1 Wuhan finance bureau’s public urging of debt repayment signals surfacing of financial crisis
May 26
The Wuhan municipal finance bureau and Wuhan Yangtze River Asset Management Co. published in a full-page announcement (page 10) in the local official newspaper Yangtze River Daily a list of 259 entities, including some state-owned enterprises. The announcement said that these entities had outstanding debts owed to the local government as of December 20, 2018 and urged them to pay up.
The announcement also authorized Wuhan Yangtze River Asset Management, a state-owned professional platform responsible for the disposal of various non-performing assets in Wuhan City, to handle matters related to the debts.
Other details of the announcement include:
- The total debt of the 259 entities amounted to about 300 million yuan, with the highest amount owed at 23.54 million yuan and the lowest at 10,000 yuan.
- The top three entities by debt are Dongfeng Wuhan Light Automobile Co. with 23.54 million yuan owed, Wuhan Hongtaokai Group Co. Ltd with 20 million yuan owed, and Wuhan Industrial State-owned Investment Co., Ltd. with 15 million yuan owed. Uni-President Enterprises Corporation, a well-known company, owed 10 million yuan.
- Five district finance bureaus—Hannan, Caidian, Xinzhou, Huangpi, and Jiangxia—made the debt collection list. Of the five district bureaus, Jiangxia District owed the most at 12.52 million yuan, while Hannan District owed the least at 500,000 yuan.
At the time of writing, the Yangtze River Daily had removed the debt collection announcement from the online version of its newspaper.
May 27
A person in charge of the “certain city’s finance bureau in the eastern part of the country” told mainland news website Economic Observer News that much of the debts owed by the entities listed by the Wuhan local government are “historical legacy issues.” For instance, some of the debts were loans by the Wuhan finance bureau to SOEs and institutions from the “end of last century,” while some of the other debts arose from guarantees by previous Wuhan local governments to SOEs and other institutions.
The person in charge added that a majority of counties and district finance bureaus in China owed a lot of money to municipal finance bureaus, but the latter do not publicize the fact because the problem could be “resolved within the system.”
The person in charge reckoned that “the supervisory authorities found the Wuhan municipal finance bureau to have historical debts stemming from previous budget irregularities,” and the Wuhan finance bureau was looking for a “suitable method” to write off the debt.
Other mainland media reported that in addition to Wuhan, the Haizhu district finance bureau in Guangzhou, the Wenchang City finance bureau, and some other local finance bureaus had publicly issued debt collection documents in recent years similar to the one issued by the Wuhan municipal finance bureau.
May 29
Dongfeng Motor Corporation, a state-owned and publicly listed company, issued a notice clarifying that it has no “equity or business relationship” with Dongfeng Wuhan Light Automobile Co., which is one of the entities listed by the Wuhan finance bureau in its debt collection announcement. The Dongfeng Motor notice added that it had no major debt issues that should be disclosed but were not disclosed, and “there is no situation that damages the interests of the company, as well as small and medium shareholders.”
Wuhan City’s finances
1. According to data from the Wuhan municipal finance bureau:
- 2019: Local general public budget revenue increased 2.3 percent (same caliber growth [同口徑增長] of 12 percent after excluding factors such as tax cuts and fee reductions) year-on-year to 156.411 billion yuan; local general public budget expenditure increased 16 percent year-on-year to 223.816 billion yuan; and fiscal deficit was 67.405 billion yuan.
- 2020: Local general public budget revenue decreased 21.3 percent (same caliber decrease of 12.9 percent after excluding new tax and fee cuts for the year) of year-on-year to 123.029 billion yuan; local general public budget expenditure increased 7.5 percent year-on-year to 240.781 billion yuan; and fiscal deficit was 117.752 billion yuan.
- 2021: Local general public budget revenue increased 28.3 percent year-on-year to 157.865 billion yuan; local general public expenditure decreased 8 percent (same caliber growth of 9.8 percent after excluding some expenditure factors from the previous year) year-on-year to 221.597 billion yuan; and fiscal deficit was 63.732 billion yuan.
- 2022: Local general public budget revenue decreased 4.7 percent (comparable caliber growth of 3.7% after deducting “tax refund factors”) year-on-year to 150.474 billion yuan; local general public budget expenditure increased 0.5 percent (same caliber growth of 6 percent after excluding the decrease in land transfer funds and general bond funds) year-on year to 221.597 billion yuan; fiscal deficit was 71.123 billion yuan.
