Property firms’ bond defaults show ripple effect of Evergrande crisis; Xi’s Xinhai Revolution speech & the CCP’s designs on Taiwan

Oct. 3
The top 100 real estate companies in China made 844.34 billion yuan in sales in September, according to mainland media reports citing Chinese property information service provider CRIC. The figure was down 36.6 percent over the same period last year, and down 6 percent from August. September is typically a peak month for property sales.CRIC found that more than 90 percent of real estate companies in the top 100 recorded a year-on-year decline in their September sales, with 60 percent of the companies seeing year-on-year declines of over 30 percent, and over 50 percent of the companies seeing declines in year-on-year and month-on-month sales. China Evergrande saw the greatest sales drop at minus 96.26 percent, followed by Greenland Holdings at minus 55.54 percent. Other companies that saw steep declines include Country Garden (minus 34.07 percent), Vanke (minus 30.33 percent), Sunac China (minus 33 percent), Poly Real Estate (minus 30 percent), China Overseas Property Holdings (minus 37 percent), and China Merchants Shekou Industrial Zone Holdings (minus 20 percent).

Oct. 4
1. Mainland luxury apartment developer Fantasia Holdings Group announced that it did not make a $206 million U.S. dollar bond due on Oct. 4.

According to Caixin, Fantasia currently has 12 U.S. dollar bonds, including the one it had missed payment on, as well as a debt balance of $3.98 billion. Five bonds totaling $1.559 billion will expire within one year, while three worth $762 million will expire in 2021. Interest rates on Fantasia’s U.S. dollar bonds are generally high, with seven having an interest rate greater than 10 percent (the highest is 15 percent) and only three bonds having an interest rate lower than 8 percent.

Pan Jun, Fantasia’s CEO and board chairman, previously said in this year’s Boao Real Estate Forum that the company’s sales will decline if the policy environment does not improve by June 2022, and that 60 percent of private developers may face bankruptcy.

2. The Shenzhen local government announced that there were 1,765 second-hand housing transactions in September, down 13.6 percent month-on-month and down 80 percent year-on-year. September was also the sixth consecutive month of declines in second-hand housing transactions in Shenzhen.

Oct. 5
Ratings agencies downgraded mainland property developer Sinic Holdings over cash flow risks. Fitch downgraded Sinic from “CCC” to “C” because some of its subsidiaries did not pay interest on onshore financing arrangements, and noted the company’s liquidity problems and that “a default-like process has begun” for Sinic.

Meanwhile, S&P Global Ratings downgraded Sinic Holdings from “CCC+” to “CC,” noting that the company has a “severe liquidity problem and its debt-servicing ability has almost been depleted.”

Sinic has a $246 million offshore dollar-denominated bond maturing on Oct. 18. S&P noted that the company is likely to default on the bond. Sinic has total liabilities of $14.2 billion per a first-half financial statement.

Oct. 6
1. CRIC noted that real estate companies like Evergrande, Fantasia, Sinic, China Fortune Land Development, Sichuan Languang Development, Sunshine 100 China, and Fujian Sannong Group have been experiencing liquidity constraints in 2021. As of Sept. 27, 2021, real estate companies have defaulted on 39 bonds (46.75 billion yuan cumulative), as compared to 25 bonds (18.044 billion yuan total) for the whole of 2020 (or up 159 percent).

CRIC estimated that 108.2 billion yuan worth of real estate bonds will mature in the fourth quarter of 2021. While this represents a year-on-year decrease of 7 percent, it is still at a higher level from a historical perspective. Meanwhile, an estimated 367.1 billion yuan of real estate bonds are set to mature in the first half of 2022.

Oct. 7
1. A video circulating on Chinese social media shows hundreds of people bearing banners with the words “Ping An, Return Our Money!” (平安還錢!) and protesting in front of Ping An Bank in Ningbo Eastern New Town. According to information circulating on social media, Ping An Bank had reported violated regulations by allowing funds from an account under supervision to be used by a real estate company in Hangzhou’s Xinwan District for loan repayments on June 4 this year. As a result, there was insufficient balance in the account to complete the rest of the real estate company’s development project, and houses could not be delivered by the due date at the end of September.

