PBoC’s moves to boost the economy appear to have limited impact; is Beijing really cracking down on a popular card game?

  1   PBoC’s moves to boost the economy appear to have limited impact

  PBoC passively shrinks balance sheet

Aug. 7
The People’s Bank of China said in a statement that it would not inject any short-term cash into the financial market because the current liquidity level in the banking system was “reasonably ample.”

The central bank also said that the amount of repurchase operations was zero that day. Since 251.67 billion yuan of PBoC reverse repos matured on Aug. 7, a net 251.67 billion yuan was returned to the system.

Data from Wind showed that the scale of central bank reverse repo operations has been small and gradually decreasing since August 2024. On Aug. 1, Aug. 2, Aug. 5, and Aug. 6, the PBoC conducted reverse repo operations of 10.37 billion yuan, 1.17 billion yuan, 670 million yuan, and 620 million yuan respectively, resulting in 235.1 billion yuan, 358.05 billion yuan, 301.57 billion yuan, and 216.27 billion yuan being returned to the system on those days. Including the 251.67 billion yuan that matured on Aug. 7, the PBoC had returned a cumulative 1.35 trillion yuan over the first five trading days of August.

Mainland media reported that the 7-day central bank reverse repo rate was at 1.7 percent on Aug. 7 while the 7-day bond repo rate for deposit-taking institutions in the interbank market was at 1.69 percent. This means that it is more cost-effective for financial institutions to raise funds directly from the market than from the central bank and there is sufficient market liquidity.

Mainland media also reported that the fixed income team at Cinda Securities expects the PBoC to conduct net returns of approximately 360 billion yuan through reverse repos in the open market in August. The Cinda team also expects to see a slight continued reduction in the central bank’s medium-term lending facility (MLF) operations and continued net returns of loans through the pledged supplementary lending (PSL) facility.

  Nearly half of the funds raised from new gov’t bonds go towards debt repayment

Aug. 5
Mainland media reported that local governments raised 4.2 trillion yuan through bond sales in the first seven months of 2024. Of the total, about 2 trillion yuan of the funds raised went towards refinancing outstanding debt while about 2.2 trillion yuan of the funds were available for new projects.

Data from the Qiyeyujingtong showed that funds from newly issued special bonds for local governments primarily (about 34 percent) went towards financing municipal and industrial park infrastructure. The second-largest portion of funds (about 20 percent) was allocated to transportation infrastructure such as railways, government toll roads, and rail transit. Some of the remainder of the funds raised from the sale of local government special bonds went towards shantytown redevelopment (about 9 percent), healthcare (about 7.5 percent), and agriculture, forestry, and water conservancy (5.4 percent).

Mainland media also reported China Minsheng Bank chief economist Wen Bin as saying that the funds raised from the sale of local government special bonds are going mainly towards infrastructure. Of the local government special bonds issued from January to July 2024 to fund project construction, 68.2 percent was allocated towards infrastructure. Wen noted that while the funds allocated to infrastructure from January to July were slightly lower than in January to June (down 0.2 percent), the January-July figure was 5.1 percent higher than the previous year and indicated a continued high level of investment in infrastructure.

  Big picture

1. The PBoC cut several key rates between mid to late July 2024.

2. On Aug. 9, the National Bureau of Statistics released China’s consumer price index and producer price index data for July 2024 and the January-July 2024 period:

• The CPI increased by 0.5 percent year-on-year in July.
• The CPI rose by 0.2 percent on average year-on-year during the January-July period.
• The PPI decreased by 0.8 percent year-on-year in July and 0.2 percent month-on-month, with the rate of decline remaining the same from June. The purchasing prices for industrial producers decreased by 0.1 percent both year-on-year and month-on-month.
• The PPI decreased by 2.0 percent on average year-on-year during the January-July period, while the purchasing prices for industrial producers decreased by 2.2 percent.

  Our take

1. The PBoC’s net return of over 1.3 trillion yuan to the system is a passive reduction of its balance sheet. This development appears to have been brought about by the “asset famine” in China amid poor economic conditions, and has resulted in “reasonably ample” liquidity in the banking system and sluggish credit demand. Further, the central bank’s July key rate cuts, which were aimed at stimulating the economy, are likely to have limited effectiveness.

