Friday, April 16, 2010
As many of you know, Premier Wen Jiabao recently penned a very emotional essay remembering former Party Secretary General Hu Yaobang. To be sure, it was published on the 21st anniversary of his death, but there are some very unusual elements of this essay. I attach the full text below for readers' own analysis. Needless to say, the China studies community has been in an uproar about this essay. Below, I present my own take of this essay; comments welcomed!
To be sure, Wen shows no hesitation to display affection publicly, but if his feelings were "sincere," why didn't he write such an article last year? Also, like many, I find the last paragraph especially strange. Isn't reminiscing Hu's greatness enough? Why also tell readers that he continues to visit Hu's widow every year? I read that as a credible signal to all Hu YB sympathizers which side Wen stands on.
Now, the question is why send such a signal. To be sure, Hu Yaobang has been making a come-back in the official press. the last time that Hu was praised by a Politburo Standing Committee member was Zeng Qinghong's speech in 2005. If you read the text of the Zeng Qinghong's 2005 speech on HYB (which I also append below), it reads like a detailed official biography of Hu with some usual pleasantry about "great Marxist"...etc at the end. The Wen piece clearly appears to be the most "heart-felt." Again, the issue is why the need to send such an emotional signal.
One possibility is that Hu Jintao is trying to send a strong signal of the CYL's power in the run-up to the 18th Party Congress. But if that were the case, why not just write such an article himself. I am sure Hu can conjure up many emotional anecdotes of his former mentor.
Finally, we come to the hypothesis that Wen Jiabao himself is in deep trouble and may be under threat of being removed. I find this possibility the most reasonable. In essence, Wen may feel that he is under direct threat of being removed or may implement a policy which puts him in danger of being removed. As either a last ditch effort or an insurance policy, he writes this article to rally HYB sympathizers on his side in case his enemies move to remove him from power. In particular, I was struck by the paragraph on Hu YB's insistence of working despite
being ill. We know of course that "illness" has historically been used to sideline or remove top officials in China (Chen Yun, Li Peng...etc.). It seems that Wen is saying through that passage that "as a loyal student of HYB, I would never let illness stop me, so you shouldn't believe people if they say I am stepping down due to illness." All this may be related to the possible implementation of the property tax, which may indeed place Wen under the threat of removal by powerful interests.
http://www.sina.com.cn 2010年04月15日05:24 人民网-人民日报
1. Wen is notorious for his emotional style of political performance, particularly public appearance and writing. So it's not unusual for him to go emotional in such article. It may be the case that he carries much emotion in the article of HYB, given their past connections, but such conclusion can not be drawn based on his rhetoric in this article.
2. The reason Wen didn't write it last year was clear, a reminiscence of HYB in the 20th anniversary of Tian'anmen Square naturally leads to a reminiscence of all things happened following HYB's death that year. It'd be a political disaster and earthquake to publish that in 2009, unless Wen has a more aggressive agenda.
3. HYB's stature in CCP's history is unique. He has always been officially recognized as "Leader of the Party and Nation", and the official treatment he received posthumously is at a reasonable level. No political committee member in recent terms has publicly criticized HYB. In CCP's perspective, HYB is completely different with Zhao Ziyang, and there'll be no political asset for any leader to deny HYB. Hence, no one actually stands against HYB, So Wen's benefit from signaling his stance is actually limited, if any.
4. If we take a look at the Chinese political tradition in remembering leaders, Zeng Qinghong's appearance in 2005 is actually the most meaningful inroad. CCP tends to remeber high leader's birth at the beginning point of each decennium,i.e. 80,90,100 anniversary. And HYB didn't get such one in 1995, his 80 anniversary, which is understandable given the atmosphere then, the 2005 then become crucial in evaluating CCP's attitude toward HYB. ZQH's appearance, as the Standing member in charge of party affairs, carries great weight. In terms of his speech then, it's a standard-written one in typical CCP leader memorial style. ZQH's speech and WJB's article is two form of expression, with the former disallows personal emotion, and actually reflects the authority's appreciation of HYB, rather than ZQH's personal idea. WJB's essay is a personal article, not for official occasion, and given his lavish and emotional style, comes as no surprise.
