1 Xi missing G20 in India hints at growing political problems
Xi to skip G20 in India
Aug. 31
Reuters reported that Xi Jinping is likely to skip a summit of G20 leaders in India from Sept. 9 to Sept. 10.
Two Indian officials, including a China-based diplomat and an official working for the government of another G20 country, said PRC premier Li Qiang is expected to represent Beijing instead in New Delhi.
Sept. 3
President Joe Biden told reporters that he was “disappointed” that Xi was not attending the G20 meeting, but added that “I am going to get to see him” without elaborating.
Sept. 4
The PRC foreign ministry announced that Li Qiang will be leading a PRC delegation at the G20 summit in New Delhi. Foreign ministry spokeswoman Mao Ning did not correct reporters who asserted that Li’s attendance meant Xi’s absence from the meeting.
Xi also skipping APEC?
Sept. 4
The PRC Ministry of State Security posted an article on its official WeChat account that essentially accused the United States of being insincere in its dealings with China.
The article claimed that the U.S. adopted the “old two tactics” (老兩手) of “engagement plus containment” in the first few decades after the normalization of PRC-U.S. relations before switching to the “new two tactics” (新兩手) of “competition plus management of competition” under the Trump and Biden administrations. The article argued that the “new two tactics” is in fact “old wine in new bottles” and are “doomed to fail.”
In concluding, the article said, “To realize the move from Bali to San Francisco, the U.S. needs to show real sincerity.” The mention of Bali appeared to be a reference to the meeting between Xi Jinping and Joe Biden at the G20 summit in 2022, while San Francisco seems to reference the potential meeting between Xi and Biden on the sidelines of the Asia-Pacific Economic Cooperation meeting in California in November.
PLA equipment damaged by Hebei floods?
Sept. 1
Dajiyuan (Chinese-language edition of The Epoch Times) reported that military troops stationed in Baoding City and Zhuozhou City sustained substantial equipment losses, including tanks and aircraft, as a result of the local authorities’ effort to “protect Xiong’an” during the heavy rains and flooding in Hebei Province in late July.
A source familiar with the matter told Dajiyuan that the equipment of People’s Liberation Army “Unit 66289” in Zhuozhou was affected by the floods, with the tanks of a certain group army in the unit that is tasked with defending Beijing becoming “almost useless” post-flooding. Also, the base of an aviation brigade stationed in Zhuozhou was flooded to the point that it resembled “a swimming pool,” while the “entire compound” of an aviation school in Baoding was flooded by waters as high as two to three meters.
The source said, “Presently, no one in Beijing dares to step forward to see that there is justice over this matter; no one dares to broach the matter or assume responsibility.” The source added, “There is no leader or standing committee at the central level, let alone a minister, who dares to take the initiative to talk about the flooding matter.”
A former journalist on the mainland also told Dajiyuan that he learned from sources inside China that the local authorities in parts of Hebei that went ahead with destructive flood control measures to “protect Xiong’an” did so without instructions from Xi Jinping.
Meanwhile, information circulating on the internet claimed that the water damage caused by the floods to military equipment led to dissatisfaction in the PLA, saw Xi fly into a rage, and had Li Qiang propose his resignation.
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The main PLA forces garrisoned in the Baoding area in Hebei Province are likely to be from the 82nd Group Army (formerly 38th Group Army) from the Central Theater Command. The 82nd Group Army has six combined arms brigades (tanks, mechanized infantry, etc.), one helicopter aviation brigade, one artillery brigade, and other support brigades.
As the 82nd Group Army is tasked with defending Beijing, it is one of the best-trained and equipped group armies in the PLA. The 82nd Group Army is also known to have the latest equipment. If the information on military bases being flooded in Baoding and Zhuozhou is accurate, then it is likely that the 82nd Group Army’s tanks, planes, and even electronic facilities had suffered serious water damage.
Party elder pushback?
Sept. 5
Nikkei Asia reported that Party elders led by Zeng Qinghong had “reprimanded” Xi Jinping “in ways they had not until now” at this year’s Beidaihe gathering, citing sources familiar with the matter.
