Evergrande not out of the woods with bond repayment; Jack Ma’s overseas trip & the state of CCP factional struggle

The NBS also announced that real estate investments grew 8.8 percent from January to September this year. Because real estate investments grew at 10.9 percent in the January-August period and 12.7 percent in the January-July period, the January-September figures indicated that investments in the third quarter fell to single digits, a first in many years. The NBS also reported declines in land purchases and new housing construction areas.

Oct. 20
1. The NBS released data showing changes in commercial property sales for September. Per the data, prices of new and second-hand homes in 70 medium and large-sized cities saw declines, with new home sales in third-tier cities falling for the first time in nearly six years.

New home sales price index in 70 medium and large-sized cities (month-on-month)

3. Mainland media outlet Yicai Global reported that sensitive investors and speculators concerned by the CCP’s proposed property tax have begun selling their surplus real estate. Citing data from Lianjia Net, Yicai noted that the number of second-hand housing listing in Beijing increased by more than 10,000 units in the past three months to 89,400 units as of Oct. 19, while those in Guangzhou increased by over 8,000 units to 91,300 units in the past month.

4. China raised $4 billion through a U.S. dollar sovereign bond issue, according to various news reports. The three- and 10-year tranches raised $1 billion each, the 5-year raised $1.5 billion, and the 30-year tranche raised $500 million. Official statistics show that bids for the four tranche deal reached $23.2 billion, or almost six times the amount raised. The final pricing of the deal was much lower than first flagged.

5. PRC vice premier Liu He said during a speech at a financial forum in Beijing that while there are “individual problems” in China’s property market, the risks are “generally controllable” and reasonable capital requirements are being met. Liu added that the “overall trend of healthy development of the real estate market” will not change.

6. People’s Bank of China governor Yi Gang said during a speech and Q&A session at the G30 International Banking Seminar: “In general, the spillover of Evergrande’s risk to the financial sector is under control. The principle we try to deal with in this case is that the right and interest of creditors and property owners will be fully respected in strict accordance with the law. And also, the law has clearly indicated the seniority of those liabilities. And we try to protect consumers’ and home buyers’ rights. In the overall consideration, we will treat this case in strict accordance with law, put consumers’ rights, home buyers’ rights pretty much at a higher priority, and treat all the creditors and related parties equally under the law. On the whole, we are confident that we can prevent the risk from spreading and avoid systemic risk.”

Oct. 21
1. State media Securities Times reported without stating a source that Evergrande sent $83.5 million through Citibank to settle a U.S. dollar bond payment that was due on Sept. 23.

Mainland property stocks in Hong Kong rose on the news, with Evergrande’s share price jumping 5 percent.

2. Liu Zhongrui, an official at the statistics department of the China Banking and Insurance Regulatory Commission, said during a State Council Information Office press conference that “houses are for living, not for speculation,” and added that the authorities are focusing closely on ensuring “stable land prices, stable housing prices, and stable expectations.”

Liu added that banks should be urged to meet the regulatory requirements for real estate development loans and personal housing loans, and cooperate with the PBoC in implementing the real estate loan concentration management system so that the growth rate of real estate loans can slow down and stabilize.

Liu also said that it is necessary (for financial institutions) to meet the credit needs of groups with proper housing needs. First-time home buyers should receive support in terms of loan down payment ratio and interest rates. Liu noted that more than 90 percent of personal housing loans at present are for first-time home loans.

Oct. 22
Securities Times reported that a rumor circulating on the internet in the evening of Oct. 21 regarding “two major state-owned banks liberalizing credit lines in a certain city” had been scrubbed by the WeChat number that sent it.

Securities Times said its reporter sought comment from a joint-stock bank about the rumor, and was told that the credit lines were not “fully liberalized” per some rumors. Rather, only real estate companies with “good risk and leverage” control can access credit lines, and banks still have to go through the normal approval and disbursement procedure before making credit available to those companies.

Oct. 23
The Standing Committee of the National People’s Congress authorized the State Council to implement a property tax pilot plan in some parts of China, according to state mouthpiece Xinhua.

Details include:

Politburo Standing Committee member Han Zheng, who is responsible for the plan’s rollout, “has recommended to Mr. Xi against imposing the levy too widely for now” in light of the opposition, according to the Journal, citing people familiar with the matter. Other details include the scaling back of the pilot from 30 cities to 10; officials are “still haggling over how to set the tax rate for the pilot initiative and whether to offer discounts and exemption areas,” and a new law to implement the property tax across China will not be finalized until around 2025.

Declining real estate sales in China will have an impact on local government and bank revenue. A 2013 mainland media report estimated that the government and bank revenue from real estate in 2012 was about 75 percent of property sales that year. Banks and local governments could see their revenue dip precipitously if current property sales trends persist.