5. It's possible that this article is intended to push CYL's power before 18th congress. But one notable fact in CCP politics tradition is that party boss rarely publish personal authored pieced on People's Daily. I find no record of HJT, even JZM publishing articles of this style on People's Daily ever. (except political documents, such as new year speech, party congress report). Interestingly in contrast, Wen has utilized People's Daily in remarkable frequency to publish personal-authored articles similar to this HYB one. That's also one thing worth examination, on different political communication strategies different leaders choose. So even HJT wish to write such articles, it's not consistent with his style. And I wonder whether WJB is closely-allies with HJT enough to make push for CYL. WJB is never considered as a part of CYL, and is not expected to be a staunch supporter of this bloc.
6. Removal of PM is of greatest significance in China, the only time when PM was unusually removed was in 1980, associated with major political reshuffle then. There's extremely slim possibility that Wen even foresees a potential forebode of risk of removal. With his term to expire within 3 years, it's so hard to imagine that Wen is at risk of removal, and if he's in that dangerous situation, I don't think he'll still be capable of getting this article published.
If you - a scholar who's dedicated himself to reading the runes - and all the other political analysts can't read clearly what the "signal" being sent here is, then why do we believe that party cadres (not always intellectual giants) are able to decode them? This idea of treating Party publications as code breaks down if no-one can actually understand the code.
I liked the essay a lot - I'm a bit of a Wen fan, despite the emetic Uncle Wen stuff. Until someone comes up with a better reason, I'm going to take his essay at face value.
Wen omitted one notable fact that, when HYB and Wen paid visit to Xingyi, Guizhou Province in 1986, HJT happened to be the party boss there. Accordingly, HJT must be present during HYB and Wen's visit. Interesting to see this historical dynamic not cited in Wen's article.
My theory is that Wen is trying to bolster support for planned policy changes. Hu Yaobang is well-known to be a proponent of reform and of the youth/student demographic. The Hu/Wen administration is currently considering some difficult economic reforms (I agree, property tax is one, but only one of these) and meanwhile the problems of the unemployed recent college demographic are not going anywhere quickly. So rekindling the memories of HYB's effective governance style (which is a major focus of the piece), and promising to emulate these lessons, seems to be a way to lay the groundwork for how the leadership is going to get through a tough couple of years before 2012.
First, modesty is always attractive; but modesty should not blind you to reality. You may not be as "in the loop" as the very highest in Beijing, but you know an awful lot about Party factionalism. More than most Party members.
Second, you seem to be confusing two groups of people here. If Wen had a message for the central committee members, he would talk to them. They're all right there in Beijing. He can get in a room and say what he wants to say.
The purpose of publishing an article would surely be one of two things: (a) a way of talking to the much broader Party membership (and they really aren't in the loop; there's no reason to assume they can "crack the code"); or (b) a public statement which serves some kind of purpose analogous to your "nauseating displays of loyalty". Obviously not the same, as Wen's at the top.
If it's (a), then the article needs to be decodeable by a large proportion of the Party. Your difficulty in reading suggests that it isn't.
If it's (b), then we need to ponder what the value of such a display would be, given that it can't be expression of loyalty to a faction. I haven't seen a good explanation of what it might be.
So I'm left with (c): it's just an article that Wen wanted to write, and enough people decided that with HYB dead 20 years, it wouldn't be too dangerous now.
Sunday, April 04, 2010
Since the publication of my editorial in the Asian Wall Street Journal on local debt, there has been a wave of interest on this issue. Several investment banks have issued reports on local debt, and some of them have disputed my main finding that current local government investment vehicle debt stands at around 11.4 trillion RMB. The World Bank likewise addressed this issue and came up with a much lower estimate on local investment company (LIC) debt. In the discussion below, I outline some reasons why I still adhere to my estimate that existing local investment vehicle debt stands at around 11 trillion RMB. Furthermore, I once again reiterate that local debt is a serious problem which will require decisive actions from the Chinese government.
