Around May 23rd, a document allegedly from a secret meeting about the local government debt of Kunming (the capital city of Yunnan province) started circulating on Chinese social media. The next day, Kunming government issued an official denial, denouncing the document as “not factual”. But of course, no one believes the government announcement.
Interestingly, on May 23rd, someone posted on the social media Xiaohongshu recordings of Cathay Pacific airline alleging that the employees on the plane discriminated against people from Mainland, which also went viral.
The secret meeting was supposedly held on the night of May 22nd. Allegedly, it is a meeting of experts from Haitong Securities, discussing local government debt crisis Kunming.
The document is short, but full of details on the debt structure of Chinese local governments.
The experts discuss possible sources of funds to pay the debt, such as state-owned enterprises, the central government, the provincial government, or aid money from Shanghai (in China, rich cities are paired with poor cities and often send aid money). But all looks grim. The provincial government helped last year, but the central government had not responded. Shanghai, because of the COVID last year, had no more money. The document then asks, if it is possible to use the money from social security and medical insurance.e
What shocked most people is the dire financial situation some local governments face. It has been spread on social media that local governments are cutting salaries and even retrieving past bonuses due to fiscal difficulty. But this document gave the public a rare (non-casual) glimpse of the public debt crisis in China and how it has been managed. You can read more details about it in English on Yicai.
What makes this viral is that they think they will touch the social security and medical insurance funds, which means ordinary people will have no help from the government when they get old or sick. For some who study the Chinese Economy, this is also a rare moment of how local governments manoeuvre the debt issues. There is normally very little transparency on such government matters. But last year, there had been many rumours about salary cuts of local government employees, because COVID-zero policies have depleted government funds. On top of that, the trouble of real estate developers (for example, the Evergrande crisis) made it much harder for the government to raise funds (they would usually sell land to developers). So, people are already expecting the worst, just they did not know what the worst will look like.
But for China watchers in the West, this is not news. As far back as 2018, the Little Red Podcast interviewed experts on Chinese debt during the episode “All Maxxed Out: The Biggest Ponzi Scheme The World Has Ever Seen?. They predicted that “Beijing’s strategy may be driving a stealthy renationalization of the Chinese economy”.
A Ponzi scheme can last for quite a while. But is it about to collapse now?
Lately, both Qingdao and Shenzhen governments are experimenting with buying up vacant apartments in the city and using them as “housing reserve”. If there is a shortage of housing, they can put those reserve back into the market to keep the market stable, and vice versa if the market is slow, they buy and keep the sales going. This government interference of housing market is considered by many Chinese as a way to renationalize the housing market.
But more important than local government debt, other signs of the economy downturn appeared in May. On May 31st, a new Twitter user, Laoman who specialized in Chinese economic data (he came from Weibo, where he has many followers), posted on Twitter and YouTube:
Economic recovery (promised by the government when COVID-zero ended), has already proven false.
By April, China’s investment had collapsed, exports were down, surpluses were shrinking, the real estate bubble had burst, and local debt was plummeting. Honestly, I’ve never heard of this kind of multi-organs’ failure (of the economy) at the same time.
The April data was published in late May, it showed that domestic investment has come down from last year (last year was the peak of COVID-zero policy when Shanghai was put under a lockdown). Export went up, but money flow into China did not increase, indicating that people are taking money out of China. Before 2021, money rushed into China, but this has been reversed. Similarly for the real estate market, where sales peaked in 2021. The sales in March 2023 were quite good, spreading some hope, but the April sales plummeted. Sale data in May (not finalized) indicates a further decline in sales.
Laoman is not the only one that sees the coming “death” of the Chinese economy, Ren Zeping (we mentioned him in Newsletter 25) also see the writings on the wall: Ren was very bullish on economic recovery in April, but now he is so bearish that he argues that the government needs to save the market fast.
But, for now, what we have got from the government was : “China Has a Youth Unemployment Problem; Guangdong Province Spearheads a Plan to Send 300,000 Youth to the Countryside by the End of 2025 “. This is a throwback to Mao’s sending-the-youth-to-the-country-side movement, of which Xi was a part. Perhaps Xi thinks this is an excellent idea?
According to New York Times, Xi did just that in May: China’s Young People Can’t Find Jobs. Xi Jinping Says to ‘Eat Bitterness.’
The article, about Mr. Xi’s expectations of the young generation, mentioned “eat bitterness” five times. He has also repeatedly urged young people to “seek self-inflicted hardships,” using his own experience of working in the countryside during the Cultural Revolution.
Because Xi thought that his ascending to power is a consequence of his “eating bitterness”, not of his father’s power and help. Yeah, millions of young people ate bitterness just like Xi, most of them did not fare well at all!
And one more data point that highlights the trouble that is coming: estimated total births in 2023. This can be calculated in May based on data from health care facilities. It is a meager 8 million. It is less than half of the births in 2016, when one child policy officially ended, allowing a family to have a second child.
According to Japanese media: China revised conscription law, eyeing Taiwan conflict.
“Xi Jinping Says He Is Preparing China for War, The World Should Take Him Seriously”:
At the annual meeting of China’s parliament and its top political advisory body in March, Xi wove the theme of war readiness through four separate speeches, in one instance telling his generals to “dare to fight.” His government also announced a 7.2 percent increase in China’s defence budget, which has doubled over the last decade, as well as plans to make the country less dependent on foreign grain imports.
This is backed by soaring import of grains from Brazil, and reduction of imports from the USA.
In February this year, China’s military given power to change how it handles criminal cases in wartime.
During the March “Two Session” (which was covered in newsletter 120). Someone noticed a resolution adopted back then:
Zhou Xiaoping, controversial wolf warrior author, sponsored a resolution at CPPCC for China to set up a black list of “Taiwan separatists” to be killed during China’s Special Military Operation against Taiwan
According to US media: the U.S. has released video of a Chinese warship sailing dangerously close to a Navy destroyer in the Taiwan Strait on Saturday.. This is China testing the water and see what the USA will do in reaction.
The good news is that soon secretary Blinken will visit Beijing. The world is determined to avoid the war.