1 CCP loosens some social controls in bid to revive the economy
The CCP authorities have recently been rolling out various measures to rescue the economy, including those supporting the private sector, macroeconomic proposals, and symposiums on the economy.
Even the public security ministry and Supreme People’s Procuratorate have issued measures in support of “promoting the development of the private economy,” including relaxing some social controls.
Public security and judicial apparatus measures
July 31
1. The Supreme People’s Procuratorate issued an opinion on punishing and preventing crimes pertaining to the infringement of legal rights and interests of private enterprises by private enterprise insiders, as well as creating a “good legal environment for the development of the private economy” (關於依法懲治和預防民營企業內部人員侵害民營企業合法權益犯罪、為民營經濟發展營造良好法治環境的意見). The opinion consisted of four parts and 12 articles that set out specific requirements for the performance of procuratorial duties with regard to the aforementioned topics, as well as refined the methods for examining and judging the necessity for prosecution.
Noteworthy points in the opinion include:
- Increase penalties for private enterprise insiders who engage in corrupt practices such as job misappropriation (職務侵占), misappropriation of funds, and accepting bribes.
- Promote a sound mechanism for the recovery and disposal of property, and help private enterprises recover losses in those cases.
- Private enterprise insiders who take advantage of their position to illegally operate private sector businesses, as well as make illegal profits and show favoritism in discounting shares at low prices or selling business assets to friends and relatives, shall be dealt with in accordance with the law.
- Severely crack down on crimes involving the infringement of trade secrets, trademark rights, and copyrights by personnel in key technical and managerial positions in private enterprises that affect enterprise innovation and development.
- It is necessary to prevent the use of criminal means to intervene in economic disputes. Also, it is necessary to accurately grasp the boundaries between criminality and non-criminality in cases arising from economic disputes such as those involving equity and debt.
2. The All-China Federation of Industry and Commerce held its fifth summit on the construction of the rule of law in the private economy in Beijing. The summit was backed by the Supreme People’s Court, the Supreme People’s Procuratorate, the Ministry of Public Security, the Ministry of Justice, and China Law Society.
Xu Datong, a member of the MPS Party Committee and vice minister of public security, said at the summit that public security organs across the country will fully implement the opinion by Party Central and the State Council on promoting the development and growth of the private economy, resolutely crack down on illegal and criminal activities that disrupt the normal production and operation order of enterprises, and provide better services and stronger protection for the high-quality development of the private economy.
Aug. 3
The MPS held a press conference to announce its “study and formulation” of “several measures for public security organs to serve and guarantee high-quality development” (公安機關服務保障高質量發展若干措施). A total of 26 measures covering matters such as administrative licensing, household registration access, and approval reform were unveiled, with their “full deployment and implementation” scheduled for before the end of August 2023.
Noteworthy measures include:
- Improve the household registration system (hukou) based on permanent residency, and further relax the conditions and threshold for acquiring residency (落戶).
- Adjust and optimize the policies for acquiring hukou in mega cities (特大城市; permanent population of between 5 to 10 million people) and super-mega cities (超大城市; permanent population of over 10 million), improve the points-based for acquiring hukou, and better resolve hukou problems of ordinary workers in cities.
- Further relax the conditions for collective hukou (集體戶; a type of temporary hukou arrangement meant for people [like professionals, etc.] from outside an area who are without a local home that they can use for registration). Promote the establishment of public collective hukou in towns (streets) or villages (communities) to facilitate the acquisition of hukou for all types of personnel.
- Foreigners applying for residency permits are not required to submit their passports for processing.
- Enable the issuing of visas to foreign businessmen upon their arrival in China and facilitate their renewal of multi-entry visas without needing to visit the PRC embassy.
- Fully implement the list management of administrative licensing projects (i.e. The CCP authorities will approve projects based on whether they adhere to its list of criteria. Here, the MPS is signaling to lower level authorities that it should stick to that list of criteria in approving projects and not find external reasons [including coming up with criteria outside those officially listed] to arbitrarily reject projects.)