The Xi leadership is no doubt aware that there will be dire consequences for the regime if property sales continue to decline. Thus, the CCP is looking to ensure “stable land prices, stable housing prices, and stable expectations,” and has relaxed loan requirements for first-time homebuyers.

2. The CCP is looking to avoid a “hard landing” for the property sector and boost investor confidence. To that end, the authorities have partially eased real estate loan requirements, and are likely to have a hand in Evergrande suddenly being able to make its bond repayment. The timing of Evergrande’s loan repayment, however, suggests that any government decision to back the company likely came at the last minute.

The falling through of the Evergrande-Hopson Development also hints at forthcoming government support. Evergrande likely weighed that it was worth paying HK$1 billion to cancel the deal in anticipation of government help rather than sell its stake in Evergrande Property Services for an amount that it might not find to be reasonable. Evergrande would have also noted that the CCP’s $4 billion bond sale raises the probability of it receiving government support down the road.

3. We believe that Evergrande is still in serious trouble and will see defaults. While the CCP will likely give the company enough support to avoid a “hard landing” for the property sector, a worsening of financial contagion, and a triggering of vicious cycles, Beijing is not likely to deviate too much from its general direction of deleveraging the real estate sector.

The Xi leadership’s effort to clean up the property sector and impose a property tax, however, will only further antagonize the Party elite and China’s wealthy. Both groups of people own multiple properties, and Beijing’s policies will badly hurt their pockets. The CCP’s information about purged officials and their assets give an idea of how the Party elite will be affected by a property tax: Anti-corruption investigations into Dalian’s Jinzhou District former Party secretary Xu Changyuan found that he owned 2,714 properties; former railway minister Liu Zhijun owned 374 properties; former PLA General Logistics Department deputy director Gu Junshan owned over 300 properties; Lufeng City Public Security Bureau deputy director Zhao Haibin owned 192 properties; and Wang Tianchao, the former president of the First People’s Hospital of Yunnan Province, owned 100 properties and 100 parking lots. Meanwhile, more than 90 percent of urban families in China own their own homes and 80 percent of the wealth of Chinese households is in real estate. The property sector also accounts for nearly a third of China’s economic output.

The Xi leadership will likely find implementing its pilot property tax program to be less than smooth. Xi’s political rivals and influential Party elite will likely continue to give him trouble over the property tax. Intra-Party pushback could drag out the launch of the pilot even though Xi’s allies head the State Council and the National People’s Congress. And when the pilot finally gets off the ground, the central government could run into headaches in dealing with local government tax plan formulations.

CCP history shows that its use of authoritarian measures and control to overcome crises often lead to greater crises. We are not optimistic that Beijing will be able to turn China’s property sector troubles around without incurring great challenges.

     SinoInsight  2     

OUR TAKE
There was much speculation about Jack Ma’s political situation after the suspension of Ant Group’s IPO last year and while Ma was lying low in mainland China, including rumors that the billionaire had been placed under a form of house arrest. The relatively high-profile coverage of Ma’s overseas trip by pro-China Hong Kong media outlets indicates that there people in the Party elite want those outside the PRC to know that Ma is now “safe.”

Either the Xi camp or the Jiang faction have an interest in broadcasting news of Ma’s “safety” depending on the state of the factional struggle. Some China pundits believe that Ma was “freed” after Xi Jinping came to a compromise with the Jiang faction. If this scenario is accurate, then the Jiang faction is boasting that it still retains influence in the regime by revealing details about Ma’s overseas trip to the Hong Kong press.

Another scenario sees Jack Ma securing his “freedom” after spilling the beans on the Jiang faction or other members of the Party elite who oppose the Xi leadership. As a “reward” for providing corruption evidence, Ma was allowed to travel abroad, but is likely still being kept under close surveillance. The publicizing of Ma’s overseas trip and apparent newfound “safety” helps the Xi camp to “persuade” other wealthy Chinese elites to stand in line with Xi, join his faction, and even “donate” assets belonging to the Jiang faction or other opposing Party elite that they are managing in exchange for political security. Concurrently, foreign investors will be reassured by Ma’s “freedom” that Xi is not going after the rich in a bout of Maoist fanaticism, but is doing a targeted elimination of factional rivals. We believe that this scenario is more likely.

If the second scenario that we outlined is the one that is currently unfolding, and if Wall Street and foreign investors continue to support the CCP regime, then Xi Jinping could be emboldened to more vigorously cleanse the financial sector and the political and legal affairs apparatus this year. The following two forecasts in our China 2021 Outlook standing increasing chances of being verified:

• “Active or retired Party or state leaders could be investigated”;
• “Active Central Committee members (full or alternate) and officials at the ministerial level could be investigated, including allies and supporters of Xi Jinping.”