1 Analyzing the alleged detention of Liu Jianchao
Liu Jianchao detained?
Aug. 7 to Aug. 11
Overseas Chinese-language social media started spreading rumors that CCP International Liaison Department (ILD) head Liu Jianchao was being investigated from Aug. 7. Western media later reported the same, citing people familiar with the matter.
Per official information, Liu recently traveled in his capacity as head of the ILD to Singapore, South Africa, and Algeria. Liu’s last public appearance was July 30; in four subsequent external engagements, ILD vice ministers represented the department instead. The ILD is a CCP agency in charge of establishing and maintaining relations with foreign political parties, foreign organizations, and socialist states.
The Wall Street Journal reported that people who have met Liu said he once publicly declared his love for golf and played often, but likely stopped when the CCP soured on officials golfing amid the Xi leadership’s crackdown on extravagant behavior. Additionally, some people said that Liu’s son worked in the finance industry in the U.S. at some point and is now based in China.
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Liu Jianchao, 61, graduated from Beijing Foreign Studies University and entered the PRC Ministry of Foreign Affairs in the 1980s. A fluent English speaker, Liu would go on to hold multiple senior diplomatic posts, including assistant foreign minister and director-general of the MFA’s information department.
During Xi Jinping’s first term, Liu served as deputy director of the National Bureau of Corruption Prevention, head of the Central Anti-Corruption Coordination Group’s international fugitive recovery office, and director of the CCDI’s international cooperation bureau (August 2015 to April 2017). He later served as Party secretary of the provincial discipline inspection commissions in Hunan and Zhejiang (September 2015 to April 2018).
In Xi’s second term, Liu became deputy director of the upgraded Office of the Central Foreign Affairs Commission (April 2018 to June 2022; Liu would rise to full ministerial rank during this time). In June 2022, he was appointed minister of the ILD.
After the downfall of former PRC foreign minister Qin Gang, there was much speculation that Liu Jianchao was a favorite to replace Qin after he made diplomatic trips to the U.S. and Japan in 2024.
Liu’s links to Wells Fargo’s Mao Chenyue?
Rumors circulating in Chinese-speaking circles hint that Liu Jianchao was probed over his facilitating corruption overseas. When Liu was director of the Central Commission for Discipline Inspection’s international cooperation bureau (where Liu oversaw the “Operation Fox Hunt” effort to track down Chinese fugitives accused of corruption who fled abroad), he allegedly developed a close relationship with Mao Chenyue, a Chinese-American senior executive at Wells Fargo and chairwoman of Factors Chain International whom the CCP authorities had prevented from leaving China (officially because she was involved in a criminal case and had to cooperate with investigations) in recent weeks. The rumors claim that Liu had introduced many Chinese private businesspeople and corrupt officials to Mao, who helped them set up family trusts abroad and transfer funds overseas.
The rumors add that Liu’s case is linked to several private entrepreneurs who in recent months have either died by suicide or were placed under investigation, including Wang Linpeng (Easyhome), Bi Guangjun (Jindianzi), Liu Wenchao (Xizi Elevator), and Zeng Yuzhou (Cozy Home).
Xiaomi founder Lei Jun is also rumored to be implicated in Liu’s corruption probe. The rumors allege that Lei had transferred $5 billion overseas through a Wells Fargo executive surnamed “Mao” and that Lei was supposedly preparing to emulate Pan Shiyi, the well-known Chinese real estate tycoon who successfully relocated to the United States after moving his assets abroad years earlier. On Aug. 8, Xiaomi general manager of public relations Wang Hua issued a statement denying the allegations and asserted that Xiaomi had never had any cooperation or contact of any kind with Wells Fargo or anyone surnamed “Mao” anywhere in the world.
Our take
1. From Western media reporting and some information from Chinese-speaking circles, the rumor that Liu Jianchao is being held and questioned by the CCP authorities is not entirely unfounded.
It is notable that Liu has missed four high-profile diplomatic engagements as of Aug. 11, 2025, including a July 31 meeting with US-China Business Council president Craig Allen. Given the critical importance of Sino-U.S. relations to the CCP, Liu’s absence from the meeting — which was likely intended to reassure American businesses about the economic conditions in China — is conspicuous and indicates that Liu is in some kind of trouble.
