SinoInsight 1
Sept. 16
China Huarong Asset Management announced on the Beijing Financial Assets Exchange that it is recruiting investors for restructuring.
According to public information, Huarong’s interest-bearing liabilities was in excess of 1 trillion yuan as of the end of 2021, and accounted for 69.29 percent of the company’s total liabilities. Of Huarong’s interest-bearing liabilities, bonds and negotiable instruments totaled 285 billion yuan, while the company’s loan balance totaled 782 billion yuan. Huarong’s balance of bonds payable within one year was 107.5 billion yuan and the balance of loans due in a year was 577.9 billion yuan (total of 685.4 billion yuan due in a year).
Sept. 17
1. Beijing has a “new mandate” for Hong Kong’s powerful property tycoons, Reuters reported, citing three major developers and a Hong Kong government adviser familiar with the talks.
In closed meetings this year, PRC officials told property tycoons to “pour resources and influence into backing Beijing’s interests, and help solve a potentially destabilizing housing shortage.” The officials also said that “the rules of the game have changed,” with Beijing no longer willing to tolerate “monopoly behavior,” Reuters reported, citing a source close to mainland officials.
2. Hong Kong billionaire Li Ka-shing’s CK Asset Holdings sold Century Shenghui Square, an office building project in Shanghai’s Jing’an District, to Hysan Development for 3.5 billion yuan. CK Asset received about 2.1 billion yuan in the deal.
Sept. 19
Hong Kong’s elite held elections for members to a 1,500-person Election Committee. Fewer than 5,000 people voted pro-establishment and pro-Beijing members to the committee, with only one member being not strictly aligned with the establishment camp.
Earlier on Sept. 5, the South China Morning Post reported that the wealthiest families behind the biggest property developers in Hong Kong were informed that they were restricted to having two members each on the Election Committee. An influential businessman familiar with Beijing’s thinking told SCMP, “The big families will still have a say in the committee with their representatives. But Beijing’s blunt message to us is, ‘You can no longer be a kingmaker.’”
Sept. 20
1. Shares in Evergrande fell 19 percent, the weakest level since May 2010, before closing down 10.2 percent at HK$2.28. Evergrande’s shares also dropped by over 87 percent from HK$17.58 on Jan. 19 this year.
Shaken by Evergrande’s debt crisis and contagion fears, markets in Asia plunged, with Hong Kong’s Hang Seng dropping 821 points, or down 3.3 percent. Property stocks in Hong Kong slid, with nearly 20 property stocks falling by more than 10 percent. Of those stocks, Sinic Holdings plunged 87 percent, China Aoyuan fell 12.04 percent, Sunac China dropped 10.48 percent, while Logan Group, R&F Properties, and Fantasia Holdings fell by over 7 percent.
Financial stocks also plunged across the board due to concerns about companies and their exposure to China’s property sector. Ping An Insurance, a trillion Hong Kong dollar market cap company, fell by more than 8 percent during intra-day trading and closed down 5.78 percent. Shares of China Merchants Bank slid the most among the H-share companies, falling over 11.5 percent during trading and closing down 9.38 percent. The H-shares of Minsheng Bank, Chongqing Rural Commercial Bank, Bank Of Chongqing, and China CITIC Bank all fell by more than 5 percent over the day, while the H-shares of three large state-owned banks, China Construction Bank, Agricultural Bank of China, and Postal Savings Bank of China, fell by over 4 percent.
U.S. and European markets also saw volatility, with investors selling stocks and buying bonds. The Dow Jones Industrial Average dropped 614.41 points, or 1.8 percent, while U.S. Treasury prices rallied, with yields on the 10-year note down 6.4 basis points to 1.3057 percent. Concerns of a possible Evergrande default also sent the prices of emerging market bonds spiraling, with Latin America stocks hitting their lowest levels in six months.
2. Evergrande did not pay interest to at least two major lending banks, according to mainland media reports. Earlier on Sept. 14, the PRC Ministry of Housing and Urban‑Rural Development informed major banks that the company would not be able to make interest payments due on Sept. 20.
3. According to a South China Morning Post report, Beijing’s efforts to tighten supervision over local government financing vehicles (LGFVs) has led to concerns about how local governments will secure funds to repay their debts, especially after years of poor returns on infrastructure projects.
