Beijing is doing a lot of work to keep banks and provinces solvent. Despite the official assurances about the strength of the Chinese economy and robust 5 percent growth, the actions taken reveal a worried central government about the financial and political risks from years of debt buildup.
So what do the actions reveal about Beijing’s thinking?
In the past few weeks, Beijing has taken a number of steps to reduce financial risks in the Chinese economy. These steps don’t boost growth but reduce the risk of a bank or provincial collapse that would cause significant disruption. Many major banks announced the issuance of capital bonds to shore up their balance sheet. A provincial government bought a large book of bad loans from a bank close to collapse because of its ties to the real estate sector.
Struggling provinces will issue nearly 2 trillion yuan in long-term bonds with the sole use of repaying debt coming due. Just this week, Chinese leader Xi Jinping visited the central bank, the People’s Bank of China (PBOC), and made changes to give direct control over it and related agencies to the central government and the Chinese Communist Party (CCP).
So what does this flurry of economic activity and political moves indicate?
First, despite the sanguine assurances, Beijing is deeply worried about the economic and financial risks in China. In recent announcements, Beijing cited the need to control risks and manage debt to avoid problems. While highlighting the need to control risks is unsurprising, the policy and personnel highlight the view from Beijing. These risks need not just highlighting but also concrete action.
Second, the moves by Beijing to take control of the PBOC and centralize decision-making power over financial matters indicate a lack of trust in the leadership and policies. The Party both needs and fears the bankers, provincial leaders, and policymakers but also deeply distrusts them. The Chinese cliché “The mountains are high and the emperor is far away” speaks volumes about how central authorities view provinces and agencies. Bankers and central bankers in China tend to be less Party cadres and purely business-focused. This causes fear within Party leadership in which fealty and loyalty to the Party, above all, remains the treasured characteristic.
So what should we expect moving forward?
The financial and personnel moves indicate that Beijing is gaining a clearer understanding of the risks within the Chinese economy. This extends to their concerns over the answers that come with greater clarity about the risks within banks and provincial-level finances. This implies that Beijing will roll out additional policies to contain the risks they uncover. Historically, this meant delaying and pretending, the most likely scenario as Party leadership learns more. Still, it also seems likely that more financial bailouts and risk management policies will be rolled out.
It also seems likely that policy in practice will adhere much closer to what Beijing wants. For years, Party announcements stressed debt management and not hiding debt, and, for years, neither happened. With the centralization of control and installation of key personnel, high-level officials assume much closer control because they don’t trust their underlings to execute their orders.
What does this greater adherence to Beijing’s policy look like in practice?
In reality, it isn’t entirely clear because of the economic conundrums the Party mandated and allowed to fester for years. For years, Beijing stressed the importance of restricting debt growth while simultaneously pushing unrealistic growth targets and turning a blind eye to what provincial leaders did to hit those targets.
Now, Beijing increases the official deficit level only to roll over old debt, which doesn’t generate the new activity an investment-heavy economic model so desperately needs. It isn’t clear how centralized policies will differ materially, but it seems likely to be more uniform and tightened; however, the tightrope that regulators need to walk to generate activity and manage the risks is now tighter than ever.
Beijing seems to be gaining greater clarity about the depths of the problems it faces and not liking the trustworthiness of its underlings. The CCP’s assumption of control will reveal its ability at economic problem-solving and is unlikely to yield anything more than more tightening and Party control.
