1 Weak May data, lack of stimulus furthers market pessimism on China
Economic data
June 15
The PRC National Bureau of Statistics released China’s economic data for May. Noteworthy data include:
Unemployment rate
The surveyed unemployment rate for the 16 to 24 age group in China hit a record high of 20.8 percent in May. This is compared with 18.1 percent in the January to February period, 19.6 percent in March, and 20.4 percent in April.
Changes in commercial housing prices in 70 medium and large cities in May
New home prices (month-on-month)
- Prices in first-tier cities rose by 0.1 percent while the growth rate fell by 0.3 percent.
- Prices in second-tier cities rose by 0.2 percent while the growth rate fell by 0.2 percent.
- Prices in third-tier cities stayed flat, compared with an increase of 0.2 percent in April.
Second-hand home prices (month-on-month)
- Prices in first-tier cities decreased by 0.4 percent, compared with an increase of 0.2 percent in April.
- Prices in second-tier cities decreased by 0.3 percent, compared with staying flat in April.
- Prices in third-tier cities decreased by 0.2 percent, compared with staying flat in April.
Prices of new homes compared year-on-year
- Prices in first-tier cities rose by 1.7 percent, compared with a 2.1 percent rise in April.
- Prices in second-tier cities rose by 0.5 percent, compared with a 0.2 percent rise in April.
- Prices in third-tier cities fell by 1.6 percent, compared with a 1.9 percent rise in April.
Prices of second-hand homes compared year-on-year
- Prices in first-tier cities rose by 0.4 percent, compared with a 0.9 percent rise in April.
- Prices in second-tier cities dropped by 2.1 percent, compared with a 2.2 percent rise in April.
- Prices in third-tier cities dropped by 3.3 percent, compared with a 3.6 percent rise in April.
Real estate investment and sales
- From January to May, China’s real estate development investment decreased 7.2 percent (calculated on a comparable caliber) year-on-year to 4.5701 trillion yuan. Of the total, residential investment decreased 6.4 percent year-on-year to 3.4809 trillion yuan.
- From January to May, the sales area of commercial housing decreased year-on-year by 0.9 percent to 464.4 million square meters; of the total, sales area of residential buildings increased by 2.3 percent to 406.63 million square meters. During the same period, the sales of commercial housing increased 8.4 percent year-on-year to 4.9787 trillion yuan; of the total, sales of residential buildings increased by 11.9 percent to 4.5132 trillion yuan.
Fixed assets investment
- From January to May, China’s fixed assets investment (excluding rural households) increased by 4 percent (calculated on a comparable caliber) year-on-year to 18.8815 trillion yuan; of the total, private fixed assets investment decreased 0.1 percent year-on-year to 10.1915 trillion yuan.
- Fixed assets investment (excluding rural households) increased by 0.11 percent to 4.1333 trillion yuan in May from a year ago.
Consumption
- In May, total retail sales of consumer goods increased 12.7 percent year-on-year to 3.7803 trillion yuan, while the growth rate in April was 18.4 percent. Of the total, retail sales of consumer goods other than automobiles increased by 11.5 percent to 3.3875 trillion yuan.
Added value of industries above designated size
- In May, the added value of industries above designated size increased in real terms by 3.5 percent year-on-year (the value-added growth rate is the actual growth rate after deducting price factors).
- In May, the added value of industries above designated size increased by 0.63 percent from a month ago.
- From January to May, the added value of industries above designated size increased by 3.6 percent year-on-year.
- In May, the added value of industries above designated size of private enterprises increased by 0.7 percent year-on-year.
June 16
According to fiscal data released by the PRC Ministry of Finance:
- From January to May, the national government fund budget revenue decreased by 15 percent year-on-year to 1.8657 trillion yuan.
- From January to May, the local government fund budget revenue decreased 16.7 percent year-on-year to 1.7501 trillion yuan. Of the total, revenue from the transfer of state-owned land use rights was down 20 percent year-on-year to 1.4893 trillion yuan.
