1 CCP steps up united front work and strengthens control over society
Central Social Work Conference
Nov. 5 to Nov. 6
The CCP held the inaugural Central Social Work Conference in Beijing.
The meeting conveyed Xi Jinping instructions, including:
- Social work is an important part of the work of the Party and the country, and is connected to the Party’s long-term governance and the country’s long-term stability.
- China’s social structure is currently undergoing profound changes. Social work faces new situations and tasks, particularly with the rapid development of emerging sectors, the emergence of a large number of new economic and social organizations, and the continuous expansion of new employment groups.
- Social work should focus on strengthening Party building in new economic organizations, new social organizations, and new employment groups.
- Doing social work well is the shared responsibility of the entire Party.
Politburo Standing Committee member Cai Qi attended the meeting and delivered a speech. In his speech, Cai praised Xi’s instructions as being “far-sighted, insightful, and highly political, ideological, and instructive” in pointing the way for carrying out social work in the new era. Cai also stressed the need for the deep study and firm implementation of Xi’s instructions.
United Front symposium for private business leaders
Nov. 7
A symposium for private sector economic representatives to study and implement the spirit of the Third Plenum of the 20th Central Committee was held in Beijing. Shi Taifeng, head of the United Front Work Department, attended the symposium.
At the symposium, Shi expressed hope that the private sector representatives would deeply understand and grasp the spirit of the Third Plenum from the perspective of the “two overall situations” (the strategic overall situation of achieving the great rejuvenation of the Chinese nation and the major changes unseen in a century in the world). Shi also urged the private sector representatives to align their “thoughts and actions” with the spirit of the Third Plenum.
Shi also called on the private sector representatives to “comprehensively and accurately grasp” the direction of reform and policy guidance, adhere to the “two unwaverings” (兩個毫不動搖; unwaveringly consolidate and develop the public sector of the economy and unwaveringly encourage, support, and guide the development of the non-public sector of the economy), and promote the “two healthies” (兩個健康; the healthy development of the non-public sector of the economy and the healthy growth of individuals in the non-public sector). He also urged the private sector representatives to demonstrate practical actions in firmly supporting Xi Jinping’s “Two Establishes” and resolutely upholding the “Two Safeguards.”
Big picture
The Xi leadership has been intensifying political indoctrination in the Party, government, and military in recent months to build “broad consensus” around the “Decision” of the Third Plenum of the 20th Central Committee.
Beijing also rolled out a series of economic support measures at the end of September that appeared to indicate an adjustment of economic policy.
Our take
The Central Social Work Conference and the symposium for private sector economic representatives are part of the Xi leadership’s effort to build “consensus” around the Third Plenum’s “Decision” so as to strengthen the CCP’s control over society and improve its ability to navigate various serious crises.
1. The CCP has long been wary of emerging sectors, new economic and social organizations, and new employment groups that elude its control. For instance, food delivery workers waiting outside restaurants to pick up orders can easily form new social groups that serve as the breeding ground for the dissemination of opinions and information that run counter to the communist regime’s interests. The circulation of unflattering information and opinions about CCP governance among food delivery workers is likely higher now than it was several years back as many of them are now highly educated individuals who were forced by poor employment opportunities to take up low-skill jobs. The discussion of topics such as the cost-effectiveness of expensive higher education, economic difficulties leading to employment challenges, and economic conditions not “steadily improving” as per the CCP’s claims serve to erode the Party’s political legitimacy and could eventually lead to social instability.
The CCP would look to rein in new economic and social organizations, as well as new employment groups, by establishing Party groups within them.
2. The Nov. 7 symposium for private sector economic representatives is likely intended to step up the political indoctrination of that group and demonstrate the Party’s appreciation of the private sector. The CCP authorities must rely on private enterprises to rescue the economy, promote technological innovation, and address employment issues to stabilize their rule.
Local governments also need a healthy private sector to better extract revenue from them and resolve their own fiscal issues. We previously looked at how local governments have been targeting companies in the more economically developed coastal provinces with “deep-sea fishing” style law enforcement to boost their revenue by collecting fines and penalties.
3. The CCP authorities’ effort to intensify united front work in the private sector and tighten social control indicates that China’s economic problems are impacting social stability at the grassroots and public dissatisfaction within the Xi leadership is steadily mounting.