- Fully implement “cross-provincial processing” for matters such as the first-time application of resident identity cards, the application of temporary resident identity cards, the issuance of household registration certificates, and the issuance of certificates of no criminal records (i.e. residents can apply for the aforementioned identity cards or certificates in areas outside their original hukou)
State Council ministries and organs measures
July 31
The National Development and Reform Commission issued a notice on measures to restore and expand consumption (關於恢復和擴大消費措施的通知). The 20 measures listed in the notice covered ways to recover bulk consumption, service consumption, rural consumption, “new” (digital and green) consumption, consumption facilities, and the consumption environment.
Aug. 3
The China Securities Depository and Clearing Corporation (CSDC) announced its intention to further reduce the minimum settlement reserve payment ratio for stock-type businesses from the current 16 percent to an average of close to 13 percent by October 2023. The CSDC also implemented a differentiated arrangement for the minimum settlement reserve payment ratio for stock-type, charging lower minimum settlement reserves for settlement participants with earlier payment times and later withdrawal times.
According to mainland media reports, experts estimated that the CSDC’s move is expected to release more than 30 billion worth of funds into the market.
Aug. 4
The National Development and Reform Commission, the Ministry of Finance, the People’s Bank of China, and the State Administration of Taxation jointly held a press conference to announce a “combination of macro policies to promote high-quality economic development.”
Key points in the press conference include:
- The PBoC will comprehensively assess the reserve requirement ratio policy with the goal of maintaining a “reasonable abundance of liquidity” in the banking system.
- Banks will be instructed to adjust interest rates on existing personal housing loans.
- Make timely and appropriate counter-cyclical adjustments according to the economic and financial situation and macro-adjustment requirements. (Explainer: Quantitative easing could be implemented according to economic needs.)
- If necessary, new tools will be created to continuously support key areas and weak links such as financial inclusion and the green economy.
- Continue to plan and study a batch of more targeted and stronger reserve policies, which will be launched and implemented in a timely manner in accordance with changes in the situation.
- Strengthen policy reserves in preventing and resolving external risks and challenges, and firmly hold the bottom line of not incurring systemic risks.
- Reduce or waive various taxes and fees for micro and small enterprises and individual businesses, and require local finance and tax departments to implement policies to that regard.
- The Ministry of Finance will announce follow-up arrangements for preferential tax policies in the near future.
- The Ministry of Finance will introduce preferential tax policies for scientific and technological innovation, key industrial chains, the establishment of a modern industrial system, and the promotion of income growth and consumption expansion.
- Promote the enhancement of policy and work coordination among various departments to prevent “fallacy of composition” (合成謬誤) in governance. (Explainer: The CCP authorities want better inter-agency cooperation in tackling economic issues.)
Central bank symposium on private enterprises
Aug. 3
New People’s Bank of China governor Pan Gongsheng presided over a symposium on financial support for the development of private enterprises. At the symposium, Pan listened to opinions and suggestions from attendees, promoted the syncing up of supply and demand between banks and private enterprises, and announced study initiatives to strengthen financial support for private enterprises.
The key persons in charge of eight private enterprises (Yili Group, Hongqiao Group, Longfor Properties, Chint Group, New Hope Group, Cifi Group, Midea Group, and Hongdou Group), some financial institutions (Industrial and Commercial Bank of China, China Construction Bank, etc.) and the National Association of Financial Market Institutional Investors (NAFMII) participated in the symposium.
At the symposium, the persons in charge of the eight private enterprises put forward the hope of further broadening bond financing channels and other demands. The Industrial and Commercial Bank of China and China Construction Bank said that they would play the “leading role of large state-owned banks” and enhance the stability of loans to private enterprises, expand the coverage of credit granted to small- and micro-enterprises, and support the underwriting and issuance of bonds to private enterprises. Also, NAFMII said that it would accelerate innovation in the bond market to meet the diversified financing needs of private enterprises.