The sources said that Party elders “convened their own meeting,” likely in the suburbs of Beijing, to “summarize their opinions before conveying them to the current leaders.” Later several of these elders went to Beidaihe to “convey their consensus” in a face-to-face meeting with Xi and other leaders on a single day.
The sources said that the core of the message sent to Xi was that if “political, economic and social turmoil continues without any effective countermeasures being taken, the Party could lose public support, posing a threat to its rule,” and the regime “cannot have more turmoil.”
After receiving criticism from the Party elders, Xi spoke with his close political allies like Li Qiang and expressed frustration at his three predecessors, Deng Xiaoping, Jiang Zemin, and Hu Jintao. “All the issues that were left by the previous three leaders are on my shoulders. I’ve spent the last decade tackling them but they remain unresolved. Am I to blame,” Xi is believed to have said.
Xi is also believed to have told his political allies that it was now their task to fix the leftover issues. Xi’s venting of frustration left his allies, especially Li Qiang, shaken.
Nikkei Asia noted that Zeng Qinghong “remains influential within the Party and enjoys a wide network of personal connections.” Also, “some say that in the wake of Jiang’s death, Zeng has a bigger role to play.”
Analysis: Nikkei’s information aligns with the political rumors that emerged in mid-August about what happened at this year’s Beidaihe gathering. The information also partly aligns with our longtime observation that Xi Jinping has been unhappily dealing with the mess left behind by his predecessors during his first two terms, and has been looking for opportunities to denounce Jiang’s “incorrect political line.”
Some of the information, however, does not sound plausible given the current political environment and factional balance of power in the CCP regime. For one, Xi has been increasing his control over the officialdom and retired cadres, which means that it would likely be difficult for CCP elders to hold gatherings in private to speak ill about the Party boss. Also, while Zeng Qinghong certainly does retain influence in the Party and has a wide network of personal connections, his political significance would have been substantially diminished over the years as Xi consolidated power.
Despite the implausible or exaggerated elements of the information, its central thrust appears to be directionally accurate. That is, some prominent Party elders like Zeng could have expressed their concerns about how the regime is fairing under Xi directly to him at Beidaihe, and Xi could have later spoken to his close allies about who he thought was actually responsible for the regime’s problems.
The remnant Jiang faction stands to benefit the most from the release of Nikkei’s information about Party elders “reprimanding” Xi. It is possible that the Zeng-led Jiang faction and the “anti-Xi coalition” are behind the information, with the article serving as political mobilization to rally “anti-Xi” forces both inside and outside China to step up their pushback against Xi and his leadership.
Our take
Xi Jinping’s G20 absence is unusual due to several reasons. First, the Xi leadership clearly moved to resume “great power diplomacy” near the end of “zero-COVID” in China with senior diplomats making international trips, and Xi himself met with President Biden at the G20 summit in Bali. Second, Xi would get to meet Biden face-to-face in New Delhi and find avenues to lower Sino-U.S. tensions or at least walk away with a propaganda boost. Third, Xi would get the opportunity to demonstrate to the international community, which is becoming increasingly wary of the CCP regime and the expansion of BRICS, that China is not at odds with the G20 and the U.S.-led rules-based global order.
One hypothetical reason why Xi is sending Li Qiang to the G20 while he stays away is that he and the CCP no longer see any reason to “give face” and be accommodating to the U.S. and the West after assessing that the West is bent on “containing” China and perpetuating “new cold war” tensions. Such sentiments are hinted at in the MSS article questioning U.S. sincerity. However, we believe this scenario to be less likely because the PRC is currently not adequately prepared for all-out confrontation with the West (even if the Party believes that “the East is Rising and the West is in Decline”) and the Xi leadership has not shown that it has given up on diplomacy or improving relations with Washington and the other G20 nations. Also, the anti-U.S. sentiments expressed in the MSS article do not exceed those from the CCP’s past propaganda; if anything, Beijing appears to be telegraphing that it is willing to play ball with the U.S. so long as the latter becomes more accommodating towards the PRC.
