1 Early analysis of the political ramifications of Li Keqiang’s sudden death
On Oct. 27, PRC state mouthpiece Xinhua reported the death of former premier Li Keqiang at the age of 68.
Xinhua wrote that Li “recently had a rest in Shanghai,” and suffered a “sudden heart attack” on Oct. 26. Li passed away at 00:10 a.m. Beijing time on Oct. 27 after “all rescue measures failed.”
Xinhua later published an official obituary for Li Keqiang about 10 hours after announcing his death. The obituary praised Li as an “excellent member of the Chinese Communist Party, a time-tested and loyal communist soldier and an outstanding proletarian revolutionist, statesman and leader of the Party and the state.”
Before hailing Li’s political “achievements” as premier, the obituary noted that they came about “under the strong leadership of Party Central with Comrade Xi Jinping at the core.” In describing Li’s role in the COVID-19 outbreak, the obituary said that he “assumed the post of head of the central leading group for COVID-19 response, and helped secure tremendously encouraging achievements in both epidemic response and economic and social development.”
The obituary noted that Li “continued to uphold the leadership of the Party Central with Comrade Xi Jinping at the core” after his retirement, “cared for advancing the cause of the Party and the country, and firmly upheld the Party’s efforts to improve conduct, build integrity, and combat corruption.”
In the conclusion, the obituary called on the Chinese people to “turn grief into strength by ralling more closely around Party Central with Comrade Xi Jinping at the core,” fully implement “Xi Jinping Thought” and “deeply understand” Xi’s political theories, and “strive in unity for fully building a strong country and achieving national rejuvenation through a Chinese path to modernization.”
News of Li’s death leaked
Oct. 26
The Chinese language edition of Radio Free Asia reported that Li Keqiang was in good physical condition and enjoyed swimming, citing multiple people familiar with the matter. However, Li suffered a heart attack while swimming on the evening of Oct. 26, 2023 after checking into Dongjiao Hotel in Shanghai.
A person familiar with the matter said that someone posted on the internet at 5:54 p.m. Beijing time on Oct. 26 that Li Keqiang had passed away and an official announcement was inbound. The official announcement, however, said that Li had died at 00:10 a.m. Beijing time on Oct. 27.
Internet reactions, censorship, and Western media reporting
Li Keqiang’s death became a hot topic of discussion on Western and Chinese social media outlets, and even topped Weibo’s trending list.
In discussing Li’s death, overseas Chinese language media and social media brought up the supposed “feud” between Xi Jinping and Li Keqiang, or doubt about the official explanation for Li’s death. Some of the “differences” between Xi and Li that were raised include:
- In 2020, Li mentioned that about 600 million people in China were living on a monthly income of 1,000 yuan, or remarks that ran counter to Xi’s claim of having eliminated “extreme poverty” and having results in achieving a “moderately prosperous society.”
- During a press conference at the 2022 Two Sessions, Li said that under the current leadership, the international environment saw “profound and complex shifts” while the domestic environment saw a “multiplication of domestic contradictions and difficulties.” Li also said that the biggest challenge facing the Xi leadership was the COVID-19 pandemic and its serious impact on the economy. Overseas Chinese language media and social media commentators implied or observed that Li’s “blunt” remarks stood in contrast to Xi’s propaganda.
- In March 2023, multiple videos of Li bidding farewell to the 800 or so staff at the State Council went viral. Li was filmed saying, “Heaven is looking at what humans are doing. The firmament has eyes.” (人在幹,天在看, 看來是蒼天有眼啊). Li’s remarks were interpreted as being a jab at Xi. However, Li’s full remarks at the event showed that he did not make any allusions to Xi. Li’s “Heaven is looking” comment also appeared to be a reference to the sunny weather on a wintry day; Li was trying to tell the staff that the good weather was a “reward” of sorts for their hard work.
Given the widespread belief that Xi Jinping and Li Keqiang had differences or were even political rivals, many commentators speculated or implied that Xi had Li assassinated. Some observations or remarks that implied an assassination include:
- Some netizens observed that Li appeared to be healthy in a video of him visiting the Mogao Caves in Dunhuang on Aug. 30, 2023.
- A netizen wrote, “Even a fool knows what’s going on, dictators have no qualms [about assassinations].”