Pan Gongsheng said at the symposium that the PBoC will guide the flow of more financial resources to the private economy, and support local governments in taking the initiative to solve the problem of payments owed to enterprises.
Our take
1. Beijing’s recent raft of economic rescue measures mostly continue what it has done to date, that is, reduce restrictions on society and create conducive conditions for consumption in the hopes of turning around the pessimistic business environment of the “zero-COVID” years to restore consumer confidence. The CCP authorities, however, have refrained from rolling out major stimulus and directly transferring cash to households, or measures that observers are encouraging Beijing to do to jumpstart the economy.
Beijing will likely not follow through on popular expectations regarding major stimulus and cash handouts to households. Regarding stimulus, the PRC cannot take on more leverage without the serious risk of popping China’s debt bubble. According to data from the PRC’s National Institution for Finance and Development, China’s macro leverage ratio grew to 283.9 percent in the second quarter of 2023, higher than 281.8 percent in the first quarter. A macro leverage ratio of 250 percent is generally considered to be an inflection point to a financial crisis, with every subsequent 10 percent increase in the leverage ratio raising the probability of systemic risk being triggered by 3.5 percent. Regarding cash handouts, the PRC lacks a direct distribution system and Beijing likely does not trust the current administrative system to make the transfers without breeding corruption and increasing public grievances in the process. The CCP is likely also wary about handing out “free” cash and giving up some of its control (including how people spend the cash) over the populace in the process; authoritarian regimes generally prefer to keep their citizens poor and ignorant to exercise greater control over them.
Beijing’s inability to get cash to households and increase their presently limited disposable income greatly reduces the effectiveness of the National Development and Reform Commission’s measures to boost consumption. For instance, improving new energy vehicle charging infrastructure, expanding housing supply, extending shopping hours, and increasing advertising and marketing may create conditions that promote consumption, but will not result in more consumption if household budgets remain stagnant or shrink further. Chinese households could shift what they buy in light of the CCP’s measures, but are still limited in how much they can consume. Meanwhile, households face poor prospects of increasing their income and purchasing power on their own amid rapidly deteriorating economic conditions and rising unemployment in China.
Growing authoritarianism in China is another factor inhibiting Beijing’s ability to restore business and household confidence. The public security and judicial apparatuses’ various measures in support of the private economy, including the relaxation of residency restrictions and efforts to build a better legal environment for businesses to operate in, look good on paper, but could still run into problems with implementation at the local level due to corruption and other structural deficiencies of the CCP authoritarian dictatorship. Moreover, businesses and investors are more concerned about political risks associated with the CCP regime (“zero-COVID” policy, anti-espionage law, prioritization of national security above all, etc.), and their confidence in doing business in China with the Party in charge will likely erode steadily unless they perceive fundamental change in how Beijing operates.
Finally, Beijing will struggle to inspire business and consumer confidence with poor economic performance. Official data for the first half of the year shows that China’s post-pandemic “rebound” was virtually non-existent. Also, current trends suggest that the Chinese economy will fare even worse in the second half of 2023.
A leading indicator portending trouble is China’s official manufacturing purchasing managers index published on July 31. The PMI went up to 49.3 in July from 49 in June, but stayed below the 50 mark that separates expansion from contraction. A PMI subindex of new export orders fell to a six-month low of 46.3, while other subindexes showed five straight months of contraction in employment, construction dropping to its lowest (51.2 in July) since February 2020, and the lowest reading (51.5 in July) on business activity in services since December 2022.
China’s exports are likely to contract further this year as global demand for Chinese-made goods cools as recessionary pressures grow in the United States, Europe, and other countries. Contracting exports in turn translate into fewer factory orders, more business closures, higher unemployment, decreasing household budgets, and greater deflationary and recessionary pressures in China.
