SinoInsight 1
On Jan. 15, U.S. President Donald Trump and PRC vice premier Liu He signed “phase one” of the Sino-U.S. trade deal at a ceremony in the Oval Office. Over 200 people from business, diplomatic, and government circles attended the signing ceremony. According to a report by the Chinese edition of BBC, a total of 52 American officials and legislators were in attendance as compared to just 10 officials from the PRC.
Trump hailed the deal as a “momentous step” towards “a future of fair and reciprocal trade” between the United States and China. Trump also thanked Xi Jinping, who he described as a “very, very good friend of mine,” for the “cooperation and partnership throughout this very complex process.”
Liu read out a message from Xi to Trump, and in his own remarks, described the “phase one” deal as a “mutually beneficial and win-win agreement” that is “in line with WTO rules.”
OUR TAKE
1. The “phase one” trade deal is clearly an interim agreement that both Xi and Trump needed to sign to satisfy some domestic needs (re-election for Trump, the economy for Xi). We remain pessimistic about the PRC’s ability to properly implement and adhere to the deal, as well as the prospect of the PRC and the U.S. reaching a full trade agreement (“phase two,” etc.).
2. From the CCP’s perspective, the “phase one” deal can be considered one of those humiliating “unequal treaties” (喪權辱國) that it frequently vows to avenge in its propaganda. Thus, the signing of the deal greatly raises political risk levels for Xi Jinping and his confidant Liu He.
Previously, we looked at how Xi had stepped up efforts to boost his “quan wei” (權威) and “strictly govern the Party” (從嚴治黨) ahead of the deal signing by tightly controlling the PRC’s rhetoric on the “phase one” deal (here and here), promoting military generals loyal to him, and even threatening to ramp up the anti-corruption campaign to pre-19th Party Congress levels. Xi’s various actions will beget strong reactions from his political opponents and result in an intensification in the CCP factional struggle.
3. The CCP propaganda apparatus has been trying to sell the “phase one” deal as a sort of “restoration” of Sino-U.S. relations. There also appears to be an internal directive forbidding and calling for the censorship of anti-U.S. rhetoric. Given the current circumstances, it seems that the CCP is hoping to use the “phase one” deal to its advantage to boost first quarter GDP growth and attract foreign investments into China to help “bailout” the regime from its economic woes.
The current CCP rhetoric, however, would do its propaganda agenda more harm than good in the long run. There is a risk that brainwashed Chinese “patriots,” confused by the flip-flop in propaganda messaging, could eventually get frustrated and turn on the regime.
4. As part of the deal, the PRC agreed to purchase $200 billion more in U.S. products over the next two years. As the PRC scrambles to fulfill the trade deal, it will likely have to buy less from other countries. The means that the PRC will have less negotiating leverage over other countries and its relations with Russia and Iran would be affected.
5. The European Union could be emboldened by the PRC’s concessions to the U.S. and adopt a more demanding approach to negotiating trade with China.
SinoInsight 2
On Jan. 17, the PRC’s National Bureau of Statistics announced preliminary data for the fourth quarter of 2019 and the whole of 2019. According to official data, China’s GDP grew by 6 percent in Q4 2019 compared to a year ago, or by the same rate in the previous quarter. In 2019, China’s GDP grew 6.1 percent to 99.09 trillion yuan, the slowest growth rate in nearly three decades. Meanwhile, China’s per capita GDP in 2019 was $10,276, surpassing $10,000 for the first time.
OUR TAKE
1. The release of the 2019 GDP data shortly after the signing of the Sino-U.S. “phase one” trade deal on Jan. 15 helps the CCP create the impression that the Chinese economy, while undergoing a slowdown, still faces good prospects.
However, the CCP’s economic data is always suspect and politics drives economics in the CCP regime. Also, the development progress of most Asian countries does not serve as a good reference point or forecasting guide for how the PRC will likely develop economically because the Chinese economy is not a full market economy (despite having the semblance of one).
Based on our observation of other signs, we remain pessimistic about China’s economic prospects.
2. A sign that the CCP anticipates economic woes this year can be glimpsed from a PRC State Council work meeting in Q1 2020.
On Jan. 13, Premier Li Keqiang chaired the fourth plenary session of the State Council. In going through the work to be done in the first quarter, Li again stressed the need for officials to do well the “six stabilities” (employment, finance, foreign trade, foreign and domestic investments, job expectations). Li also noted that China’s economic performance in the first quarter of 2020 will have a “weathervane” effect for the rest of the year, and requested that the various departments do a good job in Q1, particularly in carrying out measures such as accelerating the issuance of local bonds to spur infrastructure construction, cutting rates to boost liquidity, promoting employment, and clearing arrears of wages.
3. The recently released GDP growth data appears to be inconsistent with other available economic data.
China’s GDP grew at 6 percent in both Q3 and Q4 2019. Based on official data released by the NBS, urban fixed asset investment in the Q4 was 9.03 trillion yuan, or only 55.7 percent of urban fixed asset investment in Q3. This suggests that corporate profits have decreased in Q4 as compared to Q3, as well as a lack of willingness to invest. The reduced investments in Q4 2019 as compared to Q3 2019 suggest that China’s economic prospects are less than optimistic.
Another two key consumption indicators, auto sales and smartphone sales, also declined last year. In 2019, retail sales of general-purpose passenger cars decreased 7.5 percent from a year ago, the second consecutive year of declining sales. Meanwhile, total shipments of smartphones decreased by 6.2 percent year-on-year to 389 million units. Again, it is difficult to read optimism in China’s economic outlook for the year.