The report cites Nomura chief China economist Lu Ting as estimating local government hidden debt (including bonds and loans) at 45 trillion yuan at the end of 2020, or 44 percent of China’s GDP. The figure is more than four times the 9.6 trillion yuan at the end of 2010, which was around 23 percent of the GDP then.
4. According to Reuters, China Securities Regulatory Commission vice chairman Fang Xinghai told leaders of top Wall Street firms at the fifth China-U.S. Financial Roundtable on Sept. 16 that the PRC’s regulatory crackdown does not seek to rein in China’s private enterprises or decouple the country from the United States or international financial markets, but instead is aimed at strengthening regulation of consumer-facing platform companies to promote “common prosperity.”
Fang said that no government in the world is as “positive” and “focused on technology” as the PRC government, and added that Beijing was expected to approve a record number of IPOs in 2021, with a majority of companies getting listed being private companies.
“I don’t think you can find a government anywhere in the world that is as positive and as focused on technology as China,” Fang was quoted as telling the fifth China-U.S. Financial Roundtable (CUFR) last Thursday.
The 35 or so Wall Street executives who attended the three-and-a-half-hour meeting “listened very intently to what Fang had to say” and most “were very satisfied,” one of the meeting’s participants told Reuters.
Sept. 21
1. Evergrande chairman Hui Ka Yan wrote in a memo to employees that “Evergrande will surely be able to get out of its darkest moment as soon as possible, and speed up the full resumption of work and production” of its developments.
2. Bank of America cut its China growth forecast for 2021 from 8.3 percent to 8.0 percent, its forecast for 2022 from 6.2 percent to 5.2 percent, and its forecast for 2023 from 6.0 percent to 5.8 percent.
Sept. 22
1. Evergrande’s Hengda Real Estate Group said it had “resolved” through “private negotiations” payment on one coupon due on Sept. 23 on its Shenzhen-traded 5.8 percent September 2025 bond (20 Hengda 04). The news saw Evergrande’s shares rise 17.62 percent to close at HK$2.67.
Evergrande is due to pay interest worth $83.5 million on Sept. 23 and another interest payment of $47.5 million on Sept. 29. Analysts and market watchers expect Evergrande to miss those payments and believe that Evergrande is likely to default.
2. U.S. stocks rallied on the back of the Federal Reserve signaling that it could reduce bond purchases soon and raise interest rates, while concerns over Evergrande began to subside. The Dow Jones Industrial Average peaked at 520.58 points during intra-day trading, while the S&P 500 index was up 1.2 percent for the day.
Fed chair Jerome Powell said that “there’s not a lot of direct United States exposure” to Evergrande’s debt problems. He added, “The big Chinese banks are not tremendously exposed, but you would worry it would affect global financial conditions through global confidence channels and that kind of thing. But I wouldn’t draw a parallel to the United States corporate sector.”
Sept. 23
1. According to a Wall Street Journal report, the PRC authorities are instructing local governments to “get ready for the possible storm” over Evergrande’s debt crisis.
Local government agencies and state-owned enterprises are to “step in to handle the aftermath only at the last minute should Evergrande fail to manage its affairs in an orderly fashion.” Local governments have been “tasked with preventing unrest and mitigating the ripple effect on home buyers and the broader economy, for example by limiting job losses.”
A district-level local government in Guizhou has called on officials to make sure that migrant workers employed on Evergrande projects receive their salaries, according to a notice reviewed by the Journal. The notice also urged cadres to “attach great importance to the seriousness of Evergrande’s problems,” while local authorities should “dare to act, cooperate closely and make every effort to resolve Evergrande’s debt crisis.”
Analysis: The PRC authorities’ orders to local governments affirm our analysis of how Beijing could handle the Evergrande debt crisis as laid out in the Sept. 16 edition of this newsletter (see point 1).
To briefly reiterate, Beijing is unlikely to bail out Evergrande because it is looking to resolve a greater debt crisis and does not have the financial means to carry out such rescue operations. While the central authorities could look to “buy as much time as possible for Evergrande to resolve its debt issues while staving off a default and minimizing financial contagion,” the company could be allowed default on some debt but not declare bankruptcy. Also, the authorities call to prevent unrest and the “ripple effect” of the Evergrande crisis is aimed at “maintaining stability” in the regime.
