1 Efforts by local gov’ts to ‘smash pots and sell iron’ could exacerbate credit crunch
Mainland media reported on Aug. 28 that the local government’s office of Bishan District in Chongqing City issued a notice on the establishment of a special task force for “smashing pots and selling iron” (砸鍋賣鐵) in the district.
“Smashing pots and selling iron” was originally a political slogan from the Great Leap Forward. At the time, the CCP sought to “surpass Britain and catch up with America” (超英趕美) in steel production by mobilizing China’s entire population for the task. Households were made to literally melt their cooking pots and other metal utensils to contribute to steel production, resulting in the term. The term started to appear frequently in local government meetings and documents from mid-2023 as local governments moved to liquidate state-owned assets to deal with debt problems. In CCP official parlance, “smashing pots and selling iron” refers to various methods that local governments use to revitalize the “three assets” (funds, assets, and resources) of state-owned enterprises, reduce debt ratios, and improve the quality and efficiency of fiscal expenditures.
The Bishan District local government’s notice said that the task force was established in accordance with the relevant requirements of a work plan for promoting the activation of state-owned assets in the district (重慶市璧山區推動國有資產盤活工作方案) and was formed after research by the local government. The notice added that Bishan District performed relatively well in terms of its fiscal quality and debt status as compared to other districts and counties in Chongqing in 2023.
Yuan Haixia, director of China Chengxin International Credit Rating’s research institute, told mainland media that “smashing pots and selling iron” reflects the proactive efforts of local governments to defuse debt and their sense of helplessness. Yuan added that defusing debt does not mean reducing it to zero, but maintaining sustainability between fiscal policy, economic conditions, and debt, with the most important aspect being the continuation (i.e. no defaults and continued ability to raise debt) and rolling over of debt.
A local financial official told mainland media that the use of “smashing pots and selling iron” by a first-level local government (i.e. provincial governments or governments of directly administered municipalities), and especially in a public document, will inevitably lead to sensationalism. In particular, the document could cause panic among residents and local investors, as well as pose certain risks for the management of public discourse.
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The report on Bishan District establishing a special task force for “smashing pots and selling iron” sparked heated discussions on Chinese social media. Some netizens commented:
- “Whose pots are being smashed? Whose iron is being sold?”
- “This type of campaign-style slogan is really frightening!”
- “It seems that the government is out of money.”
Our take
1. The establishment of “smashing pots and selling iron” task forces by the Bishan District government and other local governments appears to be mostly a political gesture aimed at demonstrating to the higher authorities that they are actively working to address the debt crisis at the local level.
The choice of the Great Leap Forward-era slogan “smashing pots and selling iron” to describe the liquidation of state-owned assets reflects local government urgency towards addressing fiscal shortages and debt problems, which have worsened as China’s economy continues to decline. Beijing has issued multiple directives in recent years requiring all levels of government to “tighten their belts” (勒緊腰帶) and prepare to “live frugally” (過緊日子). In March 2024, the finance department heads of 14 local governments released debt resolution plans; the plan by Gansu Province mentioned phrases like “living frugally” and “smashing pots and selling iron.”
Local governments likely also decided to revive a slogan from the Mao era in an attempt to “align” themselves with what they believe the Xi leadership wants from propaganda rhetoric in pursuing Beijing’s call to defuse and guard against local debt risks. In striving for “political correctness,” local governments are looking for another way to accrue political capital as they struggle to secure achievements by boosting growth and fabricating data in the current tough economic environment.
2. Official fiscal data indicates that efforts by local governments to “smash pots and sell iron” have ticked up in recent months.
The revenue generated from the liquidation of state-owned assets is categorized as non-tax revenue in fiscal accounts. According to Ministry of Finance data, non-tax revenue for the first seven months of 2024 increased by 12 percent year-on-year to reach 2.4 trillion yuan. In comparison, non-tax revenue for the January-July period in 2017 was 1.6 trillion, or slightly more than half the amount generated this year. Specific to Chongqing where Bishan District is located, non-tax revenue increased by 31.2 percent to 50.6 billion yuan in the first half of the year while the municipality’s tax revenue went up by just 2.8 percent to 80.1 billion yuan.
Mainland media reports indicate that the proportion of non-tax revenue in the fiscal income of some prefecture-level cities exceeded 50 percent in the first half of 2024. The main growth areas of non-tax revenue include the operation of state-owned capital, paid use of state-owned resources, and the “revitalization” of existing assets (i.e. liquidation of state-owned assets).
3. Local governments are looking to lower debt risk and resolve debt issues by “smashing pots and selling iron.” The move, however, could also adversely impact China’s economic growth.
