China’s Q1 fiscal revenue drop and other data hints at Beijing’s growing difficulties; Beijing prepares for China’s financial crisis to worsen

  1   China’s Q1 fiscal revenue drop and other data hints at Beijing’s growing difficulties

April 22
1. The PRC Ministry of Finance released China’s fiscal revenue and expenditure data for the first quarter of 2024.

General public budget revenue

• The national general public budget revenue decreased by 2.3 percent year-on-year to 6.088 trillion yuan. After deducting special factors such as deferred tax payments for small and micro enterprises in 2023, which raised the base, as well as the lagged impact of certain tax reduction policies introduced in mid-2023, the national general public budget revenue saw a comparable growth of around 2.2 percent.
• The national tax revenue decreased by 4.9 percent year-on-year to 4.917 trillion yuan. Non-tax revenue increased by 10.1 percent to 1.171 billion yuan.
  • Domestic value-added tax decreased by 7.1 percent year-on-year to 2.005 trillion yuan.
  • Domestic consumption tax increased by 10 percent year-on-year to 511.1 billion yuan.
  • Corporate income tax increased by 1 percent year-on-year to 1.178 trillion yuan.
  • Personal income tax decreased by 4.5 percent year-on-year to 424 billion yuan.

General public budget expenditure

• The national general public budget expenditure increased by 2.9 percent year-on-year to 6.986 trillion yuan.
  • Expenditure on social security and employment increased by 3.7 percent year-on-year to 1.271 trillion yuan.
  • Debt interest payments increased by 4.8 percent year-on-year to 242 billion yuan.

National gov’t fund budget revenue and expenditure

• Income from the transfer of state-owned land use rights decreased by 6.7 percent year-on-year to 814.7 billion yuan.
• Related expenditures for the transfer of state-owned land use rights decreased by 4.5 percent to 1.223 trillion yuan.

2. PRC vice minister of finance Wang Dongwei held a press conference on China’s fiscal revenue and expenditure situation, and later took questions from reporters.

Noteworthy points from the press conference include:
i) Wang said that China’s fiscal revenue and expenditure operation were steady in Q1 2024 and showed three characteristics:

• Fiscal revenue, calculated on a comparable basis, continued to maintain a trend of recovery-oriented growth.
• Tax revenue from industries such as culture and tourism, advancing manufacturing, etc., grew rapidly.
  • Tax revenue from the accommodation and catering industry increased by 44.7 percent.
  • Tax revenue from the culture, sports, and entertainment industries increased by 26.7 percent.
  • Tax revenue from transportation, storage, and postal services increased by 6.8 percent.
  • Tax revenue from the retail industry increased by 5.7 percent.
  • Tax revenue from the railway transportation equipment manufacturing industry increased by 9.5 percent.
  • Tax revenue from the computer manufacturing industry increased by 6.8 percent.
• Key expenditures were well protected.

ii) In discussing fiscal expenditure, Wang noted:

• Funds from the issuance of government bonds have been fully allocated at the start of the year.
  • Most of the 1 trillion yuan raised from the issuance of government bonds in the fourth quarter of 2023 were utilized this year.
  • The finance ministry had fully allocated 1 trillion yuan of funds raised from issuing additional government bonds to local governments by the end of February 2024.
  • The funds raised from issuing government bonds were mainly allocated to expenditures in urban and rural communities, agriculture and forestry, disaster prevention and control, and emergency management.
• More than 80 percent of the transfer payment budget has been allocated.
  • The central government allocated 10.2 trillion yuan worth of transfers to local governments in 2024, representing a comparable increase of 4.1 percent from the previous year. As of early April, the central government transfers to local governments reached 8.68 trillion yuan, accounting for 85.1 percent of the initial annual budget.
  • Funds for eligible projects have been fully allocated in general transfer payments and transfer of shared fiscal responsibilities.
• Fiscal expenditure progress has been reasonably accelerated.
  • National general public budget expenditures reached 24.5 percent of the budget in Q1 2024, higher than the average level over the past three years.

iii) In answering a question about investors actively subscribing to treasury savings bonds and some banks experiencing a “bond shortage,” Wang Dongwei replied that the finance ministry would study appropriate increases in the volume of issuance.

iv) When asked by a Bloomberg News reporter about the slow issuance of local special bonds in the first quarter, Wang said that there was an increase in issuance volume at the beginning of the year in previous years to address factors like the pandemic. He added that the slow issuance is also related to factors such as local project funding needs, construction conditions during the winter and spring, and bond market interest rates.