Some points people have raised about my estimate of local debt:
1. The Chinese government claims that there is only 6 trillion RMB in local investment vehicle debt.
My response: A. This widely cited figure was produced by a 6/2009 CBRC survey of the situation. The exact methodology is unclear, but informants state that the CBRC extrapolated this amount on the basis of a partial study of a few provinces.
B. Other government agencies have provided conflicting and higher amounts. For example, a MOF research team uncovered "well over 4 trillion" in late 2008 (excellent Credit Swiss research even states that the 4 trillion was a YE 2007 figure).
C. The CBRC finding concerns only bank loans, but total debt should also include bond issuance and accounts payable, which constitute triangular debt.
D. if we sum the gross debt of just the top 50 or so LICs, we quickly arrive at gross debt of over 2 trillion (try adding the gross debt of Guangdong Highway, Guangdong Transportation Group, Chongqing Highway, Beijing Basic Construction, Shanghai Urban Construction and Development Company, Shanghai Pudong Development Co., Tianjin Urban Basic Infrastructure, Binhai Development...etc.), so the remaining 8000 or so entities only owe 4 trillion (on average 500 mln RMB each)?
2. The 11.4 trillion is too high when compared with total bank loans in various categories.
My response: A. First of all, total loans outstanding at the end of 2009 was well over 40 trillion RMB, and I think it is completely reasonable to believe that nearly 1/4 of it was loans to LICs. In fact, I wouldn't be surprised that a higher share of bank loans ended up in LICs.
B. Some analysts have trouble believing that such a high share of medium and long-term loans ended up in LICs. When we consider how many LICs there are and the vital role they play in the local economic strategy, it is not surprising that likely as much as 3/4 of new medium and long term loans in 2009 ended up in LICs.
C. Beyond medium and long term loans, many LICs are holding companies with subsidiaries engaged in a wide range of businesses. For example, the LICs run thousands of hotels across China, and loans to these hotels would be classified as loans to the service industry. Thus, in addition to medium and long term loans and loans to infrastructure, it is perfectly reasonable for a sizable share of working capital loans, trust loans, and loans in the "other" category to end up in LICs. Again, gross debt of these entities would also include bond issuance and debt owed to each other.
3. LIC debt can be calculated by subtracting government spending on basic infrastructure from the total infrastructure spending figure. In that light, LIC debt only increased by 2.8 trillion RMB in 2009.
A. First, as pointed out, LIC are diversified holding companies which do not only engage in infrastructure construction. For example, thousands of subsidiaries of local investment companies engage in real estate development and absorb some share of the real estate loans. The figure generated using the method above, however, may be meaningful one-day when the government decides how much of the existing LIC debt it will seek to take over as part of a bail out.
B. The calculation above assumes that much of the extrabudgetary revenue from local governments derived from land sales went to infrastructure construction. According to excellent research done by Standard Chartered and UBS on land sales, much of the land sales revenue is spent on compensating original residents, leaving only a minority share for actual investment. Thus, a realistic application of this methodology would lead to something like 3.5 trillion RMB in new loans to LICs, not just 2.8 trillion.
4. My estimate of 12.7 trillion in future LIC debt is baseless and is way too high for YE 2011.
A. To be sure, I now think most of this debt will not realize by YE 2011 also. However, it would not be far-fetched to think that most of this debt will be realize by YE 2012. This estimate is not "baseless" as it comes from the hundreds of lines of credit that banks have granted to local governments. As long as banks more or less adhere to these lines of credit, they will lend this amount to local governments at some point in the future.