A more likely reason is that Xi is preoccupied with resolving serious political problems at home and is simply unable to leave the country at the moment. Nikkei Asia’s information about Party elders led by Zeng Qinghong “reprimanding” Xi at Beidaihe suggests that the remnant Jiang faction and the “anti-Xi coalition” are mounting a major pushback against Xi Jinping. If so, then Xi not attending the G20 meeting in India—like him skipping a speech at the BRICS summit in South Africa and his immediate post-BRICS trip to Xinjiang, as well as the removal of Qin Gang and the reshuffle of the PLA Rocket Force leadership—is another indirect sign that things are heating up politically for Xi within the regime. It cannot be ruled out that the MSS article questioning U.S. “sincerity” is Beijing making excuses in advance in the event that serious political problems prevent Xi from traveling to San Francisco for the APEC meeting in November.
The Xi leadership’s recent and mounting failures include:
- Further rapid and serious deterioration of the Chinese economy, including a virtually non-existent post-pandemic “recovery,” declining trade figures, and global investors quickly souring on China’s growth prospects;
- Bursting of the real estate bubble;
- Worsening debt and financial crisis, particularly with property developers and local governments;
- Shadow banking crisis;
- Damage from flooding and other natural disasters;
- Demographic crisis, particularly the coverup of COVID-related deaths.
- Nascent signs of COVID-19’s return and lack of government preparedness.
The Xi leadership’s failures would have angered or disappointed the following groups:
- Party princelings, elders, and other CCP elites who are opposed to Xi. In particular, the Jiang Zemin faction already believes that Xi has been “eroding the CCP’s ruling foundation layer by layer,” “precisely attacking all of the regime’s vital organs,” “constantly dismantling this totalitarian government in an almost surgical manner,” and has “cut off the Party’s escape route”;
Senior PLA officials, who would likely be troubled by the personnel movement and probes into the PLARF leadership; - The bulk of CCP officials, whose interests are being increasingly harmed by the Xi leadership’s policies and are increasingly being stifled under the high-pressure political environment that Beijing has created;
- The vast majority of the Chinese people, many of whom suffered and lost confidence in Xi and the CCP during the three years of “zero-COVID.”
Of the aforementioned four groups, the first two are the most likely to have raised their heckles (with Party elites being the more likely of the two) in recent times over the Xi leadership’s measures and performance, with the reported Party elders “reprimanding” Xi at Beidaihe likely being the most notable incident. And if so, then Xi Jinping has to find ways to bring them under control, especially because Xi can no longer use “zero-COVID” to restrict their movement or limit their interactions.
Xi also likely dares not leave the country at this juncture if internal dissent is indeed high lest the remnant Jiang faction and the “anti-Xi coalition” seize the opportunity to cause havoc. Previously, Xi had Hu Jintao and Wen Jiabao to carry out a political “show of force” on his behalf by making public appearances when he was away on international travels during his first and second term. But Xi may not be able to rely on his old political allies now after having solidified his status as the undisputed paramount leader (定於一尊) at the 20th Party Congress and with Hu looking frail in his more recent public outings. (Hu’s health situation could also be more dire than the Xi leadership has let on; rumors circulating in Chinese-speaking circles claim that some Western press have been preparing Hu’s obituary.)
If Xi is indeed unable to attend the G20 in India due to political problems, then this would debunk explanations by experts that assume Xi is currently in an insurmountable position of strength at home and abroad, including Xi wanting to follow his own agenda and Xi looking to challenge India geopolitically (this argument becomes less convincing in considering that India and China are both in BRICS and looking to expand their influence together under that geopolitical grouping).
What’s next
The Xi leadership could step up the “self-rectification” of the regime with more anti-corruption investigations and purges. Xi Jinping could also find himself under even greater political pressure if the CCP regime releases dismal third-quarter economic figures in October.
Political Black Swans could emerge in China in the second half of 2023 if Xi is forced to take drastic action to resolve intra-Party problems.
2 Beijing’s latest policies in support of real estate unlikely to reverse property gloom
‘Recognize property, not the mortgage’
On Aug. 25, the PRC Ministry of Housing and Urban-Rural Development, the People’s Bank of China, and the National Administration of Financial Regulation jointly issued a notice on “optimizing the standards for determining the number of housing units in personal housing loans” (關於優化個人住房貸款中住房套數認定標準的通知).