June 21
According to a report by semi-official mainland media The Paper:
- Inner Mongolia, Jiangxi, Hebei, Gansu, Hubei, Zhejiang, Yunnan, and some other provinces announced their local government fund budget revenue for January to May 2023. Yunnan (up 18.7 percent) and Inner Mongolia (up 8.7 percent) posted positive revenue growth figures, while five other provinces reported negative revenue growth. Of the five provinces, Hubei (down 31.7 percent), Jiangxi (down 23.4 percent), and Zhejiang (down 20.2 percent) saw double-digit negative revenue growth.
- The provinces of Jiangxi, Gansu, Hubei, Zhejiang, and Yunnan announced their revenue from the transfer of state-owned land use rights in the first five months of the year. Only Yunnan (up 19.6 percent) saw positive revenue growth while the rest saw negative growth; the rate of negative growth in Gansu, Hubei, and Zhejiang declined in May as compared to the period from January to April.
Dragon Boat Festival trip figures
On June 24, state broadcaster CCTV reported that there were a total of 140.47 million trips made during the three-day Dragon Boat Festival in China, or up 89.1 percent from 2022 but down 22.8 percent from the pre-COVID levels of 2019.
Other details include:
- Railway trips were up 150.2 percent year-on-year to 43.26 million, but just 12.8 percent higher as compared to the same period in 2019.
- Road travel grew 64.4 percent year-on-year to 89.34 million, or down 33 percent from the same period in 2019.
- Waterway trips (2.53 million) doubled from 2022 but were down 43.6 percent from 2019.
- Airborne trips rose 287 percent from 2022, but were up a mere 3 percent from 2019.
PRC economic measures
June 14
Bloomberg News reported that senior PRC officials have held at least six consultations in recent weeks with business executives and economists on how to revitalize the economy, citing people familiar with the matter.
During the meetings, the officials sought ideas on “ways to stimulate the economy, restore confidence in the private sector and revive the real estate industry.” In response, the business leaders and economists urged the government to “make urgent policy revisions and adopt a more market-oriented, rather than planning-led, approach to growth.”
A participant of a meeting held around two weeks before the Bloomberg report was published said that there was a “consensus among high-level government officials and some 10 people present at one meeting about two weeks ago that more and better-coordinated monetary and fiscal stimulus is needed,” and all those present “shared pressing concerns over the ambiguity of the timing and form of any stimulus.”
Two people who attended several of the meetings said that PRC officials admitted that China’s economy was “facing a critical period and displayed an impetus to finding solutions they hadn’t seen before.” A person familiar with the matter said that senior figures from regulators and other government bodies had met recently with “executives in Beijing and asked for their suggestions on how to encourage private companies and overseas investors to return or expand in China.”
June 15
Financial Times reported that the PBoC will mobilize more than 10 billion yuan, or about a fifth of currently available deposit insurance funds, to repay customers at Yuzhou Xinminsheng Village Bank and three other troubled banks in Henan Province.
June 20
1. The PBoC cut its one-year loan prime rate from 3.65 percent to 3.55 percent, and reduced the over-five-year rate from 4.3 percent to 4.2 percent. The one-year rate affects most new and outstanding loans, while the five-year rate affects the pricing of mortgages and other longer term loans.
2. A consultation meeting on recovering and expanding consumption was held in Beijing. The research discussed at the meeting was carried out by the central committees of non-Communist parties, the All-China Federation of Industry and Commerce, and representatives of personages without Party affiliation.
Wang Huning, the chairman of the National Committee of the Chinese People’s Political Consultative Conference, attended the meeting and delivered a speech. Wang affirmed the research, proposals, and suggestions on recovering and expanding consumption done by the aforementioned bodies. He added that the recovery and expansion of consumption is an inherent requirement for achieving expected economic development goals for the whole year, and called for high-quality research to facilitate the recovery and expansion of consumption.
June 21
The PRC Ministry of Finance, the State Taxation Administration, and the Ministry of Industry and Information Technology jointly announced a 520-billion yuan package of tax breaks over four years for new energy vehicles.
NEVs purchased in 2024 and 2025 will be exempted from purchase tax of as much as 30,000 yuan per vehicle. The exemption will be halved and capped at 15,000 yuan for purchases made in 2026 and 2027.
