Don't bank on China's headless economic recovery, Plus Yellen back in China to stop 'flood' of green tech exports -- China Boss News 4.05.24
Newsletter
What happened
The number of bad loans at China's largest state banks is rising as the financial sector tries to heed Beijing’s call to "pump up the domestic economy” and “rescue its debt-laden property developers and local governments," Bloomberg reported.
Bank of Communications Co. (Bocom), Industrial & Commercial Bank of China Ltd. (ICBC) and Agricultural Bank of China Ltd. (ABC) all reported notable increases in bad loan ratios last week mostly due to defaulted residential mortgages.
“As of the end of 2023, the balance of real estate loans and mortgages at ICBC was more than 7 trillion yuan, accounting for more than a quarter of their loan book. Bocom’s Vice President Yin Jiuyong said the pressure to keep asset quality in check remains ‘immense’ this year as it will take time for home sales and developers’ liquidity conditions to recover,” Bloomberg staff said.
The property crisis is also rocking China’s 12 “shareholding” banks - a group of national joint-stock banks, like China Merchants Bank, Shanghai Pudong Development Bank, China Everbright Bank, China Guangdong Development Bank, and Ping An Bank, in which the Chinese government has controlling interest.
On Monday, South China Morning Post’s He Huifeng revealed that that these work-horses of China’s financial system “reported the largest salary cuts among financial institutions last year” while 10 of China’s state-owned and state-controlled banks “also demanded employees return bonuses.”
Why it matters
Xi Jinping wants China to be a ‘financial superpower’
Ironically, the glum news comes as half of China's top 10 provincial economies are planning vast expansions in financial services, including increases in the number of financial institutions, as a separate South China Morning Post report said.
At last October’s financial work conference, Chinese leader Xi Jinping said China must “strengthen the quality of its financial services to support key areas such as technology, advanced manufacturing, the green economy and small and medium-sized enterprises.”
In January, he kicked off 2024 with “a roadmap . . . for how China would become a financial superpower,” one that would be “distinct from Western models” and “have world-leading economic, technological and comprehensive national strength.”
That sent the governments of Guangdong, Jiangsu, Zhejiang, and other regional powerhouses into a burst of planning sessions in a bid to outcompete one another for top shares of Beijing’s development budget.
Mary E. Gallagher, a China specialist and Professor of Democracy, Democratization, and Human Rights Professor at the University of Michigan, gave valuable insight into this phenomenon in a carefully worded essay last week. Although Gallagher was addressing global trade concerns over China’s glut of manufactured goods for export, she emphasized that her “excess capacity is a feature, not a bug” argument applied across sectors and is part and parcel of China’s governance model.
“The use of campaigns for governance tends to produce overcapacity and excess because it provides clear priorities and goals that are sent out down through the system. It unleashes competition not only between firms, but also between local governments who strive to assist local companies through protectionism, subsidies, and lax enforcement of regulations that might stand in the way of performance. Even when focused on economic goals, these campaigns provide opportunities for local officials who are competing for promotions and appointments higher up in the system to demonstrate personal loyalty to the leader,” she wrote.
Btw, Gallagher’s article is the best attempt I’ve seen lately at explaining China’s political economy to the unfamiliar, and I urge you to read it or share.
Who’s really driving this thing?
The fog, here, however, is that China’s new-age mass mobilization and campaign-style governance has a very different sort of leader.
Mao was a war hero - a communist revolutionary that inspired the masses. Xi, on the other hand, is the party’s man, a life-long bureaucrat for whom political education in the halls of elite power was instructive, Wall Street Journal reporter and author of Party of One: The Rise of Xi Jinping and China's Superpower Future, Chun Han Wong says.
In an excerpt of his book adapted for Time Magazine last year, Wong wrote that “[m]ythmaking is a key component of Xi’s push for preeminence.”
“Whereas Mao and Deng Xiaoping won adulation through revolutionary exploits and epoch-defining achievements, Xi took power as a relative unknown and had to build his appeal from scratch. He opted for winning favor through populist deeds and folksy branding, drawing on imagery that recalls Mao and on methods that are more Madison Avenue.”
“The party” also has a significant role in “humaniz[ing] Xi” especially “on social media,” Wong added.
What’s more, Wong pointed out long-held concerns among the party elite about Xi’s, ahem, limitations, and, in particular, his lack of formal education which could deeply impact the country’s direction. Xi was sent to the countryside to work with peasants in his most formative years during the Cultural Revolution.
Last week, the Economist highlighted the confusion over the leadership of China’s economic recovery as it discussed the “swirling debate inside China” about Premier Li Qiang’s “reticence” in taking charge.
At the recent China Development Forum in Beijing, a major annual economic conference normally led by the premier, Xi, rather than Li, met with top American CEOs. Li also missed the much-anticipated and high profile Two Sessions closing news briefing last month, breaking with more than 30 years of tradition.
“This reticence is becoming a pattern. Compared with his predecessor, Mr Li has held fewer meetings with foreign officials and business leaders in his first year: only two-thirds as many, according to the South China Morning Post in Hong Kong. He has travelled to only half as many meetings abroad. And when he has taken to the skies, he has flown on chartered flights rather than a government plane. …”
“…If Mr Li has lost clout, who has gained it? The obvious answer is He Lifeng, another deputy prime minister, who has become Mr Xi’s economic tsar,” Economist analysts suggested.
While that may be, the “obvious” point to make at this most critical time - when China’s entire financial system is slipping under the weight of bad debt - is that no one should be wondering who's in the driver's seat.
This Week’s China News
The Big Story in China Business
YELLEN IN CHINA AS TENSIONS OVER GREEN TECH EXPORTS RISE: US Treasury Secretary Janet Yellen is back in China for the first part of a week-long effort “to manage the trade relations between the world’s two largest economies,” South China Morning Post reported.
Keep reading with a 7-day free trial
Subscribe to China Boss News to keep reading this post and get 7 days of free access to the full post archives.