The PBoC’s passive balance sheet reduction reflects China’s ongoing economic deterioration. The low CPI in July and the first seven months of the year, along with continued contraction in the PPI and purchasing prices for industrial producers, are signs of weak consumer demand and a reluctance of businesses to invest in expanding production. The CPI and PPI trends partly affirm our earlier analysis that the central bank’s rate cuts and lowering of the collateral requirement for medium-term loans after the Third Plenum of the 20th Central Committee appear to be a response to the market’s disappointment in the policies that emerged from the important political meeting. The tough challenges in China’s financial and real estate sectors likely led the PBoC to cut rates before the U.S. Federal Reserve in hopes of countering negative market sentiment post-Third Plenum and stimulating the economy.

The PBoC’s passive balance sheet reduction further indicates that financial institutions have not received a significant boost in credit despite the reduction in financing costs and increased liquidity brought about by the rate cuts. Also, consumer and business demand for consumption and investment remains low.

2. China’s growth in credit and financing is largely dependent on government investment. The current government-driven economic stimulus, however, appears to be showing limited effectiveness due to the slow pace of local government bond issuance and the fact that nearly half of the funding raised from bond sales is being used to make debt repayments instead of driving investment.

According to mainland media, the issuance of new local government special bonds by the end of July 2024 was 46 percent of the annual issuance quota, or below the average level of the past five years. Moreover, 48 percent of the funds raised by the bond issuance in the first seven months of the year were used to pay off debts. Meanwhile, 75.9 percent of the remaining funds (2.2 trillion yuan) went towards infrastructure projects, many of which have low returns on investment.

The CCP’s effort to drive growth through investment is becoming increasingly ineffective. In a previous newsletter, we spotlighted an opinion piece from January 2022 by the prominent Chinese economist Teng Tai where he argued that China’s economy is no longer being driven by investment and will not continue to be in the future. Teng wrote that China is already in a “post-infrastructure era” given that various constructions, airports, roads, and railways have been built to a relatively complete level. He added that the artificial expansion of investment in infrastructure would run against the law of economic development, resulting in a huge waste of human, material, and financial resources without increasing production capacity or real public service capacity.

Infrastructure investment also presents a strain on local finances as China transitions from a period of large-scale infrastructure development to one of extensive maintenance. Worse, local governments appear to be unable to afford the costs of maintenance. Inadequate road maintenance recently led to several major accidents in China. In May 2024, a landslide that hit the Meilong Expressway in Guangdong Province saw 48 deaths, 30 injuries, and three missing persons. In July, the partial collapse of a bridge on Daning Expressway in Zhashui County in Shaanxi Province led to 25 vehicles plunging into a river and saw 38 confirmed deaths and 24 missing persons. In August, a sudden mudslide on the Yakang Expressway in Sichuan Province caused a bridge to collapse, resulting in three vehicles falling off the bridge and six persons affected (one rescued, five missing).

Even if infrastructure investment is the best among many worse options for stimulating the economy, local governments have limited capacity to make such investments given their huge debt burden. As recently reported by mainland media, nearly half of the funds that local governments raised through bond sales went towards refinancing outstanding debt. Bloomberg News also reported that banks and provincial governments were given a new directive to help local government financing vehicles to repay their debt maturing no later than June 30, 2027, but LGFVs will be restricted from selling dollar bonds with a tenor of 364 days or less unless the proceeds are used to refinance outstanding debt.

Local governments would not be able to stimulate the economy much even if they were to accelerate bond issuance in the coming months to raise funds for infrastructure investment. The localities need time to allocate the funds towards actual investments, and with winter approaching in a few months, infrastructure projects in the northern regions will be halted on account of unfavorable weather. This means that the effects of local government bond issuance on China’s economic growth this year are likely to be limited.

  2   Is Beijing really cracking down on a popular card game?

  Beijing municipal media warns against ‘guandan’ and faces rebuttals

Aug. 5 to Aug. 7
Beijing Youth Daily, a mainland media that is part of the Beijing Daily Newspaper Group under the Beijing Municipal Party Committee, published three consecutive commentaries criticizing the popular Chinese poker-like card game “guandan” (摜蛋, or “throwing eggs”).

