SinoInsight 1
In the afternoon of Aug. 25, the People’s Bank of China released its 16th announcement of the year. The announcement stressed that “houses are meant for living, not speculation,” and made the following key points:
1. Banks will set mortgage loans based on the new loan prime rate (LPR) effective from Oct. 8.
2. The interest rate on individual mortgage loans for first-time home buyers cannot be lower than the LPR. Also, the rate of loans for second-time home buyers cannot be lower than the LPR plus 60 basis points. The interest rate policy on the housing provident fund for individual mortgage loans will not be adjusted.
Per the LPR five-year rate set on Aug. 20, a first-time home buyer’s individual mortgage loan interest rate will not be lower than 4.85 percent, while the interest rate for a second-time home buyer will not go below 5.45 percent. The new minimum interest rate level is basically the same as the current level.
3. The lower limit for interest rates for first- and second-time home buyers will be determined by provincial PBoC branches.
OUR TAKE
1. We believe that the PBoC’s main goals of introducing its new LPR policy are to make it harder for those who wish to invest in property, as well as “lock-up” the funds that are already invested in the property market to prevent housing prices from plummeting.
2. According to mainland media reports, mortgage interest rates in the second-tier cities of Hangzhou, Suzhou, Nanjing, Xi’an, Zhengzhou, Nanning, and Wuhan rose by a large margin after the PBoC announced its new LPR policy. First-time home buyers saw interest rates on mortgage loans rise by as much as 20 percent from the earlier benchmark, while second-time home buyers saw interest rates on mortgage loans go up by 25 percent.
Meanwhile, 12 banks in the second-tier Hefei City suspended issuing mortgage loans for second-hand housing. Also, interest rates for mortgage loans for second-time home buyers rose to a high of 35 percent. In Nanning City, the Shanghai Pudong Development Bank raised interest rates for second-time buyers from 25 percent to 40 percent after the introduction of the LPR policy.
The increased mortgage loan interest rates for second-hand homes and second-time home buyers will make it more difficult for property sellers to sell off second-hand property. However, if speculators cut the price of second-hand housing sharply, then buyers will worry about falling home prices and be hesitant to enter the housing market. Either way, the outcome of the LPR policy is reduced property transactions.
3. According to mainland media reports, property companies of all sizes have a higher debt to asset ratio this year as compared to 2018, are finding it difficult to raise funds, and are experiencing cash flow problems. As a result, many property companies are forced to cut staff and sell their property at reduced prices.
On Aug. 14, China’s National Bureau of Statistics released figures which showed that declines in the growth rate of property development investment on the mainland, new construction area, and other property-related indicators between January to July this year. Also, land acquisition by property companies, investment in property development, and received funding (房企到位資金) hit record lows for the year in three consecutive months. The growth rate for property sales area in the mainland has also been negative for seven consecutive months.
On Aug. 20, prominent mainland developer China Evergrande announced a 22 percent discount for 532 of its property developments across China.
On Aug. 22, Country Garden, a top-three property developer in China, published its 2019 interim report. According to the report, it has cut staff from 141,400 at the end of 2018 to 116,600, a decrease of 11 percent.
4. The PRC government is very concerned about a sudden bursting of the property bubble and the triggering of financial risks. To curb that risk, the PRC government has to restrict property companies from raising funds and the ability of home buyers to take out mortgage loans, with a focus on the second-hand housing and second-time home buyer markets.
We remain pessimistic about the PRC government’s moves to stop the property bubble bursting. Instead of keeping their money in property, property speculators could instead move to significantly lower property prices to cash out of the market.
SinoInsight 2
Several developments pertaining to Hong Kong and the Sino-U.S. trade war which took place between Aug. 18 to Aug. 25 hint at a worsening of the political crisis in the Chinese communist regime.
Aug. 18
- In the afternoon, an estimated 1.7 million protesters in Hong Kong participated in a peaceful rally and march in the city’s business district. Later in the evening, some protesters vandalized government buildings and pointed laser beams at police officers. The police did not take action against the rowdy protesters or sought to disperse those who participated in the march, which was carried out without an official permit.
Aug. 20
- In an interview on Bloomberg Television, pro-Beijing lawmaker and businessman Michael Tien said that the “next 10 days is a golden window” for Hong Kong. If Hong Kong “wants to avoid any central government intervention during the month of September, this is a perfect time for Carrie Lam to think about addressing some of the five demands,” Tien said.
At a press conference, Hong Kong chief executive Carrie Lam promised “a platform for dialogue with people from all walks of life.” She also pledged to launch “an important fact-finding study in addition to a very robust system to investigate and look at the complaints against police over this prolonged period of confrontation and violence.”
Aug. 23
- The People’s Republic of China announced $75 billion of tariffs on U.S. goods, including automobiles, agricultural products, apparel, chemicals, and textiles.
In response to PRC tariffs, U.S. President Donald Trump raised tariff rates on $300 billion worth of Chinese goods scheduled to hit Sept. 1 and Dec. 15 from 10 percent to 15 percent, and raised rates on $250 billion worth of Chinese products from 25 percent to 30 percent.