- Another netizen wrote, “How can a 68-year-old national-level cadre who has annual health examinations suddenly die of a heart attack?”
- Yet another netizen wrote, “People like [Li Keqiang] basically can live up to 80 or 90 years old with such good healthcare. Even one’s toes know what’s going on.”
Tsai I-Chen, a well-known Taiwanese cardiologist, wrote in a Facebook post that there are two common reasons for a sudden death from heart problems. The first is an obstruction of a coronary artery leading to a massive heart attack, and the second is severe arrhythmia leading to a heart attack. Tsai noted, however, that it is “not easy” for a national-level leader like Li Keqiang to die from either of the two reasons. Several Chinese language media outlets later cited Tsai’s Facebook post.
***
The CCP authorities censored comments about Li Keqiang’s death on Weibo and other Chinese social media. Information circulating on Western social media showed that universities in China had issued notices banning public mourning for Li.
***
In reporting the death of Li Keqiang, Western media mostly went with the narrative of Li as a “reformer” being “sidelined” by the authoritarian Xi Jinping. (for e.g., see here, here, and here)
Other notable heart attack deaths that drew suspicion
White glove
Xu Ming, a businessman who was deeply involved in the case of former Chongqing boss Bo Xilai, died of a heart attack in a prison in Wuhan City at the age of 44 on Dec. 4, 2015. Xu’s death sparked heated discussions and speculation online, including theories about how he was assassinated.
Second-generation red
Chen Xiaolu, a second-generation red (i.e. Party princeling), died of a heart attack at the age of 72 on Feb. 28, 2018. There was a lot of speculation at the time that Chen had been assassinated given that China Insurance Regulatory Commission had taken over Anbang Group just six days before his death and prior information circulating about Anbang’s “true” ownership. In January 2015, mainland media Southern Weekly reported that Chen was the “real boss” behind Wu Xiaohui’s Anbang, but Chen firmly denied the reporting. Chen, however, is publicly listed as one of Anbang Group’s nine directors.
Financial tycoon
Xie Zhikun, the founder of Zhongzhi Enterprise, died from a heart attack on Dec. 18, 2021 at the age of 61. After Xie’s death, there was constant speculation that he had been “silenced” (被賜死) as part of Xi Jinping’s crackdown on the financial sector.
Our take
1. We previously debunked the idea of a “Xi-Li split” on several occasions (see here, here, here, and here). To briefly reiterate, Xi Jinping and Li Keqiang, a protégé of Hu Jintao’s, are allied politically against the Jiang Zemin faction. The Xi-Hu alliance came about after the Bo Xilai scandal and the Jiang faction’s coup attempt against Hu and Xi.
We also earlier noted that Xi and Li almost certainly have disagreements over policy, but there were no publicly observable signs that their political alliance had frayed. Throughout his time in office, Li was never in any position to challenge Xi given his lack of political power and “commoner” background in the CCP elite. Nor was there anything personal about Xi’s supposed “sidelining” of Li; the downgrading of the PRC premiership is in line with the Xi leadership’s continuous effort over a decade to centralize power in Xi Jinping and elevate the “core” (i.e. Xi) over the “collective leadership.” After his retirement, Li became negligible as a political force and posed no threat to Xi.
Xinhua’s official obituary for Li Keqiang indirectly affirms our analysis of factional dynamics in the CCP elite and the relationship between Xi and Li. Notably, the obituary wrote that Li “continued to uphold the leadership of the Party Central with Comrade Xi Jinping at the core” after his retirement and kept Party discipline, which suggests that Xi did not consider Li to be corrupt or disloyal.
We believe that many commentators quickly suspected that Xi had Li assassinated because the idea of a “Xi-Li split” has become the dominant narrative despite being an incorrect interpretation. Part of the reason why the assassination speculation seems “plausible” at first glance is because most CCP leaders have historically engaged in fierce struggles against their “second-in-command”:
- Mao Zedong suppressed Zhou Enlai (even preventing doctors from informing Zhou about his bladder cancer and allowing him to receive treatment) and took actions that led to the deaths of Liu Shaoqi and Lin Biao.
