After the Chinese Communist Party (CCP) introduced several measures to revive the economy, the latest official data shows that it has failed to boost social consumption and investment sentiment. Despite announcing a plan to increase local “debt swaps” by 1 trillion yuan, market response has been pessimistic, and tensions between the CCP central and local governments are raising concerns. With Trump’s re-election as the President of the United States, it is seen as a major crisis for the CCP regime. Various signs indicate distress in Zhongnanhai, and experts believe that the end-of-year Central Economic Work Conference will face challenges.
On November 8th, the CCP’s Standing Committee of the National People’s Congress approved a State Council resolution to increase the local government debt swap quota by 6 trillion yuan. Starting from 2024, 800 billion yuan will be allocated annually in the addition of local government special bonds to supplement government funds specifically for debt swaps, totaling 10 trillion yuan.
The Shanghai and Shenzhen 300 Index ETF listed on the NYSE surged nearly 6% last Friday, while on Monday (November 11), the three major A-share indexes saw marginal gains. However, the overall increase was not as significant as the “celebratory” market reaction seen in late September following the announcement of real estate stimulus measures, reflecting negative investor sentiment.
According to financial experts cited by the Hong Kong Economic Daily, the total 10 trillion yuan scheme proposed by the authorities is inadequate when distributed at the grassroots level. The funds channeled to the local governments for debt swaps would primarily address high-interest short-term debts rather than significantly reducing the debt burden. It is evident that the central government’s most pressing issues for debt swaps revolve around “ensuring the basic livelihood, safeguarding wages, and maintaining operation”, with a keen focus on safeguarding the functioning of grassroots political power.
Meanwhile, an article in the Hong Kong Economic Journal points out that the nature of this 10 trillion yuan plan is “local debt” rather than the previously rumored “special national debt”. This implies that the heavy burden of repayment remains with the local governments, emphasizing self-sufficiency and potentially minimal savings in interest expenses.
Experts believe that there has always been contention between the CCP central and local governments, and the issuance of debts in the current economic downturn has escalated tensions in their relationship.
American economist David Huang explained to Dajiyuan that debt swapping mainly involves transforming high-interest commercial loans and bonds into long-term low-interest government bonds. The current debt swap plan represents the central government’s short-term support for local finances but falls short of market expectations. With these debts still lingering at the local level rather than being assumed by the central government, it indicates that the central government has not taken more robust rescue measures and continues to delegate the problem-solving to the local entities. Therefore, the strategy adopted by the central government is akin to addressing issues piecemeal without addressing the core problems.
“This could lead to local grievances because current demands to protect basic livelihood, wages, and operations actually require a set of significant measures to address historical fiscal issues and establish a firewall mechanism to ensure the basic functioning of local finances, especially at the grassroots level, to prevent societal unrest.”
Huang noted that the prevalent sentiment of local officials adopting a passive attitude could exacerbate matters, coupled with the rise of local protectionism in recent years, which might further strain the relationship between the central and local governments.
Taiwanese macroeconomist Jia-Long Wu, in his analysis for Dajiyuan, pointed out that local governments initially relied on transfers of payments for support from the central government, but with the central government facing its own challenges and potentially larger debts from state-owned enterprises, it is unable to address both local and state-owned enterprise debts simultaneously. The central government’s primary source of funds comes from foreign investments, but with the increasing withdrawal of funds by the United States, including many foreign investments, redirected through Hong Kong or other channels, the CCP is left with no choice but to print money without anchor. However, given the massive scale of debt, direct unanchored money printing may lead to severe inflation and a political crisis. Without printing money, there is no way to acquire new funds from outside, and the debt crisis can only be prolonged, eventually leading to a major explosion. Therefore, the current strategy is to delay, borrow new funds to repay old debts, and keep the debt rolling.
Recent official data indicates a bleak outlook for the overall Chinese economy, as the effects of the market rescue policies remain limited.
The CCP’s National Bureau of Statistics announced on the 10th of this month that the year-on-year consumer price index (CPI) for October increased by 0.3%, while the producer price index (PPI) decreased by 2.9% compared to the previous year, both falling short of market expectations, indicating continued pressure on monetary tightening by the CCP government.
Data shows that foreign enterprises withdrew 8.1 billion US dollars from China in the third quarter, reflecting ongoing investor pessimism.
According to the new loan and social financing increment data released by the CCP’s central bank on November 11th, new loans in China amounted to 16.52 trillion yuan in the first ten months of this year, with a monthly increase of 499.7 billion yuan in October. This is the lowest level in the past three months, below the market expectation of 700 billion yuan and far lower than the 1.5 trillion yuan in September.
The broad money supply reflecting private sector deposits (M2) reached 309.71 trillion yuan, with a year-on-year increase of 7.5%, while the narrow money supply reflecting cash flow in private consumption activities (M1) stood at 63.34 trillion yuan, a 6.1% decrease.
The size of social financing in October was only 1.4 trillion yuan, a decrease of 236 billion yuan from the previous month. The cumulative increment of social financing in the first ten months was 27.06 trillion yuan, a decrease of 4.13 trillion yuan year-on-year. Government debt issuance represented the highest growth among various types of financing at 8.23 trillion yuan, an increase of 709.1 billion yuan year-on-year, accounting for 30.42% of the social financing increment.
