SinoInsight 1
On July 13, the Intermediate People’s Court of Wuxi City, Jiangsu Province approved the Yixing branch of China Guangfa Bank’s request to freeze 132 million yuan (about $20.4 million) held by China Evergrande Group and its unit Yixing Hengyu Real Estate Co Ltd.
According to mainland media reports, the 132 million yuan was the remaining balance of a 370 million yuan loan by Guangfa Bank to Yixing Hengyu for a building project. While Yixing Hengyu was due to repay the loan on March 27, 2022, Guangfa Bank argued that the Evergrande unit should make full payment on the loan principal and interest because a clause in the loan agreement had been reached (the sale of 70 percent of the building project).
Evergrande argued that it had already pledged to pay the loan in full by the due date, and Guangfa Bank was “abusing” legal procedures. On July 19, Evergrande announced plans to sue Guangfa Bank.
On July 21 (July 22 Beijing time), Evergrande issued a statement on its website stating that it had resolved its dispute with Guangfa Bank after “ample communication.” Also, “the two parties will continue to consolidate and deepen their business relationship in the future.”
===
Evergrande’s Hong Kong-traded stock fell 18.7 percent to close at HK$7.24 on the day its assets were frozen. After news of the asset freeze made the rounds, stocks of listed companies linked with Evergrande plunged on July 19.
According to data from China Securities Depository and Clearing Corporation on July 20, the conversion rate of bonds issued by several Evergrande units had fallen to the 0.5 level. In particular, the conversion rate of the standard bond “19 Evergrande 01” fell from around 0.7 in April to 0.47 after Evergrande’s asset freeze, or close to the 0.43 level when the company’s debt crisis was exposed in September 2020.
In late June, Fitch Ratings downgraded the Long-Term Foreign-Currency Issuer Default Rating (IDR) of Evergrande and its subsidiaries Hengda Real Estate Group Co., Ltd and Tianji Holding Ltd. to “B” from “B+.”
===
Evergrande’s debt crisis was exposed last September when its effort to secure government help in restructuring was leaked to the press (see here for analysis).
Subsequently, the CCP authorities appeared to approve Evergrande’s debt-for-equity deal arrangement with investors to rescue the “too big to fail” property developer. However, Evergrande’s crisis was far from over. In May, the company sold property in third- and fourth-tier cities at ultra-low prices and under dubious agreements, a move which the authorities eventually curbed. Evergrande suppliers also complained that the company’s banker’s acceptance notes are running overdue on a large scale.
According to a recent research report by the Shenzhen-based Essence Securities, the scale of commercial papers issued by the top 50 real estate companies in China at the end of 2020 grew 33.8 percent from 2019 to 401.35 billion yuan. Evergrande’s commercial papers made up 51.3 percent (205.7 billion yuan) of the total.
Meanwhile, Evergrande’s debt-for-equity deal with investors last September may have helped it avert its debt crisis, but the move ended up imperiling some of its strategic investors.
For instance, Suning Appliance Group’s 20 billion yuan debt-for-equity swap with Evergrande meant that it would struggle to repay 40.276 billion yuan worth of loan and bond obligations at the end of 2021. Suning’s plight led to a $1.36 billion government bailout plan on July 12 where Suning major shareholder Zhang Jindong transferred 1.58 billion Suning shares (16.96 per cent) to a state-backed fund and resigned as chairman of the company.
===
Evergrande aside, other major Chinese property developers are also running into debt problems.
July 12
Sichuan Languang Development, the leading property developer in Sichuan Province that is listed on China’s A-shares market, announced that the company and its units have 4.544 billion yuan of overdue debt. In March 2020, Languang ranked 21st among China’s top 100 real estate developers, and ranked 38th by contracted sales in 2020 according to China Real Estate Information Corp.
July 20
1. China Fortune Land Development, another A-shares listed property developer, announced that it recently added 6.381 billion yuan in debts and saw its overdue debts increase to 73.2 billion yuan as of July 19, 2021. In 2020, China Fortune Land ranked 12th among China’s top 100 property developers.
