SinoInsight 1
1. The People’s Bank of China (PBoC) and the China Banking and Insurance Regulatory Commission announced that bank loans to fund affordable rental housing projects will not be subject to regulatory curb, according to a notice (關於保障性租賃住房有關貸款不納入房地產貸款集中度管理的通知). The notice also called on financial institutions to step up support for affordable rental housing and required banks to trim their loan exposure to the real estate sector to a certain level.
Sun Yang, a chief analyst at Chinese property information service provider CRIC, believes that the easing will allow property developers to secure more funding and invest in the construction of low-cost rental housing.
2. In an article for the PBoC-run “China Finance” (中國金融) magazine, Sun Tianqi, director of the PBoC’s Financial Stability Department, wrote that some overseas securities institutions used internet platforms to provide services to investors on the mainland without obtaining the necessary local licenses. He added that such activity constitutes “cross-border delivery” (跨境交付) and go beyond the PRC’s commitment on opening up under the framework of the General Agreement on Trade in Services.
Sun noted that the aforementioned cross-border online brokerages should be regarded as “driving without a driver’s license in China, and are suspected of engaging in illegal financial activities.” He added, “this characterization has nothing to do with whether the capital account is fully convertible.”
Sun also listed six types of cross-border financial services as “illegal financial activities”:
- Cross-border opening of bank accounts and other banking services;
- Cross-border securities investment services;
- Cross-border sales of insurance products;
- Cross-border payment services;
- Cross-border bitcoin and initial coin offering trading services;
- Cross-border foreign exchange margin trading.
Feb. 9
1. The state-run China News Service published an article (個人存取現金5萬元以上需要登記,什麼信號?) about the upcoming implementation of administrative measures (金融機構客戶盡職調查和客戶身份資料及交易記錄保存管理辦法) by various financial authorities (the PBoC and three other departments) governing cash transactions from March 1, 2022.
The administrative measures, which were introduced on Jan. 27, 2022, stipulate that financial institutions shall identify and verify the identity of clients who make cash transactions (deposits and withdrawals) of 50,000 yuan and above or foreign currencies equivalent to $10,000 and above. Financial institutions should also find out and register the source and use of those funds.
The report added that on the day the administrative measures were introduced, the PBoC, the Ministry of Public Security, and eight other government departments also announced the launch of a campaign to crackdown on money laundering crimes nationwide from January 2022 to December 2024 to “resolutely curb the spread of money laundering and related crimes.”
2. China’s total financing of real estate enterprises in January 2022 was 79.22 billion yuan, a year-on-year decrease of 70.3 percent and a month-on-month decrease of 16.6 percent, according to data released by CRIC. The monthly total financing data from March 2021 to January 2022 reflected declines when compared with the corresponding month from the previous year.
Analysis: January is usually an important period for real estate companies to seek financing and a peak period for bonds issuance. For instance, total financing in January in the years 2019 to 2021 are 282.33 billion yuan, 224.67 billion yuan, and 266.46 billion yuan respectively, accounting for 12.2 percent, 9.4 percent, and 15.1 percent of total financing for each of those years.
However, total financing this January was less than a third of the previous year, extending weaknesses seen in the fourth quarter of 2021. A chief reason for the sharp decline in real estate enterprise total financing is the inability of property developers to make payments on overseas bonds and trusts, and the weakening solvency of developers is making investors more cautious.
Feb. 10
1. Mainland media outlets reported remarks by China Evergrande chairman Hui Ka Yan in a staff meeting on Feb. 6:
- Evergrande plans to deliver 600,000 apartments (about 70 million square meters) in 2022, or nearly 50 percent of the company’s guaranteed delivery projects;
- Evergrande can “basically commence the full resumption of work” after the Lunar New Year period with over 50 billion yuan in pre-sale funds in escrow. To keep up construction, the company has to rely on nearly 170 billion yuan of cash yet to be collected from sales and saleable resources. Also, more than 80 percent of Evergrande’s long-term partners are continuing to cooperate with the company.
- Hui said that he was against fire sales to pay off debt, “otherwise it will be difficult to repay debts even after the assets are sold cheaply”;
- Evergrande will look to restore the confidence of home buyers and achieve an average monthly sales return of over 10 billion yuan;
- Hui vowed to “severely crack down on internal corruption” because a minority of people are taking advantage of Evergrande’s troubles to make a buck;
- Hui also vowed to “resolutely remove leading cadres who ‘lay flat’ (躺平).”