- Q1 2023: Local general public budget revenue decreased 8.5 percent year-on-year to 50.77 billion yuan; local general public budget expenditure increased 6.6 percent to 63.51 percent; fiscal deficit was 12.74 billion yuan.
2. In 2022, Wuhan’s GDP grew nominally by 6.49 percent to 1.887 trillion yuan and accounted for 35.06 percent of Hubei Province’s total GDP that year. Wuhan’s GDP ranks first in Hubei and is 3.2 times greater than that of the second-ranked Xiangyang City. Wuhan’s GDP also ranks eighth among all Chinese cities.
Backdrop
The Wuhan finance bureau’s public demand for debt repayment follows the public airing of debt and financial woes by several other local governments and local government fund vehicles since December 2022 (see here, here, here, here, and here).
Our take
1. At a glance, the Wuhan local government’s public demand for repayment does not seem overly troubling given that the 300 million yuan owed is relatively small compared to the city’s annual fiscal revenue of about 150 billion yuan. The Wuhan finance bureau is also not the first to have gone public in urging indebted entities to pay up.
However, things become more concerning in considering that Wuhan is the most prominent area so far to be publicly demanding debt repayment. Notably, Wuhan is a major industrial and commercial city in China, with industries such as automobiles, optical-electronics, iron and steel manufacturing, shipbuilding, medicine, food, and chemicals. Wuhan was also the epicenter of the COVID-19 pandemic and the first area to be placed under extended lockdown.
We see at least two possible reasons for why the Wuhan municipal finance bureau went public with its debt collection announcement.
First, the Wuhan local government is likely struggling badly to secure funds as the Chinese economy worsens significantly this year. The lifting of “zero-COVID” in late 2022 only resulted in a lackluster recovery thus far, with the CCP acknowledging the problem of “insufficient demand” on numerous occasions. A rapidly worsening Chinese economy is hitting local government revenues even as expenditures have increased significantly, partly due to the to pay off “zero-COVID” spending over the past three years and maintaining the “three guarantees” social support policy. To make up for fiscal shortages, the Wuhan local government has no choice but to collect “old” debts (assuming they are really all “historical legacy issues”).
Second, the Wuhan local authorities do not want to fall afoul of the central government over various issues in the city’s governance. In March, Beijing launched an “investigation and research” campaign and a new round of special campaigns to “prevent and punish statistical fraud.” In particular, the statistical fraud prevention campaign lasts from March 2023 to February 2024, with the period from March 2023 to May 2023 set aside for “self-examination and self-correction.” And on May 23, Xi Jinping presided over the first meeting of the 20th Central Audit Commission and spotlighted the “unique role” of auditing in promoting the Party’s “self-revolution.”
With the central government turning up the heat on improving the CCP’s governing ability and effectiveness, the Wuhan authorities would find themselves having to take appropriate actions that comply with what Beijing wants and avoid punishment. For instance, having the supervisory authorities breathing down the necks of the Wuhan local government over “historical debts” and “previous budget irregularities” would naturally compel the latter to go public with its debt collection. In the best case scenario, the Wuhan authorities would be able to collect the bulk of its debts and show the central authorities that it is working towards fixing its problems (有作爲) instead of “lying flat.” Even if the Wuhan authorities failed to secure sufficient repayment, it could still show Beijing that the city is doing its best to address long-standing issues while shifting the blame for lingering problems to previous municipal administrations.
2. We believe that more local governments will go public about their financial and debt woes as the Chinese economy worsens further. Local governments know that there is only so much they can do to “rob Peter to pay Paul” (拆東牆補西牆) to address their current and longtime problems, and appear to be scrambling to get ahead of each other in seeking support from the central authorities while partially absolving themselves of blame when defaults become unavoidable.
An official public default by a local government or that of an LGFV could lead to a concentration of successive defaults and technical defaults. This would in turn trigger the CCP regime’s systemic financial risks, negatively impact investor confidence, and spark an exodus of foreign capital from China.
2 Netizens mocking Hebei police over fireworks ‘mishap’ hints at regime legitimacy crisis
On May 27, state media reported that a fireworks explosion in Dacheng County in Hebei Province killed at least four people and saw two missing.
