Instead, his government looks like it’s in disarray. Xi’s mysterious purge of his foreign minister in July, followed by the reported ouster of his defense chief less than two months later, is making China appear unstable to the outside world. The Chinese leader also overhauled the generals overseeing China’s Rocket Force, which manages the nation’s nuclear arsenal, without giving an explanation.

And those are just the firings that have been made public. 

While most analysts don’t see any threat to Xi, who has amassed more power than any leader since Mao Zedong, questions are being raised about his management style. Morale within the Foreign Ministry in particular is very low, with anxiety running high among a group of bureaucrats that see themselves as professional diplomats who don’t want to get caught up in political power plays, according to Chinese officials who asked not to be identified discussing sensitive information. 

Eoin Treacy's view

Occasional purges of high profile cadres is a de rigueur for authoritarian regimes. If one’s position is improved by official dictate it can just as easily be erased by official dictate. It’s easy to gloss over what a controlled economy really means when the direct of control is one’s interests. The challenge for global investors today is there are significant doubts about whether the Chinese administration is aligned with their best interests.

China is currently ramping up issuance of local government financial vehicle (LGFV) loans. The predominant use for the funds is to prop up local bank balance sheets. That’s not exactly a productive use of capital and the practice will only increase leverage for the respective local governments.

Chinese government bond yields continue to trend higher which suggest investor are unconvinced about the trajectory of policy. The most particular risk is any effort to spend their way out of trouble will stoke the same kind of inflationary pressures that everywhere else has been dealing with over the last couple of years.
The US listed China Fund Inc has one of the most impressive records of returning capital to investors through special dividends as well as weathering several storms in the Chinese markets. This is the longest amount of time the fund has traded below the 1000-day MA in 20 years.