SinoInsight 1
Sept. 3
The Chinese Academy of Fiscal Sciences released the PRC’s fiscal revenue and expenditure forecasts for the 14th Five-Year Plan period (2021-2025) in its 2021 bluebook (中國財政政策報告 [2021]).
The bluebook stated that fiscal revenue in 2021 will see high growth due to the low base figure in the previous year, with fiscal revenue growth expected to slow down over the 14th Five-Year Plan period. However, fiscal expenditure will “maintain a certain rate of growth” of 7.5 percent and above. The bluebook also forecasts a drop in the fiscal deficit to 4.7 trillion yuan in 2021 compared with 6.27 trillion yuan in 2020 (a historical peak), but the fiscal deficit is expected to expand in subsequent years, reaching 10.7 trillion yuan in 2025.
Sept. 4
1. At the China International Finance Annual Forum, China Securities Regulatory Commission (CSRC) deputy chairman Fang Xinghai spoke about further promoting the systematic opening of capital markets, implementing new regulations for qualified foreign investors, and facilitating the allocation of renminbi assets by foreign investors.
Fang said that the CSRC will resolutely safeguard the status of Hong Kong as a global financial center, and support both Hong Kong and the mainland in developing “pragmatic cooperation on all fronts.” He added that A-share index futures will begin trading in Hong Kong this year.
Fang also said that the PRC will expand the opening up of commodity and financial futures markets to foreigners, introduce more internationalized financial products, and deepen the “interconnectedness” of domestic and foreign capital markets.
Further, Fang Xinghai mentioned the need to guard against the risk of large capital inflows or outflows, including preventing “some foreign-funded institutions” from maliciously facilitating market-moving changes with their investment decisions. “If there is malicious behavior, we will promptly stop it,” he said.
2. According to a Bloomberg News report, hedge funds have been slashing their exposure to U.S. companies that rely heavily on China for businesses. Fund managers reduced their net holdings of companies with elevated sales from China by 26 percent over the month through late August, reaching the lowest level since April 2020. Companies that lean on China for supplies saw their ownership drop 17 percent toward the bottom range of 2020.
“U.S. hedge funds are getting more concerned about the place of China in the global economic system,” said Brad McMillan, chief investment officer at Commonwealth Financial Network, according to Bloomberg. McMillan added that those hedge funds are “less willing to bet on the continued favorable record” that China has had, referring to the PRC’s openness to foreign businesses and investors.
Sept. 6
1. PRC vice premier Liu He pledged that the PRC government will keep supporting the private sector amid growing international concern over recent crackdowns and regulation.
“Guidelines and policies for supporting the private economy have not changed… and will not change in the future,” Liu said via video link to a forum on the digital economy in Hebei, according to Xinhua.
Liu again stressed that the private economy contributes over 50 percent of tax revenue, over 60 percent of the GDP, and 80 percent of urban employment in China.
2. In an op-ed in The Wall Street Journal, George Soros described BlackRock pouring billions of dollars into China now as a “tragic mistake.” He added that BlackRock’s decision is “likely to lose money” for its clients, and “will damage the national security interests of the U.S. and other democracies” while “prop[ping] up President Xi’s regime.”
Soros also noted that “the U.S. and China are engaged in a life and death conflict between two systems of governance,” and called on Congress to “pass legislation empowering the Securities and Exchange Commission to limit the flow of funds to China.”
Soros further noted that Xi Jinping “faces an important hurdle in 2022,” and is “bound to have enemies, whom he must prevent from uniting against him.” Soros earlier expressed his opposition to Xi and encouraged foreign investors not to invest in Xi’s China in two other recent op-eds in major newspapers (see here and here).
Sept. 7
1. TheCityUK, a lobbying group representing financial and professional service companies across London, recently called on the London City government to “embrace Communist China to thrive after Brexit,” according to a report in The Telegraph. Some Tory lawmakers criticized the group’s proposal.
2. BlackRock raised about $1 billion for its China mutual fund, the first that is solely run by a foreign firm and allowed to sell to Chinese individuals. According to a statement, the BlackRock China New Horizon Mixed Securities Investment Fund received over 111,000 orders from individual investors in China during a five-day marketing period in the week of Aug. 30.
The Wall Street Journal reported that several other firms could follow BlackRock, including Fidelity International, Neuberger Berman, and VanEck.
Sept. 8
1. In response to George Soros’s Wall Street Journal op-ed, a BlackRock spokesperson told media outlets (see here and here): “The United States and China have a large and complex economic relationship. Total trade in goods and services between the two countries exceeded $600 billion in 2020. Through our investment activity, U.S.-based asset managers and other financial institutions contribute to the economic interconnectedness of the world’s two largest economies.”