2. According to mainland media The Paper, Jiangsu Zhongnan Construction Group Co., Ltd. recently sold property at steep discounts to its employees for a period of time until July 20. Discounts on apartments ranged between 20 percent to 35 percent depending on the location, while 35 percent discounts were offered on commercial properties.
The Paper also reported that Zhongnan Construction is due on July 27 to make a 1.134 billion yuan payment on its debt. The company’s total liabilities at the end of 2020 was approximately 310.89 billion yuan, of which 120.29 billion yuan were advance receipts and 79.9 billion were interest-bearing liabilities. In July 2020, Zhongnan Construction ranked 143rd in Fortune 500’s China list.
OUR TAKE
1. China Guangfa Bank may be a commercial bank, but its largest shareholder is the state-owned enterprise China Life Insurance Co. Ltd. (43.69 percent stake). That makes the bank a quasi-SOE, giving it the clout to use legal proceedings to its advantage. Given Evergrande’s serious debt problems, Guangfa Bank was probably looking to err on the side of caution and act first to protect it and its shareholders’ interests.
Guangfa Bank’s action, however, has already sent ripples in the markets and the property sector. The Guangfa-Evergrande feud could further complicate matters for the property developer and encourage financial institutions to start taking measures to minimize losses from their exposure to Evergrande. For instance, financial institutions could suspend mortgages to Evergrande projects on the mainland; stop approving loans to Evergrande; require increased collateral from Evergrande or shorter loan repayment periods; and sell-off their Evergrande stocks and bonds.
Financial institutions have already stopped approving mortgages to Evergrande projects in Hong Kong. According to media reports on July 21, HSBC, Hang Seng Bank, Bank of East Asia, Bank of China (Hong Kong), and Standard Chartered declined to offer some mortgages for properties developed by Evergrande in the city over concerns about the company’s liquidity and ability to meet debt payments.
However, financial institutions have yet to fully jump ship from Evergrande. We believe that those institutions are currently adopting a “wait-and-see” approach instead of rushing to drop the company because they are betting that the CCP government will eventually bail out the company given its scale. Indeed, Evergrande’s “too-big-to-fail” status could have inspired Guangfa Bank to freeze the company’s assets in the first place to secure its interest while leaving Beijing with the burden of preventing the property developer’s debt risks from blowing up.
Beijing cannot allow Evergrande to go bust given the sweeping impact it would have on the regime. As the company revealed in a distress letter to the Guangdong government last August, it had 835.5 billion yuan in total interest-bearing liabilities involving 239 financial institutions. The company also said that it had sold 617,000 commercial property units to 2.04 million buyers, and its inability to secure financing would directly affect 3.31 million jobs. While Evergrande announced this June 29 that it had reduced its interest-bearing liabilities to about 570 billion yuan, the sum does not include the 200 billion yuan of banker’s acceptance notes that it owes its suppliers.
2. The roots of the PRC’s present debt problems, real estate bubble, and other financial issues can be traced back to the 4 trillion yuan stimulus package rolled out by the Jiang faction-dominated Hu Jintao government in 2008. While the stimulus helped China weather the global financial turmoil that year, it also generated the massive debt and financial risks that the Xi Jinping leadership has been struggling mightily to defuse.
Beijing cannot simply crack down on property developers and financial institutions like how it did with the peer-to-peer (P2P) lending industry. For one, the P2P industry was small relative to the property industry, hired fewer people, had no suppliers, and did not involve nearly as many financial institutions. This meant that the P2P sector could be allowed to blow up with controllable risks for the regime.
In contrast, the property sector is directly connected to people’s livelihood (rental, property owning, employment, etc.), supports construction supply chains, and is deeply intertwined with financial institutions and the Chinese economy. For instance, Ping An Insurance, one of the biggest insurers in China, had about 68.210 billion yuan invested in the property sector by the end of 2020. Ping An also holds dividend-paying shares of at least 13 out of the top 20 property companies in China, and has 54 billion yuan in exposure to the troubled China Fortune Land Development (see above). The property sector’s interconnectedness with the economy and society means that any effort by the CCP to “blow up” property companies P2P-style will plunge the PRC into catastrophic crises.
