1 Beijing makes more gestures in support of the economy
Beijing issues measures to grow employment
Sept. 25
The CCP Central Committee and the PRC State Council issued an opinion on “implementing an employment-first strategy to promote high-quality and adequate employment” (關於實施就業優先策略促進高品質充分就業的意見). The opinion includes 24 specific recommendations on boosting employment.
The opinion states in its general requirements that the employment-first strategy would serve as the guiding principle, employment-first policies would be strengthened, addressing structural employment imbalances would be a focus, reforms in the employment system and mechanisms would be advanced, and the baseline of preventing large-scale unemployment risks would be maintained.
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Data released by the National Bureau of Statistics on Sept. 20 showed that the youth (ages 16 to 24, excluding students) unemployment rate in China reached 18.8 percent in August 2024. This was an increase of 1.7 percent from July, the second straight month of rising unemployment and the highest rate so far in the year.
The official youth unemployment rate reached a high of 21.3 percent in June 2023. Afterward, the CCP authorities suspended the release of the data and changed its statistical method to exclude students from the calculation.
Politburo holds meeting on the economy
Sept. 26
The CCP Politburo convened a meeting to study and assess the current economic situation and deploy the next phase of economic work.
Key points from the meeting from state media reporting include:
- The meeting said that China’s economy is “generally stable and making progress” and the “overall social situation remains stable.” Also, the fundamentals of the Chinese economy, such as its vast market, strong economic resilience, and great potential, “have not changed.” Concurrently, “some new situations and problems have emerged in the current economic operation” that calls for looking at the current economic situation “comprehensively, objectively, and calmly,” “strengthen confidence,” and “face up to difficulties” to “do a good job in economic work.” The meeting also urged officials to “strive to complete the annual economic and social development goals and tasks.”
- The meeting emphasized the need to strengthen countercyclical adjustments of fiscal and monetary policies, ensure necessary fiscal expenditures, and effectively carry out “three guarantees” (wages, operations, and basic services) work at the grassroots level.
- The meeting said the reserve requirement ratio should be lowered and substantial interest rate cuts should be implemented.
- The meeting said efforts should be made to stabilize the real estate market and stop the decline. Strict control over new housing construction should be enforced, housing purchase restrictions should be adjusted, and interest rates on existing home loans should be reduced.
- The meeting said the capital market needs to be boosted, with an emphasis on guiding medium- and long-term funds to enter the market.
- The meeting said support should be given to the merger and acquisition of listed companies, public fund reforms should be steadily advanced, and policies to protect small and medium-sized investors should be studied and introduced.
- The meeting said a law to promote the private economy should be enacted to create a favorable environment for the development of non-public ownership economies.
- The meeting said efforts should be made to increase the income of middle- and low-income groups.
- The meeting said efforts to attract and stabilize foreign investment should be intensified, and reforms such as those easing the access of foreign investment in the manufacturing sector should be expedited.
- The meeting said special focus should be placed on the employment of key groups, including recent university graduates, migrant workers, people who have been lifted out of poverty, and households with zero employment.
Beijing promotes entry of capital into the market
Sept. 26
The office of the Central Financial Commission and the China Securities Regulatory Commission jointly issued guidelines on promoting the entry of medium- and long-term capital into the market (關於推動中長期資金入市的指導意見).
The guidelines introduced three key measures, namely, continuously optimizing the capital market ecosystem, vigorously developing equity-based funds, and improving the supporting policy framework for various types of medium- and long-term capital to enter the market.
Central bank issues more policies
Sept. 27
The People’s Bank of China announced that it lowered borrowing costs of the standing lending facility (SLF) by 20 basis points across all tenors. The central bank said that the overnight rate was cut to 2.35 percent, the seven-day rate to 2.50 percent, and the one-month rate to 2.85 percent.
SLF is a type of loan that the PBoC offers to commercial banks to fulfill their temporary cash demand.
Sept. 29
The PBoC said in a statement that commercial banks should, in batches, reduce interest rates on existing mortgages to no less than 30 basis points below the loan prime rate (LPR) before Oct. 31. The move is expected to cut existing mortgages by about 50 basis points.
The central bank said, “As market-oriented reforms on interest rates continue to deepen, and the supply and demand relationship in the real estate market undergoes major changes, the current mortgage rate pricing mechanism has exposed some shortcomings. With the public showing strong responses (to the situation), the mechanism needs urgent adjustments and optimization.”
The PBoC also said it would extend supportive measures of developers’ real estate development loans and trust loans to the end of 2026 to better fulfill their financing demand.
More stimulus?
Sept. 25
Bloomberg News reported that China is weighing injecting up to 1 trillion yuan of capital into the biggest state banks to increase their capacity to support the ailing economy, citing people familiar with the matter. The people said the funding will mainly come from the issuance of new special sovereign bonds, but the details are not yet finalized and are subject to change.
