1 CCP factional struggle set to intensify as Xi’s enemies turn Li Keqiang’s ‘legacy’ against Xi
Public mourning of Li Keqiang
After Li Keqiang’s sudden death on Oct. 27, many people made trips to his former residence (a three-storey shophouse) in Hefei City, Anhui Province, as well as Li’s ancestral home in Anhui’s Dingyuan County, to pay their respects.
Nov. 1
Overseas Chinese language media reported rumors that the CCP central government had criticized the Anhui provincial Party Committee because an estimated three million people had traveled to Anhui to lay flowers outside Li’s former residence. There was also speculation that Anhui Party secretary Han Jun could be forced to step down over the incident.
Analysis: Han Jun previously served under Li Keqiang in the State Council. Han spent his formative years at the State Council’s Development Research Center (March 2001 to October 2014) and was promoted to deputy director of the research center in November 2010. Meanwhile, Li was appointed executive vice premier of the State Council in October 2007 and was put in charge of development and reform work. It is possible that part of the reason why the Anhui authorities have been relatively lax in allowing people to travel to the province is because Han has superior-subordinate relations with Li.
Beijing might not have been overly restrictive towards mourners visiting Anhui because it does not want to trigger social chaos over the death of a premier, as was the case after Hu Yaobang’s death. Beijing also might not have publicly reined in the Anhui authorities over tolerating the flood of mourners because it did not want to give the impression that there are splits in the Party elite over Li Keqiang’s death.
We believe that while it is possible that the central government was not pleased with how many people ended up traveling to Anhui, Han Jun is unlikely to lose his job over it.
Nov. 2
Bloomberg News reported that some people in China are skeptical of the official reason for Li Keqiang’s death and that this “showed a lack of trust in the ruling Communist Party.”
Bloomberg also noted that at least three mainland newspapers, including the Beijing Evening News, “went beyond the treatment of the Communist Party’s top mouthpiece” in paying tribute to Li. Bloomberg noted that one publication ran a large image of chrysanthemums (a symbol of mourning in Chinese culture) at an unrelated flower show next to reports of Li’s death. The Southern Metropolis Daily published a large image of a tree on its front page along with news of Li’s passing, a move that was likely a reference to the song “What a Magnificent Tree” which is associated with Hu Yaobang.
Call to carry on Li’s ‘legacy’?
Nov. 6
Mainland media Caixin published an editorial titled, “Reform Urgently Needs New Breakthroughs” (改革亟須新突破).
The editorial noted that the Third Plenum of the 18th Central Committee passed a major decision on comprehensively deepening reform and opening up that was “unprecedented in scope and power.” The editorial added, “Today, in the face of the many challenges facing China’s economy and society, people are expecting another major breakthrough in reform and opening up.”
The editorial wrote, “‘The Yangtze River and Yellow River will not flow backward.’ Reform is like a relay race, and needs to be passed down one baton at a time.” The editorial then praised the Third Plenum of the 18th Central Committee for its reform work and the Third Plenum of the 11th Central Committee for initiating reform. The editorial also hailed the 14th Central Committee and its Third Plenary Session for having the milestone of establishing the socialist market economy.
In concluding, the editorial wrote that while the decisions of the Third Plenum of the 18th Central Committee have been “gradually implemented” over the past decade, there is a “certain temperature difference between public perception and the expectations of that year [2013].”
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Li Keqiang is known for saying “the Yangtze River and Yellow River will not flow backward” at the Two Sessions in March 2022 and while visiting Shenzhen in August 2022. However, Li made that remark in the context of promoting the Xi leadership’s commitment to “unswervingly expand reform and opening up,” and the remark itself did not exceed the perimeters of Beijing’s propaganda on reform and opening up.
Li was also serving his first term as premier when the Third Plenum of the 18th Central Committee was held.
Li’s death and factional struggle
Nov. 2
Nikkei Asia columnist Katsuji Nakazawa claimed that Li Keqiang was “actually behind the harsh advice Party elders carried to current leaders in Beidaihe” that the newspaper had earlier reported, citing a source familiar with the situation in Beijing’s Zhongnanhai area. (For our analysis of Nikkei’s earlier articles on this topic, see here, here, and here).