Market sentiments
June 15
The Wall Street Journal reported that Beijing is considering issuing about one trillion yuan (about $140 billion) of special treasury bonds to help indebted local governments and stimulate business confidence, citing people familiar with the discussions. The special bonds would be used to finance infrastructure projects and other initiatives aimed at boosting economic growth, as well as would be used indirectly to help local governments repay their debt.
Beijing is also considering plans to do away with purchase restrictions on second homes in China’s small and medium-sized cities to boost the property market, according to the Journal’s sources. Presently, the down payment ratio on second homes is no less than 30 percent in most cities and generally no less than 50 percent in first-tier cities.
June 16
Several major banks cut their 2023 China GDP forecasts after the PRC authorities published the May economic data. Banks now expect China’s GDP to grow between 5.1 percent to 5.7 percent this year, down from 5.5 percent to 6.3 percent.
Some of the updated bank forecasts include:
- Nomura: 5.1 percent from 5.5 percent.
- UBS: 5.2 percent from 5.7 percent.
- Standard Chartered: 5.4 percent from 5.8 percent.
- Bank of America: 5.7 percent from 6.3 percent.
- JPMorgan: 5.5 percent from 5.9 percent.
June 19
Goldman Sachs cut its 2023 China GDP forecast to 5.4 percent from 6 percent.
Goldman analysts said that “no reopening boosts have faded as quickly as in China,” listing the real estate downturn and its flow-on effects as the chief reason. “We judge that growth headwinds are likely persistent while policymakers are constrained by economic and political considerations in delivering meaningful stimulus.”
June 20
MarketWatch reported that China-related exchanged-traded funds fell after the People’s Bank of China cut benchmark lending rates due to concerns that Beijing’s monetary stimulus was insufficient to support China’s post-pandemic economic recovery.
The iShares MSCI China ETF closed 4.1 percent lower that day, or its worst day of 2023 and the biggest one-day percentage drop since October 2022 according to Dow Jones Market Data.
Meanwhile, the Invesco Golden Dragon China ETF (tracks American depositary shares of companies based in China) fell by 4.9 percent and the KraneShares CSI China Internet ETF (offers exposure to Chinese software and information technology stocks) declined by 5.6 percent, according to FactSet data.
June 21
1. BlackRock CEO Larry Fink told Nikkei Asia, “We are seeing some international investors selling China. They are de-emphasizing China because they’re worried about China’s economy, and they’re investing in Japan as they want to continue with their Asian exposure.”
Fink said that investor capital is moving from Chinese stocks to Japanese equities amid concerns about China’s sluggish recovery and fading long-term growth prospects. He added that geopolitical risks and fear of a long-term economic slowdown in China are factors in the shift.
2. Hong Kong media report that Bank of America analysts have said that the renminbi could fall to 7.4 against the U.S. dollar by the end of September, or the lowest since December 2007 (the weakest level since the 2007-2008 global financial crisis), before stabilizing to 7.2 to the dollar by the end of 2023.
3. A report by the European Union Chamber of Commerce in China found that foreign companies are moving investments and their Asian headquarters out of the mainland as confidence drops with the PRC’s expansion of its anti-espionage law and other challenges.
Two-thirds of the 570 companies that responded to the European Chamber’s survey found that doing business in China has become more difficult, up from less than half before the COVID-19 pandemic. Meanwhile, three out of five companies said the business environment in China is “more political,” up from half in 2022.
European Chamber president Jens Eskelund told reporters before the release of the report that business confidence in China is “pretty much the lowest we have on record” and there is “no expectation that the regulatory environment is really going to improve over the next five years.”
Backdrop
China’s lackluster economic figures contrast with popular expectations of a swift economic rebound after Beijing removed “zero-COVID” restrictions at the end of 2022.
Our take
1. The official economic and financial data for May and the first five months of the year released by the CCP authorities affirm several of our predictions in our 2023 China Outlook:
- “Financial institutions and investors could bet on the Chinese economy recovering under the expectation that things will return to normal with the easing of ‘zero-COVID.’ However, signs of a quick recovery will likely be illusory as the Chinese economy continues to deteriorate and people lose confidence in China’s economic prospects.”
- “China’s real estate crisis will worsen further and the CCP will find it difficult to turn things around even as it introduces various stimulus and rescue policies.”