A CCP princeling told the Hong Kong edition of the Chinese language newspaper Dajiyuan that the Xi Jinping leadership wants the Hong Kong government to “pick up its own mess” after the mass demonstration on Aug. 18. The princeling also said that the Hong Kong pro-establishment faction, the PRC’s Hong Kong Liaison Office, and the State Council’s Hong Kong and Macau Affairs Office have been “making things hard” for Xi. Finally, the princeling said that the Jiang faction has been creating trouble for Xi since the outbreak of the Sino-U.S. trade war, including causing chaos in Hong Kong and spreading false intelligence to Beijing. Xi’s orders “cannot leave Zhongnanhai,” according to the princeling.
Aug. 24 and Aug. 25
- Protests flared across Hong Kong over the weekend, and police brutality came back into the spotlight. Notable incidents include:
– A protester was hit in the left eye by a police rubber bullet;
– A policeman fired a shot from his service revolver into the air in a confrontation with protesters and concerned residents in Tsuen Wan District in Hong Kong’s New Territories region. In total, three policemen drew and pointed their revolvers at protesters during the confrontation;
– Two police trucks with water cannons were deployed in the New Territories;
– Police fired tear gas to disperse protesters;
– Skirmishes broke out between the “brave martial clique” (勇武派, or a group of young protesters who opt to use violence in confronting the Hong Kong government) and the police Special Tactical Squad, or “raptors” (速龍小隊). - On Aug. 24, a small group of youngsters started tearing down smart lampposts with surveillance cameras in Kowloon’s Kwun Tong District. The youngsters claimed that PRC was “spying” on the protesters via those cameras.
- On Aug. 25, suspicious-looking characters who seemed to be dressed as protesters threw Molotov cocktails and firebombs at the police in the New Territories region. At least of their projectiles were hurled at a group of journalists.
Triad members took to the streets to protest and clash with the Hong Kong protesters. Some triad members were spotted waving the PRC flag. Later, some protesters attacked shops which were known to be operated by the triads. - On Aug. 24, Hong Kong’s MTR took the unprecedented step of shutting down several train stations in an area where a protest that was approved by the police was to be held. This made it hard for protesters to get to and leave the protest area. The public and protesters strongly censured the MTR’s move.
- On Aug. 24, Carrie Lam met with about 30 people, including ex-transport chief Anthony Cheung and former Hong Kong bishop Cardinal John Tong, to gather ideas on how to build a dialogue platform.
- On Aug. 24, the Chinese Communist Party mouthpiece People’s Daily published an advertisement poster titled, “Hello, My Hong Kong Friend” which featured two young women, one representing Hong Kong and the other the mainland, holding hands and smiling in friendship. The People’s Daily also released a short video aimed at Hong Kong with the message that “the future of Hong Kong is in our hands.” In sharp contrast with earlier depictions of Hong Kong, the video did not mention anything about violent protesters.
Despite the violence in Hong Kong over the weekend, state broadcaster CCTV did not describe the protesters as “thugs” or condemned the violence in news programs that weekend. This represented a stark change in tone from earlier broadcasts.
OUR TAKE
1. We previously wrote that the CCP is looking to “advance to retreat” on Hong Kong. The recent softening rhetoric on Hong Kong in state and Party media outlets corroborates our analysis. Carrie Lam’s recent “dialogue platform” gesture and the absence of police brutality on Aug. 18 also confirm our analysis that Beijing is planning to “retreat” per Party characteristics on Hong Kong.
CCP elite politics, however, are a complicated affair, and factional struggles have always been “you die, I live.” The resumption of violence in Hong Kong over the weekend suggests that factional interests are again clashing with Beijing’s will as the Sino-U.S. trade war heats up. We previously explained how the factional struggle between the Jiang faction and the Xi camp affects the ongoing Hong Kong protests (see here, here, and here). We believe that the spike in police brutality, triad action, and suspicious acts of violence on Aug. 24 and Aug. 25 are linked to the escalation in the CCP factional struggle, and are a sign that Xi Jinping does not have everything under control in Hong Kong.
Going forward, we expect to see more developments unfold which would seem like Beijing is sending mixed messages on Hong Kong and the Sino-U.S. trade war, but are in reality a reflection of the bitter factional struggle inside the Communist Party.
2. We believe that the warning by pro-establishment figure Michael Tien that the “next 10 days is a golden window” for Hong Kong is aimed at both the Carrie Lam government and the Hong Kong protesters.
If Lam’s government cannot resolve tensions in the city, then Beijing could take action against the Hong Kong government, the Liaison Office, and the Hong Kong and Macau Affairs office. Carrie Lam and undercover security forces in Hong Kong are in danger of being “taken out,” while senior PRC officials at the Liaison Office and the Hong Kong and Macau Affairs Office are in danger of being purged.
Michael Tien’s “golden window” warning is likely also intended to get the protesters to quickly de-escalate the demonstrations and accept what the Hong Kong government could propose to address their demands. If the protesters refuse to back down, then Beijing could next launch a near-Tiananmen incident in the city, i.e. a crackdown without deaths and minimal bloodshed using undercover paramilitary troops instead of the People’s Liberation Army.
3. We have observed that the Hong Kong people are gradually beginning to directly target the CCP as opposed to the Hong Kong government during their demonstrations. Unless the protests die down over the next couple of weeks, the CCP will eventually face a bona fide “color revolution.”
In our China 2019 outlook, we predicted that a “Black Swan event could imperil the CCP regime” this year.
