SinoInsight 1
On June 1, the CCP Central Committee issued guidelines on strengthening supervision of leading officials (yi ba shou, 一把手) and their leadership team (中共中央關於加強對“一把手”和領導班子監督的意見).
The guidelines were divided into five sections, namely, the political stance of leading officials, their main responsibilities, the supervision of subordinates by superiors, mutual supervision of the leadership team, and intra-Party dedicated supervision.
In the section on political stance, the guidelines stressed the importance and urgency of strengthening supervision of leading officials and their leadership team in the face of “[the] unprecedentedly complex environment and risk challenges.” Only when leading officials and their teams stick to the “centralized and unified leadership of Party Central” and the Party’s “great self-revolution,” as well as take control of the “key minorities” (i.e. leading officials and their leadership team), can the CCP achieve “new victory for the cause of socialism with Chinese characteristics.” The guidelines also called on leading officials and their leadership team to “take the lead in safeguarding the quan wei of Party Central and its centralized and unified leadership to ensure that the whole Party advances in unison.” Finally, the section emphasized the need for leading officials and their leadership team to be loyal to the Party.
On supervising leading officials and their teams, the guidelines proposed having “leading officials feel that they are under supervision all the time.” Also, superior leading officials must keep subordinate leading officials in line, and this task will be an important part of their annual work performance review. Superior leading officials who do not demonstrate competence in supervising their subordinates will be held accountable.
On leadership team mutual supervision, the guidelines state that officials who conceal violations of law and discipline from other members of the leadership team will be investigated and held jointly liable with the violators.
Finally, the guidelines require discipline inspection committees to serve as a dedicated agency in strengthening political supervision. Those who do not perform their supervisory duties up to par will be held “severely accountable.”
For consecutive days after the guidelines were released, Xinhua, other official propaganda outlets, and the Central Commission for Discipline Inspection published articles on how to interpret them. A big takeaway was that the guidelines represent an important measure in cracking the issue of supervising leading officials and their peers.
OUR TAKE
In a nutshell, Beijing is looking to tighten and better enforce intra-Party control with the guidelines on strengthening supervision of leading officials and their leadership team. Leading officials at all levels will be inclined to take curbing corruption, malfeasance, and passivity/low productivity within their ranks more seriously when doing so directly affects their career prospects (supervision is now a part of their annual work performance review) and security (punishment will be handed out to those who do not reporting violators of law and discipline). Xi Jinping is also demanding that leading officials and their leadership team remain loyal to him and the Party.
However, the fact that Beijing needs to issue the guidelines in the first place is indicative of greater problems. It is characteristic of the CCP to only acknowledge the superficial aspect of crises that cause it trouble; like an iceberg, there is much more below the surface.
First, Xi Jinping is reminding leading officials and their subordinates that they should stay loyal to his Party Central and not “another Party Central” helmed by his factional rivals. That Xi needs to spell this out to the Party is a sign that he is currently lacking in “quan wei” despite having consolidated power to a high degree; titles mean little when a Party leader is unpopular in the officialdom and faces resistance from powerful factional elements in the CCP elite and the “permanent bureaucracy.” The guidelines, along with Xi’s visit to the Battle of Xiangjiang memorial in Guangxi in April, the Qiushi essay alluding to “another Party Central” in May, and recent leaks of “damaging information” about his close ally Liu He to foreign press (see here and here), are the clearest pieces of evidence to date that factional struggle in the CCP elite is heading into showdown territory ahead of “sensitive” dates for the Party and the 20th Party Congress in 2022.
Second, Xi is clearly still having problems with corruption and passivity in the officialdom despite running a nearly decade-long anti-corruption campaign and punishing over 100,000 officials. Corruption and passivity affect regime productivity and survival even in the best of times, and the CCP is currently facing an “unprecedentedly complex environment and risk challenges” as admitted in the guidelines. To ensure that his orders go beyond the gates of Zhongnanhai and fight the resistance of the “anti-Xi coalition,” Xi has no choice but to come up with Orwellian new rules that let “leading officials feel that they are under supervision all the time.” However, there is no guarantee that the guidelines will work. Tighter supervision of leading officials could result in even greater passivity, especially with the trend of “laying flatism” (tang ping, 躺平) catching on in Chinese society. The guidelines could also backfire badly, especially if leading officials and their leadership team are more united in opposing Xi than reporting on each other.