However, Beijing also cannot allow things to continue as they have been with the property sector. The debt-fueled model of Chinese property developers and skyrocketing property prices will eventually hit a dead end, the resulting collapse of the property bubble would quickly imperil the CCP regime. Beijing’s only option is to defuse property sector financial risks and debt problems with piecemeal measures and over an extended period. For instance, government regulators introduced the “three red lines” last year to check the issuing of bonds by heavily leveraged property companies and control the real estate bubble. Government regulators were also likely behind or approved Evergrande’s debt-for-equity deal to help the company survive its debt crisis. And around the middle of this year, some local governments reportedly suspended or made it difficult for people to take out mortgages on second-hand property, according to overseas Chinese media. But as seen in the Evergrande case, property companies are running into trouble soon after government derisking measures are implemented.
3. On the whole, China’s debt crisis is growing more serious this year. According to Fitch Ratings, Chinese companies’ bond defaults totaled 62.59 billion yuan ($9.67 billion) in the first half of the 2021, a record high. In the first half of 2021, a total of 25 companies defaulted on their bond payments, as compared with 19 over the same period last year. And of those companies, state-owned enterprises accounted for 36.65 billion yuan of the defaults, or 58.6 percent of all defaults. Debt defaults in China will inevitably soar if Evergrande’s debt crisis worsens and triggers a chain reaction.
4. Evergrande’s debt woes could trigger China’s debt crisis this year, “resulting in a wave of defaults by local governments (urban investment bonds, local government financing vehicles, etc.), state-owned enterprises, and large private corporations,” as we wrote in our China 2021 Outlook.
China’s economic problems will in turn amplify political risks for the CCP and Xi Jinping, and will accelerate the arrival of Communist China’s “Berlin Wall moment.”
SinoInsight 2
July 12
When asked by the South China Morning Post about the prospect of Falun Gong being banned in Hong Kong, pro-establishment lawmaker Regina Ip said that she “saw no reason to act against the group,” citing “few followers” as a reason. “The situation might have changed now,” she said.
Ip previously promoted the adoption of Article 23 of the Hong Kong Basic Law when was Hong Kong Secretary for Security from 1998 to 2003. At the time, many observers believed that the CCP wanted Hong Kong to pass Article 23 so that it could expand the Falun Gong persecution campaign to semi-autonomous Hong Kong.
July 16
The Biden-Harris administration announced sanctions against seven deputy directors of the Hong Kong Liaison Office under the Hong Kong Autonomy Act. The sanctioned individuals are Chen Dong, He Jing, Lu Xinning, Qiu Hong, Tan Tieniu, Yang Jianping, and Yin Zonghua.
As part of the sanctions, the individuals would be prohibited from accessing U.S. financial services; having transactions with U.S. personnel; will have their assets in America frozen; and will be barred from migrating to the United States.
July 21
The Hong Kong national security police arrested four former Apple Daily employees and charged them with conspiring to “collude with a foreign country or with external elements to endanger national security.” The four were denied bail and will be detained until Sept. 30 for further questioning.
The four employees are former executive editor-in-chief Lam Man-chung, former associate publisher and deputy chief editor Chan Pui-man, and journalists Fung Wai-kong and Yeung Ching-kee.
July 22
A Hong Kong court sentenced seven men who participated in the “Yuen Long Incident” on July 21, 2019 to between three-and-a-half to seven years in prison for violently attacking pro-democracy protesters and passers-by near the Yuen Long MTR station. Hong Kong media reported that two of the seven men were also involved in illegal “Ding Rights” cases.
According to the Hong Kong police, 63 individuals have been arrested so far in connection with the “Yuen Long Incident.” Of the 63, 15 were charged with rioting, eight were charged with conspiring to injure others with intent. Also, 48 of the 63 were part of the group of white-clad individuals who attacked protesters, of which just eight have been charged (less than 20 percent prosecution rate). Of the 15 remaining individuals, seven face rioting charges, including former legislator Lam Cheuk-ting.
