1 CCP economic census paves way for wealth redistribution
Mainland media reported on Aug. 21 that the PRC is carrying out its fifth national economic census. China Mobile, China Unicom, and other operators have already begun sending out text messages urging users to “actively cooperate and provide truthful information” for the census, and the text messaging drive will conclude on March 6, 2024.
The PRC State Council previously issued a notice on conducting the fifth national economic census on Nov. 17, 2022. The notice said that the census would, for the first time, carry out an input-output survey, comprehensively investigate the scale, layout, and efficiency of the development of China’s secondary and tertiary industries, and ascertain the “basic situation” of various work units. The census would target all legal entities, industrial work units, and individual business households engaged in secondary and tertiary activities within China’s territory. The census’s reference point will be Dec. 31, 2023 and annual data for 2023 would be part of the census.
The CCP authorities previously stated that an economic census will be carried out every five years, and in the years ending with “3” and “8” respectively.
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In August, former Alibaba chief financial officer Song Shoucheng claimed in a video that was later widely shared that the CCP authorities were rolling out a “personal income and property information registration system” to get a feel of how much wealth every person has. Song added that everyone’s official identification number would be linked to the system and entering one’s ID would show “how many apartments, cars, and assets” a person has in their name.
Song claimed that the purpose of the system was to allow the CCP authorities to get a handle on how much wealth was in the hands of high-net-worth and high-income individuals, with those with assets of more than 2 million yuan falling under the regulatory threshold. Song added that those with assets of over 6 million yuan will be key targets of national supervision.
Big picture
The PRC’s economic census and alleged establishment of a “personal income and property information registration system” comes amid clear signs that the Chinese economy is worsening, a shrinking real estate industry, the CCP authorities’ fiscal shortages, and a growing debt crisis.
Beijing is also ramping up the anti-corruption campaign, including retroactive investigations into the healthcare system and the pharmaceutical sector, as well as a probe into Wailian Group.
Our take
1. The CCP authorities’s economic census and the rumored “personal income and property information registration system” are measures that will facilitate the Xi leadership’s “common prosperity” agenda (a socialist program aimed at bringing social equality and economic equity) and allow Beijing to strengthen its supervision over wealthy and high-income groups (including the Party elite).
The measures also affirm the prediction in our 2023 China Outlook that the CCP will “conduct more stringent tax inspections of those with high income and the wealthy.”
2. The CCP authorities will not be able to extract money from 90 percent of the working population whose income is less than 5,000 yuan per month (according to National Bureau of Statistics data) without facing significant social pushback under present economic conditions (recession and deflation, government and business financial shortages, rising unemployment, local government difficulties in sustaining grassroots operations, etc.). Official data suggests that the number of people making less than 5,000 yuan per month is on the rise; fiscal revenue data from January to July released by the Ministry of Finance shows that the amount collected in personal income tax fell by 0.6 percent year on year to 902.7 billion yuan for the aforementioned period.
3. We previously warned that Beijing is targeting high-net-worth and high-income individuals in analyzing the CCP’s Golden Tax system and plans to recruit more people into the tax system back in November 2022. Many of the points we made about the Golden Tax System and what the Xi leadership likely plans to do remain relevant in understanding what the economic census and the rumored “personal income and property information registration system” will help to achieve.
We noted at the time that “Xi stepping up the CCP’s techno-totalitarian approach to taxation is a double-edged sword and increases his and the regime’s vulnerabilities.” On the one hand, Beijing would be able to “better restrict outflows, keep the wealthy elites honest and make it hard for them to leave the country, and reduce the threat of capital to the CCP regime. Further, the Xi leadership would be to secure more taxation revenue to replenish the government’s depleted coffers and tide the regime through increasingly tough times. Finally, Xi can use the Golden Tax IV system to keep his remaining political rivals, would-be opponents, rank-and-file officials, and the wealthy Chinese elite in check; those considering standing up to Xi will be forced to think twice lest they are tripped up on ‘tax evasion’ charges (whether genuine or trumped up), and more officials will have ‘incentive’ to be loyal to Xi or face the tax man.”
On the other hand, “while the Xi leadership may be able to recover some much-needed funds through taxing the rich, it risks killing the goose that lays the golden egg in the name of income redistribution and ‘common prosperity.’ High net worth individuals have vested interests in defending the CCP regime that allowed them to make their wealth, but could quickly be disinclined to support the regime (including by voting with their feet) when the Party increasingly sacrifices their interests. There are numerous examples in Chinese imperial history of the court taxing the elites to preserve the dynasty, only for the court to lose the support of the elites and hasten the end of the dynasty.”
2 Beijing prepares 1.5 trillion yuan debt swap to delay local gov’t risks
On Aug. 20, mainland media Caixin reported that Beijing plans to allow local governments to sell 1.5 trillion yuan worth of special financing bonds to help 12 regions repay debt. The regions, which are under more pressure to make payments on local government debt, include Yunnan, Guizhou, Tianjin, Shaanxi, and Chongqing. Caixin noted that one of the conditions for local governments in a southwestern province to sell special financing bonds was that it could have to downsize 20 percent of its civil service.
Caixin also reported that the People’s Bank of China may establish a special purpose vehicle with banks to provide low-cost and long-term liquidity to local government financing vehicles. The aforementioned measures are expected to help LGFVs lower liquidity risks.
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According to mainland media reports, CITIC Securities noted that the selling of special financing bonds is akin to resolving implicit debt by increasing the statutory debt limit, and hence there is an upper limit on how much can be sold.