The titles of the three commentaries are:

• “Beware of the Demoralizing Effects of Guandan Addiction” (警惕摜蛋沉迷助長消頹之氣)
• “The Trend of ‘Lying Flat’ Associated with the ‘National Guandan Craze’ Must be Addressed” (「全民摜蛋」的躺平之風該管管了)
• “There is an Urgent Need to Break Up the ‘Circle Culture’ Woven by Guandan” (亟須破除摜蛋編結的「圈子文化」)

Noteworthy points in the commentaries include:

• Guandan addiction has become a new variant of “lying flat culture” if indulging in drinking sessions and playing guandan becomes a daily hobby for some leading cadres, if guandan becomes a “trump card” for certain business operators to expand their markets, or if guandan becomes a “safe haven” for many young people to escape their lethargy.
• In some places, guandan addiction has become a “poisonous bomb,” eroding the work ethic of cadres and with some Party members and officials deeply engrossed with it.
• There are new manifestations of “lying flat culture” among certain public officials.
• For the broader youth population, guandan is becoming a new vessel for “Buddhist” attitudes (i.e. lack of ambition) and a synonym for “lying flat.” Their passion for striving withers in the game and the drive to succeed is lost in entertainment.
• Some officials are keen on “lying flat” in the comfort zone of guandan, consciously or unconsciously eroding the positive social atmosphere. This is extremely harmful and must be firmly opposed.
• The “circle culture” of forming cliques and factions is spreading with the guandan craze in the country, and many guandan sessions have degenerated into “guandan circles.”
• The various large and small circles that have formed around guandan urgently require enough vigilance.

Aug. 8
1. RedNet, a news website run by the Hunan provincial government, published an article titled, “Oppose Guandan? Enough of this Nonsense!” (“反對漚蛋”？別扯蛋了！) in a rebuttal to Beijing Youth Daily’s commentaries on guandan.

The RedNet article argued:

• Guandan is simply a new variation of poker and is a regular recreational activity. What reason does the media have to criticize guandan harshly and make all sorts of accusations about the game If someone has ill intentions, any form of entertainment, be it poker, mahjong, rock-paper-scissors, or arm wrestling, could be used for gambling or corruption. Should all recreational activities therefore be banned?
• The (Beijing Youth Daily’s) overblown criticism (of guandan) is baseless, illogical, unreasonable, and merely criticism for criticism’s sake. Is this not a form of “anti-intellectualism” and “absurdity”?

2. New Yellow River, an official media outlet in Shandong’s Jinan City, published a commentary refuting the Beijing Youth Daily’s commentaries titled, “Criticism of Guandan Should Not Become a ‘Moral Carnival’ That is Detached From Reality” (批評漚蛋不能成為脫離實際的“道德狂歡”).

The commentary argued:

• Any addictive popular phenomenon thrives in a certain social environment.
• If the macro causes are separated from the individual and moral criticism is directed solely at individuals, then such criticism lacks empathy.
• Ignoring the root causes of the problem and turning a blind eye to some actual reasons while wasting time on superficial cause-and-effect relationships will make the effort to correct the trend nothing more than empty rhetoric.

3. The theoretical commentary section of the local Xinhua in Jiangsu Province published a commentary (“Guandan’s ‘Attack’ and Being ‘Attacked’; 漚蛋的“打”與“被打”) on its official WeChat account (Jiangdong Guanchao) that summarized the key points in the Beijing Youth Daily guandan commentaries without explicitly naming them while recounting the rebuttals from RedNet and New Yellow River.

The commentary noted:

• With popularity comes controversy, and guandan is no exception. Guandan is being “attacked” because it is growing more popular.
• The effort to criticize guandan to the extent of elevating it to issues like “loss of entrepreneurial spirit,” “escapism,” and “decadence” has startled many guandan enthusiasts. But is guandan really that “guilty” (of the aforementioned accusations)?
• Guandan, the recently growing popularity of sunbathing (to treat illnesses), or any other activities are merely different leisure choices made by different people. As long as these activities do not infringe on principles or cross any fundamental lines, there is no need for anyone to judge what is right or wrong. Clearly, the habitual mindset and writing style of resorting to harsh criticism and exaggeration are no longer compatible with today’s developmental environment and societal mindset.