***
Mainland media reported that government bond issuance in the first quarter of 2024 was nearly 240 billion yuan less than the same period in 2023, and net financing was about 470 billion less when compared to the same period.

  Tax and fee reduction for some companies in 2022

Publicly available information from the CCP authorities shows that some small and medium-sized enterprises that were originally required to declare and pay taxes from December 2022 to July 2022 can extend filing and payment until between January 2023 to May 2023. In May 2023, the PRC State Administration of Taxation announced 12 tax and fee preferential policies.

According to the CCP authorities, the total amount of newly added tax reductions, fee reductions, refunds, and deferred payments exceeded 4.2 trillion yuan in 2022. In 2023, it amounted to 2.2 trillion yuan.

  Foreign direct investment plummets

Data provided by the PRC Ministry of Commerce showed that the actual use of foreign direct investment (FDI) in China from January to March 2024 amounted to 301.67 billion yuan. This represented a decrease of 26.1 percent as compared to the same period in 2023, and was a larger decline than the 19.9 percent year-on-year decrease in the previous two months.

The commerce ministry said that the latest FDI data was due to the high base in 2023 when the inflow of foreign investment reached the highest level on record for the quarter.

  Our take

1. The CCP authorities’ explanation of how the national general public budget revenue saw a “comparable growth of around 2.2 percent” in Q1 2024 seems reasonable at a glance. The fiscal revenue in the first quarter of 2023 included some deferred taxes from 2022 that inflated the base. Meanwhile, the reduction in tax payments due to cuts in 2023 would have led to a reduction in tax revenue reported in January 2024.

However, this explanation is unconvincing in juxtaposing the data with the CCP authorities’ own fiscal figures from earlier:

• The national general public budget revenue in the first quarter of 2023 was 6.234 trillion yuan, a year-on-year increase of 0.5 percent. Of the total, the national tax revenue decreased by 1.4 percent to 5.171 trillion yuan while the non-tax revenue increased by 10.9 percent to 1.063 trillion yuan.
• The national general public budget expenditure in the first quarter of 2023 was 6.7915 trillion yuan, a year-on-year increase of 6.8 percent.
• China’s deficit in the first quarter of 2023 was 557.4 billion yuan, an increase of 359.6 percent from a year ago.

The data above indicates that China’s economy was very weak in the first quarter of 2023. Even assuming that fiscal revenue did see “comparable growth of around 2.2 percent” in Q1 2024, the low figures compared to even worse data from the same period in 2023 suggest that the Chinese economy has not yet recovered even after a year. Indeed, the pre-modified 2.3 percent revenue drop for the January-March period aligns with our observation that China saw negative GDP growth in the first quarter of the year.

Other recently released Q1 fiscal data also reflects China’s economic downturn:

• Domestic value-added tax decreased by 7.1 percent from a year ago and the corporate income tax only increased by 1 percent, reflecting deflation and reduced corporate profits. The drop in corporate profits also led to a 4.5 percent decline in personal income tax collected from the previous year, which points to reduced income for individuals earning more than 5,000 yuan per month.
• Social security and employment expenditures increased by 3.7 percent from a year ago, reflecting an increase in retirees and unemployed individuals, as well as the government’s growth welfare burden.
• Debt interest payments increased by 4.8 percent year-on-year, reflecting the CCP authorities’ rising debt costs. Debt costs have increased by over 50 percent in the first quarter of 2024 as compared to the first quarter of 2020 (debt interest payments of 156.6 billion yuan).
• Land revenue decreased by 36.5 percent in the first quarter of 2024 compared to the first quarter of 2020 (1.112 trillion yuan).
• Tax revenue from accommodation and catering industries increased by 44.7 percent in Q1 2023 as compared to a year ago. However, data from the National Bureau of Statistics showed that mainland China saw a 232.6 percent increase in the number of cancellations and revocations of accommodation and catering-related enterprises (459,000) in the first quarter of 2024 as compared to the same period in 2023 (less than 140,000 cancellations).