The Chinese economy is currently experiencing deflation, a “balance sheet recession,” and contracting private investment. The CCP authorities have been supporting investment and social financing to keep things ticking. But efforts by local governments to reduce debt, including disposing state-owned assets, are bound to cut into overall credit growth and squeeze social financing in the short term, affecting China’s economic growth.
The high-profile efforts by local governments to “smash pots and sell iron” can also breed corruption. Local government fiscal difficulties in recent years and the deep-rooted culture of corruption in the CCP officialdom saw the bulk of high-quality state-owned assets that local governments can pledge mortgaged to banks for financing. This means that local governments have limited valuable assets left for “smashing pots and selling iron,” or assets with inflated valuations that would not secure much funds from the banks. Unless there are personal gains to be had, local officials could be less inclined to actually “smash pots and sell iron” despite the sloganing because the disposal of overvalued assets at a low price would be reflected as losses on the books and leave them with a bad political record. Rather, keeping overvalued assets allows local governments to maintain a lower (at least by appearances) debt-to-asset ratio and avoid criticism from higher authorities.
As long as China’s economy continues to decline and the local government fiscal revenue situation does not improve, the effort by local governments to “smash pots and sell iron” could exacerbate other risks and problems even as it helps somewhat with debt reduction.
2 PBoC’s open market operations suggest Beijing is looking to run the money printing press hot
Central bank enters treasury bond market
Aug. 29
1. The PRC Ministry of Finance announced that the issuance of two tranches of special treasury bonds has been completed. The first tranche has a maturity period of 10 years, an issue value of 300 billion yuan, and a coupon rate of 2.17 percent. The second tranche has a maturity period of 15 years, an issue value of 100 billion yuan, and a coupon rate of 2.25 percent. Both tranches would be listed and accrue interest on Aug. 29, 2024.
2. The People’s Bank of China announced that it purchased 400 billion yuan worth of 10-year (300 billion yuan) and 15-year bonds (100 billion yuan) in open market operations.
Aug. 30
The PBoC announced that it conducted open market operations involving the buying and selling of government bonds in August 2024.
The central bank purchased short-term government bonds from some primary dealers and sold long-term government bonds, resulting in a net purchase of bonds with a face value of 100 billion (i.e. releasing 100 billion yuan of medium- to long-term liquidity into the market) for the month.
The PBoC also officially implemented the trading of government bonds on the secondary market that it mentioned on several occasions this year.
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The PRC finance ministry’s special treasury bond issuance of 400 billion yuan and the central bank’s purchase of government bonds in the same amount appears to be the continuation of an operation to roll over maturing government bonds from the mid-2000s.
In 2007, the finance ministry issued 1.55 trillion yuan of 10-year and 15-year special treasury bonds to fund the establishment of the sovereign wealth fund China Investment Corporation. When 600 billion of the 10-year bonds matured on Aug. 29, 2017, the Ministry of Finance rolled over the debt by issuing 400 billion yuan of 7-year bonds (maturity date of Aug. 29, 2024) and 200 billion yuan of 10-year bonds (maturity date of Aug. 29, 2027). With the 7-year bonds having recently matured, the CCP authorities rolled over the debt again with the finance ministry’s recent special treasury bond issuance and the PBoC’s open market operations.
Backdrop
June 2024: PBoC governor Pan Gongsheng said at the 2024 Lujiazui Forum that the central bank’s bond trading would serve as a liquidity management tool. He added that the PBoC would be involved in both the buying and selling of bonds, and bond trading will not become a form of large-scale monetary easing.
July 2024: PRC state media reported that the PBoC had signed agreements with major financial institutions to borrow government bonds worth several hundred billion yuan and has plans to sell those bonds.
Our take
1. The PBoC’s recent bond operations in the open market affirms our analysis in July when the central bank announced that it would “borrow sovereign bonds from primary traders in the open market in the near future.”
We wrote that the CCP authorities can “technically have the PBoC purchase large amounts of government bonds from the secondary market to provide funds for the Ministry of Finance to help manage the continued deterioration of the Chinese economy and the fiscal revenue problems of local governments.” We also wrote that this operation would have the central bank “run its money printing press in high gear and could lead to hyperinflation.”
2. The PBoC’s recent bond-buying operation is different from what investors have been speculating over the past few months. Many investors believed that the central bank would restart secondary market bond trading as a routine monetary policy tool to raise government bond yields by selling medium- and long-term government bonds. However, the PBoC’s open market operations in August (net purchase of 100 billion yuan and rolling over of 400 billion yuan of debt through purchasing special treasury bonds on the secondary market), as well as similar operations in previous years (such as in 2017 and 2022), do not align with what investors have anticipated and instead appear to reveal that the central bank is planning to undertake a form of large-scale monetary easing.