2. The rumors about Liu Jianchao and Mao Chenyue being involved in financial arrangements may not be too far-fetched. Liu’s two-year tenure overseeing the CCP’s overseas fugitive repatriation program could have positioned him at the center of sensitive financial networks. To recover corrupt officials and the assets they stashed abroad without triggering concerns with the U.S. authorities about transnational repression, the CCP would have to employ various gray-area tactics. Such tactics include pressuring or enticing foreign banks that have business in China to cooperate with the CCP authorities’ investigations, offering in return to introduce mainland Chinese entrepreneurs as potential financing clients for those banks.
Per information circulating in overseas Chinese language media, Mao Chenyue’s department handles approximately 80 percent of Wells Fargo’s China-U.S. cross-border factoring business, including facilitating asset transfers for Chinese entrepreneurs. Over her 13-year tenure, Mao managed significant projects like handling supply chain financing for firms like Xiaomi and NIO, totaling billions of dollars. Her innovative factoring model — combining open-account factoring and reverse factoring — enabled Chinese exporters and foreign importers to conduct unsecured financing, reducing cross-border costs by up to 30 percent. Mao’s model also allowed firms with legitimate export activities to bypass the PRC’s stringent foreign exchange controls, enabling “compliant” and rapid offshore fund transfers. For example, if Wells Fargo facilitated a $5 billion transfer for Xiaomi, the bank’s supply chain financing process could complete it within a month, earning fees while aligning with China’s export promotion policies and navigating 2025 capital controls.
The sizable gap between China’s reported trade surplus and official data from the State Administration of Foreign Exchange (SAFE) underscores potential capital outflows. In 2024, China’s trade surplus reached $992.16 billion, yet SAFE’s goods and services trade surplus was only $660.85 billion, a 33.3 percent discrepancy. This suggests that up to one-third of funds may be transferred offshore through export trade channels, leveraging mechanisms like factoring.
3. The severity of Liu Jianchao’s potential investigation remains unclear and it is too early to draw conclusions at this stage. However, some preliminary observations can still be made.
The purge of Liu after Qin Gang’s downfall would further tarnish CCP’s diplomatic apparatus. The Xi leadership could follow up the investigation of Liu with a broader rectification of the diplomatic apparatus. However, Beijing could opt to mitigate the fallout of such a rectification given the need to preserve diplomatic expertise amid heightened global tensions.
The Xi leadership could show Liu leniency if his role was limited to facilitating introductions between Chinese entrepreneurs and Wells Fargo or other overseas financial institutions, with no direct involvement or knowledge of illicit asset transfers. Liu could also be shown leniency if the scale of capital flight he could have been involved in was minor or the funds were recovered.
2 A-share market’s ‘water buffalo rally’ can’t hide deflationary pressures
China’s ‘water buffalo rally’
Mainland media reported that Morgan Stanley’s China chief economist Xing Ziqiang said in a closed-door briefing on Aug. 11 that the A-share market’s recent surge is a “water buffalo” rally, or a liquidity-driven bull market. He added that the signs of this rally first emerged in the second half of 2024.
A “water buffalo” rally refers to a stock market surge primarily fueled by abundant liquidity rather than fundamental improvements. Such a rally is often seen in low-interest-rate environments, asset shortages, or when funds shift from fixed-income to equity assets.
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On Aug. 13, the Shanghai Composite Index closed at 3,683.46 points, approaching 3,700 points (up 0.48 percent) and reaching a four-year high. Meanwhile, the Shenzhen Component Index closed at 11,551.36 points (up 1.76 percent), and the ChiNext Index closed at 2,496.50 points (up 3.62 percent).
The Shanghai index is up nearly 28 percent in 2025, driven by technology and major financial stocks. In Hong Kong, the Hang Seng Index recorded a 21 percent increase in the first half of the year.
China’s financial data for July and first seven months of 2025
On Aug. 13, the People’s Bank of China released financial and social financing data for July 2025 and for the first seven months of the year.
Financial data
Money Supply
- Broad money supply (M2) increased 8.8 percent year-on-year to 329.94 trillion yuan in July.
- The significantly higher M2 growth rate as compared to the same period last year (up 6.3 percent) is indicative of a loose monetary environment. However, the high growth has not effectively translated into credit demand in the real economy.
- Narrow money supply (M1) increased 5.6 percent year-on-year to 111.06 trillion yuan in July.
- While the M1 growth rate turned positive as compared to last year (negative 6.6 percent), it is lower than the M2 and reflects limited improvement in companies’ demand deposits and still-weak business momentum.
Loans
- New renminbi loans grew by 12.87 trillion yuan in the January-July 2025 period.
- The growth in new RMB loans was below last year’s level (13.53 trillion yuan), indicating slower credit issuance and insufficient demand.