The spokesman added, “We believe that globally integrated financial markets provide people, companies, and governments in all countries with better and more efficient access to capital that supports economic growth around the world. The overwhelming majority of the assets BlackRock manages are for retirement. BlackRock’s clients around the world—including many U.S. clients—seek a broad range of investments, including in China, to achieve their retirement and other financial objectives.”
The spokesman also said that BlackRock can help China address its “growing retirement crisis” by “providing … retirement system expertise, products, and services.”
2. Financial intelligence provider REDD wrote that Evergrande will suspend due interest payments on loans to two banks on Sept. 21, according to Reuters. REDD also reported that Evergrande has delayed payments to several trust firms and may suspend all payments to its wealth management products from Sept. 8.
3. Credit Suisse wrote in a client note that hedge fund exposure to Chinese equities and indexes listed in the U.S. fell to a two-year low due to sharp reduction in prices and selling of positions, according to CNBC. Net exposure to Chinese equities fell from over 2 percent at the end of 2020 to about 0.75 percent as of Aug. 25.
OUR TAKE
1. The Chinese Academy of Fiscal Sciences’s fiscal policy bluebook forecasts affirms our early observation of the PRC’s fiscal shortages. The forecasts also explain why the CCP has been making efforts to reassure foreign investors and is opening up financial markets further to attract foreign investment.
However, Fang Xinghai’s recent remarks indicate that Beijing is also wary of the risks of allowing greater capital flows, especially with deepening interconnectedness between foreign and domestic markets. For instance, allowing the trade of A-share index futures in Hong Kong is very likely intended to attract more foreign investment to the mainland as foreign financial institutions gain hedging tools. At the same time, “some foreign-funded institutions” (Beijing could be obliquely referring to George Soros and others betting against Xi’s PRC) will have greater opportunity to carry out “malicious behavior” to create financial turbulence on the mainland.
In recent newsletters, we noted that Xi’s domestic and international rivals “can cause serious trouble for Xi in the financial sector,” including launching another “financial coup” against the Xi leadership (see here and here).
2. International capitalists appear to be divided on China in the wake of crackdowns, increased regulation, and a march towards greater socialism under Xi Jinping. On the one hand, powerful lobbyists in the U.S. and UK are calling for improved China relations, be it abolishing tariffs (America) or deepening ties with Communist China (Britain). On the other hand, prominent financier George Soros is calling out the CCP regime for its repressive dictatorship and calling on big Wall Street firms and foreign investors to withdraw their funds from the mainland.
The pro-China position of lobbyists and the multinationals they represent is not hard to understand. Multinationals have made huge investments in China over the years, and naturally wish to protect their investments and reap more profits amid growing global anti-CCP sentiment and increasing signs of financial trouble on the mainland. Also, the CCP definitely has a hand in influencing international capitalists to be sympathetic to the regime, and would have stepped up its own lobbying efforts with multinationals and lobbying groups with the escalation of Sino-U.S. tension during the Trump years. Thus, many multinationals and lobbyists are still singing the CCP’s tune despite increased regime control and repression under Xi Jinping.
One cannot rule out the possibility that George Soros and the financial interests he represents are so sickened by what they see happening in China that they feel a moral obligation to pull their mainland investments and persuade other financiers to do likewise. However, Soros’s views also happen to match those of establishment elites who are advocating an “anti-Xi, not anti-CCP” strategy. As we previously analyzed, we do not rule out the possibility that Xi’s domestic rivals are working with foreign establishment elites to oust Xi before the 20th Party Congress in 2022. The factional struggle element could eventually see international financiers and investors come to the same view on what to do with Xi Jinping, which will sharply raise political risks for the latter and the probability of Black Swans emerging in China.
3. Businesses, investors, and governments must be vigilant to escalating political risks in China as opposition to Xi Jinping grows and problems mount for the CCP regime with growing geopolitical and economic instability in the wake of America’s disastrous pullout from Afghanistan, the prolonged coronavirus pandemic, and central bank policies to curb inflationary pressures.
SinoInsight 2
Sept. 2
1. China Chengxin International Credit Rating Co downgraded Evergrande and its onshore bonds from AAA to AA, and placed the company and its bonds on a watchlist for potential downgrades.
2. Bloomberg News reported at least two of the Evergrande’s largest non-bank creditors have demanded immediate repayment of some loans, citing people familiar with the matter. The creditors, both trust companies, sent repayment notices to Evergrande over the past two months, with one of the trusts receiving a small portion of owed money.
Bloomberg noted that “the size of the loans involved couldn’t immediately be learned.”
Sept. 3
1. Evergrande’s average selling price fell 11.5 percent from the previous month to the lowest since July 2016, according to Bloomberg. The company’s contracted sales, including those to contractors and suppliers to offset payments, fell to 38.1 billion yuan ($5.9 billion), or 26 percent lower than a year ago.