Third, the guidelines recognize that the CCP is presently under severe internal and external pressure, or in its own words, an “unprecedentedly complex environment and risk challenges.” Noteworthy internal problems include a rapidly deteriorating economy; various production woes (global raw materials inflation, price hikes, power outages, RMB appreciation, etc.); massive debt risks as trillions of yuan in bonds are set to mature over the next three years; a demographic crisis becoming more obvious; a recent COVID-19 surge in Guangdong Province (the best-performing province in terms of GDP); and the growing popularity of “laying flatism.” Prominent external problems include a failure of overseas propaganda and influence efforts (pushback against “wolf warrior” diplomacy); increasing international censure over human rights issues (particularly Xinjiang and Hong Kong); a potential U.S. interest rate hike to combat inflation in 2021 or 2022 (which results in “hot money” leaving China and financial market turbulence); and growing international attention on the “lab leak” theory of COVID-19’s origin and the CCP’s role in covering up the outbreak.
Xi Jinping would be particularly concerned about the international community’s sudden focus on the origins of the coronavirus in light of the “anti-Xi, not anti-CCP” strategy advocated in the Atlantic Council’s “Longer Telegram” report published in January. Xi and the CCP may have noticed that an Atlantic Council senior fellow, Jamie Metzl, happens to be one of the leading voices calling attention to the “lab leak” theory and demanding that Xi be held accountable. In a recent interview with LBC’s Maajid Nawaz, Metzl said that the PRC would be dealt a “massive geopolitical blow” if the “lab leak” theory is proven and “there is a real chance Xi Jinping could be overthrown.”
Xi and the CCP would also note efforts to call out, pressure, or punish the regime around the “sensitive” June 4 period.
- The Biden-Harris administration chose June 3 to sanction PRC companies with links to the People’s Liberation Army.
- Hours before the anniversary of the Tiananmen Square Massacre in China (June 3 in the U.S.), Vanity Fair published an 11,000 word piece on the “lab leak” theory.
- On June 4, The Washington Post ran a piece titled, “China could pay if nations come to believe the virus leaked from a lab” by Council of Foreign Affairs senior fellow for global health Yanzhong Huang. Huang argued that the “lab leak” theory will have “extraordinary geopolitical implications,” including “a free fall in China’s relationship with the outside world—even if nations simply come to believe that the balance of the evidence suggests that China is covering up a lapse at one of its labs.”
- On June 6, three U.S. senators arrived in Taiwan on a U.S. Air Force C-17 Globemaster III, a move made especially provocative by CCP hawks’ previous declaration that the arrival of American military forces in Taiwan is tantamount to U.S. invasion. The senators will meet with ROC leader Tsai Ing-wen to discuss security and other matters, and will donate 750,000 COVID-19 vaccines to Taiwan.
Given the CCP’s paranoia and survival-dominance focus, it would unlikely view the developments detailed above as happenstance. The Party (and other communist regimes) believes that international media outlets are really doing intelligence and influence work for their respective countries because the PRC’s own media/propaganda operations engage in precisely those activities. Thus, the CCP would look at Western mainstream media’s spotlighting of the “lab leak” theory and U.S. sanctions before the Tiananmen anniversary as evidence of a conspiracy to “contain” the PRC and bring about regime change. Meanwhile, Xi Jinping would likely see the aforementioned developments as evidence that his foreign enemies are dead serious about leveraging splits in the CCP elite to oust him, and hence would be doubly convinced regarding the correctness of his decision to tighten control over leading officials and their leadership team. The probability of political Black Swans emerging in China will tick up should Xi’s external enemies launch targeted attacks around upcoming important and “sensitive” dates for the regime, such as the CCP centennial anniversary, the Beidaihe meeting, the PRC national day, and the Sixth Plenum of the 19th Central Committee.
