SinoInsight 1
Recent news about China’s property sector hint at coming property bubble troubles.
On July 6, a spokesperson from the China Banking and Insurance Regulatory Commission said that China’s balance of property trust assets totaled 3.15 trillion yuan, or 14 percent of the total trust assets balance. The spokesperson added that the property trust assets of some trust companies have grown too rapidly and too much, and reminded those companies to “prevent and control risks in the property trust field.”
On July 9, the PRC’s National Development and Reform Commission issued a notice on the “relevant requirements” for the property industry regarding the issuance of foreign debt. Chinese property companies are only allowed to issue foreign debt to replace the medium and long-term foreign debts that are due to expire within the year.
On July 12, the People’s Bank of China released financial data for the first half of 2019. The data showed that medium and long-term loans to households comprised 28.4 percent of total national loans in H1 2019, 40.8 percent in April, and 39.8 percent in May. Home loans make up the bulk of medium and long-term loans to households.
On July 13, Chinese state media Economic Daily reported that the “Shenzhen Property Market Barometer,” a popular real estate information platform, had ceased releasing data on average property transaction price and total transaction amount of new and second-hand housing from April 2019.
OUR TAKE
1. The news items above point towards growing property bubble risks in China. Earlier this year, we noted other serious issues concerning China’s property bubble and the debt risks of Chinese property developers (see the March 25 and June 20 editions of this newsletter).
The CCP authorities’ attempt to tighten control over property trusts and restrict the issuance of foreign debt by property companies suggest that they are looking to rein in the property sector via regulating the financial channels of property companies. This is contrary to the relaxed housing policy introduced at the end of 2018.
The restricting of issuance of foreign debt will affect a lot of Chinese property companies because many raise funds for development from abroad. Only a handful of large property companies managed to successfully issue bonds on the mainland.
According to reports in mainland media, Chinese property companies issued a total of 428.6 billion yuan worth of domestic and foreign bonds in the first half of 2019. Of the total, 67 percent (289.8 billion yuan) were foreign bonds, up nearly 20 percent from 2018. This June, Chinese property companies raised 39.75 billion yuan via foreign financing, up 436 percent from May.
Interest rates for Chinese property company bonds differ greatly depending on the credit rating of the company. In July, a property company with a state-owned enterprise background issued $450 million in bonds with an annual interest rate of 3.45 percent. In contrast, a wholly-owned subsidiary of the public company Tahoe Group issued bonds worth $400 million with a coupon rate of 15 percent per annum, or over four times higher than the other company.
The fact that Chinese property companies are seeking financing from abroad at high financing costs indicates that these companies have huge debt problems. Once their capital chain breaks, the aforementioned property companies are at risk of bankruptcy.
2. The drop in medium and long-term loans to households and the rising home loan interest rates in 2019 indicates that the CCP is also looking to regulate the available financing to property buyers alongside the financial channels of property developers.
3. The fact that a popular Shenzhen real estate information platform ceased releasing important property transaction data indicates that the CCP is wary of the impact of first quarter stimulus measures on the property bubble. The bursting of the property bubble will trigger systemic financial risks and affect the CCP’s ruling legitimacy.
SinoInsight 2
On July 16, the State Council’s General Office issued guidance on accelerating the construction of a social credit system. Per the guidance, all ministries and local governments are to step up efforts to build the “new credit-based supervision mechanism.”
OUR TAKE
1. The CCP’s social credit system is unlike Western-style credit systems because the Party will use it to strengthen its control over society and enhance its “stability maintenance” measures. With artificial intelligence and Big Data technologies, the CCP will be able to step up its crackdown and persecution of dissidents on the mainland. The CCP could also potentially export refined surveillance and control “social credit” technology abroad to further its global domination agenda.
2. On the flipside, the fact that the CCP is accelerating the construction of its social credit system suggests that it fears that continued economic deterioration would heighten “social contradictions” and increase potential threats to the regime. Thus, the CCP feels the urgency to put in place its social credit system as soon as possible to be ready to cope with future unrest.
The CCP’s acceleration of its social credit system construction also hints that China’s economic situation may be much worse than what the official data shows, and that American tariffs could be having a greater impact on the mainland than what most observers believe.
