Updated on May 22, 2024.
1 Xi’s speech again warns of escalating risks and their transformation into political risks
The “Excerpts of Xi Jinping’s Discourse on Chinese Modernization,” a book published by Central Party Literature Press on Nov. 5, contained a speech by Xi to hundreds of senior officials at an internal meeting on Feb. 7, 2023.
In the speech, Xi said, “Now, various risks and dangers are highly correlated, strongly linked, and rapidly transmitted. A little carelessness can cause a butterfly effect.”
“Do not let small risks become big risks, do not let individual risks become comprehensive risks, do not let local risks become regional or systemic risks, do not let economic risks become social and political risks, and do not let international risks become domestic risks,” Xi added.
Xi also told officials to “identify risks early, act quickly, take command at the front, and make immediate judgments as soon as they arise.”
“Do not let small things be delayed to become big things, and big things be delayed until they explode,” Xi said.
Consistent sense of risk and crisis
Xi Jinping has consistently warned and required the CCP officialdom to guard against risks in his decade in charge. Some examples include:
Oct. 29, 2015
In a speech at the Second Plenum of the 18th Central Committee, Xi said:
- “We must give prominence to risk prevention, ‘think about it before it emerges, and worry about it before it happens’ (圖之於未萌, 慮之於未有; i.e. “act before it is too late”), and strive to avoid major risks or be able to withstand major risks when they occur.”
- “Don’t let small risks evolve into big risks; don’t let individual risks evolve into comprehensive risks; don’t let local risks evolve into regional or systemic risks; don’t let economic risks evolve into social and political risks; and don’t let international risks evolve into domestic risks.”
Jan. 15 to Jan. 16, 2019
In a speech at the Central Political and Legal Affairs Work Conference, Xi:
- Requested that officials “strive to prevent [risks] first, detect [risks] at an early stage, and dispose of [risks] when they are small.”
- Instructed that “all districts must take responsibility and deal with problems immediately when they occur, instead of delaying small matters and blowing up big ones.”
Jan. 18, 2016
In a speech to a special seminar for leading cadres at the provincial and ministerial levels to study and implement the spirit of the Fifth Plenum of the 18th Central Committee, Xi:
- Warned that “various sources of contradictory risks and challenges and various types of contradictory risks are intertwining and interacting with each other.”
- Noted that if “there is insufficient prevention and inadequate response” in dealing with risks, they will be “transmitted, superimposed, evolved, and upgraded,” resulting in “small contradictory risk challenges developing into big contradictory risk challenges; local contradictory risk challenges developing into systemic contradictory risk challenges; international contradictory risk challenges developing into domestic contradictory risk challenges; and contradictory risk challenges in the fields of economics, society, culture, and ecology developing into political contradictory risk challenges.” Ultimately, these “contradictory risk challenges” will “endanger the Party’s ruling status and endanger national security.”
June 29, 2018
In a speech at the sixth collective study session of the Politburo of the 19th Central Committee, Xi said:
- It is necessary to “educate and guide leading cadres at all levels to enhance their political acumen and political discernment; give high priority to and timely block the transformational pathways of risks in different areas to avoid cross-infection of risks in various areas; and prevent non-public risks from expanding into public risks and non-political risks from spreading into political risks.”
July 7, 2022
Qu Qingshan, dean of the Central Party History and Documentation Research Institute, published a nearly 12,000-character article on the official website of the Central Commission for Discipline Inspection and the National Supervisory Commission.
In explaining the importance of Xi’s “Two Establishes” to the regime, Qu wrote that risks often do not exist in isolation and are likely to “overlap, intertwine, transform, interact and form a risk complex.” This results in “small risks developing into large risks,” “external risks turning into internal risks,” and “economic risks transforming into political risks.”
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Xi also increasingly warned of a growing regime crisis after Sino-U.S. tensions worsened when President Donald Trump took office and launched a trade war against the PRC. Some examples are:
Jan. 21, 2019
In a speech at the opening ceremony of a special seminar for important provincial and ministerial-level leading cadres on adhering to “bottom-line thinking” (底線思維) and preventing and defusing major risks, Xi:
- Called for “adhering to bottom-line thinking, enhancing danger awareness, improving prevention and control capabilities, and striving to prevent and defuse major risks.”
- Called for “always remaining highly vigilant and be on guard against both ‘Black Swans’ and ‘Gray Rhinos’” in the face of “a volatile international situation, the complex and sensitive surrounding environment, and the arduous tasks of reform, development, and stability.”
Sept. 3, 2019
In a speech at the opening ceremony of a training class for young and middle-aged cadres at the Central Party School, Xi said:
- “The risks and tests we face on the way forward will only become more and more complex, and we may even encounter perilous situations (驚濤駭浪).”
- “The various struggles we are facing are not short-term but long-term, and will accompany us at least throughout the entire process of realizing the second centenary goal.”
Xi would later remind officials of the “perilous situations” facing the CCP regime in speeches in 2021, 2022, and 2023.