2. Beijing’s economic rescue measures could produce some positive results over the short term. However, we believe that the systemic deficiencies of the CCP dictatorship will not allow it to sustain good results and build enough momentum to fire up the regime’s “torturous” economic recovery. For one, many local governments are plagued by financial shortages and local officials need to turn around the situation to secure political “achievements” to advance their respective careers. This incentivizes local governments to “raid” private companies through levying arbitrary fines and other means to take a greater slice of any increased profits that the latter may gain from Beijing’s recent economic rescue measures. As the central government’s measures get canceled out by the behavior of local governments, the private economy will not be able to pick itself up; if this is the case, Beijing will eventually find itself back at square one.
3. China’s growth prospects for the second half of the year look even less promising as countries increasingly sour on the Chinese economy (see here and here) in light of the PRC’s own official figures, mounting concerns about deepening authoritarianism under Xi Jinping, and the increasing sense that Beijing will not issue strong stimulus.
On Aug. 2, Morgan Stanley issued a report that cut its recommendation on the MSCI China Index from overweight to equal weight in light of the CCP authorities’ dovish signals to spur growth. The report said, “investor confidence and conviction level are still very fragile, and investors are still reluctant to preposition in a major way, given that they have been disappointed by rather lackluster/lukewarm easing measures seen since March.” Also, a “lack of quick follow-through of actionable easing measures could lead to a retreat from the early recovery in sentiment.” The report added, “Given that we expect near-term market volatility to remain relatively high, we believe the right approach is to move to the sidelines, taking advantage of the latest sentiment improvement, and wait for a better entry point down the road.”
Meanwhile, Congress’s hawkish attitude towards Beijing and scrutiny of U.S. investments in China could accelerate efforts to “de-risk” and “diversify” from the PRC. On Aug. 1, The Wall Street Journal reported that the House of Representatives Select Committee on the Chinese Communist Party had notified BlackRock and MSCI that they are being investigated for facilitating American investment in Chinese companies that the U.S. has accused of backing the CCP’s military and violating human rights. By enabling the “massive flows of American capital” to such Chinese entities, BlackRock and MSCI are “exacerbating an already significant national-security threat and undermining American values,” according to letters sent by the Select Committee to those companies.
As Sino-U.S. tensions rise, American and foreign companies could become increasingly reluctant to invest in China and step up the migration of supply chains and company headquarters from the mainland. This could in turn lead to greater escalations in the “new cold war” with the weakening of the PRC’s “economic shield,” as well as stymie Beijing’s efforts to boost growth and revive the Chinese economy more broadly.
2 More of China’s property and financial ‘iceberg’ surfaces
Evergrande debt woes
July 17
China Evergrande released its long overdue results for 2021 and 2022 (mid-term and whole year). The property developer reported having total assets of 1.83834 trillion yuan as of Dec. 31, 2022, down 20 percent from 2020, while its total liabilities increased by 23 percent from 2020 to 2.43741 trillion yuan. Evergrande also reported a cumulative net loss of 812.03 billion yuan in 2021 (686.22 billion yuan) and 2022 (125.81 billion yuan).
Evergrande’s more than 2.4 trillion yuan in total liabilities is a record for Chinese enterprises, far surpassing HNA Group (total liabilities of 750 billion yuan) and Anbang Insurance Group (total liabilities were 82.8 billion yuan greater than total assets at the end of June 2018). Evergrande’s total liabilities also exceed that of Inner Mongolia (2.32 trillion yuan), and is close to the total liabilities of the five worst Chinese provinces by GDP (2.88 trillion yuan).
Evergrande’s report comes about two months before the company’s shares are due to be delisted (Sept. 20, 2023) for being suspended for 18 months. Evergrande said that its shares would remain suspended in a filing made on the same day as the release of its results report.