The central bank’s open market operations suggest that the CCP authorities could gradually shift its approach to injecting base money from measures like cutting the reserve requirement ratio and making medium-term lending facility loan adjustments to having the finance ministry sell bonds on the primary market and the PBoC purchase government bonds on the secondary market.
3. The PBoC’s recent substantial bond-buying operations suggest that Beijing is seeing fiscal shortages as China’s economy continues to deteriorate and is looking to roll over debt to weather the tough times. Concurrently, the central bank’s purchase of special treasury bonds issued by the Ministry of Finance helps maintain the money supply and prevent a further contraction of credit amid deflationary pressures.
What’s next
The CCP authorities’ fiscal deficit will likely expand as deflationary conditions and the economic downturn persist, and should the U.S. and its allies intensify their containment of China. To tackle the problem, Beijing will likely run the money printing press hot by having the Ministry of Finance keep issuing special treasury bonds for the central bank to purchase.
3 US-China relations remain tense despite Sullivan’s Beijing trip
Sullivan visits Beijing
White House National Security Advisor Jake Sullivan visited China from Aug. 27 to Aug. 29. In Beijing, Sullivan met with PRC foreign minister Wang Yi, Central Military Commission vice chairman Zhang Youxia, and Chinese leader Xi Jinping.
According to White House readouts, Sullivan discussed a range of issues with the senior PRC officials he met, including counternarcotics, military-to-military communications, AI safety and risk, the Russia-Ukraine war, the situation in Gaza, cross-Strait issues, and the South China Sea. The readouts also noted that the U.S. and the PRC will hold a theater commander telephone call in the future, and Biden and Xi will hold a call in the coming weeks.
In a press conference on Aug. 29, Sullivan said that the Sino-U.S. relationship “remains a competitive relationship.” He added that there is a need to “responsibly manage that competition” to “arrive on a stable basis so that each of us can stand up for our interests, we can stand up for our friends, we can defend our values, we can take the actions we feel we need to take in service of our national interests.” Sullivan said that the diplomacy of the past two years “puts us in a position to increase the prospect of stability in the relationship.”
Sullivan also said to be mindful of “risks of escalation, risks of misunderstanding, [and] risks of something going awry.” He characterized his China trip as the “continuation of a sustained pattern of intensive diplomacy led by President Biden and President Xi and carried out by many of us across our administration and the Chinese government, and we’re going to keep at it.”
When asked by a reporter about whether PRC officials had asked about what a potential Harris administration would represent for Sino-U.S. relations, Sullivan said that the PRC would have to “speak for themselves on that.” He added that Vice President Kamala Harris “has been a central member of the Biden foreign policy team, a leading member, and has been part of the design and execution of the overall strategy in the Indo-Pacific and with respect to the responsible management of U.S.-China relations.”
When asked about PRC interference in U.S. elections, Sullivan said, “Every time I meet with Chinese officials, I raise the issue of election interference and laying down a clear marker that it’s unacceptable for any nation to interfere in the U.S. election. And this trip was no different in that regard.”
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Noteworthy points made by Xi Jinping in his meeting with Jake Sullivan include:
- Xi said that countries need “solidarity and coordination” in a “changing and turbulent world,” not “division or confrontation.” He added that people want “openness and progress, not exclusion or regress,” and China and the U.S. “should be responsible for history, for the people and for the world, and should be a source of stability for world peace and a propeller for common development.”
- Xi said that both sides should “first and foremost find a good answer to the overarching question: Are China and the United States rivals or partners?”
- Xi claimed that the PRC “follows a path of peaceful development” (including “building a community with a shared future for mankind”) and that “China’s U.S. policy is highly consistent.”
The Xinhua readout of the Xi-Sullivan meeting had Sullivan reiterating that the U.S. “does not seek a new Cold War, does not seek to change China’s system, the revitalization of U.S. alliances is not against China, the U.S. does not support ‘Taiwan independence,’ and it does not seek conflict with China.” Also, the U.S. “one-China” policy “has not changed,” and it has “no intention to use Taiwan as a tool to contain China.”
Notable China-related developments before Sullivan’s trip
Aug. 26
1. Canada imposed 100 percent tariffs on Chinese electric vehicles and a new 25 percent tariff on Chinese steel and aluminum.
2. A PRC reconnaissance aircraft briefly entered Japanese territory near Nagasaki Prefecture around 11:30 a.m., according to Japan’s defense ministry. Japan’s Self-Defense Force put fighter jets on high alert and issued a warning to the PRC aircraft in response.
Aug. 28
The Financial Times reported that PRC officials and scholars, including former ambassador to Washington Cui Tiankai, have been largely unsuccessful in meeting former president Donald Trump’s campaign officials and surrogates, citing eight U.S. and Chinese people familiar with the situation.