Bloomberg said that the move would be the first time since the 2008 global financial crisis that Beijing has injected capital into its large banks.
Sept. 26
Reuters reported that China plans to issue about 2 trillion yuan worth of special sovereign bonds, citing two sources familiar with the matter.
The sources said that the PRC Ministry of Finance plans to issue 1 trillion yuan of special sovereign bonds mainly to stimulate consumption. Part of the finance ministry proceeds raised from special bonds will be used to increase subsidies for the trade-in and renewal of consumer goods and for the upgrade of large-scale business equipment. The first source said that the proceeds will also be used to provide 800 yuan per child to all households with two or more children, excluding the first child.
The first source added that the authorities plan to raise another 1 trillion yuan via a separate special sovereign debt issuance and use the proceeds to help local governments with their debt problems.
Reuters reported that the bulk of China’s fiscal stimulus still goes into investment, but returns are diminishing and the spending has left local governments with $13 trillion in debt. Meanwhile, China’s household spending is about 20 percentage points below the global average at less than 40 percent of the GDP.
Chinese market rally
Chinese stock markets rallied after the People’s Bank of China introduced a raft of measures in support of the economy on Sept. 24.
The Shanghai Composite Index closed above the psychologically important 3,000-point mark on Sept. 26 and Sept. 27. The index rose by 12.81 percent over the course of four trading days, marking the largest weekly gain in 15 years.
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The Shanghai Stock Exchange trading system experienced delays after trading opened on Sept. 27. The Shanghai index stayed roughly unchanged for about an hour after 10:00 a.m. even as the Shenzhen index gained 4.4 percent over the period.
On the same day, the number of retail investor account openings surged.
Our take
1. The Politburo meeting on China’s economic situation and economic work deployment, Beijing’s officially announced economic support measures, and other planned economic policies reported in Western media indicate that the CCP authorities are very concerned about continued economic deterioration and the difficulty of believably hitting its growth target for the year. To clarify the latter point, the CCP authorities will very likely release an official GDP figure for 2024 that fulfills its “around 5 percent” target even if that does not reflect the actual economic performance. However, the authorities do not want a situation where China’s real GDP performance is very far from the official figure, and it becomes too obvious that it heavily manipulated the data.
Some brief takeaways on the above developments:
i) The state media readout of the Politburo meeting attempts to preserve the Party and Xi Jinping’s “great, glorious, correct” image and “quan wei” (authority and prestige) by “spinning tragedy into victory.” For instance, the meeting claimed that China’s economy is “generally stable and making progress” despite clear signs of deflation and even recession. The meeting also claims that the fundamentals of the Chinese economy “have not changed” despite signs of consequential changes, particularly significantly higher pandemic-related deaths than officially reported and weak demand greatly diminishing the potential of China’s “vast market.”
Concurrently, the Politburo meeting hints that things are going as well as they seem. The meeting acknowledges that “some new situations and problems have emerged in the current economic operation” and that its recent policies were aimed at addressing those “new situations and problems.” The meeting also called on officials to “strive to complete” the central government’s annual economic goals and tasks instead of seeking to “unswervingly achieve” them per the previous rhetoric, a sign that Beijing is not confident that the Chinese economy can hit the “about 5 percent” target.
ii) The Politburo meeting’s call to “ensure necessary fiscal expenditures” and Reuters’ report about Beijing planning to issue about 2 trillion yuan worth of special sovereign bonds are signs that China’s economic slowdown and weak consumption are seriously impacting the ability of local governments to generate fiscal revenue. Therefore, the central government is forced to step in to issue special sovereign bonds to prevent the debt crisis in the localities from spiraling out of control and spur consumption.
iii) The Politburo meeting’s call for efforts to be made to “stabilize the real estate market and stop the decline,” as well as enforcing strict control over the construction of new housing, suggests that the series of property policies Beijing introduced earlier this year to revive the real estate sector only had a limited effect. Notably, home prices have not bottomed out and demand for housing is moribund.
As long as the real estate market does not stabilize and rebound, Chinese households will be inclined to make early mortgage repayments and the loss of confidence in China’s economic prospects will not be reversed. The continued real estate and economic crisis in turn would exacerbate risks in the financial system, with the banks likely being the first in line to run into liquidity and other problems. Beijing has likely anticipated this, and is therefore planning to issue new special sovereign bonds to inject up to 1 trillion yuan of capital into the biggest state banks per the Bloomberg report.
iv) Beijing’s guidelines on boosting employment and “preventing large-scale unemployment risks” reflects the poor economic conditions in China, including growing business closures and rising unemployment.
Meanwhile, the increase in the youth unemployment rate in August per NBS data hints that the potential of societal instability is growing. The CCP authorities’ focus on employment is a sign that it recognizes that the regime is in danger if it cannot reverse current economic conditions and there is widespread unemployment.