We believe that Beijing’s attempt to strengthen control over society will be more detrimental than helpful to resolving its troubles. In particular, CCP-style social work and Party building will further encumber individuals and businesses by doubling down on regime interference in the private sector, when what is necessary for economic development and technological innovation is a freer business environment. Over time, the CCP’s suffocating control over society will drive more wealthy and ambitious people to leave China, provided they have the means to do so, and lay the foundation for the eruption of serious social incidents.
2 Why Beijing’s ‘12 trillion yuan’ local debt package is more gimmick than stimulus
NPC announces local debt plan
Nov. 8
The Standing Committee of the 14th National People’s Congress concluded its 12th session. The session passed a number of legislation and decisions, and approved several personnel appointments.
After the session, the General Office of the NPC Standing Committee held a press conference at 4:00 p.m. Beijing time to announce a much-anticipated local debt package. The package contained three fiscal arrangements:
- The first arrangement raises the local governments’ debt quota by 6 trillion yuan over the next three years. The arrangement would increase the limit on local government special bonds from 29.52 trillion yuan to 35.52 trillion yuan by the end of 2024.
- The second arrangement sets aside 800 billion yuan annually from new local government special bonds for debt restructuring for five consecutive years starting in 2024, providing debt relief to replace 4 trillion yuan of hidden debts.
- The third arrangement calls for paying, in accordance with the original contracts, the 2 trillion yuan of hidden debt stemming from housing improvement projects in run-down areas due by 2029 and beyond.
Finance minister Lan Foan said at the press conference that the three fiscal arrangements will “reduce the total hidden debt that needs to be addressed from 14.3 trillion yuan to 2.3 trillion yuan by 2028.” Also, the average annual debt reduction amount would decrease from 2.86 trillion yuan to 460 billion yuan, or “less than a sixth of the original amount” and “significantly easing debt restructuring pressures.”
Lan explained that the three local debt restructuring fiscal arrangements are meant to address urgent local issues, alleviate present debt restructuring pressures, and reduce interest expenditures. He added that the arrangements are estimated to produce 600 billion yuan in savings over five years.
Lan also said that the debt swap policy would enable local governments to free up resources and policies for development, improve people’s livelihoods, support investment and consumption, and foster technological innovation while improving the quality of financial assets.
Lan said that China’s current total government debt amounts to 85 trillion yuan, including a national debt of 30 trillion yuan, 40.7 trillion yuan in legally authorized local government debt, and 14.3 trillion yuan in hidden debt. He added that the government debt ratio is 67.5 percent.
In reporting about the NPC Standing Committee meeting, state mouthpiece Xinhua said that the local debt package was akin to “three arrows fired at the same time.” Xinhua also noted the total sum of the package in its headline as “6+4+2 trillion yuan.”
Market reaction to local debt plan
The A-share market was unusually exuberant before the NPC Standing Committee announced the local debt plan. In the previous five trading days before Nov. 8, the Shanghai Composite Index surged 5.5 percent (briefly breaking the 3,500-point mark during intra-day trading), the CSI 1000 Index increased by 8.3 percent (closing at its highest level since Oct. 8), and the ChiNext Index was up by over 9 percent. The total trading volume across the Shanghai, Shenzhen, and Beijing stock exchanges rose from 1.7 trillion yuan on Oct. 28 to 2.73 trillion yuan on Nov. 8, marking the third-highest level since the market rally on Sept. 24 (3.48 trillion yuan and 2.97 trillion yuan respectively on Oct. 8 and Oct. 9).
After the NPC Standing Committee General Office press conference, the FTSE China A50 Index, the Hang Seng Index futures, and overseas Chinese concept stocks all saw varying degrees of decline.
Backdrop
Market expectations for the CCP authorities to introduce massive stimulus has been steadily rising since Beijing introduced various economic support policies at the end of September 2024.
Mainland and international media reports initially reported expectations for Beijing to issue 2 trillion yuan in special government bonds. Caixin later reported that the CCP authorities planned to raise 6 trillion yuan in special treasury bonds over three years, and after that there reports that the figure was 10 trillion yuan (6 trillion yuan for debt restructuring and 4 trillion yuan for asset acquisition). Following the reelection of Donald Trump as president, the market expected the local debt package to hit 12 trillion yuan.
Our take
1. The CCP authorities’ self-marketed 12 trillion yuan local debt restructuring package is likely to fall far short of expectations and the A-shares market is likely to take a hit in the week of Nov. 11, 2024.
i) The three fiscal arrangements of the local debt restructuring package suggest that it is not so much stimulus as a form of debt transfer.
