SinoInsight 1
R&F Properties, China’s 10th largest property developer in 2019, released its 2018 annual report on March 20.
During the past year, the company’s turnover increased 24 percent to 66.388 billion yuan ($9.881 billion) while its profits dropped 59 percent to 8.371 billion yuan. R&F’s liabilities in 2018 grew 57.6 percent year-on-year to 177.719 billion yuan, with total liabilities reaching 296.33 billion yuan. Also, the company’s debt ratio rose from 78.23 percent to 80.9 percent last year.
OUR TAKE
1. Based on turnover alone and overall ranking alone, R&F did pretty well in 2018. Other indices, however, paint a different picture.
R&F’s profits decreased, while its liabilities and debt risk increased significantly last year, according to its annual report. The company’s financing cost was 5.212 billion yuan in 2018, an increase of 212 percent from a year ago. That means in 2018, R&F’s financing cost is 62.3 percent of its profits, while its debt is 35 times higher than its profits. Thus, R&F has substantial debt pressure.
Meanwhile, the company sought large scale financing on an unusually frequent basis in 2018, according to incomplete data in mainland media. R&F issued bonds at least 26 times and secured total financing of more than 51.4 billion yuan. R&F bond coupon rates ranged between 5 to 9 percent.
Between January to February this year, R&F issued bonds seven times and secured 10.82 billion yuan and $1.625 billion yuan in financing. The company said that a large portion of the new debt will be used to pay off old debt.
R&F’s peak debt repayment period stretches from 2019 to 2022. High debt will place the company under substantial financial strain and affect growth and development. In 2018, R&F slowed its rate of land acquisition by spending 37.1 billion yuan, a year-on-year decrease of 36.5 percent. In 2019, the company expects to spend only 40 billion yuan on land acquisitions.
2. Recently released official economic data shows that consumer purchasing power has dropped sharply and residents debt leverage ratio has nearly peaked. Meanwhile, Sino-U.S. trade negotiations are still dragging on with unclear prospects. In this economic environment, the decline of the Chinese property sector is almost inevitable and financing costs will rise as profits decrease. For greatly indebted Chinese property companies, the risk of them defaulting on debt will dramatically increase.
In our China 2019 outlook, we predicted that “a few major property companies could file for bankruptcy.”
SinoInsight 2
On March 18, the Shijiazhuang Public Security Bureau announced that the city is scrapping restrictions on residents changing their household registration (hukou) status. Chinese citizens can now migrate freely to Shijiazhuang without needing to update their hukou status. Likewise, spouses, children, and parents of residents can move along with them without restrictions. Shijiazhuang is the capital of Hebei Province in northern China.
On March 22, officials from the Jinan government in Shandong Province confirmed that the city had canceled a policy limiting property prices in February but a purchase restriction policy was still in force, according to mainland media. Jinan is the first Chinese city to publicly do away with property price limits.
To date, at least 23 cities across China have relaxed their property market regulatory policies, according to incomplete statistics compiled from property websites. The nature of regulation relaxation is dependant on local conditions, and has come in the form of canceling price limits, removing restrictions on sales, lowering the threshold for settlement, or lowering property transfer tax for second-hand housing.
OUR TAKE
1. Recent developments in China’s property sector affirm our China 2019 outlook prediction that “more cities may scrap their policies restricting homeownership.”
2. We believe that the CCP government is relaxing property regulations to cope with China’s deteriorating economy. Loosening property regulations is one way to boost local government revenue, which relies on land sales. After China’s property market started spiraling downward in the second half of 2018, local governments have been generating less revenue from land sales this year.
According to data from property services company Tospur Research Institute, 300 Chinese cities sold 1,168 parcels of land in February, a 79.5 percent decrease from a month ago and a 23.5 percent drop from the same period in 2018. Total land sales was 198.475 billion yuan, a decrease of 40.26 percent from January and a 30.36 percent decline from February 2018.
At this year’s Two Sessions, the CCP promised to cut taxes and fees, as well as reduce the proportion of urban workers’ basic pension insurance units by 4 percent. However, the CCP did not announce plans to trim government bureaucracy, and instead exhorted “all levels of government” to “lead frugal days” and “find ways to raise funding.”
To “raise funding,” local governments have been relaxing property regulations to stimulate property sales and encourage developers to buy land and build more developments. While land sales are a quick and familiar way to boost revenue, local governments will likely end up inflating the property bubble with deregulation and increase risks.
SinoInsight 3
On March 21, the Supreme People’s Procuratorate announced on its website that an anti-corruption investigation into Chen Qingen, a Party committee member and deputy director of Hebei’s Public Security Bureau, had been concluded and that his case had been transferred over to the procuratorate for review and prosecution. The announcement noted that Chen was guilty of “bribery and using influence to accept bribes.” The latter charge is used when retired officials continue to take bribes on the basis of their former positions, or when their relatives accept bribes from others.
On Sept. 8, 2018, the Hebei discipline inspection and supervisory commission announced on its website that Chen was being investigated for “severe violations of discipline.”
OUR TAKE
1. Based on our research into CCP factional politics, we believe that the purge of Chen Qingen is part of Xi Jinping’s effort to rectify the political and legal affairs apparatus. Xi’s determination to clean up the political and legal affairs apparatus, which is controlled by political rivals, is clear from the fact that Chen could not avoid arrest despite being retired for five years.
In our China 2019 outlook, we wrote that “Xi will likely continue to clean out the political and legal affairs apparatus, the propaganda apparatus, the intelligence apparatus, and the financial system.”
2. Chen Qingen is a career public security official. He served as public security bureau chief in Hebei’s Langfang City (May 1999 to September 2006) and Qinhuangdao City (September 2006 to August 2011) before being promoted to the provincial Public Security Bureau in August 2011 at age 59, or one year before the usual retirement age for bureau-level officials. At Hebei’s Public Security Bureau, Chen served as deputy director to Hebei security boss Zhang Yue until his retirement in March 2013. Zhang was sentenced to 15 years in prison on corruption charges in July 2018.
Chen’s career trajectory, political correctness, and guanxi networks mark him as a Jiang faction member.
Purged Hebei security chief and Jiang faction member Zhang Yue was Chen’s superior for most of the latter’s career. Eventually, Chen rose to become Zhang’s deputy.
Both Chen and Zhang appeared to have been “politically correct” in advancing the crackdown on Falun Gong, Jiang Zemin’s pet project and political legacy, in Hebei. According to incomplete data compiled by the Falun Gong-run Minghui.com, Hebei ranks third in the country in terms of the severity of the crackdown. The crackdown on Falun Gong in Hebei’s Langfang City and Qinhuangdao City, where Chen Qingen was in charge of public security, is particularly serious. Based on our research, officials who proactively implemented Jiang’s anti-Falun Gong campaign were usually rewarded with quick promotion. Zhou Yongkang, Bo Xilai, and Zhang Yue are prominent beneficiaries of Jiang’s unofficial promotion policy.
3. Chen Qingen was arrested barely two months after the prosecution of Zhang Yue. In January 2018, Xi Jinping launched an anti-Mafia campaign which also targeted public security officials who are guilty of being “protective umbrellas” for criminal elements.
4. Chen was found guilty of “bribery and using influence to accept bribes,” a charge that the wife and son of Jiang faction member Zhou Yongkang was also found to be guilty of. The purge of Zhou, who was widely considered to be “untouchable,” is one of Xi’s major moves against the Jiang faction.