As of the end of 2022, the national local government debt limit was 37.65 trillion yuan and the national local government debt balance was 35.07 trillion yuan, with a debt limit balance (債務限额空间) of 2.58 trillion yuan. Areas under greater implicit debt pressure typically have smaller debt limit balances.
According to the Enterprise Early Warning (企業預警通) risk tracking platform:
- There are eight provincial-level administrations with a debt limit balance of more than 100 billion yuan each and a combined debt limit balance of 1.23 trillion yuan (55 percent of the total). These eight areas are Shanghai (276.5 billion yuan), Jiangsu (190 billion yuan), Beijing (163.7 billion yuan), Hebei (141 billion yuan), Henan (130.4 billion yuan), Guangdong (117.6 billion yuan), Anhui (106.9 billion yuan), and Yunnan (106.7 billion yuan).
- There are 10 provincial-level administrations with a debt limit balance of between 50 billion yuan and 100 billion yuan (combined debt limit space of 746 billion yuan). Those areas, arranged from the biggest to the smallest debt limit balance, are Fujian, Jiangxi, Shandong, Shaanxi, Sichuan, Liaoning, Inner Mongolia, Hubei, Xinjiang, and Zhejiang.
Previous local gov’t debt swaps
Local governments had conservative budgets and little debt before the 2008 global financial crisis, but saw their liabilities skyrocket after Beijing rolled out a four trillion yuan stimulus package to shore up the economy. Local government debt (including LGFV debt) had officially reached 16 trillion yuan (or as much as 40 trillion yuan by other estimates) by 2015, and Beijing introduced debt swaps that year as part of a strategy to convert implicit debt and improve transparency over the scale of local government borrowing.
First wave of debt swaps
From 2015 to 2018, local governments issued swap bonds totaling 12.24 trillion yuan, according to data from Huafu Research. The debt swaps reduced the interest burden of local governments (local government accumulated interest savings from 2015 to 2018 was about 1.7 trillion yuan), but did not stop debt growth. By 2023, local government debt had ballooned to 100 trillion yuan.
Second wave of debt swaps
Beijing extended the swap bond program in 2019 in a pilot to selected, poorer county-level regions in Guizhou, Hunan, Inner Mongolia, Liaoning, Yunnan, and Gansu. The amount of swap bonds issued was relatively small at 157.9 billion yuan.
Later, Shanghai, Beijing, and Guangdong issued de facto swap bonds (reflected in local balance sheets as refinancing bonds) to tidy up their implicit debt. About 1.17 trillion yuan of such bonds were issued between late 2020 and mid-2022, according to GF Securities.
Our take
1. Beijing allowing troubled local governments to sell 1.5 trillion yuan worth of special financing bonds is a type of debt swap arrangement. This arrangement is likely the result of a compromise between the central government and distressed local governments in resolving the exploding local government debt crisis.
The central government has repeatedly emphasized that it will adhere to the principle of “no assistance from the central government” and “if it’s your kid, you take care of it.” However, local governments in Guizhou, Yunnan, and other areas going public about their financial and debt woes have raised concerns at home and abroad about the severity of China’s debt problems and what Beijing will do to address the situation. The 1.5 trillion yuan special financing bond arrangement thus appears to be a concession of sorts by the central authorities to local governments under pressure to make debt payments.
The central government, however, has by no means entirely jettisoned its “no assistance” approach. The special financing bond arrangement is a de facto debt swap instead of an outright bailout, and Beijing is still working within the debt limits approved by the National People’s Congress. The debt swaps will also increase the explicit debt ratio of local governments (through the financing of payments on principal and interest) by bringing off-balance-sheet borrowings onto their books rather than wiping their slates clean. The conversion of implicit debt to explicit debt does benefit local governments by lowering their interest cost and allowing them to more transparently seek financing to pay off their on-the-book borrowing.
The central government also appears to be taking the opportunity of the debt swap arrangement to get some local governments to trim their roster of civil servants and cut down on expenses. The local governments in a southwestern province that could be made to downsize their civil service by 20 percent as part of the debt swap deal are likely from Yunnan and Guizhou. Substantial downsizing will create dilemmas for corrupt local governments; interest networks could be disrupted and superiors offended if the “incorrect” civil servants are sacrificed, while the firing of diligent but less well-connected workers will render local government operations even more inefficient and worsen the local debt crisis.
2. The central government’s 1.5 trillion yuan “debt swap” arrangement, coupled with recent news that commercial and policy banks could be urged to extend maturity loans to LGFVs to ultra-long terms and cut interest rates, are akin to applying “band aids” to the local government debt crisis. And for all of Beijing’s talk of “accountability” in borrowing, it does not appear to have prohibited local officials (at least from publicly available information) from indiscriminately issuing more debt to secure political achievements while leaving the financial risks to the central authorities.
Beijing’s stopgap measures to address the local government debt crisis suggest that it is likely hoping to “delay and wait for change” and does not have any concrete solutions to fundamentally defuse the crisis. However, the Chinese economy is rapidly declining and has not hit its nadir, and Beijing will have fewer and less effective means to continue “delaying and waiting for change” going forward. Moreover, the debt swap program will transfer risks to the financial system and add to the series of vicious cycles plaguing China’s economy.
3. Local government debt problems are set to worsen if current economic trends in China hold or worsen in the coming months. Also, global investors could sour more quickly on China if the official third quarter data released in mid-October is dismal and Beijing still shows no sign of introducing major stimulus in the coming months and especially at the central economic work conference in October. A concentrated triggering of economic risks would in turn heighten political risks for Xi Jinping and the CCP, and increase the odds of political Black Swans emerging in China.