The explosion reportedly took place around 4:00 p.m. at the Zangtun police station in Dacheng County, where “police officers were sampling and identifying fireworks suspected of being illegally traded,” according to state media.
Netizen mocking and suspicions
Chinese netizens ridiculed the state media report of the Dacheng fireworks explosion and came up with their own theories, including:
- The police were likely not “sampling and identifying fireworks” at the police station. Netizens argued that the police should have sealed off the location where the “fireworks” or other explosives were found to deal with the threat on site instead of removing the “fireworks” back to the police station (i.e. netizens are implying that the police themselves were to blame for the blast at the police station because they attempted to redistribute the seized goods amongst themselves like a bunch of greedy “chengguan” [urban administrative and law enforcement personnel]).
- A netizen claiming to be a Dacheng local “revealed” that the explosion at the police station was the work of a firecracker vendor who was driven to desperation after being fined repeatedly by the local authorities. The firecracker vendor then allegedly detonated some explosives and firecrackers at the police station.
- Some netizens joked that the people can rest easy because there were “zero casualties” among their numbers (i.e. only the detested police and CCP authorities were hurt by the explosion, not the common folk).
- Some netizens accused the police of “dividing up the spoils” and inviting trouble upon themselves (i.e. several police were killed or injured from the blast because they were gathered in an area to redistribute the confiscated “fireworks”).
‘The avalanche has fallen’
Following the outpouring of mocking and hatred directed at the police in the wake of the “fireworks explosion,” a deputy director of the Hebei provincial public security bureau’s political department shared an article by a public security reporter on a verified Weibo account (“永華的小菜園”) and wrote, “When an explosion at the police station resulted in the sacrifice of several police officers and [Chinese netizens] mock the incident on the internet, the avalanche has fallen (雪已經崩了)!”
Chinese netizens make the following responses to the “avalanche has fallen” remark:
- Some netizens guessed that the deputy director of the Hebei public security bureau’s political department was implying that the online mockings had “endangered social order and security” (i.e. the CCP authorities believe that there was serious social destabilization).
- “Priority should be given to thinking why ‘the avalanche has fallen’!” (i.e. netizens believe that the CCP authorities should do some self-reflection on why the Chinese people mocked the “fireworks explosion” instead of complaining about the mocking).
- “During an avalanche, are there any innocent snowflakes?”
- “Asking a question first, where did the snow come from? And must there be an avalanche before you [the public security authorities/CCP authorities] come to this realization?”
- “The purest and lightest snowflakes were crushed, which in turn caused an avalanche. Are you completely clueless? Have you all not carried out the slightest bit of self-reflection?” (i.e. by “the purest and lightest snowflakes were crushed,” the netizen is implying that the blast at the police station was likely caused by a regular Chinese person being driven to desperate acts by the authorities. The netizen then implies that even the slightest bit of introspection would enable the authorities to understand why the people are turning against them over the “fireworks explosion.”)
Our take
1. The official account of the “fireworks explosion” at the Zangtun police station in Dacheng County, that is, “police officers were sampling and identifying fireworks suspected of being illegally traded,” flies in the face of belief given that the public security authorities likely have strict protocols for handling explosives and suspected explosives. However, it cannot be ruled out in the event of extreme incompetence.
A more likely explanation is the information floating on the Chinese internet about how a local fireworks seller who was driven to their wits’ end attempted to blow up the police station. If this was indeed the case, then it suggests that the Chinese people are becoming increasingly intolerant of the CCP authorities’ oppression and are becoming more willing to pull off “perish together” (同歸於盡) moves to extract justice for themselves.
2. The “avalanche has fallen” remark from the Hebei public security authorities and the intense reactions to that statement by Chinese netizens suggest that the “social contradictions” between the CCP authorities and the Chinese people are now quite significant. In particular, the CCP authorities are realizing that the Chinese people have perhaps reached a crucial tipping point and are girding themselves for an “avalanche” of pushback as the internal and external crises facing the regime worsen further.