Ping An Bank is a national joint-stock commercial bank headquartered in Shenzhen, and is one of the three pillars of Ping An Group’s business. Reuters reported on Aug. 31 that the China Banking and Insurance Regulatory Commission was investigating Ping An’s investments in the property market. The regulator also ordered the company not to sell alternative investment products, which are usually tied to the property market.

In February, Ping An disclosed a 54 billion yuan exposure to China Fortune Land Development.

2. The Institute of International Finance’s capital flows report showed that $8.1 billion flowed out of China’s bond market in September, the highest since March 2021. Over the same period, $1.4 billion flowed into China’s stock markets, or well below the monthly average of $7 billion over the past 12 months.

Oct. 8
The Shanghai Land Market website announced the termination of the sale of seven residential lots located in the suburban Shanghai districts of Songjiang, Fengxian, Chongming, Jinshan, and Baoshan. The seven residential lots were from a batch of 27 lots that were originally scheduled to be put up for auction from Oct. 2 to Oct. 11.

The cancellation of land sales in Shanghai continues a trend of recent cancellations in several cities, including first-tier and some popular second tier cities like Guangzhou, Hangzhou, Wuxi, Xiamen, Changchun, Tianjin, and Shenyang. The trend makes obvious the cooling of China’s land market.

In February, the PRC authorities announced that the 22 largest cities will only be allowed to conduct three rounds of land sales this year so that it can better control land prices in China’s most valuable areas.

2. JPMorgan estimated that Evergrande and its main competitors have billions of dollars worth of off-balance-sheet debt that would increase their leverage ratios if added on, Reuters reported.

JPMorgan’s analysts noted that “instead of true deleveraging,” Evergrande “shifted some of the interest-bearing debt to off-balance sheet debt,” including commercial papers, wealth management products and perpetual capital securities. The analysts believe that Evergrande used the tactic to help it meet the PRC’s “three red lines” rules introduced last year, and the company’s disguised debt could be up to 55 percent of its overall debt.

JPMorgan analysts estimated Evergrande’s “net gearing” (debt as ratio of a company’s known equity) was at least 177 percent at the end of the first half of 2021 and not the 100 percent that the company reported. Other property firms whose gearing levels were likely higher than officially reported included R&F Properties at 139 percent versus 123 percent, Sunac China Holdings at 138 percent versus 87 percent, and Country Garden at 76 percent versus 50 percent.

3. Creditors of a $260 million bond issued by Jumbo Fortune Enterprises that matured on Oct. 3 said that they did not receive their principal payment, according to Bloomberg. Jumbo Fortune Enterprises is a joint venture whose owners include Evergrande’s Hengda Real Estate Group. Because the bond has no grace period, nonpayment of the note’s principal may constitute a default.

Oct. 9
1. State media Securities Times reported that there were only four second-hand housing transactions in Shenzhen during China’s Golden Week holiday (Oct. 1 to Oct. 7), a historic low.

2. The number of new housing transactions in the 15 National Bureau of Statistics key monitored cities (first-tier and popular second-tier cities) during the Golden Week period fell 19 percent year-on-year to 8,309, according to data by mainland property sector information provider Anjuke Institute. The figure was roughly the same as during the 2019 Golden Week period. According to the China Real Estate Index System (CREIS), the area of residential housing transactions in key monitored cities decreased 33 percent during the Golden Week as compared to the same period last year.

In breaking down the four first-tier cities:

1. As we previously analyzed, Evergrande’s debt crisis is having a ripple effect on the entire property sector and is driving up the real estate industry’s debt risks. Current trends indicate that the number and amount of real estate company defaults will hit a record high this year and extend into 2022. The CCP authorities will strive to control financial contagion, but will face a steep uphill battle with multiple complications.

2. Local governments in the PRC have long relied on land sales to sustain their finances. According to mainland media reports, land auctions in China grew significantly last year despite the pandemic, generating a record 8.4 trillion yuan ($1.3 trillion) in sales.

