Exclusive Insight: Taking stock of Li Keqiang's legacy

Welcome to today's issue of "The China Brief"” China is planning to create a new national data bureau to oversee data-related issues and address data-security practices by businesses, but industry executives are concerned that the new regulator could stifle innovation in the technology sector. Meanwhile, the recent disappearance of a prominent banker has reignited fears among Chinese entrepreneurs about Beijing's approach to private enterprise, with many concerned that China's pro-market stance will not last. Additionally, experts argue that China's $140 billion investment in its chip sector to overcome US export curbs will not be enough to catch Western rivals who are generations ahead. Finally, as the National People's Congress elects a new government, China's leaders must address growing skepticism at home and abroad regarding their policy blunders and disregard for the rule of law.

And here’s today’s exclusive insight:

Exclusive Insight: Taking stock of Li Keqiang's legacy - the rampant expansion of shadow banking

This is the fourth installment of the series"Critical Problems in China's Fiscal System."

The 2008 economic stimulus package was hastily prepared, resulting in projects of questionable quality. After 2009, funds shifted from the traditional banking system to the shadow banking system, which has higher funding costs and shorter terms.

Since 2009, local governments have resorted to borrowing through "financing platforms" that can only be sustained by continuous rollovers. Consequently, local government debt, alongside the shadow banking system, has spiraled out of control. During the same period, real estate prices have surged, guaranteeing adequate revenue from land sales. The real estate bubble continues to inflate.

(Editor's Note: "Local governments' financing platform" or 地方政府融资平台 (dìfāng zhèngfǔ róngzī píngtái) refers to a type of financing platform that local governments in China use to borrow money. These platforms are created by local governments and usually constitute separate legal entities from the government. They raise funds by issuing bonds or taking out loans from banks and other financial institutions, and then lend the money to local government departments, infrastructure projects, or state-owned enterprises. However, these platforms have been criticized for exacerbating local government debt and being opaque in their operations.)

Despite Liu He serving as the Vice Premier in charge of finance during Premier Li Keqiang's first term, these issues remained unaddressed. The size of the shadow banking system surged uncontrollably, and new patterns emerged frequently, including internet technology platforms engaging in financial businesses to capitalize on their user bases.

From a micro perspective, this has resulted in the transfer of vast sums of funds within the financial system, leading to a rise in funding costs and financial risks each time. From a macro perspective, the high-risk shadow banking system underpins numerous low-quality loans, and their size continues to escalate.

The 2008 financial crisis in the United States resulted in the bursting of the real estate bubble and systemic financial risks, followed by the Eurozone debt crisis. China's potential problems are also intertwined with local government debt and shadow banking.

In recent years, the Chinese government has taken specific measures to stabilize the size of the debt, strengthen supervision of the shadow banking system, and address heavily indebted players such as HNA Group. However, the problem of local government debt, especially the concealed debt borrowed through "financing platforms," persists.

Throughout history, Chinese prime ministers have received the highest praise for "exhausting oneself in service until death."

The various prime ministers mentioned in this series have left an impression of short-sighted economic policies and a relentless pursuit of media fame.

(The "Critical Problems in China's Fiscal System" series is written by Li Weijun, a special analysis expert for "The China Brief."

WSJ: China to Create New Top Regulator for Data Governance

China is planning to create a new national data bureau to oversee data-related issues and address data-security practices by businesses. The new regulator would be the top Chinese regulator on various data-related issues, and it would set and enforce data-collection and sharing rules for businesses. The plan is expected to be discussed and approved at the National People's Congress. The move aims to streamline China's regulatory structure for data governance and bring a more unified approach to data governance. However, some industry executives are concerned that the new regulator could stifle innovation in the technology sector.

Bloomberg: Missing Banker Reignites Fear of Xi Among China’s Tech Bosses

The recent disappearance of Bao Fan, a prominent banker in China's tech industry, has reignited fears among Chinese entrepreneurs about Beijing's approach to private enterprise. Despite reassuring comments from Communist Party leaders, many entrepreneurs and investors are concerned that China's pro-market stance will not last. Venture deals in China plummeted by 45% in 2022 due to government-related risks, and investors are cautious about backing any startups this year. Many entrepreneurs are struggling to navigate extra-jittery bureaucrats, even in sectors where Beijing has ostensibly backed off, such as gaming. There are concerns that Beijing's crackdown could shave about 1% off economic growth if it continues.

