1 More signs indicate worsening of local gov’t debt crisis and fiscal shortages
More cities do away with their ‘chengguan’
July 5
Mainland media reported that multiple cities recently abolished their comprehensive administrative enforcement bureau (also known as “urban management department,” or “chengguan” [城管]):
- June 25: Zhangye City in Gansu Province scrapped its comprehensive administrative enforcement bureau and transferred the bureau’s administrative enforcement functions to the Ganzhou District urban management bureau.
- July 3: Chifeng City in Inner Mongolia abolished its comprehensive administrative enforcement bureau and transferred the bureau’s administrative enforcement functions to relevant supervisory departments.
Previously, Beihai City in Guangxi Province did away with its comprehensive administrative enforcement bureau on June 10 and transferred its functions to other relevant departments.
LGFVs dabble in ‘gray’ financial products
July 6
Mainland media China Business News reported that some local government financing vehicles and state-owned enterprises are raising funds in the third-party wealth management market through financial products called “property rights trust” (財產權信託) and “trust asset income rights” (信託資產收益權). These products have a minimum investment threshold as low as 300,000 yuan and investor funds are directly transferred to the financing company’s accounts, which would ordinarily classify them as a type of fixed-income product (定融產品). However, the filing documents issued for “property rights trust” and “trust asset income rights” are asset service trust documents pre-registered by the trust companies with China Trust Registration Co. Ltd.
Per PRC regulations, LGFVs are permitted to issue privately issued fixed income products through financial exchanges that have a minimum purchase amount in the hundreds of thousands of yuan and which funds are directly transferred to the LGFV’s accounts. The filing institutions for such products are financial exchanges or various “pseudo-financial exchanges.” Meanwhile, trust companies can issue non-standard government trust products (非標政信信託產品) with a minimum purchase amount of no less than 1 million and which funds are placed in a trust company-managed account after the products are registered with China Trust Registration. Given the regulations, it is unclear how the “property rights trust” and “trust asset income rights” should be categorized.
China Business News cited industry insiders as saying that trust companies only handle the registration and filing of related asset service trust projects and do not participate in the subsequent packaging and financing processes of the products. The insiders add that trust companies essentially only serve as a channel for the products and have a “return rate” (i.e. a service fee) of about 0.2 percent (of product sales). The insiders say that there are just a few trust companies handling asset service trust products and third-party wealth management companies are dealing with the actual operations.
China Business News reported analysts saying that the LGFVs are being forced to continually search for new financing channels due to the continuous tightening of non-standard financing channels for LGFVs.
China Business News further pointed out that trust companies selling non-standard financial products run the risk of being charged with violating laws and regulations, as well as disrupting the financial market order. China Business News added that the regulatory authorities, along with some trust companies, have previously warned about the risks associated with such business activities.
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Third-party wealth management refers to financial services provided by independent entities or individuals separate from banks, securities companies, and insurance companies. Unlike traditional financial institutions, third-party wealth management firms do not sell financial products directly, and instead offer financial advice or suitable financial products based on the client’s financial situation, investment goals, and risk tolerance.
Backdrop
Closure of local financial exchanges
Local governments in various places have been “rectifying” and closing local financial asset exchanges this year.
On June 21, financial management departments in Guangdong, Tianjin, Shanxi, Heilongjiang, Henan, Hainan, Xiamen, and Ningbo announced that financial asset exchanges within their respective jurisdictions had been “cleared.” This was the third batch of financial asset exchange closures since March 2024.
Local financial asset exchanges are the main trading venue for fixed-income products issued by LGFVs.
Central government tightens control over LGFVs issuing new debts
The CCP authorities have required local governments to resolve existing debt for 2023 and 2024 since the third quarter of 2023. The move is aimed at strictly controlling the increase in LGFV debts and ensuring that no repayment risks break out until at least 2025. Also, 3,899 LGFVs were restricted to issuing bonds to refinance existing debts.
Central and state-owned enterprises exit the financial sector
On June 3, the Party Committee of the State-owned Assets Supervision and Administration Commission held an expanded meeting. The meeting explicitly stated that central enterprises are forbidden from establishing, acquiring, or investing in all financial institutions “in principle.”