The U.S. scholars and former officials who were interviewed by the Times gave the following reasons for why the PRC is struggling in its outreach efforts with Trump:
There is “very little upside” for Trump advisers to meet with PRC officials, especially because there is a risk that such meetings could be “misconstrued.” For instance, Trump advisers want to avoid the fate of Trump’s former national security adviser Michael Flynn, who was investigated and scrutinized over his meetings with Russian officials ahead of Trump’s inauguration.
Trump advisers believe that PRC officials are attempting influence operations or intelligence gathering “as opposed to looking for real discussions.”
Some Trump advisers are concerned that meeting with PRC officials could impact their chances of working in a future administration, while others believe that doing so could affect getting security clearances.
Aug. 29
Bloomberg News reported that the Netherlands government will likely not renew certain ASML licenses to service and provide spare parts in China when they expire at the end of 2024, citing people familiar with the matter. The people said that the decision is expected to cover ASML’s top-of-the-line deep ultraviolet lithography machines.
Aug. 30
Vietnam and the Philippines agreed to advance defense and military relations, as well as deepen collaboration on maritime security, when Vietnamese defense minister Phan Van Giang was in Manila for talks with his Philippine counterpart Teodoro.
The Philippine defense department said in a statement that the ministers “expressed their unwavering commitment to deepen defense and military cooperation through continued interaction and engagements at all levels.”
Giang told a joint briefing that the two sides “shared the importance of maintaining peace, stability, safety and freedom of navigation and aviation in the East Sea, also known as the West Philippine Sea or the South China Sea.”
Teodoro said, “While we face common threats, we will work together in facing these threats in the spirit of ASEAN solidarity.”
Aug. 31
The PRC and the Philippines accused each other of intentionally colliding coast guard vessels near the Sabina Shoal in the South China Sea. This was the fifth maritime confrontation between the two sides in a month.
U.S. State Department spokesman Matthew Miller said in a statement, “This is the latest in a series of dangerous and escalatory actions by the PRC. The PRC’s unlawful claims of ‘territorial sovereignty’ over ocean areas where no land territory exists, and its increasingly aggressive actions to enforce them, threaten the freedoms of navigation and overflight of all nations.”
Our take
1. Beijing appeared to indulge Jake Sullivan and the Biden administration by having the U.S national security adviser meet with Zhang Youxia and Xi Jinping. The gesture and Xi’s remarks from his meeting with Sullivan suggest that the Xi leadership is more interested in de-escalating tensions with the U.S. and seeking stability in the bilateral relationship than being confrontational. Beijing is likely attempting to appear less provocative and willing to engage with the U.S. as it seeks to mitigate a key source of pressure against the PRC in the “changing and turbulent world” and open up more bandwidth to deal with increasingly severe domestic crises.
Xi and the CCP, however, did not miss an opportunity to engage in some finger-pointing and misdirection. In his remarks, Xi subtly faulted the U.S. for being the source of Sino-U.S. tensions while ignoring the CCP’s role in forcing the U.S. and its allies to take action to guard against PRC belligerence, cyber activities, and influence operations. Xi also forced the Biden administration and the U.S. to clarify the current state of Sino-U.S. relations by offering up a false binary (“Are China and the United States rivals or partners?”) while continuing to state the PRC’s ambition of global hegemony (“peaceful development,” “building a community with a shared future for mankind,” etc.).
2. While not stated, the Xi leadership likely also sought further clarification and information from Sullivan on a potential Harris administration. But whether or not Beijing was able to obtain any information on a future Harris or Trump administration is almost certainly inconsequential as the CCP has long marked the U.S. as its chief rival and will ceaselessly pursue long-term strategies and policies to ultimately supplant America as the global hegemon.
We believe that both parties in the U.S. have reached a consensus on the CCP threat and will act to counter the threat even if their methods differ. The broad strokes of U.S. “containment” towards Beijing will likely be the same regardless of which candidate wins the November election, including tariffs on Chinese goods, efforts to restrict the PRC’s access to advanced technology, and preparing the U.S. and its allies for potential conflict in the South China Sea and over Taiwan. Either party could also potentially expand the ideological component of U.S.-China competition, especially if gains are hard to come by in other areas or the CCP shows particular vulnerability in this regard.
The CCP will not have much room to maneuver in navigating bilateral tensions given the sentiments in the United States. However, the CCP will likely do what it can to “delay and wait for change” while it focuses on what is in its control in an effort to outlast its chief geopolitical rival. Regardless of what assurances Beijing could have given to Jake Sullivan, the CCP will almost certainly exploit any opportunities that the November election could present to intensify internal divisions in America and keep the U.S. government distracted with domestic troubles and less able to focus on its efforts to counter the PRC.