Nikkei Opinion: World out of balance is not yet China's to set right

China's recent unveiling of a peace plan for resolving the Ukraine conflict raises questions about whether the world is ready for Chinese leadership, according to Abishur Prakash, co-founder of the Center for Innovating the Future. Although the West still perceives the US as the global leader, many other nations are distancing themselves from Beijing and forging their own paths. For China to become a superpower that can rival the US, the world would need to perceive a global leadership void, and nations would have to be willing to realign with a new world power and discard some Western or other systems in favour of Chinese alternatives.

Reuters Analysis: Chinese companies hang onto dollars, hedge to prepare for volatile yuan

According to executives, bankers, and data analyzed by Reuters, some Chinese companies are holding onto their dollar revenues from exports and turning to foreign exchange hedging in anticipation of a fall in the value of the yuan. More than 30 A-share listed companies have signed up to use currency derivatives for risk-hedging so far this year. The moves are at odds with bank forecasts for a rising yuan in 2023 and broader market expectations that the US dollar will fall this year, and could contribute to yuan weakness.

Reuters Analysis: China's chip sector needs more than state money to dull impact of US restrictions

China plans to invest $140 billion to help its chip sector overcome US export curbs, however, experts argue that money alone will not be enough to catch Western rivals who are generations ahead. The country's domestic firms are trapped at the low end of the value chain due to a cycle that hinders innovation, which limits exposure to advanced chipmaking facilities like Taiwan Semiconductor Manufacturing and Samsung Electronics. Furthermore, the lack of exposure has made it difficult for them to independently solve engineering problems and move up the value chain. Industry workers and market watchers argue that a complete rethink is necessary to focus on the next era of chipmaking to catch up.

FT: Hong Kong political elite pressed to give up western passports

Beijing is reportedly asking Hong Kong's political elite to give up their foreign passports, including British National Overseas (BNO) documents, in order to be selected for the Chinese parliament. This is seen as part of China's efforts to tighten control over Hong Kong and stamp out foreign influence. While Hong Kong citizens hold Chinese passports, many residents of the former British colony also hold passports from countries such as the UK, Canada, Australia, and the US. At least one National People's Congress (NPC) delegate was reportedly denied a seat because they held a BNO document.

FT: Chinese regulators probe large Covid-related writedowns

Regulators at China’s Shanghai and Shenzhen stock exchanges have asked over 70 companies to explain why they made significant provisions for the effects of the pandemic, with concerns raised over China’s zero-Covid policy being used as a cover for earnings manipulation. The exchanges have queried companies with a combined market capitalisation of CNY398bn ($57bn) over why they wrote down the value of assets in earnings guidance last year. Staff at the exchanges also questioned over two dozen companies about large goodwill impairments. Over 859 listed groups have said in recent weeks that they expect to report big losses in 2022, partly due to asset write-offs in Q4.

SCMP: Whatever happened to Likonomics? Chinese Premier Li Keqiang heads for the exit

Chinese Premier Li Keqiang has delivered his last government work report as he prepares to retire at the end of his second five-year term, the maximum allowed under China's constitution. During his premiership, Li promoted the private economy, foreign investment, and simplified government procedures, but his power waned as President Xi Jinping introduced party committees to oversee the economy and other matters. Despite being seen as a political weakling, Li has been remembered for his efforts to encourage local officials to focus on economic recovery during Covid-induced lockdowns and for overseeing improvements to China's business environment.

SCMP op-ed: Xi’s Chinese dream is in danger of being hijacked by ultra-left nationalism

China's Communist Party has alternated between ultra-left radicalism and pragmatism throughout its history, with the latter leading to China's rise as the world's second-largest economy. However, ultra-leftist national sentiment has made a comeback in recent years, threatening to derail China's economic development and its goal of national rejuvenation. China's new government, expected to be led by President Xi Jinping and his ally Li Qiang, will need to take serious steps to curb ultra-nationalistic tendencies and get back on the track of reform and development. The government is expected to unveil pro-market measures at home and soften its hawkish stance towards the West abroad. However, signaling a conciliatory approach is not enough, and China's leaders must also address growing skepticism at home and abroad regarding their policy blunders and disregard for the rule of law.

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