnan since 2022 because Shanghai’s finances were affected by “zero-COVID” lockdowns. We later explained that the central government has “long relied on a few economically developed provinces and cities to support the more economically backward regions through fund transfers.” If economically developed localities like Shanghai are experiencing financial difficulties and the central government does not have spare funds to dole out to local governments (see Li Keqiang’s remarks to 100,000 cadres in a teleconference in 2022), then how much valuable transfer payment (nearly half of local financial resources) can be made available to struggling localities remains in question.
The observation of experts and scholars interviewed by Xinhua for its report that “challenges and risks still exist” for local governments certainly downplays the situation. According to a March 2023 report by the Chinese Academy of Fiscal Sciences (CAFS) on the local government financial and economic operations in 2022, nearly 50 percent of local government treasury funds (i.e. the balance of funds received by local financial authorities) in 521 cities and counties that the government think-tank researched were barely maintained at the critical level of 0.3 (i.e. having enough treasury funds to sustain nine days of local expenditures). The CAFS report also pointed out that grassroots-level financial departments generally reported needing to make a large number of deferred payments to maintain their treasury funds at the critical level. In other words, the CAFS report indirectly confirms what some local governments have revealed about their financial and debt difficulties, as well as affirms our assessment that the localities have been getting around their difficulties through technical defaults, enacting “countermeasures” to the central government’s policies, and utilizing various “robbing Peter to pay Paul” tactics.
The “relevant finance ministry official” observation that China’s debt-to-GDP ratio is “not high” and its risks are “generally manageable” is accurate insofar as the official figures go. However, the Kunming LGFV case reveals that local governments are doing all they can through legal and illegal means to avoid publicly defaulting on their debt; Kunming LGFVs are already in technical default given their implicit debt situation. The wave of local governments crying out for help with their financial and debt woes also suggests that the PRC’s debt problems are much more severe than its official figures show.
The “relevant finance ministry official’s” claim that “local government debt is unevenly distributed” and China’s financial situation is “healthy and safe” on the whole is the CCP’s attempt to whitewash the local government debt and financial problem as being limited to just some areas and not reflective of the broader situation. Yet local problems can quickly become a national crisis; we earlier analyzed that “an official public default by a local government or that of an LGFV could lead to a concentration of successive defaults and technical defaults.” The risk of local government debt problems is quite high, especially with the central government being short on funds itself and requiring the localities to take care of their own problems (Li Keqiang telling local governments that “you’re on the hook for the rest of the money; the PRC finance ministry calling for “adhering to the principle of no assistance from the central government” and “parents should carry their own children” [誰家的孩子誰抱]).
2. Local governments auctioning asset operating rights to SOEs and LGFVs or other companies controlled by the authorities is another sign of worsening financial conditions in the localities.
Perhaps more troubling for the CCP regime is the practice of using asset operating rights as collateral to secure huge bank loans as seen in the “Huipo Parking” case. The local authorities are essentially monetizing fiscal deficits and transferring their debt risks to banks in exchange for funds to resolve their immediate debt problems. This practice also opens up opportunities for local officials to embezzle part of the funds and secure political “achievements” for (temporarily) helping the local government overcome debt problems, while leaving the debt risks to the banks and their successors.
3. We believe that the CCP authorities will struggle to fix and cover up the local government debt and financial problems given the systemic deficiencies of the CCP authoritarian dictatorship, including the bad habits ingrained in the officialdom. It is now a question of when, and not whether, the CCP’s debt risks are triggered. Businesses, investors, and governments must track the local government financial and debt crisis and take early “de-risking” measures to avoid being caught off guard by concentrated defaults.