Centaline Property provided the following figures for land sales in key areas:

According to mainland media reports, of the 44 major cities in China, 20 were 100 percent financially dependent on land sales. Five of the 20 were over 150 percent financially dependent on land sales, with Foshan the highest at 180 percent. And of the 44 major cities, only five had below 50 percent financial dependency on land sales.Land sales in 2020 provided local governments with a solution to their immediate needs. However, the central government’s restriction on land sales this year and new tax collection policies mean that they will no longer be a reliable stream of income for local governments.

This June, the central government introduced a policy that shifted the responsibility for collecting all four government non-tax revenues, including income from the transfer of state-owned land use rights (i.e. land sales), from the natural resources ministry to the taxation administration. The new revenue collection policy was piloted in seven provinces (including Hebei and Inner Mongolia) from July 1, and will be fully implemented in all provinces and areas from Jan. 1, 2022. The policy allows the central government to directly monitor the use of land revenue by local governments, which will have a deterrent effect on forced land acquisition by local governments and curb their incentive to sell land.

Fewer land sales in turn translate into reduced local government revenue and falling land prices. This August, the value of land sales across China fell 17.5 percent on a year-on-year basis, the biggest drop since February 2020. Declining land value will eventually affect property prices and threaten the real estate bubble. On the whole, land sale curbs and the current property sector crisis will create even more financial woes for the CCP.

3. Xi Jinping’s approach to the Evergrande crisis is a double-edged sword. On the one hand, Beijing gets a chance to reform and somewhat de-financialize the property sector. On the other hand, the deflating of the real estate bubble will shrink the wealth of the Chinese people as their property investments lose value, increasing their resentment towards Xi and the CCP. An inability to control financial contagion and a triggering of China’s debt crisis would also sharply raise Xi’s personal political risks.

China’s economic woes (real estate bubble deflation, debt defaults, energy-related economic contraction, natural disasters exacerbating food and supply chain problems, etc.) present a great challenge to Xi, and cannot be easily resolved over the short-term. Thus, while improving Sino-U.S. relations and weakening geopolitical pressures appear to have given Xi “time and momentum,” he has to first seize the window of opportunity to settle longstanding and extremely problematic domestic issues like factional struggle ahead of the 20th Party Congress in 2022 to reduce pressure on his leadership and deny his political rivals further opportunities to undermine him.

We believe that Xi will prioritize the resolution of domestic problems, and particularly the factional struggle in the CCP elite, between now and the 20th Party Congress. The current trend of purges in the political and legal affairs apparatus (especially the targeting of former 610 Office cadres), as well as Beijing’s signaling about “another Party Central” and “cliques and factions” within the CCP, suggest that Xi could be preparing a major factional struggle-related move around the period of the Sixth Plenum of the 19th Party Congress (issuing a “third major ‘historical resolution,’” arresting active and retired “big tigers” at the Politburo and Politburo Standing Committee level, etc.). Major factional struggle moves by Xi or his rivals will sharply increase the odds of political Black Swans emerging in China this year.