- Paramount leader Deng Xiaoping removed Hu Yaobang and Zhao Ziyang as Party head, and nearly removed Jiang Zemin when the latter initially did not embrace Deng’s political legacy of “reform and opening up.”
- Jiang Zemin suppressed premier Zhu Rongji and interfered in the latter’s state-owned enterprise reforms and anti-corruption campaign. However, Zhu managed to retire without incident because many CCP elders were opposed to Jiang at the time.
- Hu Jintao and Wen Jiabao were too busy uniting against the Jiang faction and coping with the constraints of the “collective leadership” system during Hu’s tenure. There are also no obvious public signs that Hu and Wen fought each other.
2. We currently see three possible explanations for Li Keqiang’s sudden death.
The official reason
Many are skeptical that Li died from the officially stated reason of a heart attack given the general longevity of retired cadres and the top-notch medical treatment afforded to senior CCP cadres of his stature. Also, it seems particularly damning that Li’s medical team was not able to save him or take sufficient preventive medical measures even after knowing that he was suffering from a heart disease of some sort.
That being said, it cannot be ruled out that Li indeed succumbed to a naturally occurring heart attack despite adhering to the best preventive measures and despite receiving the best treatment available. The official reaction to Li’s death also showed that Beijing was likely caught off guard; Xinhua first issued a terse statement that Li had died, and an official obituary was only published many hours later.
Xi sought to ‘silence’ Li
We believe that there is a very low probability of Xi Jinping having attempted to assassinate (including withholding life-saving treatment following an unintended heart attack) Li Keqiang, given their long-standing political alliance and the fact that as a political force, Li posed no threat to Xi. The best evidence that Li and other Hu Jintao associates have negligible political strength and cannot seriously threaten Xi’s “quan wei” (authority and prestige) is their being almost completely shuffled out of the top ranks of the Xi leadership at the 20th Party Congress.
Xi also has no political incentive to “silence” Li. Just the perception that Xi ordered Li’s assassination would do much to wreck his image at home and abroad. Foreigners would reinforce their impression of Xi as a ruthless, unbound dictator who has no qualms with removing perceived “reformers” and “moderates” who could perhaps check Xi’s desire for aggression against Taiwan. Meanwhile, CCP officials and the masses could believe more firmly that Xi is determined to follow in Mao Zedong’s footsteps with the assassination of his former number two; heightened paranoia of Xi and deep concerns about the direction he is taking the Party and the regime would worsen political and social instability in the PRC.
Of course, Xi could have contemplated “silencing” Li if the latter were engaging in acts of extreme disloyalty, including working actively with Xi’s enemies at home and abroad to oust Xi. However, Li would have had to be doing something that posed an immediate and dire threat to Xi, and a threat that could only be stopped with Li’s death, for Xi to have Li assassinated instead of simply investigated.
The “Xi assassinated Li” argument becomes even weaker in considering that the Xinhua obituary noted that Li’s political “achievements” were accomplished “under the strong leadership of Party Central with Comrade Xi Jinping at the core,” a positive assessment which indicates that Li did not pose a threat to Xi.
Xi’s enemies ‘silenced’ Li to get at Xi
We previously obtained information after this year’s Beidaihe meeting that Xi Jinping is “greatly concerned about the possibility of assassination attempts against him, and has placed heightened importance on ensuring his personal safety.”
It cannot be ruled out that “anti-Xi” forces decided to go after the retired Li Keqiang, who almost certainly received less protection as compared with Xi and other current members of the Xi leadership, after failed attempts to assassinate Xi himself. As we explained in the second scenario, “anti-Xi” forces have a lot to gain by allowing the perception that Xi could have “silenced” Li to circulate in the public discourse.
3. Regardless of what the actual reason for Li Keqiang’s sudden death might be, his passing will almost certainly trigger political turmoil in the CCP elite.
For one, Xi’s enemies will definitely take advantage of Li’s death to circulate all sorts of rumors, speculation, and disinformation to further tarnish Xi’s image and undermine his “quan wei.” The waging of an “information war” against Xi will heighten domestic and global paranoia about the Xi dictatorship, which will in turn exacerbate the CCP regime’s many internal and external crises.