July 26
Evergrande New Energy Vehicle Group released its annual results for 2021 and 2022 (mid-term and whole year). The company’s total liabilities reached 183.872 billion yuan as of Dec. 31, 2022, while its holdings in cash and equivalents fell from 10.476 billion yuan to just 220 million yuan. Evergrande NEV also accumulated losses of 84.008 billion yuan, or the most serious losses among Chinese automakers.
Evergrande NEV’s net loss was 56.27 billion yuan for 2021 and net loss from continuing operations was 14.85 billion yuan for 2022, compared with a net loss of 7.4 billion yuan in 2020 when its business was predominately health management.
Shares of Evergrande NEV later dropped by as much as 69 percent after they resumed trading following a 16-month halt.
Aug. 3
Shares of Evergrande Real Estate plummeted by 47 percent when trading resumed after a 16-month suspension. The company’s market value fell to HK$13.081 billion, compared with HK$193.1 billion at its peak.
Evergrande Real Estate halted the trading of its shares on March 21, 2022. At the time, the company’s 2021 financial report found that its parent company China Evergrande Group had misappropriated 13.4 billion yuan of its funds. Evergrande Real Estate remains the only profitable company under the Evergrande Group.
Country Garden crisis
July 30
Country Garden Services Holdings, the Hong Kong-listed property management affiliate of property developer Country Garden, announced that its board chair Yang Huiyan is donating 55 percent of her personal shares in the company (or 20 percent of Country Garden Services’ total shares) to Guoqiang Public Welfare Foundation, a family charity established by her sister. The charity said it will hold Yang’s shares for 10 years and will not sell them. The transfer left Yang with about 16.12 percent of Country Garden Services’ shares and Guoqiang Public Welfare Foundation became the company’s actual controller.
UBS analysts said in a report published on July 31 that they viewed the moves as a “negative,” adding that the “timing of the donation seems unusual to us, due to the recent market discussion on the liquidity situation” for the main property operation.
July 31
Country Garden announced that it expects to report an unaudited net loss in the first half of 2023.
Before the announcement, four domestic bonds issued by Country Garden fell by more than 20 percent on July 21 while several of the property developer’s overseas bonds saw varying degrees of decline. Mainland media reported on July 25 that there were rumors that KPMG had been brought in to conduct due diligence on Country Garden’s assets and liabilities.
According to publicly available data, Country Garden will have more than 10 billion yuan worth of debts maturing over the next two months, including a 3.9 billion yuan bond (“16 Country Garden 05”) on Sept. 4, 2023, a $400 million bond maturing on Oct. 19, and two corporate bonds worth about 3 billion yuan due in September.
Publicly available data also shows that Country Garden acquired 130.3 billion yuan worth of land in 2019 but just 6.1 billion yuan worth of land in 2022. The developer acquired 5.8 billion yuan worth of land in the first half of 2023. Industry observers believe that Country Garden’s land acquisition over the past two years is too small for it to support its business operations.
Country Garden’s profits in 2022 totaled 430.37 billion yuan, or about 90 billion yuan less than in 2021. The company’s gross profits fell to 32.88 billion yuan in 2022 and its core net profits attributable to shareholders dropped to 2.61 billion yuan. Meanwhile, Country Garden let go of 30,773 employees in 2022, a 30.56 percent reduction from a year ago and the most among the top 50 list of construction companies in China, who cut 159,100 employees in total.
‘Zhongzhi network’ default?
An apology letter dated July 29 allegedly written by a consultant with Hang Tang Wealth Management, a company under leading Chinese asset management corporation Zhongzhi Enterprise Group, recently made the rounds on the Chinese internet.
The consultant, Liang Juliang, wrote in the letter that Zhongzhi Enterprise was overdue on making payment on products for the first time in its history in June 2023 due to a liquidity gap that emerged from the failure of a large number of receivables on the asset side to arrive in time. Zhongzhi Enterprise then suspended all fundraising and payments on its debt products starting from July 19, 2023, its largest default since the founding of the PRC. Liang added that Zhongzhi Enterprise was forced into a process of repaying investors’ interests through debt restructuring.
