Chinese leader Xi Jinping paid his first-ever visit to the central bank on Oct. 24 since taking office in 2012. This unprecedented visit comes at a critical juncture as developers grapple with financial challenges and the nation faces a looming economic crisis, according to China observers.
After the arrest of Evergrande Chairman Xu Jiayin in late September, several other major developers in China, such as Country Garden, have also defaulted on their debts, and default problems could quickly spread to many other areas.
Multiple sources informed The Epoch Times that before Mr. Xu’s arrest, he had requested Mr. Xi to intervene and rescue Evergrande Group, leveraging the potential threat of an economic crisis.
Xi Attempts to Gain Insight Into Real Economic State
On the afternoon of Oct. 24, Mr. Xi, along with Vice Premier He Lifeng and other officials, went to the central bank, the People’s Bank of China (PBOC), and the State Administration of Foreign Exchange. Mr. He inspected China’s sovereign wealth funds.Specific details of the visit are not known, but investors are watching Mr. Xi’s moves closely for potential policy signals.
Public records indicate that the CCP’s top leaders, preceding Xi, have never conducted inspections at the central bank since the establishment of communist China. Typically, such inspections are carried out by the premier or the vice premier responsible for economic matters.
Lu Yuanxing, a U.S.-based political and economic analyst and former marketing executive at a Chinese company, told The Epoch Times on Oct. 25 that Mr. Xi visited both agencies for two reasons.
First, Mr. Xi has lost confidence in Premier Li Qiang, who is designated to oversee economic matters, prompting him to consolidate power and personally oversee these agencies.
Second, China’s current economic situation is worrying, with foreign investments withdrawing rapidly and the central government facing fiscal constraints. Therefore, Mr. Xi wants to use this opportunity to understand the actual economic situation.
Li Hengqing, a scholar at the Washington-based Research Institute of Information and Strategy, told the publication on Oct. 26 that China’s financial situation is now dire, with bubbles bursting in numerous sectors. Given these circumstances, it has become imperative for Mr. Xi to gain a firsthand understanding of the issues within China’s financial sector, as the stability of the sector directly impacts the overall stability of the nation, Mr. Li said.
Central Authorities Issue Massive Treasury Bonds
On the same day that Mr. Xi inspected the central bank, the central authorities decided to issue an additional 1 trillion yuan (about $136.75 billion) in treasury bonds in the fourth quarter and to allocate all of it to local governments, with 500 billion yuan (about $68.38 billion) to be used this year and 500 billion yuan to be used in 2024.Chinese officials have also stated that all funds raised through the issuance of treasury bonds will be earmarked for local governments, helping to alleviate pressure on local finances, which are currently facing multiple debt risks.
Mr. Lu said that the CCP’s attempt to save local governments is unlikely to produce the desired outcome because many areas face substantial challenges. Moreover, these problems are interconnected, making it increasingly challenging to manage them simultaneously.
He contends that the CCP’s increase in the issuance of national debt is the primary factor prompting foreign investors to further withdraw from China.
“Who would be willing to continue investing in something already heavily in debt? The same goes for the Chinese Communist regime, which is already heavily in debt and has difficulty repaying it,” Mr. Lu said.
He further explained that the CCP’s printing and releasing of money, as well as issuing additional national bonds, already shows that it is running out of money to the extent that it must keep borrowing money to repay its debts.
“Otherwise, local government financing vehicles and even local governments themselves will be in financial trouble, which will seriously affect the government’s creditworthiness and, in turn, affect social stability,” Mr. Lu said.
“So will foreign capital continue to invest? The investors will definitely pull out because this market is no longer attractive to them,” he added.
State media Xinhua News reported that with the issuance of additional treasury bonds, adjustments will be necessary for the 2023 government budget, leading to a corresponding increase in the fiscal deficit.
Mr. Li emphasized that even after the issuance of more treasury bonds, the CCP’s fiscal deficit continues to grow, reflecting the challenging fiscal reality the CCP faces.
“Current debt is simply not enough to pay off old debt, and it can only be used to pay interest. Deficits are considered debts, and both government debts and deficits continue to accumulate, akin to a snowball effect. Failing to address the underlying issue will ultimately result in a collapse, which would have profound repercussions on China’s economy,” he said.
Shanghai Index Drops Below 3,000
On Oct. 23, a day before Mr. Xi’s visit to the PBOC, Chinese A-shares experienced another significant decline, with the Shanghai Composite Index hitting a new interim low of 2,923. Apart from the Shanghai Composite, most other indices reached their lowest levels in three years, including the CSI 300 Index, Shenzhen Component Index, ChiNext Index, and the STAR 50 Index.As of the close of trading on Oct. 23, more than 4,500 individual stocks in the Shanghai and Shenzhen markets had fallen, signaling a notable weakening of market confidence.
The “3,000-point” level has historically been an important gauge in the Chinese stock market. In recent years, whenever the market approached the 3,000-point mark, various government departments would introduce a series of stimulus measures; hence, “3,000-point” is often referred to as the “policy floor” and has always been closely watched by investors.
From Oct. 16 to 20, the market already exhibited a trend of downward volatility, with all major indices posting losses, notably the Shanghai Composite Index falling below the critical 3,000-point level. Foreign investment recorded a net outflow of 24.05 billion yuan (approx. $3.29 billion) for the week, marking the third consecutive week of net outflows. Notably, on Oct. 19, there was a substantial net outflow of 11.70 billion yuan (approx. $1.60 billion), marking the third instance this year of a single-day net outflow exceeding 10 billion yuan.
Mr. Li believes that this round of stock market decline is the result of a massive sell-off of foreign capital.
“As there is not enough capital to counteract this, the market is bound to keep falling,” he said.
He explained that there are two main reasons for the capital outflow. First, foreign investors are not optimistic about China’s economic prospects. Second, while China has relaxed its monetary policy by reducing interest rates to boost its economy, other nations have raised their rates to counter inflation. This disparity in interest rates further incentivizes capital to move out of China.