Our take
The various developments above indicate that local governments are experiencing severe fiscal shortfalls. The developments also represent local government “solutions” to generating or saving funds amid the central government’s efforts to “de-financialize” the Chinese economy and control the growth of new local debts.
1. The central government has been getting stricter on resolving the growth of local government debt since the third quarter of 2023 to keep the situation in check and prevent the triggering of risks. However, the “de-financialization” of local governments has also made it difficult for them to raise funds and meet their various needs.
Local governments are finding that the bulk of their funds are going towards debt repayment. For instance, 80 percent of new local government bonds issued between January and May 2024 were used to pay off old debts. Most of the funds raised from issuing new local government bonds in the first five months of the year were also used to repay debts, with less than two-fifths available for non-debt purposes. Further, more than half of the funds raised by local governments were invested in non-revenue or low-revenue projects.
The CCP authorities announced during this year’s Two Sessions that the target scale of local government special bonds issuance was 6 trillion yuan, or the same amount as in 2023. This means that the new issuance of government special bonds cannot cover the interest on old debts, and local governments facing declining tax revenues will be increasingly forced to find ways to raise funds to pay interest and finance other government spending.
2. The Xi leadership’s push for the “de-financialization” of the state sector could turn out to have a similar effect as the property sector’s “three red lines” policy and trigger even greater financial risks.
The State-owned Assets Supervision and Administration Commission’s call for central and state-owned enterprises to exit the financial sector will almost certainly exacerbate the financing difficulties of local governments. For one, the equity prices, capital chains, and operational stability of financial institutions that had COE or SOE investment would be affected by the withdrawal of those state entities because it is unclear whether there are sufficient other entities to take up those positions.
State entities exiting the financial sector will also impact the funding of small and medium-sized financial institutions, which were previously major channels for LGFVs to secure financing. Trouble at small and medium-sized financial institutions will increase the financing difficulties of LGFVs and their debt risks.
We believe that the Xi leadership’s attempts to mitigate financial risks are likely to exacerbate the local government debt crisis and may even create new financial risks.
3. LGFVs issuing potentially illegal trust products amid the strict regulatory environment reflects the desperation of local governments to raise funds. Local governments are also opting to prioritize securing their political and personal interests over regime stability by having LGFVs issue risky financial products.
4. The continued abolishing of comprehensive administrative enforcement bureaus reflects the growing financial strain on local governments and their attempt at cutting spending through streamlining local administration. The transferral of urban management responsibilities to other departments is likely to weaken local enforcement capabilities and impact the regime’s ability to “maintain stability.”
2 Xi promotes a general, lauds troops, and pushes political work ahead of Third Plenum
July 1
The CCP’s newly revised regulations on military auditing came into effect. The regulations require military auditing work to be based on the positioning of economic supervision, as well as enhance its political nature and political functions.
The audit covers the entire People’s Liberation Army, including “military funds, assets, and resources” to ensure that they are “authentic, legit, and efficient.”
July 9
1. Xi Jinping presented a certificate of order to promote He Hongjun, the executive deputy director of the Central Military Commission Political Work Department, to the rank of general.
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He Hongjun, 62, is a career political work officer. He was promoted to the rank of major general during Xi’s first term (July 2013) and was transferred to the CMC General Political Department (the predecessor of the CMC Political Work Department). In April 2019, He was appointed deputy director of the CMC Political Work Department and was promoted to lieutenant general in December of that year. In July 2024, He was appointed to his present position of executive deputy director at the Political Work Department (theater command level).
2. Xi signed an order to commend Unit 92950 of the PLA with a first-class merit citation and Liu Aijun of the Army Engineering University with a third-class merit citation in defense-related science and technology. According to publicly available information, Unit 92950 is a carrier-based aviation unit.
Xi also presented a flag of honor to a rocket artillery company of the PLA and awarded the company with the honorary title of “Model Rocket Artillery Company.”
July 10
The CMC issued a “Decision on thoroughly implementing the strategy of political military building in the new era and deepening political training in the military” (關於全面貫徹新時代政治建軍方略深入推進軍隊政治整訓的決定), according to state mouthpiece Xinhua.