2. Bloomberg News reported that Evergrande’s electric-car unit missed paying salaries to some of its staff and has fallen behind on paying some suppliers. Also, cash flow difficulties means that the company “will likely miss its target to start mass deliveries next year considering trial production of electric vehicles at its factories in Shanghai and Guangzhou has been dialed back,” Bloomberg reported, citing people familiar with the matter.
3. Fitch downgraded China’s growth forecast over Evergrande and property sector concerns. The ratings agency said it expected China’s GDP to grow at 8.1 percent, down from the previous 8.4 percent, with the “main factor weighing on the outlook” being “the slowdown in the property sector.”
OUR TAKE
1. Evergrande’s unfolding debt crisis and the market turmoil it has triggered are in line with the development trend we outlined in analyzing the introduction of the “three red lines” last August. We wrote at the time that Chinese real estate companies, including those that cross the “three red lines” like Evergrande, will find it “very difficult … to both issue new debt and repay old ones. The inability of Chinese real estate companies to refinance their debt will lead to large-scale defaults and trigger systemic risks in China’s property and financial sector.”
More recently, we warned in July after Guangfa Bank sought to freeze Evergrande’s assets in July that the bank’s actions would send ripples in the markets and the property sector. We added that Evergrande’s debt woes could trigger China’s debt crisis in 2021, “resulting in a wave of defaults by local governments (urban investment bonds, local government financing vehicles, etc.), state-owned enterprises, and large private corporations,” per our China 2021 Outlook.
We also noted in our China 2020 and 2021 outlooks that several large property companies could file for bankruptcy. Evergrande’s inability to make repayments (including vaguely worded “resolutions” of matured bonds) suggests that it is already in default territory and is technically bankrupt. However, as we noted in the Sept. 16 edition of this newsletter, “the CCP can hardly allow ‘too-big-to-fail’ Evergrande to simply default and declare bankruptcy” lest it “trigger(s) systemic financial risks and spark(s) social unrest that could potentially endanger the regime.” We also noted that the CCP will likely “look to buy as much time as possible for Evergrande to resolve its debt issues while staving off a default and minimizing financial contagion” through various administrative means.
2. Evergrande’s debt crisis and the huge scale of local government implicit debt (45 trillion yuan per Nomura’s Lu Ting) seriously threaten the security of the CCP regime. Xi Jinping and the CCP cannot allow the debt bubble to inflate further without compounding problems for the regime, and thus have to find ways to “allow” a puncture of the bubble while mitigating the negative effects of deleveraging.
To better handle financial risks resulting from tackling the debt problem, maintain social stability, and address factional struggle issues, Xi has to tighten control over the regime. This has resulted in Beijing’s recent regulatory crackdowns, the combatting of “monopolistic practices,” bringing capital to heel, the promotion of “common prosperity” and other socialist policies, strengthening of control over the military, “rectification” of the political and legal affairs apparatus, and other control efforts.
We warned last year that “should the CCP’s derisking policies burst the property bubble, the scale of non-performing loans will go up sharply. In this scenario, China will not only see economic Gray Rhinos, but political Black Swans.” Xi, however, may believe that he needs to take the debt bubble now to take advantage of the unique window of opportunity that has emerged.
On the home front, Xi wants to secure a norm-breaking third term in office at the 20th Party Congress in 2022, and needs to curb serious financial risks early before they metastasize further and undermine his third term bid. While doing something to address the debt crisis and property bubble is very risky, the Xi leadership probably assessed that not doing anything is far riskier. And if Xi succeeds in handling the debt crisis until the 20th Party Congress, he will likely package his management of risk as a “political achievement” (i.e. “Comrade Xi has led the Party to overcome yet another unprecedented challenge”) to boost his “quan wei” and strengthen his case for serving another term.
Meanwhile, Xi and the CCP would have noticed a “fulfillment” of its “the East is Rising, the West is in Decline” narrative with a drop in competitiveness from America and its allies, the Biden-Harris administration’s incompetence over the Afghanistan withdrawal, and Washington’s inadequate efforts to address the “China challenge” post-Trump. Xi is likely seizing the onset of Western weakness and dropping off in pressure to double down on addressing his domestic problems, boost the regime’s survivability, and build a strong base from which to later advance the CCP’s domination agenda.