B. Although the State Council has called for more caution in lending to local investment vehicles, we still see local governments aggressively trying to raise money from the banks. Hubei, for example, has an investment plan worth 12 trillion RMB, and plans on investing 6 trillion RMB between now and 2012 (please see http://nf.nfdaily.cn/epaper/21cn/content/20100324/ArticelJ07002FM.htm). Of the 6 trillion, at least 3 trillion will come from bank loans and other forms of debt. If Hubei is able to realize its ambition, we are already 1/4 of the way toward my 12.7 trillion estimate. Thus, unless the central government harshly restricts overall credit, I think local governments at the provincial and municipal levels will have no trouble borrowing an additional 12.7 trillion by YE 2011 or 2012.
Beyond critizing my estimate, some investment bank reports also argue that whatever the debt amount, the Chinese government is fully capable of addressing this issue and in heading off a financial crisis. On this point, I mainly agree with my colleagues, but I still don't think the problem is trivial, especially in light that local governments seem determined to take on trillions in additional debt in the coming two years to finance ambitious investment plans. My main worry is that unless Beijing decisively restricts local investment projects, local investment companies will continue to borrow in large quantities in the coming two years.
Even relatively bullish investment bank report suggests that new non-performing loans in the banks can increase by 2-3 trillion RMB in the next couple of years. To be sure, this is well within the government's ability to handle and likely will not lead to any kind of financial crisis. However, this remains a daunting problem for the government and for current shareholders of China's banking stocks. This will require the China Investment Corporation to inject tens of billions of dollars into banks through Huijin. Additional asset management companies will have to be formed to take over the NPLs. This is a lengthy and difficult process involving numerous ministries and interests, which is expected to generate a great deal of uncertainty. If the expectation indeed is a couple of trillions in NPLs, it deserves careful watching rather than dismissal.
Finally, some investment bank reports suggest that the enormous sum of state assets must be considered along side of the debt. If debt ever becomes a problem, the Chinese government can always sell state assets to repay the debt. Here, I am in complete agreement with my colleagues. It will be a great day when the Chinese government decides to privatize trillions in state assets to raise money to repay local debt. The record of the Chinese government in privatization, however, is spotty at best. Even in the late 1990s, when the fiscal shape of the central government was at its weakest, only small SOEs were privatized, often through murky processes to insiders. Since then, both the central and local governments have done their utmost to maintain the dominance of large state-owned corporations through protectionism and subsidies from both the budget and the financial system. Instead of privatizing these firms and allowing them to compete on equal footings with private and foreign firms, they are given every advantage so that they can dominate the domestic and even the global markets. The financial system in particular channels the bulk of its resources to the state sector. Unfortunately, it does not seem privatization is anywhere near on the horizon. Instead, we can expect trillions more being poured into state entities, including local investment companies, in the foreseeable future.
Thank you for enumerating the responses to your critics. The sheer volume suggests your research has made quite an impact on popular thinking.
You seem to invoke investment banks and their research quite frequently. While it is gracious of you to give their views air time, I think you can afford to be less conciliatory. Some of us who have published "research" on China at an investment bank (at least since 改革开放 took hold) would not take those reports' conclusions as seriously as you seem to.
As in many other circumstances, the road between the data and their interpretation is filled with unscientific potholes. No employee can afford to be critical of Chinese policy without somehow softening their conclusion and/or using the findings in a normative prescription for how the central government should do the "right" thing. As a recent example, take Citi chief economist Willem Buiter, he of the former Maverecon blog, in his March 24 note "Is China Blowing Bubbles?":
"Even if a large fraction of the loans made during 2009 as part of the government-mandated bank lending boost were to go bad eventually, this does not mean that the policy itself was misconceived from a macroeconomic and social welfare perspective...If even part of the additional productive capacity created through the bank-financed investment stimulus has a positive social rate of return, the policy is superior to paying unemployed workers to dig holes and then to fill them again."
Left unsaid, of course, is the very risk you have highlighted, that this large block of LIC lending has not been directed toward "additional productive capacity". Investment bank research on China has many fine qualities but balance is surely not one of them.