2. The price of several of Evergrande Real Estate’s bonds plummeted following a morning sell-off. In particular, the bond “15 Evergrande 03” fell by over 22 percent during intraday trading, leading the Shanghai Stock Exchange to temporarily suspend trading of the bond for 30 minutes. After trading resumed, the bond closed at 54.9 yuan, a decrease of 5.88 percent from the previous day.
Some Evergrande shares also fell sharply, with China Evergrande Group’s shares sliding 4.42 percent in intraday trading (a six-year record low) and closing down 4.2 percent for the day.
Sept. 4
The transaction volume of second-hand property in Shenzhen fell for the fifth consecutive month in August to hit a decade-low, according to official Shenzhen government data. Only 2,043 units were sold in August, down 20.1 percent month-on-month and down 81.96 percent year-on-year (11,322 units were sold in August 2020).
Sept. 6
1. Evergrande’s bonds continued to slump, leading the Shanghai and Shenzhen stock exchanges to respectively temporarily suspend trading of “15 Evergrande 03” and “20 Evergrande 20” at midday. The bonds closed at 42.9 yuan and 44 yuan respectively, or down 21.9 percent and down 35.3 percent.
Evergrande’s offshore U.S. dollar bonds also continued to fall. One bond maturing on March 23, 2022 with a coupon rate of 8.25 percent slid to 30.39 cents per dollar. Another bond maturing on Oct. 24, 2023 with a coupon rate of 12 percent fell to 20.8 cents on the dollar.
2. Mainland media The Time Weekly reported that a total of 274 real estate companies issued bankruptcy documents from the start of the year to Sept. 5 for an average of one bankruptcy a day, citing incomplete statistics. The media outlet noted an acceleration of small and micro real estate companies exiting the market, with “no shortage of well-known companies.”
Time Weekly also noted that real estate companies face another debt repayment peak in September, with a total of 83.85 billion yuan of bonds maturing according to data from the China Index Academy. Also, an average of 61.9 billion yuan will mature each month from October to December this year. The next repayment peak will occur in March and April of 2022, with 103.94 billion yuan and 94.06 billion yuan worth of bonds maturing respectively.
3. Bloomberg reported that the private-banking units of Citigroup and Credit Suisse stopped accepting the bonds of Fantasia Holdings Group as collateral due to concerns about the property developer’s financial health, citing people familiar with the matter.
Bloomberg data showed that Fantasia has $752 million in dollar bonds maturing through the end of 2021, including $208 million in October. Another $1.4 billion of Fantasia’s dollar bonds will mature in 2022. The company also disclosed in an interim report that it has about 8.5 billion yuan ($1.3 billion) of debt due in a year.
Headquartered in Shenzhen, Fantasia was founded in 1996 by Zeng Baobao, the niece of former PRC vice president and Politburo Standing Committee member Zeng Qinghong. Zeng Baobao is an executive director at Fantasia and a major shareholder, and the company has business all over the country, including projects in the Guangdong-Hong Kong-Macau Greater Bay Area, the Yangtze River Delta, and in Chengdu.
Sept. 9
Evergrande Real Estate’s bonds fell across the board, with three bonds sliding by more than 20 percent over the day and receiving temporary suspensions:
- “20 Evergrande 01” fell by over 32 percent during intraday trading and was temporarily suspended twice. The bond closed at 34 yuan, down 32 percent.
- “15 Evergrande 03” fell by more than 22 percent during intraday trading and was temporarily suspended once. The bond closed at 34.32 yuan, down 10.86 percent.
- “20 Evergrande 02” fell by over 23 percent during intraday trading and was temporarily suspended once. The bond closed at 28.58 yuan, down 15.94 percent.
OUR TAKE
1. Evergrande’s debt crisis is clearly growing, with the recent selloff of Evergrande’s bonds indicating that the markets are very pessimistic about the company’s situation. Meanwhile, Evergrande’s troubles appear to be spreading across the property sector, driving up the CCP regime’s debt bomb and real estate bubble risks.
The CCP, however, will likely find ways to prevent an Evergrande bankruptcy, which will undermine regime security given the company’s “too-big-to-fail” status. Evergrande’s plight and other financial woes will give Beijing greater impetus to open up China’s financial markets and court international investments to buy time to mitigate or resolve the regime’s financial risks. The Xi leadership will likely view each day it delays the bursting of the debt crisis as a success of sorts.
2. As seen in the Fantasia case, Evergrande’s debt crisis is affecting the interests of the Party elite. Fantasia founder Zeng Baobao is the niece of Zeng Qinghong, Jiang Zemin’s political enabler and the Jiang faction’s number two.
With the Jiang faction and Party princelings hurting from the Evergrande crisis, the “anti-Xi coalition” will have even greater incentive to oust Xi Jinping and revert the PRC to policies that protect their interests (even if it comes at the cost of regime security). We do not rule out the possibility of the “anti-Xi coalition” steering into the skid of the Evergrande crisis to engineer another “financial coup” against the Xi leadership.