The CCP’s official GDP figure has always been problematic and recently invited public scrutiny from a prominent Chinese economist and former central banker. Xiang Songzuo, an economics professor at the Renmin University of China, had earlier cast skepticism about the official GDP growth rate in Q3 2019 after it was released. In a WeChat post, Xiang said that the 6 percent figure was “obviously overestimated” and gave his explanation. In December 2018, Xiang said that a “very important institute” in China estimated that China’s GDP growth for 2018 should be about 1.67 percent or even negative; the NBS figure was 6.5 percent.
4. Another sign of serious economic problems on the mainland is economic targets released by the various provinces.
As of Jan. 18, 29 provincial governments have held their local “two sessions” meeting (the local governments of Sichuan and Yunnan typically hold their “two sessions” meeting in February) and announced their expected 2019 GDP growth and economic growth targets for 2020. Most of the local governments set their 2020 economic target lower than the previous year; in particular, Guangdong expects its GDP to grow by around 6.3 percent (10.5 trillion yuan) in 2019, but set its 2020 GDP growth rate at around 6 percent (as compared to between 6 to 6.5 percent in 2019). If Guangdong, a provincial economic powerhouse, predicts that it will find it hard to maintain 6 percent GDP growth in 2020, then the other provinces will likely find economic growth much harder to come by this year.
5. It is possible that the effect of the Sino-U.S. “phase one” deal (especially the entry of U.S. financial institutions into China and greater market liberalization on the mainland) and the CCP’s various economic stimulus measures (increasing liquidity via RRR cuts, issuance of local government bonds, etc.) could result in improved economic performance for China in Q1 2020. We believe that signs of a Chinese economic “recovery” will be short-lived because fundamental economic and geopolitical problems remain. Businesses, investors, and governments need to beware of charging Gray Rhinos and Black Swans in China in 2020.
SinoInsight 3
In the first 17 days of 2020, about 23 Chinese property companies issued 75.1 billion yuan worth of bonds, according to reports in mainland media. In comparison, the total value of bonds issued by Chinese property companies thus far this year is roughly equivalent to 1.7 times the total profit made by Evergrande Group, Country Garden, and Vanke (the top three Chinese property companies) in the first half of 2019.
In the evening of Jan. 16, Evergrande Group announced that it plans to issue two series of U.S. dollar-denominated bonds valued at $2 billion. The first series is valued at $1 billion with an annual interest rate of 11.5 percent and is due in 2023. The second series is also valued at $1 billion with an annual interest rate of 12 percent and will mature in 2024. Interest payments for both series of bonds will be made semi-annually. The Evergrande statement noted that it is issuing the two series of bonds to pay off existing debts, including a bond valued at $1.6 billion (interest rate of 7 percent) due in 2020.
According to a previous statement on its bond situation, Evergrande said that Jingheng Co. Ltd., a wholly-owned subsidiary of Evergrande Group, had issued two series of U.S. dollar-denominated bonds worth $1.565 billion with an annual interest rate of 11 percent that are due in 2020. All in all, Evergrande needs to make bond repayments of $3.165 billion this year.
OUR TAKE
1. Evergrande Group’s large-scale debt refinancing is symptomatic of a broader trend among Chinese property developers and a sign that China’s property bubble crisis is growing increasingly severe. China’s worsening property sector woes is in line with the forecasts that we made in our 2019 and 2020 China outlook.
2. We wrote in our China 2020 outlook that “large or prominent (at least well-known at the provincial level) property companies could file for bankruptcy.” Present trends suggest that this prediction could be verified in the year ahead.
First, the CCP will likely find it difficult to sustain present housing price levels as it strives to keep the renminbi stable to comply with the currency agreements in the “phase one” Sino-U.S. trade deal. Should property prices fall below a threshold, Chinese property companies, many of whom have a lot of debt, could encounter financing and refinancing problems. And when the property companies cannot secure financing to preserve their capital chains, they will have no choice but to file for bankruptcy.
Currently, Chinese property developers are looking abroad to refinance their debt because the CCP restricted available financing channels for property companies in 2019 to control property price growth. In the second half of 2019, the CCP government issued a document that permitted property companies to seek overseas bond financing in cases where they need to roll over existing bond issuances.
According to data from Centaline Group, Chinese property companies will accumulate a high of 1.5 trillion yuan in outstanding debt between 2019 to 2021. Meanwhile, property companies secured $75.2 billion worth of overseas financing in 2019 (a year-on-year increase of 52 percent); $22.58 billion worth of overseas bonds will mature in 2019. According to statistics released by Bloomberg, $29.465 billion worth of Chinese property company overseas bonds that will mature in 2020.
According to CRIC Research, 557.5 billion yuan worth of bonds issued by 95 Chinese property companies will mature in 2020, an increase of 43 percent from 2019. The months of January (61.6 billion yuan), July (61.5 billion yuan), and November (66.2 billion yuan) are peak periods for debt repayment this year.
3. In 2019, the CCP has repeatedly stated that it wants to check the growth of China’s property bubble.
In June 2019, China Banking and Insurance Regulatory Commission head Guo Shuqing warned at a forum that “history has proven that there is a price to pay for over-dependence on property.” He added that China is “quite dependent” on the property market and that countries that rely too much on the real estate market for economic prosperity will end up paying a heavy price. And while on inspection tour in Jiangxi Province in November, Guo called for suppressing the financialization of the property sector and the forming of bubbles, as well as the stabilization of housing prices, land prices, and buyer expectations.
It is clear that the CCP will not allow the property bubble to grow further to rescue the real economy. However, from recent changes to the household registration system policy, it appears that the CCP plans to protect the property market in first- and second-tier cities while “abandoning” the third- and fourth-tier cities.