2. Chinese banks extended 3.98 trillion yuan in new bank loans in January, an increase of 394.4 billion yuan year-on-year and up from 1.13 trillion yuan in December, according to data released by the PBoC. Total social financing grew by 6.17 trillion yuan in January (compared with the 2.37 trillion yuan growth in December) and 984.2 billion yuan year-on-year; total social financing includes central and local government bonds. Both the new bank loans and growth in total social financing hit record highs in January.
Analysis: At a glance, social financing seems to have rebounded in January. From a structural perspective, however, the figures are clearly being artificially dragged up by policy and not real economic improvement.
For one, growth in household loans was lackluster across the board. The 843 billion yuan increase in household loans in January represented a drop of 33.6 percent year-on-year (down from 1.27 trillion yuan in January 2021). Of the total, short-term loans (down 227.2 billion yuan YoY) as well as medium- and long-term loans (down 202.4 billion yuan YoY) saw significant declines from a year ago. Personal mortgage loans increased by 742.4 billion yuan, down 21.4 percent year-on-year (compared to 944.8 billion yuan in January 2021). This indicates that residential consumption and housing demand are weakening at an accelerated pace.
Meanwhile, loans to enterprises increased 31.8 percent ($810 billion yuan) year-on-year to 3.36 trillion yuan in January, compared with 2.55 trillion yuan over the same period last year. However, the growth in loans was mainly supported by notes financing (up 319.3 billion yuan YoY) and short-term loans (up 434.5 billion yuan YoY). Medium- and long-term loans, which reflect the economy’s endogenous growth momentum, only increased slightly by 60 billion yuan from a month ago (up 380 billion yuan YoY).
Feb. 11
1.Regulations governing the supervision and management of commercial housing pre-sale funds have been formulated and introduced recently, according to the state-run Securities Daily, citing a source familiar with the matter. The report observed that the real estate sector will see “substantial benefits” if the information is accurate.
The Securities Daily report also noted that some local governments began to “excessively supervise” property developer pre-sale funds after the default of a “well-known real estate company” (almost certainly Evergrande), including overseeing the “zero allocation of funds.” The report added that the aforementioned regulations will correct local government behavior and help ease the cash flow of struggling real estate developers.
2. Vanke Group chairman Yu Liang said in his concluding remarks at the company’s 2022 annual meeting on Jan. 9 that the real estate industry will “enter a stage of shrinking and clearing balance sheets” in 2022, according to a report by semi-official mainland media The Paper.
Yu noted that the shrinking and clearing of balance sheets is a form of de-financialization of the real estate sector. He added that the state does not want the real estate sector to take up too much financial resources or allow residents to bear huge debt burdens from home buying because the allocation of those financial resources do not effectively support the real economy.
Yu also said that “de-financialization is an inevitable trend and a painful process,” while 2022 is a year of “burning one’s boats” (破釜沉舟), “fighting with one’s backs to the river” (背水一戰), and the beginning of a “new era” for Vanke.
OUR TAKE
1. The PRC government’s easing of financing restrictions on the real estate sector and accelerating the issuance of local government bonds indicate that it is very pessimistic about China’s economic situation.
Beijing will also look to tighten capital controls to prevent a “spillover” of financial risks when the U.S. Federal Reserve hikes interest rates this year. The Fed is widely expected to raise rates by 50 basis points in March, particularly in light of the U.S. CPI rising 7.5 percent year-on-year in January and hitting a 40-year high. The Fed’s moves will drive global central banks to adopt more hawkish policies, which in turn could lead to greater capital outflows from China.
2. The CCP does not appear to have effective ways to deal with rapid economic downturn and “spillover” financial risks. Beijing is currently resorting to the usual fixes of increasing government investment, relaxing monetary policy, investing in infrastructure, and stabilizing investment in the real estate sector. For instance, the PRC Ministry of Finance approved in advance the issue of 1.46 trillion yuan of local government special bonds in 2022. In January 2022, local governments issued 698.9 billion yuan of special bonds (nearly 70 percent of which are new bonds), more than double the month-on-month increase in December 2021. Meanwhile, the PRC issued a record 7.48 trillion yuan of local government bonds in 2021, of which over 4.2 trillion yuan were new bonds.
