1 Analyzing the removal of 11 NPC deputies and the rumors debunked by Qin Gang’s resignation
NPC announcement
Feb. 27
The Standing Committee of the National People’s Congress issued a notice confirming the qualification of a deputy and the removal of 11 other deputies. Of the 11 removals, seven were dismissals and four were resignations.
Dismissals
- Wang Yixin (60 years old), member of the Heilongjiang Provincial Party Committee and provincial deputy governor.
- Sun Biao (52), first-level inspector of the Heilongjiang Provincial Water Resources Bureau.
- Hu Jianwen (60), chairman of Hunan Linwu Shunhua Duck Industry Development Co. Ltd.
- Lei Dongzhu (55), Party secretary of the First People’s Hospital of Chenzhou City, Hunan Province.
- Zhu Hong (59), former Party secretary and director of the Guangdong Provincial Health Commission.
- An Jiuxiong (49), secretary of the Qiandongnan Prefecture Party Committee in Guizhou Province.
- Li Zhizhong (age unknown), deputy commander of the Central Theater Command.
Resignations
- Qin Gang (67), former foreign minister.
- Huang Jiawu (59), founder and chairman of Guangzhou Haodi Group.
- Feng Jiehong (47), Party secretary and chairman of China Aerospace Sanjiang Group Co. Ltd.
- Lu Weiwei (33), chairman of the Songlinchong Ecological Planting Cooperative Society in Zhaoping County, Guangxi Province.
Political rumors about Qin Gang
1. The earliest political rumors about Qin Gang following his “disappearance” near the end of June in 2023 noted that he was removed for having an affair with Phoenix TV reporter Fu Xiaotian and having a child with her in the United States.
According to some rumors, Qin insisted that the child, who is a surrogate by some accounts, should not become a U.S. citizen. However, after Qin was promoted to State Councilor in March 2023 and severed contact with Fu, Fu allegedly obtained U.S. citizenship for the child and reported Qin to the Central Commission for Discipline Inspection in May 2023.
2. In a Dec. 6 piece with no byline, Politico Europe claimed that Qin Gang had died “either from suicide or torture” in late July in the military hospital in Beijing that treats top PRC leaders, citing two people who were allegedly familiar with the matter. Politico’s sources also claimed that Russian deputy foreign minister Andrey Rudenko’s “real mission in Beijing” on June 25, 2023 when he met with Qin Gang “was to inform Xi that his foreign minister and several top officers in the PLA had been compromised by Western intelligence agencies,” citing people “with access to top Chinese officials.” Those people also told Politico that Rudenko’s message to Xi included “allegations that Qin and relatives of top rocket force officers had helped pass Chinese nuclear secrets to Western intelligence agencies.”
Politico noted that “given the opacity of the Chinese system, it is impossible to confirm these accounts definitively.” Our analysis at the time was deeply skeptical of the information in the Politico report.
3. After Qin Gang resigned from the National People’s Congress on Feb. 27, 2024, rumors circulating on Chinese social media suggested that he had received a serious warning from within the Party and was handed a major administrative demerit.
Backdrop
Between December 2023 and January 2024, the National People’s Congress and National Committee of the Chinese People’s Political Consultative Conference revoked the deputy qualifications of nine military generals and four defense industry senior executives.
Our take
1. The seven deputies who were recently dismissed from the NPC are likely to have been found guilty of major wrongdoing and are likely to be handed over to the PRC’s judicial authorities.
Meanwhile, the four NPC deputies who resigned could have done so for a variety of reasons, including personal reasons (i.e. having committed no wrongdoing) and wrongdoing that is not sufficiently major. In the latter case, the resigned deputies could still face disciplinary action (i.e. punished by the Party) and administrative penalties (i.e. punished by the state government).
2. Qin Gang’s “voluntary” resignation from the NPC suggests there is a good chance that he is not guilty of serious wrongdoing. The official announcement about Qin’s fate also refutes some of the more dubious political rumors circulating about him, including reports that he had died in custody or that his case is connected with corruption in the People’s Liberation Army. We previously explained why we were skeptical of the aforementioned rumors (see here and here).
If Qin is ultimately not punished severely and is allowed a “soft landing,” then this would partly affirm our earlier assessment that Qin’s case at least is an effort by “Xi Jinping’s remaining factional rivals and the ‘anti-Xi coalition,’ including elements opposed to Xi in the military or the CCP intelligence apparatus’s “hidden front” (see here and here), to exploit the Xi leadership’s prioritization of national security matters to ‘manipulate’ the PRC leader into taking out his own allies and ultimately undermining his own interests.”
