Beijing’s inability to turn around the economy and address the property sector crisis has left it increasingly anxious about financial risks and their potential transformation into social and political risks.
Since the start of the year, the Xi Jinping leadership has tried various measures to revive a Chinese economy in decline. In mid-May, Beijing unveiled “historic” steps to stabilize the crisis-stricken property sector, including the easing of mortgage rules, the central bank facilitating 1 trillion yuan in extra funding, and local governments set to buy “some” apartments. Xi also sought to promote high-tech manufacturing and the industrial sector when on inspection tours in various parts of the country.
The Xi leadership’s moves, however, have not found traction. Take the real estate industry, for example. Despite the property policies, developers continue to see their sales plummet. In May, the top 100 property companies in China saw their sales drop by 33.6 percent from the same period in 2023 to 322.41 billion yuan, according to China real estate information service provider CRIC. Meanwhile, mainland media reported the transaction volume of new homes in 15 key cities went up by just 0.85 percent from the previous week after Beijing introduced the new property policies, citing data from Zhuge Data Research Center.
Other economic indicators also point to continued pains for the Chinese economy. Data released by the National Bureau of Statistics on May 31 showed that China’s purchasing managers’ index fell to 49.5 in May from 50.4 in April, or below the 50-point mark separating growth from contraction. Further, the sub-indices for new orders, raw material inventories, employment, new export orders, imports, purchasing volume, and orders in hand all showed contraction. China also saw a credit plunge in April, with the scale of social financing decreasing by 198.7 billion yuan, or the first monthly decline in aggregate financing since comparable data was used in 2017 and the first monthly decline since October 2005 using a smaller data set that excludes things like government funding.
Beijing’s inability to turn around the economy and address the property sector crisis has left it increasingly anxious about financial risks and their potential transformation into social and political risks. Meanwhile, rumors are swirling that Xi has placed his prominent political foes under strict control and is undecided about denouncing a predecessor and top enemy.
Focus on financial risks
The PRC authorities have recently called attention to the need to prevent and control financial risks.
On May 21, the State Council held a national meeting of local Party Committee financial office directors in Beijing. In a speech to the meeting, People’s Republic of China vice premier He Lifeng said the key work in the financial sector should be anchored in the long-term goal of “building a strong financial nation” and “firmly preventing systemic risks” in the short-to-medium term. He added that the PRC needed to confront the risks and hidden dangers present in the financial system, and carry out the “main line” of work of risk prevention, strengthening regulation, and promoting development.
He Lifeng also told the meeting that it is essential to “comprehensively manage and strictly control” the intertwined risks in the real estate sector, local government debt, and local small and medium-sized financial institutions. He further called for cracking down on illegal financial activities.
Meanwhile, a Politburo meeting on May 27 reviewed new rules for financial accountability and said that those regulations are aimed at “further promoting the comprehensive and strict governance of the Party in the financial sector,” “effectively strengthening Party Central’s centralized and unified leadership over financial work,” and “further consolidating the responsibilities of relevant management departments, financial institutions, industry regulatory departments, and local Party Committees and governments in the financial sector.”
The PRC authorities would move swiftly to promote financial accountability. On June 7, Bloomberg News reported that the National Audit Office had dispatched a team of about a dozen staff each to at least 10 of the top mutual funds in China in past weeks, citing people familiar with the matter. The people said that the National Audit Office team “screened through documents, focusing on expenses.” Two of the people said that the staff at the mutual funds were asked to give full support to the audit teams. Another person said that the work was part of routine audits and a constitution of the examination of large funds.
And on June 9, the Central Commission for Discipline Inspection announced on its website that Xu Zuo, the vice general manager of China CITIC Group and a member of its Party Committee, was currently under investigation for “suspected serious violations of discipline and the law.”
The PRC authorities’ anti-corruption efforts in the financial system and focus on preventing and controlling financial risks suggest that such risks are becoming very severe and are in danger of bubbling to the surface.
Jiang clan in trouble?
The Xi leadership’s focus on preventing and defusing financial risks is likely to have a very limited impact in addressing the various financial and economic problems that were created by Xi Jinping’s predecessors. Worse for Xi, the real estate sector crisis and some of the problems he inherited were exacerbated by his own policies and the worsening of the PRC’s relations with the United States and the rest of the world.
Beijing’s tough “rectification” of the financial system could clean up some of the entrenched corruption and force executives to think twice before engaging in risky financial behavior that increases the Chinese Communist Party regime’s risks. However, Xi clamping down tightly on the financial system will likely cause a brain drain and further antagonize Party princelings and other elites, many of whom already have an axe to grind with Xi for hurting their interests over the past decade with the anti-corruption campaign and other policies.
Xi is almost certainly aware that he faces strong internal pushback over his policies and has already sent warnings that he is not to be challenged. For instance, the investigation of CITIC Group’s vice general manager Xu Zuo signals to the princelings with influence over Chinese financial institutions that they should toe the line or prepare to be punished. Ironically, Xi’s move to gain political leverage over the Party elites could pave the way for increased internal conflict in the CCP’s upper ranks.
China could potentially see political Black Swans if Xi senses that he is in serious political danger. Rumors have been circulating in Chinese-speaking circles since the start of the year that Xi is planning to “thoroughly negate” his late chief rival Jiang Zemin’s “incorrect political line,” and possibly at the coming Third Plenum of the 20th Central Committee. Party insiders also told an overseas Chinese language media outlet that Xi allegedly has Jiang Mianheng, his brother Jiang Miankang, and Jiang Mianheng’s son Alvin Jiang Zhicheng placed under strict control. The CCP faces a dire outcome should Xi Jinping decide that he has to publicly denounce Jiang Zemin and the Jiang faction to ensure his personal safety amid escalating political risks.