The notice introduced the so-called “recognize property, not the mortgage” (認房不認貸) policy (henceforth referred to as the “recognize property” policy), which relaxed credit rules for homebuyers to allow people or their dependents who do not own property in the city to be treated as first-time buyers and be eligible for favorable mortgage conditions during their loan application process.
The first-tier cities of Beijing, Shanghai, Guangzhou, and Shenzhen adopted the “recognize property” policy between Aug. 30 to Sept. 1. By Sept. 6, at least 15 cities had implemented versions of the policy adjustment.
The changes in down payment and mortgage interest rates for homebuyers under the “recognize property” policy in the four first-tier cities are:
Down payment ratio
- Beijing: From 60 percent to 80 percent down to 35 percent to 40 percent.
- Shanghai: From 50 percent to 70 percent down to 35 percent.
- Guangzhou: From 40 percent to 70 percent down to 30 percent.
- Shenzhen: From 50 percent to 60 percent down to 30 percent.
Mortgage interest rates
- Beijing: From 5.25 percent down to 4.75 percent.
- Shanghai: From 5.25 percent down to 4.55 percent.
- Guangzhou: From 4.8 percent down to 4.2 percent.
- Shenzhen: From 4.8 percent down to 4.5 percent.
Li Yujia, the chief researcher at the Guangdong Urban and Rural Planning and Design Institute (廣東省城規院住房政策研究中心), told mainland media that the property market in the three metropolitan areas of Beijing, Shanghai, Guangzhou, and Shenzhen forms the “foundation” of national sales, or 70 percent of sales in the national market. Therefore, the property market “urgently needs to stabilize expectations through policy adjustments in first-tier cities like Beijing, Shanghai, Guangzhou, and Shenzhen as the ‘Golden September and Silver October’ period and the year-end peak sales season approaches,” Li said.
***
Following the rollout of the “recognize property” policy, many rumors began circulating on the Chinese internet regarding the cancellation of property discounts and property price hikes. Also circulating was information that some real estate projects saw a significant increase in the number of viewings, with viewings being held until the early hours of the morning. Meanwhile, reception to many other projects was still lukewarm.
According to data from real estate monitoring and research institute Zhuge, the number of second-hand homes in the four first-tier cities that saw price increases on Sept. 2 and Sept. 3 includes:
- Beijing: 1,048 and 867 respectively, with the average daily price increase of house listings quadrupling over the same period in the previous week.
- Shanghai: 680 and 582 respectively, with the average daily price increase of house listings doubling over the same period in the previous week.
- Guangzhou and Shenzhen: 98 and 189 respectively, with the average daily price increase of house listings showing a steady trend.
Mortgage rate and down payment cuts
On Aug. 31, the PBoC and the NAFR jointly issued a notice on “adjusting and optimizing differentiated housing credit policies” (關於調整優化差別化住房信貸政策的通知) and a notice on “reducing interest rates on existing first home loans” (關於降低存量首套住房貸款利率有關事項的通知).
According to the notices, the lowest mortgage interest rate limit for first-time buyers should be no less than 20 basis points over the loan prime rate, while the limit for second-time home buyers would be the loan prime rate plus 20 basis points. Also, the minimum down payment on homes will be 20 percent for first-time buyers and 30 percent for second-time buyers.
The notices also stated that existing mortgage borrowers who meet the relevant conditions can, from Sept. 25 onwards, apply to financial institutions to either revise the housing loan interest rate in their contract, or have the bank issue new loans to replace the existing one.
Mainland media cited sources close to regulators as saying that the mortgage rate for home buyers will be reduced by about 0.8 percentage points on average after the rate limit adjustment. The sources also estimate that the scale of loans involved in this policy adjustment could reach 25 trillion yuan. Meanwhile, a China International Capital Corporation research report said that the policy change could save buyers up to 194 billion yuan in annual interest payments.
Related policies
On Sept. 1, a number of Chinese commercial banks—including major state-owned lenders like the Industrial & Commercial Bank of China, Bank of China, Agricultural Bank of China, China Construction Bank, and Bank of Communications—cut interest rates on a range of yuan deposits to protect their profitability after the CCP authorities rolled out the mortgage rate cuts.
