SINOWEEKLYPLUS

Why ZTE ‘probation’ benefits US national security; China film industry tax probe could see shakeup of stars

SinoInsight 1
In the first five months of 2018, the top 100 property developers in China made total sales of 3.47 trillion yuan (about $543.67 billion), a year-on-year increase of 33.5 percent.

Well-known property developer Evergrande Group made 254.09 billion yuan (YoY increase of 38.8 percent), while Country Garden, another developer, made 334.68 billion yuan (YoY increase of 37.04 percent).

OUR TAKE
On the one hand, the Chinese government is deleveraging the economy and regulating the property market. On the other hand, the central bank is increasing liquidity via MLFs that include junk bonds. And historically, property prices go up when the central bank increases liquidity.

Seeing how the property bubble keeps expanding in an economic downturn, we believe that China’s real economy is performing poorly. The property bubble is at increased risk of bursting.

SinoInsight 2
On June 7, Shenzhen Ecobeauty Co. Ltd. announced that the company and its subsidiaries are defaulting on bond payments of about 510 million yuan. Shenzhen Ecobeauty is listed on the Shenzhen stock exchange.

OUR TAKE
Shenzhen Ecobeauty’s case indicates that China’s bond default wave is perpetuating. Given the current trend, local state-owned companies could be next to default on bonds after private companies, followed by key state-owned companies.

We believe that China’s debt crisis has been triggered, and Beijing needs to attract and keep foreign investments in the mainland to resolve the crisis. Expect the Xi Jinping administration to roll out policies to liberalize the Chinese economy to a significant degree.

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