- “Despite orders from Beijing to boost domestic demand, local authorities will struggle to implement the central government’s policies. Chinese consumption and demand will continue to shrink.”
- “The CCP authorities will introduce more measures to open up China’s markets and the economy. However, it may not be able to reverse the trend of capital outflows and supply chain migration out of China.”
The official data looks even bleaker in considering the low economic base in 2022 and the fact that the Chinese economy was practically stagnant as many parts of the country were subjected to strict lockdowns during the pandemic period. The Dragon Boat Festival trip figures also hint at China’s poor economic health. The absence of a robust rebound after the end of “zero-COVID” and the resumption of regular economic conditions suggests China is experiencing very serious economic deterioration, with worrisome underlying factors affecting future recovery.
2. Sharp economic downturn and continued real estate sector problems have led to reduced income for both the central government (national government fund budget revenue decreased by 15 percent) and local governments (local government fund budget revenue down nearly 17 percent in total).
Declining national government fund budget revenue indicates that the central government is finding it increasingly difficult to generate revenue through selling or leasing state-owned assets after the three years of “zero-COVID.” This in turn affects the central government’s ability to support or bail out troubled local governments experiencing serious debt and financial difficulties.
Meanwhile, local government implicit debt risks and other financial risks (see here, here, here, here, and here) have a greater probability of being triggered as local governments continue to struggle to generate revenue through land sales (transfer of state-owned land use rights revenue down 20 percent) and other means. Deepening local government income problems will make it harder for local governments to sustain grassroots operations and maintain stability, and in turn impact regime security.
3. Wang Huning attending the consultation meeting on recovering and expanding consumption, as well as reports about senior CCP officials meeting with business leaders and economists, indicate that Beijing is actively trying to resolve China’s economic problems. However, the PBoC’s 10 basis point cuts to two key lending rates and lack of strong policies to stimulate the economy have disappointed observers.
More disappointment could await investors who are still looking to bet on China. With the Chinese economy showing increasing signs of deflation and the emergence of a “liquidity black hole,” no amount of stimulus provided by the central bank will have a significant effect in boosting economic recovery. Should the PBoC drastically lower rates, it could further incentivize the Chinese people to pay off their loans earlier, accelerate capital outflows due to the widening spread between China and the U.S.’s 10-year Treasury bonds, put pressure on the renminbi to depreciate, and form various vicious cycles.
RMB devaluation will have a limited positive impact on China’s exports given shrinking global demand, the U.S. and Europe’s reducing dependency on Chinese goods, and the migration of supply chains out from the mainland. The aforementioned trends will strengthen over time, further limiting any benefits the CCP regime might gain from currency devaluation.
4. The CCP’s NEV tax breaks are likely to have limited impact over the short term in boosting China’s NEV industry given the reduced consumption ability of Chinese residents amid tough economic conditions and China’s current lack of supporting infrastructure for NEVs.
5. The Xi leadership is still promoting the idea of China being “open to business,” supportive of private capital, and welcoming of foreign investments. However, foreign investors and private entrepreneurs in China will likely be increasingly chilled by Xi Jinping’s efforts to grow the CCP’s national security apparatus and strengthen controls over Chinese society, his continuation of various political and anti-corruption campaigns to “rectify” the regime, the CCP’s increasing focus on ideology and personal devotion to Xi, and fears of China’s escalating geopolitical risks as the “new cold war” heats up between the PRC and the U.S. and its allies.
Going forward, Chinese private entrepreneurs and foreign investors concerned about China’s mounting political and geopolitical risks are more likely to hold off on investing in China, as well as increasingly withdraw capital and move headquarters from the mainland.
6. Various political, geopolitical, financial, and debt risks aside, substantial population decline is likely a major factor behind China’s stalling economic recovery. We noted at the start of the year that the CCP had almost certainly concealed the true toll of COVID-related deaths over the past three years. We also noted that a high death toll (tens of millions to hundreds of millions) means that “China’s economic ‘rebound’ will be lackluster at best” and the regime is “more likely to noticeably fall into recession. This will in turn impact the global economy and endanger regime survival.”