According to online statements issued by the banks, the rate on one-year time deposits was lowered by 10 basis points to 1.55 percent, the two-year rate was trimmed by 20 basis points to 1.85 percent, and the rates on three- and five-year deposits were cut by 25 basis points to 2.2 percent and 2.25 percent respectively.
According to PBoC data, the scale of domestic deposits in China reached 276.3 trillion yuan in July 2023.
Our take
1. The CCP authorities’ recent rollout of policies to benefit the real estate sector is timed to coincide with peak property buying periods (“Golden September and Silver October,” year-end sales, etc.) and is definitely intended to help the increasingly financially troubled Chinese property developers generate as much sales as possible to clear inventory and pay off their debts.
From mainland media reports and other publicly available information, Beijing’s property measures, and in particular the “recognize property, not the mortgage” policy, have indeed lowered the threshold for buying houses for a segment of the population, including those in need (“rigid demand”) of housing but were unable to make a purchase despite having the means to do so before the policy adjustment. This means that the revised property measures could bring in some sales for developers over the short term.
However, Beijing’s latest property policies are unlikely to reverse the weak property sales or resolve the real estate debt crisis given the current economic conditions and trends in China. Three years of “zero-COVID” has left the Chinese people with less disposable income to buy property, while the appeal of real estate as investment has died down substantially as people become accustomed to Beijing’s “houses are for living in, not speculation” mantra and associated policies.
The declining appeal of property in China has had a detrimental impact on the real estate sector on the whole.
Yu Liang, the chairman of Vanke, estimated during the developer’s mid-term performance meeting on Aug. 31 that the total new construction area in China for the whole of 2023 would only be 660 million square meters, or the scale from 2006, assuming a 25 percent year-on-year decline in new construction area from the January to July period holds for the rest of the year. Shrinking construction area means fewer properties being built, which in turn translates into fewer sales and reduced operating income for developers.
Weakening cash flows for developers will see developers suffer greater losses. For instance, the mid-term reports released by 17 listed real estate companies indicated that they lost a total of 83.5 billion yuan; many of those 17 companies are state-owned, and some appear to be insolvent. Of those developers, Country Garden reported losses of 48.932 billion yuan and interest-bearing liabilities of 257.91 billion yuan; Sino-Ocean Group lost 18.369 billion yuan, a substantial increase of 1589 percent from a year ago; Sunac lost 15.37 billion yuan; KWG Property lost 9.929 billion yuan; and CIFI Group lost 9.5 billion yuan.
According to data from CRIC Research, the top 100 real estate companies in China saw their sales plummet by 33.9 percent in August as compared to a year ago, further extending declines in July. This suggests that the real estate sector’s decline has not yet bottomed out and will continue to spiral downward.
Current property trends will see developers face greater insolvency risks. According to a Sept. 1 Nikkei Asia report, the top 10 developers by sales plus China Evergrande had 6.35 trillion yuan in properties under development at the end of June. Those 11 developers had about 12.33 trillion yuan worth of assets (about half of which are properties under development) on their balance sheets at the end of June and 10.34 trillion yuan in liabilities, which placed their aggregate capital at 1.99 trillion yuan. Nikkei concluded that should the value of the holdings of those 11 developers fall 32 percent, then their liabilities would exceed assets and the whole group would have negative net worth.
2. Contagion from China’s troubled real estate sector is spreading to the financial system and is endangering the economy more broadly.
According to July data from the Shanghai Commercial Paper Exchange Corporation, there were 2,851 institutions with more than three overdue bills, with overdue balances at the end of the month, or overdue bills in the current month. And of those institutions, 270 were banks (the majority of which were small- and medium-sized banks), compared with just 32 between Feb. 1 and June 30. Notably, the “Zhongzhi network” (see here and here) began having trouble making payments in June and stopped its wealth product payout as of July 19.
Should current trends persist or worsen, the prediction in our 2023 China Outlook that “small and medium-sized banks will see increased financial risks” while “high-risk banks could merge, be taken over by bigger banks, or file for bankruptcy” would be on track to be verified. Worsening economic, social, political, and geopolitical crises could compel Xi to “make shocking and subversive moves,” of which some could be obvious and some implicit, later this year.
