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Local Governments’ Illegal Debts Highlight Fiscal Strain on China

China’s Ministry of Finance disclosed eight cases of illegal debt held by local governments, highlighting the seriousness of local debt issues facing the country. Since 2018, local governments have violated national-level policy by forcing state-owned enterprises and banks to advance billions of yuan in funds for urban development, infrastructure projects, and other expenditures that should have been funded by municipal or provincial budgets instead. This has created tens of billions of yuan in “hidden debt” in certain cities.

Examples include Hubei Province’s creation of 21.48 billion yuan (US$2.95 billion) in hidden debt through land development projects, Guangxi Province’s 17.7 billion yuan (US$2.43 billion) of debt for land projects, and Shaanxi Province’s 2.6 billion yuan (US$360 million) for a conference center. Other cases involved hundreds of millions of yuan in illegal advances for flood relief and other spending.

Banks were found complicit in the practice, with the Agricultural Development Bank of China’s Shaanxi branch illegally providing 1.3 billion yuan (US$180 million) that went toward river management projects in Xi’an. The Agricultural Bank’s Wuhu branch was found to have illegally loaned 471 million yuan (US$64.7 million) to the local government.

China’s Finance Ministry released information about these cases to hold local officials and banks accountable and warn others against engaging in the practice. The release highlights the financial difficulties faced by local governments, where even basic infrastructure and public works spending has required procurement of illegal hidden debt, typically via shell companies owned by the local government.

Beijing’s attempt at introducing accountability through publicity will likely be insufficient to resolve the issue absent more comprehensive reforms.

Source: Central News Agency (Taiwan), November 6, 2023
https://www.cna.com.tw/news/acn/202311060331.aspx

Briefings | | |   Economy/Resources

Plummeting Fertility in China Likely to Sustain Population Decline into Next Century

China’s birth rate has fallen sharply, leading to negative population growth that is likely to continue into the next century, according to Chinese economists. This will not only affect the labor supply but also slow economic growth. Zuo Xuejin, former Shanghai Academy of Social Sciences executive, said at a recent economic forum that coping with demographic changes and creating high-quality growth [in the Chinese economy] would require speeding up the country’s transition to a demand-centric economy and increasing investment in human capital.

Since the country’s total fertility hit a record low in 2022, China’s various policies aimed at increasing the birth rate have met with limited success. Experts believe negative population growth will persist as fertility remains far below the replacement level of 2.1 children per woman. Modeling shows that, even with optimistic assumptions regarding a rebound in fertility, China’s population decline could continue through 2097. If current lower fertility rates continue, negative growth may persist into the 2100’s.

The urban concentration of population and economic activity in major coastal and inland city clusters will continue even as cities face depopulation. Local governments would do well to avoid wasted infrastructure investment in the face of population decline.

Source: Central News Agency (Taiwan), November 5, 2023
https://www.cna.com.tw/news/acn/202311050119.aspx

Briefings | | |   Economy/Resources

Chinese Automakers to Produce Cars in Mexico

Chinese automakers are eyeing the American car market, making substantial investments in Mexico so that they can take advantage of geopolitical and trade agreement benefits. Since China faces high tariffs and restrictions on exporting cars to the U.S., Mexico’s strategic location and the USMCA trade agreement have made the country a favorable location for Chinese companies to produce electric vehicles (EVs) for export to the U.S.

Beijing’s strong support for China’s domestic electric vehicle industry, along with the prominence of Chinese company CATL as the world’s largest lithium battery producer, has positioned China as a major player in the EV market. Chinese automakers, such as JAC and Giant Motors, have already been assembling cars in Mexico for several years. Recently, Chinese companies Chery and Foton also began setting up factories in Mexico.

Source: Voice of America, November 1, 2023
https://www.voachinese.com/a/focusing-on-the-us-ev-market-chinese-companies-invest-heavily-in-mexico-20231031/7335006.html

Briefings | | |   @CS Economy/Resources Geo-Strategic Trend US-China Relations

CCP’s Financial Work Conference Emphasizes Risk Prevention

The Central Financial Work Conference was held in Beijing on October 30-31. The meeting, held every 5 years, sets the direction for China’s major financial reforms and policies. This year’s conference comes amid a slumping Chinese economy, real estate crises, local debt issues, and financial sector troubles.

The meeting emphasized strengthening financial supervision to effectively prevent and resolve risks, including establishing mechanisms to address local debt and optimizing government debt structures. It highlighted promoting healthy real estate financing, regulating foreign exchange and maintaining RMB stability, overseeing financial markets to prevent cross-border risk contagion, and coordinating financial regulators.

Xi Jinping delivered an important speech summarizing financial work since 2012, analyzing the financial situation, and laying out current and future policy priorities. The conference also aimed to promote a positive cycle in finance and real estate, strengthen foreign exchange management, prevent financial market risks, and coordinate financial regulators.

The meeting was originally scheduled for 2022 but postponed to this year. The last meeting was held in 2017. According to recent reports, He Lifeng has taken over as director of the CCP Central Finance and Economics Office.