First, the raising of local governments’ debt quota by 6 trillion yuan over the next three years (or 2 trillion annually) serves to swap high-interest hidden debt for lower interest government bonds. The debt swaps do not pay down risk local government debt, but instead push their maturity dates into the future. Therefore, the economic impact of the debt swaps is likely to be limited and indirect.
Second, the 4 trillion yuan set aside for debt restructuring over the next five years changes the scope of what new local government special bonds are used for and lowers financing costs. However, the measure is another form of “borrowing new to repay old” (借新還舊) that does not change the debt scale but reduces the amount of funds available for new investment projects. For instance, local governments issued a total of 6.7 trillion yuan in special bonds from January to September 2024, but repaired 3.73 trillion yuan in principal and interest on maturing local debt. This meant that just 44.3 percent (2.97 trillion yuan) of issued local bonds were available for investment. Having an additional 800 billion yuan (27 percent of funds available for investment) set aside for debt restructuring would therefore further weaken the ability of local governments to spur economic development through investment.
Third, the paying of 2 trillion yuan of hidden debt stemming from housing improvement projects in run-down areas due by 2029 and beyond gives local governments the quota to issue bonds in the future to restructure their debt. But this amounts to “borrowing new to repay old” and cannot be considered stimulus as it is not very relevant to the current economic condition.
ii) Finance minister Lan Foan said that the three fiscal arrangements would reduce financing costs by an estimated 600 billion yuan over five years and free up local government resources for development or public welfare. However, 600 billion yuan in savings amounts to just 120 billion yuan per year, or just a drop in the bucket for local governments facing massive fiscal deficits. Whether local governments can effectively utilize the freed up resources and not create new headaches for Beijing is another issue.
iii) Beijing’s 10 trillion yuan local debt restructuring package is inadequate in scope for the task at hand. While Lao Foan claimed that China has 14.3 trillion yuan worth of hidden debt, many private economists estimate that the actual figure is between $7 trillion (about 50 trillion yuan) to $11 trillion (about 79 trillion yuan), with as much as $800 billion (about 5.74 trillion yuan) of that debt at a high risk of default. Also, the bulk of local government hidden debt comes from local government financing vehicles, and the outstanding balance of on-sheet LGFV debt was already around 16 trillion yuan as of October 2024.
Carlos Casanova, an Asia senior economist at UBP, estimated that China needed to issue a debt package of 23 trillion yuan to reduce the inventory of unsold homes and repay maturing LGFV debt. Casanova believed that Beijing’s local debt package is “going to disappoint the market because China needs more essentially.” We believe that market disappointment has already been reflected in the reaction to the local debt package in overseas markets.
iv) Beijing’s latest fiscal policy focused on debt restructuring and did not include stimulus that the market was expecting, including fiscal allocations to recapitalize Chinese banks, address the property market downturn, stimulate consumption, and subsidize childbirth. This suggests that the CCP authorities are looking to hold some dry power in reserve in the event of potential escalations in trade tensions after the return of Donald Trump to the White House.
2. Beijing’s local debt package indirectly suggests that local governments are seeing severe financial shortages and need some form of relief. Official data hints at the problem with local government financial shortages. For the 2024 local budget, local general public budget revenues were projected at 12.2 trillion yuan (expected growth of 3.7 percent) and local government fund budget revenues were projected at 6.6 trillion yuan (expected growth of 0.1 percent), for a total of 18.8 trillion yuan. However, the two revenue streams in the first nine months of the year amounted to just 9.1 trillion yuan (year-on-year growth of 0.6 percent) and 2.8 trillion yuan (year-on-year decline of 22.5 percent) respectively, for a total of 11.9 trillion yuan (63.2 percent of the annual target).
Local government financial shortages and debt pressure are bound to affect grassroots operations and their ability to govern. Some local governments have cut public service subsidies, resulting in higher related costs or insufficient services. Some cities even abolished urban management departments and delayed the payment of civil servant salaries, causing dysfunction at the grassroots level. Meanwhile, more impoverished local governments have resorted to “predatory” law enforcement tactics (like “deep-sea fishing”) to seize financial resources from companies in wealthier provinces, thereby damaging the business environment and causing further economic deterioration.
Facing regime-threatening crises and stability issues, the central government appears to have been forced to step in to “bail out” local governments with the local debt package. However, Beijing is essentially paying for the disorderly practices of local governments at the expense of regime interests, and is being held “hostage” to a degree by local officials.