A “soft landing” for Qin would also indicate that Xi wields considerable influence in the regime even though his actual political strength may not be as solid as depicted in Party propaganda and assessed by external observers.
Finally, a “soft landing” for Qin would likely improve or stabilize the morale of Xi’s political allies and loyalists as they would believe that their political patron is not paranoid like Mao Zedong and can still be relied upon to largely protect their interests even in tricky political situations.
There is a small chance that investigations into the Qin Gang case have not yet concluded because it is “very complex and serious,” and the CCP leadership have yet to determine if they will handle his case as an internal disciplinary matter (within the Party) or as a criminal matter (prosecuted by the state) because investigations are ongoing. In such a scenario, the CCP leadership would prefer to have Qin resign as an NPC deputy before the Two Sessions while they continue to look into his case to avoid having to answer questions from foreign media about why he is missing from the political conclave. If Qin is later criminally charged, then his resignation becomes a procedural matter and will not affect the outcome of the case.
3. Publicly available information about the probe into the PLA, including the removal of military and defense industry personnel as deputies to the NPC and the National Committee of the CPPCC, suggests that the case against former defense minister Li Shangfu could be more serious than the one against Qin Gang.
Unlike Qin, Li has yet to be removed as a deputy to the NPC. However, Li could potentially be dismissed from the NPC at the Two Sessions if his case is serious enough. Investigations into the PLA and its Rocket Force are likely to continue even after the CCP authorities officially announce how they plan to deal with Li.
4. The Xi leadership took nearly half a year before releasing updates on the Qin Gang and Li Shangfu cases. This suggests that Xi Jinping needed the time to both investigate his political allies and mitigate the impact of the probes on his “quan wei” (authority and prestige). Xi could have also used the time to investigate and purge political opponents.
5. The resignation of Feng Jiehong from the NPC is almost certainly linked to corruption in the PLARF and the PRC’s defense industry.
Feng spent the bulk of his career serving in the PRC’s aerospace and defense industry. He held various positions at China Aerospace Science and Industry Corporation (CASIC), including vice chairman of CASIC’s Second Academy which focuses on missile development and production. The place where Feng holds his current position, China Space Sanjiang Group, is a key developer and manufacturer of carrier rockets and is linked with CASIC. Feng also resigned as chairman of Aerosun Group, which is affiliated with CASIC, in August 2023 for “personal reasons.”
Four defense industry executives who were earlier disqualified as deputies to the National Committee of the CPPCC had all previously worked at CASIC. More defense industry executives and officials could subsequently have their seats in the CPPCC or NPC revoked as Beijing deepens its anti-corruption probe into the industry and the PLA.
2 Worsening of property sector woes is bad news for the markets
Shanghai index fluctuates around 3,000 points
The Shanghai Composite Index returned to the 3,000-point mark on Feb. 23 and fluctuated around that level during the week of Feb. 26. The index was up 1.29 percent for the whole week. Meanwhile, northbound funds made net purchases of over 23.5 billion yuan for the week, marking the fifth consecutive week of net inflows.
At the market close on March 1:
- The Shanghai index rose by 0.39 percent to 3,027.02 points.
- The STAR 50 Index rose by 0.96 percent to 815.49 points.
- The Shenzhen Component Index rose by 1.12 percent to 9,434.75 points.
- The ChiNext Index rose by 0.94 percent to 1,824.03 points.
- The total turnover in the Shanghai and Shenzhen indexes exceeded 10.553 trillion yuan for the third consecutive trading day.
- Northbound funds recorded net sales of 5.333 billion yuan.
Regulators restrict quant industry
Feb. 25
Bloomberg News published an article about the PRC authorities’ clampdown on China’s quant industry. The article noted that the authorities’ restrictions and “national team” efforts to rescue the markets caused “gyrations” that made the market “unpredictable for computer models trained on reading historical data,” and that the quant industry has “become the latest casualty of Beijing’s campaign to stop a $4 trillion selloff in stocks.”
The article noted that while Beijing’s measures have helped keep up share prices at least temporarily, “they raise bigger questions of how far Xi Jinping’s government will go to meet short-term goals at the expense of maintaining some pretense of a free market that’s attracted billions of dollars from Wall Street firms in recent years.”
The article added that Beijing’s abrupt trading restrictions are giving international investors who are “increasingly skittish about China” another reason not to invest. The article noted that China saw a record six months of outflows from the stock market until February, foreign direct investment is at a three decade low, and China is at risk of losing out more to countries that are seeing a surge in investment like Japan and India.