2. The issuance of government bonds and transfer payments in the first quarter of 2024 also reflects China’s economic challenges.

On one hand, the CCP authorities appear to be doing very well with bond issuance and fund allocation, with the bulk of the 1 trillion yuan in additional government bonds issued in the fourth quarter of 2023 being used in 2024 and the full allocation of 1 trillion of funds raised from the issuance of additional government bonds to local government by the end of February 2024. With central government transfer payments to local governments reaching 8.68 trillion yuan as of early April, local governments have received over 10 trillion yuan in financial support from the central government thus far. However, the massive financial support does not appear to have significantly impacted China’s economic growth in Q1 2024.

On the other hand, many people have bought treasury savings bonds in the first quarter of the year, resulting in banks seeing a “bond shortage.” Also, the issuance of local special bonds has been slow. We believe that there could be several reasons for this:

• Residents and businesses are reluctant to make speculative investments given China’s gloomy economic outlook. Instead, they are opting to buy so-called “risk-free” government bonds, resulting in a shortage. However, this development reduces the effectiveness of government investment in stimulating the economy while increasing debt costs.
• The reluctance of residents and enterprises to invest and consume is also reflected in domestic deposits. Financial data released by the People’s Bank of China in March shows the proportion of demand deposits held by residents decreased from 29.7 percent in March 2023 to 27.8 percent in March 2024. Meanwhile, the proportion of demand deposits held by enterprises fell from 33.1 percent in March 2023 to 31.3 percent in March 2024.
• The high demand for PRC government bonds is reflected in the yield of said bonds falling by over 50 basis points in April 2024 as compared to the same period last year. As of April 23, the yield on the 2-year government bond decreased to 1.823 percent from 2.365 percent in 2023, while the yield on the 10-year bond fell to 2.244 percent from 2.82 percent over the same period.
• The slow issuance of local government bonds could be related to the recent trust defaults on investments involving local government financing vehicles. This suggests that the local government debt crisis is worsening, with local governments looking to borrow new funds to repay old debts but financial institutions being reluctant to purchase local government bonds.

3. Both domestic and international trends are very unfavorable to the Chinese economy at present, and the Xi Jinping leadership has yet to issue policies that inspire confidence in the PRC’s economic rescue. If the U.S. Federal Reserve delays or cancels interest rate cuts, and if the domestic and international situation does not improve for the PRC, then China’s economy will almost certainly worsen much further in the second half of 2024.

  2   Beijing prepares for China’s financial crisis to worsen

  Xi’s financial work gets propaganda boost

April 19
The CCP authorities held a symposium in Beijing to launch the “Selected Excerpts from Xi Jinping’s Discourse on Financial Work” (習近平關於金融工作論述摘編), according to official media.

He Lifeng, director of the Office of the Central Financial and Economic Affairs Commission and secretary of the Central Financial Work Commission, attended the symposium and delivered a speech. Also in attendance were officials from the Central Propaganda Department, Office of the Central Financial and Economic Affairs Commission, Central Party School, Central Institute of Party History and Literature, General Office of the State Council, National Development and Reform Commission, Ministry of Finance, central financial regulatory departments, centrally administered financial enterprises, and the Xi Jinping Economic Thought Research Center.

The symposium praised Xi Jinping’s economic thought on finance as an “important innovative achievement in Marxist political economy regarding financial issues.” The symposium also noted that Xi Thought on finance “provides fundamental principles and action guidelines for doing financial work well in the new era and on the new journey.” The symposium urged financial institutions to prioritize the study, propaganda, and implementation of the “Selected Excerpts” as a major task for the “current and future periods.”