***
Many mainland media outlets republished Beijing Youth Daily’s guandan commentaries, as well as the rebuttals from other media.

  More on guandan

1. Guandan is played using two decks of cards and among four players paired in teams. To win, players must throw down poker and other special card combinations to clear their hands before their opponents.

The card game first gained popularity in Jiangsu Province and its surrounding areas before spreading nationwide. Mainland media reports from earlier this year estimated that over 20 million people regularly participate in various guandan activities in the provinces of Jiangsu and Anhui alone, and there are about 140 million guandan enthusiasts in the country. Some local television stations have carried guandan programs.

2. A Reuters report from August 2023 noted that guandan’s popularity was partly fueled by worsening investment prospects as Sino-U.S. tensions worsened and the Xi leadership signaled its preference for a greater state presence in the economy.

Reuters said that financiers “increasingly view the game as a way to build ‘guanxi’ or connections with officials who hold the purse strings on local projects.” Yang Yiming, an investment banker whose job involves canvassing government funding for semiconductors and defense-linked projects, told Reuters, “In finance, information is currency. During a game which can stretch for hours, we are bound to chit-chat, and sometimes useful information gets passed around after people feel comfortable and trust you.” For Yang, guandan has become a “standard gambit before wining and dining local officials.”

3. Lu Xiongwen, the dean of the Fudan University’s School of Management, commented on the “guandan craze” in a commencement speech (“The Power of Faith Will Eventually Bear Fruit”) in June 2024.

Lu said, “The guandan craze is prevalent at present. For ordinary people, playing guandan is a form of leisure and entertainment. For officials, entrepreneurs, and professional managers who bear missions and responsibilities, occasionally playing guandan can be a way to relax and unwind.”

Lu continued, “However, when the guandan craze sweeps across the country and permeates all levels and corners of society, it reflects society’s loss of drive and entrepreneurial spirit, and is a manifestation of escapism and decadence.”

  Our take

1. Some Chinese observers believe that Beijing Youth Daily’s series of commentaries criticizing guandan is linked to factional struggle in the Xi Jinping camp. They describe it as “Hui Rui Dismissed from Office 2.0,” alluding to Mao Zedong’s use of the “Hai Rui Dismissed from Office” play by the Beijing Opera to criticize the Liu Shaoqi faction and conduction political mobilization just before the Cultural Revolution.

Those observers argue that the Beijing Youth Daily commentaries are a sign of infighting between CCP General Office director Cai Qi and PRC premier Li Qiang. They say that guandan is popular in the wealthy eastern provinces and claim that Li represents the interests of the Jiangsu-Zhejiang region. They also suggest that Cai’s hand is behind the Beijing Youth Daily commentaries because he was previously the Beijing municipal Party secretary and Beijing Youth Daily falls under the control of the Beijing Municipal Party Committee. Some observers infer that because Cai is a close confidant of Xi Jinping, he may have “understood” Xi’s intentions to target Li Qiang via criticizing guandan and instructed Beijing Youth Daily to launch a political mobilization campaign.

We believe that the argument that the Beijing Youth Daily guandan commentaries are “Hui Rui Dismissed from Office 2.0” cannot be completely ruled out, but is tenuous at best.

For one, Xi Jinping’s political situation is not analogous to that of Mao Zedong before the Cultural Revolution. Then, Mao was a marginalized figure looking to take indirect action against factional foes to force his way back to prominence. Xi, however, has already consolidated power to a very high degree and does not need roundabout means to deal with potentially wayward political allies in his camp.

If Xi really wanted an effective political mobilization campaign against guandan, be it to target the card game’s negative influence on the regime or to criticize the factional forces using the game to engage in “circle culture,” he would be better served having the commentaries published in Xinhua or People’s Daily. There is simply no reason for Xi to have Cai Qi use his influence over the Beijing Municipal Party Committee and Beijing Youth Daily, which lacks “quan wei” (authority and prestige) compared to the national-level propaganda outlets and faces pushback from other regional official publications, to carry out political mobilization.