Liang wrote that the default incident affected 150,000 high-net-worth investors, 5,000 corporate clients, 13,000 professional financial planners, and bond interests amounting to 230 billion yuan. Of the investors affected, there was one who made over 5 billion yuan in purchases while Zhongzhi Enterprise employee purchases exceeded 100 million yuan.
Liang further noted that he had witnessed or heard from within company circles of the tragedies that had emerged from the incident, including some financial planners committing suicide after coming under immense pressure from their clients, and some clients going to extremes to salvage their interests from the debacle, including kidnapping some financial planners, making threats with knives and gasoline, and carrying out other activities in violation of the law.
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“Laoman,” a prominent Chinese financial blogger who frequently comments on sensitive topics and has been censored by the authorities on multiple occasions, made the following observations about the information in Liang Juliang’s letter:
- The default of the “Zhongzhi network” (中植系, i.e. Zhongzhi Enterprise and its subsidiaries) is the most consequential outcome to date of China’s long-term failure to regulate the financial sector, and will likely be the single largest financial enterprise bankruptcy case in the history of China.
- “Zhongzhi network’s” business revolves around transactions within their subsidiary companies, and the pool of funds raised will basically be invested in the network’s own projects. This is a form of illegal self-financing.
- Liang writes that there are 230 billion yuan worth of claims stemming from the incident, but the authenticity of these claims is highly dubious. (Explainer: “Laoman” is suggesting that the 230 billion yuan figure is too low.)
- Financial contagion caused by the 230 billion yuan worth of claims that the “Zhongzhi network” has to settle could create at least 1.6 trillion yuan of losses in Chinese society. Those losses will likely be borne by the people of China (i.e. given the scale of the problem, the fact that other financial institutions will be affected by the “Zhongzhi network’s” situation, and the need for the CCP authorities to provide bailouts).
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Zhongzhi Enterprise has four wealth management companies under it, namely, Hang Tang Wealth Management, Tang Wealth Investment Management, Xinhu Wealth Management and Investment, and Gaocheng Wealth Management. According to mainland media reports, the cumulative assets of the four companies were as high as 3.6 trillion yuan at the end of November 2021.
The “Zhongzhi network” is a prominent industry mover and shaker. The network is known to use its trust funds to build “bridges” (i.e. the network provides short-term financing to its companies without sufficient funds to acquire holdings), pull up the share price of its acquisitions, and sell them later at a premium.
The “Zhongzhi network” has also long been suspected of serving as a “white glove” for the CCP elite. Notably, the “Zhongzhi network” was forced to sell Zhongrong Trust, one of its core companies, to a central-owned enterprise in March 2018; this was around the period when the Xi leadership took control of other “white glove” companies like Anbang Group, CEFC China Energy, and the “Tomorrow [Group] system.” Zhongrong Trust is a leading trust company alongside CITIC Trust and Ping An Trust.
Xie Zhikun, the late founder of Zhongzhi Enterprise, was known for being a mysterious and low-key figure. Xie’s brother Xie Zhichun is the former general manager of Central Huijin Investment and the deputy general manager of China Investment Corporation, and his wife is the famous singer Mao Amin. Xie Zhikun died from a heart attack on Dec. 18, 2021 at the age of 61, and rumors circulating at the time said that Xie, like HNA founder Wang Jian, was “silenced” by the CCP elite.
Some mainland media outlets have begun reporting on the “Zhongzhi network” after Liang Juliang’s “apology letter” began circulating. According to some mainland media reports, the “Zhongzhi network” is fully licensed in China to engage in all 19 types of financial work (banking, insurance, trust, etc.) and has invested in more than 300 Chinese companies, including 25 listed firms. Those reports also claim that of the clients affected by the default incident, the most individual loss was 5 billion yuan and the least was 3 million yuan, and about 150,000 people lost 3 million yuan or more.