     SinoInsight  2     

• Xi reframed Sun Yat-sen’s Xinhai Revolution, the overthrow of the Qing Dynasty, and the end of dynastic rule in China as “a great and arduous quest by the Chinese people and Chinese advanced elements to achieve national independence and people’s liberation.”
• Xi recognized that the Xinhai Revolution established “the first republic in Asia” in China, but added that the Sun’s endeavor merely “explored the way to realizing the great rejuvenation of the Chinese nation.” Drawing on the standard Party line, however, he said that the Xinhai Revolution “did not change the semi-colonial and semi-feudal social nature of Old China and the Chinese people’s miserable situation, and did not accomplish the historical task of achieving national independence and people’s liberation.”
• Xi claimed that after the Xinhai Revolution, Marxism-Leninism “promoted the great awakening of the Chinese people” and the CCP came into being. Xi also boasted that the “Chinese Communists are the staunchest supporters, most loyal collaborators, and most faithful successors of Dr. Sun Yat-sen’s revolutionary cause,” and that the CCP helped the Kuomintang complete its reorganization and fight the Beiyang warlords.
• Xi reframed the CCP’s seizing power and imposition of totalitarian rule over mainland China as the Chinese Communists “inheriting” Sun Yat-sen’s legacy. He added that the Chinese communists continue to struggle alongside all those “loyal to [Sun’s] cause” to “realize and develop” Sun and the Xinhai revolution pioneers’ “great ambitions.” Xi also said that “socialism with Chinese characteristics is the only correct path to achieving the great rejuvenation of the Chinese nation.”
• Xi grafted Sun Yat-sen’s observation that  “to restore the nation’s standing, we must first restore its spirit” (要恢復民族的地位, 便先要恢復民族的精神) onto the CCP’s “united front” agenda of defending the regime against foreign enemies. He also borrowed Sun’s comments on “unification” (“‘Unification’ is the hope of the Chinese people. If there is unification, all people in China will be blessed; if not, they will suffer”; “‘統一’是中國全體國民的希望。能夠統一, 全國人民便享福; 不能統一, 便要受害”) to urge cross-strait unification.
• Xi said, “To achieve the reunification of the motherland by peaceful means is most in line with the overall interests of the Chinese nation, including our compatriots in Taiwan.” He added, “We adhere to the basic policy of peaceful reunification and ‘one country, two systems’; adhere to the one-China principle and the 1992 consensus; and promote the peaceful development of cross-strait relations.”
• Xi did not mention the oft-repeated CCP threat of taking Taiwan by force if necessary in his speech, but stressed that “the Taiwan issue is purely China’s internal affair and doesn’t abide any foreign interference.” He added, “no one should underestimate the strong determination, firm will, and strong ability of the Chinese people to defend national sovereignty and territorial integrity.”

OUR TAKE
1. Xi Jinping’s ahistorical treatment of the Xinhai Revolution in his speech marking its 110th anniversary reveals the CCP’s continued insecurity over its legitimacy in the present day.

The CCP is fully aware that it began as an international branch of the Soviet Communist Party and that its original goal was to sabotage the unification of China and eventually subordinate the country to the Soviet Union. The Party—per the Comintern’s orders—duly played its part by successfully infiltrating and splitting Sun Yat-sen’s Kuomintang into “left” and “right” factions, as well as undermining the latter’s effort to fight the Beiyang warlords and unify China. Under Chiang Kai-shek, who took over following the death of Sun Yat-sen in 1925, the KMT finally managed to go on with its unification campaign after purging its ranks of most CCP elements. However, the CCP’s subsequent revolutionary activity across China gave Japan an opportunity to invade northeastern China and start the Sino-Japanese War. The establishment of the Jiangxi–Fujian Soviet also meant the continued disunity and instability of the ROC.

The CCP eventually distanced itself from Moscow after Mao Zedong seized power within the Party and marginalized the pro-Soviet faction. Yet the CCP continued to struggle against the republic Sun Yat-sen founded and the “Xinhai revolution pioneers” from the Shaanxi-Gansu-Ningxia Border Region and its headquarters at Yan’an. The CCP later took advantage of its second “united front” with the KMT to bolster its ranks, strengthen its infiltration of the KMT, and advance its domination agenda while leaving the bulk of the fighting to Chiang Kai-shek’s nationalists, who suffered heavy losses. After the Second World War, the CCP consolidated its gains and pushed “the first republic in Asia” out of the mainland to Taiwan in 1949. Given the history of its rise to power, the CCP has tremendous political incentive to eliminate the ROC and finally gain a sense of full political legitimacy.