Xi will very likely respond to the “information war” against him by stepping up anti-corruption purges and censorship. There are already signs that the Xi leadership is clamping down more strongly on “anti-Xi” messaging:
- A reprint of the book, “Chongzhen: The Diligent Emperor of a Fallen Dynasty,” was recalled after it sparked negative comparisons online about Xi and his rule.
- A State Council announcement of holiday arrangements for 2024 on Oct. 23 notably marked the start of the Lunar New Year holiday as the first day of the new year instead of the eve, as was the case for all years since 2007 with the exception of 2014. We believe that officials who “preferred left rather than right” and were looking to safeguard their respective careers decided not to have the eve of the Lunar New Year as the start of the holiday because they would be in danger of declaring that they are seeking Xi’s ouster; “Lunar New Year’s eve” (除夕) in Mandarin is a homonym for “removing Xi” (除習). This move, however, has backfired as many Chinese are unhappy that they do not have the eve of the Lunar New Year off.
- A columnist for Dajiyuan (Chinese-language edition of The Epoch Times) learned that the CCP authorities have a “special internet leading group” whose job is “safeguarding” Xi Jinping’s image. This leading group allegedly has an overseas unit that focuses on going after those who oppose or insult Xi, and has been known to use “fishing” techniques to gather “evidence.” The columnist added that the leading group is reportedly policing “anti-Xi” behavior more severely than “anti-CCP” behavior, and suspects that this could be due to factional struggle in the CCP because some “anti-Xi” forces are known to operate through overseas networks.
Meanwhile, escalated anti-corruption activities in response to rumors about the actual cause of Li Keqiang’s death, including major purges, will almost certainly lead to serious political destabilization. In a scenario where Xi suspects that his factional rivals were responsible for Li’s death, the Xi leadership could decide to move against remaining “big tigers” like Zeng Qinghong and other Jiang faction members sooner rather than later as Xi looks to shore up his personal safety.
2 Xi strengthens his control over the financial system as various crises intensify
Xi makes unprecedented visit to the PBoC
Bloomberg reported that Xi Jinping, PRC vice premier He Lifeng, and other officials visited the People’s Bank of China (PBoC) and the State Administration of Foreign Exchange (SAFE) in the afternoon of Oct. 24, citing people familiar with the matter. This was Xi’s first known visit to the central bank since taking office. The people familiar with the matter added that He Lifeng also visited China Investment Corporation, the PRC’s sovereign wealth fund.
One of the people said that Xi’s visit to SAFE is in part aimed at better understanding the PRC’s $3 trillion of currency reserves. Xi’s visit also comes as state leaders, regulators, and top bankers will gather at a closed-door financial policy meeting early in the week of Oct. 30 to set medium-term priorities for the $61 trillion financial industry and prevent risks.
Bloomberg noted that Xi’s visit to the PBoC and SAFE “reinforces a string of recent moves by the government to boost growth and stabilize markets” and could “help ease concerns among investors” that Xi had been “neglecting the economy amid a purge of senior ministers and a volatile relationship with the US.”
Bloomberg also noted that previous inspections of the central bank were often led by PRC premiers or vice premiers, and the public records show that Mao Zedong never made an appearance at the PBoC. Bloomberg added that Xi’s visit would “highlight recent Communist Party rhetoric on its ‘centralized and unified’ leadership over the financial industry.”
1 trillion yuan new bond issuance to aid recovery
Oct. 24
1. The sixth meeting of the Standing Committee of the 14th National People’s Congress approved a resolution to allow the State Council to issue an additional 1 trillion yuan in treasury bonds in the fourth quarter of 2023, according to state media reports.
The PRC finance ministry said that the new sovereign bonds will be used in eight areas:
- Post-disaster recovery and reconstruction.
- Key flood control projects.
- National disaster emergency capacity improvement projects.
- Other key flood control projects.
- Irrigation area construction, as well as rehabilitation and key soil erosion control projects.
- Improvement of urban drainage and flood prevention capabilities.
- Comprehensive prevention and control system construction project for key natural disasters.
- High-standard farmland construction in northeast China and disaster-stricken areas in the Beijing-Tianjin-Hebei region.
State media said that the extra bonds would be allocated to local governments through transfer payments. Half the quota of the new bonds would be used this year and the other half in the new year.
