Hello everyone, welcome to “Clean Garden Finance”.
In the previous episode, we discussed that from the end of 2000 to the second half of 2020, the total amount of currency issued by the Chinese Communist Party’s central bank reached 20 trillion yuan, and the current M2 issuance total has exceeded 30 trillion yuan. The CCP has no real ability, they don’t know how to earn money, they only know how to spend money. When the borrowed money is spent, they just print more money to repay the debt. With the current speed of money printing, will China face severe inflation?
In 2020, the housing market value in China was 62.6 trillion US dollars, significantly surpassing countries like the United States, Japan, the UK, France, and Germany. In terms of the ratio of housing market value to GDP, in 2020, China was at 414%, higher than the US, Japan, Germany, the UK, and France at 148%, 233%, 271%, 339%, and 354% respectively.
Before and after the 2008 financial crisis, the highest ratio of housing market value to GDP in the US was 169%; in the 1990s, before the burst of the real estate bubble in Japan, the ratio of housing market value to GDP was only 391%. It’s evident how insane housing prices have become in China over the past 20 years, with buying a house consuming the majority of several generations’ wealth.
Land finances have fattened the local governments of the CCP. Currently, with rapidly falling housing prices, local finances are facing bankruptcy.
Most of the financial revenue of local governments in the CCP relies on land sales, with land sales accounting for more than 50% of financial revenue, some even exceeding 80%. Looking at annual land revenue, from 2019 to 2023, national land revenue was 7.7914 trillion yuan, 8.4142 trillion yuan, 8.7051 trillion yuan, 6.6854 trillion yuan, and 5.7996 trillion yuan respectively. In 2023, land financial revenue was nearly 3 trillion yuan less than the peak in 2021. The decline in land sales revenue has led to many local governments being unable to pay salaries, let alone engage in infrastructure projects.
To maintain the huge local government employee system, local governments have started finding ways to extort money. Recently, cities like Shanghai and Guangzhou have successively increased water prices by 10% to 50%, while provinces like Guangdong, Hunan, Anhui, and Jiangsu have announced plans to increase electricity prices, with the highest increase reaching 30%. The high-speed rail has also recently announced four price adjustment notices, implementing price hikes for trains traveling at speeds above 300 kilometers per hour, with the highest increase reaching 40%.
Local governments will inevitably find ways to extort money to survive, directly affecting the vital interests of local residents, leading to even greater public resentment.
In the 2024 CCP government work report, it was proposed to issue 1 trillion yuan of ultra-long-term special national debt this year, which will continue for several years. Ultra-long-term refers to national debt with a term of 10 years or more. As early as 1998, the CCP first issued 30-year ultra-long-term national debt; in 2009, the first 50-year ultra-long-term national debt was issued and gradually became normalized. According to incomplete statistics, since 1998, the CCP has issued 9 series of 15-year fixed-rate national bonds, 17 series of 20-year fixed-rate national bonds, 102 series of 30-year fixed-rate national bonds, and 36 series of 50-year fixed-rate national bonds. It is worth noting that since 2016, the CCP has issued fewer 15-year and 20-year national bonds, with 30-year and 50-year ultra-long-term national bonds becoming mainstream.
A 50-year national debt, how many 50-year periods can a person have in their life? It is clear that they do not intend to repay the debt. If these bonds are transferred to the central bank through the secondary market, there will be no need to repay the debt, just keep the printing press running. Of course, now it’s all electronic accounts, just a few keyboard strokes.
Currently, China’s consumption has sharply declined, foreign capital is retreating, the demographic dividend is disappearing, and local government debts are accumulating. By the end of 2023, the Ministry of Finance announced that local government debt was 40 trillion yuan, a figure that is far lower than the actual amount. How will these debts be repaid? How will the existing massive power system expenses be maintained? The CCP is tearing its face off, printing money and spending it themselves.
On April 23, the theoretical study group of the Finance Ministry’s Party committee stated in the People’s Daily that they support gradually increasing the buying and selling of national debt in the open market operations of the central bank to enhance the toolbox of monetary policy. This move is interpreted by the outside world as China’s version of quantitative easing about to start. The CCP is trying to hide by saying that the central bank is not buying national debt in the primary market, so it is not quantitative easing, but rather increasing liquidity through buying national debt in the secondary market.
Buying national debt in the primary market refers to the central bank directly purchasing national debt issued by the finance ministry, thus creating a large amount of currency out of thin air. However, the current Article 29 of the 2003 version of the Chinese People’s Bank Law stipulates that “The People’s Bank of China shall not overdraw the government’s finance, nor directly subscribe to, underwrite national debt, and other government bonds.”
This means that direct money printing by the central bank is illegal. In fact, before the 1980s, the People’s Bank of China was merely a subordinate department of the finance ministry, acting essentially as the finance ministry’s accountant. The amount of money issued was determined by the finance ministry, and the central bank had no independence. This was the monetary policy of the planned economy era of the CCP. In other words, they could print as much money as they wanted, it’s just that back then, it was a ticket economy, and inflation was concealed by ticket issuance.
Isn’t buying national debt in the secondary market currency monetization of fiscal deficits? In fact, buying old debt in the secondary market and subscribing to new debt in the primary market have no fundamental difference. For example, many countries stipulate that if a gaming hall does not allow customers to exchange their winnings for tokens, it is not considered gambling. However, many gaming halls can exchange tokens for prizes and then open a nearby store to redeem the prizes, and both establishments are not in violation but together they have essentially created a large gambling operation.
For example, in 2007, the CCP’s Ministry of Finance established CITIC Limited needing foreign exchange, they issued 1.55 trillion special national debt, which was subscribed to by the Agricultural Bank. After the Agricultural Bank subscribed, the central bank then bought the national debt from the Agricultural Bank, and after receiving the foreign exchange, the Agricultural Bank handed it over to the Ministry of Finance. By going through the Agricultural Bank, printing money for the Ministry of Finance by the central bank is considered legal.
It is intriguing that on April 23, the Ministry of Finance wrote in the People’s Daily, “From a medium-term perspective, we must strengthen the coordination between fiscal and monetary policy, financial reform, and improve the basic money injection and money supply adjustment mechanisms, support the gradual increase in buying and selling national debt in open market operations by the central bank to enrich the toolbox of monetary policy.” The so-called “coordination” here, bluntly speaking, is that the Party mom is short of money and needs the Ministry of Finance to ask the central bank for money, but it’s not appropriate to ask directly. To avoid directness, they go through the secondary market as a buffer. But fundamentally, it reverts to the fiscal monetary policy framework of the planned economy era, where the central bank becomes the finance ministry’s accountant.
This move by the CCP is essentially printing money to repay debts and fund local government operations. How will the central bank keep track of this? It’s simple, they can just say the books are missing, as they used to.
What does this rogue behavior of the CCP mean for the people?
A simple analogy: a country has two people, where one person borrows money from the other. The borrower doesn’t work and can’t earn money, so when they can’t repay the debt, they just print money. What does this mean for the other person? They not only have to work to support themselves but also have to support the other person. The non-working government will squeeze the blood and sweat out of the working people.
We have already seen examples from Venezuela and the former Soviet Union. In 2016, Venezuela’s inflation rate reached 800%. In the early 1990s, Russia experienced extreme hyperinflation, with annual inflation rates peaking at over 2000 points.
When a massive amount of RMB floods the market, what will Chinese people face? When that time comes, the CCP regime is likely to collapse.
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