A substantially reduced population would account for the cliff-like shrinkage of consumption and the “insufficient demand” in China that the CCP has acknowledged. Beijing cannot drive up consumption by much regardless of how “strongly” it moves to stimulate the economy if the regime is suffering from critical demographic issues, including having significantly fewer people now as compared to before the pandemic and with 20 percent of working-age youths (age 16 to 24) struggling to find employment.
7. The further deterioration of the Chinese economy in the second half of the year will squeeze local governments more and Beijing’s job of economic rescue even harder. This will heighten the regime’s various crises and increase the probability of Black Swan events occurring later in 2023.
2 Beijing puts princelings on notice with rectification of China Development Bank
On June 11, the discipline inspection and supervision team stationed in China Development Bank and the bank’s Party Committee held a special meeting on “comprehensively and strictly governing the Party.”
During the meeting, the discipline inspection and supervision team stationed in CDB said the bank had “improved its Party style and behavior” (黨風行風已有好轉) since the 18th Party Congress (2012) and especially after it was embedded at the bank, but added that the situation is “still serious and complicated.”
The discipline inspection and supervision team stationed in CDB then noted that several cadres at the bank had been investigated for corruption since the 18th Party Congress. The corruption cases had “seven typical characteristics,” including “the high rank of (corrupted) personnel; the long duration of their corruption; the many series of corruption cases; (the involvement of corrupted cadres in) credit infrastructure area with many issues; (corruption involving those) mainly from the younger generations of those born in the 1950s and 1960s; very serious corruption problems (風腐一體問題嚴重); and the prominence of new types of hidden corruption.”
The discipline inspection and supervision team stationed in CDB summarized the “deep-rooted reasons” of corruption cases at the bank as follows:
- First, some leading cadres are not strict with themselves and even took the lead in partaking in corruption.
- Second, the (corrupt cadres had been engaging in) business that deviates from the main responsibilities and main business, internal management is sloppy, and effective supervision and control mechanisms are lacking.
- Third, “talent” was preferred over “virtue” in the selection and appointment of personnel (i.e. personnel were picked for their abilities but without consideration of their character), and the bank had a “backward” corporate culture.
Corruption at China Development Bank
Xi Jinping had overseen the purge of four “big tigers” at CDB since the launch of his anti-corruption campaign in early 2013:
- June 2016: Yao Zhongmin, former CDB deputy Party secretary and chairman of the bank’s board of supervisors, was investigated.
- July 2019: Hu Huaibang, former CDB Party secretary and chairman, was investigated.
- September 2021: He Xingxiang, CDB Party Committee member and vice president, was investigated.
- May 2023: Zhou Qingyu, former CDB Party Committee member and vice president, was investigated.
CDB top executives that have been investigated from 2020 to the present include:
- July 2020: Yang Degao, former CDB Hubei branch Party Committee member and vice president.
- August 2020: Wang Xuefeng, former CDB Shanxi branch president.
- July 2021: Lin Fang, former CDB Hubei branch president.
- July 2021: Xu Weihua, former CDB Hainan branch president.
- December 2021: Liu Chunsheng, former CDB Hainan branch president.
- June 2022: Fu Xiaodong, former CDB Henan branch president.
- July 2022: Rao Guoping, former CDB Xinjiang branch president.
- March 2023: Wang Weijun, former CDB Henan branch president.
- June 2023: Mao Juncai, former CDB Shanghai branch president.
Other CDB officials that were investigated in recent years include:
- February 2019: Guo Lin, a former CDB executive member.
- January 2021: Zhang Linwu, a senior expert at CDB’s second evaluation bureau. From March 2012 to December 2014, Zhang was director of the CDB General Office (Party Committee office); Chen Yuan (the son of CCP elder Chen Yun and a Party princeling) was CDB’s chairman at the time.
- April 2021: Zhang Maolong, a former CDB director of operations who had been retired for more than eight years. From September 2000 to March 2005, Zhang had served as director of the CDB General Office.
- November 2021: Ni Xianmeng, former CDB Zhejiang branch Party Committee member and vice president.
- July 2022: Lu Jun, former deputy director of CDB’s development fund management department.
- September 2022: Ren Kai, vice president of CDB’s management enterprise department.
- October 2022: Liang Chu, deputy general manager of CDB’s marketing and investment department.