Our take
Xi Jinping began warning of escalating risks and the need to prevent them from metastasizing early on in his tenure as he made increasing progress in purging the Jiang Zemin faction, other political adversaries, and corrupt officials. At the time, Xi was likely concerned about spiking political and other risks as he took out “big tigers” from the Jiang faction like Zhou Yongkang, Xu Caihou, and Guo Boxiong, as well as started to work on resolving the “basketcase” of problems stemming from the policies of the Jiang-Hu era.
After the outbreak of the Sino-U.S. trade war and worsening bilateral relations from 2018 onwards, Xi included international matters when instructing officials on what they should be mindful of in various speeches.
That Xi still needs to warn officials about intertwining and escalating risks, as well as how “economic and social risks will become political risks,” after more than a decade in charge reflects poorly on his effort to escape the historical cycle of political power’s “rise-and-fall” through power consolidation and “self-rectification.” If anything, it is becoming increasingly observable that Xi’s “solution” to defusing risks and preserving the regime (i.e. intense power centralization, strengthening of the national security state, and elevating Xi and the Party’s position above all) are accelerating the regime’s headlong dash towards disaster and failure.
Should Xi stay on his current path of continuous power consolidation and enhancement of the CCP’s control over the country, the systemic deficiencies of the CCP authoritarian dictatorship will inevitably produce developments that lead to a worsening of social tensions and the evolution of social and economic risks into greater political risks. For example, we noted in the Nov. 20, 2023 newsletter that Xi’s attempt to strengthen his and the Party’s control over the financial sector and system will frighten away foreign capital and lead to an intensification of factional struggle as CCP elites look to retaliate against Xi over their harmed financial interests. Growing financial chaos will also impact the economy and create even more enemies of Xi in the populace as the Chinese people struggle even more to make ends meet. Unless Xi abandons the CCP and moves China towards genuine reforms, he will almost certainly go down with the communist regime that he is currently striving hard to save.
2 PRC authorities ease financing regulations in bid to save property firms
Nov. 17
The People’s Bank of China, the National Administration of Financial Regulation, and the China Securities Regulatory Commission jointly held a seminar for financial institutions to study recent key work in real estate finance, credit investment, and debt risk resolution of financing platforms.
In discussing real estate, the meeting stressed that all financial institutions should treat all real estate enterprises equally and meet the reasonable financing needs of real estate companies without discrimination. Financial institutions should also not hesitate to lend, withdraw, or cut off loans to real estate firms that are operating normally (i.e. companies that have not defaulted on their debt).
Nov. 20
Mainland media Caixin reported that the PRC financial regulatory authorities discussed a number of real estate financial relaxation policies at a seminar for financial institutions on Nov. 17.
According to relevant people from several major state-owned banks, the financial regulatory authorities proposed the so-called “three no lower than” (三個不低於) measure at the seminar:
- The growth rate of each bank’s real estate loans shall not be lower than the average real estate loan growth rate of the banking industry.
- The growth rate of corporate loans to non-state-owned real estate companies shall not be lower than the growth rate of bank’s real estate loans.
- The growth rate of personal mortgages to non-state-owned real estate enterprises shall not be lower than the growth rate of each bank’s mortgages.
Caixin added that changes to development loans, business property loans, and personal housing loans were also proposed at the seminar.
Caixin further noted that regulatory agencies are drafting a white list of Chinese real estate developers, with 50 state-owned and private real estate firms likely to be included in the list. Those on the list will receive support in various areas, including credit, debt, and equity financing. The white list will be an expanded version of a list of systemically important “high-quality” real estate firms that the authorities identified earlier in 2023.
A relevant person in charge of one of China’s “Big Four” banks told Caixin, “On the whole, it is unrealistic to expect financial rescue. Activating market confidence is the key to reviving the real estate industry.” The person added that the regulators were likely forced to introduce more real policies in light of the property sales during the “Golden September and Silver October” peak period not meeting expectations and the liquidity shocks that China Vanke and Gemdale Corporation experienced. “If systemic risks are triggered in real estate enterprises, then small and medium-sized financial institutions will simply not be able to bear it. The non-performing asset ratios of the four major state-owned banks will also increase significantly and this may trigger a huge wave of personal loan defaults,” the person said.
Other mainland media reported that the PRC authorities have come up with a list of real estate enterprises that are operating normally and ranked according to their asset size, and the authorities require the banks to meet the financing needs of these “white-listed” companies. The list contains about 50 private and state-owned firms, including Vanke, Seazen Group, Longfor Group, and Gemdale.
Nov. 22
Bloomberg News reported that Country Garden, Sino-Ocean, CIFI Holdings Group, Gemdale, Vanke, Seazen, and Longfor are on the PRC authorities’ draft white list of 50 developers eligible for financing support, citing people familiar with the matter.
The people said that regulators are set to finalize the list and distribute it to banks and other financial institutions within days. The people added that some of the details could be changed.
Backdrop
Nov. 15
The PRC National Bureau of Statistics released the following real estate data:
- Investment in real estate development from January to October 2023 decreased 9.3 percent (calculated on a comparable caliber) year-on-year to 9.5922 trillion yuan. Of the total, investment in residential property fell by 8.8 percent to 7.2799 trillion yuan.