SinoInsight 2
June 1
The People’s Bank of China issued a revised draft anti-money laundering law (中華人民共和國反洗錢法 [修訂草案公開徵求意見稿]) to bring non-financial institutions within its scope of regulations governing the business of financial institutions.
Non-financial institutions include property developers (those that do home sales and offer brokerage services), accounting firms (those that accept commission to manage assets or accounts from clients, or help them raise funds), precious metal exchanges, online microlenders, financial asset management firms, financial leasing companies, and other institutions considered to be money laundering risks by the PRC State Council.
June 3
Evergrande Group announced plans to lower its debt during its annual strategic partner sharing meeting. The leading property developer in China said that it would bring its net debt-to-equity ratio below 100 percent on June 30, 2021, or below 600 billion yuan from a high of 874.3 billion yuan in 2020. Evergrande is also looking to achieve a cash ratio of 1 or greater on Dec. 31, 2021, as well as bring its debt-to-assets ratio below 70 percent (after excluding advance receipts) by Dec. 31, 2022.
“By June 30, Evergrande will at least realize having one red line ‘turn green’” (“到6月30日，恆大至少實現‘一條紅線’變‘綠’” ), said Evergrande chairman Xu Jiayin (Hui Ka Yan), referencing the “three red lines” that PRC regulators rolled out last year to prevent heavily indebted real estate developers from issuing more debt in seeking refinancing. According to a Huaxi Securities report, Evergrande’s debt-to-assets ratio was 76.7 percent after excluding advance receipts at the end of 2020; its net debt-to-equity ratio was 152.9 percent, and its cash ratio was 0.47, which meant that it was in breach of all three “red lines.”
On the same day, Evergrande’s stocks plummeted across the board, with China Evergrande falling 5.25 percent, Evergrande Property down 4.6 percent, and Evergrande Auto down 3.39 percent. Evergrande’s bonds also fell sharply with its U.S. denominated debt maturing in 2023 seeing its greatest decline in seven months.
June 4
1. Mainland media cited attendees of HNA Group’s liquidation meeting as saying that as of June 3, 67,400 creditors had filed 1.2 trillion yuan of claims, including 29.959 billion yuan in wealth management product claims. Also, HNA has 405.7 billion yuan of verified claims and 353.5 billion yuan of rejected claims, with deferred claims totaling 156.5 billion yuan.
HNA had earlier announced at the end of January that it was officially entering bankruptcy and restructuring proceedings. Many of the company’s subsidiaries simultaneously announced that they had filed for bankruptcy. In March, the Hainan High People’s Court consolidated the restructuring of HNA Group and 320 of its affiliates.
2. According to Reuters, the PRC government wants China Huarong Asset Management to sell its non-core assets, including “a bank, a trust, an investment firm and a consumer finance firm.” Government regulators could also informally back $20 billion of Huarong’s dollar debt due in 2021.
After Reuters’ report was published, a perpetual bond issued by Huarong Finance grew 7.5 cents to trade at 68 cents in the dollar, while bonds maturing in 2027 and 2029 added 5.5 cents and 5 cents respectively.
In April, Huarong delayed issuing its 2020 annual report and suspended trading of its shares, spooking investors and prompting panic selling.
OUR TAKE
1. The PRC’s debt crisis is rapidly worsening, with the respective plights of Evergrande, HNA Group, and Huarong being emblematic of the phenomenon.
2. Evergrande, a “too-big-to-fail” property developer, sought help from the Guangdong local government in dealing with its debt crisis last August. At the time, Evergrande warned in a letter to the Guangdong government that its inability to secure funding by Jan. 31, 2021 would result in cross defaults in the company’s borrowings from banks, funds, and the bond market, which in turn poses systematic risks for the PRC financial system. Likely intervention by the CCP authorities in September saw Evergrande temporarily weather its debt crisis through issuing debt-for-equity swaps. By the end of 2020, Evergrande was one of four property companies that remained in the PRC regulators’ “blacklist” for crossing all of the “three red lines,” with the highest debt-to-assets ratio of the four.
Evergrande’s credibility severely worsened after its appeal to the Guangdong government revealed the extent of its debt crisis, and its struggles with refinancing are bubbling to the surface.