- February 2023: Teng Guangjin, a senior expert at CDB’s information technology department.
- March 2023: Pu Hao, a senior expert at CDB’s Henan branch.
Background
Established in 1994, China Development Bank is a state-owned financial institution under the direct jurisdiction of the PRC State Council and the central government. The CDB is tasked with providing development-oriented financing for key areas or weak links in the Chinese economy.
At the end of 2022, CDB’s assets totaled 18.2 trillion yuan.
Our take
1. Xi Jinping’s “rectification” of China Development Bank since taking office, including the discipline inspection and supervision team stationed in CDB recently highlighting the “deep-rooted reasons” of corruption cases at the bank, appears to be part of a broader effort by the Xi leadership to purge the financial sector of disloyal elements and the lingering influence of rival factions, defuse financial risks, and further consolidate Xi’s control over the regime.
2. The Jiang Zemin faction and its associates established their influence over China’s financial sector during the Jiang faction’s era of dominance (1997 to 2012) and continued to reap benefits from their sway well after Xi Jinping took office. During Xi’s first term, the Jiang faction sought to leverage its financial sector influence to undermine Xi, notably during the 2015 “financial coup.”
Since then, Xi has steadily consolidated power and moved gradually to hit the pocketbooks of the Jiang faction members and associates, as well as curb their influence over the financial sector. Notable examples include:
- Purging Tomorrow Group’s Xiao Jianhua, former CEFC China Energy chairman Ye Jianming, and other “white gloves” of the Jiang faction and Party princelings.
- Crackdown on technology companies whose top executives, board members, or leading investors were accustomed to the way things were done during the Jiang faction era of dominance. For example, Beijing stopped Ant Group’s blockbuster IPO and moved to split up Jack Ma’s Alibaba empire, as well as forced Didi Chuxing to delist from the New York Stock Exchange. While by no means the sole reason for its legislation, the Hong Kong National Security Law also gives the Xi leadership the ability to target Jiang faction “anti-Xi” financial activities or other potentially troubling maneuvers in Hong Kong.
3. Party princeling and Jiang faction ally Chen Yuan had previously served as chairman of CDB for 15 years (1998 to 2013) and had plenty of time to establish factional and interest networks at the bank. Beijing likely purged many of CDB’s top executives as part of an effort to root out Chen’s (and by extension, the Jiang faction’s) lingering influence over the bank and limit any mischief that “anti-Xi” elements could potentially cause. Meanwhile, the investigation of former CDB General Office directors, who are former subordinates and top aides of Chen Yuan, sends the signal that while Xi will not be quick to take action against Party princelings, Chen and others who might be thinking of challenging Xi should perish the thought lest they are next in line to be purged.
Chen Yun (the father of Chen Yuan) and Bo Yibo (the father of Bo Xilai) were Jiang Zemin’s political backers back in the day. Meanwhile, Chen Yuan is also known to be a strong supporter of Bo Xilai. After Bo was purged at the 2012 Two Sessions (implicitly over his role in a failed coup attempt against Hu Jintao and Xi Jinping), overseas Chinese language media reported in April 2012 that Chen was one of few princelings who still supported Bo. Overseas Chinese language media also reported that Chen’s daughter Chen Xiaodan and Bo’s son Bo Guagua were allegedly lovers at the time.
When Bo Xilai was still in charge of Chongqing, the CDB headed by Chen Yuan injected a lot of money into the city, which helped prop up Bo’s “Chongqing Model” and boost his political prestige and prospects. Xu Chenggang, an honorary professor at the University of Hong Kong and former consultant to the World Bank and IMF, told the Chinese-language edition of Reuters in a May 2012 article that “the level of support Chongqing received from CDB is beyond that of other provincial governments.” Xu added that the “Chongqing Model” is a “political achievement project” undertaken by politicians for political purposes without consideration of financial resources and commercial benefits.
Therefore, Xi’s targeting of CDB at this time implicitly serves to put on notice Party princelings and other CCP elites could potentially undermine Beijing at this crucial juncture for the regime. Xi is likely also warning princelings not to create additional financial risks for the PRC for the sake of personal gain or as a challenge to his rule, otherwise he will have no choice but to openly move against them.