OUR TAKE
1. The “Yuen Long Incident” on July 21 was a watershed moment in the 2019 Hong Kong anti-extradition bill movement. Many in Hong Kong were angered that local triads attacked protesters and passers-by indiscriminately in Yuen Long. Many were also angered that the police appeared to “allow” the attacks to be carried out for a period of time before responding, and did not apprehend the white-clad attackers despite passing them by on their way to the subway station.
While dozens of Yuen Long attackers have been arrested since the incident, only seven have been charged to date and many remain at large. Further, the Hong Kong police had apprehended passers-by and pro-democracy activists who were fending themselves from attacks that day under the guise of being “impartial.” Hong Kong media observed that the police has been framing the “Yuen Long Incident” as a clash between two groups of people at the Yuen Long MTR, not a premeditated attack by triad elements against members of the general public. Hong Kong media believe that the police framing of the incident obscures their possible culpability in the incident (the police had early intelligence of the attacks, according to some reports), while diminishing the liability of the triad elements.
It does not seem coincidental that the Hong Kong police arrested former Apple Daily employees, including former top executives, on the anniversary of the “Yuen Long Incident.” The police and the Hong Kong government have become increasingly pro-Beijing in recent years, and the CCP is known to carry out high-profile arrests of dissidents or thought leaders around so-called “sensitive dates” (anniversary of the Tiananmen Square Massacre, “709 Rights Defense Lawyer” crackdown, etc.) to create an atmosphere of terror. The CCP appears to have successfully exported its classic “stability maintenance” methods in Hong Kong.
2. Pro-establishment lawmaker Regina Ip’s claim that there is “no reason to act” against Falun Gong in Hong Kong because the spiritual discipline has “few followers” in the city is scarcely believable to any neutral observer. Hongkongers witness hundreds of Falun Gong practitioners wearing their trademark yellow T-shirts participating in annual parades where they raise awareness about the persecution on the mainland. The number of practitioners is also less crucial in the CCP’s “national security” considerations in accounting for Falun Gong’s disproportionate influence in the city; The Epoch Times and several other media organizations linked with Falun Gong have a Hong Kong edition.
Ip’s remarks are also at odds with the CCP’s ramped up unofficial efforts to harass Falun Gong practitioners in Hong Kong before the 18th Party Congress. The Hong Kong Youth Care Association, which was disbanded in December 2020, started operations in June 2012. This year, thuggish elements have also been employed to vandalize Falun Gong street stalls in the city, attack The Epoch Times’ printing press, and assault an Epoch Times journalist.
We believe that Regina Ip’s remarks about Falun Gong are another example of the Xi Jinping-Jiang Zemin factional struggle coming to the fore in Hong Kong. Being a former security secretary and a trusted pro-establishment figure, Ip almost certainly has channels to Beijing and understands the current thinking at Zhongnanhai. As we explained in previous newsletters, the Falun Gong persecution campaign is a core issue in the Xi-Jiang struggle because it concerns the political legacy of Jiang Zemin and his faction. Xi appears to be keeping the “Falun Gong card” in play, most notably in Hong Kong, to counter the Jiang faction and the international “anti-Xi coalition” should they make serious moves to secure his ouster (including forcing him to appoint a future successor at the 20th Party Congress).
3. Factional struggle in the CCP elite means that the “contradictory” human rights situation in Hong Kong could become increasingly obvious going forward. On the one hand, the Hong Kong police will continue to suppress the pro-democracy movement even as the United States and the international community speak up about rights violations and impose sanctions. On the other hand, the Hong Kong authorities could shut an eye to Falun Gong despite their “Heaven Will Destroy the CCP” (天滅中共) banners and the continued publication of The Epoch Times.
Efforts by the U.S. and the international community to hold Xi Jinping accountable for the Falun Gong persecution campaign could bring the Xi-Jiang struggle to a head. In such a scenario, the Jiang faction will seize the opportunity to associate Xi with their bloody campaign and secure the safety of their faction. Meanwhile, Xi will be forced to either preserve the CCP by “owning” the persecution, or preserve himself by acknowledging the brutality of Jiang’s campaign in a move akin to Mikhail Gorbachev admitting the Katyn Forest Massacre.