***
According to PRC official media reports, the “Selected Excerpts” was compiled by the Central Institute of Party History and Literature. The book consists of 10 topics, 324 sections, and excerpts from more than 120 documents including reports, speeches, explanations, and lectures by Xi Jinping from November 2012 to February 2024. Official media added that some of the Xi excerpts were being made public for the first time.

April 15 to April 23
CCP propaganda agencies and financial authorities published commentaries in major Party media praising the importance of studying the “Selected Excerpts.”

• April 15: The Central Institute of Party History and Literature published a commentary titled, “Promoting High-quality Financial Development to Aid in Building a Strong Country and Achieving National Rejuvenation” (以金融高品質發展助力強國建設、民族復興偉業).
• April 16: The Office of the Central Financial and Economic Affairs Commission and the Central Financial Work Commission’s theoretical study center published a commentary titled, “Adhering to the Centralized and Unified Leadership of Party Central in Financial Work” (堅持黨中央對金融工作的集中統一領導)
• April 17: The National Development and Reform Commission’s theoretical study center Party group published a commentary titled, “Adhering to People-centered Value Orientation and Deeply Understand the People Nature of Financial Work” (堅持以人民為中心的價值取向 深刻掌握金融工作的人民性).
• April 18: The People’s Bank of China’s theoretical study center Party Committee published a commentary titled, “Adhering to Serving the Real Economy as the Fundamental Purpose” (堅持把服務實體經濟當作根本宗旨).
• April 19: The Office of the Central Financial and Economic Affairs Commission’s theoretical study center published a commentary titled, “Advancing High-quality Financial Development and Accelerating the Construction of a Financial Powerhouse” (推動金融高品質發展、加速建設金融強國).
• April 19: The China Banking and Insurance Regulatory Commission’s theoretical study center Party Committee published a commentary titled, “Persisting in Making Risk Prevention and Control the Eternal Theme of Financial Work” (堅持以防控風險作為金融工作的永恆主題).
• April 22: The China Securities Regulatory Commission’s theoretical study center Party Committee published a commentary titled, “Persisting in Advancing Financial Innovation and Development on the Track of Marketization and the Rule of Law” (堅持在市場化法治化軌道上推動金融創新發展).
• April 23: The Ministry of Finance’s theoretical study center Party group published a commentary titled, “Persisting in Deepening Structural Reforms on the Supply Side of Finance” (堅持深化金融供給面結構性改革).

  Financial agencies inspected

April 16
The central inspection team conducted routine inspections of 22 national ministries and administrative agencies, as well as the Party Committees of 12 financial institutions including the PBoC, the National Development and Reform Commission, the Ministry of Finance, the Ministry of Commerce, the National Financial Regulatory Administration, and the Shanghai and Shenzhen stock exchanges.

Mainland media reported that the central inspection team has teams stationed in 17 of the 22 work units.

  Combating illegal fundraising

April 18
Mainland media reported that Beijing held a national mobilization and deployment meeting for the special action of cracking down on illegal fundraising and an inter-ministerial joint meeting on dealing with illegal fundraising in 2024.

Li Yunze, director of the National Financial Regulatory Administration, attended the meeting and gave a speech. Also in attendance at the main venue in Beijing were Supreme People’s Court deputy chief justice Li Yong, Supreme People’s Procuratorate deputy prosecutor general Ge Xiaoyan, vice minister of public security Xu Datong, Ministry of Agriculture and Rural Affairs Party group member Li Jinghui, China Securities Regulatory Commission vice chairman Fang Xinghai, National Public Complaints and Proposals Administration deputy director Li Zijun, All-China Federation of Industry and Commerce vice chairman Fang Guanghua, as well as other persons-in-charge from member units of the inter-ministerial joint meeting on dealing with illegal fundraising in 2024.

The meeting noted that the current situation of illegal fundraising risks remains “severe and complex,” with significant pressure from major and important cases especially as existing risks continue to be revealed.

The meeting stressed that preventing and handling illegal fundraising is both a “decisive battle” and a “protracted war.”