State media added that the new issuance of treasury bonds is estimated to increase China’s fiscal deficit up to 4.88 trillion yuan from 3.88 trillion yuan ratio in 2023, as well as increase the fiscal deficit ratio to 3.8 percent, up from the target of 3 percent set at the start of the year.
Oct. 25
PRC finance vice minister Zhu Zhongming said at a State Council policy press conference that the PRC government’s debt ratio is still “within a reasonable range” and the overall risk is “controllable” although the deficit rate has increased slightly this year after the issuance of the additional sovereign bonds. Zhu added that the additional treasury bonds would be issued in a public offering.
Zhang Shixin, the deputy secretary-general of the National Development and Reform Commission, said that funds from the treasury bond issuance will be managed on a “project basis.” He added that those who misappropriate funds from national debt projects would be “severely held accountable in accordance with the relevant regulations.”
2. Mainland media Yicai reported that the funds from the issuance of 1 trillion yuan in additional treasury bonds cannot be used directly to make repayments on local debt or finance recurring expenditures such as civil servant wages.
Yicai said that there was speculation about how funds from the sovereign bond sale would be used because some local governments recently borrowed 1 trillion yuan over a short period to make repayments on existing debts, and the State Council subsequently announced that it was issuing new debt.
Feng Lin, a senior analyst at Golden Credit Rating, told Yicai that banks and securities firms will purchase the bulk of the treasury bonds as usual. Yicai added that the speculation by some that the PBoC would directly purchase the treasury bonds was incorrect and there was “no so-called monetization of fiscal deficits.”
Liu Yu, the chief analyst of fixed income at GF Securities, wrote in a note that the additional issuance of 1 trillion yuan in treasury bonds will boost China’s GDP in the fourth quarter by about 1.5 percent and drive the year-on-year growth rate of social financing by about 0.3 percent.
Feng Lin also said that the treasury bond issuance will enable local governments to allocate more financial resources to stabilize growth at the end of 2023 and in early 2024. Feng expects China’s real GDP growth in the fourth quarter to rise to 5.5 percent and economic growth for the whole year to reach about 5.3 percent.
Front-loading bond quota
Oct. 24
The sixth meeting of the Standing Committee of the 14th NPC authorized the State Council to allow local governments to front-load part of their 2024 bond quota. The sum could account for 60 percent (including the general debt quota and special debt quota) of the ongoing year’s bond quota.
The total bond quota for 2023 is 4.52 trillion yuan, given the new special and general bond quotas of 3.8 trillion yuan and 0.72 trillion yuan respectively. This means that as much as 2.71 trillion yuan worth of bonds (2.28 trillion yuan of special bonds and 0.43 trillion yuan of general bonds) from 2024 can be issued ahead of the 2024 Two Sessions.
‘National team’ to the rescue again
Oct. 23
Central Huijin Investment Ltd. announced that it had bought exchange-traded funds (ETFs) and would continue to add ETF holdings in the future. Huijin did not specify how many ETFs it bought.
News of Huijin’s purchase saw the three major A-shares indexes rebound slightly on Oct. 24. On Oct. 27, the Shanghai Composite Index closed above 3,000 points (3,018.5). However, the net outflow of northbound funds reached 446 million yuan in the week of Oct. 23, compared with just 135.282 billion yuan in net outflows over the past three months.
Oct. 26 to Oct. 27
The PRC National Council for Social Security Fund held its 2023 Domestic Investment Manager Symposium in Chengdu, according to mainland media. The Fund’s chairman Liu Wei delivered a speech and vice chairman Wang Wenling presided over the symposium. In attendance at the symposium were the main persons-in-charge and investment managers of 24 social security fund and pension fund investment managers, as well as the heads of relevant departments of social security funds.
The symposium said that the current valuation of China’s equity assets has reached a historical bottom and A-shares have entered a window of “long-term value allocation.” The symposium added that it is necessary to “strengthen countercyclical investment thinking, proactively respond to risk challenges, and actively seize long-term investment opportunities in the capital markets.”
Xi strengthens control over the financial sector
Oct. 25
The Financial Times reported that the CCP is recruiting nearly 100 officials to staff the Central Financial Commission ahead of the National Financial Work Conference (a five-yearly meeting that sets the agenda for financial reform) on Oct. 30, citing four people familiar with the matter.