The Xi leadership has likely realized that the CCP is sitting atop a social powder keg after the “white paper revolution” broke out in late 2022. Since then, Xi Jinping has worked to steadily strengthen the Party’s control over society, including stepping up the indoctrination of officials and Party members, as well as more tightly regulating speech. Xi’s “self-revolution,” however, is unlikely to resolve the regime’s crisis and will only aggravate them given the systemic deficiencies of the CCP authoritarian dictatorship. Chinese society is set to grow more unstable and the Party’s political legitimacy will see greater erosion.
3 Xi urges the CCP to be ready for ‘major tests’ at national security commission meeting
May 30
Xi Jinping presided over the first meeting of the 20th Central National Security Commission. According to state media reports, Xi delivered a speech where he called for having a deep understanding of the “complex and severe situation” facing national security, “correctly grasping” major national security issues, and accelerating the modernization of the national security system and its capabilities.
The meeting emphasized the following points:
- The “complexity and arduousness” of national security issues currently facing the regime have significantly increased.
- The national security front (i.e. all personnel in the national security system) must build up “strategic self-confidence,” have firm “confidence in victory,” and fully perceive their “own advantages and favorable conditions.”
- The CCP must adhere to “bottom-line thinking and worst-case scenario thinking (極限思維),” be prepared to withstand “major tests” that can throw up “high winds and rough waves” (風高浪急) as well as “perilous situations” (驚濤駭浪).
- It is necessary to actively create a favorable “external security environment,” better maintain “opening security” (開放安全), and promote the deep integration of development and security.
- It is necessary to promote national security “means and method reform” and “technological empowerment” (i.e. improving the use of technology in national security).
- It is necessary to improve the “complex” (綜合體, or the entire national security system) for dealing with national security risks.
- Do a good job in maintaining political security, improving the level of network data artificial intelligence security governance, accelerating the construction of a national security monitoring and early warning system, promoting the construction of the rule of law with regard to national security, and strengthening national security education.
The meeting also reviewed and approved several documents, including an opinion on accelerating the construction of a national security risk monitoring and early warning system (加快建設國家安全風險監測預警體系的意見) and an opinion on comprehensively strengthening national security education (關於全面加強國家安全教育的意見).
Recent government-civilian clashes
April 21
A villager was killed in a fierce skirmish between the police and civilians that broke out after the 23rd team of the state-run Xiqing Farm in Danzhou City, Hainan Province forcibly seized land from the locals for the Tianjiaotan Water Conservancy Project. The Danzhou local government later censored information about the incident and arrested some villagers.
According to villagers who were able to get information out, the local government had tasked farms with the job of expropriating land from the villagers and had given them compensation funds meant for the villagers to facilitate the process. However, the farms withheld most of the compensation funds for themselves and only gave a small portion to the villagers; the villagers said that they only received about 30,000 yuan per mu of land when the local government had promised 100,000 yuan.
May 14
The local government of Zhengzhou City in Henan Province blacklisted nearly 100 depositors of Henan Baolei Rural Bank who were looking to get their funds back and prevented them from entering the city. Those depositors ended up protesting with banners in front of the People’s Bank of China branch in Jiaozuo City, and the local police used tear gas to disperse the crowd.
The protest has roots in the Henan rural bank scandal that emerged in April 2022. The scandal affected more than 400,000 depositors across the country and involved at least tens of billions of yuan in funds. At the time, the CCP authorities began making repayments to depositors with less than 500,000 yuan in their accounts at the troubled banks. However, those with over 500,000 yuan continue to have their accounts frozen, leading to continued protests.
May 27
1. Clashes broke out between the police and local Hui Muslims in Yunnan’s Tonghai County after the local government forcibly demolished the dome of Najiaying Mosque and triggered a gathering outside the mosque to stop further demolition. Hundreds of military police were deployed to put down the crowd and many people were arrested.
On May 28, the Tonghai county government issued a notice requiring the organizers and participants of the anti-demolition protest to voluntarily surrender themselves to the authorities before June 6. Overseas Chinese language media reported people familiar with the matter as saying that the entire Najiaying area in Tonghai’s Nagu Town had been cut off from the internet and the local authorities are expected to carry out house-to-house arrests.