Feb. 28
1. The China Financial Futures Exchange said in a statement that it had recently banned the hedge fund Shanghai Weiwan Fund Management from opening stock index futures positions for 12 months and confiscated 8.9 million yuan in illegal gains.
The exchange added that Shanghai Weiwan had used high-frequency trading to circumvent transaction limits on multiple equity index futures. The hedge fund also did not disclose the links between accounts by its controller and relatives and accounts used for managing its products.
2. In responding to questions about regulators restricting the Direct Market Access business, a spokesperson for the China Securities Regulatory Commission noted that private equity funds employing the DMA strategy have incurred losses during the recent market volatility and “the risk has been to some extent been absorbed.” The spokesperson added that the scale of DMA business has steadily decreased after the Chinese New Year, with the daily average trading volume accounting for about 3 percent of the total market turnover.
The spokesperson added that the “stable deleveraging” (i.e. tightening the transaction of DMA products) of the DMA business is beneficial to the “stable and healthy operation of the market.”
The spokesperson indicated that going forward, the CSRC will continue to strengthen the regulation of DMA and other over-the-counter derivative businesses, control trading scale and leverage, and severely crack down on illegal activities.
‘National team’ support ‘well below’ historical level
Feb. 26
Bloomberg reported that the “national team” injected more than 410 billion yuan (about $57 billion) into onshore shares this year to support the markets, citing a report from UBS Group AG.
The report said that the “national team” added 1.24 trillion yuan of shares over July to September 2015 during the stock market turmoil at the time. The current year-to-date flow of 410 billion yuan is “well below the historical level, with the potential to rise further under extreme conditions.”
Mainland media reports citing the same report noted that the “national team” holdings remained relatively unchanged from the second half of 2015 to the end of 2020. The “national team” only partially reduced its holdings of A shares when market valuation was high in 2021, but still holds large amounts of shares in finance and other heavyweight sectors.
The UBS report said that the proportion of “national team” inflows to the CSI 300, CSI 500, CSI 1000, and CSI 2000 were 75.9 percent, 12.9 percent, 6.7 percent, and 4.5 percent respectively, according to mainland media.
Capital outflows reach pre-2018 levels
Feb. 27
Reuters reported that Standard Chartered suspended new investments by its Chinese clients into offshore products via the qualified domestic institutional investor (QDII) program.
Standard Chartered told Reuters in a statement that “commercial reasons” were why it was suspending new investments under QDII, but did not elaborate. Reuters noted that the move came “amid a surge in demand for overseas investments due to weakness in the local market and currency.”
Launched in 2006, the QDII is the largest channel for Chinese investors to invest overseas. Standard Chartered has been awarded a total QDII quota of $2.8 billion, which is behind HSBC ($4.73 billion) and Citigroup ($35 billion) according to State Administration of Foreign Exchange data.
Feb. 28
Mainland media wrote that the research department of the state-owned CITIC Securities published a report which noted a significant differentiation in the flow of various overseas funds since the beginning of 2024. The report added that the magnitude of net outflows exceeding historical limits suggests that the trend of foreign funds reducing the A shares holdings may be ending.
The CITIC Securities report divided foreign funds into three categories:
- Hong Kong institutional funds: These funds entered the market significantly when Chinese shares declined sharply in January 2024, but turned in a flat performance during the market rebound and traded less after the Chinese New Year. Net inflows from Hong Kong institutional funds amounted to 56.7 billion yuan from Jan. 2 to Feb. 26, with a holding value of 139.2 billion yuan as of Feb. 26 (accounting for 6.9 percent of the overall northbound flow).
- Allocation-oriented foreign funds: These funds saw net outflows from August 2023 to the middle of January 2024, with recent net inflows slowing down. From Jan. 2 to Feb. 26, net inflows from allocation-oriented foreign funds were only 7.7 billion yuan (cumulative net outflow of 21.9 billion yuan from Jan. 2 to Jan. 25, and cumulative net inflow of 29.6 billion yuan from Jan. 25 to Feb. 26), with a holding value of 15.58 trillion as of Feb. 26 (accounting for 77.4 percent of the overall northbound flow).
- Trading-oriented foreign funds: These funds did not show one-way inflows or a trend of continuing outflows, but recent bidirectional fluctuations have significantly increased. There were several trading days before and after the Chinese New Year when trading-oriented foreign funds experienced single-day net inflows or outflows exceeding 10 billion yuan. The holding value of these funds was 314.6 billion yuan as of Feb. 26 (accounting for 15.6 percent of the overall northbound flow).