The Central Financial Work Conference is the highest profile meeting on China’s financial system. Held every 5 years since 1997, each conference sets the tone for major financial reforms and policies in China. This year’s meeting comes amid serious economic slump and financial sector instability.

Source: Radio Free Asia, October 31, 2023
https://www.rfa.org/mandarin/Xinwen/10-10312023155932.html

Briefings | | |   Economy/Resources

Sing Tao: Nomura Re-examines Its China Strategy

Primary Hong Kong news media Sing Tao News Group recently reported that leading Japanese securities firm Nomura is re-examining its Shanghai joint venture strategy as its business losses in China continue to worsen. The firm’s subsidiary Nomura Orient International Securities (NOIS) has followed the lead of Morgan Stanley and Goldman Sachs in terms of its shrinking footprint in China: management reorganization and layoffs have occurred, and many employees have resigned. In the meantime, Nomura has cut loose about 10 Hong Kong-based investment bankers, including some who focused on China-related deals. The Hong Kong layoffs were announced very recently and affected both junior and senior bankers, including managing directors and executive directors. Kenji Teshima, chairman of Nomura’s China Business Committee, said that now is a good time to review and re-evaluate the business.

China’s Zero Covid restrictions during the pandemic seriously affected the business’ expansion during that time. More recently, the market environment has undergone major changes that affect Nomura’s operation in China. The profitability of NOIS has continuously deteriorated since its establishment at the end of 2019.

According to available documents, the losses of NOIS more than doubled last year. Although the organization’s client list and assets under management continued to grow, successive years of losses have caused concerns among Nomura’s partners. Moreover, many department heads working for NOIS have resigned since the beginning of this year, including the heads of wealth management, compliance and risk management.

Source: Sing Tao, October 26, 2023
https://std.stheadline.com/realtime/article/1960012/

Briefings | | |   Economy/Resources Geo-Strategic Trend

Chinese Companies Stocked Up as US Chip Export Controls Tighten

On October 17th the U.S. Department of Commerce’s Bureau of Industry and Security (BIS) issued an announcement expanding the scope of controls on the export of advanced computer chips to China. This action directly affects semiconductor giant NVIDIA’s sale of “special edition” A800 and H800 chips to China and other regions. The expanded export controls also restricts Dutch ASML from exporting certain machine models to China. Additionally, it added Chinese companies Biren Technology and Moore Thread and their subsidiaries to the “Entity List” to restrict export to them.

Many Chinese Artificial Intelligence (AI) startups have already acted to stock up on chips prior to the ban. Through various channels such as service providers, middlemen, and foreign trade agents, these Chinese companies are trying to prevent their previous orders from being cancelled while exploring avenues for obtaining additional chips in the short term.

Market research firm Counterpoint estimated that Chinese companies are now lagging behind global counterparts by about 2.5 to 3 years in fields like generative AI. According to Counterpoint, chip acquisition is not the sole factor driving this lag. The gap between China and its global counterparts is expected to widen over the next few years.

Source: Central News Agency (Taiwan), October 23, 2023
https://www.cna.com.tw/news/acn/202310230203.aspx

Briefings | | |   Economy/Resources US-China Relations

Eighteen Provinces Issue Special Bonds Totaling 840.4 Billion Yuan Over Seventeen Days

China’s provincial governments have accelerated issuance of special refinancing bonds since the beginning of October. These special refinancing bonds are used to repay existing debt, including settlement of government arrears to businesses. Beijing gave the green light to issuance of such bonds so as to mitigate risks associated with local government debt.

On October 9th, Inner Mongolia became the first province to issue special bonds this year. According to local disclosure records regarding special bond issuance, the total issuance of local special bonds reached approximately 840.4 billion yuan (US$ 115 billion) within 17 days. Yunnan, Inner Mongolia, and Liaoning are the top three issuing provinces, with each issuing over 100 billion yuan in special bonds.

During the three years leading up to this wave of special bond issuance, there were two prior waves of special bond issuance by local governments. Both prior waves were longer in duration than the most recent 17-day wave. The first wave occurred over 10 months and amounted to about 627.8 billion yuan and the second one, 9 months in duration, totaled 504.2 billion yuan of issuance.

Source: Security Times (China), October 19, 2023
http://www.stcn.com/article/detail/1008629.html

Briefings | | |   Economy/Resources Government/Politics

Local Government Positions for Chinese Officials’ Children Educated Abroad?

Recently, many local governments have announced government positions hiring Chinese students who obtained degrees from certain qualifying foreign universities. For example, Beijing will selectively hire individuals who have obtained degrees between August 1, 2022, and July 31, 2024 from overseas universities ranked within the top 100 in the world (based on the 2023 Academic Ranking of World Universities by ShanghaiRanking).

Chinese college graduates have been facing a tough job market for years. Moreover, many local governments have struggled to pay their employees on time as they face big fiscal deficits. Chinese netizens have charged that these new government positions are intended to provide jobs to officials’ children who have studied overseas and then returned to China.

Source: Aboluo, October 22, 2023
https://www.aboluowang.com/2023/1022/1968901.html

Briefings | | |   Economy/Resources Government/Politics