The Decision requires the PLA to adhere to the “CMC chairman responsibility system,” as well as continuously and deeply rectify ideology, personnel, organization, work style, and discipline, with a focus on high-level Party Committees and senior cadres. The military must “always dare to fight and be sure to win” (始終敢打必勝), be always disciplined (始終法紀嚴明), and provide strong political guarantees for “strong military work” (強軍事業).
The Decision also emphasized that deepening political training in the military is of great significance for promoting substantial and practical political military building. Political training must be treated as a “serious and major political task,” and must be pursued to the end with “firm determination and a pragmatic style.”
Backdrop
PLA purges
To date, five PLA generals have been investigated since the Xi leadership launched a major purge of the military in the second half of 2023. These include the two former defense ministers Wei Fenghe and Li Shangfu (both were subsequently stripped of their rank), former PLA Air Force commander Ding Laihang, and former PLA Rocket Force commanders Li Yuchao and Zhou Yaning.
The purge of the PLARF, equipment department, and defense industry has also led to the downfall of at least dozens of lieutenant generals, major generals, and defense industry executives.
Propaganda
Ahead of the Third Plenum of the 20th Central Committee, the CCP propaganda apparatus has been intensively publishing commentary and articles lauding Xi Jinping’s achievements since he took office.
Our take
1. Xi Jinping’s promotion of generals, lauding of troops, implementation of military audits, focus on political work in the military, and the CMC political work conference in Yan’an held in mid-June appear to be intended to strengthen his control over the PLA.
Several factors are driving Xi to enhance his control over the military at this time:
i) The Xi leadership needs to be firmly in command of the military ahead of the Third Plenum in mid-July in case PLA elements have to be mobilized for “stability maintenance” purposes.
Public discontent is on the rise in China over the rapidly worsening economy and its impact on the Chinese people, various failures of governance, the recent onset of natural disasters such as severe droughts in the north and floods in the south, and other issues.
ii) The Xi leadership wants to ensure the military’s loyalty and obedience in case the Party’s “gun” has to be used to deal with situations that could arise based on what is announced at the Third Plenum and the potential fallout resulting from those announcements. We explored various scenarios in an earlier edition of this newsletter.
iii) The Xi leadership is promoting senior officers and commending individuals and units in the rank-and-file to instill confidence in the troops, keep morale up, and stabilize sentiments in the wake of the ongoing rectification of the PLA.
Xi Jinping likely wants to show the military that he is not paranoid like Mao Zedong or Stalin, and is not undertaking an indiscriminate purge with the anti-corruption probe that officially started in the second half of 2023. Xi is also likely signaling that he will reward loyalty and good work in the PLA even as he goes after those who have caused “significant damage to the Party’s cause, national defense, and military construction, as well as to the image of the senior leadership” with offenses that were “extremely serious, the impact was extremely egregious, and the damage was particularly immense.”
Xi’s spotlighting of “good work” in the military (promotions, various commendations, etc.) further helps him take away some of the attention to himself over the purges and anti-corruption investigations. Particularly, Xi bears some responsibility for corruption in the PLA because he signed off on key personnel appointments.
iv) The military audits will likely serve to keep active and retired military leaders in line during a crucial period for Xi and the CCP. Military leaders will think twice about crossing the Xi leadership lest they too be found guilty of corruption through the audits.
v) Xi Jinping needs the military to obey his orders and be especially disciplined during a period of rising geopolitical tensions. To achieve this, the Xi leadership is strengthening political work and training, as well as anti-corruption efforts in the military.
2. The promotion of He Hongjun to the general rank suggests that he is being positioned to succeed Miao Hua as director of the CMC Political Work Department. Miao is already 68 this year and according to the typical norm will not serve beyond 70 (i.e. until November 2025).
He Hongjun was steadily promoted during Xi Jinping’s tenure, but he did not enjoy an exceptionally rapid ascent. He’s career trajectory partially affirms our previous observation that Xi does not trust senior officers who rose up the ranks during the Jiang Zemin faction’s era of dominance and prefers to take his time to foster senior officers who are more inclined to be loyal to him. The recent PLA purges, however, suggest that loyal officials are not necessarily clean and Xi’s more than a decade-long anti-corruption campaign has not been successful in eradicating the corruption left over from the Jiang-Hu era (corruption in the PLA could even have worsened).