Nakazawa also cited a source as saying that Li was seen as Xi Jinping’s “eternal rival” and Li was not part of Xi’s faction.
Nov. 6
Wang Juntao, a former Tiananmen Square protester and chairman of the U.S.-based China Democratic Party National Committee, told Dajiyuan (the Chinese language edition of The Epoch Times) that he was skeptical of the Nov. 2 Nikkei Asia column about Li Keqiang. Wang said that “all senior central cadres are effectively under house arrest” and retired Party elders have no opportunities to hold private gatherings.
Wang added that Xi Jinping has required the powerful families in the CCP regime to hand over a portion of their assets in exchange for peace because the regime is facing an economic crisis. “Now there are only two major families who can refuse to pay. One of them is [the family of] Hu Jintao and the other is [the family of] Jiang Zemin. The other families have already paid up, including that of Wen Jiabao.” Wang claimed that the Zeng Qinghong family had already given up part of their assets to the Xi leadership in exchange for not being held accountable.
Financial sector ‘rectifications’
Nov. 4
The CCP anti-corruption authorities announced that Zhang Hongli, the former vice president and Party Committee member of the Industrial and Commercial Bank of China (ICBC), was being investigated.
According to mainland media, Zhang previously worked at Deutsche Bank from 2001 to 2010, and served as president of Deutsche Bank Asia Pacific and chairman of Deutsche Bank (China) Co. Ltd. In 2010, Zhang was appointed as an executive vice president of ICBC, which made him the first banker from a foreign lender to be hired to a senior executive role at one of the PRC’s state-owned banks. Zhang later resigned in 2018 due to “family reasons.”
Mainland media added that Zhang Hongli hired hundreds of young and inexperienced, but well-connected employees (including the children of CCP leaders and executives of large state-owned enterprises) when he was president of Deutsche Bank Asia Pacific to help Deutsche Bank participate in large initial public offering deals for state-owned companies. Mainland media claimed that some of Deutsche Bank’s deals violated the U.S. Foreign Corrupt Practices Act, including a deal involving 19 “well-connected employees” who brought in $189 million for the bank. Deutsche Bank later agreed to pay more than $16 million to the Securities and Exchange Commission to settle charges that it had violated U.S. corruption laws.
Nov. 6
1. State-run mainland media Jiemian News reported that Zhao Bingxian, the chairman of listed company Shandong Wohua Pharmaceutical Co., Ltd., had been detained by the mainland authorities as early as July 2023.
Jiemian News cited people familiar with the matter as saying that Zhao, who is known as “China’s Warren Buffett,” had been “remotely controlling” the affairs of his company from Hong Kong. Zhao recently made a trip to the mainland and found that he had been subjected to “border controls” (i.e. he was being restricted from leaving the country) when he attempted to leave, and was soon placed under control by the authorities.
Wohua Pharmaceutical’s administrative department told Jiemian News that it was not aware that Zhao Bingxian had been detained and that it would make inquiries before responding.
2. Multiple mainland media outlets reported that Chen Shaojie, the founder, chairman, and CEO of the live-streaming platform DouYu, had been “out of contact” (失聯) recently. Mainland media added that DouYu’s total market value in the United States was about $299 million.
On Nov. 7, the Financial Times reported that Chen had been taken away “several weeks ago,” citing two people familiar with the matter. One of the people close to Chen said, “We have been unable to contact him since October. He was taken away by the public security department for investigation related to the pornographic and gambling content on the site [DouYu].” Gambling and pornography are illegal in China.
Our take
1. Based on our observation of public sentiment, many people mourned the death of Li Keqiang due to feelings of nostalgia for what is perceived to be the tail end of a comparatively politically “liberal” period of CCP history and as an indirect protest of sorts against Xi Jinping.
The public support for Li and doubts about the official reason for his death also reflect the steady erosion of the CCP’s political legitimacy even as Xi strove to “rectify” the Party through intense power centralization over the past decade.