In making the case for “Hui Rui Dismissed from Office 2.0,” some Chinese observers have argued that Cai Qi allegedly having Beijing Youth Daily publish commentaries critical of guandan is similar to Mao Zedong’s wife Jiang Qing instructing the Shanghai Municipal Party Committee to publish articles in Wenhui Daily criticizing the Beijing Opera play “Hui Rui Dismissed from Office.” This comparison, however, falls flat because Jiang could only have critical articles published in Shanghai where she had influence because she was at odds with then-vice premier Tao Zhu (who was in charge of propaganda), but Cai Qi is the Politburo Standing Committee member in charge of propaganda and does not need to go to an official municipal newspaper to get criticism published when he can directly mobilize national-level state media for the task.

2. We believe that it is more likely that the Beijing Youth Daily’s commentaries targeting guandan is an effort by local officials to win political capital with the Xi leadership by advancing an agenda that appears to be consistent with what Beijing has done and is doing. For instance:

• Xi Jinping has expressed strong disdain for factionalism in the regime and has repeatedly warned officials against “circle culture” (“absolutely no small cliques, small circles, or small factions”) and the formation of “cliques and factions.”
• The Xi leadership had previously targeted Ant Group (based in the wealthy eastern city of Hangzhou) and implicated the company in the corruption case involving former Hangzhou Party secretary Zhou Jiangyong.
• In April 2020, the Central Commission for Discipline Inspection published an investigation into 17 people from the political and legal affairs apparatus in Jiangsu’s Xiangshui County that specifically mentioned that they were playing guandan while drinking alcohol (in violation of a pandemic period alcohol prohibition) while waiting for food to be delivered to a private room at their workplace canteen.
• On Aug. 2, 2024, the CCDI announced an investigation into Chen Xiaopeng, the former Party secretary and director of the Shenzhen Supervisory Bureau of the China Securities Regulatory Commission. Mainland media Caixin reported that Chen was known to be a guandan enthusiast.
• A personal self-inspection report form for Party leading cadres that was being circulated online showed that some local authorities are requiring officials to self-report their involvement in forming factions, creating “small circles,” or transferring benefits through playing guandan. Observers believe that the form is evidence that the CCP is conducting a thorough investigation into “guandan circles” within the officialdom. Meanwhile, other information circulating online claim that some Party and state agencies have issued internal orders prohibiting the playing of guandan.
• In an Aug. 7 report, Hong Kong media Sing Tao Daily cited sources from state-owned enterprises saying that many SOEs have recently banned playing guandan in office areas. Also, leading cadres are specifically prohibited from leading or organizing guandan-related activities to “curb the guandan trend.”

Local officials could easily have interpreted the developments above as a sign that playing guandan is becoming “politically incorrect” and one way to win favor with the Xi leadership is to speak up against guandan and “circle culture.” Notably, the Beijing Youth Daily commentaries were published shortly after the appointment of a new editor-in-chief in July. The new editor-in-chief, Mao Xiaogang, previously served as deputy editor-in-chief of Beijing Daily and also held the positions of deputy director and director of the commentary department at Beijing Daily. It is possible that Mao, eager to make a name for himself and advance his self-interests, was behind Beijing Youth Daily’s decision to publish the commentaries critical of guandan.

If Mao Xiaogang was indeed involved in the guandan commentaries, he would have weighed that it was less risky for Beijing Youth Daily to condemn what is perceived as a wealthy eastern region problem than spotlight a truly local issue and risk facing blowback. Guandan’s growing popularity nationwide, however, likely led other local newspapers to publish rebuttals that appeared to be aimed at protecting the interests of local officials and avoiding the tacit acceptance of Beijing Youth Daily’s criticism.

3. Beijing Youth Daily’s guandan commentaries are likely to lose momentum and fizzle out instead of leading to a broader campaign to stamp out the card game if they were just the work of local officials looking for opportunities to build political capital. However, the Xi leadership will likely still target guandan passively in curbing “circle culture” and “lying flat culture.”

In the unlikely event that Beijing Youth Daily’s commentaries were driven by forces high up in the Xi leadership, then political mobilization against guandan and other negative influences associated with the card game can be expected to escalate and intensify.