The people said that the Commission is recruiting cadres from existing financial regulators such as the PBoC, the National Administration of Financial Regulation, the National Development and Reform Commission, and the finance ministry.
The people added that veteran state banker Wang Jiang has been appointed executive deputy director of the office of the Central Financial Commission and will report to vice premier He Lifeng.
Oct. 26
The Wall Street Journal reported that Xi Jinping is “looking for someone to blame” for China’s property sector bust, citing people familiar with the matter. The people said that Beijing is expanding investigations beyond China Evergrande’s Hui Ka Yan to include “bankers and financial institutions that facilitated developers’ risky behavior.”
Liu Liange, the Bank of China’s former chairman and Party secretary, is one of the individuals being probed. People familiar with the matter said that the charges against Liu partly involved the Bank of China’s lending to Evergrande and the announcement of Liu’s charges was intended to be a “warning shot” to major banks and their executives over the exposure to Evergrande and the property sector.
People familiar with the matter also said that China Minsheng Bank, Evergrande’s biggest lender, is also under scrutiny.
People familiar with Beijing’s decision-making told the Journal that part of the reason for the lack of a comprehensive debt-restructuring plan is “guidance from Xi himself that the property sector must be squeezed.” Therefore, policy recommendations urging Beijing to increase spending to bail out big developers or local governments, and then get them to deliver unfinished homes, have not gotten much traction.
Senior executives of some provincial LGFVs probed
Oct. 25
Mainland media reported that at least twelve heads of provincial local government financing vehicles (LGFVs) in eight provinces (Shandong, Hunan, Guizhou, Sichuan, Guangdong, Heilongjiang, Jilin, and Yunnan) have been investigated since August 2023. Among the senior executives probed was Chen Bingheng, the deputy general manager of the prominent state-owned enterprise Guangdong Holdings Limited (officially investigated on Sept. 15).
Backdrop
- This year, several local governments have gone public with their local financial and debt woes in a bid to get assistance from the central authorities. According to a UBS research note, 1.75 trillion yuan worth of local government financing vehicle bonds are set to mature in the second half of 2023.
- China’s official economic data for the third quarter and the first three quarters of the year indicate that Beijing’s economic rescue measures have been ineffective. China’s real estate sector crisis also continues to worsen, with Country Garden defaulting on a U.S. dollar bond for the first time. The property sector woes have also seen local government revenue from land sales drop significantly.
- Local governments in many parts of China are struggling to pay their civil servants.
Our take
1. The various developments listed above, as well as local governments being allowed to issue special refinancing bonds to pay off implicit debt, suggest that the financial, debt, and fiscal crises plaguing the CCP regime are intensifying.
The developments also suggest that Beijing is working to address local government liquidity problems to stimulate the economy and drag the PRC towards meeting its 2023 GDP target of “around 5 percent.” However, the trillions released in liquidity is just a drop in the bucket of massive local debt, and will likely only allow local governments to temporarily tide over their most urgent and pressing funding and debt problems.
2. Officially, the additional treasury bonds worth 1 trillion yuan that the NPC approved are meant to finance disaster relief and construction projects. However, we believe that it is more likely that the funds from the sovereign bond sale are meant to provide liquidity to local governments to tide them through their financial and debt problems.
For one, 1 trillion yuan is an excessive sum to allocate to disaster and emergency projects. According to the 2023 departmental budget of the PRC Ministry of Emergency Management, the ministry’s total expected expenditure was 10.02 billion yuan, of which just 4.468 billion yuan would go to disaster prevention and emergency management. Meanwhile, the CCP has a reserve fund of between 1 percent to 3 percent of the general public budget set aside for expenditures involving natural disasters, emergencies, and other unforeseen expenses. In 2023, this reserve fund should contain between 275.13 billion yuan to 825.39 billion yuan per the 1 to 3 percent quota. By comparison, the 1 trillion yuan in funds that the sale of additional treasury bonds would yield would be 120 percent to 363 percent of the reserve funds set aside for natural disasters and emergencies.