Meanwhile, the idea of Li Keqiang being a “reformer” of sorts appears to have taken root in both Chinese-speaking and Western spheres, in no small part due to media reporting and framing. Yet the PRC State Council under Li always rolled out policies that were perfectly in line with the guidances of the Xi leadership, and there were no signs of real differences between Xi and Li on policy (aside from the overinterpretations by commentators of relatively trivial incidents during Xi’s second term). The public perception of Li the “reformer” stands in contrast with Xi’s image as an illiberal dictator, and will likely create problems for Xi and the CCP down the road as trust in the authorities erodes further in the face of the serious domestic and foreign crises plaguing the PRC.
2. Xi’s lingering factional rivals and other elements of the “anti-Xi coalition” appear to be taking advantage of Li Keqiang’s increased popularity post-death and growing dissatisfaction towards Xi Jinping to press their “information war” against the Xi leadership.
We do not find the claim by the source of Nikkei Asia’s Katsuji Nakazawa that Li Keqiang is “actually behind the harsh advice Party elders carried to current leaders in Beidaihe” to be convincing or credible. The “slowwalking” of information by Nakazawa’s sources about what happened at this year’s Beidaihe enhances the perception that they are more interested in spinning stories that hurt the Xi leadership and engaging in political mobilization against Xi Jinping rather than in exposing truths about actual developments in CCP elite politics. The playing up of “differences” between Xi and Li (“eternal rival,” etc.) and the latter’s involvement with Xi’s real factional rivals at this time also appears to be a little too convenient while running counter to actual factional dynamics (Xi, Hu Jintao, and Li Keqiang being allied politically against the Jiang faction). As we noted in the Oct. 2, 2023 newsletter, the Nikkei Asia columnist’s sources “have a tendency to disclose information that is mostly positive about the Jiang faction and negative about Xi and his camp.”
Meanwhile, Wang Juntao’s skepticism of the Nikkei Asia piece and his analysis that Xi basically has all senior cadres placed under some form of control are aligned with what we have been saying. In going over Katsuji Nakazawa’s first piece about the supposed act of Zeng Qinghong and other Party elders at this year’s Beidaihe, we analyzed that “Xi has been increasing his control over the officialdom and retired cadres, which means that it would likely be difficult for CCP elders to hold gatherings in private to speak ill about the Party boss.”
3. Xi Jinping appears to be countering his factional enemies’ attempt to use the death of Li Keqiang against him by going after their wallets and kin as part of Beijing’s “rectification” of the financial sector and system.
The probe of former ICBC vice president Zhang Hongli will likely grant the Xi leadership more evidence and leverage against the Party elite given Zhang’s previous relations with the children of CCP leaders and the executives of large state-owned enterprises. We believe that Zhang being investigated, the detention of Shandong Wohua Pharmaceutical’s Zhao Bingxian, and DouYu’s Chen Shaojie being “out of contact” are signs that the Xi leadership is planning to make more significant moves against the CCP elite who are opposed to him and their so-called “independent kingdoms.”
Wang Juntao’s information that Xi Jinping is requiring the powerful families in the CCP regime to hand over a portion of their assets in exchange for him not going after them is consistent with the general thrust of Beijing’s latest crackdown on the financial sector, including the arrest of Evergrande’s Hui Ka Yan and other top executives. Xi likely believes that he must move against the Party elites, who have long profited from their monopoly over key economic and financial “lifelines” in the regime, to replenish the CCP authorities’ coffers, shore up his personal political security, and better “prevent and defuse risks” in the financial sector and system. Xi’s willingness to offend a powerful political constituency and “backbone” of the Party is an indirect indicator that China’s financial crisis is very severe and Xi has no choice but to increase his political risks as he struggles to turn things around in the regime.
The CCP elite and Xi’s remaining factional rivals are not likely to take Xi’s targeting of their “white gloves” and wallets without putting up a fight. We believe that the CCP factional struggle is headed for a showdown as Xi and his enemies become more willing to use “perish together” (同歸於盡) moves against each other as they fight for ultimate survival. The resulting political destabilization could produce Black Swans that bring tremendous change to China.