- Household loans increased by 680.7 billion yuan during the Jan-July 2025 period, compared with an increase of 1.25 trillion yuan in the same period last year.
- Short-term loans decreased 383 billion yuan, compared with an increase of 60.8 billion yuan last year. The sharp drop suggests declining consumer credit demand.
- Medium- and long-term loans increased 1.06 trillion yuan, compared with an increase of 1.19 trillion yuan last year. The decline points to a property market that is still in a slump.
- Corporate and institutional loans grew 11.63 trillion yuan during the Jan-July 2025 period, compared with an increase of 11.13 trillion yuan in the same period last year.
- Short-term loans were up 3.75 trillion yuan, compared with an increase of 2.56 trillion yuan in the same period last year. The larger increase indicates a stronger preference for working capital.
- Medium- and long-term loans were up 6.91 trillion yuan, compared with an increase of 8.21 trillion yuan last year. The decline reflects weak expansion and investment appetite.
- Bill financing was up 824.7 billion yuan, compared with an increase of 214.6 billion last year. The surge could be linked to arbitrage opportunities and the recirculation of idle funds, rather than productive economic activity.
- Loans to non-bank financial institutions grew 235.7 billion yuan during the Jan-July 2025 period, compared with an increase of 594.6 billion yuan in the same period last year. The sharp drop reflects a marked reduction in both the capacity and willingness of financial intermediaries to extend credit, underscoring growing caution within China’s financial sector.
Deposits
- Total new deposits grew 18.44 trillion yuan during the Jan-July 2025 period, compared with an increase of 10.66 trillion yuan last year.
- Household deposits grew 9.66 trillion yuan, compared with an increase of 8.94 trillion yuan last year. Continued high growth indicates weak consumer willingness to spend.
- Non-financial corporate deposits grew 310.9 billion yuan, compared with a drop of 3.23 trillion yuan last year. The turnaround is modest, suggesting limited improvement in corporate cash flow.
- Fiscal deposits were up 2.02 trillion yuan, compared with an increase of 401.9 billion yuan last year. This reflects a greater buildup of idle government funds, with money not entering the market in a timely manner to generate actual spending.
- Non-bank financial institution deposits were up RMB 4.69 trillion yuan, compared with an increase of 2.96 trillion last year. The sharp rise indicates that market funds are more inclined to remain within the financial system rather than being channeled into production, consumption, or long-term investment.
Social financing
- Total social financing increased 22.83 trillion yuan during the Jan-July 2025 period, compared with growth of 18.1 trillion yuan in the same period last year. The increase was largely driven by government bond issuance, while real economy demand remained weak.
- RMB loans to the real economy were up 12.74 trillion yuan, compared with an increase of 12.46 trillion last year. Both household and corporate medium- to long-term loans showed signs of slowing.
- Net corporate bond financing grew 1.15 trillion yuan, compared with an increase of 1.41 trillion yuan last year. The 256.2 billion yuan drop reflects a sluggish direct financing market, with companies avoiding medium- to long-term debt.
- Net government bond financing increased 7.66 trillion yuan, compared with an increase of 3.34 trillion yuan last year. The 4.32 trillion yuan increase in 2025 accounted for over a third of total social financing growth, highlighting Beijing’s fiscal-led approach to economic support.
Our take
China’s A-share market has seen trading volumes and margin financing balances rebound to 2021 levels in the first half of 2025. This has prompted PRC state media to herald a “restoration of market confidence” and hint at economic recovery.
However, a closer look at the details suggests that the market rally is a classic “water buffalo” and is not driven by robust economic fundamentals.
1. The A-share market’s ascent is not underpinned by corporate earnings growth, industrial upgrades, or an expansion of domestic demand. Rather, it is a rally driven by policy-driven liquidity, speculative capital flows, and misleading economic signals.
Policy-driven liquidity
The PBoC sustained loose monetary policy in July 2025, with significant net injections via open market operations, reverse repos, and medium-term lending facilities. State-backed entities — state-owned institutions, policy banks, and local state-owned platforms — have actively intervened to stabilize markets, reducing volatility and boosting share prices. However, this top-down support lacks corresponding corporate earnings growth, creating a “liquidity illusion” that masks underlying economic weaknesses.