2. Beijing’s policies to reverse economic deterioration are lacking in detail and to a certain extent self-contradictory.
i) The central government’s plan to boost employment sounds ambitious, but is rather vague on the specifics and implementation.
The employment support plan also does not fully reconcile with Beijing’s recent move to delay the retirement age in China. China’s job market is particularly unfriendly to workers over 35, with industries like food delivery and ride-hailing becoming saturated. With the employment support plan pledging more support for college graduates and young people, a situation could arise where job shortages increase rather than decrease as those in the older demographics are squeezed out of the workforce as more jobs are reserved for the youth.
ii) The Central Financial Commission and the China Securities Regulatory Commission’s guidelines promoting the entry of medium- and long-term capital into the market include a three-year assessment mechanism for commercial insurance funds, various types of pensions, and other medium- and long-term funds that prevents the sale of stocks within three years. This requirement runs into conflict with the performance assessment of state-owned enterprises.
If SOEs are forced to hold stocks for three years, they would not be able to “buy low, sell high” to generate profits, especially when they turn bearish on long positions that are not doing well. With fewer profits, the performance of leading executives in those companies would be negatively impacted. Over time, these leading executives would become demoralized and be more inclined to turn passive instead of working hard to benefit the CCP regime.
iii) Many of the policies proposed at the Sept. 26 Politburo meeting are not new and have been in circulation for some time. Yet the Chinese economy has struggled to recover despite those policies because their effect has either been limited or they have not been properly implemented due to passivity or inefficiency in the localities.
Even assuming the policies proposed at the Politburo meeting are properly implemented, Beijing is not likely to see their results until at least after the next six to nine months. This means that there is little that the CCP authorities can actually do to ensure that it comes closer to achieving its growth target for the year. The policies, however, do allow Beijing to tweak the optics and play the propaganda card to make its almost certainly manipulated official economic figures for the rest of the year seem more “plausible.”
3. The CCP authorities will increase fiscal spending with its latest economic support measures, but will do little else to address the core issues plaguing the Chinese economy. Instead of directing investments into social security and livelihood areas to grant households greater peace of mind to spend, Beijing has opted to inject more liquidity into the market in the hopes of luring private capital to make investments. But after the hubbub has died down over its “stimulus” measures, Beijing will likely find that Chinese residents and companies remain unwilling to spend and invest, and China’s economic problems are set to worsen.
2 Are Party and financial elites shorting the market?
CITIC Securities short-selling?
Sept. 25
Mainland media CLS (Cailian Press) reported that CITIC Futures, a wholly-owned subsidiary of CITIC Securities, made a net purchase of 7,166 short contracts on that day, bringing its total net short position to 85,634 contracts.
CLS added that CITIC Securities had previously explained that CITIC Futures does not engage in proprietary trading. Therefore, the trading volume and positions (long or short) held by CITIC Futures were all conducted “on behalf of clients.”
Sept. 27
Mainland media reported market rumors that CITIC Securities faced a “short position liquidation” (空單爆倉). Citing data from Chinese financial and stock information website provider East Money, mainland media noted that CITIC Securities ranked first in losses among institutional investors on Sept. 27, with losses amounting to 6.632 billion yuan.
Relevant personnel at a futures company told mainland media that the rapid rise in stock index futures during the trading day triggered the risk of forced liquidation for some private equity products whose margins could not be replenished in time.
Mainland media also reported market rumors that broke after trading hours claiming that “quantitative private equity neutral strategies and DMA (Direct Market Access) operations had faced margin calls.” However, several professionals in the quantitative private equity industry told mainland media outlet Jiemian News that their companies had not experienced margin calls.
Mainland media reported that the scale and leverage of DMA operations have decreased since February 2024, and risks have been mitigated. The Asset Management Association of China also issued guidelines on private securities investment fund operations (私募證券投資基金運作指引) at the end of April this year that explicitly required the DMA operations of private securities funds participating to not exceed two times leverage.
Industrial profits for January-August 2024
Sept. 27
The National Bureau of Statistics released data showing that industrial enterprises above designated size 4.65 trillion yuan in total profits from January to August 2024, a 0.5 percent increase in total profits from a year ago calculated on a comparable caliber.
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From our calculations based on NBS data:
- Profits for industrial enterprises above designated size during the January-August 2024 period decreased by 0.07 percent year-on-year in absolute terms.
- Profits for industrial enterprises above designed size by month this year in absolute terms are as follows:
- January-February: Profit of 887.21 billion yuan, a year-on-year decrease of 22.9 percent.
- March: Profit of 591.47 billion yuan, a year-on-year decrease of 6.05 percent.
- April: Profit of 589.16 billion yuan, a year-on-year increase of 14.15 percent.