2 China’s financial crisis briefly glimpsed in rare money market distress event
Nov. 2
Reuters reported that the PRC financial regulators are investigating a month-end liquidity crunch that pushed short-term funding rates as high as 50 percent in some cases on Oct. 31.
Two sources with direct knowledge of the matter said that the China Foreign Exchange Trade System asked institutions that settled trades on Oct. 31 at the 50 percent rate to provide explanations. Another direct source said, “Anyone who borrowed money at very high rates needs to explain to regulators the decision-making and bidding process.”
Traders and analysts told Reuters that an increasing supply of government bonds and the recently approved issuance of 1 trillion yuan in sovereign bonds created unusual liquidity stress at a time when banks had to square their books to meet month-end regulatory requirements.
A trader told Reuters that a large number of brokerages, fund houses, and trust firms had rushed to borrow money in afternoon trade on Oct. 31 to avoid defaults as big banks appeared unwilling to lend. The source said, “Demand for cash far exceeded supply, boosting short-term rates. For each individual institution, it was a rational decision.”
Nov. 6
Reuters reported that the PRC’s effort to keep the renminbi from falling contributed to the chaos in money markets that saw short-term funding rates reach as high as 50 percent in some cases on Oct. 31.
Six participants in the market told Reuters that a confluence of factors led to fear and confusion across trading rooms in Beijing and Shanghai by late afternoon on Oct. 31. The scramble for short-term funds became a stampede, and the repo rates between banks went from an overnight rate of 2 percent on Oct. 30 to as high as 8 percent on Oct. 31.
The People’s Bank of China later stepped in and asked state banks to supply funds while the China Central Depository and Clearing Co and Shanghai Clearing House reopened settlements at 6:00 p.m. Beijing time in an emergency response. The crisis was averted by 8:30 p.m., and the market cleared and closed again.
Xia Chun, the chief economist at wealth manager Yintech Investment Holdings, said that the incident “was an accident” and an unforeseen result of the PRC authorities’ heavy hand in financial markets. “Banks were grudging in lending, leaving non-banks asking each other for money in afternoon trade. Borrowing rates surged as a result, with some willing to take any price,” he said.
Reuters said that the early beginnings of the trouble surfaced in October when the central government approved the issuance of 1 trillion yuan in sovereign debt. Sources familiar with the matter told Reuters that the sovereign debt rollout stuck to the issuance schedule for the fourth quarter but increased the size of each tranche.
A Shanghai fund manager told Reuters that the PBoC would typically offset the cash drain from the extra bond issuance with extra funding support, including relaxing bank reserve requirements. But the adding of extra cash in the system would risk increasing downward pressure on the RMB and undercut months of efforts to stabilize the currency.
The fund manager said, “The inaction by the central bank is mainly due to its concern over RMB depreciation.”
Backdrop
Nov. 6
1. Mainland media Shanghai Securities News reported that the local government bond issuance in China increased by 1.2 trillion yuan from a year ago to reach 8.6 trillion yuan as of Nov. 2, 2023, citing data from zhuanxiangzhaiquan.com (“Special Bonds Information Net”).
Shanghai Securities News cited experts as saying that the scale of local debt issuance for the full year of 2023 could be around 9 trillion yuan considering the new local debt quota for the year has not been reached and special refinancing bonds are still being issued.
2. The PBoC’s monetary policy department issued a document stating that work of reducing existing mortgage interest rates has been basically completed. The document said that the interest rates on 22 trillion yuan worth of existing mortgages have been reduced, with an average reduction rate of 0.73 percentage points.
The document added that the interest reductions benefited more than 50 million households and 150 million people, reduced the total interest expenses of borrowers by about 160 billion to 170 billion yuan per annum, and lowered the average interest expenses of households to 3,200 yuan.
3. A Morgan Stanley report noted that China and Hong Kong equities saw a combined $3.1 billion in net outflow from active long-only funds in October, citing data from fund flow tracker EPFR. This was the third consecutive month of net selling exceeding $3 billion, according to the report.