The report added the following analysis:
- Allocation-oriented foreign funds are seeing a slight “replenishment.” Cumulative net outflows of allocation-oriented foreign funds were 161.5 billion yuan from a peak in August 2023 to Jan. 25, 2024. As of Feb. 26, net outflows of these funds had narrowed to 131.9 billion yuan.
- Trading-oriented foreign funds have not seen sustained net inflows. The cumulative scale of reductions of these funds since August 2023 has exceeded the limits of previous rapid reductions. It is characteristic of such funds to “rapidly enter during a bull market and rapidly withdraw during a bear market.”
- The average actual position of overseas multinational active funds (e.g. MSCI AC Asia, MSCI EM, etc.) in China has already dropped to pre-2018 levels.
Feb. 29
Bloomberg reported that overseas investors bought a net 60.7 billion yuan of onshore equities in February 2024 via links between the Hong Kong and mainland stock exchanges, halting a record 201 billion yuan of outflows from August 2023 to January 2024.
The report said that PRC policymakers are “understood to use the offshore accounts of state-backed funds to help boost the market.” Data compiled by Bloomberg as of Feb. 23 found that the biggest recipient of the inflows in February was Kweichou Moutai Co. (5.2 billion yuan), followed by China Merchants Bank Co., Ping An Insurance Group Co., and Industrial and Commercial Bank of China Ltd.
Property sector crisis deepens
Feb. 27
Rumors circulating on Chinese social media say that Vanke, a leading property developer in China, is negotiating with certain lending institutions (mainly insurance companies) to extend the maturity of its non-standard debts.
The rumors claim that Vanke’s non-standard debts were originally set to mature in December 2023 but the deadline was extended to March 2024 are a recent round of negotiations. With the new deadline approaching, Vanke’s chairman and management team are allegedly headed to Beijing to meet with regulators in hopes of coordinating another extension.
The rumors add that Vanke is actively selling off assets to preserve the company and that its major shareholder is Shenzhen Metro Group.
Feb. 28
Country Garden said in a regulatory filing to the Hong Kong Stock Exchange that it had received a liquidation petition dated Feb. 27 filed by creditor Ever Credit Limited. The petition was issued for the non-payment of a loan worth HK$1.6 billion ($204.4 million).
Country Garden said that it will “vigorously” oppose the petition and seek legal measures to do so. A court hearing is scheduled for May 17.
March 1
Reuters reported that Deutsche Bank is looking to file a liquidation lawsuit in Hong Kong against Shimao Group in March after it found the developer’s debt restructuring terms unacceptable, citing two sources with knowledge of the matter. Shimao presented its offshore debt restructuring terms to creditors in December 2023 after negotiating with them for 18 months. One of the sources said that Deutsche Bank’s credit exposure to Shimao is linked to private dollar bonds.
Shimao, which was once a top 20 developer in China, missed the interest and principal payment for a $1 billion offshore bond in July 2022. The developer’s entire $11.7 billion worth of offshore debt was deemed to be in default after it missed that payment.
Reuters calculated that liquidation petitions against at least 10 Chinese developers have been filed in Hong Kong and other overseas courts so far since the property sector crisis started.
Our take
1. The UBS report on “national team” support offers some information which suggests that the state may not have the necessary resources to constantly step in and stabilize the markets if downward trends persist.
For one, the “national team” net inflows tracked by UBS showed that PRC authorities mainly propped up the heavyweight indices. This suggests that the “national team” may not have sufficient funds to conduct a broader rescue and has to prioritize what it can do with limited resources.
The “national team” efforts to rescue the market during the recent downturn also appear to be much weaker in comparing the market performance during the turmoil in the second half of 2015 and between the latter half of 2023 to February 2024:
June 12, 2015 to Dec. 31, 2015:
- 137 trading days, with a turnover of 65.6 trillion yuan.
- The Shanghai index closed below 3,000 points on two trading days.
- The Shanghai index hit an inter-trading day low of between 2,900 to 3,000 points on four trading days.
- The Shanghai index hit 2,850.71 points at the lowest during intra-day trading.
July 31, 2023 to Feb. 29, 2024:
- 141 trading days, with a turnover of 47.2 trillion yuan.
- The Shanghai index closed below 3,000 points on 57 trading days.
- The Shanghai index closed below 2,900 points on 23 trading days.
- The Shanghai index closed below 2,800 points on seven trading days.
- The Shanghai index fell below the 2,700 points range during intra-day trading on three trading days.
- The Shanghai index hit 2,635.09 points at the lowest during intra-day trading.