The ROC’s existence as a political entity, however, is not the CCP’s only legitimacy problem. The Party’s adherence to Marxism-Leninism also means that it rejects not just Sun Yat-sen’s “Three Principles of the People” and republicanism, which Taiwan officially upholds to this day, but also authentic Chinese culture and traditions that are still preserved in the ROC. Put another way, the CCP is the definition of the “hostile foreign force” label that it frequently throws at the United States and other countries, and it makes every possible effort to obscure that fact. Thus, the CCP constantly promotes the view (such as through Xi’s Xinhai Revolution anniversary speech) that the PRC is a “continuation” of Dr. Sun’s ROC rather than a brutal, authoritarian usurper, and borrows the trappings of traditional Chinese culture (Confucius Institutes, etc.) to keep up its pretense to be the bona fide “inheritors” to China’s 5,000-year civilization.

2. Xi Jinping’s rhetoric on Taiwan, heightened PLA activity in the Taiwan Strait, and a noticeable weakening of the U.S. stance towards the CCP (see here, here, and here) has left the Tsai Ing-wen government and many observers greatly concerned about Taiwan’s security and what appears to be increased prospect of a PRC invasion in the short term.

Based on our understanding of CCP operations and factional struggle, however, we believe that the prospect of the PRC engaging in kinetic “reunification” of Taiwan is not likely in the short term and very unlikely before the 20th Party Congress in 2022, at least based on current trends.

The CCP prefers “peaceful reunification” where possible to avoid strong international backlash and draining military conflict. While the “one country, two systems” model has become very unappealing after the imposition of a national security law in Hong Kong, the CCP still has not exhausted all its non-kinetic options for taking Taiwan. These include subverting major Taiwanese political parties and seeing that pro-Beijing elements are in office, forcing “reunification” through constant intimidation, gradually turning Taiwan “red” through influence operations and political infiltration, coaxing the U.S. to abandon its commitments to Taiwan, etc. Invasion has always been the CCP’s last resort, and will remain the case barring drastic shifts in the international climate.

Meanwhile, Xi Jinping’s top priority at present is securing a third term at the 20th Party Congress, and his biggest obstacle is intra-Party factional struggle. Unless Xi resolves the factional struggle decisively in his favor, all his policies are at risk of being undermined by his political enemies. With his “quan wei” and position far less secure than popularly believed, Xi dares not yet arm the troops for an invasion of Taiwan lest he ends up equipping a “Lin Biao armed coup” against his leadership.

Factional struggle aside, the many serious domestic problems facing the PRC at present (economic recession, debt crisis, rising unemployment, natural disasters, coronavirus pandemic, etc.) make it difficult for Xi to contemplate invading Taiwan (at least over the short term) even though the external environment is trending towards “the East is Rising, the West is in Decline” slogan coined by the Party. When viewed in light of his domestic troubles, Xi’s Xinhai Revolution speech suggests that he is keen on keeping the status quo on the Taiwan issue for the time being even as he repeats the CCP’s longstanding “reunification” ambition.

3. Taiwan and its supporters must maintain or increase vigilance against the CCP regardless of Xi Jinping’s current focus on more pressing domestic priorities and what goes on with factional struggle in the Party elite. In fact, factional struggle increases the probability of unintended cross-strait “accidents” (擦槍走火) breaking out; such “accidents,” however, can be mitigated or avoided if all sides remain alert to them.

Taipei should not be intimidated by the PLA’s stunts or the CCP’s intimidation, which are designed to make the prospect of “peaceful reunification” seem like the lesser of two evils and ultimately fracture Taiwanese society. To thwart Communist China’s strategy, Taipei should double down on counterpropaganda, ideological education (as opposed to the CCP’s propaganda-style brainwashing), and expose CCP influence operations, particularly the Party’s attempts to subvert Taiwan’s democratic elections and processes. Concurrently, Taiwan should use its advantages in chip manufacturing, coronavirus handling, and democratic institutions to strengthen its alliances and win new ones.

Countries must speak up for Taiwan and stand up to the CCP where possible to check Beijing’s ambitions under the present geopolitical climate. The CCP fears countries that stand by their values and cannot be bought by the PRC doling out more economic incentives and other interests. If a critical mass of countries are willing to support Taiwan, the CCP cannot seriously consider invasion to achieve its “reunification” goal.