2. The Cyberspace Administration of China announced that it had deleted more than 1.4 million social media posts as part of an internet “rectification” campaign between March 10 and May 22. The statement also noted that 927,000 “self-media” accounts had been “dealt with,” more than 66,000 accounts had been permanently closed, and over 2,000 “self-media” commentators had been “interviewed.” A section on “rumors” specifically mentioned the case of Hu Xinyu, a teenager from Jiangxi Province who went missing and is popularly believed to have been a victim of forced organ harvesting
May 30
The Hong Kong-based China Labor Bulletin recorded more than 555 incidents of worker rights defense cases in China so far in 2023. Of those incidents, 88 were strikes or street protests involving more than 100 people, including 15 in April and 31 in May.
External pressure
The CCP regime faces efforts by the U.S. and the EU to “de-risk” from China and Western accusations of infrastructure hacking amid Washington’s efforts to step up “engagement” with China and “thaw” the bilateral relationship.
On May 30, the Pentagon accused a PLA fighter jet of carrying out an “unnecessarily aggressive maneuver” in flying within 400 feet of the nose of a U.S. reconnaissance aircraft over an area over the South China Sea on May 26.
Our take
1. Xi Jinping’s remarks at the first meeting of the 20th Central National Security Commission affirm our assessment that the CCP does not believe that the West’s push to “de-risk, not decouple” from China represents any softening in the latter’s approach to China. If anything, the CCP believes that the external security environment has become more “complex and arduous” and it needs to be prepared to withstand “major tests.”
We wrote in the May 25, 2023 edition of this newsletter that “Beijing likely firmly believes that ‘camp confrontation,’ decoupling, and efforts to ‘contain’ China are the status quo regardless of how the West repackages its statements, and will base its external policies on this assumption accordingly.”
2. The requirements put forward at the meeting of the Central National Security Commission indicate that the CCP still wants to keep China “open” to attract investments and promote economic development even as it strengthens the national security system and measures. This is in line with the CCP’s recent efforts to crack down on foreign due diligence firms and limit foreign access to various databases even as it tells foreign countries and businessmen that “China is open for business.”
Meanwhile, the “technological empowerment” requirement indicates that the CCP wants to develop and leverage AI, big data, and other advanced technologies to strengthen its surveillance and early warning capabilities to better deal with national security risks and enhance its techno-totalitarian regime.
The call for national security personnel to have “strategic self-confidence” and fully perceive their “own advantages and favorable conditions” suggests that their morale has taken a hit. This is likely the case in considering the escalation of “internal contradictions” and social instability in China (see item two in this newsletter), as well as the arrest and prosecution of CCP agents abroad in the United States and elsewhere.
Externally, the CCP is looking to step up diplomatic efforts, propaganda, and influence operations to create a favorable “external security environment” for the PRC. This means that the CCP could double down on lobbying and other means to prevent the passage of legislation in Western countries and China’s neighbors that are not conducive to the regime, split the West by playing up China as an economic alternative to the U.S. to European governments, and strengthening ties with BRICs nations and other countries who prefer to be “non-aligned” or are “anti-U.S.”
3. The Xi leadership’s greater prioritization of national security is a double-edged sword under current conditions. On the one hand, the CCP needs to boost national security efforts to tighten its control over the regime, keep social tensions in check amid rapid economic downturn, and ultimately ensure that the Party remains in power as its political legitimacy erodes.
On the other hand, increased national security measures will further worsen the internal and external problems that have driven Beijing to step up national security in the first place. For instance, local governments that are already struggling to generate revenue and sustain grassroots operations will need to find more cash to upkeep “stability maintenance” and guard against national security risks. This additional burden will force local governments to take even more desperate measures to secure funding like expropriating land from villagers to increase land sales or delay compensating depositors whose funds were frozen by troubled banks. Such measures would in turn create more social instability and heighten national security risks, or precisely the opposite outcome of what Beijing is looking to achieve.
The CCP’s increased surveillance and control over society, as well as efforts to prevent foreigners from accessing data, could deal with national security risks and safeguard regime security to a degree in the short term. However, foreign investors and governments will only grow more skeptical of the PRC as it reduces transparency and signals that it prizes national security over economic development despite the assurances of its diplomats and propaganda. Over time, foreign investors and governments who are looking to minimize their political risks in China will accelerate “de-risking” efforts such as pulling out or withholding investments, as well as shifting some of their supply chains out of the mainland. The more countries and global investors decouple from China, the weaker the CCP’s “economic shield” will be and the more “complex and severe” its external security environment would become.