3. The CCP’s influence operations appear to have “stabilized” market confidence in China amid the Evergrande crisis and regulatory crackdowns. Wall Street appears to be satisfied with Fang Xinghai’s reassurances, and investors are relaxing their vigilance against a potential Evergrande-triggered financial crisis in China.
Businesses, investors, and governments should not drop their guard and must prepare China contingencies. Financial contagion from Evergrande’s debt crisis remains very real, especially with many overseas banks and financial institutions (including those in Hong Kong and Taiwan) having invested heavily in China’s real estate in recent years. And while there might be few derivative instruments built on Evergrande’s debt, the company’s inability to make repayments threatens the health of China’s property and financial sectors on the whole, driving up the risk of cross defaults. Further, Xi Jinping’s efforts to rein in the financial sector will almost certainly inspire pushback from his factional rivals and influential members of the Party elite, sharply escalating political risks in China and hastening the arrival of the CCP’s “Berlin Wall moment.”
SinoInsight 2
Sept. 18
The Central Commission for Discipline Inspection (CCDI) published an article on its website titled, “Don’t Be a Peach Blossom Spring Person” (“不能做桃花源中人”). The article noted that two recently purged officials, former Anhui Higher People’s Court president Zhang Jian and former China Huadian Corporation general manager Yun Gongmin, both claimed to be a “Peach Blossom Spring Person” before they were investigated.
The article stated that officials should abandon the idea that they can escape the anti-corruption campaign by pretending to be in a “Peach Spring beyond this world” (反腐败没有“世外桃源”). Officials who believe that they have “special status,” that discipline and rules are for others, and anti-corruption investigations will not touch them “are just pretending to be calm, deceiving themselves and others, and are living in a pipe dream” (只是故作鎮定，自欺欺人、癡人說夢).
The article stressed that the investigation and prosecution anti-corruption cases to date shows that there are no “untouchable officials” (刑不上大夫) or “iron-cap princes” (鐵帽子王), and that retirement is not a “safe landing” (退休即安全著陸) or there being a “safe haven” overseas (海外是避罪天堂). The article added that all Party members and cadres will be severely punished so long as they violate discipline and the law regardless of whether they are “tigers and flies”; or in the the political and legal affairs apparatus, financial sector, and energy sector; or are in seemingly “mundane” occupations like civil air defense and the meteorological department; or have sought to flee domestically or abroad.
In concluding, the article urged officials not to be a “Peach Blossom Spring Person” but rather a “sensible person with firm political convictions who abides by the rules and keeps discipline” (“政治信念坚定、遵规守纪的明白人”).
Background: “Peach Blossom Spring” is a reference to a poem about a man who stumbled into an idyllic rural paradise hidden from the political instability and strife of the Jin Dynasty (266–420). The term “Peach Blossom Spring” became a Chinese expression similar to “utopia” in the West; today, the expressions “Peach Blossom Spring person” and “Peach Spring beyond this world” are used to describe those who are detached from reality, or who have poor knowledge and learning.
The CCP uses the aforementioned expressions to describe officials and cadres who seem to live in their own world and do not keep up with the political orthodoxy of the day. Xi Jinping warned officials against being “Peach Blossom Spring persons” during his “remember our original aspiration and mission” speech on Jan. 8, 2020.
Sept. 22
The CCDI announced that Wang Like (pronounced “lee kuh”), the former Jiangsu provincial Political and Legal Affairs Commission Party secretary and member of the Jiangsu provincial Party Standing Committee, was expelled from the Party and removed from office for “serious violations of discipline and the law.”
The CCDI notice stated that Wang “never lived up to his ideals and had never been faithful to the Party,” had acted with “no sense of political discipline and rules,” lost the “Four Consciousnesses,” engaged in “cliques and factions” in the Party (党内搞团团伙伙), sought speculations political for personal promotion, and “deliberately opposed” investigations into him by Party organization (處心積慮對抗組織審查).
Wang is also accused of “seriously damaging the political ecosystem of the political and legal affairs apparatus, and especially the public security system” through his actions, and had “long served as a ‘protective umbrella’ for evil forces” (長期為黑惡勢力充當“保護傘”)
Wang Like had “voluntarily” surrendered himself for investigation on Oct. 24, 2020.