• Governments at all levels must implement their work.
• Financial regulatory authorities, industry regulators, and other departments should strengthen policy coordination and regulatory cooperation, and be synergized in their work.
• Public security and judicial organs should intensify efforts in investigating, prosecuting, and adjudicating cases of illegal fundraising.
• The person in charge of the Central Political and Legal Affairs Commission’s stability maintenance guidance bureau emphasized the need to enhance coordination efforts, promote the crackdown and handling of crimes such as illegal fundraising, and collaboratively address and dispose of risks related to stability maintenance in the field of handling illegal fundraising.
• The person in charge of the Supreme People’s Court stressed that courts at all levels should efficiently and effectively adjudicate criminal cases of illegal fundraising, continuously innovate enforcement methods, and maximize the recovery of illegally raised funds.
• The person in charge of the Ministry of Public Security said that public security organs should strengthen data empowerment (i.e. use “Big Data” and other technologies when investigating cases), focus on taking out key targets (i.e. cases and criminals), and resolutely ensure the effectiveness of special action.
• The person in charge of the National Public Complaints and Proposals Administration stressed that public complaints and proposals administrations at all levels should strengthen governance at the source and intensify efforts to investigate and resolve conflicts and disputes.

The meeting emphasized that all regions and departments must unify their thoughts and actions with the important speeches and decisions of General Secretary Xi Jinping and Party Central, deeply grasp the political and people-centered nature of financial work, and effectively defuse risks and hidden dangers related to illegal and stability-related issues.

  Public security apparatus to intervene in capital market work?

April 22
PRC premier Li Qiang presided over the State Council’s seventh special study session on the theme of “further deepening capital market reform and promoting the stable and healthy development of the capital market.”

During the study session, Li emphasized the need to thoroughly study and implement the important instructions of General Secretary Xi Jinping regarding the development of the capital market. He urged accelerating the construction of a “safe, regulated, transparent, open, dynamic, and resilient capital market,” advancing the “building of a strong financial nation,” and serving the “overall goal of China’s modernization.”

Mainland media reported that vice premiers Ding Xuexiang and Liu Guozhong, as well as State Councilor and public security minister Wang Xiaohong, made verbal remarks during the study session, while vice premier He Lifeng submitted a written statement.

Chinese commentators believe that Wang Xiaohong’s presence and participation at the study session meant that the CCP authorities were preparing to mobilize the public security apparatus to participate in capital market regulation through arrests and intimidation tactics.

  Fitch lowers ratings on Chinese banks and SOEs

April 16
Fitch Ratings revised its outlook on six Chinese state banks from “stable” to “negative.” Fitch said that the revision follows its revision of the outlook on China’s “A+” sovereign rating to “negative” from “stable” on April 9, 2024, which “reflects increasing risks to China’s public finance outlook as the country contends with more uncertain economic prospects amid a transition away from property-reliant growth to what the government views as a more sustainable growth model.”

The six banks are:

• Industrial and Commercial Bank of China Limited
• China Construction Bank Corporation
• Bank of China Limited
• Agricultural Bank of China Limited
• Bank of Communications Co., Ltd.
• Postal Savings Bank of China Co., Ltd.

April 21
Fitch Ratings revised its outlooks on the Long-Term Issuer Default Ratings of 21 Chinese public finance state-owned enterprises from “stable” to “negative.” Fitch said that the revision follows its revision of the outlook on China’s “A+” sovereign rating to “negative” from “stable” on April 9, 2024.

The 21 companies are:

• China Jianyin Investment Limited
• State Development & Investment Corp., Ltd.
• Beijing Infrastructure Investment Co., Ltd.
• Beijing Public Housing Center
• Beijing State-owned Capital Operation and Management Company Limited
• Guangdong Hengjian Investment Holding Co., Ltd.
• Guangdong Provincial Communications Group Co., Ltd.
• Guangzhou City Construction Investment Group Co., Ltd.
• Guangzhou Finance Holdings Group Company Limited
• Guangzhou Industrial Investment Fund Management Co., Ltd.
• Guangzhou Metro Group Co., Ltd.
• Hualu Holdings Co., Ltd.
• Shandong Finance Investment Group Co., Ltd.
• Shandong Hi-Speed Group Co., Ltd.
• Shandong Land Development Group Co., Ltd.
• Shanghai Lingang Economic Development (Group) Co., Ltd
• Shenzhen Investment Holdings Co., Ltd.
• Zhejiang Communications Investment Group Company Limited
• Zhongguancun Development Group
• China Chengtong Hong Kong Company Limited
• Shandong Hi-Speed Holdings Group Limited

