SINOWEEKLYPLUS

The factional struggle behind opening up Hainan; P2P liquidations point to debt crisis

SinoInsight 1
On July 6, Renrenaijia Financing, a Hangzhou-based peer-to-peer (P2P) lending platform, announced that it was going out of business on its website. Renrenaijia had total investments worth 23.2 billion yuan and 1.736 million users. Three days before Renrenaijia shut shop, niubangold.com, another P2P lender based in Hangzhou whose total transactions reached 39 billion yuan, announced its liquidation.

Chinese online P2P lenders have been folding one after the other recently. In June, at least 46 companies have closed.

OUR TAKE
We believe that China’s debt crisis has been triggered by a worsening economy and Beijing’s deleveraging campaign.

Recently, stocks of property developers plummeted in the wake of news that state banks were curbing support of shantytown redevelopment projects. By early July, the renminbi had dropped sharply (6 percent) after reaching a yearly high on April 11. Meanwhile, the cost of financing property investments with borrowed U.S. dollars keeps soaring, pushing up default risks.

SinoInsight 2
Han Zheng, a Politburo Standing Committee member and State Council vice premier, visited Hainan Province from July 1 to July 3 as head of a leading group overseeing Hainan’s “comprehensive reform and opening up.”

OUR TAKE
1. The appointment of a Politburo Standing Committee member to oversee the opening up of Hainan suggests that the Chinese Communist Party (CCP) is placing great emphasis on the matter. Major reforms may be forthcoming in Hainan.

With the break out of the Sino-U.S. trade war and China’s foreign exchange reserves in short supply, the economic liberalization of Hainan should become a strategic priority for the CCP as it seeks to attract foreign investments. Hainan’s opening up, however, is a double-edged sword—insufficient liberalization would fail to attract investors, while a high degree of liberalization would endanger the CCP regime.

2. Hainan is a popular vacation destination for high-ranking CCP officials of all factional stripes. The province is also known for its triads and underground gambling industry. Before the 19th Party Congress in October 2017, Hainan was “territory” of the Jiang Zemin faction.

The political and social situation in Hainan makes any sort of reform and opening up contentious to the various CCP factions and local interest groups. For instance, a plan by the Hainan local government to allow tourists to access foreign social media sites like Twitter and Facebook sparked an uproar on the Chinese internet. The Hainan government later removed the plan document from its official website. The central government’s April decision to allow in Hainan racehorse betting, sports lotteries, and foreign investment in the local entertainment industry could potentially upset various interest groups.

3. Han Zheng is a Jiang faction member, and the faction appears to have marked him as a possible candidate to replace Xi Jinping. We believe that the CCP factional struggle is a factor behind Xi’s decision to give Han the unenviable task of opening up Hainan.

In rolling out reform, Han cannot completely avoid offending the various factional and local interest groups in Hainan, and would face the brunt of their opposition. If he fails to attract enough investments, he accrues no political capital. And if Han’s efforts at reform and opening up endanger the Chinese regime, he stands to take the fall.

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