However, the CCP’s efforts to stabilize investments may not be sustainable in the long-run, and government investment is contributing less and less to economic growth. We noted in an earlier newsletter that local governments are experiencing difficulties in finding new projects to invest in. Teng Tai, a prominent Chinese economist, noted in a Jan. 29 opinion piece published by several mainland media outlets that China’s economy is no longer investment driven and will not be so in future. Titled “In the Post-infrastructure Era, Can Stable Growth Still Rely on Investment” (後基建時代, 穩增長還能靠投資嗎), Teng’s piece points out that China is already in a “post-infrastructure era” given the relative completion of various constructions, airports, roads, and railways. He argued that the artificial expansion of investment in infrastructure will run against the law of economic development, resulting in a huge waste of human, material, and financial resources without increasing production capacity or real public service capacity.
Teng Tai noted that China’s real estate investment contracted in the second half of 2021 while the growth rate of investment in plants and equipment had fallen to single-digits as compared to double-digit growth in previous years. He believes that the contraction is mainly due to medium- and long-term factors, including a slowdown of population urbanization, the decline in the growth rate of residents’ income, financial deleverage of the real estate sector, and a reduction in speculation and investment demand for housing. Teng added that while the central government had allocated more than 3 trillion yuan in government special bonds for investment, there were not many local projects where the money could be used.
Teng Tai also quoted Wei Jianing, the former head of the State Council’s Development Research Center Macro Department as saying: “There is a certain need for investment, but the question is who is doing the investing? Foreign companies aren’t investing, the government has no money to invest (high debt ratio), state-owned enterprises cannot invest (high leverage ratio), and private enterprises dare not invest (due to chaotic signals).” Wei believed that the government investment should “instead go to social security.”
3. While the CCP has been relaxing curbs on real estate financing, property companies are seeing shrinking total financial and sales. This suggests that the long-held notion of perpetually rising property prices is evaporating and China’s once-“hot” real estate sector is quickly cooling off.
Mortgage interest rates in China have been falling across the board since late January due to declining loan prime rates. Rates for first-home and second-home loans in Beijing fell to 5.15 percent and 5.65 percent respectively; those in Shanghai fell to 4.95 percent and 5.65 percent; and rates in Shenzhen dropped to 4.9 percent and 5.2 percent. Banks in Shanghai were also approving loans at a brisk pace, with most loans approved within one to two months and some as quickly as a week.
Some areas also began easing restrictions on provident fund loans. From Feb. 1, the Fuzhou local government opened applications for those seeking provident fund loans for a second time and uniformly adjusted the down payment ratio to 40 percent. Those seeking second loan applications are eligible to do so in the same month that they secured their first loan; previously, loan applicants had to wait 12 months between their first and second applications.
Regardless, real estate sales in China fell sharply in January. Only 15 housing companies had sales exceeding 10 billion yuan in January 2022, or 14 fewer companies compared to the same period last year, according to China Index Academy. There were 22 companies with sales exceeding 5 billion yuan, or 31 fewer companies from the previous year. Companies that made between 3 billion yuan and 5 billion yuan fell the fastest to just 20.
According to CRIC, the supply area of commercial housing in 29 key monitored cities in China decreased 43 percent in January compared with the same period in 2021 and was down 58 percent compared with the previous month. Meanwhile, the transaction area fell 37 percent month-on-month and 46 percent year-on-year.
4. China’s rapidly decelerating economy is forcing Beijing to release stimulus and strengthen capital controls to stem outflows. The latter move, however, will also limit economic activity and blunt the effect of stimulus.
Xi Jinping’s “quan wei” (authority and prestige) will steadily erode should China’s current economic trends continue or worsen. This will compel him to step up efforts to purge factional rivals and suppress dissenting voices, which will in turn sharply raise political risk levels in China.
SinoInsight 2
1. The foreign ministers of the Quad countries (the United States, Australia, Japan, and India) held a meeting in Melbourne to discuss cooperation on COVID-19, regional challenges, and supply chains.
A joint statement said that the Quad partners “champion the free, open, and inclusive rules-based order” and reaffirm their commitment to “upholding and strengthening the rules-based multilateral trading system, with the World Trade Organization at its core.” The Quad also opposes “coercive economic policies and practices that run counter to this system and will work collectively to foster global economic resilience against such actions.”
When asked whether “confrontation with China in the Indo-Pacific is inevitable” during a press conference, Secretary of State Antony Blinken said, “Nothing is inevitable … I think we share concerns that in recent years China has been acting more repressively at home and more aggressively in the region, and indeed potentially beyond.” He added, “I think again the relationship for all of us with China is among the most consequential and the most complex of any we have.”