  PBoC signals increase in gov’t bond trading

April 23
1. The PRC Ministry of Finance’s theoretical study center Party group published an article in the People’s Daily regarding how deepening structural reforms on the supply side of finance requires strengthening coordination between fiscal and financial policies.

The article said that it supported the gradual increase of government bond trading in the central bank’s open market operations to enhance the monetary policy toolkit. The article also called for exploring the potential to broaden the range and scale of government bond offerings through counter sales.

2. The People’s Bank of China’s internal publication “Financial Times” published a piece on an interview conducted with an official in charge of a relevant department regarding issues such as the continuous decline in long-term government bond yields, including the 30-year government bond yield falling below 2.5 percent in recent times.

The official in charge said that long-term government bond yield primarily reflects expectations of long-term economic growth and inflation, but it can also be affected by other factors such as supply and demand dynamics. Also, China’s actual economic growth rate is expected to remain at a reasonable level for an extended period, and long-term government bond yields are expected to increase as inflation levels rise.

The “Financial Times” report said some market participants believe that the market’s lack of “safe assets” is one reason for the continued decline in long-term government bond yields. With the government bond supply having decreased significantly this year, leading institutional investors are concentrating on buying long-duration assets, contributing to the downward pressure on long-term bond yields.

The official in charge also mentioned that the central bank’s trading of government bonds in the secondary market can serve as a method of liquidity management and a reserve monetary policy tool. The official in charge noted that the Central Financial Work Conference had called for “enriching the monetary policy toolkit and gradually increasing government bond trading in the central bank’s open market operations,” which provides the possibility for the central bank to conduct trading operations of government bonds in the secondary market.

The “Financial Times” report further noted that many experts believe China is adhering to a normal monetary policy and the PBoC’s government bond trading operations are fundamentally different from the quantitative easing operations conducted by central banks in some developed economies.

***
Data from Huaxi Securities Research Institute shows that the PBoC held about 1.52 trillion yuan in government bonds as of February 2024. Of the total, 1.35 trillion yuan were special government bonds issued in 2007 to purchase foreign exchange and inject capital into China Investment Corporation. If these special government bonds are excluded, the central bank holds just 174.9 billion yuan worth of government bonds.

Huaxi Securities data also shows that the government bonds held by the PBoC (including special government bonds) accounts for just 5.1 percent of the 30.2 trillion yuan in total outstanding government debt.

  Washington weighing sanctioning Chinese banks over Russia

April 20
The U.S. State Department announced that Secretary of State Antony Blinken would travel to China from April 24 to April 26 and meet with senior PRC officials in Shanghai and Beijing.

April 23
1. The Wall Street Journal reported that the U.S. is preparing sanctions that threaten to cut some Chinese banks, who have served as key intermediaries for commercial exports to Russia, handling payments, and providing client companies credit for trade transactions, off from the global financial system.

U.S. officials say that hitting Chinese banks with sanctions is an escalatory option in case diplomatic means do not persuade Beijing to curb its commercial support of Russia’s military production.

2. Reuters cited a U.S. official as saying that while the U.S. has preliminarily discussed sanctions on some Chinese banks, it does not have a plan to implement such measures in the near term.