Recently, Evergrande suppliers along its supply chain took to the internet to complain that the company’s banker’s acceptance notes are running overdue on a large scale. Evergrande previously extended the redemption period on the bulk of its banker’s acceptance notes from six months to a year starting in 2020, resulting in interest on the notes rising above 20 percent and businesses becoming unwilling to accept those notes. As of the end of 2020, Evergrande has issued 200 billion yuan of banker’s acceptance notes, or a sum equivalent to all the notes issued by Chinese real estate developers who issued the most banker’s acceptance notes, including China Resources, Greenland Holdings, Sunac Holdings, Country Garden, China Fortune Land Development, and Risesun Real Estate Development. Large property companies in China turned to issuing banker’s acceptance notes in recent years to secure financing because those notes are not counted in their interest-bearing debt.
The cash-strapped Evergrande started selling property in third- and fourth-tier cities at ultra-low prices near the end of May. Evergrande offered “discounts” of up to 50 percent to buyers who were willing to pay the full, undiscounted price in cash upfront and agree to not immediately begin registering their home with the government online as mandated. Per the contract between Evergrande and the home buyer, the company would “refund” the agreed upon discount to the buyer and “allow” the buyer to begin registering property online after a three to six-month period. For example, a buyer would pay Evergrande in full for a flat retailing for 1 million yuan after signing a contract with the company, then expect to be “refunded” with the agreed discount at a later date. Meanwhile, the delay of online property registration proceedings left a loophole that “allows” Evergrande to sell each property unit multiple times or quietly take out mortgages on those properties. Evergrande’s dubious property agreement and steep promised discounts led directly to price wars in areas where they were carried out and in surrounding estates, and the CCP authorities eventually had to step in to rein in the situation.
All in all, Evergrande Group’s debt crisis and refinancing issues pose tremendous risks for home buyers and the CCP regime. Increased volatility in the housing market and the economy in general would further compromise Evergrande’s ability to secure funds, potentially triggering the company’s debt crisis and resulting in its de facto bankruptcy (government takeover or bail out counts as company failure).
3. The CCP continues to tightly regulate its financial sector and non-financial institutions involved in financial activity. The CCP is also intervening to stop the property bubble from rapidly inflating, particularly in the current global inflationary environment.
Globalization, however, means that Chinese economy, financial sector, and property market can still be impacted by the world economy and policy changes by the U.S. central bank despite the CCP’s best efforts to tame the domestic front.
Take the renminbi for example. While the yuan has strengthened dramatically in recent weeks against the dollar, the currency could struggle for further gains with seasonal dividend payments from Hong Kong-listed Chinese firms rising and the Federal Reserve debating a reduction in stimulus. Chi Lo, Greater China senior economist at BNP Paribas Asset Management in Hong Kong, told Bloomberg News that “the renminbi’s strength has peaked,” and “sees the yuan trading in a range of 6.4 to 6.6 per dollar this year, implying a drop of as much as 3 percent from current levels.”
Foreign institutional investors slowing their buying of PRC government bonds could also affect the renminbi’s strength. According to chinabond.cn, foreign institutional investors increased their holdings of PRC treasury bonds by 25.8 billion yuan in May, or a near 50 percent decrease from 51.7 billion yuan in April. At the end of May, foreign institutional investors held 2.12155 trillion yuan of PRC treasury bonds, a decrease of 763.294 billion yuan from the same period in 2020 or a return to similar levels in May 2020.
The renminbi will depreciate if markets expect the Fed to reduce the scale of stimulus or raise interest rates to cope with inflation. Foreign institutional investors, who likely profited from the 12 percent appreciation of the yuan, are likely to withdraw their funds from China in anticipation of moves by the Fed. Renminbi fluctuations caused by large-scale capital outflows will hit Chinese imports and exports, manufacturing, and commodity prices, which could in turn trigger China’s debt risks.
Xi Jinping’s personal political risks will inevitably skyrocket if the PRC is shaken by economic turbulence and financial crisis, especially with this year being the CCP’s centennial.