- The area of new housing construction from January to October 2023 decreased by 23.2 percent to 791.77 million square meters.
- Sales of commercial housing from January to October 2023 declined by 4.9 percent to 9.7161 trillion yuan.
Nov. 16
The NBS announced the changes in sales prices of commercial housing in 70 key cities in October 2023 from a month ago:
New commercial housing
First-tier cities: Prices declined by 0.3 percent, or at the same rate of decline in September. Beijing saw price drops of 0.4 percent, Guangzhou down 0.7 percent, Shenzhen down 0.5 percent, and Shanghai saw price increases of 0.2 percent.
Second-tier cities: Prices declined by 0.2 percent, compared with a drop of 0.3 percent in September.
Third-tier cities: Prices declined by 0.5 percent, compared with a decrease of 0.3 percent in September.
Second-hand housing
First-tier cities: Prices fell by 0.8 percent, compared with an increase of 0.2 percent in September. Beijing saw price declines of 1.1 percent, Guangzhou down 0.8 percent, Shenzhen down 0.8 percent, and Shanghai saw price increases of 0.5 percent.
Second-tier cities: Prices dropped by 0.5 percent, or the same rate of decline in September.
Third-tier cities: Prices decreased by 0.6 percent, compared with a drop of 0.5 percent in September.
Of the 70 cities, the prices of new commercial housing and second-hand housing dropped from a month ago in 56 and 67 cities respectively, or up two in each category.
Our take
1. The “three no lower than” policy lowers the threshold of lending to real estate companies in what appears to be a move by the PRC authorities to compel banks and other financial institutions to keep lending to real estate companies amid the worsening property sector crisis. Just as was the case with the earlier “three red lines” policy, the CCP is resorting to administrative means to do what it believes to be necessary to rescue the regime; the “three red lines” sought to control the property bubble and lower risks, while the “three no lower than” seeks to mitigate the impact of a real estate sector “hard landing.”
Beijing has likely calculated that financial institutions in China could become unwilling to extend loans to embattled property companies as the real estate crisis drags on. But Beijing’s measures are unlikely to delay the inevitable. In extrapolating from the decline in the area of new housing construction (down 23.2 percent) from January to October 2023, the total area of new housing construction for the whole year could be less than 900 million square meters, or around the same level as in 2007 (954 million square meters) and less than 40 percent of the total area (2.271 billion square meters) during the peak of the recent housing boom in 2019.
The decline in the area of new housing construction means that developers are making fewer investments and taking out fewer loans, which in turn leads to significantly fewer property sales in the future at a time when developers are defaulting on their debt. Property sales will also not be helped by potential buyers increasingly adopting a “wait-and-see” mentality as they wait for prices to bottom out before making a purchase. The resulting vicious cycles will likely lead to the collapse of many real estate companies, which will in turn significantly increase the amount of non-performing loans being held by financial institutions and trigger systemic financial risks with disastrous consequences for the CCP regime.
2. The PRC authorities’ real estate measures will likely only slow down the eruption of a full-blown crisis while transferring risks from the property sector to the financial system. Rapid economic deterioration aside, a key factor for why the property sector problem is an intractable one for the CCP regime is China’s shrinking population.
China’s population decline is obvious even from the CCP’s own manipulated figures. From the 1980s to the 1990s, the country’s population grew by between 15 million to more than 20 million people annually. By 2000, that number had fallen below 10 million. China’s population growth dropped further to 7 million in 2005 and 6.4 million in 2010.
Shifting demographics in China means that there are increasingly fewer people between the ages of 23 to 36, that is, the cohort more likely to purchase homes. Given the current trend of population declines, the people in the critical age group of home buyers will shrink even more over the next five to 10 years, with a corresponding decline in property demand.
The housing demand problem looks even more dire in light of recent official data. On Nov. 20, the NBS released data showing that 20 out of China’s 31 provincial-level regions had a negative natural population growth rate in 2022, or seven more regions as compared to 2021.
3. The PRC authorities could be planning to take advantage of what appears to be a peak in Federal Reserve monetary tightening as inflation eased slightly in the U.S. to embark on monetary easing to better rescue the real estate sector. Beijing would have even more confidence to press ahead with monetary easing if the Fed pauses rate hikes and even lowers the interest rate.
However, the Fed may not be done with monetary tightening just yet. The U.S. core CPI beat expectations (4.1 percent) by rising 4 percent in October, but is still well above the Fed’s 2 percent inflation target. Other factors like energy prices being affected by global conflicts and the Bureau of Labor Statistics changes to how it estimates health insurance costs could put upward pressure on inflation numbers. If inflation in the United States is not contained and the Fed continues to raise rates, then Beijing could end up shooting itself in the foot with its monetary easing policies as those would put more downside pressure on the renminbi given the wide differential between interest rates in the U.S. and China. Greater currency depreciation would also end up accelerating outflows and affecting the Chinese economy more broadly.