  Our take

1. The various developments above are signs that China’s economic outlook is worsening and financial risks are growing, and the CCP authorities are preparing tough measures to curb risks.

i) Fitch Ratings revising its outlook on six Chinese state banks and 21 public finance SOEs indicates that observers are wary that the collapsing Chinese real estate bubble is greatly increasing the likelihood of state-owned financial institutions defaulting on their debt. Fitch and other international ratings agencies could continue cutting their China ratings outlook in view of growth risks.

ii) The April 18 inter-ministerial joint meeting on dealing with illegal fundraising’s observation that the current situation of illegal fundraising risks remains “severe and complex,” with significant pressure from major and important cases especially as existing risks continue to be revealed, implies that the CCP authorities are concerned that PRC financial institutions could face a worst-case scenario of concentrated defaults later this year. The recent closure of financial asset exchanges in several parts of China and default of trust products involving real estate and local government financing vehicle bonds by state-owned companies are early and very worrisome signs.

Meanwhile, the central inspection team’s recent inspection of agencies in the financial system foreshadows the holding to account of some officials over the financial risks produced by the default of SOE trust products.

iii) Public security minister Wang Xiaohong’s participation in the State Council’s special study session on “further deepening capital market reform and promoting the stable and healthy development of the capital market” indicates that the CCP authorities are turning to the public security apparatus for “stability maintenance” as it embarks on capital market work.

Wang’s remarks at the special study session are invariably linked to his job scope and will unlikely be solely about economic matters. The public security apparatus’ involvement in capital market work echoes previous statements from the Ministry of State Security indicating the possible intervention of the national security apparatus in matters concerning the PRC’s financial security.

The growing involvement of public security and national security elements in economic and financial work suggests that China’s financial and economic situation is quite dire, and is likely to deepen the chilling effect that businesses and investors both inside and outside the country are experiencing with the Xi leadership’s prioritization of regime security.

iv) The recent signals from the CCP authorities about the decline in long-term government bond yields and the central bank looking to gradually increase government bond trading in open market operations imply that the PBoC could provide deficit financing to local governments in the future. For example, the central bank could offer favorable loans to commercial banks to purchase government bonds, which would then be sold in the secondary market. Concurrently, the PBoC would utilize buying and selling operations in the secondary market to implement a loose monetary policy.

Meanwhile, the article from the finance ministry and speeches by officials from the PBoC suggest that the CCP authorities could adopt relatively unconventional monetary easing policies and increase fiscal spending in response to financial risks and local government debt crises in the future. We do not rule out the possibility that the central bank’s current gradual increase in government bond trading is preparation for indirect “debt monetization” should extreme circumstances arise down the road.

v) The PRC’s economic and financial risks will likely be further exacerbated should the U.S. press ahead with the threat of imposing financial sanctions on Chinese banks and other financial institutions over the Russia issue.

Washington’s threat of financial sanctions could be a bargaining chip to secure a favorable diplomatic outcome when Secretary Blinken travels to China and meets with senior PRC officials. Depending on their scale and severity, financial sanctions on China would be double-edged and could severely impact trade between the U.S. and China, as well as China and Europe.

We believe that Washington’s threat of sanctions is unlikely to sway Beijing from backing Moscow. Imposing sanctions would also likely serve to strengthen PRC-Russia ties and embolden Beijing to more openly support Moscow’s war effort.

Unless the fragile PRC-U.S. détente is irrevocably shattered, the CCP authorities are likely to outwardly put on a show of compromising with Washington as they seek to “delay and wait for change” (i.e. political change in the U.S. and Europe, the U.S. and Europe running into economic and financial trouble, etc.). Concurrently, Beijing will strengthen its rectification of the financial system and enhance Party Central’s leadership in preparation for worst-case scenarios.

2. The recent wave of propaganda in support of Xi Jinping’s financial work political theory marks a new round of internal political mobilization within the CCP. This political mobilization is akin to campaigns like “self-revolution,” “Two Establishes,” and “zero-COVID,” which aim to establish Xi’s “quan wei,” as well as provide theoretical basis and legitimacy for Xi’s authoritarian consolidation and tough disciplinary actions.

The promotion of Xi’s political theory on financial work is likely also meant to encourage Party members, cadres, and the general public to endure the turbulence and losses that will come with so-called “financial reform” and continue to support the Xi leadership’s effort to bring a “better future” for the CCP regime.