Our take
1. China Evergrande and Country Garden’s financial and debt woes spell trouble for China’s real estate sector, the PRC’s debt crisis, and the Chinese economy more broadly.
China’s property market accounts for a sizable portion of the economy, contributing around 17 percent to over 25 percent of the GDP depending on the scope of the industries included. Yet Evergrande (2.44 trillion yuan in total liabilities at the end of 2022) and Country Garden (1.15 trillion yuan in total liabilities at the end of 2022), two of the biggest developers, have total liabilities of 3.59 trillion yuan combined and are estimated to pay nearly 180 billion yuan in interests (rate conservatively calculated at 5 percent) annually. Many of the smaller developers are likely to have similar, if not worse, debt problems.
Debt trouble in the real estate sector is set to worsen as the Chinese economy deteriorates further and developers struggle to generate income. According to a report released in June 2023 by the real estate research team at Tianfeng Securities, the property industry has 2.54 trillion yuan worth of domestic and foreign bonds maturing this year. Yet sales of commercial housing went up by just 1.1 percent to 6.3092 trillion yuan in the first half of 2023. The lackluster sales increase looks even worse given that it came on the basis of a 28.9 percent drop in sales in the first half of 2022.
The public sector is another area where China’s debt problems are alarming. For instance, the state-owned China Railway announced a net profit loss of 69.6 billion yuan in 2022, or a 40 percent increase (19.7 billion yuan) from a year ago. China Railway’s total liabilities in 2022 also reached 6.11 trillion yuan, or 2.5 times that of Evergrande’s. Meanwhile, the interest-bearing debt of local government financing vehicles (LGFVs) was in excess of 70 trillion yuan in 2022, 53 percent of which were bank loans. We previously analyzed the LGFV debt issue and how banks extending longer-term loans with short-term interest or principal repayment exemptions merely transfer debt risks from LGFVs to financial institutions.
2. The ‘Zhongzhi network’ default, if confirmed, would likely bring to light part of the immense and hidden risks in China’s financial system. That such risks exist is also a sign that Xi Jinping is still struggling to rein in the financial sector, which had long been influenced by the Jiang Zemin faction and other elite factional interests.
We earlier noted on several occasions that the Jiang faction and their “white gloves” like Tomorrow Group’s Xiao Jianhua and CEFC’s Ye Jianming have long profited from the financial markets through various fraudulent or quasi-legal schemes, and those schemes have greatly expanded China’s financial risks over the years. Since taking office, Xi has been purging the Jiang faction, gradually eroding their influence over the financial sector, and implementing financial de-risking through measures like halting Ant Group’s (founder Jack Ma is connected to the Jiang faction) IPO, splitting up Alibaba, and going after Anbang, HNA, and Tomorrow Group.
The Xi leadership, however, appears to have made very few inroads into tackling the “Zhongzhi network” even though it is similar to the “Tomorrow network” in terms of financial market manipulation and other highly questionable behavior. And until rumors of a serious default in the “Zhongzhi network” recently made the rounds, mainland media has long refrained from shining a light on the financial group or its top executives. This suggests that the elite elements behind the “Zhongzhi network” have significant political strength or influence, and the Xi leadership cannot easily carry out “de-risking” of the “network” due to intractable problems and complications.
3. The rapid and severe deterioration of the Chinese economy is exposing the PRC’s massive financial and debt “iceberg.” More of the “iceberg” is likely to be uncovered going forward as recessionary and deflationary pressures pile up, Chinese enterprises struggle to make profits and their losses mount, and various financial and debt problems expand and become more serious.
Should present trends keep up or worsen, China could see concentrated defaults and the triggering of other financial risks in the second half of 2023 or later. Poor third-quarter results will likely further affect investor confidence and compound the CCP regime’s debt and financial woes.