Previously, official figures released on October 18th showed that the Chinese economy grew by 4.6% year-on-year in the third quarter of this year, marking the slowest growth rate since early 2023 and the third consecutive quarterly decline.
This indicates that the various market stimulus and real estate and stock market incentives introduced by the authorities have failed to boost social consumption and investment sentiment. However, CCP official media continue to promote the “bright economic theory,” with the People’s Daily front-page commentary claiming that “confidence in achieving the 5% expected target is increasing.”
In reality, as the year-end approaches, high-level CCP officials are increasingly anxious about not meeting inflated economic targets. Following recent visits by senior members of the State Council to various regions urging to “revive the economy,” Xi Jinping himself recently emphasized the need for local officials in Hubei to achieve economic growth targets.
David Huang stated that the current economic data suggests significant downward pressure on the Chinese economy with no signs of recovery, let alone growth. He pointed out that CCP bureaucracy has a severe problem with overstating achievements, with initially optimistic economic targets now needing adjustments through exaggerated data.
Every December, the CCP traditionally convenes the Central Economic Work Conference to summarize the year’s work and set economic guidelines for the following year.
David Huang believes that against the current backdrop, convening the Central Economic Work Conference will face multiple contradictions: If extensive reforms are to be implemented, it would involve challenging existing officials and potentially changing the fundamental principle of “state advances, private retreats.” Improving economic and trade relations with Europe and the United States could conflict with diplomatic and geopolitical considerations. Additionally, complete adoption of Western market stimulus measures clashes significantly with the CCP’s political system.
“Beijing seems to have many policy options, but there is scarce congruence between its economic and political systems. Thus, the Central Economic Work Conference operates within a narrow space to salvage the economy, posing significant challenges.”
Jia-Long Wu believes the central government’s inability to aid local governments in resolving debt issues may lead to local governments taking matters into their own hands, potentially disregarding central directives. This could result in increased penalties, tax evasion investigations, and eventually resorting to selling land usage rights or even land ownership as a last resort. However, due to ideological sensitivity and socialist principles, this step is highly delicate.
“If they are cognizant enough, the Central Economic Work Conference will determine if all better alternatives have been exhausted and if the last resort is to trade land ownership. It is known that all wealthy individuals have used land assets for sales.”
An article in the Hong Kong Economic Journal on October 24th suggested that external observers have been closely monitoring the amount of debt issued by the CCP, estimating that the National People’s Congress meeting might be postponed. If there were to be a “premature issuance of part of the additional local debt quota” after the dust settles from the US election in mid-November, there could be a clearer picture.
As a result of Trump winning the US presidential election and set to return to the White House in January next year, reflecting his pledge to impose tariffs of 60% or more on goods from China, it is widely believed that the CCP will face even greater challenges.
Some opinions suggest that the intensity of the CCP government’s market rescue plan falling short of expectations may be a strategic move to retain strength in dealing with the situation post-Trump’s re-election.
David Huang does not believe in the CCP’s concept of “leaving room to maneuver.” Given the tense US-China relations since 2018, compounded by uncertainties in EU-China relations and foreign trade relations with Japan, South Korea, Australia, and other Western developed countries, he anticipates increased economic tensions between the US and China after Trump’s return to the White House from late 2024 to 2025. This could involve tariffs and further restrictions on Chinese exports to the US, inevitably impacting China’s economic growth. With increasing debt, capital outflows, and weak domestic demand, the economy could be pushed towards a perilous situation.
In the days following Trump’s re-election as the President of the United States, China’s National Development and Reform Commission published an article in the official Economic Daily urging the stimulation of internal demand. It suggested that in the near future, domestic market dominance will be more prominent in driving the economic cycle of China.
David Huang remarked that the Beijing leadership is inclined towards boosting domestic demand, but the issue lies in the absence of increased income for the common people by the authorities. Internally, industrial upgrades are hindered by technology restrictions from Europe and the United States. Hence, there is a significant contradiction between the authorities’ aspirations and the ground reality.
Following the CCP’s introduction of the 10 trillion yuan debt swap plan, Liu Shijin, former Deputy Director of the State Council’s Development Research Center, remarked that the current emphasis on stimulus over reforms will not solve structural issues, with insufficient domestic demand being a major structural problem.
Huang noted that Liu Shijin’s remarks are quite accurate and reflect the underlying concerns of the CCP’s economic and bureaucratic systems. Without changing the economic system structure and uprooting bureaucratic obstacles, even the best policies will struggle to deliver results.
Jia-Long Wu believes that Trump’s second term aims to dismantle the CCP regime entirely, asserting that resolving the CCP issue would cascade into addressing Iran, Russia, Middle East, and Ukraine conflicts. With China being the root cause of international problems now, as long as China stops challenging the US on the international stage, the US will be at ease.
In summary, the article presents a comprehensive analysis of the economic challenges faced by the Chinese Communist Party and the potential implications of its current policy decisions both domestically and internationally.