- May: Profit of 659.69 billion yuan, a year-on-year increase of 3.72 percent.
- June: Profit of 756.65 billion yuan, a year-on-year increase of 5.15 percent.
- July: Profit of 588.14 billion yuan, a year-on-year increase of 5.87 percent.
- August: Profit of 553.56 billion yuan, a year-on-year decrease of 22.24 percent.
- Profits for industrial enterprises above designated size in 2023 in absolute terms decreased by 15.7 percent year-on-year to 7.6 trillion yuan.
- Profits for industrial enterprises above designated size in the January-August 2023 period in absolute terms decreased by 15.74 percent year-on-year to 4.66 trillion yuan.
Our take
If CITIC Securities’ claim that all of CITIC Futures’ trading volume and positions were conducted on “behalf of clients” is accurate, then the latter’s purchase of short contracts after the CCP authorities’ recent round of economic support measures has nothing to do with the former. However, a closer look reveals some suspicious elements.
i) Beijing’s recent round of economic support measures led to a surge in stocks. When the stock market sees increased trading volume and institutions buy up blue-chip stocks and go long on A-shares, they would also hedge their risks by shorting stock index futures. Additionally, some quantitative hedge funds engage in so-called DMA strategies, which typically use high leverage and involve holding long positions in individual stocks while shorting stock index futures. However, those funds were caught off guard recently by the biggest weekly equity rally since 2008 that was sparked by Beijing’s latest economic support measures. Some funds saw a worsening of their losses because of a Shanghai Stock Exchange glitch that prevented them from selling holdings to meet margin requirements.
To make better decisions on what trades to carry out under current circumstances, institutions would seek out CITIC Securities and other similar government-connected companies to better understand the strength and determination of the central government’s effort to support the markets and other stimulus measures. As a “national team” member, CITIC Securities would understand Beijing’s rationale and would likely have obtained more accurate economic and financial information than the broader market.
It is therefore curious that clients of CITIC Securities, which include members of the Party and financial elite, would increase their short positions the day after the central financial regulators rolled out favorable policies. This suggests that they and CITIC Securities either believe that the central government’s measures to lift the stock market are insufficient, or they are acting in opposition to the central authorities.
ii) There is precedent of CITIC Securities shorting the Chinese stock market. During the 2008 global financial crisis and the stock market turbulence in 2015, CITIC Securities consistently held the largest net short positions among all Chinese futures companies and brokerage firms. Particularly in 2015, CITIC Securities was believed to have been involved in a “financial coup” against the Xi leadership; Liu Lefei, CITIC Securities’ vice chairman at the time and the son of Jiang Zemin faction member Liu Yunshan, appeared to have a role in CITIC Securities’ shorting the market and channeling benefits to companies with vested interests as part of the market rescue effort by the “national team.” Several CITIC Securities executives would later be investigated as part of Xi Jinping’s purge of the financial system.
We believe that the remnant Jiang faction and other “anti-Xi” forces in the financial system retain a degree of influence over the financial sector despite the Xi leadership’s efforts to rectify the financial system. This means that Xi’s rivals could be behind CITIC Securities’ recent effort to short the market almost immediately after Beijing announced plans to support the market (including “guiding medium- and long-term funds to enter the market”) and in contradiction to the Xi leadership’s call to curb short-selling. At the very least, CITIC Securities’ sharp increase of short positions is highly unusual and seems like deliberate hostile action to undermine regime interests rather than a normal technical operation that is consistent with Beijing’s orders.
iii) Whether or not CITIC Securities’ recent short-selling was intentional can be partly verified by observing whether the Xi leadership investigates or replaces senior executives at the company in the near future.
Although there is currently no direct evidence linking the development to CITIC Securities recent shorting of the market, it is noteworthy that Luo Jinhui, the former vice president (equivalent of general manager of a primary division) of CITIC Bank’s asset management business center, was officially investigated on Sept. 27 for serious violations of duty.
iv) We believe that Beijing’s efforts to boost the capital market are unlikely to be unsustainable regardless of whether CITIC Securities intentionally or unintentionally carried out short-selling operations. This is because Beijing did not properly address the fundamental problems causing China’s economic downturn with its latest raft of economic support measures. Even if the market was buoyed by the support measures, those recent gains could quickly evaporate when the reality of China’s economic situation becomes apparent again after a couple of months.
There are already signs that the Chinese economy is facing severe issues that cannot be easily resolved. We previously observed that the A-share listed companies saw declining revenue and profits in the first half of the year. In August 2024, profits of industrial enterprises above designated size fell by 22.24 percent in absolute terms, and those enterprises are taking in even fewer profits than in 2023. Given the weak fundamentals, the CCP authorities would be hard-pressed to sustain the stock market’s continued rise.