The CCP authorities have long been sensitive about keeping the Shanghai index above the 3000 psychological level to keep up investor confidence. It is odd that the “national team” was lax in preventing the index from falling below the psychological level and even dropping under 2,700 points. This suggests that either the “national team” lacked funds to keep the index above 3000, or it did not believe that the market plunge had bottomed out and was holding funds in reserve to deal with an even worse situation. Either way, this indicates that the “national team” has diminished potential to intervene in the market under extreme situations.
The UBS report’s finding that the “national team” barely reduced its holdings of Chinese equities from the second half of 2015 to the end of 2020 indicates that most of the “national team” funds from the 2015 market rescue are still stuck in the markets. This suggests that the “national team” has less space now to step in and buy up shares when the situation calls for it.
We previously looked at some reasons why the “national team” is unlikely to have enough funds for prolonged market stabilization work. As China’s economic situation deteriorates further and the CCP authorities run into more severe fiscal shortages in general, the “national team” will have even fewer funds to properly support the markets with each subsequent time it trends down and requires state intervention.
2. The CCP authorities clamped down on China’s quant industry to halt and stabilize recent market declines. While the clampdown appeared to have had an effect, it will likely do more harm than good in the long run in undermining investor confidence in China’s stock markets and investment prospects.
The quant industry clampdown will likely also leave foreign investors even more wary of growing authoritarianism and political risks in China due to the lack of consistency or transparency in the verbal “window guidance” issued by PRC regulators to financial institutions. Foreign investors are already spooked by Xi Jinping’s crack down on the financial sector in recent years, including the “disappearance” of business elites, the raiding of foreign consulting companies in anti-espionage investigations, and the anti-corruption campaign’s targeting of collusion between officials and businesses.
The CCP authorities’ restricting of hedge funds, quant funds, and the financial sector on the whole is unlikely to reverse and will likely tighten over time as ideology increasingly comes to guide policy in the regime. Notably, the 2023 Central Financial Work Conference called for “accelerating the construction of a modern financial system with Chinese characteristics” and ensuring that finance serves “socialist construction.” This means that the financial sector in China, while appearing similar to those in the West at the onset and for many years, will gradually function even less like Western markets and be shaped according to socialist politics.
3. The CITIC Securities report and Bloomberg’s Feb. 29 on overseas investors purchasing 60.7 billion yuan of onshore equities in February 2024 suggests that the northbound funds flowing into China in recent months are likely injections from the “national team” rather than funds from actual foreign investors. Meanwhile, CITIC Securities’ findings about allocation-oriented foreign funds suggest that China is still seeing net outflows of foreign funds, albeit with a slight reduction in scale.
We believe that CITIC Securities’ assessment of the trend of foreign funds reducing their holdings of Chinese shares is overly optimistic. Several factors indicate that the exodus of foreign funds will accelerate rather than decelerate going forward:
- Domestic and global demand is weak, China’s economy is facing a recession, and supply chains are uprooting from China and moving overseas.
- China’s geopolitical risks are continuously rising as countries around the world become more concerned about Beijing’s friendliness with Moscow amid the ongoing Russia-Ukraine war and various threats associated with the CCP regime.
- Hotter than expected inflation figures in the U.S. is making it difficult for the Federal Reserve to lower interest rates. With the yield differentials between China and the U.S. at all time highs (minus 180 basis points on March 1, 2024) and the U.S. dollar staying strong against the renminbi (an analysis by Founder Securities on Feb. 29 suggests that the dollar-RMB exchange rate could fall in the 7.3 to 7.4 range in the first half of 2024), the situation suits outflows from China.
4. China’s property sector crisis is likely to worsen further and possibly faster this year as creditors hound developers for debt repayments and file liquidation suits against them amid the backdrop of economic decline. Data from China Index Academy showing that sales of the top 100 real estate companies in February 2024 had fallen 51.6 percent year-on-year also bodes ill for the real estate situation for the rest of the year.
In analyzing the liquidation of Evergrande, we noted that the development meant that “it cannot be ruled out that Country Garden’s creditors could find reasons to sue the latter in Hong Kong.” This has already been verified with Ever Credit Limited filing a liquidation petition against Country Garden in Hong Kong. We also warned that “Evergrande’s liquidation could be the first domino to fall and cause a concentrated triggering of crises in China in 2024.”
Assuming current trends persist, the “stabilization” of the Chinese markets could be reversed sooner rather than later and foreign capital would be more inclined to leave rather than stay in China. China’s markets could see declines again once the “national team” lacks sufficient resources to prop up indices or investor confidence falls again should Beijing fail to announce strong stimulus and reforms at the Two Sessions in March.