“The outflows (are) mostly due to regional funds’ rebalancing out of China, in which European-domiciled funds led,” Morgan Stanley analysts led by Gilbert Wong said. Morgan Stanley added that the persistent outflows have led to foreign long-only managers being their most underweight on China since 2018.
4. The Wall Street Journal reported that foreign firms pulled more than $160 billion in total earnings from China during six consecutive quarters through the end of September. The Journal said that the unusually sustained run of profit outflows illustrates how much China’s appeal is waning for foreign capital, and have left overall foreign direct investment into the world’s second-largest economy in the red in the third quarter for the first time in a quarter of a century.
The Journal said that the outflows put more pressure on the RMB when the PBoC is already struggling to slow its decline, adding that the yuan has depreciated 5.7 percent against the U.S. dollar so far in 2023 and reached its lowest level in more than a decade in September.
Our take
1. The month-end liquidity crunch that saw short-term money rates surge to as high as 50 percent appears to be less an “accident” than an early sign of a financial crisis that is threatening to fully erupt in China.
The soaring of the overnight rate for pledged repo was mostly the product of the CCP authorities’ own policies. Beijing wanted to provide ample liquidity to local governments through bond issuances while keeping the currency stable. Yet it ended up squeezing liquidity from the banking system (including large state-owned banks having insufficient liquidity to lend to other financial institutions) and triggering financial risks. Had the central bank not intervened when it did, the financial institutions experiencing a liquidity crunch would technically go bankrupt the following day, a development that would lead to bank runs, sharp drops in asset prices, and the emergence of other vicious cycles.
We previously warned in the July 10, 2023 newsletter that “Beijing cannot introduce strong stimulus policies without incurring various economic and financial troubles.” Also, the central government could be concerned that “ramping up stimulus and taking on more leverage would end up triggering the systemic financial risks of Chinese banks.” Our analysis has since been verified from the recent money market distress event in considering that Beijing’s effort to provide liquidity support to local governments through bond issuance is partly an attempt at stimulus, yet the bond issuance and the PBoC’s unwillingness to offset it through extra funding support created a mini-liquidity crisis for financial institutions.
Financial institutions in China, and in particular the banks, are likely to see greater risks and the triggering of risks going forward as the CCP authorities press ahead with measures that transfer risks to them, including rolling over local government debt and issuing even more local government bonds (estimated to hit 9 trillion yuan by the end of the year).
Meanwhile, the central bank will likely have more limited space to extend liquidity to financial institutions as downward pressures on the RMB increase. Capital outflows will put the weak yuan under even more pressure. A broad measure of foreign direct investment published by the PRC State Administration of Foreign Exchange showed an outflow of $11.8 billion in the third quarter of 2023, the first deficit since the agency began compiling data in 1998. Meanwhile, China’s foreign exchange reserves were down $13.8 billion to $3.1012 trillion at the end of October from the end of September.
2. Banks in China are experiencing greater liquidity pressure and reduced income ever since the central government urged them to “give up profits for the real economy” and lower mortgage rates. For instance, the third quarter financial reports of the six major state-owned banks showed that Industrial and Commercial Bank of China (minus 3.55 percent), China Construction Bank (minus 1.27 percent), and Agricultural Bank of China (minus 0.54 percent) had negative year-on-year growth for operating income in the first three quarters of 2023. The net interest margins of the six major state-owned banks also continued to decline.
The bubbling of China’s financial risks to the fore at this time puts our analysis in July on track for verification. We wrote that “the central government’s economic rescue limitations foreshadow the development of even more severe economic and financial difficulties for the PRC in the second half of 2023. The emergence of concentrated economic, financial, debt, and social problems will not only trigger systemic risks in the financial system but will lead to serious political problems for Xi and the CCP.”
The focus of the Central Financial Work Conference on risk prevention and control, as well as the Ministry of State Security’s warning about “short sellers” and “some countries” shaking investor confidence in China, are consistent with the recent signs that the PRC faces significant financial risks and will be hard-pressed to continue covering up a major financial crisis.