If the funds from the additional treasury bonds are indeed solely allocated to disaster relief and construction projects, then this means that the losses that China suffered from natural disasters and emergencies this year greatly exceed what the PRC officially reports. But if this is not the case, then it can be reasonably inferred that Beijing is finding an excuse to transfer funds to local governments and stimulate the economy.
Local governments have already been misappropriating funds to make up for shortages in their coffers. In May 2023, information circulating on the Chinese internet alleged that the Kunming municipal government in Yunnan Province had misappropriated funds from local social security and provident funds to make payments on maturing LGFV bonds. And on June 26, the State Council noted in a report on the execution of the central budget and other fiscal revenues and expenditures for 2022 that 70 localities had inflated fiscal revenue by 86.13 billion yuan through “self-selling and self-buying” state-owned assets and fictitious land transactions. Hence, it is almost certain that local governments will channel the funds meant for disaster relief and construction projects to finance things that the central government did not intend (like civil servant wages and various debts); the central authorities could temporarily turn a blind eye to such misappropriation so as to ensure the continuation of local government operations and grassroots stability.
3. Beijing’s massive issuance of new debt will likely increase risks in the banking system.
The sovereign debt will be mainly underwritten by 55 financial institutions, including the Industrial and Commercial Bank of China (ICBC), the Agricultural Bank of China, the Bank of China, and China Construction Bank. Because the central government will transfer the funds to local governments, the financial institutions would end up indirectly underwriting the massive debts of local governments and the huge risks associated with doing so.
China’s state lenders are not exactly in prime position to take on more risks. The ICBC’s third-quarter financial report released on Oct. 27 showed that the bank’s net profits only increased by 0.03 percent in Q3. ICBC’s very thin profits reflect the serious deterioration of China’s economy as well as the reduced profitability of the banks as they are increasingly tasked by the central government to help with the local government debt situation and the property sector crisis.
The ICBC is the world’s largest bank by assets and was the most profitable company in China in 2022 with net profits exceeding 360 billion yuan. If one of China’s bigger state lenders is struggling with profitability and will see increased risks as it comes to deal with local government debt, then the risks of small and medium-sized banks whom local governments are heavily reliant on are likely to be even greater.
4. Xi Jinping appears to be doubling down on centralizing and consolidating his control over the financial system as he searches for ways to resolve China’s economic and financial problems.
Xi did not make much headway in bringing the financial system to heel during his first two terms. Part of the reason was Xi’s need to bring other crucial organs and apparatuses of the regime under his control first, including the military and the political and legal affairs system. Another reason was because Xi needed to gather immense political strength before he could move effectively and more safely against the financial system and the powerful elite interests (including the Jiang faction and its private entrepreneur associates) associated with it. After having consolidated power to a much higher degree at the 20th Party Congress, Xi likely believes that the time is ripe to more thoroughly expand his “self-revolution” campaign to the financial system and move against the various Party elite-linked interest groups and so-called “independent kingdoms” that have long profited from the financial sector at the expense of the regime (there are echoes of this in China’s imperial history where the downfall of dynasties were preceded by powerful elites “cannibalizing” the central government’s finances).
As part of Party and state institutional reforms announced during this year’s Two Sessions, the CCP authorities established several new entities to strengthen the Party’s (and by extension, Xi’s) control over the financial system. These include the Central Financial Commission, the Central Financial Work Commission, and the National Administration of Financial Regulation. Beijing’s recent rush to staff the Central Financial Commission hints at Xi’s urgency to consolidate his control over the financial system.
Meanwhile, Xi’s unprecedented visit to the PBoC is reminiscent of his tour of the newsrooms of state media outlets in February 2016. At the time, Xi reminded state media that their family name is the Party (黨媒姓黨), a move that was meant to tighten his and the CCP’s control over the propaganda system. Likewise, Xi’s tour of the central bank could be intended to serve as a sign of his support for new PBoC governor Pan Gongsheng and send a resounding political signal that the Party (and Xi) is firmly in control over the financial system.
We believe that while Xi Jinping will tighten his control over the financial system with his various measures, he also risks incurring backlash and pushback from the Party elites with stakes in the financial sector. As Xi moves more vigorously against the entrenched interests in the financial system and sector, he risks triggering more intense political and financial turmoil in China in the short term instead of resolving the regime’s financial and economic crises.