Explainer: The CCDI’s accusations against Wang Like are very severe. In particular, allegations that Wang engaged in “cliques and factions” in the Party, served as a “protective umbrella,” and “deliberately opposed” the Party’s investigations into him indicate that he was an active participant in factional struggle. The last charge suggests that Wang’s “voluntary” surrender last year was an expedient measure by the authorities to avoid addressing the “cliques and factions” problem at the time.
We previously looked at Wang Like’s political career, including his alignment with the Jiang Zemin faction (via Bo Xilai) and his likely role in Jiang’s Falun Gong persecution campaign. We also recently analyzed Wang Like’s connection with Luo Wenjin and Deng Huilin, who were accused of heading a “judicial mafia” and threatening the safety of central government personnel.
OUR TAKE
1. The fact that the Xi leadership needs to repeatedly caution officials against being “Peach Blossom Spring person” indicates that many are not keeping up with Xi Jinping’s political requirements and “resolutely safeguarding the centralized and unified leadership of Party Central with Comrade Xi Jinping at the core.”
The repeated warnings also suggest that there are officials today who are not aligned with Xi in the CCP factional struggle or who opt to seat on their hands (不作爲) instead of diligently enacting Beijing’s orders while they wait for a clear winner to emerge from factional struggle in the Party elite. Put another way, Xi is still being challenged by the problem of “orders not leaving Zhongnanhai” (政令不出中南海) despite his protracted anti-corruption campaign and mass personnel reshuffles. Moreover, some officials continue to doubt Xi’s “quan wei” and whether he will ultimately triumph in factional struggle in the CCP elite, and hence would rather be “Peach Blossom Spring persons” than heed Xi’s commands.
2. The CCDI’s “Peach Blossom Spring” article foreshadows the impending downfall of high-ranking active or retired Party officials. The reference to “tigers and flies” recalls the purge of senior Jiang faction officials during the early years of the anti-corruption campaign. Xi Jinping also criticized “untouchable officials” (刑不上大夫) and “iron-cap princes” (鐵帽子王) on several occasions during his first term, and the Wang Qishan-led anti-corruption campaign eventually arrested the “untouchable” former security czar Zhou Yongkang while “iron-cap prince” Zeng Qinghong was prominently placed on notice.
Xi’s rectification of the political and legal affairs apparatus could pave the way for investigations into the remaining Jiang faction officials holding high office in the apparatus (Supreme People’s Court head Zhou Qiang is a possible target given his resistance to the Xi leadership). Meanwhile, the entertainment and financial sector crackdown, if allowed to be taken to its ultimate conclusion, implicates Zeng Qinghong, Jiang Zemin, and other powerful members of the “red” aristocracy who oppose Xi.
We noted in our China 2021 Outlook that “active or retired Party or state leaders could be investigated” this year. Also, “active Central Committee members (full or alternate) and officials at the ministerial level could be investigated, including allies and supporters of Xi Jinping.”
3. Political mobilization from Xi Jinping and his factional rivals will likely become more obvious as factional struggle in the Party elite moves to a showdown with Xi tightening control over the regime in preparation for the 20th Party Congress.
Xi could conceivably “spare” his rivals and recalcitrant or indifferent officials to avoid incurring more political risk if they become “politically sensible people” instead of “Peach Blossom Spring persons,” and adhere to Xi’s political orthodoxy (“Two Safeguards,” “Four Consciousnesses,” etc.) instead of engaging in “cliques and factions.” But Xi will likely have few qualms about punishing officials or eliminating his rivals if they seriously challenge his “quan wei” and threaten to upend his third term bid.
Meanwhile, Xi’s rivals will likely do their utmost to derail Xi’s pursuit of a third office term and even oust him ahead of schedule. To that end, the Jiang faction and the “anti-Xi coalition” at home and abroad could engineer challenges to the Xi leadership in areas where they still retain significant influence, such as the financial sector. Factional struggle in the Party elite could make Evergrande’s debt crisis even more complicated and unpredictable than it already is, and worsen social turmoil in China.
Businesses, investors, and governments must track developments in CCP elite politics and the factional struggle to avoid being blindsided by political Black Swans in China.