Speculative capital flows
Funds are flooding into equities not because of improved returns in the real economy but due to a lack of confidence in alternative investments. Enterprises and households, wary of investing in expansion, R&D, or durable goods, are turning to short-term market speculation. This aligns with July’s financial data showing a contraction in long-term loans and a surge in short-term financing and bill financing (824.7 billion yuan in 2025 versus 214.6 billion yuan last year), with funds flowing into asset markets like equities and property rather than productive investments. Additionally, from Aug. 8, 2025, the PRC reinstated value-added tax on interest income from newly issued government, local, and financial bonds, squeezing bond market profitability and diverting capital to equities.
Misleading economic signals
The market’s surface exuberance is being misconstrued by state media as evidence of economic recovery. However, this obscures the structural challenges facing China’s economy, including manufacturing contraction (July PMI at 49.3 percent), exports to the U.S. falling 21.7 percent amid trade tensions, and the weakening of consumer demand (July CPI flat, PPI down 3.6 percent year-on-year).
Morgan Stanley’s Xing Ziqiang previously forecasted that China’s GDP growth would slow to 4.5 percent or lower in the second half of 2025, given declining exports and persistent deflation (measured by GDP deflator).
2. July 2025 financial and social financing data paint a starkly different picture from the A-share rally, underscoring weak credit expansion, subdued real economy demand, and reliance on government debt.
Deteriorating loan structure
Corporate lending in July showed a high proportion of short-term loans, used for working capital, receivables, or cash flow support, rather than long-term investments like expansion or R&D. Mid-to-long-term loan growth continued to decline, reflecting corporate caution about future demand and reluctance to take on capital expenditure risks. This fragile financing structure increases cash flow vulnerabilities, raising the risk of concentrated credit defaults if liquidity tightens.
Contracting household credit
Household lending nearly stagnated, with mid-to-long-term mortgage loans remaining subdued despite relaxed property restrictions in some cities. This signals persistent concerns over falling property prices and unstable income expectations.
Short-term consumer loans also showed no significant recovery, even during the summer travel and consumption season, indicating a “save-first” mentality. This contraction aligns with declining consumer goods prices in the CPI, reflecting weak domestic demand and consumption downgrading.
Government debt as sole driver
Government bond issuance was the primary driver of social financing growth, with net financing of 4.88 trillion yuan in July accounting for 95.3 percent of the 5.12 trillion yuan in new social financing. This reflects accelerated local government special bond issuance for infrastructure and public projects to offset private sector investment shortfalls.
The PRC’s debt-driven stimulus faces diminishing returns, as infrastructure projects yield low returns on investment and accumulate debt without proportional economic output. High local government debt ratios further strain public services and social welfare, undermining long-term growth.
3. China’s capital markets and debt structure form a precarious “dual-peak” dynamic: A liquidity-driven asset bubble in equities and ballooning government debt amid weak private credit.
Liquidity mismatch in equities and bonds
The A-share rally relies heavily on loose monetary conditions and policy interventions, while the bond market absorbs massive financing demands from local governments and state-owned enterprises via special bonds and policy tools. This structural mismatch — prosperous asset prices versus declining real economy returns — creates an imbalanced risk-reward profile. External shocks, such as U.S. monetary tightening or renminbi depreciation pressures, could trigger simultaneous pressure on equities and bonds, risking a “double kill” scenario.
Debt-driven growth risks
Social financing data reveals an overreliance on government bond financing (22.83 trillion yuan in 2025 versus 18.1 trillion yuan in 2024), with limited impact on total factor productivity. Corporate bond financing fell significantly in July, signaling a challenging environment for private firms, crowded out by state-owned enterprises and government borrowing. This debt accumulation, without corresponding growth potential, risks a long-term “debt trap.”
Internal and external vulnerabilities
Impending mandatory social insurance contributions (from Sept. 1, 2025) will raise labor costs, particularly for small and medium enterprises, squeezing profits and potentially triggering layoffs and reduced household income. This could exacerbate debt repayment pressures and elevate credit risks.
Externally, escalating U.S.-China trade frictions, including a 40 percent U.S. tariff on transshipped goods and rising anti-dumping scrutiny from ASEAN and the EU, threaten export growth. A slowdown in exports would weaken corporate cash flows, further constricting liquidity for equities and bonds.
What’s next
The A-share market’s liquidity-driven rally offers short-term opportunities, particularly in technology and financial sectors. However, its detachment from economic fundamentals demands caution.
Investors should monitor the sustainability of liquidity policies, as their time-limited nature could lead to a correction if fundamentals remain weak. Structural opportunities may exist in select sectors, but a broad-based bull market is unlikely without the real economy’s recovery. Geopolitical risks, such as U.S. tariffs and institutional profit-taking, could precipitate market volatility, underscoring the need for rigorous risk management.