2. The Biden-Harris administration released its Indo-Pacific Strategy. “Under President Biden, the United States is determined to strengthen our long-term position in and commitment to the Indo-Pacific,” the 19-page document noted. “This intensifying American focus is due in part to the fact that the Indo-Pacific faces mounting challenges, particularly from the PRC.”
The Strategy added, “The PRC is combining its economic, diplomatic, military, and technological might as it pursues a sphere of influence in the Indo-Pacific and seeks to become the world’s most influential power.” The strategy also noted that the PRC’s “coercion and aggression spans the globe, but it is most acute in the Indo-Pacific,” citing examples with regard to Australia, India, Taiwan, and the South and East China Seas region.
The Biden-Harris administration is “investing in the foundations of our strength at home, aligning our approach with those of our allies and partners abroad, and competing with the PRC to defend the interests and vision for the future that we share with others. We will strengthen the international system, keep it grounded in shared values, and update it to meet 21st-century challenges.”
With regard to China, “our objective is not to change the PRC but to shape the strategic environment in which it operates, building a balance of influence in the world that is maximally favorable to the United States, our allies and partners, and the interests and values we share. We will also seek to manage competition with the PRC responsibly. We will cooperate with our allies and partners while seeking to work with the PRC in areas like climate change and nonproliferation.”
In the conclusion, the Strategy notes that the “decisive decade before us will determine if the region can confront and address climate change, reveal how the world rebuilds from a once in-a-century pandemic, and decide whether we can sustain the principles of openness, transparency, and inclusivity that have fueled the region’s success.”
Some mainstream media outlets reported on the Strategy, but the news did not make their front pages. The Associated Press noted that the Biden-Harris administration has “yet to release a strategy paper laying out thinking for U.S. policy toward China and China’s growing influence globally and in Asia and the Pacific,” adding that “the delay in release of a grand vision on China has drawn criticism, especially given Biden’s emphasis on China as one of the United States’ long-term foreign policy challenges.”
Feb. 12
The English edition of the nationalistic Party mouthpiece Global Times published an article on the Biden-Harris administration’s Indo-Pacific Strategy on the front page of its website.
The article cites experts as saying that the Strategy is a “ridiculous Biden administration fantasy filled with deceptive actions to tie Asian countries to its anti-China chariot to stir up regional turbulences.” Li Haidong, a professor from the Institute of International Relations of China Foreign Affairs University, said that the Strategy “demonstrates U.S. government’s policy continuity to besiege China.”
Chinese Academy of Social Sciences research fellow Lü Xiang told Global Times that the “positive wording” of the Strategy “cannot conceal” the “real intention” of the U.S., that is, “to stir up instability in the Asia-Pacific region and coerce Asian countries to fall into (the) U.S. trap of containing China under the disguise of maintaining regional peace and prosperity.”
In concluding, the article wrote, “Experts said the stance of the US toward China will tarnish cooperation between the two powers, including on climate change. For China, the country will continue to focus on self-development and will not take the initiative in provoking conflicts with the U.S.”
Chinese-language mainland media did not report on the Strategy at the time the Global Times piece was published.
OUR TAKE
The new Indo-Pacific Strategy and the latest meeting of the Quad are consistent with the Biden-Harris administration’s milder approach to China (see also here, here, and here). Despite the slightly sharper language referencing the PRC in the Strategy, the CCP’s general lack of outrage and attention to it suggests that Beijing does not feel threatened by the document. This contrasts markedly with the propaganda onslaught unleashed against an open letter urging former President Donald Trump to “stay the course” on China cosigned by over 180 U.S. scholars, foreign policy and military officials, and members of the business community back in July 2019 (disclosure: Three SinoInsider experts signed the letter), as well as the torrent of propaganda and criticism directed at former Secretary of State Mike Pompeo after he delivered speeches challenging the CCP’s “red lines” (ideology, sensitive human rights issues, differentiating between the Chinese people and the Party, etc.) from October 2019 (see here, here, and here for examples).
Beijing’s effort to “not take the initiative in provoking conflicts with the U.S.” indicates that the Xi leadership is prioritizing domestic affairs as Xi Jinping looks to secure a third term at the 20th Party Congress. Xi’s factional rivals and opponents in the Party elite could latch onto Washington’s latest China-related strategy as further evidence of growing Western “containment” under Xi’s “incompetent” rule in making the case for him to step aside. Such efforts from Xi’s enemies, however, will likely convince Xi Jinping to move quickly and more heavy-handedly against them under the pretext of carrying out “self-revolution” and rooting out corruption.
